Political and Economic Crises (Pt 6)

Storm over the Federal Reserve System

U.S. President Donald Trump has indicated that he will nominate right-wing economic commentator Stephen Moore and businessman Herman Cain to fill two vacancies on the
Federal Reserve System’s Board of Governors – called the Federal Reserve Board for short. If confirmed, both Moore and Cain would serve for 14 years. While Trump’s other nominees to the “Fed” have been conventional conservative Republicans, Moore and especially Cain have been strongly attacked in the media and by economists and some Republicans for being completely unqualified.

Of the two, Cain has drawn the most opposition from within the Republican Party. As of this writing, his confirmation by the U.S. Senate looks unlikely. Republican Senators Mitt Romney (who ran against Obama for president in 2012), Lisa Murkowski, Cory Gardner, and Kevin Cramer have all indicated that they are leaning against voting to confirm Cain. If all them vote no, Cain’s nomination will fail unless he can win over some Democratic senators.

Cain – one of the few African-Americans Trump has nominated for high office – throughout his business career has expressed opposition to even elementary labor rights. In 2016, he briefly ran for president as a Republican on a platform of reforming the federal tax system in an extremely regressive way going beyond Trump’s own tax cut for the rich. Cain was then forced to withdraw from the presidential campaign when several women came forward alleging that he had sexually assaulted them. For Donald Trump, this was not a disqualification but it might be for some U.S. senators who have to face re-election.

Cain has not indicated that he supports inflationary monetary policies. On the contrary, he has said that he would like to see a return to the gold standard. For taking this stand, he has been ridiculed by liberals and progressives as well as mainstream economists. However, Cain does have actual central bank experience having served as head of the Federal Reserve Bank of Kansas City, one of 12 regional banks that make up the Federal Reserve System.

Capitalist opponents of Cain’s nomination – Cain has been a strong supporter of Trump – fear that Cain would do Donald Trump’s bidding on the Fed’s Open Market Committee (1 ). With the 2020 presidential election approaching, it is widely suspected that Cain would push for an “easy” monetary policy and cuts to the Fed’s target for the federal funds rate in a bid to stave off the looming recession until after the November 2020 election. Not only would such a policy put the dollar-centered international monetary system in danger in the short run, it would also erode the Federal Reserve System’s independence over the long run.

Trump’s other prospective nominee, Stephen Moore, has drawn much criticism from mainstream media and professional economists but so far less from Senate Republicans. Like most of Trump’s nominees for high positions, Moore is white. He is not even a professional economist. Although majoring in economics in college, he does not hold a PhD. Unlike Cain, Moore has never directed either a business enterprise – Cain in addition to serving as head the Federal Reserve Bank of Kansas City was also head of the Godfather Pizza Chain. However, like Cain, Moore has been accused of mistreating women. This raises the question whether Cain’s race could be a factor in the apparent lack of opposition to Moore on the part of Senate Republicans.

Change of Guard at the Fed, the Specter of ‘Secular Stagnation,’ and Some Questions of Monetary Theory

Ben Bernanke will not seek a third term as chairperson of the Federal Reserve Board of Governors – “the Fed.” President Obama has nominated, and the U.S. Senate is expected to formally approve, economist Janet Yellen as his successor. The Federal Reserve Board is a government body that controls the operation of the U.S Federal Reserve System.

“The Fed” lies at the heart of the U.S. central banking system, which under the dollar standard is in effect the central bank of the entire world.

A professional central banker

Janet Yellen is currently vice-chairperson of the Federal Reserve Board. She has also served as an economics professor at the University of California at Berkeley and chaired President Bill Clinton’s Council of Economic advisers. She headed the Federal Reserve Bank of San Francisco from 2004 to 2010, one of the 12 Federal Reserve Banks within the Federal Reserve System. If there is such a thing as a professional central banker, Yellen is it.

Yellen will be the first woman to serve as head of the Federal Reserve Board and will hold the most powerful position within the U.S. government ever held by a woman. Yellen’s appointment therefore reflects gains for women’s equality that have been made since the modern women’s liberation movement began around 1969.

Like other social movements that emerged out of the 1960s radicalization, the modern women’s liberation movement began on the radical left. The very name of the movement was inspired by the name of the main resistance organization fighting U.S. imperialism in Vietnam – the National Liberation Front. However, as a veteran bourgeois economist and a long-time major policymaker in the U.S. government, Yellen would not be expected to have much sympathy for the 20th-century revolutions and movements that made her appointment even a remote possibility.

Significantly, Yellen was appointed only after Lawrence Summers, considered like Yellen a major (bourgeois) economist and said to be the favorite of the Obama administration to succeed Bernanke, announced his withdrawal from contention. Summers became notorious when as president of Harvard University he expressed the opinion that women are not well represented in engineering and the sciences because of mental limitations rooted in biology.

Summers was obliged to resign as president of Harvard, and his anti-woman remarks undoubtedly played a role in his failure to win enough support to be appointed Fed chairman. In addition, Summers attacked the African American Professor Cornell West for his work on Black culture and his alleged “grade inflation,” causing West to leave Harvard. This hardly made Summers popular in the African American community. His nomination would therefore have produced serious strains in the Democratic Coalition, so Summers was obliged to withdraw.

Ben Bernanke like Yellen is considered a distinguished (bourgeois) economist. He had devoted his professional life to exploring the causes of the Great Depression, much like Yellen has. Essentially, Bernanke attempted to prove that the Depression was caused by faulty policies of the Federal Reserve System and the government, and not by contradictions inherent in capitalist production – such as, for example, periodic crises of overproduction. Bernanke denied that overproduction was the cause of the Depression.

Like Milton Friedman, Bernanke blamed the Depression on the failure of the Federal Reserve System to prevent a contraction of money and credit. Bernanke put the emphasis on credit, while Friedman put the emphasis on the money supply. Blaming crises on currency and credit, according to Marx, is the most shallow and superficial crisis theory of all.

Economic Stagnation, Mass Unemployment, Budget Deficits and the Industrial Cycle

A few months ago I had dinner with a some friends from the old days. One of them expressed the view that the current economic situation of prolonged economic stagnation, continuing mass unemployment, and falling real wages represented a fundamental change in the workings of the capitalist system. He asked what is behind this change? This a good question and is worth examining in a non-trivial way.

A month or so ago the media, which had been painting a picture of a steadily improving economy, was startled when the U.S. government announced that its first estimate showed that the fourth-quarter GDP declined at an annual rate of .01 percent. Though slight, this would be a decline nonetheless.

Those economists who make a business of guessing the U.S. government’s GDP estimate expected an annualized rate of growth of 1.5 percent for the fourth quarter (of 2012). This would represent a historically low rate of growth, but growth nonetheless.

The media has been working hard to create an impression of a recovery that is at last gaining momentum. Therefore, if we are to believe the capitalist press, a “new era” of lasting prosperity is on the way. This latest “new era” will be fully assured if only the Obama administration and both Democrats and Republicans can settle their differences on the need to bring the current deficit in the finances of the U.S. federal government under control.

This is to be done by some combination of “entitlement cuts” for the working and middle classes and very modest tax increases for the rich. With the tax question settled by the New Year’s Day agreement, the only question now is how deep the entitlement cuts will be, spending on the military and “national security” being largely untouchable.

Thrown somewhat off balance by the estimated fourth-quarter GDP decline, the economists, bourgeois journalists and Wall Street brokerage houses—ever eager to paint the U.S. economy in glowing terms in order to sell stocks to middle-class savers—explained that “special factors” were behind the slight fall in the estimated GDP, not a new recession.

Behind the Austerity Drive

January 2013 marks the beginning of the sixth year since the last crisis began in August 2007 and the fifth year since the crisis reached its climax with the panic on Wall Street in September 2008. Compared to the stormy events of those years, recent weeks have been relatively quiet.

The European debt crisis has at least momentarily eased with the decision of the European Central Bank to expand the euro-denominated monetary base—though much of the European economy remains in the grip of recession with unemployment still rising. In the U.S., the economy remains sluggish as the leaders of the ruling class seek ways to accelerate growth in order to halt and reverse U.S. de-industrialization and prevent a serious social and political crisis.

This is therefore a good time to take a larger view of the current economic situation within the broader long-term evolution of the capitalist system. This month I will focus on the U.S. government deficits and the current austerity drive.

The U.S. federal government is now carrying a debt of over $16 trillion and is fast approaching the current legal maximum of $16.4 trillion. The financial situation of the federal government doesn’t affect only the United States but the entire world, since not only is the U.S. government the world’s biggest borrower, it is also the center of the entire world imperialist system.

Real versus manufactured crises

On New Year’s Day, just as I predicted last month, a last-minute agreement was reached between the Obama administration and the congressional Democrats and Republicans to avert mandatory tax hikes and spending cuts that would have withdrawn as much as $800 billion of purchasing power from the U.S. economy over the next year. If such a withdrawal of purchasing power had actually occurred, the U.S., and perhaps the world, economy would have been thrown into an artificial, government-induced recession that would have aborted the current global industrial cycle. Exactly because of this, there was virtually no chance this would actually happen. Far from seeking to induce a recession, the political leadership of the U.S. ruling class is attempting to accelerate the slow rate of growth of the U.S. economy.