- Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
- He spoke with author Christopher Leonard about the role of the Federal Reserve in recessions.
- Leonard says the Fed should put money into Americans' hands, not Wall Street, to boost the economy.
In 2008, when the real-estate bubble burst and the whole world staggered on the precipice of total economic disaster, the Federal Reserve leapt into action to try to save the economy. The planet's most powerful people — world leaders, the media, heads of elite institutions — basically had to helplessly stand by and watch the Fed.
Created in 1913, the Fed is a system made up of 12 powerful banks headed up by a single main office in Washington, DC.
"The Federal Reserve is the central bank of the United States," business reporter Christopher Leonard said on the latest episode of "Pitchfork Economics." "Their job is to basically create dollars — that's the Fed's superpower. It can create new dollars out of thin air and it manages our money supply."
The subtitle of Leonard's new book "The Lords of Easy Money" might give you a hint about how he thinks the Fed's action paid off: "How the Federal Reserve Broke the American Economy."
In his book, Leonard suggests that the Fed's policies helped create the conditions for the 2008 economic collapse in the first place and that the decade of low wages and raging economic inequality we saw in America's lackluster recovery from the 2008 recession was entirely the Fed's fault. The problem wasn't in the creation of new money, Leonard argues — the problem was where that new money went and who was in charge of distributing it.
"There's this group of 24 banks on Wall Street — financial institutions like JP Morgan, Goldman Sachs, Wells Fargo," Leonard said. When the Fed wants to create money to spur spending and combat recessionary influences, he added, they buy large amounts of treasury bills from those two dozen huge financial firms.
"From basically 1950 until 2008, that's how the Fed influenced our supply of money," Leonard said. "They would gradually loosen or tighten the money supply by making these purchases on Wall Street."
Of course, the problem with this system should be apparent to anyone who's witnessed the repeated failure of trickle-down economics to spur the economy over the last four decades: Giving money to the richest Americans doesn't create economic growth.
"The top 1% of our country owns 40% of all our assets. The bottom half of all Americans only own 7% of our assets," Leonard said. "The Fed is pumping up asset prices, which really benefits a tiny group of hyper-rich people. And at the same time, it creates these asset bubbles that inevitably collapse, as we saw in '08 and 2020."
"So that's why I say these policies clearly have dramatically widened the gap between the rich and everybody else and they've created these bubbles on Wall Street that periodically explode," Leonard added.
Additionally, Leonard said the currency created by the Fed has funded activity that's actively harmful to the public good. "One of the things I document in the book is how this binge of debt and quantitative easing really benefited the fracking industry," Leonard said. "It pushed billions of dollars into corporate junk debt for frackers in North Dakota and Texas — investments that don't make any sense at all" if we expect to combat climate change.
Widespread consumer demand is what creates jobs and grows communities. The Fed would do more to encourage true economic growth by creating money and getting it directly into the hands of the American people.
Pitchfork Economics cohost David Goldstein said that the Fed could buy municipal bonds at low interest rates to fund the construction of housing in expensive urban areas where homeownership is now out of reach for ordinary Americans, or to fund the construction of solar panels on the roofs of millions of homes to create a green energy grid.
Goldstein added the Fed would be "collateralizing against future rents or future income from these investments" and in the meantime the money created would be directed "toward transit and housing and clean energy and schools and so many other things that are real investments that pay off in the future and would more broadly benefit people than just going and raising asset prices."
"There's another structural reform people are talking about, in that the Fed could create money in bank accounts instead of just the 24 reserve accounts," " Leonard said.
Imagine if, during the economic collapse of 2008, every American received regular infusions of cash from the Fed. Instead of the painfully slow economic recovery that stretched out for the entirety of the Obama presidency, that consumer spending would have been invested directly in communities around the country, spurring small-business growth, tax revenue, and job creation that would have built the economy from the bottom up — not from Wall Street on down.
Had the Fed actually invested in the American people and not just the stock market, the pandemic could have ushered in an era of true economic growth and investment in communities — not just a series of record-breaking years for corporate profits, stock buybacks, and executive bonuses.