Revamp the Federal Reserve


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. Is it an ole saying or something I just realized?

    First they shoot themselves in the foot & then they scream the USA needs to get rid of the 2nd amendment because to many idiots have guns. 🙂

    **White House Front Group Vows to Target Alternative Media

    Media Matters set to intensify attacks against Drudge, Infowars in concert with Obama advisors

    Paul Joseph Watson
    Prison Planet
    December 13, 2013

    White House front group Media Matters has vowed to target “alternative online outlets” as part of its new “strategic plan” to exert media influence in coordination with the Obama administration.
    White House Front Group Vows to Target Alternative Media 131213media

    Image: Media Matters CEO David Brock (YouTube).

    Claiming that its war with Fox News is over and that “to a large extent, we won” (despite polls showing Americans trust Fox News over any other mainstream network), Media Matters has finalized a blueprint which outlines a shift to focus on “new, increasingly influential targets, including Spanish-language media, social media streams, alternative online outlets and morning and entertainment sources.”

    In other words, Media Matters, whose employees brag about writing MSNBC’s prime time content and attending strategy calls with Obama advisors on a weekly basis, will now turn its big guns on the likes of Infowars, Alex Jones and the Drudge Report. **

  2. **Below are four excerpts from a April 2013 article to refresh the short term memory of your Canadian audience regarding Bail-Ins in Canada and the mindset of Canadian government to let banks deal with their own issues and use depositors savings to prevent their own failures.
    1. Mark Carney says policy-makers are working diligently to devise an international “bail-in” regime to prevent big bank failures, but he offered no guarantee global depositors would be protected under all circumstances.

    2. Asked if this would include non-insured deposits — those over $100,000 — Carney referred to a previous statement from Finance Minister Jim Flaherty’s office that depositors were excluded.

    3. The March budget announced that Canada intended to implement a “bail-in” regime for systemically important banks to ensure that in case of failure, there would be no need for governments to bail them out. In Canada, those banks are the Royal Bank, Scotiabank, the Bank of Montreal, the Canadian Imperial Bank of Commerce, Toronto-Dominion and the National Bank.

    4. In his comments, delivered before an audience in a one-on-one interview format with Reuters’ Chrystia Freeland, Carney said the idea of a bail-in would be to set up a queue of capital buffers that banks could dip into to avoid failure. It likely would include some types of deposits.**

  3. ** Poll: Moronic Majority Want TSA Agents Armed

    Only group who oppose are Libertarians

    Steve Watson
    December 11, 2013

    A new poll indicates that a majority of Americans want to see TSA agents carrying firearms in airports, while the only grouping who oppose the notion are self identified Libertarians.

    The survey, conducted by Reason-Rupe, found that 59 percent of those polled favor arming TSA agents in the wake of the recent shooting at LAX airport where a TSA worker was fatally wounded.
    Poll: Moronic Majority Want TSA Agents Armed 020713arm

    Image: Wikimedia Commons

    Thirty-five percent of those surveyed said that they do not think it is wise to arms TSA agents, with 6 percent expressing no opinion one way or the other. **

  4. Ok, I went blind before finishing this one, but one thing of note:

    *Today I would like to take the opportunity to discuss one of those challenging issues – the orderly resolution of systemically important financial institutions ( SIFIs). The Dodd-Frank Act provided important new authorities to the FDIC to resolve SIFIs.*

    As you can see by their own wording they don’t give a damn about “We the People” as we are not “systemically important financial institutions”.

  5. lottakatz, et al.,

    I almost wish I hadn’t said anything as now I feel I should backup my words with a bit of writing, but that’s ok.

    I forgot the page/s from back then , but in the GW Bush 2005 Bankruptcy Act, (scam), the Banking section, All Depositors are listed, you & I, are listed as unsecured creditors. (Last in line to be paid if anything is left of value)

    Like with all insurance the FDIC is just another ponzi scam. Yes, they may promise to pay, but they decide when to pay. It could be the next week or a 100 years from now.

    I believe they only hold maybe 2% of the funds to pay depositors claims.

    I don’t wish to hurt anyones eyes or mine, so careful about getting hung up in the text. I haven’t found a good piece with the cliff notes, but looking in the right spot to find it.

  6. “This is your leadership on Crack.

    Yes, the USA leaders already have the regs in place to Ph you too.”

    Correct me if I am wrong, but since the 1930′ hasn’t the FDIC protected depositors only up to a limited amount. So if a bank has financial difficulties – and there is no bailout – owners, creditors, and deposits above the FDIC insured amount will all be lost.

    I may be wrong, but I think that is the usual pattern in this country – with the single exception of the recent WS bailout.

  7. Oky1: What does your link say? I can’t watch whatever you posted. I was under the impression you are siding with the small government crowd here. Is that the case?

  8. The September 2013 level of 3.1 is the lowest in the entire 100-year history of the Federal Reserve. Until the last five years, the money multiplier never dropped below the old historical low of 4.5 reached in late 1940. Thus, Large Scale Asset Purchases may have produced the unintended consequence of actually reducing economic growth. Indeed, 81.5% of money created through quantitative easing is still sitting there gathering dust, due to a conscious decision by the Fed to tie up the money and prevent from being loaned out to Main Street.
    Ziad K Abdelnour

    1. “81.5% of money created through quantitative easing is still sitting there gathering dust, due to a conscious decision by the Fed to tie up the money and prevent from being loaned out to Main Street.”

      I thought QE was entering the financial markets to purchase long term securities to change the yield curve.

      One observation regarding the recovery is that corporations are holding large cash (or liquid) balances. Some suggest those balances are sitting there because low demand gives corporations little reason to invest and expand their business – leading to the funds ‘gathering dust’.

      Could you describe some of the techniques used by the FED to “tie up the money” and prevent it from being “loaned out to Main Street”.

  9. Oky1, I recall reading that there was some kind of general agreement reached for dealing with bank failures through bail-ins a couple of years ago but the specifics eluded me. Any cites you have would be appreciated.


  10. Tony C, GeneH, Bron, etc..

    **Oky1 1, December 8, 2013 at 8:57 pm

    The Failure of Laissez Faire Capitalism and Economic Dissolution of **

  11. Oky1: Don’t blame me if you cannot understand the difference between a corrupt government and a servant government.

    What I mean, about Bron, is his previously stated desires to do away with all regulation of any kind. No minimum wage, no safety regulations, no disclosure regulations, no building codes, no sexual harassment laws, no restraints on the free exercise of racism, religious prejudice, gender prejudice, intimidation, child labor, or even hiding the use of carcinogenic pesticides on food to make a buck.

    I presume you are the same kind of sociopath as Bron; you have zero regard for the health or well being of others; you advocate an ‘every man for himself’ ethos, and think any form of taxation is some kind of robbery.

    Feel free to read my many posts addressed to him as if they were addressed to you.

    1. I think Tyler Durden is a real hoot. I always read him right after I finish reading the Onion every morning.

      The only thing is I think he made a strategic career error when he stopped promoting after hours fist fights – or is he still doing that?

      What ever gave the man the idea that he could make it as a political or economic analyst is a mystery to me.

      But funny? – lord yes the man cracks me up every time.

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