RADHIKA DESAI: Hello and welcome to a new season of Geopolitical Economy Hour, the show that explores the fast-changing political and geopolitical economy of our time. We are beginning this new season with our 50th episode. I'm Radhika Desai, and joining me today is one of our regulars and favorites, indeed, the person with whom I inaugurated this show, Professor Michael Hudson. Welcome again, Michael.
MICHAEL HUDSON: Good to be back here.
RADHIKA DESAI: Great. Now, as we record this, the Federal Open Markets Committee of the U.S. Federal Reserve, whose decision set interest rates, has just finished its six-weekly meeting. And as some of you may know, they have agreed to decrease interest rates, the first decrease this year, by 25 basis points.
Not a big move, but the fact is the Federal Reserve has been the focus of a lot of controversy recently. And much of the controversy comes from Donald Trump. Anyone paying the slightest attention to the news these days cannot have failed to notice that Trump has a thing about the Federal Reserve, an itch, shall we say, one that he can't help scratching.
He's called Powell a numbskull and too late – which is to say he's, according to Trump, always too late to lower interest rates – while demanding that Powell reduce interest rates. He undertook a theatrical visit to the renovations of the Federal Reserve's Marriner Eccles building, disputing a difference of $300 million in costs in front of TV cameras, as if this few million dollars were consequential in a country whose debt is shooting north of 150% and 37 trillion US dollars.
It's long been clear that he's not going to renew the tenure of the current chair Jerome Powell and has already used the early retirement of one governor to place a loyalist on the board. And while he has recently named four candidates that he is considering for the position of chair, speculation rages far wider.
So some people are talking about more than 10 candidates. In yet another salvo at the Federal Reserve, Trump has, of course, tried to fire one of its governors, Lisa Cook, for cause he says, but so far he's been unsuccessful with the most recent legal ruling, leaving her in place for today's critical Federal Open Markets Committee meeting. So many questions arise from this.
While economists loyal to Trump have been publishing papers and writing commentaries on the Federal Reserve's problematic easy money policies, Trump actually demands that the Federal Reserve keep monetary policy easy. So is there a coherent Trump administration policy towards the Federal Reserve? Secondly, while Trump wants the dollar to remain the world's currency, he also seems determined to undermine the much doubted independence of the Federal Reserve.
So even as the easy money he wants certainly ensures that the Federal Reserve will not be able to rein in inflation, a standing threat to the dollar system. Inflation raises yet another question. While general inflation remains high – and it has gone up ahead of this meeting despite low energy prices – driven by high food prices, undoubtedly a result of Trump's own tariffs, and core inflation – that is inflation discounting volatile food and energy prices – also remains high, Trump, on the one hand, continues to insist that he has brought down living costs, meanwhile ensuring that nothing that the Federal Reserve does will reduce it.
And then there's the matter of cryptocurrency. With the passage of the Genius Act, a whole new set of assets, very dodgy assets, namely cryptocurrency, which any sane analyst would consider highly volatile, risky, and inherently speculative, have been given the imprimatur of government regulation.
This means that one way or another, these assets will enter the financial system and become one more thing in the everything bubble, taking the fragility of the U.S. financial system, which is already at breaking points, even closer to it. Any crash that now occurs can only consign the dollar system to the dustbin of history, as we've discussed so many times, Michael. So Michael, what's your favorite drive about this morass of contradictions in which Trump is only further muddying with his attacks on the Federal Reserve? Go with whatever is on the top of your head because there's so much to discuss. We can start anywhere.
MICHAEL HUDSON: Trump's head is full of junk economics. He wants to depreciate the dollar. He wants the dollar's exchange rate to go down because he imagines that this will make U.S. exports more competitive. As the dollar goes down, its price against European currencies and foreign currencies gets cheaper. The problem is America has been deindustrialized over the last 30 years, and there's not that much to export.
And by lowering interest rates, what he's actually doing is the exact opposite of what his Secretary Treasurer Scott Bessent, has done. It's as if he wants to go back to the zero interest rate policy of making money by debt leveraging, by inflating the prices of stocks and bonds because you can borrow inexpensively from the banks and you can buy a stock whose dividends are higher or a bond whose rates are higher. He wants to make the economy safe for speculators again because they're his constituency, after all.
Well, here's the problem. The sane people on Wall Street, I guess the 1%, or people like you and me, are criticizing him from the point of view of what's the independence of the Federal Reserve. If you have Donald Trump intervening in Federal Reserve policy, micromanaging under his imagination of how the Federal Reserve affects policy, or his pretense or cover story for serving his campaign contributors, then you're going to have instability and probably inflation.
And of course, Trump pretends that he's against inflation. But as you've just pointed out, tariffs are increasing inflation. And his vast, wonderful budget cuts (budget deficit), by slashing taxes on the wealthiest 10% and raising them on the bottom 90%, are going to inflate the economy. So he's sort of overseeing instability.
And the question for many years – there's been this mantra for the last century: the central bank has to be independent because central banks are responsible. And we all know that governments are irresponsible because they're elected and they're democratic and they want to spend money for welfare into the economy, and that's inflationary. And they want full employment, and that'll push up wages.
Instead the Fed's job, ever since Paul Volcker, is to create enough unemployment to prevent wages from going up. What's wrong with this picture, again, as you and I have discussed, is the Federal Reserve serves its member banks, the commercial banks. And if there's any sector of the economy that's more irresponsible, it's the banking sector, because that's what's led to the financialization of the economy and the deindustrialization and the incredible debt overhead that we have today.
So there's no reason to believe that the Federal Reserve is more responsible than the government. I'm not saying the government's responsible because the same Wall Street billionaires that control the banks control the government itself. So you're going to lose either way around. So the problem is: the Federal Reserve has taken over from Congress the management of the whole economy.
And as you and I have discussed, and I think you will today, trying to manage the economy just by affecting interest rates by buying and selling securities by open market operations is only one sliver of the economy and it misses the whole big picture, which is all about industrialization. how you organize what corporations are going to do with the revenue they get, are they going to buy the stock back their stock and push up stock prices and pay out dividends, or are they going to invest long term.
That's really what it's all about, and the Federal Reserve is not concerned with that at all. It's just concerned about providing money to the banks and banks don't lend money into the real economy, they lend money for stocks and bonds for financial speculation and you could look at the Federal Reserve as the implementer of the Ponzi scheme into which the United States economy has degenerated.
RADHIKA DESAI: Well, you've made so many different points so let's just take them by turn. First of all, let's take the whole issue of the so-called independence of the Federal Reserve. Now you know, at one level, in the post-Second World War period for the first several decades, it was actually assumed that monetary policy was just one of the instruments in the hands of governments, elected governments, to keep the economy going, etc., so it was not assumed that that central banks would have to be independent.
The independence of the central banks has become a mantra and has become this rule of thumb, this principle that cannot be violated, only in the age of financialization. So when you said, Michael, a couple of things that already suggested this, which is that what the Federal Reserve has done over the last several decades is essentially inflate asset bubbles.
It has essentially lent money primarily to financial institutions, not so that the financial institutions will invest in the real economy. That possibility has already been thrown out of the window by the Federal Reserve in its role as the regulator of the financial sector, essentially because for decades, going back to certainly the early 80s, if not earlier, every time there has been any kind of a regulatory problem, the default position has always been to deregulate, not to re-regulate.
We can discuss that further, but there has been deregulation. The Federal Reserve essentially lends money to banks, which then use it for asset price inflation and so on. The easy money policy, particularly since the early part of this century, has been instrumental; first in blowing the housing and credit bubbles, which burst in 2008, and now in blowing up this everything bubble we are in.
So essentially the independence of the Federal Reserve, what it actually amounts to, the so-called independence of the Federal Reserve effectively means regulatory capture. That is to say, the regulator becomes captured by those it is supposed to regulate. It's like essentially asking the fox to defend the chicken coop. It's not going to happen. So, essentially, that's why financial interests have been in the lead.
You said something else that's really interesting, and that is that in recent decades there has not been any serious fiscal policy. What there has been is only monetary policy posing as the only form of management of the government. And in my own writing, in my geopolitical economy, where I track the financial policies and the monetary policies of the Federal Reserve, particularly in relation to the dollar system but also in relation to the management of the U.S. economy, what I discovered is that, certainly by the Clinton administration, if not earlier, there was basically no serious fiscal policy. The only fiscal policy was that Republican administrations would always reduce taxes on big corporations.
Then Democratic administrations would come in; they would not touch it but they would engage in fiscal consolidation, essentially by cutting social services and so on, which Republican administrations also did. And then the next Republican administration comes in and reduces taxes further. So, essentially, what this has also done, of course, is vastly increase the debt mountain of the United States. Because while you are cutting social services to some extent, it's not nearly enough to account for the revenue you are foregoing by giving corporations big tax cuts.
So for the last many decades, what we have had in terms of economic management was simply monetary policy. And this really began with Alan Greenspan, and that's why Alan Greenspan was himself called the maestro, as though he was, as a kind of superstar conductor, conducting the orchestra that was the U.S. economy with the slightest movements of his little baton.
But of course, in reality, what you had was essentially a situation in which they gave up trying to manage the U.S. economy. They gave up trying to preserve the productive character of the U.S. economy. They, in fact, encouraged things like outsourcing, financialization, etc. So they have essentially destroyed the U.S. economy, made it an economy based on consumption, etc. So, in all of these ways, what you've seen is that monetary policy has displaced any fiscal policy and thereby hangs many other threads.
MICHAEL HUDSON: They've not only deregulated monetary policy, they've deregulated crime. President Obama appointed Eric Holder as Attorney General, and Holder said, it's true that there was an enormous crime wave that's led to the financial crisis; junk mortgage lending, the banks have falsified mortgage statements, the appraisers have falsified them, the brokers have falsified them, there have been billions of dollars, and we have a choice.
As a result of this financial fraud, the mortgages of about 8 million American families are way overpriced beyond the ability to pay. What are we going to do? Well, we have a choice: either we can write down the debts, as President Obama had promised, to the reasonable, realistic value of their houses and enable these families to be saved from the exploitation of the banks, or we can prosecute the bankers and throw them in jail.
But there's a problem with that. These bankers, most of them, are married with children, and their children and wives are innocent. And it would be wrong to hurt their innocence because if you look at the value of the life and the family happiness of a multi-billionaire, 10 billionaires are worth the 8 million Hispanic and black and other families that we're expropriating.
So we're not going to punish anybody. In fact, what we're going to do is turn to the Federal Reserve and say, make sure that, although the banks are insolvent because they've lent much more money than the debtors can pay, we're going to create the largest financial boom in history, the largest bond market boom in history, by slashing interest rates from the current highs all the way down to less than 1%, which is going to enormously increase the capitalization of bonds and stocks.
And so Obama appointed Federal Reserve Chairman Ben Bernanke as Fed chairman, and then Janet Yellen. And their job was to prevent the banks from writing down the debt to what could be paid and, say, our job is to not to stabilize consumer prices, but to make sure that we stabilize and prevent asset prices for stocks and bonds and real estate from going down. Because if the economy is so highly leveraged and banks have lent out so much money relative to their capital reserves, if prices go down even a little bit, one or two percent, you've wiped out the equity of the largest bank customers, the largest speculators, and the banks themselves will go under.
And so the head of the Federal Reserve Deposit Insurance Corporation said, you know there's one really crooked, incompetent bank; that's Citibank. It's so reckless that we've got to foreclose on it. And Obama's Treasury Secretary, Tim Geithner, said, no, no, my job is to save Citibank. You know, they're the people who put me in power. And hey, Mr. Obama, they have put you in power through Clinton's Treasury Secretary. So you have the banks running the justice system and the prosecution system, as well as the financial system.
And the common aim of all of them is to make sure that the banks will not lose money by writing down the debt that you've just described as growing. If you don't write down the debt and it accrues interest and is growing and growing and growing, then you have to create more and more and more money at lower and lower interest rates to carry this higher debt. That's what a Ponzi scheme is.
You need new entrants into the scheme to provide the money to bail out the early investors, or the whole scheme fails. That's what the United States economy has turned into, and that's what the independence of the Federal Reserve means. Don't let anyone, or the prosecution system, or laws against fraud, or even common sense, interfere with creating an economy that makes money by financial speculation, not by industrial investment. We're not an industrial economy anymore.
RADHIKA DESAI: Well, exactly. And you know what, Michael, Look at this. We've shown this chart before, but this is the chart of the Federal Reserve's balance sheet. As you know, it went from under a trillion dollars to about $2 trillion in the aftermath of the 2008 financial crisis. And then, with a series of rounds of quantitative easing, it went up to above $4 trillion.
And then, with the pandemic, it went up to $9 trillion. So, what is all this? This is essentially the Federal Reserve itself entering the market of various speculative assets. The Federal Reserve itself has become essentially an agent to preserve the value of the speculative assets of the various bankers and what have you. And there's another thing, what's really interesting insofar as the stock market is supposed to be democratic and so on – allow everybody to make money.
Well, another thing that's happening, in addition to what you were just saying, is that actually the number of publicly listed companies is shrinking. More and more companies are owned by private equity, which is essentially elite clubs of investors who have inside knowledge about what can turn a profit and what can't turn a profit. Knowledge which they refuse to make public and so that they can privately, as members of this club, benefit from these lucrative investments and not allow the ordinary investor, the retail investor, to come in.
That's another really fascinating thing that has been happening. And now, of course, the Trump administration is allowing even greater kinds of forms of club-like behavior. So, the few companies that remain publicly listed, Trump has recently suggested that their reporting responsibilities – they should no longer be held to quarterly reports. They can go down to semi-annual reports once in six months.
So this again restricts the amount of information that is available for the retail investor. In so many ways, the Ponzi character of this system, in which essentially there's a pecking order in which the rich continue to get rich, while ordinary people have no purchase on the system. And as far as things like pension funds are concerned, they are typically the bodies whose enormous amounts of money that they have forms essential "throw weight" in the financial system. It is used as "throw weight." But, of course, whenever there is any gain, they gain the least, and whenever there is any loss, they lose the most.
MICHAEL HUDSON: Could you put that chart up again? I want to show it actually shows a radical unprecedented development of the Federal Reserve. You see at the very beginning of the chart that flat line. Yes, that flat line goes back a century, just as flat as it is then. And that flat line is how central banks all over the world have acted for a century. They intervene to buy and sell government bonds overnight in the short term, simply to affect interest rates up and down.
There is no long-term accumulation. What happened when you had the jump in 2008 that you show, and the jump that continued all the way through that period, is for the first time, the Federal Reserve began to be a huge investor itself. It bought enough stocks and bonds, not only government bonds, but corporate bonds, not only corporate bonds, but junk bonds, to push up their prices.
And so you have an enormous inflow of money not to be spent on goods and services, as you're taught in school, but to buy stocks and bonds. The Fed creates money to inflate asset prices. It creates money for stocks and bonds and real estate purchases, not for consumer spending at all. This whole idea of Fed money creation that affects consumer prices is just a fiction. When you look at that chart, you realize what they really create money for. And that was revolutionary.
RADHIKA DESAI: Absolutely. Michael, one of the things we want to discuss, is exactly what the Trump administration wants out of the Federal Reserve. Trump himself has said such contradictory things. On the one hand, he says that he wants the dollar to be strong and the dollar system to work, etc. And of course, it was expected early on when Trump started announcing his tariffs, that tariffs were going to increase the value of the dollar.
But what you've seen here, from the time Trump has taken office, the value of the dollar has gone down consistently. Some say that it has lost some 10% of its value, and this is one chart which shows the ups and downs. And here's another one, which just shows essentially the broad dollar index, which again reaches a peak in January 2025 and since then has been in decline.
So the dollar has just continued to decline. And of course, everybody who doesn't like Trump says that it is Trump's fault. But I think that the situation is much more complicated. Part of the reason the dollar is declining is because of inflation. Now, mind you, tariffs have contributed to inflation, but inflation was going up even before Trump took office. And at the same time, the Federal Reserve finds it very difficult to deal with this inflation because the only way in which the Federal Reserve will permit itself to deal with inflation is by raising interest rates. But if it raises interest rates much more than it has already done, then it is in serious danger of pricking all the asset bubbles, the so-called everything bubble. Again, here is the chart of the federal funds rate going back to 1955. This is the Volcker peak.
But the Federal Reserve can't do a Volcker anymore because, back then, when Volcker increased interest rates, he didn't have to worry about asset bubbles, which would burst. Whereas what we see here, for example, is a series of interest rate increases, which were essentially forced on the Federal Reserve because the dollar was going down. So it had to restore the value of the dollar.
So they started increasing interest rates and the moment they went slightly beyond 5%, that triggered all those processes that led to the crash of the North Atlantic financial bubble, so to speak. So it led to the North Atlantic financial crisis. And similarly, we see again here today that we are already at that point of just a little over 5%, which is why, although inflation remains high, the Federal Reserve daren't raise interest rates more.
Indeed, now what they are doing, in fact, is they are bringing it down. Now, Trump says that the Federal Reserve doesn't want to decrease interest rates, and that Trump is advocating for decreasing interest rates. But you know what? The Federal Reserve, Jerome Powell, and most of the Federal Market Committee would like nothing more than to decrease interest rates because they want asset inflation to continue.
But they have been forced to at least keep interest rates as high as they are, at which they have come over the last two or three years, because inflation is not going away. The Federal Reserve is caught in a bind; that's why they are keeping up this higher for longer. In a certain sense, I suppose what I'm trying to say is that Trump just wants to look like the person who caused interest rates to decrease and as though they care about the real economy. But, of course, what Jerome Powell, as well as Trump, what they all care about merely, is the continuing inflation of asset bubbles.
MICHAEL HUDSON: That's right.
RADHIKA DESAI: And then the other thing that I would add to that is that; the independence of the Federal Reserve, which is allegedly in question – Scott Besant, the Treasury Secretary, recently published this article, in which he criticizes the easy money policies of the past. Now he may want to criticize it, but the fact of the matter is Trump wants the continuation of these easy-money policies.
I think that the real effect, whether it's intended or otherwise, of interventions like Scott Besant's – this article is being much talked about – will be essentially to establish that the Federal Reserve has never been truly independent. And if today the Trump administration appears as though it is infringing on the independence of the Federal Reserve, this is no different from what happened in the past. In one sense, that's true, because all monetary policy is political, and the independence of the Federal Reserve, as we've already said, is only to leave the regulation of the financial sector in the hands of the financial sector. So, and that's a silver political action [Please clarify]. The point is that he is basically establishing a new norm where Federal Reserve policy is political. And I think the only purpose of making it political is to give Trump the credit for keeping interest rates low.
MICHAEL HUDSON: The article that Besson wrote is really – I'm very happy with it. It's made wonderful, wonderful points, such as we've made for many years. And he called the title of the article: The Fed's New Gain of Function Monetary Policy. Gain of function is the term that was used for the coronavirus that's come out and a pandemic. And he's treating Federal Reserve policy as a pandemic.
And the gain in function has been a mutation of Federal Reserve policy, which we've just discussed, in saving the financial debt overhead of the economy, not the economy itself. And he goes to a long discussion of how the effect of making money financially, as you pointed out earlier, the leading financial sector investors are multi-tens of billionaires, and their way of making money is to deindustrialize the economy, not to industrialize it. And I think we've shown before the growth of wealth in the economy.
Here's the wealth of the bottom 50%. The bottom 20% has actually gone down. All of the growth in the wealth of the American economy, all this growth has been in the form of stock, bond, and real estate held by the 10%. It's the 10% that hold the vast majority, over 75%, of the stock market and the bond market. The 90% people, except maybe via their retirement funds, don't have bonds and stocks. Only a very minimum compared to the super wealthy. And the beneficiaries of this asset price inflation thus have been the very top of the economic pyramid. And they've used this increasing financial wealth to increase their control of the election process by contributing to campaigns.
Now that you've deregulated the political campaign contributions in America, as well as the banks, and they've essentially bought control. And so the Federal Reserve celebrates this as success. They said, we've created wealth, but almost all the wealth they've created, 90%, has been to the wealthiest 10%, not for the economy as a whole. And if most wealth takes the form of financial claims on debtors; mortgages, bank loans, corporate bonds, and government bonds, then the creation of wealth on the asset side of the balance sheet means the creation of debt on the liability side of the balance sheet.
And the wealthiest 10% have the assets; the 90% have the debt. And the effect has been to polarize the economy. And I think Besant deserves credit for pointing out that this has been the whole effect of the Federal Reserve asset price inflation. It's been inequality and unemployment and deindustrialization, the exact opposite of what textbooks imagine; that the financial sector is only an intermediary, it doesn't have any effect on the economy. It just reflects that it's the driving shaper of the economy. And it's been misshaping it all throughout the United States and Europe and the Western economies in general.
RADHIKA DESAI: Let me say that all the truths that Scott Besant has spoken in his article are no different from the truths that Trump had to speak in order to get elected. Remember, it's been my argument for a long time that Trump discovered one thing, which is that you can no longer win elections by telling people that their economy is doing very well.
He told them the truth; it's not doing well. We agree with that, but, of course, Trump told them the truth only in order to get elected and, of course, he thenmixed that with lies, for example the fact that he said to them that the economy is not doing well because of trade and because of immigrants and so on. All of those things were, of course, lies, so Trump has just a different package of truth and lies.
In Scott Bessent's new package of truth and lies, I think the key point you have to understand is that he is only telling the truth about the inequality generated by the Federal Reserve not so that this will put a stop to it, because of course he himself would favor, as his president would favor, lower interest rates. What is going to be the effect of lower interest rates? The effect of lower interest rates will be to further inflate asset bubbles and to postpone the moment of reckoning. Let me just share a really interesting chart that I found. This is a chart of the major asset markets in the United States. You can see here there are equities, residential real estate, treasury securities, commercial real estate, farmland, and so on.
Now, what you see here on this chart is the average annual growth from 1997 to 2004. They are not small but they are not huge. But then you look at the growth just between 2023 Q4 to 2024 Q4. Within just one year, these asset markets, some of them like the equity market and so on, have been growing massively. Whereas all the other asset markets have grown less. And the commercial real estate market has actually shrunk to some extent.
So what is really interesting here is that now, in a sense, a crash will be coming because all these markets are already slowing their growth. The equity market is going up without any support. It's going up and up, but what is it climbing on? It's getting high on something else because, as we know, the entire stock market is being taken up by the Magnificent 7 and a few other such stocks. And most of the Magnificent Seven inflation in the prices of the equities has been because of the hype around AI. And it is increasingly dawning on people that the astronomical investments being made in the name of AI are not going to be lucrative. They are already not yielding stuff.
So a crash will be coming. But the point is that, in the meantime, they want to continue to have low interest rates. So Besant might complain about the easy money policy. Maybe they will not engage in quantitative easing and so on. But they will keep interest rates low. The point is that he wants to say that Federal Reserve policy has always been political, and he wants to say, therefore, that we are going to politicize it. And once that happens, then Trump will do what has been done in the past, which is to justify low interest rates in the name of economic growth, when, in fact, he wants low interest rates in order to keep asset prices up.
MICHAEL HUDSON: I agree. That's exactly what's been happening. People act as if the growth of wealth and the growth of the 10% are what the economy is all about. And for the Federal Reserve, that's what the economy is all about, because that's its constituency, because the wealthiest 10% are the customers for the bank loans. And the Federal Reserve is created to be managed and run by its member banks. So you have a closed circle.
And as long as Congress remains inactive and is unwilling to do anything except to cut taxes even more, to run an even larger budget deficit that adds to the effect, you can have Trump make the argument that if we don't lower the interest rate, imagine how much of the government debt's interest rate – the budget is going to have to be spent on interest to the bondholders.
And this is already almost as large as our military spending. This is going to create a crisis. We're going to have to cut social security and cut Medicare, but there's a solution to that because we can privatize social security and put it all into the stock and bond market to keep the Ponzi scheme going.
RADHIKA DESAI: I'm just showing exactly what you're talking about Michael, which is that the yield on treasuries both one year and 30 years, so very short term and very long term, has been going up and they are now at fairly high rates. This is really, also quite interesting and they are adding to the debt, the deficit, etc., which will continue to grow because the Trump administration is committed to cutting taxes for rich people, etc.
Another point that I just wanted to make, but essentially what is happening now is that the idea that the Federal Reserve should be independent is being buried and now we will have a new type of rhetoric, which will continue the same policies of inflating asset bubbles. They were not going to revive the American economy, just as the tariffs are not going to revive it, nor will low interest rates revive the American economy, as I've already said at the beginning.
The insertion of cryptocurrency has simply added a new asset whose value can be inflated, on the basis of which a small number of rich people can make money while the rest of the economy suffers. And this is going to continue.
MICHAEL HUDSON: Well, the real point you're making: it's the government that needs to be made independent from the financial sector. That's the real independence we're talking about. And that's the problem. Under America's two-party system, you can only have two parties. There's such a tangle of laws that there's no way of having an alternative to the Republican-Democratic duopoly. And so Congress itself is no more independent than the Federal Reserve is from Wall Street.
And the result has been to shift economic policy, meaning economic planning, to the financial sector. Out of Washington into the financial sectors, Wall Street, and also the Chicago Mercantile Exchange. And so the result of all that is the financialization of the economy and a loss of what used to be the whole dynamic of industrial capitalism and the whole idea of industrial democracy.
If Wall Street's in control, this means not a market free of government planning and centralization. Financial planning is more centralized than government planning. That's why Trump's been firing all of the government regulatory agencies. With no regulatory agencies, there's nothing to prevent the financial sector from becoming the economy's central planner. And that's what's happened in a nutshell to the US economy
RADHIKA DESAI: So what you're saying is that we will have a centrally planned economy, except that it will not be planned in the interests of ordinary people, it will be planned in the interests of a small number of very rich people, the Elon Musks of this world. And this is so true. I suppose what we've really said is that the rhetoric about the independence of the Federal Reserve has always been a way of keeping Federal Reserve policy away from democratic influence.
The idea being that, of course, as long as you have some kind of democracy then at least you can elect a government which can politically try to control the Federal Reserve, to bend its policy in the direction that will help ordinary people, that will create a productive economy, etc. But, of course, what you're adding to this is that, of course, the existing democratically elected governments of the last many decades, and still today, are simply themselves in the pockets of the financial sector.
So there's no way the elected government is going to control the Federal Reserve in a way that will benefit ordinary people. The point is not that the Federal Reserve is not independent, it's not factually independent anyway. The problem is that it is under the control of the wrong interests. And if ordinary people in the United States want to take control over the destiny of their country, they are going to have to elect a government that is not part of this duopoly, that will actually represent the interests of ordinary people.
And then, yes, there will be no need for an independent Federal Reserve. The government will essentially bend monetary policy. A popularly elected government acting in the popular interest will bend monetary policy in the direction that it needs to go in order to create a productive, equal, socially just economy. And, of course, an ecologically sustainable economy.
MICHAEL HUDSON: I think you're quite right. A democracy, unlike an oligarchy, would centralize financial management in the hands of the Treasury, which is a public, elected political agency, not a central bank. The United States didn't have a central bank until 1913. The problem is that the Treasury itself is mismanaging the economy because it was run by basically bullionists, by gold bugs. And whenever the Treasury would raise a surplus, like for tariffs, the tariffs had to be paid in bullion, gold and silver bullion, not by bank credit.
And there was such an antagonism towards banks in the United States from colonial times, from the beginning of the Republic to the 1880s, with the whole silver, gold crisis, crucified on a cross of gold, that Americans didn't want the banks to create money. And there was such a shortage of actual credit that an economy needs that, in an act of desperation, the Republicans and Democrats got together and said, we need bank credit. We can't have these libertarian nuts, bullionists, at the Treasury tie our hands. That was the story of how the Federal Reserve was created in the first place.
RADHIKA DESAI: There was that, but I think there were also some other things. The fact of the matter is that the United States dollar was not acceptable around the world because it didn't have a central bank, whose function it would be to stabilize the value of the dollar. And of course, in the recent years, in the post-Second World War period, partly because the United States government has been committed to keeping the dollar as the world's money, what you've actually seen is a systematic overvaluation of the U.S. dollar, which has then been a disaster for American industry.
It has been central to the deindustrialization of the United States. But nevertheless, my point is that the Federal Reserve was also necessary because otherwise your currency would never be acceptable. Before the Federal Reserve was created, the international transactions of the American government and other corporations were being handled via JP Morgan and handled in pounds sterling, which was kind of interesting.
There was another thing, which is that when you had banking crises, and there was a big banking crisis in 1907, there was no lender of last resort. So they had to create one. So there were many reasons. But yes, the fact is that you had to create a Federal Reserve in order to perform these functions.
MICHAEL HUDSON: Yes, but at least at that time, the lender of resort, when it did lend money to banks to avoid insolvency, it charged a penalty rate. That was the essence of management. And now the Federal Reserve gives a subsidized rate, just the opposite of what happened over a century ago.
RADHIKA DESAI: Exactly. Well, Michael, it's been a wonderful conversation. Unless you have any further things to add, maybe we should wind it up for now. Okay, great. Thanks. Bye.
Transcription and Diarization: hudsearch
Editing: Kris Liti
Review: ced
Photo by Mike Hindle on Unsplash