The publication of Fed Power: How Finance Wins represents an important step forward for the social sciences. Up until quite recently, the Federal Reserve Board existed in a nether world that was rarely visited by scholars. To be sure, economists often discuss whether Fed decisions to loosen or tighten monetary policy were appropriate, but they have largely ignored studying the Fed as an institution. In fact, that task has been left almost entirely to dissident journalists such as William Greider, author of the classic book, Secrets of the Temple. ^{Footnote 1} So it is an important event that two accomplished political scientists, Lawrence Jacobs and Desmond King, have teamed up to produce this analysis of the Federal Reserve.

There is much that is valuable in this study. From the start, Jacobs and King make clear that the United States needs a central bank and that the libertarian project pushed by Ron Paul and others to abolish the Fed and return to the gold standard is a reactionary fantasy. Jacobs and King favor reforming the Fed so that it would be more accountable to the public and less oriented to enhancing the profits of giant banks and other Wall Street interests. For them, the policies that the Fed pursued in the months after the collapse of Lehman Brothers in fall 2008 are the key indicators of the Fed’s improper priorities. On the one side, the Fed made staggeringly large lines of credit available to major financial institutions in the United states and abroad at extremely favorable interest rates. On the other side, the Fed made no effort—either direct or indirect—to help the millions of homeowners who were left with negative equity in their homes as housing prices fell. This policy choice was both morally and economically disastrous because the epidemic of foreclosures from 2009 to 2014 made it much more difficult for the U.S. economy to recover from the deep recession triggered by the Wall Street collapse. ^{Footnote 2}

While Jacobs and King deserve enormous credit for what should be a pioneering study that stimulates a major new research focus for political scientists, sociologists, historians, and economists, there are elements of their approach that are problematic. First, their primary metaphor for understanding the Fed is that of a bureaucratic behemoth that has steadily increased its autonomy and scope of action since at least the 1930s. The problem is that this analysis conflates two separate issues. The first is the idea that the Fed is just too big and too powerful, which is an argument that echoes, for example, right-wing critiques of the Internal Revenue Service. The second is the idea that the Fed uses its autonomy for the wrong purpose, which is to protect giant financial institutions rather than the public. Would they be complaining about the excessive power of the Fed had it used its authority from 2000 onward to halt the financial bubble that drove real estate prices and mortgage lending through the roof?

A closely-related problem is that the “bureaucracy gone wild” view of the Fed ends up obscuring the dynamics of financialization from Reagan onward that resulted in a handful of highly-leveraged financial institutions that were both too big to manage and too big to fail. The Fed alone does not bear responsibility for this outcome; multiple government agencies worked to encourage consolidation and concentration in the financial industry. There was a consensus in both Republican and Democratic administrations that this consolidation was desirable as a way to meet the competitive threat posed by European and Japanese banks. ^{Footnote 3}

Moreover, this effort was tightly linked to the broader strategy of U.S. policymakers in shaping the global economy. As Greta Krippner has shown, U.S. officials discovered in the early 1980s that even if the United States ran huge current account deficits, other nations would lend the necessary funds to cover the shortfall. ^{Footnote 4} So the United States simply gave up trying to limit the size of its balance of payments deficit. This policy put Wall Street firms in the catbird seat since foreign governments now had little choice but to transact with them to purchase hundreds of billions of dollar-denominated securities each year. Over twenty-five years, the enormous profits generated by these transactions accelerated the process of financialization. And as we know, this culminated in the Global Financial Crisis since financial institutions across the world purchased billions of dollars of collateralized mortgage obligations that were suddenly worth only a fraction of their purchase price.

Their neglect of this global dimension is a particular problem because their key example of an effective central bank is Canada’s. It is certainly true that Canada weathered the global financial crisis far better than most other developed nations, but Canada is very different than the United States. It is not a major global power and its financial sector is small and it is organized around a handful of major banks. The project of creating an effective and democratically-responsive central bank for the United States is far more complicated than simply imitating our Northern neighbors.

Nevertheless, Fed Power deserves a broad readership. It is written in a lively and engaging style and it opens up the debate we need to have over a deeper restructuring of our financial system than what was achieved in the Dodd-Frank legislation. As they suggest, the fundamental question is whether the financial system and the Federal Reserve work for all of us or are simply instruments to continue expanding the wealth of the 1 percent.