Monetary Policy
and the Coming Depression

Jack Rasmus

ISBN  978-0-9860853-9-0 $26.95  2017

ISBN:  978-0-9972870-3-5 $19.00

    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
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 prices.

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

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
Dr. Rasmus debates Max Keiser on Bitcoin
Barnes & Noble: