The Fed as a class warrior

Julio Huato
13 min readMar 22, 2020


[Please read the update note, at the end. 3/23/2020.]

The Fed, through daily revolving repo ops, will be directly lending extra $1 trillion to “large” banks at a zero rate. In essence, this is a massive handout to the 1% at the expense of — who else? — the 99%! This is yet another instance of the way in which the Fed routinely acts as an anti-worker class warrior.

Large banks are in serious distress, because their balance sheets hold all sorts of claims by all kinds of issuers or debtors. If the prices of their debtors’ assets — such as stocks, real estate, commodities, “human capital” (i.e. labor power), etc. — continue to fall precipitously, their outstanding claims cannot be repaid at their face values, if at all. In other words, these large banks, and — since they are all intertwined — the entire banking system, are at the brink of insolvency.

Why is this happening now? Of course, a massive triggering event is the corona virus pandemic, which disrupts — temporarily at least, though perhaps lastingly —a cornerstone of all economies, namely our ability to cooperate and interact personally, face to face, at a close range.

With the virus outbreak in China, today’s preeminent world’s factory, the prospect of its sharp economic contraction, and the more fundamental, growing concerns about the viability of continuing oil use[*] given the looming dangers of the climate crisis, oil prices, which had partly recovered in December from their October drop, collapsed. This unleashed a nasty price war among oil producers — mainly Saudi Arabia, Russia, and the United States, and the fall in oil-based financial assets fed the stock market panic.

This aside, more fundamentally, asset prices were already significantly inflated before these events popped the bubble. Since December 2019 and until early February 2020, the Shiller Price-Earnings ratio was already more than two standard deviations above its historical mean. But we should know by now that the recurrence of these massive speculative bubbles is not a glitch but a feature of capitalist societies. Crises are part of the modus operandi of capitalist reproduction.

Again, in essence, the Fed’s $1 trillion loan to large banks is vicious class warfare waged by other means. This fact requires emphasis especially in light of the still embryonic, but vigorous, rebirth of socialist consciousness in the U.S. working class: the handout to the 1% is a chunk of flesh snatched out of the workers’ social build — their living and working conditions.

To grasp this fact, ignore the Fed’s trading desk’s daily dance in the repo markets, the Fed is de-facto extending an additional $1 trillion loan to selected large banks over an indefinite term at a zero rate.

Instantaneously, because asset prices are all forward looking, concerned with book values only as a benchmark, the first-order effect of the loan is an increase in the capital of these large banks. The bankers’ capital is the difference between the value of the banks’ assets (mainly loans) and their liabilities (mainly deposits).

Now, think of banks’ stocks as apples and of corporate stocks, real estate, commodities inventories, etc. as oranges, peaches, pears, etc. If the price of apples goes up a lot (say, because buyers get a huge zero-interest loan), then a number of apple buyers will now be inclined to buy other, less expensive fruits. The result of this will be an increase in the prices of all fruits! So, the second order effect of the Fed’s action is a bump in asset prices across the board. Or, if these assets are in a nasty free fall, then the Fed’s action cushions the fall even if cannot fully reverse it.

The crucial point here is that this is not fake money or “money made out of thin air.” Oh no. This is real money. And since magic does not exist, one then has to ask: Where does this tremendous power (purchasing power, it is called) of the Fed come from? In nature and society no thing can come out of nothing.

What we are indeed asking is this: Why do people willingly accept Fed-issued dollars, the Fed’s liabilities, as comparable to and directly exchangeable for all other types of wealth, as means of debt repayment and value storage vehicles — i.e. as money? Yes, the Fed is — like Treasury, in spite of their distinct functions and constitutions— a branch of the state’s apparatus, there’s legal tender law, and taxes can be discharged in dollars, etc. but the IRS can also confiscate your socks if need be and the letter of the law means very little if there is not a force, a stick or a carrot, to compel people’s compliance.

I insist on this point, because commentators like Annie Lowrey (Atlantic), Justin Wolfers (Brookings, NY Times) have tried to ridicule Alexandria Ocasio-Cortez, Robert Reich, and Bernie Sanders as monetary policy neophytes for daring to claim (correctly!) that the Fed’s bank rescue operations are directly comparable to a massive handout to the banks and the 1%.

Also, my friend Doug Henwood (Left Business Observer), in a solid piece that Jacobin just published, argues (in passing) that the Fed’s trillion plus dollar injections are not “taxpayer’s money” but rather “money created out of thin air.”

The fact is that the Fed’s dollars are accepted as money, because they represent legal claims of ownership over wealth, just as enforceable, if not more, as any other legal instrument. Their exchangeability flows from the fact that the underlying wealth (“use values”) is as real and physically existing as the wealth underlying, or ultimately claimed by, any other legal instrument. The Fed’s outstanding currency liabilities represent in fact a modest fraction of the productive force of labor, of social labor, that the state appropriates via its coercive/persuasive taxing power, power that we also call political power.

Since only the wealth that exists today can be held, used, or consumed today, personally or productively, then the mathematical relation between outstanding legal claims (monetary or other) over existing wealth (productive or consumable physical wealth plus alienated labor power) and the stock of such existing wealth dictates ipso facto the mathematical relation between currency units (dollars), bonds’ face values, etc. and underlying wealth units — the dollar’s purchasing power (or, its reciprocal, the list of asset prices). Again, this follows ultimately from a physical conservation law.

Pinning down this relation empirically is not easy. The process that determines effective wealth valuation at each point in time, in its various forms, is complex. An economist would say that, if the whole valuation process were to be reduced to its “orthogonal components,” these components would be, respectively, (1) market driven processes and (2) political and legal re-allocations, which imply (by duality) a set of corresponding “shadow prices.” In any case, these processes are the effective form in which the overall reproductive cycle is socially formed.

This should ring a bell to readers familiar with the Preobrazhensky-Bukharin debate in 1920s’ Russia. The conventionally trained with little grasp of the history of economic ideas could try Andre Burgstaller’s (1994) Property and Prices for a unifying attempt.

In brief, monetary policy is in fact a disguised form of fiscal policy. A careful review of monetary history through the late Middle Ages and early modernity reveals that public debt issuing and, eventually, the state monopoly of coin minting, paper currency emission, and central banking overall emerged, mostly, as ways to circumvent the taxation hurdles that sovereigns faced in trying to finance military adventures, major public works, and other costly undertakings. They amounted to taxation by other means. Ricardo’s (1820) argument on the fundamental equivalence among the various modalities of public financing is perhaps the earliest reference to this, at a time when the supposed “autonomy” of central banks was not yet institutionally enshrined.

In the terms today’s conventional economists would more or less recognize, the mechanism by which the Fed can create formidable positive externalities for the 1% is essentially the same mechanism involved in the Keynesian fiscal multiplier. More generally, economists spot this mechanism in all sorts of seemingly unrelated, but in fact materially identical, phenomena, and designate it with a number of variegated names.

It is in fact the magic of Adam Smith’s “division of labor” (within a workshop or at the social scale) or David Ricardo’s trade gains from specialization in accord to “comparative advantage,” or Alfred Marshall’s “external economies,” or Allyn Young’s “increasing returns,” or what now people call “consumer and producer surpluses,” “network economies,” “endogenous growth,” and such. In fact, all of these seemingly magic phenomena are mystified instances of the emergent structures — the dynamics, if you will — that result from the association or cooperation or socialization of productive labor.

In sum, fiscal policy actions, always and everywhere, boil down not only to an effective reallocation of wealth ownership across alternative uses, but also — and crucially — to an effective redistribution of wealth ownership across individuals and groups and, therefore, between classes. In brief, all fiscal policy is in fact class struggle (and inter capitalist competition) conducted by other means.

The political power of the state can be more or less precisely quantified (in monetary or social labor terms) as the net value of the assets it manages — assets that would appear in its balance sheet if properly calculated. In spite of one reads most everywhere, neither the ability of central banks to issue currency nor political power in general is some magic, abstract entity inhabiting Plato’s world of ideal forms, some ghostly magnitude that can range from zero to infinity without any apparent logic governing it. Political power is real, and it is finite. To use Marx’s phrase, political power is socially objective, because it is the productive force of social labor under one of its many modalities.

Since political power operates in the physical world, it must necessarily reside or take the form of physical objects (including human bodies). Therefore, the conservation law of physics applies to political power, just as it applies to the total outstanding productive power of cooperative labor. Market value is another form of existence of this productive power. Because, if political power did not have a physical form of existence, then it would not be of consequence in this physical world that we inhabit.

Obviously, social forms matter. Ricardo’s equivalence is superficially distorted or “transformed” by actual historical practice, warped by institutional discontinuities, just like prices proportional to social labor quantities are “transformed” by competition into production prices and, more concretely, market prices. Also, (socially-embodied) ideology matters. But the identity is the deeper truth underpinning these formal differences.

Therefore, if any branch of the state, the Fed in this case, allocates a portion of the state’s outstanding political power to assist bankers, and thereby the chief wealth holders (under whatever legal or financial form it may appear), i.e. the 1%, then this same chunk of political power cannot have any other simultaneous use. Again, the conservation law applies.

This is why it is absolutely valid to claim, as Alexandria Ocasio-Cortez, Robert Reich, and Bernie Sanders do, that the massive multi-trillion-dollar Fed’s rapid reaction to hold up asset prices owned largely by the 1% is to be contrasted with the lethargy and meagerness of the direct support to working people. In fact, in a certain sense, the Fed’s actions in support of the 1% exclude adequate support for the workers, ultimate producers of political power and all social power.

Marx and Engels were correct: The essential dynamics of our society is the class struggle between the direct producers and those who live off them. It is a struggle over the productive power of labor, over who owns and enjoys the creative vitality of the workers.

Either the workers own and freely, democratically, allocate the power of their collective labor to meet their needs, or capital and its political executives appropriate it and turn it into a destructive force. The social conflicts of our time truly hinge on this fundamental dynamics.

That said, I must clarify here that, within the framework of a capitalist society, a society in which the workers are divided and politically disabled to a large extent — in this framework, obviously, the workers are dependent on capital. True, socialist consciousness is growing, a welcome if late development, but that consciousness is still at an embryonic stage, trying to jell politically.

One can easily find proof of the relative weakness of the working class as an active political force. To mention the latest instance, consider the long odds that the Bernie Sanders’ campaign now faces, once the enormous social power that the DP establishment, the mainstream corporate media, and the 1% wield made itself manifest and settled in enabling the (unfair) coin toss between Joe Biden and Donald Trump.

So, clearly, if the workers are not moving politically to manage their own lives, then any crisis that affects capital affects them as well, and even more dramatically. This is why it is wrong to conceive of the collapse of capitalism as the result of disintegrating crises alone. The capitalist framework has to be transcended — and that is mainly a constructive, integrative task, the task of organizing a whole array of new, more rational, functional social structures.

So, in the present context, is the Fed’s action to rescue the banks and the 1% not a means to stabilize the economy, and thereby to prevent a further decline in employment and a further deterioration in the already precarious standard of living of working people, all of that in the midst of a pandemic?

Of course, the answer is that it is. Under current conditions, given the historical weakness of their class, the workers would be significantly worse off if the banks were not bailed out and if asset prices — the capital of their bosses — were not propped up by the Fed or direct fiscal action.

In this context, it is, of course, better that the banks stay operational, that asset prices go up or not fall as fast as they could otherwise. It is not a new argument among socialists to claim that, within capitalism, the workers are better off if capital expands. But, the point here is to highlight the fundamentals of the situation. Because, if not much else changes, the main beneficiary of some restoration of the status quo ante can only be the 1%.

There are obvious alternatives to this massive handout to the 1%. The challenge is, of course, building the political vehicles to implement them, vehicles that would have to be driven by working people, based on their priorities.

Just to mention a clear example: The banks and essential industries (e.g. those needed to deal with the Covid-19 emergency or to implement Medicare for All or a Green New Deal) could be nationalized, if the state (it matters little if it is via Treasury or the Fed) acquired the controlling interest at distressed market prices, and then used proxy power to gradually reorganize their functions to serve the needs of the 99%. At the very least, those industries, even if they remained in the hands of private capital, could be directed by some form of state dirigisme.

But there is no need for me to expand on this here. Some of these alternatives are described in great clarity and detail by Doug Henwood in Jacobin piece I already mentioned.

[*] I owe gratitude to Ian Murray for sharing this reference with me.

Update (3/23/2020)

The Fed just announced that it was ready to inject unlimited amounts of cash into the economy to prevent asset prices from continuing to fall. This is not the worst case scenario. The Fed is exhibiting a remarkable decisiveness in the face of this disaster. Its helicopter promises to drop its cash, not only to support the traditional federal funds markets or the markets for near substitutes, but it also expands in a dramatic and unprecedented manner on Bernanke’s old QE measures reaching deep into markets most directly linked to “main street” credit conditions. Jay Powell’s open-mouth operation (“forward guidance”) also shows the depth of his commitment to stabilize the markets. Walter Bagehot would be proud of him.

Meanwhile, oblivious to the needs of working people, the Senate is trying to pass a $1.8 trillion pro-corporate emergency “stimulus” package that includes a $0.5 trillion slush fund to further enable Trump’s venality in chaotic times. The White House itself is, otherwise, an utter disaster, sending mixed signals to the public that contradict the recommendations of the experts. In this context, the Fed is at least trying to restore some order. However, the point of this blog post stands: If we don’t dare to go beyond restoring the old order, we will just be postponing the worst case scenario.

Back to the Fed, it is important to note, though, that its new loan facility keeps the central bank true to its nature as a class warrior. You are reading it correctly: It is zero-interest non recourse lending. That means that (1) it is free cash and (2) the borrowers are not personally liable in case of default. Their legal vehicles (banks, corporation, partnership, etc.) shields them. These organizations can be liquidated in case of default, but the principals as persons are made whole by the Fed. Based on history, if these people find it expedient, one can expect to see them parachute themselves to wealthy retirement — that is, if the virus and potential civil disorder spares them. It is an outright handout.

Again, I understand that this is not the worst case scenario — with Trump, things can always get worse! But we can do much better. Look around, people! All the indices that measure capitalist success have crashed. This is in spite of the seemingly omnipotent central bank of the USA, the Federal Reserve, getting on its helicopter with unlimited bags of cash to drop on Wall Street.

The next question for us, regular people, is: How, in the least humanly-costly manner, can we construct a better society — one that focuses on our needs of universal human development, mutual care, and a sensible, rational integration with the rest of nature?

Correct me if I’m wrong, but the only viable political vehicle that I see out there that can help us approach this vision is the movement that Bernie Sanders started, #NotMeUs. Rightly so, Bernie — with full support from our formidable sisters, superb leaders, AOC, Ilhan, Rashida, Pramila, and others — are now refocusing their efforts on making sure that public resources assist working people, regardless of gender, race, nationality, sexual orientation, immigration status, etc. and on preventing the plunder of public treasure to rescue the 1%, who led and unleashed this catastrophe.

#NotMeUs is, or at least tries to be, a true multi-racial and multi-generational, loving movement of, by, and for working people. We need to jell around it and its agenda now. Organize locally to defend and protect the most vulnerable, and also open your arms to your brothers and sisters beyond your immediacy. Stay connected. These are my two cents today.



Julio Huato

The views I express here are mine alone, and not necessarily those of the U.S. government, my employers, my students, my friends, my children, or my cat.