Will Larry Summers Ruin The Fed's Independence?

by: Cullen Roche

Felix Salmon says Larry Summers will make the Fed increasingly political and could threaten the independence of the institution:

“Summers is not a consensus-builder; he’s the kind of person who, as chairman, would be convinced that he was right, and who would bully the rest of the board into doing exactly what he wanted them to do. (In this, he would have the active help of Obama, who would certainly nominate Summers-friendly names to the multitude of open board positions, and to the vice-chairmanship.) The result would be a central bank which had, to a first approximation, zero independence from the government, at least so long as Obama is president.”

I don’t really see how that’s possible though. The thing is, when you understand how the Fed actually relates to the government, you realize that the Fed is really exists to support the private banking system. This isn’t a Jekyll Island conspiracy theory. You just have to look at what the Fed is and how it operates. And the Federal Reserve system is something that exists almost entirely to help the smooth settlement of interbank payments via daily operations and regulations. That’s 90% of what the Fed does. All the other stuff like changing interest rates, QE, managing cash reserves, etc – that stuff is all secondary to making sure that the payments system works all the time. Even so, that stuff is all done through the private banking system.

The point is, the Fed is really just a big special bank with some unique powers given to it by the government. But it implements those powers by working with and for the private banking system. In other words, if the private banking system doesn’t work then the Fed doesn’t work. And if the Fed doesn’t work then it can’t achieve public purpose. So the Fed really has to serve the banks before it can ever serve the government. It has to ensure a working and healthy banking system before it can really implement policy effectively. That’s how the whole Fed system is designed.

So, back to the question at hand. Can Larry Summers remove the distinction between the Executive Branch and the banking system when it comes to the government’s powers over money and banking? In my opinion, there isn’t a chance in my lifetime that we’ll see something like that happen. When Larry Summers becomes Fed Chief he’ll quickly realize who his true master is. And it’s not the President or the US Congress regardless of what they say. The Fed’s true master is the banking oligopoly and he will become a slave to it just like all the Fed Chiefs that came before him. And as long as that banking oligopoly is a private for profit industry the Fed will have to act in the independent best interests of the banking oligopoly before it can serve its other masters – the President, the US Congress & the US Taxpayer.