Central Banking is too Important to be De-Politicized; on Lev Menand’s The Fed Unbound

by Eric Schliesser on January 12, 2023

After Stagflation during the 1970s, many markets were liberalized and, over time, central banks made a lot more independent in lots of places. In addition, some countries in Europe embraced the EURO (and founded the ECB), and barriers between regulated banking and shadow-banking (including by investment banks) were removed.

The intended aim, and in certain respects the successful effect, of central bank independence was to de-politicize central banks in three senses: first, to remove the temptation for politicians to use interest rates to benefit their own electoral prospects (which was thought to be the cause behind persistent inflation). Second, to prevent the use of central banks as a piggy bank for well-connected interest groups. Third, to turn monetary policy over to technocratic experts and, thereby, remove it as an electoral issue.

Over time one unintended effect of the third kind of de-politization is to dumb down our political class, which need not show any interest in monetary policy because it can always pass the buck to central bankers, and even delegate the execution of other policies to them. Arguably this state of affairs also made political debates more focused on cultural issues and less on the complex trade-offs involving monetary (and so-called fiscal) issues. In addition, as central banking was removed from the political arena, and so able to move with great rapidity, central bankers were actually nudged into taking on a whole range of crisis management tasks.

After many financial crashes, Greenspan puts, and bail outs later, this has generated a considerable mission creep for institutions that lack accountability and have deep enough pockets to make mistakes without having to learn from them. In recent times new tasks – like greening the financial system/economy – have been added to central bankers’ policy portfolio. And we probably narrowly avoided a bail out for crypto (largely because central bankers were slow to understand it).

The effect of this process is the development of a super-government-agency that tries to do too much without sufficient accountability and that undermines the legislative process. While there are important differences among the regulatory and governance frameworks of central banks worldwide, and they have different stature and influence, the previous paragraphs fit the situation of many central banks in the OECD.

One of the more insidious effects of the status quo we have arrived at is that where central bankers’ efforts “to conduct a more general economic policy are successful, they are likely to increase inequality given its available levers. Most obviously, backstopping shadow banking leads to more shadow banking, which likely entails more rent extraction as show banks privatize the gains from government-backed money creation.” (Lev Menand (2022) The Fed Unbound: Central Banking in a Time of Crisis, 134-135) That is to say, central bankers have de facto encouraged asset price inflation, upward redistribution, and incentivized a bubble (or financialized) economy.

Menand is a lawyer with a background in government service as a US Treasury official. His book is primarily about the development of the Federal Reserve and how it became a kind of super government agency today. It is written with careful precision and without rhetorical excess. Even if the historical material is somewhat familiar, Menand makes the material lively and calls attention to the significance of often overlooked rule changes.

For example, I always assumed that the rise of Eurodollars –“an arbitrage, a way for companies to issue dollar money instruments without complying with US banking laws” (p.113) —  was the effect of the Marshall plan and only became important with the oil embargo that enriched OPEC affiliated countries. But Menand shows that the development of Eurodollars (and the shadow banking system) was, in fact, encouraged by the “Martin-led Fed” in the late 1950s and 1960s. The FED, thereby, undermined the whole spirit of the post 1930s banking laws, and helped promote shadow banking. It did so in order to provide US banks a competitive advantage abroad (p.114). Perversely, the institution has been rewarded with more authority since even as leading US banks have had several rounds of bail outs during the last few decades (including the 1980s Brady Bonds).

Because asset price inflation so clearly helps the educated and well off in today’s political economy, one is often treated as a class traitor or an outright crank when one casts doubts on central bank independence (and one is treated to lectures about the 1970s). This despite the fact that balance sheet of the last few decades with an independent central bank regime is underwhelming: growth rates are subdued, we have had upwardly redistributive bail-outs, and even inflation has returned. (Obviously, the asset price inflation of property is not just a monetary phenomenon, but also effect of land/zoning and mortgage deduction policies. But central banks often allow member banks to treat mortgages as (near) risk free.)

Menand (Columbia University) also points to a governance problem: central banks make policy without sufficient scrutiny from stakeholders and accountability to the wider public. It is predictable that this leads and has led to sub-par policy outcomes. As Menand puts it “there is also a practical problem with the government relying on the Fed to backstop shadow banks, compensate for inadequate fiscal policy, and extend credit to the real economy. It isn’t well designed to perform these functions. Compared to most administrative agencies, its officials are highly insulated from political oversight, and its activities are not subject to rigorous procedural requirements or public scrutiny.” (130)

In fact, “many of the Fed’s activities are not subject to the same sort of judicial review as the activities of other government agencies, nor is its policymaking process structured with as much public participation and engagement. The Fed’s mission also requires a close relationship to the banking sector and a set of tools that are financial in nature. Given this, as well as the reliance the Fed has developed on the primary dealers to execute many of its policies, any efforts the Fed makes toward general economic policy are likely to disproportionally benefit financial firms.” (p.131) As Menand goes on to note, this also encourages rent-seeking by the well-connected.

Menand has a reformist sensibility. And in future posts I discuss some of his proposals. But as long as we leave the political discussion of central banking to conspiracy theorists and anti-establishment populists, we should not expect much reasoned discussion about reform. My own view is that this is a very dangerous state of affairs not just because of the distributional effects, but because once the conspiracy theorists and anti-establishment populists own an issue they will reap the rewards when the next big financial crash hits.



MisterMr 01.12.23 at 5:33 pm

My two cents:

Modern day capitalist economies work with various degrees of keynesian stimuls. This is because without it employment and wages would be too low ant there would be torches and pitchforks in the street.

But keynesianism in its various forms works by bumping up business profits, so that companies are enticed into investing more and hiring more people. Lowering the interest rate has a similar logic: it is easier for people to get in debt so people tand to invest more; someone’s debt is someone else’s wealth so obviously this increases the wealth to income ratio.
So on the long term keynesianism does also help the rich.

When we see what happened in countries where central bankers didn’t extend their puts, sy Greece, the result was extremely bad for workers, not just for rich people.

So on the whole my opinion is this: keynesian policies are a necessity; there are other policy lever that should be used to reduce inequality (like direct taxation, but also mandatory limits on working hours, more extensive unemplyment benefits, stuff like public health etc.), while keynesian policies should be relegated to countercyclical use.

The problem comes from the fact that, since the 80s onward, basically all the “pro worker” policies were conceived in terms of keynesian policies, whereas in other aspects the worker was supposed to be flexible.


Sashas 01.12.23 at 5:58 pm

Hi Eric! I’ll have more to say later, but for now can you explain what you mean by “populists”? I’m trying to parse this:

My own view is that this is a very dangerous state of affairs not just because of the distributional effects, but because once the conspiracy theorists and anti-establishment populists own an issue they will reap the rewards when the next big financial crash hits.


reason 01.12.23 at 9:38 pm

This sounds like it leads a bit towards the argument in “Between Debt and the Devil” (Adair Turner), but without being so explicit. Expanding the money supply (necessary) by increasing private debt (especially with the bi-product of increasing land – read house as it is incorrectly framed – prices) is pernicious policy in every way. Who if it was framed that way could think that increasing the household debt ratio was a recipe for increasing stability and prosperity? What you need to do is increase the real wealth of the household sector in order to have a stable and prosperous economy. And that it best achieved through increasing public debt.


JPL 01.12.23 at 11:14 pm

@2 Sashas:

I’m not Eric Schliesser, and I don’t want to interfere with his response, but your request for clarification of the term ‘populist’ raises interesting questions that are important more generally. Let me try to clarify this term by distinguishing two different “contexts of discourse”, let’s say, that this term is often used to refer to, and coordinating it with the positive-negative dimension.

A lot of popular discourse, i.e., carried out by ordinary people in the context of their daily lives, involving their views about current governance, involves people repeating what they have heard other people saying, using similar formulations, stock expressions, etc., characterized by a shallow level of analysis which, at its worst resorts to conspiracy theorizing and scapegoating, and often including a negative emotional component of complaint, grievance, cynicism, social antagonisms, etc. This aspect of popular discourse is problematic, because the causal analysis is inadequate and fails to consider the points of view on the given problem of people in communities different from their own. On the other hand, in traditional communities ordinary people can give defenses and explanations of traditional institutions, such as communal land tenure, that show evidence of deep understanding and, in particular, an application of an advanced ethical understanding. Discourse in such contexts tends to be more sober and serious, and seems to be an attempt to express their community’s foundational cultural beliefs. So I would use the term ‘popular’ to refer to the expressed thinking of the governed, of both of these kinds, the problematic and, let’s say, the constructive.

Then there are the elites of a polity, those in positions of political influence and possible leadership, such as politicians and their helpers on “news” media programs. In the problematic case, some members of the elite, out of narrow self-interest (e.g., “careerism”, money lust) decide to advance their aims, mainly getting money and status, by supporting plutocracy, as opposed to seriously solving social problems in an effective and equitable way. An easy and dishonest way of doing this is to give reasons to the many to give the politicians their votes by repeating the same kinds of expressions used by “the people”, and directing them back at the people, this time with an amplification of the negative emotional content. If they gain power using these dishonest methods they are then free to follow the plutocratic interests of their donors. What’s called “demagoguery” is an example of this kind of elite discourse, to refer to which I would use the term ‘populist’. (The suffix ‘-ism’ (for the nominal form, ‘-ist’ being basically adjectival) is used to refer to any system of thought where to achieve coherence a principle is elevated to a position of logical dominance, sometimes extending it beyond cases where it is properly applicable. In this case it’s the use of and appeal to “the people’s views”)

The discourse of central bankers, being members of the elite, does not interact much with the ordinary people, and so is not in touch with the more serious and constructive aspects of popular thought; but the holders of political power and seekers of money will tend to exploit the more problematic aspects of popular sentiment (the emotional aspects especially) to serve elite plutocratic interests more generally by mimicking that same style of discourse, which would be “populist” in the problematic sense. In nations with important traditional cultural interests, elites will want to do away with equitable traditional institutions of the people; in opposition, an ethical, problem-solving political response based on deeply held popular values can be mounted. Such a response could be called “populist” in the constructive sense.

Schliesser’s point, as I see it, is that insisting that the central bank is beyond political accountability insulates it and precludes a challenge to its possibly implicitly held plutocratic values. This would tend to block any reform that would reflect discourse about popular interests in the constructive sense, and that’s a problem.


Marco 01.13.23 at 1:03 pm

more correct version, please delete the earlier

Central publications are often not the easy accessible ones. There is a structural need for more public information about the doings of the governors of finance. Among the many publications in all sorts of the BIS, their Basel Committee on Banking Supervision published last December the third Evalution of the impact and efficacy of the Basel III reforms. According to them the resilience of the bankingsystem is better than ever. And that’s what was asked them with Basel III, not transparency. As they write at the end of their conclusions, a next move could be to research to fully uncouple from the political democratic system: ‘While the more sophisticated and multi-dimensional framework introduced through Basel III addresses a variety of risks in order to enhance bank resilience, this comes at the cost of greater regulatory complexity. The report does not assess whether regulatory complexity could be reduced while maintaining banks’ resilience.’ The stimulation of vices through inequality levers from the financial centers will not be over tomorrow.


Ebenezer Scrooge 01.13.23 at 7:06 pm

The political economy of central banking is indeed important. Given this perspective, I think there is too much emphasis on monetary policy, and too little emphasis on mission creep. The mission creep is largely due to Congressional abdication of its responsibilities in the US. In Europe, it arises from strange structure of the EU, the ECB has EU-wide monetary responsibility, but there is no EU taxing authority. (We don’t hear about this problem in the UK or Japan.)

This, I think, is the major political economy story in the US: legislative abdication in return for unaccountability. It goes way beyond central banks. I’m not sure what a responsible central bank can do with this problem. It can’t create a better Congress. I suppose it can go nihilist: sticking to its remit while ignoring the consequences, in the name of an idealized political economy. Or it can play sovereign dictator, using its legitimate tools in a knight-errant fashion, whenever it espies an unconquered demon. It’s not a fun choice. But I don’t see another.


John Q 01.13.23 at 8:49 pm

Fascinating, especially regarding the eurodollar

We discussed central bank independence a fair bit at the time of the GFC


Australia is currently reviewing its central bank, and I’ve been restating these arguments


“As Blinder observes, central bank independence works well, except in the context of an
economic crisis. But this is damning with faint praise”

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