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 unprecedented
state 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 Asia.

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 shareholders.

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.