Why Fed Power Matters

Chapter 1 introduces the unrivaled political and economic power of America’s Central Bank, the Federal Reserve System. The Federal Reserve Bank is a mutant institution of government. It has enjoyed anonymity from Americans for most of its history even though it wields unparalleled power on domestic policy that is largely free of the traditional system of checks and balances, which routinely grind down presidential and congressional proposals. The exceptionalism of Fed power stands out among the three branches of government within the United States and among democratic capitalist countries. Instead of studying the Federal Reserve as merely a state agency implementing technical monetary and interest rate policy, this book analyzes the Fed as a powerful political institution with its own interests (and market favorites), which its leaders pursue and which contribute to rising economic inequality and racial disparities. The Fed’s exceptional independent capacity and favoritism were spotlighted in its responses to the 2008–2009 Great Recession and the economic and financial turmoil created by the start of the coronavirus in 2020.

Concealed Advantage

Chapter 3 traces the sources of the 2008–2009 and 2020 financial and economic implosions and the winners and losers of the Fed’s massive responses. Across two distinct crises, the Fed’s policies followed a similar pattern of favoring large financial institutions and big business while neglecting or altogether ignoring homeowners, small- and medium-sized businesses, and state and local governments. This conclusion is based on tracking detailed institutional features: the assertion of emergency power; the redefinition of the Fed’s boundaries to aid financial and corporate firms that previously lacked direct contacts with the Bank; the generous stretching of loan duration; and the considerable weakening of collateral requirements.

Preparing for the Next Financial Crisis

Chapter 5 charts a new direction for reviving America’s central bank to become more effective, accountable, and attentive to mitigating economic and racial inequalities. The Bank of Canada’s track record for effectiveness and success in containing the 2008–2009 crisis without favoring finance and big business offers lessons for improving the Fed’s accountability. The tumult of a pandemic and the Black Lives Matter protests in 2020 has ratcheted up interest in Congress and the Biden administration in steering the Fed toward aiding state and local governments and strengthening regulation to protect consumers, as well as borrowers who are of low- and medium-income or people of color. Change is also coming to the Fed itself to diversify its leadership and key personnel. The Fed may face the most serious demands for change in its history.

The Fed’s Legitimacy Problem

Chapter 4 explains how the Fed’s inventions in 2008–2009 and 2020 strained the Federal Reserve’s legitimacy as an apolitical central bank serving the public good. The Fed’s actions punctured its preferred reputation for technocratic expertise. Instead, the Fed’s failure to adequately regulate banks prior to 2008 and its lopsided assistance to Wall Street and big business while neglecting families and Main Street America revealed a damaging pattern of mistakes and favoritism. The general public’s confidence and approval of the Fed’s performance declined, a populist backlash formed, and lawmakers started to take aim at the Bank’s prerogatives and widening scope of responsibilities. The Fed’s activism starting in 2020 appears to be inching it closer to being perceived as a partisan tool. The cumulative threat to the Fed is enormous: its ability to respond as a trusted last resort in the face of economic and financial crisis is eroding and may become a drag on its ability to act.

The Rise of the Fed State

Chapter 2 analyzes the growth of America’s central bank from humble beginnings into the institutional behemoth it is now—what we call the Fed State. Two elements shaped the Bank’s developments since its establishment in 1913. First, the confluence of financial crises and the Fed’s self-interested maneuvering propelled it from a limited and marginalized body to a large and national institution with administrative capacity and independence that is unparalleled on the domestic front. Second, the Fed’s structures embody a “mobilization of bias” toward the organized, well-connected financial interests and corporations at the expense of disorganized, poorly resourced, and diffuse individuals and businesses.