Congress, Constitutional Law, Justice, Media, Politics, Society, Uncategorized

Revamp the Federal Reserve

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Respectfully submitted by Lawrence E. Rafferty (rafflaw)-Guest Blogger

This past week the main stream media made a big deal about the unemployment rate declining to the five-year low of 7%.  While it was good news that over 200,000 jobs were added to the economy and that the unemployment rate decreased, the economy and main street are still lagging behind Wall Street.  The Federal Reserve has been attempting monetary easing strategies in an effort to stimulate the economy.  It may have worked for Wall Street, but the rest of us are still catching up.

“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.” Ellen Brown 

Now that we have had years of low-interest rates, created by the Fed’s policies what is the next great idea from economists?  One economist, Lawrence Summers, who was a candidate to replace Ben Bernanke as Chairman of the Federal Reserve, came up with the big idea that since low-interest rates weren’t enough to bring the economy back and to spur job creation, he thought that negative interest rates would get the job done.

“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.” ‘ Ellen Brown

Yes, you read that right.  The big idea that a former Treasury Secretary and Fed Chairman candidate came up with would be to create negative interest which would cost depositors money, and protect the solvency of big banks!  That idea must have involved some serious scholastic research on Mr. Summer’s behalf.  I am guessing that Wall Street was involved in that idea because it would do little or nothing to help individual citizen depositors or to induce employers to create more jobs.

How would charging depositors for putting their money in the bank spur anyone to spend more?  It appears to be nothing more than an attempt to protect large banks from the ups and downs of the economy, while costing individual depositors even more money to have their funds in the bank.  And can anyone tell me how this negative interest idea would help spur hiring?

Don’t get me wrong.  I agree that we have to think outside of the box to find a way to help Main Street recover fully from the Great Recession. But charging customers money to keep their money in the bank seems ludicrous.  The Federal Reserve used to have the authority to loan funds directly to businesses and it seemed to work.  Of course, if it works for Main Street, Wall Street and the big banks get nervous.  Just what could we do to increase the Fed’s tools in order to actually benefit individuals and increase hiring?

“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.”  Ellen Brown

As I mentioned above, the Federal Reserve used to have the statutory authority to loan directly to businesses in their respective Districts, but the recent Dodd-Frank reform bill seems to have weakened that authority.

“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.”  Nation of Change

If the Federal Reserve had the authority before Dodd-Frank to bail out individual businesses like AIG with over 1 Trillion dollars in loans, the Fed could have also loaned money directly to businesses and even to State and local governments.  Is it more valuable to the economy and to individual citizens to bail out AIG with Fed help, but not bail out Detroit or other cities that are still struggling with austerity programs created by Congress and policies that aided the shipping of jobs overseas?

I highly recommend that you read the entire Ellen Brown article that I have linked above.  By allowing the Fed to have the power that it used to have, we might be able to aid individual businesses and maybe even individual taxpayers.  I would suggest that giving the Fed revised powers, including some that they had in the past, might allow us to even the playing field between Wall Street and Main Street.  Of course, we would also need to stop making it profitable for corporations to steal more jobs from American workers.  What ideas do you have?

Do you think returning the power to the Fed to aid businesses and individuals directly would spur the economy?  I have my doubts whether Congress would go along with the idea of strengthening the Fed’s tool box knowing their Wall Street owners might not get as much taxpayer money, but I believe it is a fight worth having.  What do you think?

Additional Resources:  Could the Banksters Grab Your Deposits?

114 thoughts on “Revamp the Federal Reserve”

  1. BFM,
    The trickle down theory has never worked for those below. The faucet is rigged by the wealthy and banksters. Why else would you have a lower tax rate for income derived from stock portfolios and why else would Social Security taxes not be collected over the $114,000 level?

    1. “The trickle down theory has never worked for those below.”

      If I left anyone with the impression that I am a proponent of the “trickle down theory”, much of supply side economics, of the Laffer curve let me disabuse you of that notion right now.

      But at least Reagan gave lip service to the idea that everybody deserves a bigger slice of the pie the the economy grows.

      Today’s affluent conservatives seem to believe that getting all the gains of a growing economy is some is some kind of moral of divine right.

      What many of us see is rules set up to favor the already affluent, crony capitalism or outright corruption.

  2. BFM said: ” Right now the only mechanism we have in place to learn how to manage health care costs is ACA – Obamacare. The fact is that over decades the free market just did not do the job – which is understandable. There are pretty clear reasons why markets do not help discover prices when the product is health care.

    The bottom line is this: if we are to avoid being overwhelmed by debt over the next 50 years or so we have to use something like ACA or something better – the status quo is not going to help.”

    Woah There Trigger!

    We don’t have a free market system currently: http://surgerycenterofoklahoma.tumblr.com/post/26698997130/the-less-you-pay-me-the-more-i-make

    While I agree that the status quo of healthcare fraud will not help, I don’t think cementing it deeper into law is the solution. (If you think the ACA is lowering prices, I need to ask if you think water is wet!) We need to go back to the free market like this surgeon in Oklahoma, not full socialization that has no payment system:

    http://www.reuters.com/article/2013/12/04/us-usa-healthcare-payments-idUSBRE9B301U20131204

  3. bfm,

    “I for one would not, and no one should, denigrate the hard work of the top 1%.”

    Not all of the top 1% work hard. There are some who don’t even have to work. Some of the banksters who made/have made many millions–both before and after the financial meltdown–didn’t break a sweat when they were selling crappy financial products to clients/pension funds.

  4. You BFM,

    After hearing about the Obama Nazis gunning that young guy down for nothing it seems, I don’t feel much like typing.

    You can most every answer to your questions following zerohedge or just go to youtube & type Ron Paul, Federal Reserve System.

    The Federal Reserve has been responsible for most every boom, bust & wars since it was created, including the great depression & this latest Greatest Depression.

    You can also google: The Creature of Jekyll Island.

    It’ll tell you how the criminal FRS was created & why.

  7. BFM:

    Why cant you and I choose whatever medium of exchange we agree on?

    I guess we can, its called barter.

    Gold and silver retain their value and make it hard for the pols to devalue our money. Which they do so they can keep borrowing for the entitlement state to grow larger while we work harder and stand still. Or we are like hampsters on a wheel, going like heII but not getting anywhere.

  8. @ron

    Sure. The market basket of goods and services is a hypothetical that includes all the goods and services produced by the economy.

    BTW, you have touched on an interesting topic.

    Anyone concerned with long term deficits has to be concerned with health care costs. CBO tells us that the single largest driver of long term deficits are growth rates for health care costs that exceed projected growth rates for GDP.

    If growth in health care cost could continue long enough it is clear we would eventually using all resources in the economy to pay for health care.

    The fact is we will have to change the way we deliver health care in this country. The only question is will we manage that change and make something better.

    Right now the only mechanism we have in place to learn how to manage health care costs is ACA – Obamacare. The fact is that over decades the free market just did not do the job – which is understandable. There are pretty clear reasons why markets do not help discover prices when the product is health care.

    The bottom line is this: if we are to avoid being overwhelmed by debt over the next 50 years or so we have to use something like ACA or something better – the status quo is not going to help.

  10. WASHINGTON (AP) — “Americans’ wealth reached an all-time this summer, buoyed by record-setting stock prices and a healthy recovery in home values.

    The Federal Reserve says to U.S. net worth, a measure of household wealth, rose 2.6 percent to $77.3 trillion in the July-September quarter. Net worth reflects the value of homes, stocks, bank accounts and other assets minus mortgages, credit cards and other debts.

    Rising stock prices boosted Americans’ net worth $917 billion. Higher home values added another $428 billion.

    Greater net worth can create a “wealth effect,” which boosts economic growth by encouraging more households to spend.

    But the gains haven’t been equally distributed. The wealthiest 10 percent of households own about 80 percent of stocks. And home ownership has declined since the recession, particularly among lower-income Americans.”

    Interest rates are going up not down as the Fed begins to taper although Yellen will taper more slowly than Summers would have as she is more middle class friendly.,

    1. @Swarthmoremom

      By some measures the top 1% have captured 95% of the economic gains of the recovery since 2009 – which emphasizes the fact and compounds the problem that the middle class has been falling behind since the 1970’s.

      The overall distribution of income in the society is not due just to luck and hard work. I for one would not, and no one should, denigrate the hard work of the top 1%. But there are institutional reasons that also account for part of this disparity.

      Even Reagan himself understood that when the economic pie gets larger, every one should get a bigger piece.

      That important fact seems to have been lost on today’s conservative, affluent leaders.

  11. Oky1:

    I think the Constitution says “to coin money”, they werent talking paper.

  13. BFM,

    What Bron said.

    Tell us why you’re hanging onto the Federal Reserve & their theft of American’s value.

    Why shouldn’t there be competing currencies in the USA.

    Why shouldn’t we get rid of the FRS after the mess they’ve made of USA the last 100 years & return the issuance of currency back over to the US Treasury that was issued “Without Interest” attached.

    1. @Oky1 and Bron

      I think you and Bron have asked some interesting and reasonable question regarding the FED. I am really not the best to justify the FED. But I am taking some time to put together my understanding of what the FED does and why that is the right institution to perform those functions – I will try to be clear about that later.

      But I can respond to some of your remarks now – usually to request that you give a broader discussion of the point you support.

      “Why shouldn’t there be competing currencies in the USA.”

      What would be the advantage of competing currencies? I can only think of complications and disadvantages when multiple currencies are introduced to trade. So I would be interested in learning of the claimed advantages of such a system.

      “Why shouldn’t we get rid of the FRS after the mess they’ve made of USA the last 100 years & return the issuance of currency back over to the US Treasury that was issued “Without Interest” attached.”

      I do see some problems with the FEDs monetary policy at various times. And I do see some serious economic problems for the US.

      For example, you might have a case that Greenspan and the FED aggravated the run up in housing prices and the mortgage crisis in the early 2000’s. But I am not so sure that FED is equally responsible for the problems that followed in the financial industry and the ultimate meltdown around 2007 that we are still recovering from.

      But I don’t see that the FED has consistently made a ‘mess of the USA the last 100 years’ because of single principle or fallacy.

      And I don’t see that the FED is responsible for the major negative trends the I see over the past 30 years, or so – a major one being the decline in the share of income going to the middle class. For example it is not an accident, and not just due to hard work that accounts for the fact that 95% of economic gains since 2009 have gone to the top 1%

      Just to be clear, over the past 100 years, I see many different FED policies, and many different kinds of economic problems. Some of those economic problems can be traced to monetary policy, but most of them have other origins.

      If you see a single or a few negative trends over the past 100 years that can be traced specifically to FED policy, I would be interested in seeing you to expand on them here.

      Finally, I am just not as informed as I would like to be. Would you explain more fully what it means to ‘issue currency without interest attached’.

  14. BFM:

    What good does the FED do? We still have booms and busts, the dollar is only worth about 2 cents compared to 1900. But a weight of gold or silver still buys what it bought in 1900 or close to it.

    What good does the FED do? It has inflated our money, it has caused the most recent panic by setting interest rates too low and other problems.

    So why are you for keeping it? The problem isnt the FED per se, the problem is the economic philosophy of our Harvard and Yale overlords.

    1. @ron

      The article you reference seems to substantiate my point that it is the standard of living that matters:

      ” The average annual income in 1913 was only $800/yr. In 2012, the median household income was $44,389. and had 1.35 wage earners so if we divide $44,389 by 1.35 we get an average annual income of $32,880. Thus the average annual income increased by 4010% so even potatoes have become relatively cheaper i.e. our standard of living has increased.”

      I used 2000 data because it was easily available to me and illustrates the point I was making.

      The important question is revealing:

      “would anyone really choose a pay check and market basket of goods it would purchase from 1900 rather than a paycheck from today and the market basket of goods it would purchase.”

      I think not.

      The true measure of economic success has to do with the standard of living not the the amount of gold we mine, not the size of the monetary base.

      Money is just a tool that helps us accomplish economic activities.

    1. You go, Bron, and stand on those principles!

      But, any body that likes the Foundation trilogy can’t be all bad.

    1. ” the dollar today buys 5 cents of what one hundred cents bought 100 years ago.”

      When IBM splits it’s stock, stock holders care not at all that their stock is worth half as much because they then have twice as many shares.

      Similarly the value of the dollar matters little to consumers.

      What is important is the market basket of goods and services that their pay check will purchase.

      Do you think a typical consumer would rather have a pay check and market basket of goods and services from 1900 or 2000?

      The fact is that the standard of living is much higher today than it was when the FED came into existence. That is due, in part, to the fact that GNP of 2000 is approximately 16 times the GNP of 1900.

      Money performs several functions in the economy. One of those functions is to server as a medium of exchange – to facilitate trade.

      The appropriate amount of money in the economy is determined by those functions.

      The appropriate amount of money in the economy has nothing at all to do with things like how much gold is mined out of the ground, or whether a particular unit of money buys more or fewer items now than at some time in the past.

      Income and the market basket of goods and services it can purchase – the standard of living – are the true indicators of economic success – not the value of the dollar.

  19. Read something about this in the weekly reader in second grade…..like 1965 … The flying cars haven’t happened here yet……

  20. I don’t care for this guys approach on healthcare, but he 7 thousand of his peers do have some valuable insight into this Greatest Depression Ever.

    Ph’ing Nazis Prez/most congress clear back to least JFK!

    At some point you all we realize we have no choice but to run those aholes out of here & declare bankruptcy on “Their” Bad Debt!

    It damn sure isn’t my or the American Public’s Bad Debt!

    http://usawatchdog.com/america-in-worse-fiscal-shape-than-detroit-professor-laurence-kotlikoff/

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