posted September 16, 2017
Review of ‘Central Bankers at the End of Their Ropes?’, Clarity Press, August 2017, by David Baker

Jack Rasmus has written a series of important books about the global economy; the critical question is, important or not, why would the general reader make the effort required to read any of them? The best answer comes from Noam Chomsky who tells us that we face two existential threats, nuclear holocaust and the environmental collapse called climate change. Those threats to tens of millions of people worldwide can only be mitigated by bringing back real democracy from the shadow of the empty political theater which we currently endure; but to bring back real democracy, we need to understand what destroyed it and what destroyed it is the collection of economic engines called neoliberalism. The most reliable guide to understanding neoliberalism is Jack Rasmus; his book, Central Bankers on the Ropes, examines the fundamental role of central banks in our new, savage global economy.

The word savage would puzzle Volker, Greenspan, Bernake, Yellen et al but it

accurately describes neoliberalism’s impact on the world; the lower 90% are collateral damage in the service of the 1%. But the central banks have always served rulings elites; kings and princes historically have financed their endless wars with the help of the institutional ancestors of central banks; in more modern times, central banks provide trillions of dollars in cash, in various forms, to the financial industry which in turn have been used to prop up the stock and bond markets world wide; offshore jobs, gamble in financial instruments, and pour out dividends. The central banks are in effect a conduit straight to the one percent; as fast as legal tender is electronically printed, it ends up hoarded in their accounts, where it stays.

Jack Rasmus is excellent at peeling away the layers of economic deceit to demonstrate that the rivers of cash pouring out of the central banks does not bring prosperity to the lower 90%; the idea that prosperity is even trickling down is empty ideology. The way in which he peels away the layers of deceit is by examining each of the central banks, in turn, The Fed, The Bank of Japan, the EU Central Bank, and the Central Bank of China, and determines which if any is actually achieving their publicly announced goals. These goals include inflation at 2%; interest rate stabilization; money supply stabilization; bailing out major financial institutions during economic downturns, and increasing GDP.

With the exception of China, each central bank has failed in all of their stated goals. Since their publicly stated goals are not being achieved, we have to examine their actual outcomes to determine what their real goals are and ultimately after peeling away all the layers of deception, their real goal to help the one per cent, by propping up stocks and bonds, providing capital to offshore jobs as well as gamble in financial assets.

The case of China is of particular importance because prior to the 2008 collapse, China pulled out of economic downturns relatively quickly and easily and did achieve its announced goal of significant increases in GDP. What happened after 2008, is that China changed its mix of monetary and fiscal policy, conventional banking, and strict restrictions on capital flows. But because China wanted its currency used as a major trading currency, it was pushed by the rest of the world banking community to open up its economy to capital flows and allow non conventional banking, i.e. shadow banking to operate within in its borders. This was a huge mistake; once China made this shift in policy, it could no longer pull itself out of downturns easily and it is finding it harder and harder to maintain its GDP goals. It has fallen into the chronic subsidization trap of financial institutions.

It is this paradigm shift, the chronic subsidization of financial institutions by central banks world wide that is the key finding; it is why central bankers are “on the ropes.” Historically, one of the major roles of central banks has been to bail out large financial institutions when they fail. Which is exactly what the Fed and others did during the 2008-2009 collapse. But by 2010, the financial institutions were stabilized but the trillions of liquidity injections, quantitative easing and low or no interest loans, continued. Why? Because the banking industry and the one per cent were making so much money from what became chronic subsidization, a subsidization that continues to this day. And here is the problem. The central banks know that a serious downturn is coming; if they continue to generate trillions of dollars in world wide debt through the extension of credit then the inevitable collapse becomes greater; but if they stop, they also risk a huge collapse since the rise in financial assets worldwide has nothing to do with the real economy but is propped up by the central banks.

Rasmus also documents another element of the central banks dilemma; they can’t raise interest rates. The central banks want to raise interest rates, for many reasons but one important reason is because it allows them to lower rates when the inevitable financial bust comes. If they can’t raise rates now, they can’t lower them when the bust comes; likewise, if they can’t stop the cash distributions now, they have nothing left in their monetary weapons to use when the crash comes. Over and over again, throughout history, it was the raising of interest rates by central banks that plunged the world into either recession or depression. So we are truly looking at the abyss since the coming collapse will be more violent, due to the rising oceans of debt [over $20 trillion] and the central banks have no monetary weapons left, either cash or lowering interest rates.

Which brings me to the heart of the debate, what in the austere language of economics is called Fiscal Policy versus Monetary Policy. Progressive fiscal policy is what finally dragged the US out of the Great Depression; it is what Ronald Regan sneered at as “Tax and Spend”. For a progressive, you tax based upon ability and spend based upon need; and, during the 1950’s and 1960’s, the progressive tax and spend policies produced prosperity for all. If you think about it, taxes are the only way to generate capital without falling into the credit/debt trap. Not so with monetary policy.

Monetary policy is economic policy driven by the central banks who in turn serve the one percent. There are many tools that can be used in Monetary Policy, the most well known of which are electronically printing low or interest free loans as well as direct buys of stocks and bonds and raising and lowering interest rates. What Jack Rasmus provides is the insight that the one percent are not willing to wait for prosperity to “trickle up” from the lower 90%; they want instant cash now, as fast as the Fed can electronically print it. Even if it brings down the entire world economy. The lower 90% can wait, apparently forever.

Once again, China did provide an interesting contrast prior to 2008; it had a true fiscal policy, not the fiscal austerity that monetary policy demands. China made and continues to make enormous expenditures on infrastructure, on a scale close to the fiscal policies of the US during WWII. In sharp contrast, none of the other central banks or economies examined engage in this kind of fiscal policy; the case of the EU is quite extreme; they are prohibited by their enabling legislation from engaging in any fiscal policy other than fiscal austerity.

Extraordinary dangers require extraordinary measures. Jack Rasmus concludes with a proposed US constitutional amendment that would place The Fed under strict democratic controls such as nationalizing all banking, prohibiting shadow banking and casino capitalism, placing strict controls on capital flows, and making the explicit goal of The Fed the raising of household disposable incomes. There is a body of scholarly work that demonstrates that the US Constitution was designed to protect investor rights [see e.g. An Economic Interpretation of the US Constitution] so why not amend it and finally give the people control over their economy? One criticism of this proposal is that it really doesn’t go far enough; doesn’t global capitalism require global controls? Thomas Piketty in his groundbreaking work, Capital, proposes just that.

David Baker

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