Ellen Brown
The Fed could be an institution that serves all the people, not just the
1%.
The
Federal Reserve
is the only central bank with a dual mandate. It is charged not only
with maintaining low, stable inflation but with promoting maximum
sustainable employment. Yet unemployment remains stubbornly high,
despite four years of radical tinkering with interest rates and
quantitative easing (creating money on the Fed’s books). After pushing
interest rates as low as they can go, the Fed has admitted that it has
run out of tools.
At an IMF conference on November 8, 2013, former Treasury Secretary
Larry Summers suggested that since near-zero interest rates were not
adequately promoting people to borrow and spend, it might now be
necessary to set interest at below zero. This idea was lauded and
expanded upon by other ivory-tower inside-the-box thinkers, including
Paul Krugman.
Negative interest would mean that banks would charge the depositor
for holding his deposits rather than paying interest on them. Runs on
the banks would no doubt follow, but the pundits have a solution for
that: move to a cashless society, in which all money would be
electronic. “This would make it impossible to hoard cash outside the
bank,”
wrote Danny Vinik in Business Insider, “allowing the Fed to cut interest rates to below zero, spurring people to spend more.” He concluded:
. . . Summers’ speech is a reminder to all liberals that he is a
brilliant economist who grasps the long-term issues of monetary policy
and would likely have made an exemplary Fed chair.
Maybe; but to ordinary mortals living in the less rarefied atmosphere
of the real world, the proposal to impose negative interest rates looks
either inane or like the next giant step toward the totalitarian New
World Order. Business Week quotes Douglas Holtz-Eakin, a former director
of the Congressional Budget Office: “We’ve had four years of
extraordinarily loose monetary policy without satisfactory results, and
the only thing they come up with is we need more?”
Paul Craig Roberts,
former Assistant Secretary of the Treasury, calls the idea
“harebrained.” He is equally skeptical of quantitative easing, the Fed’s
other tool for stimulating the economy. Roberts points to Andrew
Huszar’s explosive November 11th Wall Street Journal article titled “
Confessions of a Quantitative Easer,”
in which Huszar says that QE was always intended to serve Wall Street,
not Main Street. Huszar’s assignment at the Fed was to manage the
purchase of $1.25 trillion in mortgages with dollars created on a
computer screen. He says he resigned when he realized that the real
purpose of the policy was to drive up the prices of the banks’ holdings
of debt instruments, to provide the banks with trillions of dollars at
zero cost with which to lend and speculate, and to provide the banks
with “fat commissions from brokering most of the Fed’s QE transactions.”
A Helicopter Drop That Missed Its Target
All this is far from the helicopter drop proposed by Ben Bernanke in 2002 as a quick fix for deflation. He told the Japanese, “
The U.S. government has a technology,
called a printing press (or, today, its electronic equivalent), that
allows it to produce as many U.S. dollars as it wishes at essentially no
cost.” Later in the speech he discussed “
a money-financed tax cut,” which he said was “
essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.
But there has been no cloudburst of money raining down on the people.
The money has gotten only into the reserve accounts of banks.
John Lounsbury, writing in Econintersect,
observes that Friedman’s idea of a helicopter drop involved debt-free
money printed by the government and landing in people’s bank accounts.
“He foresaw the money entering the economy through bank deposits, not
through bank reserves which was the pathway available to Bernanke. . . .
[W]hen Ben Bernanke fired up his helicopter engines he took the only
path available to him.”
Bernanke created debt-free money and bought government debt with it,
returning the interest to the Treasury. The result was interest-free
credit, a good deal for the government. But the problem, says Lounsbury,
is that:
The helicopters dropped all the money into a hole in the ground
(excess reserve accounts) and very little made its way into the economy.
It was essentially a rearrangement of the balance sheets of the
creditor nation with little impact on the debtor nation.
. . . The fatal flaw of QE is that it delivers money to the accounts
of the creditors and does nothing for the accounts of the debtors. Bad
debts remain unserviced and the debt crisis continues.
Thinking Outside the Box
Bernanke delivered the money to the creditors because that was all the
Federal Reserve
Act allowed. If the Fed is to fulfill its mandate, it clearly needs
more tools; and that means amending the Act. Harvard professor Ken
Rogoff, who spoke at the November 2013 IMF conference before Larry
Summers, suggested several possibilities; and one was to broaden access
to the central bank, allowing anyone to have an ATM at the Fed.
Rajiv Sethi, Barnard/Columbia Professor of Economics, expanded on this idea in a blog titled “
The Payments System and Monetary Transmission.” He suggested making the
Federal Reserve
the repository for all deposit banking. This would make deposit
insurance unnecessary; it would eliminate the need to impose higher
capital requirements; and it would allow the Fed to implement monetary
policy by targeting debtor rather than creditor balance sheets. Instead
of returning its profits to the Treasury, the Fed could do a helicopter
drop directly into consumer bank accounts, stimulating demand in the
consumer economy.
John Lounsbury expanded further on these ideas. He wrote in
Econintersect that they would open a pathway for investment banking and
depository banking to be separated from each other, analogous to that
under Glass-Steagall. Banks would no longer be too big to fail, since
they could fail without destroying the general payment system of the
economy. Lounsbury said the central bank could operate as a true public
bank and repository for all federal banking transactions, and it could
operate in the mode of a postal savings system for the general populace.
Earlier Central Banks Ventures into Commercial Lending
That sounds like a radical departure today, but the Fed has ventured
into commercial banking before. In 1934, Section 13(b) was added to the
Federal Reserve
Act, authorizing the Fed to “make credit available for the purpose of
supplying working capital to established industrial and commercial
businesses.” This long-forgotten section was implemented and remained in
effect for 24 years. In a 2002 article on the Minneapolis Fed’s website
called “
Lender of More Than Last Resort,” David Fettig noted that 13(b) allowed
Federal Reserve
banks to make loans directly to any established businesses in their
districts, and to share in loans with private lending institutions if
the latter assumed 20 percent of the risk. No limitation was placed on
the amount of a single loan.
Fettig wrote that “the Fed was still less than 20 years old and many
likely remembered the arguments put forth during the System’s founding,
when some advocated that the discount window should be open to all
comers, not just member banks.” In
Australia and other countries, the central bank was then assuming commercial as well as central bank functions.
Section 13(b) was eventually repealed, but the
Federal Reserve
Act retained enough vestiges of it in 2008 to allow the Fed to
intervene to save a variety of non-bank entities from bankruptcy. The
problem was that the tool was applied selectively. The recipients were
major corporate players, not local businesses or local governments.
Fettig wrote:
Section 13(b) may be a memory, . . . but Section 13 paragraph 3 . . . is alive and well in the
Federal Reserve
Act. . . . [T]his amendment allows, “in unusual and exigent
circumstances,” a Reserve bank to advance credit to individuals,
partnerships and corporations that are not depository institutions.
In 2008, the Fed bailed out investment company Bear Stearns and insurer AIG, neither of which was a bank.
Bear Stearns got
almost $1 trillion in short-term loans, with interest rates as low as
0.5%. The Fed also made loans to other corporations, including GE,
McDonald’s, and Verizon.
In 2010, Section 13(3) was modified by the Dodd-Frank bill, which
replaced the phrase “individuals, partnerships and corporations” with
the vaguer phrase “any program or facility with broad-based
eligibility.” As explained in the
notes to the bill:
Only Broad-Based Facilities Permitted. Section 13(3) is modified to
remove the authority to extend credit to specific individuals,
partnerships and corporations. Instead, the Board may authorize credit
under section 13(3) only under a program or facility with “broad-based
eligibility.”
What programs have “broad-based eligibility” is not clear from a
reading of the Section, but it isn’t individuals or local businesses. It
also isn’t state and local governments.
No Others Need Apply
In 2009,
President Obama proposed
that the Fed extend its largess to the cash-strapped cities and states
battered by the banking crisis. “Small businesses and state and local
governments are having serious difficulty obtaining necessary financing
from debt markets,”
Obama said. He proposed that the Fed buy municipal bonds to cut their rising borrowing costs.
The proposed municipal bond facility would have been based on the Fed
program to buy commercial paper, which had almost single-handedly
propped up the market for short-term corporate borrowing. Investors
welcomed the muni bond proposal as a first step toward supporting the
market.
But Bernanke rejected the proposal. Why? It could hardly be argued
that the Fed didn’t have the money. The collective budget deficit of the
states for 2011 was projected at $140 billion, a drop in the bucket
compared to the sums the Fed had managed to come up with to bail out the
banks. According to
data
released in 2011, the central bank had provided roughly $3.3 trillion
in liquidity and $9 trillion in short-term loans and other financial
arrangements to banks, multinational corporations, and foreign financial
institutions following the credit crisis of 2008. Later revelations
pushed the sum up to $16 trillion or more.
Bernanke’s reasoning in saying no to the muni bond facility was that
he lacked the statutory tools.. The Fed is limited by statute to buying
municipal government debt with maturities of six months or less that is
directly backed by tax or other assured revenue, a form of debt that
makes up less than 2% of the overall muni market.
The
Federal Reserve
Act was drafted by bankers to create a banker’s bank that would serve
their interests. It is their own private club, and its legal structure
keeps all non-members out. A century after the Fed’s creation, a sober
look at its history leads to the conclusion that it is a privately
controlled institution whose corporate owners use it to direct our
entire economy for their own ends, without democratic influence or
accountability. Substantial changes are needed to transform the Fed, and
these will only come with massive public pressure.
Congress has the power to amend the Fed – just as it did in 1934,
1958 and 2010. For the central bank to satisfy its mandate to promote
full employment and to become an institution that serves all the people,
not just the
1%, the Fed needs fundamental reform.
There
is going to be considerable pressure on interest rates and the
Federal Reserve very soon, and it’s very likely that we’re going
to get some choppy trading action in stocks. The reason for this is,
of course, positive economic news, which is increasing the likelihood
of a decrease in monetary stimulus. As contradictory as it may seem,
good economic news is actually bad news for stocks; that’s just the
way the counterintuitive system of the stock market works—buy on
rumor, sell on news. But what’s transpired recently goes more like
buy on expectations, sell on hints of growth.
