Two of the more offbeat and interesting Federal Reserve analysts these days are Jeffrey P. Snider, Head of Global Research at Alhambra Investments, and Joseph Wang, author of the self-published book Central Banking 101. Both authors seek to unearth the complexity and mystique of this ostensibly powerful capitalist institution (Snider through his blog and Wang through his blog and his book). They do so in different ways: Snider, with his critique of the “Cult of the Fed”; and Wang, by laying bear the inner workings of the Fed and the mechanics of its interventions into the financial markets.
But they are at odds. Wang lays out the conventional wisdom, promoting the notion that the Fed can move markets with words, and Snider tears it down, arguing that the Fed is nearly powerless given the globalized complexity of the money markets. I suspect Snider is onto something, even if he, in the end, promotes the same illusions—that capitalism can be somehow centrally controlled, but still “free”—that Wang and all the Fed cultists do.
What is ultimately at stake in this argument is the question of how to bring stability to an inherently unstable economic system, capitalism. Each of these authors aims for that, but once the immensity of the problem becomes clear—the anarchy of the financial markets—the idea of asserting control seems misguided at best, and fascistic at worst.
Let’s start with Wang’s four forms of money from Central Banking 101. Each of them has a sphere of influence in which it is more powerful than the other forms of money:
- Fiat currency: Most will not dispute the notion that the dollar bills you hold in your wallet are indeed money. They can cease to be money if the government prints too many like in Weimar Germany in the 1920s. These are most potent in brick-and-mortar retail establishments and informal economies, although the sphere of influence of bank deposits significantly overlaps that of fiat currency.
- Bank deposits: One step removed from physical dollars, these are just records in a database. Their ability to become physical dollars depends on two variables: (1) the banks having enough physical dollars in their vaults to support everyone who wants to withdraw their deposits and (2) the ability of the Federal Deposit Insurance Corporation to reimburse everyone for their deposits if retail banks fail. Bank deposits exist, but their power is circumscribed by these conditions. This type of money can go places in cyberspace where fiat currency cannot such as online purchases or digital bill paying, but it has less access to informal economies.
- Central bank reserves: Often described as bank deposits for commercial banks, they are again one step removed from bank deposits, except they cannot assume a physical existence. They are merely digital records: deposits that commercial banks hold at the Fed. These records constitute the interbank ledger system of commercial banks; non-bank entities have no involvement here, so their power only extends to commercial banks.
- Treasury securities: These are pieces of government debt which largely have a digital existence, although one can still obtain printed versions. Their exchangeability largely resides in the financial markets. You cannot go down to the store and buy a sandwich with a Treasury security, but you can use it to obtain a $1 million repo to buy highly-priced assets. Treasuries are often referred to as “pristine collateral” because market participants assume the U.S. government will not default on its debts. If it does, Treasuries will lose their value as money.
So in financial markets, money is not necessarily something with an official designation, e.g. fiat currency; instead, it is any asset that can be easily exchanged and serve as a reliable measure of value. In the repo markets, Treasuries are that. While fiat currency may have great authority, it is impractical as a means of exchange in the money markets. There is a time and a place for each of these forms of money. The implication here is that the different forms of money can lose their “moneyness,” as Wang puts it, when certain measures of financial confidence evaporate.
And here is the rub. In his discussion of shadow banks (banks that are not officially banks), Wang writes, “Like commercial banks, shadow banks take on liquidity and credit risk by creating loans or purchasing assets. However, they cannot create bank deposits the way commercial banks can, so instead, they borrow from investors to fund their assets. Rather than being creators of money, shadow banks are intermediaries.” (54)
Snider would argue that the main fallacy behind the Fed cultists’ phantasmagoria is that only commercial banks create money. In fact, shadow banks create money as well because they originate loans and loans constitute money creation. These loans are securitized and collateral is rehypothecated multiple times leading to a vast expansion on claims to dollars. These assets too, then, are money insofar as they become limited universal equivalents in financial markets, that is until these markets lose confidence in the various forms of money and the assets lose their moneyness.
Snider’s point is that the traditional vertical conception of the Federal Reserve system, where the Fed creates reserve dollars and the commercial banks underneath create deposit dollars, which then get distributed to the rest of the economy, misses a horizontal dimension made up of shadow banks. He argues that shadow banks actually create and destroy significantly more dollars than the Fed, but they are outside of its regulatory sphere. This is why the Fed has been powerless since 2007 to stabilize the global financial system—it represents one small corner of a vast array of banks that are creating and destroying dollars every second. The Fed cultists conceptualize the financial system as centralized and controlled when it is anything but that.
The problems come in when this shadow banking system is creating too many dollars or not enough. Snider argues that the 1970s inflation was a case of too many and the current deflation dating from 2007 is an instance of too few. The Fed can create as many reserves as it wants, but if banks—commercial and shadow—are not lending, then dollars are not created in enough quantity to cause inflation. The ongoing low-level deflationary crisis is a case of a chronic dollar shortage that breaks out into acute crisis every few years. (The question of what underlying forces are driving this deflation is important, but beyond the scope of this post.)
Describing the modern money markets, Snider writes in his “A Brief History of ‘Money’” series, “If we are to be specific about what interbank markets are, it is that they are more remote claims upon institutions that are believed competent so as to be able to supply dollars if ever called upon to do so. None of these institutions actually have the currency in their vaults, of course, but the counterparties who transact with them on the basis of interbank funding do so in the belief that they could should the conditions ever warrant.”
He continues, “It’s all a lie, but it works because nobody ever demands to be presented with dollars. Transactions are simply settled and worked out in the format consistent with that… neither bank has any interest in obtaining dollars just the whatever transformation that result from that transaction. Dollars are purely theoretical; thus ‘dollars.’”
Wang argues that the Fed has been largely successful in its efforts to ensure financial stability. His measuring stick seems to be largely that the system hasn’t completely collapsed yet, despite ongoing financial crises since the late 1990s. Financial asset prices continue to rise, the labor force continues to shrink, living standards continue to grind lower and the working class is subjected to ongoing attacks by an increasingly rapacious ruling class. This notion of “success” seems highly qualified to say the least.
But what does Snider offer? The cult of the fed is an extension of bourgeois ideology, and posits that some wizard is controlling the credit system when in fact, it is total anarchy. But Snider promotes this ideology in his own way. He posits that the banking system can be fixed if we have a stable currency system. There is a yearning in bourgeois ideology for stability, some sense of centralized control or perfect information flow, but this cannot happen under capitalism.
In the current globalized banking system, money itself is fragmented—not a unitary concept, but relative depending on where you are in the market and at what moment. The truth about how much money is associated with a particular person or institution in the vast array of relational databases is transitory and dependent on particular flows of financial assets. If we were able to view all the balance sheets of all the banks and shadow banks in this database, the values would be constantly changing.
One problem is that we cannot see inside these balance sheets. It is lack of information. Our perception of this layer of reality is impaired—there is no tool that allows us to see to this level. We know there is something there—data associated with unique identifiers—but we cannot access it because we do not have powerful enough tools. The laws of motion of the capitalist system preclude obtaining data that is hidden in the deep-web vaults of these financial institutions. Observing and cataloguing this data is impossible.
But in addition, there is no omniscient point from which all of this can be observed. So the second problem is that the data associated with each unique identifier is contingent upon various financial flows to and from other unique identifiers. To present a given unique identifier as possessing a stable value implies abstraction from a field that is constantly in motion. It also implies perfect success in resolving those flows by abstracting to a universal equivalent, which, if it has been agreed upon, is spatially and temporally contingent. This phenomenon of a fragmented financial system is one factor driving the cryptocurrency technological revolution. There is a sense that a protocol like Bitcoin can stabilize and render visible many of these global financial flows.
In Snider’s series on MacroVoices, “Eurodollar University,” he remarks that one option that was not tried during the financial crisis was to take over AIG and start writing the credit default swaps itself, i.e. plunging into the hidden depths of the financial nerve center and performing brain surgery. But of course, he writes this off because the Fed still would not have been able to compel banks to lend. While I am not in any way attributing this to Snider, the implication is that a strong, centralized state could take over the financial system and make the lending happen, perhaps through a war drive, i.e. fascism. This is becoming a more and more realistic solution as the system breaks down and is unable to even provide basic financial plumbing. We see this in the outright fascist mobilizations that have grown across the country.
But other than fascism, we are left with an unworkable problem: the anarchy of production and financial flow that is capitalism tends to demobilize the system’s growth forces over time. It is unfortunate that so much brain power is wasted thinking of ways to put together a jigsaw puzzle with pieces that simply do not fit. Private property and class are what drives this anarchy and if we are to make the financial system visible and pliable to the workers of the world, they will need to go.
Planning is what we need—from top to bottom. Not by bankers, but by the workers.
World of Lenidzky 