Monetary Policy
and the Coming Depression

Jack Rasmus

ISBN  978-0-9860853-9-0
$26.95  2017

ISBN:  978-0-9972870-3-5

    Central banks of the advanced economies—despite having been
    designated by their respective economic and political elites as
    their states’ primary economic policy institution—have failed
    since 2008 to permanentlstabilize the world’s banking systems or
    restore pre-2008 economic growth.

    Rather, central bank liquidity injections since the 1970s not only
    produced the 2008-09 crisis, but they then became the central
    banks’ solution to that crisis; and now promise to cause of the
    next one, as a further tens of trillions of dollars of liquidity-
    enabled debt has since 2008 been piled on the original trillions
    before 2008.

    Fed policy since 2010 has represented an historically
    unprecedented subsidization of the financial system by the State,
    implemented via the institutional vehicle of the central bank.
    Central banks’ function of lender of last resort, originally
    designed to provide excess liquidity in instances of banking
    crises, has been transformed into the subsidization of the private
    banking system, which today is addicted to, and increasingly
    dependent upon, significant continuing infusions of liquidity by
    central banks.

    Taking away this central bank artificial subsidization of the private
    sector, especially the financial side of the private sector, would
    almost certainly lead to a financial and real collapse of the global
    economy.  It is thus highly unlikely that the Fed, Bank of England,
    Bank of Japan or European Central Bank will be able any time
    soon to retreat much from their massive liquidity injections that
    have been the hallmark of central bank policy since 2008. Nor will
    they find it possible to raise their interest rates much beyond
    brief token adjustments.  Nor exit easily from their bloated
    balance sheets and extraordinary historic policies of liquidity
    provisioning. That liquidity not only bailed out the banks and
    financial system in 2007-09, but has been subsidizing the system
    ever since in order to prevent a re-collapse.

    Truly, as this book addresses in painstaking detail, central
    bankers are at the end of their rope. Wrought by various growing
    contradictions, central banks, as currently structured, have failed
    to keep pace with the more rapid restructuring and change in the
    private capitalist banking system.  As a result, they have been
    failing to perform effectively even their most basic functions, or
    to achieve their own declared targets of price stability and

    Official excuses for that failure are critiqued and rejected.  
    Alternative reasons are offered, including:
    •        the declining effects of interest rates on investment,
    •        the relative shift to financial asset investing at the expense
    of real investment,
    •        failure of central banks to intervene and prevent financial
    asset bubbles,
    •        the purposeful fragmentation of bank supervision across
    regulatory institutions,
    •        mismanagement of the traditional money supply,
    •        rapid technological changes transforming the very nature of
    money, credit and financial institutions and markets worldwide,
    •        monetary tools ineffectiveness and incorrect targets, and
    •        central bankers’ continuing adherence to ideological
    notions of the mid-20th century that no longer hold true in the
    21st—like the Taylor Rule, Phillips curves, and, in the case of ZIRP
    and NIRP, the idea that the cost of borrowing is what first and
    foremost determines real investment.

    Central banks must undergo fundamental restructuring and
    change. That restructuring must include the democratization of
    decision making and a redirecting of central banks toward a
    greater direct service in the public interest.   A Constitutional
    Amendment is therefore proposed, along with 20 articles of
    enabling legislation, addressing what reforms and restructuring
    of central banks’ decision making processes, tools, targets,
    functions, as well as their very mission and objectives, are
    necessary if central banks are to become useful institutions for
    society in general. The proposed amendment and legislation
    defines a new mission and general goals for the Fed—as well as
    new targets, tools and new functions—to create a new kind of
    public interest Federal Reserve for the 21st century.


Chapter 1: Problems & Contradictions of Central Banking

Chapter 2: A Brief History of Central Banking

Chapter 3: The US Federal Reserve Bank: Origins & Toxic Legacies

Chapter 4: Greenspan’s Bank: The ‘Typhon Monster' Released

Chapter 5: Bernanke’s Bank: Greenspan’s ‘Put’ On Steroids

Chapter 6: The Bank of Japan: Harbinger of Things That Came

Chapter 7: The European Central Bank under German Hegemony

Chapter 8: The Bank of England’s Last Hurrah: From QE to Brexit

Chapter 9: The People’s Bank of China Chases Its Shadows

Chapter 10: Yellen’s Bank: From Taper Tantrums to Trump Trade

Chapter 11:  Why Central Banks Fail

Conclusion:   Revolutionizing Central Banking in the Public Interest:
             Embedding Change Via Constitutional Amendment
Dr. Jack Rasmus is the author of several books
on the USA and global economy, including

Systemic Fragility in the Global
Economy, 2015;
and Looting Greece:  A New Financial
Imperialism Emerges (2016). He hosts the
weekly New York radio show, Alternative Visions,
on the Progressive Radio network; is shadow
Federal Reserve Bank chair of the ‘Green
Shadow Cabinet’ and economic advisor to the
USA Green Party’s presidential candidate, Jill
Stein. He writes bi-weekly for Latin America’s
teleSUR TV, for Z magazine, Znet, and other
print & electronic publications.  Dr. Rasmus
studied  economics  at  Berkeley,  took  his  
doctorate  in  the  University  of  Toronto (1977),
and worked for many years as a union organizer
and labour contract negotiator.  He currently
teaches economics and politics at St. Marys
College in California
Central Banking has become an unprecedentedstate subsidization of private banking

Systemic Fragility in the Global Economy

"Systemic Fragility in the Global Economy offers a penetrating analysis
of economic stagnation in advanced economies by providing a
sustained and systemic focus on the role of finance, an analysis that
probes further than mainstream economic analysis. Rasmus has made a
signal contribution to contemporary economics and provided a vitally
important X-ray of the political economy of stagnation.."
Jan Nederveen Pieterse, University of California Santa Barbara,
Journal of Post Keynesian Economics, 2017     

"Systemic Fragility in the Global Economy (2015) is the fourth in a series
that Rasmus has produced within this broad intellectual and activist
project. Each work not only provides  a  theoretically-informed,  
empirically-grounded  diagnosis  but  also  offers  a  wide-ranging  set  
of  policy  recommendations  aimed  at  progressive  movements... The
case studies of the USA, Europe, Japan and China are excellent,
typically contrarian, and  highly  teachable.  Many  important  and  
provocative  arguments  and  points  are  made in passing in these
studies and they are strengthened by the more sustained theoretical  
analyses  that  follow.  A  major  contribution  is  the  analysis  of  the  
complexity  of  shadow  banking,  an  ill-defined  term  of  art  in  most  
of  the  literature."
Capital & Class, Vol. 40, No. 2, June 2016
Excerpt from Chapter One

Why Central Banks Are Failing

Central banks are failing because their ability to perform these primary tasks is in decline.
The question then is what are the causes of that decline?  What developments and forces in
the global economy are disrupting central banks efforts to carry out their primary tasks? The
following is a
brief introductory overview of the key problems and fundamental
contradictions with which central banks today are confronted.  

a.  Globalization and integration rendering central bank targets & tools ineffective
First, there’s the problem of the rapid globalization and integration of financial institutions and
markets that emerged in the 1970s and 1980s which has grown ever since.  Central banks
are basically national economic institutions. The global financial system is beyond their
mandate.  Not only that, there is no single central bank capable of bailing out the global
banking system during the next inevitable global financial crash.  In 2008 it didn’t even
happen. The US Federal Reserve and the Bank of England bailed out their respective
banking systems, providing more than $10 trillion in direct liquidity injections, loans,
guarantees, tax reductions and direct subsidies.  The Federal Reserve even provided a loan
in the form of a currency swap of $1 trillion to the European Central Bank and its affiliated
national central banks.  But the Euro banking system has not been effectively bailed out to
this day. Nor has Japan’s. Together both have the equivalent of trillions of dollars in non-
performing bank loans. While China’s banks and central bank, the Peoples Bank of China,
was not involved in the 2008 banking crash and subsequent bailout, it almost certainly will be
involved in the next financial crisis.  In fact, China’s financial system may be at the center of it.

The fact that the financial-banking system today is highly integrated and globalized raises
another problem for central banks. With today’s banking system composed not only of
traditional commercial banks, but of shadow banks, hybrid shadow-commercial banks, non-
bank companies engaging increasingly in financial investing, and financial institutions in
various new forms serving capital markets in general, no national central bank’s operational
tools or policies can control the global money supply or ensure stability in goods and services

The global 21st century financial system is also well beyond the reach of central bank
supervision.  How does a single central bank supervise banks that operate simultaneously in
scores of countries and economies?  Or banks that operate solely on the internet, or with a
formal headquarters located on some remote island nation?  Massive sets of real time data
are required for effective supervision by any single central bank. But access may be denied
by national political boundaries, or significantly delayed and obscured by the same.  
To be able to bailout in the event of a crash, to effectively control the global money supply, or
to reasonably supervise, national central banks would have to integrate and coordinate their
policies and actions across their respective national economies.  But they are far from being
able to achieve such coordination at present, and in fact appear increasingly fragmented and
going in different, and at times, even opposite directions.   As the capitalist banking system
becomes more complex, more integrated and more globalized, central banking has become
less coordinated across national economies, not more.

Even the most influential central bank, the US Federal Reserve, is unable to globally
coordinate national central bank actions with regard either to bailout, money supply
management, or bank risk activity supervision. As of 2017, the Fed appears even more intent
on going its separate way, independent of other major national central banks in Europe and

b.  Technological changes generating instability
A second area of major problems is associated with technological change. Apart from
technology enabling the rapid globalization and integration of finance, and the problems that
has created for central banks, technology is also changing the very nature of money itself,
creating new forms that are difficult to measure and monitor.  A gap is also growing between
forms of money and forms of credit.  Money may be used to provide credit, but credit is
increasingly made available without central bank and traditional forms of money.   Credit is
increasingly issued by banks (and non-banks) independent of money supply provision
policies and goals of central banks. Hence, central banks are losing control over the creation
of credit regardless of efforts to influence it through money supply manipulation. And credit
means debt and debt is critical to instability.
Twenty-first century technology is also upending the manipulation of the supply of money by
central banks as well.  By various means, technology is accelerating the movement of money
capital, speeding up the ‘velocity of money’ flow, both cross-borders and in and out of
markets.   Technology has also enabled fast trading, split micro-second arbitrage, and is
contributing to an increasing frequency of ‘flash crashes’ in recent years, in both stock and
bond markets, that are capable of precipitating broader financial instability and crashes.  
Technology also accelerates the contagion effect across markets and financial institutions
when an instability event erupts.  Not least, technology makes it possible for banks to avoid
central bank general supervision. It is easier to hide data on a server in the internet cloud
than it is to store paper records in filing cabinets away from central bank inspectors. Central
banks, with relatively small numbers of supervision staff and inspectors, simply cannot
compete with banks with technical staffs and leading edge technical knowledge.

c. Loss of control of money supply & declining effect of interest rates
Technology is broadening the very definition and meaning of money, beyond the scope of
influence available to central banks’ via the traditional tools they have used to influence
money supply.   That is one reason why central banks since 2008 have been experimenting
so aggressively (and even recklessly) inventing new tools, like quantitative easing (QE), to try
desperately to reassert control and influence.   But other forces minimizing central bank
control over money are at work as well, among them the rise and expansion of shadow
banking (see section d. to follow).

Another related source of loss of control is associated with non-bank multinational
corporations, which  invest on a global scale.  Should the US central bank, the Fed, seek to
reduce the national money supply by raising national interest rates, multinational
corporations can and do simply borrow elsewhere in the world,  ignoring US central bank’s
efforts.  They can even borrow in dollars offshore, since dollar markets exist in Europe, Asia
and elsewhere as a consequence of the Federal Reserve having flooding the world with
liquidity in dollars for more than a half century.

Since their earliest development in the ‘middle’ period of banking, central banks have
attempted to stimulate (or discourage) real investment in construction, factories, mines,
transport infrastructure, machinery, etc. by raising (or lowering) benchmark interest rates.  
Interest rates are simply the ‘price of using or borrowing money’.  But the price of money—i.e.
the interest rate—is not determined solely by the supply of money; it is also determined by
the demand for money and by the velocity of money as well.  Both supply and demand
determine price fundamentally. .  But central banks have never had much, if any, influence
over money demand determinants of interest rates.  Money demand is determined by general
economic conditions at large, not by central bank actions.

Furthermore, both the supply and the demand for money (and thus interest rates) are
determined also by the velocity of money. The velocity of money, however, is increasingly
determined by technology developments.
Both money demand and money velocity are drifting further from central banks’ influence.
And to the extent they do so, central banks may be said to be steadily losing control over
interest rates since interest rates are determined by all three: money supply, money demand,
and money velocity.  Central banks are left with trying to influence just one element—money
supply—as a means to control interest rates, but their influence here is diminishing as well,
as the globalization of financial markets accelerates and multinational companies grow,
enabling access to a multitude of forms and sources of credit.  

Central banks thus have decreasing influence over even the money supply determinants of
interest rates, let alone influence over both money demand and the velocity of money which
are equally important determinants of rates. Central banks are steadily losing control of their
key operational lever, the interest rate, as the means by which to influence economic activity.
As will be addressed in subsequent chapters, this general fact is perhaps why central banks
have abandoned the manipulation of interest rates as the means by which they attempt to
influence real economic activity in a given economy.


d. The rise and expansion of shadow banking

Shadow banks constitute a particular problem for central banks along a number of fronts.  
Shadow banks engage in high risk/high return investing and are thus often at the center of
financial crises requiring central bank bailout.  Shadow banks exacerbate the decline in
central banks’ ability to determine money supply and in turn interest rates.  And shadow
banks are mostly beyond the scope of central banks’ supervisory activities, although some
very minimal central bank supervision has been extended to some segments of the shadow
banking world (e.g. mutual funds in the US) since 2008.

A body of academic and central bank literature has developed since 2008 on whether and
how central banks (and governments in general) should increase their regulation of shadow
banks.  Standard financial regulation legislation and agencies’ rules address financial
regulation of traditional banks. The new area addressing shadow banks is sometimes
referred to as Macroprudential Regulation.  But to quote Rubin—a former shadow banker
himself—once again, central banks today are still light years away from being able to regulate
the shadow banking world. This is because “no one comes close to having identified the full
reach of shadow banking or the systemic risks it poses”, which “would be a monumental
undertaking for the United States alone” but “it becomes even more daunting once shadow
banking outside of our borders is considered.”
As this writer has previously concluded, thinking that central banks can macro-prudentially
regulate or effectively supervise shadow banks—given the magnitude and global scope of
operations and growing political influence of shadow banking—is delusional.   “Technology,
geographic coordination requirements, opacity, bureaucracy, the massive money corruption
of lobbying and elections by financial institutions, fragmented regulatory responsibilities, the
sorry track record to date of Fed and other agencies’ regulatory efforts, and the multiple
interlocking ties involving credit and debt between private banking forms—all point to the
futility of regulating shadow banks in the reasonably near future.”  

e. The magnitude and frequency of financial asset price bubbles

Central banks are failing to prevent or contain financial asset price bubbles. This particular
failure is not just that they lack the tools, but that they lack the will to do so.  This is in part
political.  There’s a lot of money to be made by capitalist investors and institutions when
financial bubbles are growing.  To intervene when the financial elite is ‘making money’ is to
court the ire and intervention in turn by government supporters, political friends, and the
corporate media.  

As the former head of a major US bank during the 2008-09 crash admitted when interviewed
after the crash and asked did he not know the banking system was headed for financial
Armageddon? Why did he not stop the excessive and risky investing practices at the time?  
Prince simply replied, ‘when you come to the dance, you have to dance’.  What he meant was
he (and likely other banker CEOs) knew the system was headed for a crash. But he couldn’t
buck the trend without his shareholders, demanding to participate with other banks in the
great profits and returns from the risky speculation in subprime bonds and derivatives.  If
Prince had swum against the tide, he undoubtedly would have been sacked by his Board and

A similar powerful opposition would likely have descended on the Federal Reserve officials at
the time in 2007-08, had they acted to ‘prick the asset bubble’ before it burst.  But burst it did,
causing trillions of dollars in bail outs in its wake.  Central banks would rather try to clean up
the mess from a bubble and crash than try to prevent it, or even slow it down. They and
supporters in the media and academia therefore raise excuses and arguments justifying their
non-intervention to prevent destabilizing financial asset price bubbles.  

The main arguments include it is not possible to determine whether a bubble is in progress or
not, until after the fact. Or it is too difficult to know if it’s a de facto bubble or just a normal
financial market price escalation. Or, to deflate a financial bubble in progress is likely to set
off a financial panic prematurely, and thus provoke the very condition that it was supposed to
prevent. Or, central banks’ monetary tools aren’t designed to stop excessive asset price
inflation in any event.  Nor is responding to asset price bubbles part of the ‘mission’ of central
banking.  The mission is to prevent excessive price instability in real goods and services; to
stabilize the price of money (e.g. interest rates), or maybe even to modestly encourage wage
(factor prices) growth in order to support their mission of encouraging economic growth and
employment (through consumption).  But no, hands off on financial asset inflation or
instability. Without saying it in such direct terms,  what is meant is regulating financial asset
prices and preventing bubbles is de facto directly regulating the rate of profit realization from
financial asset market capital gains!

Nearly fifteen years ago, when just a member of the board of governors of the US Federal
Reserve, for example, Ben Bernanke addressed in a formal speech the subject of financial
asset bubbles intervention. He made it clear, leaving no doubt as to the policy of the central
bank at the time, that it was neither desirable nor possible to intervene to prevent financial
asset bubbles.  All a central bank was mandated to do was set a target for inflation, by which
he meant a target for inflation in goods and services prices, not financial asset prices.  
Stabilizing goods prices would eventually stabilize financial asset prices in turn, it was
assumed.  But: to quote Bernanke at the time, before he was made chair of the US central
bank in 2006, “an aggressive inflation-targeting rule [say 2% ?] stabilizes output and inflation
when asset prices are volatile, whether the volatility is due to bubbles or to technological
shocks…there is no significant additional benefit to responding to asset prices.”    Years
later, in 2012, as Federal Reserve chair, well after the crash of 2008-09, Bernanke held to
the same view: “policy should not respond to changes in asset prices…trying to stabilize
asset prices per se is problematic for a variety of reasons”…and it runs the “risk that a
bubble, once ‘pricked’, can easily degenerate into a panic.”

What this mistaken view represents, however, is a denial that asset price bubbles are always
followed by asset price bust and deflation, and that collapsing asset prices can and do have
significant negative effects on the real economy and therefore on production, unemployment,
decline in consumer spending and on prices of goods and services.  The Bernanke view was
simply wrong.  But it served as a logical economic justification to not address financial price
bubbles.  And not a word about how monetary policies depressing interest rates for years,
might cause central bank-provided liquidity to flow into financial asset markets and create the
very financial bubbles that, according to Bernanke, the Fed and central banks should do
nothing about!
Since Japan’s early financial crash in 1990-91, and its subsequent banking crash in 1997,
scores and perhaps hundreds of academic journal articles and books have been written on
the futility of doing anything about financial bubbles.  Most echo the same logic: just target
reasonable inflation for real goods and services and the rest will take care of itself.

This traditional central bank view refusing to address financial bubbles continues to this day.

f. The growing political power of the global finance capital elite

Central banks both facilitate and are confronted with the rising political influence and power
of the new global finance capital elite.  The elite constitute the human agency driving the
restructuring of the global economy in the 21st century that is responsible for creating most
of the problems and contradictions confronting central banking today.  Symptoms of their
political influence include the successful deregulation of financial activities by governments,
their corralling of an accelerating share of income and financial wealth from financial investing
and speculation, and the absence of any prosecution and incarceration of their members
when their practices precipitate financial crashes and their disastrous consequences on the
public at large.  Central banks have been unable thus far to ‘tame’ this new, aggressive, and
ultimately destabilizing form of capitalist investment.  

"The financialization  of the US economy has been well documented
with finance capital now far surpassing manufacturing as a percentage
of GDP.  Rasmus documents the ties of the Federal Reserve to Wall
Street and demands democratization of central banking with a series of
common sense solutions.  A great book.  I learned a lot from it."
—Larry Cohen, Board chair, Our Revolution
Past President, Communications Workers of America

"[T}o 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 at the End of Their Rope?,
examines the fundamental role of central banks in our new, savage
global economy...

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 determining 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
—David Baker, Z Magazine, October 2017