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Federal Reserve Twists and Turns

The Federal Reserve is led by an inveterate “free market solves all economic problems best” kind of guy.  Mr. Bernanke loves Milton Friedman passionately and says so.  This is what big business wants to hear when it is making lots of money, when it wants tax reductions to boost profits, and when it wants government deregulation for the same reason.  But these days big business, and especially big financial business, wants to hear a different tune.  That’s because something has gone badly wrong in the free market.  Somehow, normally proper banks, hedge funds, securities dealers, mortgage companies, and the companies that rate the risks associated with what they all do got on the wrong track.  They pushed loans on people and businesses who might not be able to pay back, they drew others into sharing those loans, and they were not always clear or honest about the risks involved.  So suddenly, when some of those borrowers could no longer pay back the interest or principal they owed, the credit system began to unravel.  Lenders became painfully aware that the IOUs they owned were often worth much less than what they had thought.  Shocked and awed, they cut back on lending money.  Nowadays, they trust no one.  Borrowers — both those who are risky bets and those who aren’t — have ever greater trouble getting loans.  In a capitalism utterly dependent on massive, intertwined networks of credit, a breakdown in the lender-borrower relation threatens the economy and beyond that the society as a whole.

The free-market, no-government-intervention ideology finds itself in a rough patch.  So Mr. Bernanke’s Federal Reserve sharply cut interest rates on September 18.  Let’s be clear here.  The government intervened to make money for banks, or more precisely to print and distribute money to banks.  The grateful banks were told that their interest cost to get this new government-issue money would henceforth be much cheaper.  The government hopes that the banks, flush with this cheap new money, will lend it and so revive the credit system.  If they do, that might prevent the financial crisis from becoming a general economic crisis.  The government — led by anti-government free-market ideologues — is trying to rescue capitalism from financial free markets that have spun out of control and threaten the whole economy.

More interesting than this revelation of the contradictions between how capitalism works (or doesn’t) and its ideologies is to consider what this government did not do to address the current problems.  Last month saw a quarter of a million home foreclosures in the US.  One major contributor to the current financial crisis is the incapacity of home-owners to keep paying their monthly mortgage obligations.  Thus one way the government might have helped the situation is by helping these home-owners to make those payments or making the payments for them or lending them the money to make the payments.  Not only was none of this done, but there is little chance of anything being done anytime soon for these “distressed” homeowners — estimated to reach over 2 million within a year’s time.

Nor is the government even considering, let alone doing anything, about the housing industries.  And this despite the obvious fact that the “deregulated” dealings among the builders, financiers, mortgage dealers, and securities industries were central causes of today’s economic crisis.  Apparently, the government is to be kept away from the “efficiency” of the free market until breakdowns occur.  Then, when the government is brought in to “solve” those problem, struggles erupt over who will benefit from the government “bail out” and who will not.  It is not difficult to guess who wins in those struggles.  The banks are already today’s prime beneficiaries of the Federal Reserve’s intervention, while the foreclosed watch pitifully from the sidelines and the sidewalks outside their former homes.

In Asia and New Orleans, it was a tsunami and a hurricane that took people’s homes.  Their capitalist economies and the governments they dominate would not take the necessary and perfectly possible steps to prevent or humanely respond to those disasters.  In the US today, no weather event touched off our disaster.  Instead we have a financial crisis of capitalism and the particular “policies” of the state it controls that combine to deprive millions of their homes.  Whereas in Asia and New Orleans, the homeless saw their former homes physically destroyed, here the homeless will gaze upon their former homes, intact and empty, staring back at them.

In contemporary capitalism, the interdependence of the corporations and the state makes it absurd to look to either one for solutions to the problems their cozy relationship generates.  The debates about whether regulated is better or worse than deregulated capitalism, about whether more government intervention is better than less, miss the point.  Today’s basic social problems emerge from the interaction of this kind of economy and this kind of state.  More or less of one versus the other guarantees little or no basic changes and thus little or no basic solutions to this system’s problems such as the current financial and housing crises.


Rick Wolff Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).  



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