Barack Obama’s reported latest cabinet pick shows that even the collapse of the U.S. economy is not enough to challenge the unbridled power of the Federal Reserve. The president-elect’s choice for Secretary of the Treasury is Tim Geithner, head of the New York Federal Reserve Bank, the most powerful bank in the system. The nation’s leadership in both parties spent the better part of two decades unquestioningly following the man they called “the Oracle”—Fed chair Alan Greenspan–down the road to ruin. Now, they eagerly await the arrival of another Fed insider to lead them back into the light.
Clearly, the new administration and the Democratic Congress do not plan to in any way challenge the fundamentally undemocratic and fatally compromised nature of the Fed, which is not a government agency, but a “quasi-public” system effectively owned and run by the banking industry itself. It’s no surprise, then, that the Fed so often operates in the interests of the private banks, even when they run counter to the public interest—as it did under Greenspan, when its policies fueled, rather than reigned in, the credit bubble and accompanying fiscal disasters. What is more suprising is the fact that those sworn to serve the public still show so little inclination to demand more transparency or accountability from this all-powerful institution.
Reformers who want to democratize the Federal Reserve System have suggested bringing it inside the government, where it would at least be subject to some some oversight by elected officials. Some have proposed placing it under the control of the Secretary of the Treasury. Instead, Obama has done just the opposite: He’s placed the Treasury Department under the power of a consummate member of the Fed inner circle who, like most of the system’s leadership, has close ties to the private banks it serves.
Geithner is credited as the central figure in the Bear Stearns buyout by JP Morgan-Chase, arranging the deal and putting up the money for it. The Fed collateral on that deal included lousy subprime mortgages. He is close to other members of the elite Wall Street club that runs the Fed, whose resumes show the revolving door between the Federal Reserve and the private banks they are supposed to oversee. These include sitting directors of the NY Fed Steven Friedman, former Goldman Sachs CEO and still a director of that company, and Jamie Dimon of JP Morgan-Chase. (Until the Lehman Brothers disaster last spring, Lehman head Richard Fuld also sat as a “public” representative on the NY Fed board.) Geithner’s informal network of advisors, according to a May 2008 profile in Portfolio by Gary Weiss, includes Gerald Corrigan, the former NY Fed chief who was later a managing director of Goldman Sachs and now chair of Goldman’s bank holding company GS Bank; Pete Peterson, also a former head of the NY Fed, Secretary of Commerce under Nixon, and co-founder of the investment firm Blackstone Group; and John Thain, former head of the New York Stock Exchange, and the last CEO of Merrill Lynch, now at its purchaser Bank of America. The great Greenspan is in Geithner’s corner as well, and one of his earliest jobs was doing research for Henry Kissinger.
It’s impossible to imagine a Treasury Secretary with Geithner’s background undertaking the kind of bold action to save the economy that was outlined by William Greider in the Nation last week. This is far from the free-for-all handout to big banks going on under Henry Paulson, with the support of many Democrats. “A genuine solution,” Greider writes, “means closing down the hopeless institutions and creating a more democratic system based on small to medium-sized banks, financial intermediaries that are less imperious and closer to the real economy of producers and consumers.” Greider cites the Levy Economics Institute, which argues that “the bailout is proceeding backward. Instead of saving Wall Street first, government should devote its heavy firepower to reviving jobs, incomes and business enterprises. The banks will not get well or begin normal lending until there is overall economic recovery.”