Eight decades ago, Harold Lasswell reminded us that “politics is who gets what, when and how” (Politics: Who Gets What, When, How, 1936). This iconic guide to political science is often missing in the study of central banks, including the Federal Reserve. It defines the most significant point of disagreement our book has with The Myth of Independence. Sarah Binder and Mark Spindel view the Fed’s actions as part of a dance with Congress that is largely silent about the winners and losers outside of Washington. By contrast, Fed Power puts the distributional consequences of the central bank’s policy front and center, along with the politics that produces them. Our approach joins the dominant framework in the study of domestic and foreign policy: From Gosta Esping-Andersen, Jonas Pontusson, Theda Skocpol, and Ben Page to Peter Gourevitch and Robert Keohane and Helen Milner, scholars aim to pinpoint the interests and influence of lobbying, campaign contributions, and other tactics to curry favor and secure selective government benefits. The Myth of Independence gives the Federal Reserve a pass. Fed Power does not.
Here are four important areas of disagreement. First, The Myth of Independence breaks new ground by treating the Fed as a political organization but overstates its deference to Congress and under appreciates the Fed's will and capacity to evade legislative control. Building on scholarly economic and political research on institutions by Theda Skocpol, Douglass North and others, Fed Power defines the Fed as an institution that has developed over the past century considerable autonomy and extraordinary administrative capacity. Few students of modern executive politics will be startled to learn that evading Congress is built into the Fed's DNA as a strategic and ambitious actor with a robust sense of mission and the trained staff and clear lines of authority to pursue it.
Second, The Myth of Independence under appreciates the most important structural reality of the Fed—it is independent of the congressional budget appropriations process. The Fed’s fiscal independence results from the massive returns on collecting interest on its investments and the revenue from buying and selling them on capital markets. Fiscal independence frees the Fed from the scrutiny that accompanies the appropriations process. This structural reality has enormous implications: The Fed is dependent on the operation and health of financial markets. The Fed advances its own institutional position and resources when it protects and stabilizes finance.
Third, the Fed is enmeshed not only in domestic politics but also in the fundamental global transformation known as “financialization,” absent from The Myth of Independence. Since the 1980s, the business of banking shifted from making loans and collecting interest to reaping profits from markets for securities—including the infamous mortgage securities market responsible for the 2008 Great Recession. Narrowly focusing on congressional oversight misses the new scope and modalities of Fed activities and connections to finance in the United States and globally.
Fourth, the Fed’s selective benefits for finance and the conduct of monetary policy produce clear winners among the most affluent. Juan Montecino and Gerald Epstein demonstrate that Fed interventions “increased bank profits.” The Fed’s unorthodox policies to expand the supply of money were mimicked in the UK where they produced (according to a recent Bank of England report) the “single biggest distribution of wealth in modern history.”
Scholars should read Fed Power and The Myth of Independence for themselves and reach their own conclusions. Vibrant research fields thrive from discussion and respectful disagreement, as ours is. The Fed should be at the center of political science and public debates about democratic accountability and the impact of government policy in generating economic inequality. It is time for much more significant research on the Fed.
