The Next Federal Reserve Chair will Decide the Fate of Dodd-Frank

JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I’m Jaisal Noor in Baltimore. And welcome to this latest edition of the Epstein report.

Now joining us is Gerald Epstein. He’s the codirector of the Political Economy Research Institute and a professor of economics.

Thank you so much for joining us.

PROF. GERALD EPSTEIN, CODIRECTOR, PERI: Thanks for having me.

Noor: So this week marks the fifth anniversary of the Lehman bankruptcy, and now The New York Times’ editorial page has come out against the nomination of Larry Summers as a possible chairman of the Federal Reserve. Gerald Epstein, what are your thoughts about that?

Epstein: Well, it is good that The New York Times came out against Larry Summers’ possible nomination, because how bizarre would it be to appoint one of the chief architects of the financial crisis hit off by the Lehman bankruptcy, to appoint one of the chief architects of the financial crisis to be the chief regulator of the financial system? It would definitely be putting the foxes in charge of the hen house there. And I’m glad The New York Times came out against it. Unfortunately, there’s a lot of other reports suggesting that President Obama is perhaps likely to nominate Summers.

Noor: And so if the New York Times’ editorial page comes out against Summers, who is supporting him now? Who’s backing him?

Epstein: Well, that’s a good question. Very powerful supporters both inside and outside of the White House. The backers inside the White House is old colleagues and buddies from his days when he was working for Bill Clinton, people like Gene Sperling, who’s head of the Economic Council; Jason Furman, head of the Council of Economic Advisers; Jack Lew, who’s the Treasury Secretary; former Treasury Secretary Timothy Geithner; all inside the White House very strongly pushing Larry Summers. And then there’s very strong force outside of the White House, including people like Robert Rubin, who had been chair of Citibank. And very many other important members of Wall Street are very strongly pushing them him.

And why? Well, the reason is because he is a Wall Street guy, essentially. He sees things with finance-colored glasses, the same way that the Wall Street people see them. He works for a hedge fund and makes millions of dollars doing that. His instincts now, though they haven’t necessarily always been that way, Larry Summers’ instincts now are to look at the world through the way it’s going to affect finance first, with the faith that helping finance is going to help the real economy.

Noor: So why does his nomination to the position of chairman of the Federal Reserve specifically concern you? What kind of powers and influence would he have in that position?

Epstein: Well, it really concerns me, because the head of the Federal Reserve has enormous power not only on the economic outcomes here in the United States, but also all around the world. The Federal Reserve is the most important central bank in the world, because the dollar is the key currency of the world. It undergirds most economic transactions around the world—not all of them, but most of them. U.S. interest rates, which are affected by Federal Reserve policy, have a big influence on interest rates all over the world. And the policies have ought also a huge influence on supply of credit and so forth.

So, typically, there’s a tendency to personalize this—and by starting off with Summers, I’ve done that a bit. But I think we have to step back and see structurally what’s going on here.

Historically the Federal Reserve has been a relatively independent central bank that is independent, relatively independent of Congress, relatively independent of the presidency. And the Federal Reserve has represented largely the interests of Wall Street. And there have been some very important times throughout history since the Federal Reserve was founded at the turn of the 20th century where there’s been a change in that subservience to Wall Street. And usually this has happened during crises. During the Great Depression the Federal Reserve was brought under the control of the Treasury Department. And in the early 1950s, however, after a great battle, the Federal Reserve became more independent once again and once again returned to its role as promoting the interests of Wall Street.

Now, Ben Bernanke, who’s the current Fed chair, is kind of interesting because he straddles the fence in a bit. On the one hand, he was brought in because his views were seen as sympathetic to Wall Street. But in the course of the crisis, he’s, I think, taken some policies that have really rubbed Wall Street the wrong way—not all of his policies, but some of them.

Janet Yellen is being squeezed out or possibly being squeezed out because she’s not a Wall Street player the way Larry Summers is. And there are two key issues here. One is the control over monetary policy, setting interest rates and so forth, and one can’t be sure what the difference will be between Yellen and Summers on that score. But in terms of regulating the banks, which is the second key issue, there’s a huge difference. The Federal Reserve was given a lot more power by the Dodd-Frank law that was passed a couple of years ago to regulate banks. So the head of the Fed would now be the chief regulator of large financial institutions. And Janet Yellen, not being the Wall Street player, is making Wall Street very nervous because she’s much more likely to have strict regulation over Wall Street, whereas Summers has demonstrated through his attitude towards derivatives, Enron, other important issues, Glass-Steagall, helping to get rid of Glass-Steagall, that he’ll be very sympathetic to Wall Street.

Noor: And finally, if it wasn’t Summers that became nominated and is confirmed as Fed chair but instead you, Gerald Epstein, were the next chairman of the Federal Reserve, what kind of policies would you put into play, into effect?

Epstein: Well, first I would accept if I were nominated and I would serve if I were appointed. So, President Obama, if you’re listening, go make my day. Please go ahead and do that.

But this is what I would do. First of all, it’s very important to implement strict versions of the Dodd-Frank Act. The head of the Fed has an important seat around the table in terms of determining how the Dodd-Frank Act is going to be implemented. And right now it’s being gutted by the Wall Street lobby, and Summers will help them do that. I would do the best I could to make sure that it was implemented strongly. The Federal Reserve has the power to put on extra kinds of regulations on the large financial institutions, which I would also do. I would put a lot more people on the scene in the banks to regulate them. I would support a new Glass-Steagall Act to break up the banks, as Sherrod Brown and others have reported. And in terms of monetary policy, I would engage in a lot more directed credit lending to important sectors, for example, a sector that would help us generate more green jobs and green growth. So that’s a short list, and we’ll see if President Obama takes the bait.

Noor: We’ll certainly watch for that nomination. Gerald Epstein, thank you so much for joining us.

Epstein: Thank you very much.

Noor: Thank you for joining us on The Real News Network.