1Federal Reserve is known as the most powerful bank in the world. It has been placed on first stage in the aftermath of 2008-2009 economic crisis. Lawrence R. Jacobs, professor specialized in American political history in the University of Minnesota, founder, and director of the Center for the Study of Politics and Governance, and Desmond King, professor of politics in Nuffield College, Oxford, engaged in the study of executive and financial bases of US politics, guide us in the guts of FED. At the crossroads of finance system architecture and public policies, this book is a pamphlet claiming for public accountability and transparency. The contribution of these experts of political sciences concerning FED’s functioning brings a new approach to the front stage. They don’t only focus on financial system but try to give a lecture on the way it handles with political interests.
2Authors don’t worry to highlight the major problem : FED’s lack of counterpowers let it completely free hand to manipulate the money supply and design its own path to get out of the financial crisis. Characterized by an incisive and sharp style, the demonstration follows a quite simple thesis : in a world of growing wealth, a few wins, favoured by biased institutions. How FED act and favour finance at the expense of American households ? The book follows an Ariane string. From the ascension to the confidence crises FED faces, authors aim at showing how federal reserve’s behavior favour finance.
3They offer a close look at the failures of one of the biggest American institution. Indeed, Americans, Congress and President count on its ability to manage the money supply and to drive monetary policies against inflation. Authors show that the roots of 2008- 2009 failure came from the fact that FED grew during about a century from a humble organization to an independent Goliath, and took advantage of shadow banking. Its financial tools seemed to be efficient and the central bank enjoyed relative wide support from population. Subprime crises revealed risky decisions motivated by profit. However, it’s not a review of 2008-2009. The approach focuses on an Institution and the way it’s organized. The subprime crises are taken as a pretext in order to show to which extend finance and politics tend to be separated and how it gives freedom to FED to mobilize powers and make strong decisions.
4Through the first part : “Why FED power Matters” (p. 1) we learn about struggles around 2008-2009 FED’s response to the crisis. It’s quite a dense part, with a lot of information. But what we should remember is the process from populism and civil society confidence in the FED to acquiescence and doubt. This question is a matter of importance as this chapter aims at showing how FED creates inequalities and avidly chooses to save banks and Wall Street.
5In order to understand the process of building the FED and explain how such an important institution emerged in America and vanished counterpowers, the second part focuses on “Rise of the FED state”. It explains why and how, since century, finance is getting more and more distinct from politics. The reader is guided through the history of the building of the FED. Thanks to examples of twentieth-century crises, the authors explain how economic catastrophes contributed to the rise of FED power. What is strongly emphasized is the notion of counter-power. In a democratic state, where liberty and citizens accountability count, FED is the only institution of major importance which has no system of check and balances. FED’s chair considered and argued that politics were not enough responsible and would tend to follow their own interests. Monetarism theory gave power to the federal reserve’s actions through generalization of shadow banking system.
6It represents a threat illustrated in the third part “Concealed advantage”. A technical chapter about financial tools and FED’s strategy to get out of the crisis. This includes intensive use of 13 (3) during 2008-2009 which authorized to “act in unusual and exigent circumstances”, or TARP. As a matter of fact, this demonstration shows how fast and how easily FED can act on its own. A soundbite to illustrate the importance of these secrecy actions is that FED distributed more than 1.2 trillion USD to banks, in one day (p. 167). Subprime crises contributed to move FED power from monetary to fiscal policy.
7It generates a problem of legitimacy (chapter 4). In other words, it appears that the more federal reserve act, the more we could see the short term of its actions, the more it gets vulnerable. Moreover, tools put in place during the crisis led to confusion and deadlock and seems to widen the problem. Consequently, 2008-2009 generated backlash against FED from congressmen. A general call for political control in FED’s decision emerged as a consequence of its failure to regulate the crisis. Facing this claim for accountability and transparency Dodd-Frank was put in place : in order to guarantee check and balances, FED actions are submitted to congress approval. The objective was to avoid systemic collapse and improve FED’s capacity to act for future crises. While it tempted to limit its actions, the mechanisms contributed to improve FED’s freedom.
8The last chapter “Preparing for next financial crisis” invites to think about the reforms FED must face. Offers are inspired by the example of Canada or other countries which managed the crisis thanks to political and finance association. Indeed, after Subprime crises, Canadian and European central banks received political demand to seek stability and work prudently in order to protect business and workers. The objective is to show that secret is not essential to lead effective finance action.
9These political scientist approaches mobilized in this book is a way to understand how much financial and political issues are close. Due to this angle, some descriptions of financial mechanisms lack clarity. They would deserve some more explanations or schemes. TARP explanation and tools created to face 2008-2009 crisis would have been clearer in a table. Under this style responses to FED’s lack of efficiency is unintelligible for a neophyte. Despite these aspects, the core of the book is crystal clear. The world of American finance is depicted as a greedy system caring about its self-interest no matter what it costs. The commitment of both authors doesn’t make any place for debate.
10The whole demonstration could be resumed in a quote (p. 1) by former FED’s chair Ben Bernanke : an analogy between FED’s actions and the car market (it should ring a bell and remember us of “The lemon market” – Akerloff, 1970). He says : “It’s [FED’s governance in decision making] like selling a car : only when the customer is sold on the leather seats, do you actually reveal the price ?” Shadow banking appears essential in FED’s decisional process, moreover, it is maybe vital. Though, trust and transparency are the heart of the struggle around FED’s lack of accountability. FED’s actions trigger a significant threat as its actions are partisan. People’s claim for more control from elected authorities tempts us to question the possibility of democratic finance.
