The Problem
I was reading someone calling for Quantitative Easing, but Quantitative easing has little effect on the economy. The Banks will only loan to folks who aren't underwater, owing more than they are worth -- and to folks who have the surety to provide something the bank can take if the business fails. The term for an economy that is over-leveraged is a "liquidity trap." Quantitative easing is a waste of public money when banks won't lend to the people the Fed claims it intends to be helping. We saw that in 2009-2012 when the banks foreclosed like crazy on ordinary people -- and bought each other out -- instead of helping those people get a job.
- To borrow money on the credit of the United States
- To regulate Commerce
- To coin Money, regulate the Value thereof, and of foreign Coin,
Emitting bills of credit (money) is a power implied from the power to borrow money and the prohibition of that power to the States in Section 10. Rather than our country passing a constitution to make that power explicit, the USA has let the courts define whether the Federal Government can print money, and the result has been a 200 year fight, which is ongoing. The Federal Reserve is the latest "Missouri Compromise" on this subject in the battle between centralizing bankers and local financial interests. At this point the centralizing bankers have pretty much won their war and thus we have the Fed, which does a dance between a which privatizes and privateers on the ability to "emit bills of credit" as money and to which Congress has delegated almost all the powers just listed.
The Fed Not performing it's Mission
The thing is that this is not the Federal Reserve's money as the Federal Reserve, when the Federal Reserve creates money it is acting as an agency of congress. It may be paper notes or entries in a ledger, but the Fed is "emitting bills of credit" on the borrowing power of the United States. The authority the Federal Reserve is exercising is one that is delegated by Congress. The authorities of the banks in turn derive from these.
It's chartering law, updated in 1977, mandates:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Dual Mandate
These goals are:
- maximum employment
- Stable Prices
- Moderate Long Term Interest Rates
- Long Run Productivity
Neither employment nor production are being maximized under the current regime of the Federal Reserve. The reason this is so is that the Federal Reserve is so focused on it's mission of system stability, protecting the giant banks, which is not in the chartering law, though one could argue it is implied, that they are ignoring the other parts of their dual mandate. The problem is they aren't using the right tools. The banks are basically agents of the USA through the Federal Reserve, but they are run for the private separate advantage of their investors and management, and their individual missions are not to stabilize prices, promote maximum employment or moderate long term interest rates. Their interest and the public interest are at odds. The Federal Reserve, it's related agencies and the Treasury have to regulate the private banks and force them to focus on their mission. But since no amount of regulation is going to change the private, SCOTUS mandated, charter to "maximize [individual] profits, it is a Sisyphean task. As noted before Quantitative Easing through Banks is a waste of time. These goals cannot be achieved through the privatized banking system. Especially goal A & D.
Privateering on the Money Supply
The primary driver of economic inequality is privateering on the money supply. Continuing to rely on Bankers for economic stability is like turning on a massive octopus shaped vacuum cleaner. The combination of business cycle and predatory lending is guaranteed to hoover up wealth to increasingly centralized owners, and to destroy the real wealth of actual capital goods and natural resources, in the process. Actual capital has risk and depreciation. But rents are fixed and safe. If people can't pay they get evicted. Homelessness in the USA is terrorism. Rentiers dominate our economy. Our system is designed so that people pay fees, taxes, rents and interest, whether they can afford to or not. And much of that money winds up in private, separate pockets. Since the banks and our financial powers are exercising powers derived from congress, congress must regulate and address this. It is unsustainable. Indeed it is in the interest of the rentiers and bankers to fix it. An unstable economy threatens their long term welfare and survival too.
We need to Reform not abolish the Federal Reserve
Many of my friends want to abolish the Federal Reserve. Our current system was designed more by J.P. Morgan than by anyone else, and continues a trend towards nationalizing banking that was started by Salmon Chase during the Civil War. But the Federal Reserve is Federally chartered and constituted. Changing that charter is within the power of congress. The Federal Reserve presently does a good job of regulating banks within the context of ordinary lending. It does well on all but goals A & D. The creation of a Consumer Agency that is funded by the system can help make sure that regulation is more in the interest of the public. But as long as we do our issuing of money primarily through them, the hoovering of wealth will continue.
So rather than abolishing the Federal Reserve or letting the current mess continue, we need to implement some ideas that have been advocated by economists, engineers and thinkers for quite some time, and use these new institutions to address.
An Infrastructure Bank to support State & local Treasuries
We clearly need an Infrastructure Bank and we also need to create "Treasury Banks" that support the States the way the Treasury and Federal Reserve support the Federal Government. The infrastructure bank will have the mission of vetting and funding Federal highways directly and of regulating the system as a whole, with the power to review and fund local infrastructure investment. Since the Federal Government is responsible for the overall system it has a duty to support the construction, maintenance and sustainment of that system.
- Note I talked about this at the beginning of the Primary Season: Demanding Infrastructure Bank
Mission of the Infrastructure Bank
The Infrastructure Bank would have several missions.
- It would take on regulatory, vetting, Management and Budgeting review functions for infrastructure projects nationwide.
- Important projects funded directly with grants or zero interest loans.
- Approved projects with either zero interest loans or support for bond issues.
Quantitative Easing where it Actually Helps
The Infrastructure bank would also immediately enter the "Quantitative easing" world. It would:
- Have a vetting agency to review projects before approval for engineering, environmental and economic soundness.
- use "letter of credit" currency issues to buy up and discharge existing infrastructure debt to free taxed funds for further investment.
- It would issue some money directly (as grants or zero interest loans) to support construction, repair and upgrade of our national infrastructure.
- It woud have a reviewing function to audit projects when completed and/or at milestones.
- This direct support would only apply to Publicly controlled entities. Private entities would have to either submit to regulation or their borrowing power would be restricted to loans with interest and risk premiums.
One: Government Interest must be the Public Interest
"The government’s interest is the public interest. The government is there to provide for the general welfare, and there is no correlation between this interest and a position of surplus or deficit, nor of indebtedness, in the government’s books." [Galbraith/Wray/Mosler] Government not in the General Welfare is tyranny according to the definition of John Locke. see [Tyranny-John Locke]
Post Script
This post is a draft part of a manifesto. I simply can't talk about everything in one post without putting friends and enemies alike to sleep. More is to come. The problem has been exhaustively studied by many people. Each looking at their part of the elephant. Some looking at the whole elephant and seeing a fuzzy outline. I've added references to every statement that point to the proofs or further reading. We need solutions at this point. And it is the Post Keynesians, Geo-Chartalists, and formerly 'outlyer' critics of classical and neo-classical economic theory who have useful answers.
We can solve this if we collectively decide to. Drawing analytically from the ideas of economists from Adam Smith, Dave Ricardo, Henry George, Marx, Keynes, Samuelson from the past to James Galbraith, Joseph Stiglitz & Thomas Piketty at present, we can come up with public policy that will make our system more stable and sustainable. The problem is defined. It is the insufficiency of a banking system to address All that is missing is the consciousness and the will do do so. This is a manifesto of the things we need to do to stabilize both our nations economy and that of the world.
This series continues with the next article: Sustainable Economic Policy II
- Sources & Further Reading:
- Galbraith/Wray/mosler: Governments are sovereign.
- http://moslereconomics.com/2009/02/20/galbraithwraymosler-submission-for-february-25/
- Related Posts:
- http://holtesthoughts.blogspot.com/2016/07/economic-democratic-subsidiarity-and.html
- Vincent Huang of Naked Capitalism
- http://www.nakedcapitalism.com/2013/12/vincent-huang-nature-money.html
- This author talks about Chartalist ideas and bank Reform:
- http://economictree.org/Iraq_Am_Revolution2.html
- Larouchie ideas come close to Chartalism but miss the boat in some areas: http://economictree.org/Iraq_Am_Revolution2.html
- The Larouchies have some almost good ideas on what to do about the Fed. I reference them in this work
- The Georgists have some good ideas because they are based on Henry George:
- https://www.youtube.com/playlist?list=PLB1uqxcCESK7WucTqc4uBZ5hmXL6dz3cW
- Arguments for Nationalizing the Federal Reserve:
- http://www.informationclearinghouse.info/article31387.htm
- https://www.minneapolisfed.org/research/wp/wp642.pdf
- http://www.politicalforum.com/political-opinions-beliefs/442857-massive-reevaluation-national-wealth-must-occur-order-finance.html
- Federal Reserve Dual Mandate
- https://www.chicagofed.org/publications/speeches/our-dual-mandate
- Federal Reserve History
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