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?

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