Why the Federal Reserve Crisis Matters

going to be talking about the Federal Reserve. Now, those of you who have listened to Executive Disorder are aware that a bit over a week ago, as this episode is being released, Federal Reserve Chairman jirom Age Powell released what again I can really only describe as someone escaping from a kidnapping and releasing a video about it in which he discussed a Justice Department grand jury sabina and a threat to indict him over cost overruns on a

new fe Federal Reserve building. Now, Jerome Powell has claimed that these charges are really about removing him and about eliminating the independence of the Federal Reserve. He also claims that he was directly threatened with these charges unless he was willing to adjust the Federal Reserve policy to fall in line with the Trump administration. And this is an

astonishing video for a number of reasons. One is that it's in a lot of ways one of the most direct points of defiance that a government official has taken directly to the presidents. It's also astonishing because it is actually technically the second time that Trump has tried to do something like this to a member of the Federal

Reserve Board. Because as you're listening to this, the Supreme Court has been hearing arguments about Trump's attempt to fire one of the other members of the Federal Reserve Board, a woman named Lisa Cook. Now, obviously I don't know yet what the outcome of that deliberation is going to be. It seems right now that the Supreme Court is uncompelled with Trump's ability to fire a Federal Reserve Board member over really truly very trumped up charges about mortgage fraud.

I'm going to quote here from the Supreme Court in what has become a very important statement. Quote, the Federal Reserve is a uniquely structured, quasi private entity that follows in the distinct tradition of the First and Second Banks of the United States. Importance of this statement is that the Supreme Court has been willing to allow Trump to fire the heads of other you know, what are supposed to be independent entities, right, or fire members of what

are supposed to be independent federal agencies. He's been able to just completely illegally, by the way, but with the approval the Supreme Court been able to fire a lot of people who were appointed under the Biden administration to posts in independent regulatory agencies. However, so far the Supreme Court has balked at doing this for the Federal Reserve. Now, why is that and why is this entire thing so important?

To understand that question and to understand why I've spent so much time talking about what in the grand scheme of things seems like a kind of minor, you know, just like another example of Trump attempting to use the judiciary and investigations to go after his political enemies. We need to talk about what the Federal Reserve is and what it does, because this is ourguably the central institution of global capitalism and its importance in maintaining the global

capitalist economy is to a large extent. The reason why this is the point at which US senators, who are aligned with Trump on every other issue have actively taken a stand against this sort of prosecution of Jerome Powell is why the Supreme Court seems to not be interested in allowing Trump to wield the executive power. And this is because fucking with the Federal Reserve is fucking with the money. So what is the Federal Reserve? The Federal Reserve,

to put it mildly, is an extremely confusing entity. So if you remember back to a few minutes ago when I said that the Supreme Court said that the Federal Reserve is a uniquely structured quasi private entity, we could ask the question, Okay, so it's a quasi private entity. Is it a public entity? Or is it a private entity? This is a relatively simple question. Here is the answer

provided by the Saint Louis Federal Reserve's website quote. The Federal Reserve Banks are not a part of the federal government, but they exist because of an Act of Congress. Their purpose is to serve the public. So is the FED private or public? The answer is both. While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold

stock in the Federal Reserve and earn dividends. Holding this stock does not carry with it the control and financial interests given to holders of common stock and for profit organizations. The stock may not be sold or pleasures collateral for loans. Okay, So here's the Federal Reserve's answer to is it a public or private entity? Is both. The Board of Governors is an independent agency. The Federal Reserve banks are set up like private corporations. So it's sort of both. Okay,

question settled, it's both. We can move on. Wait, hold on, I am receiving word that the Federal Reserve has comments on this idea. Hold on, hold on, let me, let me. Let me turn to the Federal Reserve, the National Federal Reserves website, which has a comment on the idea that the Federal Reserve banks or private entities. Okay, here we go, Here we go quoting them. Now, some observers mistakenly consider the Federal Reserve to be a private entity because the

Reserve banks are organized similar to private corporations. For instance, each of the twelve reserve banks operates within its own particular geographic area or district of the United States, and each is incorporated, is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve system hold stock in their district's reserve bank. Now, okay,

let's look at what we have here. These are two different websites run by two different parts of the Federal Reserve, one of which says that the Federal Reserve Banks are not part of the of the federal government, but they exist because of an Act of Congress. So is the Fed public or private? The answer is both, because the Federal Reserve banks are set up like private corporations. That's

the Saint Louis are Reserve. Now, the National Federal Reserve says quote, some observers mistakenly consider the Federal Reserve to be a private entity because the reserve banks are organized similar leader private corporations. So you can see that we are dealing here with an absolute goddamn mess because if you read the two websites of different federal versions of the Federal Reserve, National and sort of branches of the Federal Reserve, they say different things about what it is,

and they sound like they're arguing each other. Now, Okay, I am doing this because it's funny. Technically both of these agree with each other. But this is a shit show because part of the purpose of the Federal Reserve is to be an entity that does research and distribute information to the public, and its websites can't agree on what it is now again, I'm being slightly pedantic here. Technically both versions of this story, do you say that

this is both a public and a private entity? Sort of now again, And this is a basic question about the Federal Reserve. Is it a public or private entity? And they can't agree on it. And this is, to use a technical term, a fucking nightmare, because again, the actual answer is that it is sort of both. The banks themselves are like technically private, but they're run by the Board of Governors, which is technically a government agency, and they were established by the government. So tending to

sort out this colossal mess has inside of academia. This has caused a change in the conception of what the state is because what is this crap? So okay, let's actually run through the structure of the Federal Reserve. So importantly, the Federal Reserve is kind of three entities in a way. You can think about this like the Holy Trinity. Right.

You have the twelve Federal Reserve banks, and those banks are collectively managed by what are called governors who serve on what is called the Board of Governors, which is the second entity. And then there's also the Federal Open Market Committee, which for our purposes, we don't care about that much. But is composed of the seven members of the Board of Governors, and this is the quote defend itself.

Is composed of the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven reserve bank presidents. You serve one year terms on a rotating basis. So, okay, we have three entities, right. We have the decentralized federal Reserve banks, which there's twelve of them. They cover different geographic regions of the country. We have the Board of Governors, which oversees them. And the Board of Governors is the

part that is technically a government agency. And these governors are importantly, for our purposes, nominated by the President and confirmed by Congress. And this Board of Governors. The purpose of this Board of Governors is to sort of run all of it. Now they're running all of this at a level. Each of those twelve federal Reserve banks also have their own border directors and their own structures that each run all of the different banks. So this is complicated.

And again, why talking about the Federal Reserve is so complicated? If you just like start looking at political stuff people have written about the Federal Reserve. It's a nightmare. Like if you try to like do your own research, your options are unless you know where to look, right, your options are at the Federal Reserve itself, which is actually not a terrible resource for the most part, because again, conducting economic research is one of the points of the

Federal Reserve, but it's not ideal. And then also immediately you get a bunch of very weird anti semitic conspiracy theories about sound money and the sort of rand pall people who want to eliminate the Federal Reserve because they're mad at the US dollar not being based on gold. Nightmare, terrible, zero out of ten. We absolutely hate it. Now, speaking of things that we absolutely hate, it is not buying these products and services. We are back. So, all right,

we've gone over the structure of the Federal Reserve. So what does the Federal Reserve actually do? And why are we talking about this at such length. If you know one thing about the FED, it's that the FED can print money. You may or may not remember the FED printing money memes from twenty twenty in that sort of era, and this is one of the conceptions of the FED. That is true. The Federal Reserve is the entity given

power by the US government to print money. So when dollar bills are created, the Treasury commissions the FED to print the bills. Technically speaking, coins are stubmitted by the Treasury, which is a whole side showed Tangent that I had to cut out of this story because it's like twenty minutes long. But you know, if you are holding a US dollar, basically the odds are very very very very very very very very good. The way you were holding

is technically a Federal Reserve. Note, Now what does that mean? Be a what is happening here? Why is it the government doesn't print money? Why is it this quasi private public entity that's printing the money. Now, what's happening here is slightly more complex than FED money printer. An American

dollar is US debt. Right, What you are holding in your hands is a promise from the US government to pay one dollar to the Federal l The Federal Reserve is having this money distributed and is having this debt distributed. And this is what US currency is. It is based on debt held by In this case, the Federal Reserve banks which have been given a monopoly to print this debt as Federal Reserve notes, and the Federal Reserve can

just sort of create this. It's it's also worth noting that, you know, when we talk about the FED creating money, I mean obviously like it prints money for steff commissioned by the Treasury, so you can have more bills in circulation. But most of the actual money that's being created or not created is you know, this is all happening digitally. It is funds appearing in the bank accounts of the

banks that use the Federal Reserve. So the other thing you may have heard about the FED is the FED funds rate or what's called the FED interest rates, or you know, you'll hear a bunch of talk about the FED setting interest rates. So to understand what this is, we need to kind of take aus step back and

look at what these banks actually are. The way this is commonly described is that the FED is the bank of banks, right, which is when a bank needs alone, they go to the Federal Reserve, and banks put their money in the Federal Reserve and they use it to move their money around. That's true enough for our purposes.

I should also state here that a lot of what I'm going to be saying this episode, particularly from here forward, is technically probably a simplification of what's actually happening, because the mechanisms here are very, very complicated. But okay, so the FED interest rate, right, this is the thing that is the source of all of the tension here. Right.

What Trump is pissed about to a large extent is that he thinks that Fed interest rates are too high and he wants them to be lower because he thinks this will cause the economy to grow more. So, okay, what does that mean is what is the FED interest rate? The way this is explained to the public is that the FED sets the cost of borrowing. That's like true, kind of basically, there is a rate that is decided on by the Federal Reserve Board. On a more technical level, though,

it's slightly more complicated than that. So when you hear someone talk about the Fed's interest rate, what they are talking about is the Federal funds rate. And technically what

they're talking about is the target Federal funds rate. So I'm going to quote from the Federal Reserve self quote the effective Federal funds rate is the interest rate at which depository institutions, banks, savings institutions, thrifts, and credit unions and government sponsored enterprises borrow from and lend to each other overnight to meet short term business needs. The target for the Federal funds rate, which is set by the Federal Open Market Committee, has varied widely over the years

in response to prevailing economic conditions. So yeah, Also, by the way, it is technically the Federal Open Market Committee that sets the fund rate. But okay, when we're talking about the FED setting the interest rates, right, there's kind of two things going on. So the effective federal funds rate, which is the thing that they're trying to control, is the interest rate at which all of these different banks that have their money in here are all using it

to lend to each other overnight. Through the money they have the Federal reserve, they're all lending it to each other. The average of the rate of interest that wistre lending to each other overnight, the average of that rate is the Federal funds rate. When people talk about like the interest rates like three point two percent or whatever, what the FED is trying to do is make sure that at the end of the night. This effective federal funds rate, which is the rate that all these banks will lending

each other money at, is at that rate. But they don't actually technically directly have control of this, because it is to be clear, the average rate of which all of these banks are lending to each other. What the FED is manipulating directly usually is the interest on reserve balances or IRB. So this is the thing the FED does control. The interest on reserve balances is how much interest they pay out for just putting your money in the FED and leaving it there. I'm going to quote

the FED again. The Fed's primary tool for influencing the federal funds rate is the interest the FED pays on funds that banks hold as reserve balances at their Federal Reserve Bank, which is the interest on reserve balance's rate. Because banks are unlikely to lend funds in the federal funds market for less than they get paid on their reserve balances at the Federal Reserve, the interest rate on reserve balances is an effective tool for guiding the federal

funds rate. Okay, Mia, you've been spelled gibberish for many minutes. Now, what the fuck does that mean. So what the FED is normally doing is all right, So you put your money in a bank, right, and that bank has an interest rate, and it pays you out that amount of interest at the end of the year, right, And that's the money that you are making for putting your money

in this corporation. The FED also has their own interest on reserve balances, so that they have their own interest rate for how much money you can get from just leaving your money in the Federal Reserve. And the theory, and this is like you know true, is that banks aren't going to lend each other money at interest rates that are lower than what you can get from the FED, because otherwise you just leave your money in the FED

and you get them out amount of money. So if you're going to you know, loan someone something, right, the interest that's being charged here is going to be higher than the FED rate. And that's when we talk about FED said interest rates. That's what's happening on a technical level, and this is actually very important in the global economy because what this does and this is where everything gets extremely murky. And I'm going to go to a very very high level of abstraction down from sort of the

very low technical details. Now, in theory, what this means is, this is how easy it is to obtain money to like invest in stuff. Right, this sets the rate at which you can borrow money. And in theory, if you have a very very low interest rate, right, if the FED funds rate is really low, then is very very cheap and easy to get a bunch of money, and that money flows to the economy and theoretically that money will you know, be used to invest in stuff and

that will increase economic growth. Okay, So why wouldn't the FED rate just always be zero? And the answer to that is that the FED, as an institution and this is part of its legal framework that established it, is also trying to control inflation. And the theory effectively is that if you leave these things for too low for too long, it will cause inflation, and it will cause economic bubbles that are not actually supported by the return

on investment. Because if you can just always continuously borrow money for zero dollars, then you can just invest in anything as long as the return is like slightly more than like nothing. However, Comma raising interest rates is used as a way to try to slow economic growth in order to not have inflation result, right, and also to

not have there be sort of speculative bubbles. And right now we've entered a period in which interest rates have been rising after a pretty prolonged period of interest rates being effectively zero, like following the two thousand and eight financial collapse. They've been really low for like a while for some stuff in the nineties that we're going to get you later. But this is basically the primary dispute, which is that Okay, now, obviously the FED is to

some extent a political actor. But the question or is who is going to get to set these sort of interest rates? Right? Is it going to be the President of the United States? Right? Is it going to be that Donald Trump can just be like, oh, economy look bad, turned down the interest rate? Or is it going to be the Federal Reserve itself, which is how it presently functions running this And that's what FED independence means. So

what is that stake? Here is one of the defining the defining mechanisms of sort of economic control, of control over the function of the economy. You know that this is called like a macroeconomic policy lever Right, This is one of the largest, most important and most powerful tools that exists in the entire world economy for managing and

regulating the American economy. And the question is is this going to remain with this sort of quasi technocratic, independent staff or is it going to be directly set by the presidents? And that is a huge fucking deal because, as you mentioned last time I talked about this, there have been times where presidents have gotten control over central banks.

For example, the sort of scare story that everyone is talking about is Turkey where Airdwan, their effectively dictatorial leader, managed to break the independence of his own central bank and inflation rates are now merely forty percent. So this is what's at stake. It's who gets to control this thing. Is it Donald Trump or is it the Federal Reserve. Now we are going to go to ads and we are going to come back and talk a bit more

about some of the nightmares that can happen here. Now. Okay, so we've been talking mostly about the Fed interest rate because that is most of what it does. Well, that's not most of what it does. That's the most important thing that it does on a political level in terms of you know, this is why Donald Trump wants it However, Comma, the FED does a bunch of other shit, like, for example, a whole bunch of the world's gold supply owned by a bunch of countries across the world sits in a

vault under the Federal Reserve building. The FED has a balance sheet right of like the assets that it owns, and that balance sheet is right now about six and a half trillion dollars. The payment system that the FED maintains has two trillion dollars a day moving through it. Right this payment infrastructure, the infrastructure of the Federal Reserve is the core of the functioning of the entire American

banking system. Like I kind of emphasize this enough, and this is also you know, important on a macro international level, right, like this is functioning sort of normally. Is the difference between capitalism working kind of normally, which is not good but is working and did not working and Trump is trying to take control of it. And again, this is a guy who wants to invade Greenland, and she is trying to take control over one of the most powerful

economic institutions that has ever existed in human history. So these are the sort of the stakes of the fight that's happening here, because again, the FED is supposed to be an independent entity, right, The President is not supposed to be able to order the FED to just do whatever it wants. And this is what's at stake with Trump trying to fire one of these Reserve Board presidents, with Trump trying to prosecute the current head of the Federal Reserve and use that threat to bring the FED

into line with doing what he wants to do. Now, Trump is also again attempting to install him his own guy when Jerome Powell's term as the chairman of the Federal Reserve Board ends. And Okay, in terms of could the Trump administration actually run this, right, I'm gonna read this quote from actually a very good Yahoo story about the search for Trump's knew who he wants to run

the Federal Reserve. This is starting with a quote from Trump's Treasury Secretary Scott Bessett, Who's been the guy who is running the candidate search quote, who can bring the board along with them? Who has the gravitas, Bessett said, who is going to have an open, green span like mind that we could be going through a productivity boom like we did in the nineties and not just throw

the brakes because we're alarmed at a high GDP number. Okay, if you have spent your life closely following American mac co economic policy, that is nuts. That is a terrifying statement, utterly horrifying. Now, mil why is it scary to say that he wants a green Span like mindset that doesn't throw the brakes on the economy because they're alarmed by a gdpeda. But why is that scary? And this is also you know, why is it scary for the Trump

administration to have direct control of the Federal Reserve. Part of the reason we haven't had a full scale economic collapse in two thousand and eight has been that there has been a bunch of very very careful management of the economy by the Federal Reserve. Right, they have done a lot of technical stuff. You know, I'm saying they've done a lot of technical stuff. Well, when I say well, I mean for the functioning of capital, like you and

me and everyone listening to this. Is it working for us? No, not really, but it's working for capital, right, And they've been able to prevent an economic collapse through a lot of sort of technical means. In twenty twenty and you see this now. They did these things called overnight repo injections, where they would pump like one hundred billion dollars in liquidity into the bank markets overnight in order to make sure there was liquidity to because that was one of

the things that cost two thousand and eight collapse. So they've been doing a bunch of very careful management, some of it in these large swings that have very little public attention, some of it in just the way they've been doing policy. What these guys want to do is the Greenspan stuff from the nineties. So, okay, Mia, what the fuck is that? So what he's talking about is the green Span put Now what happened to the nineties? To simplify the story a little bit, but I'm not

even really simplifying it much. Every time the market went down, green Span would just lower the interest rate to make the market go back up. Right, So every single time it even sort of looks like the market might be going down, he makes the cost of borrowing from the Fed cheaper, so you can just take more money out of the Federal Reserve and plunge that money back into the stock market. Right. That's the theory here. The economist

Robert Brenner called it asset Kanesianism. This is something we have talked about on the show many, many, many times, and it is to a large extent, the thing responsible for the two thousand and eight economic collapse, and also the dot com bo will before that, and arguably also the Asian market collapses in the nineties. Okay, you know you're you're dealing with a problem, which is that you don't have a manufacturing economy that can support economic growth.

So what are you gonna do instead? Okay, we're gonna give everyone a bunch of money so they can do speculative investing in stocks. And we're gonna give him one a bunch of money so that they can go invest in the housing market because housing prices will only ever go up, and that's the thing that these people want to do. Right And in terms of why, okay, why

should you be scared about this? Right? This is like saying that, Okay, we need to bring back the guys who did all of the like mortgage backed securities in two thousand and eight that went up and put them in charge of like the world's most powerful economic institution. So the candidates that Trump is talking about putting in place, I don't know if any of them are going to make it right now, because I think the kind of person Trump is looking for is not the kind of

person who like runs this kind of thing normally. In terms of like what Trump would do with the guy that he sort of installed there, we can look at who they've already installed, right And the one Federal Reserve Board member that Trump has successfully gotten in place is Stephan Miren, who, and I kind of emphasizes enough, I talk about how nuts this guy is all the time.

This is the guy who wants other countries to pay taxes on holding US bonds, And this is the guy that, again is now one of the governors of the Federal Reserve Board because Trump put him there. I could spend another forty minutes ranting about how bad of an idea his Mara Lago Accords, which is his version of the Plaza Chords, would be. It's gibberish, it's atrocious, and these people are simple, not good enough at technical economic management to be put in charge of the Federal Reserve, the

most powerful economic agency in the entire world. And again, as I've been saying, right, this economic management has been good for capital. Has it been good for us? Like? No, not really. However, COMMA putting that power directly into the

hands of Donald Trump is an even worse idea. But it's also very important that this has been good for capital because FED independence is the red line for a lot of very very powerful sectors of capital who would be fine with things like like you could, like Trump could do public executions in the streets, and like GP Morgan eventually would be okay with it. Right, JP Morgan

is like panicking over this Federal Reserve stuff. So this is actually a line at which segments of capital are willing to break with Trump because this is an existential threat to them. Now, before I sort of close this out, I've been giving what is essentially a very conventional analysis of what the Federal Reserve is, because to some extent you need a conventional analysis of what the Federal Reserve is to understand what the fuck is going on with

these board things. But I want to give the final word to the anthropologist David Raper. This is from his book Debt the First five thousand Years. Quote one element, however, tends to go flagrantly missing in even the most vivid conspiracy theories about the banking system, let alone in official accounts. That is the role of war and military power. There's a reason why the wizard has such a strange capacity to make money out of nothing. Behind him, there is

a man with a gun. True in one sense, he's been there from the start. I have already pointed out that modern money is based on government debt, and that governments borrow money in order to finance wars. This is just as true today as it was in the age

of King Philip the Second. The creation of central banks represented a permanent institutionalization of that marriage between the interests of warriors and financiers that had already begun to emerge in Renaissance Italy, and that eventually became the foundation of financial capitalism. And this is something that's very very important.

Right We've been talking about how important the FED is as an economic institution, and obviously the importance of the Federal Reserve is tied in with the fact that the dollar is the world's reserve currency, which makes it the most important currency on Earth. It means that every other country is doing a bunch of transactions denominated in American dollars, and it turns out when you can make American dollars that is an enormous advantage for you. But this is

all based on American military power. Right. The reason that the dollar is the world reserve currency is because all of the countries that had competing currencies that could have been the international standard were sort of annihilated during World War Two. And at the end of World War Two, it was the United States left standing with the richest and most powerful economy on Earth, yes, but also like it was the country with nukes and the largest army

that wasn't the Soviets. Right. The element here that that Graber is pointing out right is that the debt that you and me and everyone is like carrying out our day to day stuff with is war debt. Literally the thing that we used to like buy groceries is to a large extent, it's a tiny bit more complicated than this, but like it's loads that were taken out to like

go bomb Vietnam. And part of what's happening under the Trump administration is that all of the things that used to be under the table, right, the US, you know, always had the kind of military power that Trump is sort of throwing around to try to, you know, invade Greenland or just kidnap the president of Venezuela and like

run the country by gunboat. The US has always had the ability to do this, It's just that it was largely agreed upon by everyone involved running the system that using this power under the table was more effective than

using it openly. The Trump administration thinks that, you know, using soft power or not explicitly, just like saying we're going to invade you is like womanly pussy cook shit, Like that's effectively what's happening here is and these people think that these relationships need to be drawn out into

the open right. And so what we're left with here is a war between two sectors of capital, one of which wants to immolate the world to satisfy the ego of a tyrant, and the other of which wants to let climate chains immolate the world slightly slower, because doing anything about climate change would hurt the bottom line, but allowing the god king to immolate the world by himself would hurt their bottom line too. And this is effectively the problem with the moment that they're in, which is

that neither of these institutions. Right, Donald Trump is not on your side. The Federal Reserve is also not on your side. What is necessary here, though, is not for sort of comrade Federal Reserve to join us. What is necessary here for our purposes is that enough sectors of capital when the time comes, right, when Trump finally does something, and when there's a popular reaction enough that forces a

confrontration between Trump and the American people. When that time comes, what is necessary is that these massive and powerful economic institutions stand aside and not defend the regime. As I've talked about to a significant extent on this podcast already.

This is how the Bolsheviks won their revolution. It's also how the February Revolution won, which was that large poor of the populace, large portions of the ruling class, and to some extent, large portions of the state simply set the conflict out because they didn't particularly like the revolutionaries. But they also weren't going to go die for some random tyrant, and that, in the end is what's important

about this conflict. Right. There is, on the one hand, the possibility of Donald Trump just immilating the entire economy, and on the other there is the possibility of these people standing aside when we attempt to build a world, when we are not being lit on fire for profit. This has been It could Happen Here.