President Obama will soon appoint a successor to chair the Federal Reserve when Ben Bernanke steps down at the end of his term. The Federal Reserve (aka "The Fed") serves as the country's central bank, oversees the biggest banks, and sets monetary policy for the nation. It is a highly secretive and extremely powerful institution.
For decades, the Fed has been a target for critics and conspiracy theorists on both the left and the right for its lack of transparency and the close ties to Wall Street and the moneyed elite.
Casual observers know that the Fed sets the base interest rate that banks pay on their holdings, but fewer people know that the Fed is responsible for creating almost all the money in our economy by adding funds (out of thin air) to member banks' accounts, which allows them to make loans. In our debt-based monetary system, loans create money and money is debt. When loans are not repaid and result in bankruptcies, the debt (money) vanishes from the economy. Ben Bernanke understood this. He also saw that after the 2010 midterms gave fiscal conservatives control of the U.S. House, Congress would begin leaning towards an austerity budget, draining even more funds from the economy and prolonging the recession. Bernanke's solution was creative, which is unusual for a central banker. Bernanke's Fed created hundreds of billions of dollars in new money through program called quantitative easing (QE). As QE has been practiced, the central bank purchases bank assets, mainly Treasury Notes or Mortgage Backed Securities, with newly created money. By flooding Wall Street and big banks with about $85 billion per month, the Fed has re-inflated the stock market. It may have prevented more bank failures, but it is doubtful that any of that new money ever reaches the productive parts of the economy, or that it goes much farther than bonuses to the 1 percent, which may end up sitting in tax-haven accounts in the Cayman Islands.
But there is no law saying that QE must only go to the wealthiest people. It was a choice made by Bernanke's Fed, and the next Fed Chair could take QE policy in different, interesting directions. For example, the next Fed Chair could choose to send the same $85 billion each month to the people rather than the banks. QE would become a citizen's dividend. The idea would be that in order to really stimulate the economy, the Fed needs the money to actually reach the real people who will spend it into circulation and create the demand so that employers will begin hiring again. A similar policy has been advocated elsewhere as a "basic income guarantee."
The next Fed Chair must also know enough about money and debt to avoid faulty advice from the so-called "Goldbugs" who support a return to the Gold Standard or from austerity proponents who want drastic cuts to government spending on social programs. These folks are often critical of the Fed for its role in creating the national debt. But despite their self-assuredness, there are three reasons why their take on the national debt is misinformed. First, as described above, in our debt-based money system, the national "debt" is actually just an accounting mechanism for how much money is in circulation. When loans are paid off, the debt disappears, but so does that amount of money in circulation. So "paying down the debt" is just another way of saying "causing a depression." Second, Goldbugs and their austerity allies do not recognize that the rules of household budgeting do not apply to a nation with a sovereign currency that has the power to print money at will. Third, the entire worldview of Goldbugs and their austerity allies is more fragile than they let on. The entire premise of a Government Budget Constraint could vanish the instant the President chose to direct the Treasury Secretary to mint a $30 or even $60 trillion dollar coin, deposit it in the Treasury account at the Fed, and simply retire the "national debt." The trillion dollar platinum coin sounds silly, and it generated some guffaws from the media, but it remains a real policy choice, whether naysayers like it or not. For those three reasons, the debt ceiling "debate," expected to ramp up again this Fall, is pure nonsensical theatrics, unfortunately accompanied by potentially serious consequences for the actual economy.
The 100th anniversary of the Federal Reserve Act will also provide the next Fed Chair an opportunity to implement badly-needed transparency and governance reforms at the Fed. One of the best thinkers in this area is William Greider, who has written of the need to democratize the Fed or tear it down. The next Fed Chair would do well to heed Greider's calls for oversight and public accountability, along with additional reforms spelled out by the UK group Positive Money.
Even if this fantasy world where modern monetary theory frees up government resources to deal with many of the problems facing society miraculously comes about, the next Fed Chair will still have to contend with the real world constraints of the ecological limits to growth. A significant aspect of the current economic recovery, outside of QE, is the return of cheap energy from shale gas (i.e. fracking). A world above 400 ppm CO2 means the next Fed Chair will need to transform our economic system so that growth means negative carbon emissions. The citizen's dividend mentioned above could be supplemented by an economy-wide cap on greenhouse gas emissions that sends revenues from GHG permit sales to Americans. This revenue stream from our share of the atmosphere will preserve the middle class amidst persistent structural unemployment. While the UN climate talks remain stalemated, the world's central bankers could convene and almost unilaterally begin implementing contraction and convergence toward per capita equity in greenhouse gas emissions.
The next Fed Chair will need to be more than another insider bureaucrat. She will need to be an action hero who can kill zombies (i.e. Milton Friedman clones) and save the planet. Sounds like a movie starring Milla Jovovich (as Janet Yellen?). Forget fantasy football, it's time for fantasy central banker.