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The Fed and Authoritarian Capitalism

August 12, 2008

Robert Reich

Chinese authoritarian capitalism, on display this week in Beijing, has me thinking about America’s democratic capitalism and how we practice it.

Start with the U.S. economy’s most powerful government agency: The Fed, of course. Its decision this week to hold short-term interest rates steady was wrong, in my view; it should have lowered them because recessionary forces continue to increase while wage-price inflation doesn’t exist. Wages are dropping in real terms. But my opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.

Months ago the Fed decided to bail out major investment banks. That put billions of taxpayer dollars at risk without so much as a single act of Congress. Lately the Fed has been looking into the capital assets of these banks and telling them how to bolster their liquidity. Probably a good idea, but here again, nobody authorized the Fed to do this.

My opinion and your opinion count for nothing. The Fed is not directly accountable to American voters, or even to Congress or the President.

Now the Fed is issuing proposed regulations governing the credit-card industry – specifying when credit card issuers can increase interest rates on existing balances, and barring late fees on customers who weren’t given a reasonable amount of time to pay. Personally, I’d also want to stop them from marketing credit cards to people under age 21, and imposing extra charges for paying online.

But what I or you may want is irrelevant. The Fed’s proposal has draawn nearly 56,000 comments, yet the Fed isn’t compelled to read a single one of them. You see, the Fed is acting without congressional authority. Two weeks ago a congressional committee reported out a Credit Cardholder’s Bill of Rights with many of the features of the Fed’s regulation, but the banking industry mounted such a lobbying effort against it there’s no way it will get enacted this year, or maybe ever.

In other words, Congress is so immobilized we have to rely on the Fed — which operates mostly in secret, whose chair is appointed every four years but whose other governors have fourteen-year terms, and which doesn’t even depend on a congressional appropriation for its own funding but draws interest on the portfolio of Treasury securities it controls.

This isn’t Chinese-type authoritarian capitalism, of course, but nor is it, strictly speaking, what we’ve come to expect from a democracy.

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people. This entry appeared on his blog.

Copyright 2008 Robert B. Reich

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