Last Resort: The Financial Crisis and the Future of Bailouts
by Eric A. Posner
University of Chicago Press, 2018, 272 pp.
Financial Citizenship: Experts, Publics, and the Politics of Central Banking
by Annelise Riles
Cornell University Press, 2018, 120 pp.
Crashed: How a Decade of Financial Crisis Changed the World
by Adam Tooze
Viking, 2018, 720 pp.
Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State
by Paul Tucker
Princeton University Press, 2018, 656 pp.
September 29, 2008, was one of the strangest days in the recent history of capitalism. The investment bank Lehman Brothers had failed two weeks earlier in the largest bankruptcy in U.S. history, and Washington Mutual had failed after a bank run on the 26th. Insurance giant AIG was bailed out on the 30th. Global credit markets were paralyzed, stock markets were in vertiginous collapse, and the entire international financial system was at risk. Treasury Secretary Henry M. Paulson Jr. approached Congress with the Emergency Economic Stabilization Act and the $700 billion Troubled Asset Relief Program (TARP), which together granted the government sweeping and unspecified emergency powers. On September 29, a little over one month before an election, Congress voted not to save the global financial system and rejected Paulson’s proposal by a vote of 228–205. The Dow Jones Industrial Average plummeted, and on October 3, Congress voted to pass a revised and extended version of the bailout, now loaded with petty individual handouts: some funding “for wool research,” a tax break for manufacturers of wooden arrows, subsidies for Virgin Islands rum production. Such was the price Congress demanded for rescuing the global economy.
The $700 billion bailout remains an unresolved trauma in American political consciousness. But as Adam Tooze has shown in his monumental book Crashed, that $700 billion was not the real bailout. TARP was wrapped up in December 2014 with the last sale of the last troubled asset the government had bought, and in the end the Treasury turned a profit of $15.3 billion. Those government purchases of toxic assets were dwarfed by the actions of central banks: in three rounds of quantitative easing from 2009 to 2014, the Federal Reserve pumped roughly $4.4 trillion into financial markets, aided by another $2.8 trillion from the European Central Bank (ECB) and yet more from the Bank of England and the Bank of Japan. On top of these operations, between 2007 and 2011 the Federal Reserve extended currency swap lines—emergency access to dollars—to fourteen central banks, totaling some $10 trillion in credit in varying lengths of maturity. These gargantuan movements of dollars went almost unnoticed by publics, governments, and even most economists.
Among its many other achievements, Tooze’s book is the most provocative and thorough example of the wave of thinking about the political legitimacy of central banking. On whose authority did central banks coordinate to inject trillions of dollars of liquidity into the global financial system? Were there other options than buying financial assets? When the Fed lends dollars to the ECB so the ECB can provide dollar funding to private European banks, who is accountable, and under what laws, and to whom? The easy answer is no help: the Fed is empowered under Section 14 of the Federal Reserve Act to buy and sell in the open market in what it determines to be the interest of the public. What does that actually mean?
The bailouts averted another Great Depression but began a crisis of political and institutional legitimacy that shows no signs of abating. We are now in the midst of a rich harvest of new thinking on the ways that neoliberalism insulated markets from states, the political power of billionaires, and the dynamics of inequality. And few issues highlight the dominance of economic power over participatory democracy better than central bank independence. Many commentators on the left call for re-embedding finance in national governance, attempting to undo decades of neoliberal depoliticization, while politicians on the right have set about actually attempting to take over their recalcitrant central banks. The response from centrist technocrats has been an attempt to rethink the necessary conditions for central bank independence so that it once again seems safe, competent, and legitimate.
In Financial Citizenship, Annelise Riles argues that the crisis of legitimacy in central banking (and economic policy more broadly) is the result of a disconnect between the culture of economic experts and the culture of everyone else. Central bankers are trained to dress the same, to talk the same, and to recognize the same things as valuable, possible, and intelligible. They are produced by the same universities, see each other at conferences, and are deeply imbricated in the professional webs that connect elite academia and private finance. In this culture, central banking is seen as a technical activity that should be insulated from popular politics because elected officials cannot be trusted not to buy electoral victory with inflation. The isolation of this culture has provoked a backlash from across the political spectrum.
If Riles is right and the legitimacy crisis is the result of a cultural disconnect, then the solution must also be cultural. Central bankers should communicate their reasoning more transparently and intelligibly, while the public needs better financial literacy and space for participation—hence, Financial Citizenship. But “citizenship” is an odd way of framing the problem. The idea that central bankers and members of “the public” are equal citizens before some set of common financial laws runs contrary to the 2008 crisis and its aftermath, which many citizens experienced as an act of class power rather than civic virtue. Moreover, in a world of free capital flows, central bank policy affects global capital markets, prices, and exchange rates, not just domestic economic conditions. The citizenship frame is especially ill-fitting in the case of Europe, where there is literally a citizenship gap between the personnel of the ECB and, say, Greek pensioners. It’s more compelling to describe the devotion of trillions of dollars to rescuing the financial system through supporting asset prices while millions lost their jobs and their homes as the result of class warfare than as evidence of a deficit in shared cultural values.
The awkward position of central banks in democracies is not a new problem. In Globalists, his history of neoliberalism, Quinn Slobodian explores how thinkers like Friedrich von Hayek and Wilhelm Röpke (taking a heuristic devised by Carl Schmitt) imagined a world divided between imperium, where law ruled over humans in bounded territory, and dominium, where law ruled over property across the world. Under the nineteenth-century gold standard, with its free flow of capital and limited central bank autonomy, dominium ruled over imperium, the global economy over the national one. The costs of preserving the gold standard during crises and adjusting international price levels was borne by domestic workers. When faced with an outflow of gold in a crisis, central banks would be forced to raise interest rates, thereby drawing the gold back in, but at the cost of making the crisis worse. Businesses would fail, banks would collapse, people would lose their jobs, and the price level would decline accordingly.
That worked in a world of limited franchise, but not after 1918. As Barry Eichengreen has spent a career demonstrating, the attempts to return to the gold standard in a world with radical popular politics and no grounds for international cooperation produced the worst economic disaster in human history, and the rise of Hitler following the utterly avoidable austerity and deflation of the Brüning government in 1930–32. The reconstruction of the international monetary system at the Bretton Woods conference in 1944 was predicated on restricting international capital flows—in effect, subsuming dominium under imperium.
The Bretton Woods period, from 1945 to 1971, saw the most politically constrained central banks in financial history, the most heavily regulated financial sectors, and effectively zero international financial crises. It was a period with interventionist governments, capital controls, and caps on interest rates that economists call “financial repression.” If financial citizenship ever came close to reality, it was in this period, not in the post-1970s world of global capital markets, floating exchange rates, and tax havens. After the 1970s, the interconnectedness of financial markets meant that the decisions of powerful central banks, like the Fed or the Bank of England or the Bank of Japan, had global consequences. If they were citizens, it was of dominium, not imperium.
In Unelected Power, Paul Tucker, a former Deputy Governor of the Bank of England, attempts to determine how to restore popular legitimacy to central banks. Tucker is a member of the culture Riles describes, and his analysis is congruent with hers, but he is aiming for something larger: how power can legitimately be delegated in democracies at all. The problem is simply the most acute in the case of central banks, especially in their responses to crises or, in his parlance, their position in the “emergency state.” Tucker’s book is an attempt to derive principles that could guide a general refoundation of ailing democratic structures in order to avoid either illiberal democracy or undemocratic liberalism. He wants to figure out how to build institutions that will guarantee responsible financial citizenship.
As Tucker puts it, when the crisis of 2008 hit, “Almost no central bank had articulated operating principles for its lender-of-last-resort policies or for how it would operate monetary policy at the effective (or ‘zero’) lower bound for interest rates,” and “no jurisdiction had clear rules of the game for determining how central banks could come to the rescue in unforeseen circumstances or, put from another perspective, when they should stop.” For Tucker, these problems were settled by improvisation and contingency, which is very difficult to make seem legitimate. By the end of his long and detailed book, Tucker arrives at an optimistic conclusion: modern information technology will erode the gap between unelected power and the governed, who will demand and receive constant real-time dialogue with their governors. Tucker hopes that central bankers will, in turn, welcome public debate and criticism as a source of legitimacy.
Tucker seems rare among central bankers in his longing for transparency and legitimacy. Most seem to prefer the discretionary power that they wielded after the 2008 crisis. Here, no figure looms larger than Paul Volcker. Volcker’s tenure at the Federal Reserve from 1979 to 1987 marked the most spectacular modern instance of central bank policy as class warfare. After inflation peaked at 14.75 percent in March 1980, Volcker raised interest rates to unprecedented heights, touching 20 percent by June 1981. The ensuing recession—the deliberate policy of the Volcker Fed—tamed inflation while costing millions of people their jobs. The unemployment rate hit 10 percent, and Jimmy Carter lost his job too. By 1982, with inflation down to 3.8 percent, the Fed eased monetary policy and brought the country out of recession, but some things could not be put back together again.
The Federal Reserve has a dual mandate, to secure price stability and full employment. When forced to choose between them in the stagflation of the late 1970s, the Volcker Fed opted to prioritize inflation. Ever since, Americans have faced a higher rate of unemployment for any given level of inflation. The Volcker shock illustrates the tectonic distributional consequences of monetary policy and lender-of-last-resort activity. At some level, central bankers decide how many people get jobs and lose them, how many families can buy houses, how many kids go to college, and at what cost. As Tim Barker put it in a recent review of Volcker’s Keeping At It in n+1, “millions of unemployed workers are required for the economy to work as it should,” and central bankers decide how many millions at any given time.
The Volcker recession’s secondary effects were numerous and profound. The new interest rates undercut the basis of savings-and-loan associations, setting the stage for the crisis that began in 1986 and cost U.S. taxpayers upwards of $124 billion. Banks that were earning, say, 3 percent on thirty-year mortgages they had issued in the 1960s but suddenly had to pay 10 percent or more to persuade depositors not to put their money elsewhere were in serious trouble. This mismatch between low-interest mortgages issued in the 1960s and the need to pay high interest rates after 1979 was one of the driving forces of the long process of financial deregulation, allowing access to new sources of profit when the older model of finance was rendered unworkable.
On a grander scale, the adjustment of interest rates and the appreciation of the U.S. dollar also provoked the Latin American debt crisis of the 1980s, throwing an entire continent into a “lost decade” of economic stagnation and poverty. This was the context for the reorganization of central banks across the world, separating them from the control of government officials. Independent central banks were a key part of the Washington Consensus enforced on Latin American and African countries as conditions for debt bailouts in the 1980s, and were some of the first new institutions set up in post-communist Eastern Europe in the 1990s. Indeed, central bank independence as we know it is a recent phenomenon. The European Central Bank only began operation in 1998—a central bank presiding over a unified currency zone without a unified political body. The Bank of England was only granted its independence in 1997, after five decades as a stage agency. Even the Fed, with its longer history of statutory independence, was essentially refounded as an institution independent of either presidential or Treasury control in the 1950s, as Peter Conti-Brown argues in The Power and Independence of the Federal Reserve.
It’s possible to go even further. The Fed’s dual mandate to deliver price stability and full employment didn’t come until the 1978 passage of the Humphrey-Hawkins Full Employment Act, which was the outcome of a long struggle led by civil rights activists, including Augustus Hawkins, a founder of the Congressional Black Caucus, and Coretta Scott King. The civil rights connection is not a coincidence. Most central bankers have an idea of NAIRU, or the non-accelerating inflation rate of unemployment, which refers to how low unemployment can get before too many people earning wages leads to inflation—or, more pointedly, how many millions of people need to be unemployed. Since African-American unemployment was (and is) higher than the overall unemployment rate, a steady unemployment rate rather than full employment implies a zero-sum struggle for jobs, or, alternately, a permanently unemployed African-
The full employment mandate was not much in evidence during the Volcker recession or after. The Humphrey–Hawkins Act was an attempt to reign in the independence of the Fed, but there is no clear mechanism for redress when the Fed violates its mandates with impunity or expands its purview without specific authorization. The same is true for other central banks. From an early role in managing the national debt and controlling the production of currency, central bank activity has grown more complex alongside the growing complexity of the economy central banks try to manage. In practice, today they are responsible for price stability, employment, banking supervision, financial regulation, and exchange rate policy, and they act as lenders of last resort. When scholars and pundits argue that central banks must be independent to isolate price stability from politics, they are overlooking the many other things that central banks do, and what it means to have an agency overseeing those things that is either independent or completely immune.
Not only have central banks come to oversee a wider set of policy areas, but the tools available to them have also expanded. The $10 trillion in currency swap lines that Tooze describes, for example, were pioneered during the Mexican peso crisis of 1994–95 by Edwin Truman, head of the Division of International Finance at the Fed. The Clinton administration was unable to secure congressional approval to expand the resources of the Exchange Stabilization Fund, which would have provided dollars to the Bank of Mexico in order to support the value of the peso. The currency swap line was an emergency financial mechanism pursued specifically because it lacked democratic oversight. Mexico still experienced a crippling recession, but it repaid its creditors, plus a handsome profit. The swap line worked, at least for capital.
The sense that central banks exist outside of, or above, the law is particularly acute in the United States, with its long history of hostility to central banking and the public-private structure of the Federal Reserve. There is no clear and consistent mechanism to subject Fed actions to judicial review, and questions about its constitutionality are still raised occasionally by eccentric senators. One of the strangest and most stimulating arguments about the illegality of post-2008 bailout policy is Eric Posner’s Last Resort. According to Posner, the problem with central banking is that it expropriates capital by supporting or withdrawing the recognition of property rights in assets in order to manipulate their prices. In his view, after 2008 the Federal Reserve and the Federal Deposit Insurance Corporation continually broke the law; the government takeover of Fannie Mae and Freddie Mac was illegal, as was the bailout of the auto industry. In fact, the only significant entity in the 2008 crisis that Posner does not think broke the law was AIG, and he maintains that the bailout of AIG was not a windfall but a “takings” and a threat to the legal concept of property itself. (The acknowledgements belatedly mention that he worked on AIG’s ongoing legal case against the government.)
Posner’s conclusion is a surprise: the bailouts were illegal, but future crises will happen and will also require bailouts, so the law should be changed to grant central banks wider discretionary powers. A “procedural trigger” should automatically expand the powers of the lender of last resort once a financial crisis has begun to ensure the political independence of unpredictable emergency measures. He understands Paul Tucker’s worries about the popular illegitimacy of improvised responses to crises but believes that the ever-present threat of global financial contagion means that we exist in a different world from the one that Tucker spent his career managing. Posner implies that we need to move beyond central bank independence and institutionalize the de facto reality of central bank impunity.
For books about democratic legitimacy, Riles, Tucker, and Posner’s accounts all noticeably avoid the content of political ideology. The spread of independent central banks after 1980 and Paul Volcker’s policies are at least as much part of the history of neoliberalism as meetings at Mont Pelerin or the Chicago Boys in Chile or Thatcher’s war against the miners. But the Volcker shock and the ensuing regime of monetary policy have only recently begun to draw attention equal to their historical significance. The discussion about the legitimacy of central bank independence is, in fact, a discussion about the legitimacy of neoliberalism: an unelected international elite who have tremendous but legally undefined power to protect capital at the expense of labor is what neoliberalism is. There is political content in the fact that after 2008, owners and managers of capital got $10 trillion in central bank support, while workers were told that full employment would lead to inflation, despite the Fed undershooting its 2 percent inflation target.
From different vantages, Tooze, Riles, Tucker, and Posner all suggest that the modern international financial system might be inimical to the rule of law as such. Contrary to the stated hopes of 1990s globalizers, dominium has less to do with the sanctity of private property and contract enforcement than with legal immunity, contingent discretion, and informal mechanisms of tax avoidance, money laundering, and elite impunity. It is a sphere not of law but of power. It is difficult to agree with Riles or Tucker that citizenship, constitutional principles, and transparent governance will solve problems of central bank legitimacy, when all three are already under immense strain today, driven by the very politics that the bailouts produced. If the problem is the unelected power of banks and bankers, wouldn’t that same power reproduce itself through those new cultural forms, constitutions, and laws? Not for nothing are all contemporary instances of political threats to central bank independence coming from the right: the effusions of Donald Trump, Recep Erdoğan’s July 6 defenestration of the chair of the Turkish Central Bank, and the Reserve Bank of India’s pre-election gift to Narendra Modi.
If central banks are tools in class conflict, then they are much too powerful to be allowed to be captured by the intransigent political right, or to be left in the control of unaccountable managers of capital. There has been a lot of provocative thinking recently about how to push back against the power of anti-majoritarian institutions like the U.S. Senate and the Supreme Court; central banking should be at the center of that new strategic frontier. As Tooze puts it in his conclusion, “political choice, ideology, and agency are everywhere” in the questions that these institutions face. The 2008 crisis has consolidated power in the U.S. financial system, the dollar, and the Fed, rather than redistributing it downward. The crisis made central banks more powerful, not less, and the stakes for politicizing them vastly higher than before.
Tooze also shows how domestic policy and inequality interconnect with geopolitical forces. Crashed points to the need for internationalist approaches to central banks in the long aftermath of a crisis that was born out of gigantic international financial interdependencies, especially across the North Atlantic. A return to national financial markets seems less plausible than accepting the challenge of imagining a different model of international finance altogether.
But policy and laws are still made at the national level. Re-embedding finance and banking in the imperium of the nation-state would require the return of capital controls, one of the key features of the Bretton Woods regime. Long forbidden in polite economic company, capital controls have slowly begun to return to policy discussions. They cropped up following the scandal of the Panama Papers and Gabriel Zucman’s work on tax havens. They appeared again in 2016 when the IMF published policy papers on strengthening the international monetary system, in a dramatic reversal of its longstanding role as an enforcer of the free flow of capital. And they turned up yet again following the discussion of Alexandria Ocasio-Cortez’s proposed 70 percent top tax rates, as a way to prevent capital flight. Capital controls would be a radical break, but a more realistic one than the proposal for a new Bretton Woods. There is no going back to the U.S. dominance of 1944, or the wartime power of states over markets, or the formal colonial status of most of the world—the conditions under which international systems could be designed by a small group of powerful players.
Capital controls are one way to reframe independence, allowing central banks to act independently of international capital and independently of each other. Another is to challenge the close connection between monetary policymakers and private bankers—to make central banks independent of the financial class they are intended to regulate, rather than independent of democratic oversight. But “politicizing” the central banks should go beyond using the power of appointment and persuasion to change their policies. A project of re-embedding finance also needs to think about what exactly laws do and who makes them. Laws structure behavior by dispensing violence—physical, material, financial—for transgressions. Legal controls could follow the model of the Humphrey–Hawkins Act, telling central bankers how to act in certain circumstances, but what can people do if bankers ignore those laws, or act outside of national jurisdiction or in legally indeterminate policy spaces? A radical re-embedding project centered on principles of citizenship and democratic legitimacy means the application of the coercive and proscriptive power of the law over the outcomes of economic policy: a world in which someone would be legally at fault for financial crises and unemployment. That world is difficult to imagine. But then, so is $10 trillion.
Trevor Jackson is an assistant professor of economic history at George Washington University, where he teaches the history of inequality and the history of economic crisis. He is writing a history of impunity in European financial markets.