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Category: federal reserve

  • Ending the US Dollar’s Exorbitant Privilege

    Has the love, or even more so the fixation, gone with the US dollar, that all cushioning reserve currency that has shown itself unimpeachable for decades?  A curious event teasing and ruffling currency watchers and financiers is becoming a pattern: the US dollar is being sold off, suggesting it has lost its princely shine.  To this can also be added the sale of US Treasuries.

    Even before the global imposition of Donald Trump’s tariff-driven bonanza and his public bruising of Federal Reserve chairman, Jerome Powell, the world’s dominant currency was already being moved on.  Since 2014, the Chinese and Russian central banks have tried to move out of US Treasury holdings, preferring the magic of gold.  In 2022, the latter went so far as to link its currency, the ruble, to gold.

    For all that, something far more dramatic would be needed to upset the status of the dollar, and certainly the authority of its “exorbitant privilege”, to use that apt term coined in the 1960s by the then French Minister of Finance, Valéry Giscard d’Estaing.  Only “serious economic and financial mismanagement by the United States”, proposed economics professor Barry Eichengreen in 2010, “could precipitate flight from the dollar.”

    In the autumn leading to the 2024 presidential election, there was little to suggest any such flight.  The dollar had markedly appreciated, boosted by the statistical astrology of US economic growth.  This continued after Trump’s victory in November.  The promise of a vigorous tariff policy, one potentially inflationary, also charmed investors keen to make greater returns from their dollars, assuming a raise of interest rates by the Federal Reserve.

    The tariff policy well and truly arrived on “Liberation Day” (April 2), proving to be erratic, arbitrarily derived and often economically illiterate in application.  The precipitated fall of the greenback shocked the currency pundits.  “For several years, the market’s been buying this US growth story, the US stock market’s been outperforming other stock markets, and suddenly you had economists thinking tariffs would push the US into recession,” remarks Jane Foley, head of foreign exchange (FX) strategy at Rabobank.  Additionally, the tariff regime has encouraged countries with current account surpluses denoted in US assets to consider returning them back to domestic markets, something that will further weaken the dollar.

    Trump has also lost patience with Powell, petulantly ventilating on Truth Social that the Federal Reserve chair impose pre-emptive cuts to interest rates, given the White House’s own assessment that the US faces no inflation.  There would be, declared Trump in a post, a “SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW.”  While Europe continued to lower its rates, Powell had proved himself slow on the draw, “except when it came to the Election period when he lowered in order to help Sleepy Joe Biden, later Kamala, get elected.”

    In the angry mist, the President floated the possibility that the central banker might be removed.  His “termination” could not “come fast enough.”  He also charged his advisors to distribute poisoned packages of speculation as to what he intended to do with the recalcitrant Powell.  White House National Economic Council Director Kevin Hassett obliged, telling reporters that, “The President and his team will continue to study that matter [of removing Powell].”

    Then, in true seesaw fashion, the President claimed the opposite of what he meant, a move that also sent the market into another galloping spree.  “I have no intention of firing him,” Trump told reporters on April 22. “I would like to see him be a little more active in terms of his idea to lower interest rates.”

    In the tumult of it all, investors are scouring other havens, shunning the status quo and traditional sensibility of the dollar.  The Japanese yen and Swiss franc are returning to favour.  As is the euro.  While an economist’s word should never be taken as gospel, chief currency analyst at ForexLive, Adam Button offers his view: “The market wants to invest in the fastest growing places, and the US administration is showing that it is not trying to maximize growth, or they have a different idea about how to get there.  And I think that’s rattled the market.”

    Curious events are unfolding as a result of Trump’s carnivalesque approach to trade and markets.  While the value of the greenback has fallen, the returns from 10-year US government bonds have risen.  This is the sort of thing common in new, emerging markets, where capital is susceptible to flight amidst conditions of volatility. In the US, this is the fifth time it has happened in three decades.  Even with the rise in bond yields, the dollar’s slide has not been arrested.

    For the easily panicked, a particular safe haven – and one already identified by central bankers and investors – is gold.  With US government debt no longer attractive for traders, the yellow metal has outperformed most major assets with its giddying rise.  Having passed $US3,500-an-ounce on April 22, the favouring of gold is merely one aspect of a market narrative that has turned the Trump Tariff Wall into the Selling of America.

    Crystal ball gazing is a mug’s game in economics, but countries wishing to see the defanging of dollar diplomacy and greenback bullying long used by Washington to maintain power will see flashes of opportunity.  The dollar’s privilege may no longer be exorbitant.

    The post Ending the US Dollar’s Exorbitant Privilege first appeared on Dissident Voice.

    This post was originally published on Dissident Voice.

  • Interest Rate Cuts Now Could Help Workers. But That’s Not Who the Fed Serves.

    The Federal Reserve hasn’t changed interest rates since July of last year, after 11 hikes between March 2022 and July 2023 in the hope that higher borrowing costs would slow down consumer and business demand so inflation rates would drop. It kept the benchmark interest rate unchanged in its latest meeting ending July 31, 2024, but Federal Reserve Chair Jerome Powell said that the first rate cut in…

    Source

    This post was originally published on Latest – Truthout.

  • How Unelected Regulators Unleashed the Derivatives Monster and How It Might Be Tamed

    It was not the highly visible acts of Congress but the seemingly mundane and often nontransparent actions of regulatory agencies that empowered the great transformation of the U.S. commercial banks from traditionally conservative deposit-taking and lending businesses into providers of wholesale financial risk management and intermediation services.

    — Professor Saule Omarova, “The Quiet Metamorphosis, How Derivatives Changed the Business of  Banking” University of Miami Law Review, 2009

    While the world is absorbed in the U.S. election drama, the derivatives time bomb continues to tick menacingly backstage. No one knows the actual size of the derivatives market, since a major portion of it is traded over-the-counter, hidden in off-balance-sheet special purpose vehicles. However, when Warren Buffet famously labeled derivatives “financial weapons of mass destruction” in 2002, its “notional value” was estimated at $56 trillion. Twenty years later, the Bank for International Settlements estimated that value at $610 trillion. And financial commentators have put it as high as $2.3 quadrillion or even $3.7 quadrillion, far exceeding  global GDP, which was about $100 trillion in 2022. A quadrillion is 1,000 trillion.

    Most of this casino is run through the same banks that hold our deposits for safekeeping. Derivatives are sold as “insurance” against risk, but they actually add a heavy layer of risk because the market is so interconnected that any failure can have a domino effect. Most of the banks involved are also designated “too big to fail,” which means we the people will be bailing them out if they do fail.

    Derivatives are considered so risky that the Bankruptcy Act of 2005 and the Uniform Commercial Code grant them (along with repo trades) “super-priority” in bankruptcy. That means if a bank goes bankrupt, derivative and repo claims are settled first, drawing from the same pool of liquidity that holds our deposits. (See David Rogers Webb’s The Great Taking and my earlier articles here and here.) A derivatives crisis could easily vacuum up that pool, leaving nothing for us as depositors — or for the “secured” creditors who are junior to derivative and repo claimants in bankruptcy, including state and local governments.

    As detailed by Pam and Russ Martens, publisher and editor, respectively of Wall Street on Parade, as of December 31, 2023, Goldman Sachs Bank USA, JPMorgan Chase Bank N.A., Citigroup’s Citibank and Bank of America held a total of $168.26 trillion in derivatives out of a total of $192.46 trillion at all U.S. banks, savings associations and trust companies. That’s four banks holding 87 percent of all derivatives at all 4,587 federally-insured institutions then in the U.S.

    In June 2024, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board jointly released their findings on the eight U.S. megabanks’ “living wills” – their resolution or wind-down plans in the event of bankruptcy. The Fed and FDIC faulted all of the four largest derivative banks on shortcomings in how they planned to wind down their derivatives.

    How Banks Guarding Our Deposits Became the Biggest Gamblers in the Derivatives Casino

    Banks are not just middlemen in the derivatives market. They are active players taking speculative positions. In this century, writes Professor Omarova, the largest U.S. commercial banks have emerged “as a new breed of financial super-intermediary—a wholesale dealer in financial risk, conducting a wide variety of capital markets and derivatives activities, trading physical commodities, and even marketing electricity.” She notes that the Federal Reserve has allowed several financial holding companies to purchase and sell physical commodities (including oil, natural gas, agricultural products and electricity) in the spot market to hedge their commodity derivative activities, and to take or make delivery of those commodities to settle the transactions.

    It was not Congress that authorized that expansive definition of permitted banking activities. It was the Office of the Comptroller of the Currency (OCC), part of the “administrative deep state,” that permanent body of unelected regulators who carry on while politicians come and go. As Omarova explains:

    Through seemingly routine and often nontransparent administrative actions, the OCC effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions, whose safety and soundness were guarded through statutory and regulatory restrictions on potentially risky activities, into a new breed of financial “super-intermediaries,” or wholesale dealers in pure financial risk. …

    Moreover, some of the most influential of those decisions escaped public scrutiny because they were made in the subterranean world of administrative action invisible to the public, through agency interpretation and policy guidance.

    The OCC’s authority to regulate banks dates back to the National Bank Act of 1863, which grants national banks general authority to engage in activities necessary to carry on the “business of banking,” including “such incidental powers as shall be necessary to carry on the business of banking.” The “business of banking” is not defined in the statute. Omarova writes:

    Section 24 (Seventh) of the National Bank Act grants national banks the power to exercise all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes.

    No mention is made of derivatives trading or dealing.

    The powers of banks were further limited by Congress in the Glass-Steagall Act of 1933, which explicitly prohibited banks from dealing in corporate equity securities, and by other statutes passed thereafter. However, the portion of the Glass-Steagall Act separating depository from investment banking was reversed in the Commodity Futures Modernization Act in 2000. Omarova writes that this allowed the OCC to articulate “an overly expansive definition of the ‘business of banking’ as financial intermediation and dealing in financial risk, in all of its forms, and … this pattern of analysis allowed the OCC to expand the range of bank-permissible activities virtually without any statutory constraint.”

    What Then Can Be Done?

    The 2008 financial crisis is now acknowledged to have been largely a derivatives crisis. But massive efforts at financial reform in the following years have failed to fix the underlying problem. In a Forbes article titled “Big Banks and Derivatives: Why Another Financial Crisis Is Inevitable,” Steve Denning writes:

    Banks today are bigger and more opaque than ever, and they continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks.

    Most of this derivative trading is conducted through the biggest banks. A commonly held assumption is that the real derivative risk is much smaller than the “notional amount” stated on the banks’ balance sheets, but Denning observes:

    [A]s we learned in 2008, it is possible to lose a large portion of the “notional amount” of a derivatives trade if the bet goes terribly wrong, particularly if the bet is linked to other bets, resulting in losses by other organizations occurring at the same time. The ripple effects can be massive and unpredictable.

    In 2008, governments had enough resources to avert total calamity. Today’s cash-​strapped governments are in no position to cope with another massive bailout.

    He concludes:

    Regulation and enforcement will only work if it is accompanied by a paradigm shift in the banking sector that changes the context in which banks operate and the way they are run, so that banks shift their goal from making money to adding value to stakeholders, particularly customers. This would require action from the legislature, the SEC, the stock market and the business schools, as well as of course the banks themselves.

    A Paradigm Shift in “the Business of Banking”

    In a September 2023 paper titled “Rebuilding Banking Law: Banks as Public Utilities,” Yale law professor Lev Menand and Vanderbilt law professor Morgan Ricks propose shifting the goal of banking so that chartered private banks are “not mere for-profit businesses; they have affirmative obligations to the public.” The authors observe that under the New Deal framework, which was rooted in the National Bank Act of 1864, banks were largely governed as public utilities. Charters were granted only where consistent with public convenience and need, and only chartered banks could expand the money supply by extending loans.

    The Menand/Ricks proposal is quite detailed and includes much more than regulating derivatives, but on that specific issue they propose:

    While member banks are permitted to enter into interest-rate swaps to hedge rate risk, they are not allowed to engage in derivatives dealing (intermediation or market making) or take directional bets in the derivatives markets. Derivatives dealing and speculation do not advance member banks’ monetary function. Apart from loan commitments, member banks would not be in the business of offering guarantees or other forms of insurance.

    Would that mean the end of the derivatives casino? No – it would just be moved out of the banks charged with protecting our deposits:

    The blueprint above says nothing about what activities can take place outside the member banking system. It says only that those activities can’t be financed with run-prone debt [meaning chiefly deposits]. In principle, we could imagine a very wide degree of latitude for non bank firms, subject of course to appropriate standards of disclosure, antifraud, and consumer and investor protection. So securities firms and other nonbanks might be given free rein to engage in structured finance, derivatives, proprietary trading, and so forth. But they would not be allowed to “fund short.”

    By “funding short,” the authors mean basically “creating money,” for example, through repo trades in which short-term loans are rolled over and over. In their proposal, only chartered banks are delegated the power to create money as loans.

    Expanding the Model

    University of Southampton business school professor Richard Werner, who has written extensively on this subject, adds that banks should be required to concentrate their lending on productive ventures that create new goods and services and avoid inflating existing assets such as housing and corporate stock.

    Speculative derivatives are a form of “financialization” – money making money without producing anything. The winners just take money from the losers. Gambling is not illegal under federal law, but the chips in the casino should not be our deposits or loans made with the backing of our deposits.

    The Menand/Ricks proposal is for private banks, but banks can also be made “public utilities” through direct ownership by the government. The stellar model is the Bank of North Dakota, which does not speculate in derivatives, cannot go bankrupt, makes productive loans, and has been highly successful. (See earlier article here.) The public utility model could also include a national infrastructure bank, as proposed in H.R. 4052, which currently has 37 co-sponsors.

    The “business of banking” can include making money for private shareholders and executives, but that business should be junior to the public interest, which would prevail when they conflict.

    Unfortunately, only Congress can change the language of the controlling statute; and Congress has been motivated historically to make major changes in the banking system only in response to a Great Depression or Great Recession that exposes the fatal flaws in the existing system. With the reversal of “Chevron deference,” however, the OCC’s rules can now be challenged in court. A powerful citizen’s movement might be able to catalyze needed changes before the next Great Depression strikes.

    A financialized economy is not sustainable and not competitive. The emphasis should be on investment in the real economy. That is the sort of paradigm shift that is necessary if the U.S. is to survive and prosper.

    • This article was first posted as an original to ScheerPost.com

    The post How Unelected Regulators Unleashed the Derivatives Monster and How It Might Be Tamed first appeared on Dissident Voice.

    This post was originally published on Dissident Voice.

  • Why Does the Government Borrow When It Can Print?

    In the first seven months of Fiscal Year (FY) 2024, net interest (payments minus income) on the federal debt reached $514 billion, exceeding spending on both national defense ($498 billion) and Medicare ($465 billion). The interest tab also exceeded all the money spent on veterans, education, and transportation combined. Spending on interest is now the second largest line item in the federal budget after Social Security and the fastest growing part of the budget, on track to reach $870 billion by the end of 2024.

    According to the Congressional Budget Office, the federal budget deficit was $857 billion in the first seven months of fiscal year 2024. In effect, the government is borrowing at interest to pay the interest on its debt, compounding the debt. For the lender, it’s called “the miracle of compound interest” – interest on interest compounds exponentially. But for the debtor, it’s a curse, compounding like a cancer to the point of devouring assets while still growing the debt. As Daniel Amerman, a chartered financial analyst, writes in an article titled “Could A Compound Interest Wildfire Threaten U.S. Solvency?”:

    [T]he greatest debt-related threat to the solvency of the United States government and the value of the dollar could be the fact that the U.S. isn’t actually making any net principal or interest payments on its debt.

    That is, the U.S. government is borrowing money to make the interest payments, even as it borrows to roll over the principal payments – even as it borrows still more to fund the general spending which is in excess of taxes collected.

    This creates the risk of a potential compounding and acceleration of interest payments on that debt. …

    In other words, the US government is effectively insolvent, absent some major changes. Which is exactly why we need to anticipate that there will be major changes.

    The Committee for a Responsible Budget similarly concludes, “Without reforms to reduce the debt and interest, interest costs will keep rising, crowd out spending on other priorities, and burden future generations.” In fact, we are that future generation. The chickens have come home to roost. According to USDebtClock.org, the debt is now $34.8 trillion. Estimates are that we would need to tax everyone at a rate of 40%, without deductions, to balance the budgets of our federal and local governments, an obvious nonstarter. Reforms are necessary, but of what sort?

    Why Does the Government Borrow Its Own Currency?

    This question was asked of economist Martin Armstrong, who responded:

    The theory was that if you borrowed rather than printed money, you were NOT increasing the existing money supply, and therefore, in theory, it would not be inflationary.

    That would be true if the debt were paid back, but today the government does not repay the debt but just keeps rolling it over, paying off old bonds as they come due with new bonds – currently at higher interest rates. Armstrong concludes:

    We borrow, which is worse than printing because we have to pay interest on constantly rolling the debt. This year, we will spend about $1 trillion on interest, the total national debt when Reagan took office in 1981 .…

    Had we printed the money instead of borrowing, it would have been less inflationary and the capital would have created more jobs instead of investing in government debt which has only funded the Neocons’ wildest dreams [which he explained as “establishing military bases everywhere”]. [Emphasis added.]

    A report issued by the Grace Commission during the Reagan Administration concluded that at that time, most federal income tax revenues went just to pay the interest on the government’s burgeoning debt. A cover letter addressed to President Reagan stated that a third of all income taxes were consumed by waste and inefficiency in the federal government. Another third of any taxes actually paid went to make up for the taxes not paid by tax evaders and the growing underground economy, a phenomenon that had blossomed in direct proportion to tax increases. The report concluded:

    With two-thirds of everyone’s personal income taxes wasted or not collected, 100 percent of what is collected is absorbed solely by interest on the Federal debt and by Federal Government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their Government.

    As Thomas Edison observed in 1921:

    If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is that the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way.

    It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.

    It is cheaper to print money outright than to borrow money at interest that is never repaid. The Greenbackers who marched on Washington in 1897 were right. We should be printing the money – not for speculative ventures (“unearned income”) but for productive endeavors. The Greenbackers sought a return to the system in which Lincoln’s government issued U.S. Notes or Greenbacks directly, in order to avoid a crippling debt to British bankers. They were marching for the economic producers — the farmers and factory workers, represented by the Scarecrow and Tin Man in The Wizard of Oz, which took its plot from that first-ever march on Washington.

    Won’t just printing the money result in hyperinflation? Not necessarily. Price inflation results from too much money chasing too few goods. When the money is used to create new goods and services, prices remain stable. This was demonstrated by the Chinese when they increased the money supply by a factor of 1800% (18 times) in the 23 years between 1996 and 2020. The new money went toward infrastructure and other forms of productivity, increasing GDP at the same rate; and price inflation remained consistently low during that period.

    But hindsight is 20/20. What can be done now about the ballooning federal debt and interest bill?

    Possible Treasury Solutions

    Hypothetically, the Treasury could buy back its debt. But under our current system, this would have to be done with more debt, at even higher interest rates. In fact, the Treasury is doing that now, but in modest  proportions and for a different purpose. Its goal is to create a liquid market in long-term Treasuries, the sort of bonds that Silicon Valley Bank was forced to sell at a deep discount, generating insufficient funds to ward off the massive run on its deposits in March 2023. Nearly 200 banks were found to be in similar straits and equally vulnerable to runs. However, it would be counterproductive for the Treasury to buy back major portions of its debt with more debt at higher interest, which would just compound the debt and the interest burden.

    Alternatively, it could issue 35 trillion-dollar coins.

    The idea of minting large denomination coins to solve economic problems was evidently first suggested by a chairman of the Coinage Subcommittee of the U.S. House of Representatives in the early 1980s. He pointed out that the government could pay off its entire debt with some billion-dollar coins – effectively just “printing” or “coining” the money.  The Constitution gives Congress the power to coin money and regulate its value, and no limit is put on the value of the coins it creates. Of course, today these would need to be trillion dollar coins.

    In legislation initiated in 1982, however, Congress chose to impose limits on the amounts and denominations of most coins. The one exception was the platinum coin, which a special provision allowed to be minted in any amount for commemorative purposes.

    In 2013, an attorney named Carlos Mucha, blogging under the pseudonym Beowulf, proposed issuing a platinum coin to capitalize on this loophole; and with the endless gridlock in Congress over the debt ceiling, it got picked up by serious economists as a way to checkmate the deficit hawks. Philip Diehl, former head of the U.S. Mint and co-author of the platinum coin law, confirmed that the coin would be legal tender:

    In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years … under power expressly granted to Congress in the Constitution (Article 1, Section 8).

    Minting trillion dollar coins evokes images of million-mark notes filling wheelbarrows. But as economist Michael Hudson observes:

    Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.

    Prof. Randall Wray explained that the coin would not circulate but would be deposited in the government’s account at the Fed, so it could not inflate the circulating money supply. The budget would still need Congressional approval. To keep a lid on spending, Congress would just need to abide by some basic rules of economics. It could spend on goods and services up to full employment without creating price inflation (since supply and demand would rise together). After that, it would need to tax — not to fund the budget, but to shrink the circulating money supply and avoid driving up prices with excess demand.

    If issuing 35  coins worth a trillion dollars each seems too radical, the Treasury could issue just one trillion-dollar coin annually, earmarked specifically to cover the interest. A similar hybrid approach worked for the Pennsylvania colonists when they formed their first government-owned bank in the early 18th century. Other colonies were issuing “Colonial scrip,” but it was easier to issue the scrip than to tax it back, and they typically issued too much, inflating the money supply and devaluing the currency. The Pennsylvania colonists formed a “land bank” and issued money as loans to the farmers at 5% interest. To cover the interest not created in the original loans, the government was able to issue paper scrip directly to fund its own budget. As a result, Pennsylvania became the most productive economy in the colonies.

    What About Tapping Up the Federal Reserve?

    The Fed is in a position to issue money interest-free, not as the bank-created deposits circulating as our M2 money supply, but as the reserves needed by banks to meet interbank transfers and withdrawals. When the Fed buys federal securities, it is mandated to return the interest to the Treasury after deducting its costs.

    In 2011, Republican presidential candidate Ron Paul proposed dealing with the debt ceiling by simply voiding out the $1.7 trillion in federal securities then held by the Fed. As Stephen Gandel explained Paul’s solution in Time Magazine, the Treasury pays interest on the securities to the Fed, which returns 90% of these payments to the Treasury. Despite this shell game of payments, the $1.7 trillion in U.S. bonds owned by the Fed is still counted toward the debt ceiling.

    Paul’s plan: “Get the Fed and the Treasury to rip up that debt. It’s fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed.”

    Congressman Alan Grayson, a Democrat, also endorsed this proposal.

    But since June 2022, the Fed has not been buying securities but has been selling those it already has, reducing its balance sheet in an effort to fight price inflation by shrinking the money supply through “quantitative tightening.” The central bank is considered “independent” of Congress, but arguably Congress could revise the Federal Reserve Act to require the Fed to buy federal securities.

    A Financial Transaction Tax

    Barring those alternatives, another possibility is a very small financial transaction tax. In a 2023 book titled A Tale of Two Economies: A New Financial Operating System for the American Economy, Wall Street veteran Scott Smith argues that we are taxing the wrong things – income and physical sales. In fact, we have two economies – the material economy in which goods and services are bought and sold, and the monetary economy involving the trading of financial assets (stocks, bonds, currencies, etc.) – basically “money making money” without producing new goods or services.

    Drawing on data from the Bank for International Settlements and the Federal Reserve, Smith shows that the monetary economy is hundreds of times larger than the physical economy. The budget gap could be closed by imposing a tax of a mere 0.1% on financial transactions, while eliminating not just income taxes but every other tax we pay today. For a financial transactions tax (FTT) of 0.25%, we could fund benefits we cannot afford today that would stimulate growth in the real economy, including not just infrastructure and development but free college, a universal basic income, and free healthcare for all. Smith contends we could even pay off the national debt in 10 years or less with a 0.25% FTT.

    Are these proposals too radical? Perhaps, but existential crises call for radical solutions.

    • This article was first posted as an original to ScheerPost.com.

    The post Why Does the Government Borrow When It Can Print? first appeared on Dissident Voice.

    This post was originally published on Dissident Voice.

  • Beyond the Ouroboros

    If market society is going to effectively survive and adapt to global warming, it will have no choice but to abolish the perspective of the Ouroboros framework, and fully acknowledge (and embrace) the reality of modern fiat money.

    This post was originally published on Real Progressives.

  • WSJ Reports Trump Allies Drafting Plan to Give Him Control Over Fed If Reelected

    Right-wing allies of former U.S. President Donald Trump are reportedly crafting a plan to give the executive branch control over Federal Reserve policy decisions, an effort that comes as the presumptive GOP nominee continues to signal his authoritarian intentions for a potential second term. The Wall Street Journal reported Thursday that former Trump administration officials and other supporters…

    Source

    This post was originally published on Latest – Truthout.

  • Do Bond Sales & Borrowing Finance US Deficit Spending?

    Professor L. Randall Wray responds to this question and debunks the misunderstandings and fallacies surrounding it.

    This post was originally published on Real Progressives.

  • Do Bond Sales & Borrowing Finance US Deficit Spending?

    Originally published on June 21, 2009 at the New Economic Perspectives blog.

    Question: I heard a news report that the US Government is issuing bonds to finance its budget deficit, and that this will drive up interest rates and might even threaten government solvency. Also I have heard that the US Government has to rely on China to finance our deficit. Isn’t that why the stock and bond markets are bearish?

    Answer: This news report reflects two related misunderstandings: first, that government “funds” its deficit by borrowing; second that a large deficit threatens government with insolvency. Let me first deal with those fallacies, then move on to what is happening in markets.

    Government spends by crediting bank accounts (bank deposits go up, and their reserves are credited by the Fed). All else equal, this generates excess reserves that are offered in the overnight interbank lending market (fed funds in the US) putting downward pressure on overnight rates. Let me repeat that: government spending pushes interest rates down. When they fall below the target, the Fed sells bonds to drain the excess reserves—pushing the overnight rate back to the target. Continuous budget deficits lead to continuous open market sales, causing the NY Fed to call on the Treasury to soak up reserves through new issues of bonds. The purpose of bond sales by the Fed or Treasury is to substitute interest-earning bonds for undesired reserves—to allow the Fed to hit its interest rate target. (In the old days, these reserves earned no interest; Chairman Bernanke has changed that, effectively eliminating the difference between very short-term Treasuries and bank reserves. It also entirely eliminates the need to issue Treasuries—but that is a topic for another day.) We conclude: government deficits do not exert upward pressure on interest rates—quite the contrary, they put downward pressure that is relieved through bond sales.

    On to the question of insolvency. Let me state the conclusion first: a sovereign government that issues its own floating rate currency can never become insolvent in its own currency. (While such a currency is often called “fiat”, that is somewhat misleading for reasons I won’t discuss here—I prefer the term “sovereign currency”.) The US Treasury can always make all payments as they come due—whether it is for spending on goods and services, for social spending, or to meet interest payments on its debt. While analogies to household budgets are often made, these are completely erroneous. I do not know any households that can issue Treasury coins or Federal Reserve Notes (I suppose some try occasionally, but that is dangerously illegal counterfeiting). To be sure, government does not really spend by direct issues of coined nickels. Rather, it spends by crediting bank accounts. It taxes by debiting them. When its credits to bank accounts exceeds its debits to them, we call that a budget deficit. The accounting and operating procedures adopted by the Treasury, the Fed, special deposit banks, and regular banks are complex, but they do not change the principle: government spending is accomplished by crediting bank accounts. Government spending can be too big (beyond full employment), it can misdirect resources, and it can be wasteful or undesirable, but it cannot lead to insolvency.

    Constraining government spending by imposing budgets is certainly desirable. We want to know in advance what the government is planning to do, and we want to hold it accountable; a budget is one lever of control. At this point, it is impossible to know how much additional government spending will be required to get us out of this deep recession. Whether the Obama team finally settles on $850 billion worth of useful projects, or $1.5 trillion, voters have the right to expect that the spending is well-planned and that the projects are well-executed. But the budgets ought to be set with regard to results desired and competencies to execute plans—not out of some pre-conceived notion of what is “affordable”. Our federal government can afford anything that is for sale in terms of its own currency. The trick is to ensure that it spends enough to produce sustainable growth and other desired outcomes while at the same time ensuring that its spending does not have undesirable outcomes such as fueling inflation or taking away resources that could be put to better use by the private sector.

    Our federal government can afford anything that is for sale in terms of its own currency. The trick is to ensure that it spends enough to produce sustainable growth and other desired outcomes while at the same time ensuring that its spending does not have undesirable outcomes such as fueling inflation or taking away resources that could be put to better use by the private sector.

    L. Randall Wray

    Why do stock markets and bond markets react the way they do, given that insolvency is out of the question? Sophisticated market players do recognize that government cannot go insolvent and that government will always make all interest payments as they come due. Markets are, however, concerned that all the government spending plus the Fed bail-outs (lending reserves and buying bad assets) will be inflationary. In the current environment, that is quite unlikely. Even if oil prices stabilize at a higher level, that will not compensate for all the deflationary pressures around the world as firms cut prices to maintain sales in the face of plummeting demand. Still, it is not really inflation that bond markets are worried about, but rather future Fed interest rate hikes. (Again, that will not happen in the near future, and might not happen for several years—but there is little doubt that the Fed will eventually raise rates when the economy finally recovers.) Rate hikes lead to capital losses on longer-maturity bonds (interest rates and bond prices always move in the opposite direction). The Treasury persists in issuing bonds with a range of maturities (although the maturity structure in recent years has shortened). This is evidence that the Treasury does not fully understand the purpose of bond sales (since bonds are simply an alternative to bank reserves, it makes most sense to offer only overnight bonds)—but, again, that is a topic for another day.

    The Treasury is having some trouble selling the longer maturity bonds (so their price is low and their interest rate is high). China is probably playing a role in this because they are shunning longer maturity debt out of fear of capital losses; they have also shifted some of their portfolio to other currencies (partly to diversify so that they will not lose if the dollar depreciates, and perhaps to pressure US authorities to keep the dollar strong). The solution is that the Treasury should shift even more strongly to shorter maturities—something it will do even if it does not fully understand why it should: Treasury sees that short term interest rates are much lower, hence, will sell short term debt to reduce the “cost of funding the deficit”. If Treasury really understood what it was doing, it would simply offer overnight deposits at the Fed, paying the Fed’s target interest rate. Then it would not “need” to sell bonds at all, and we could stop worrying about government “borrowing from the Chinese”. If the Fed wanted to control interest rates of longer term debt, it can offer interest on deposits of different maturities—for example, it can offer an overnight rate, a 30 day rate, a 90 day rate, and so on, for deposits held at the Fed.

    This post was originally published on Real Progressives.

  • MMP Blog #31 Responses

    Comments and responses on the Modern Money Primer Part 31.

    This post was originally published on Real Progressives.

  • MMP Blog #23 Responses

    Comments and responses on the Modern Money Primer Part 23.

    This post was originally published on Real Progressives.

  • MMP Blog #15: Clearing and the Pyramid of Liabilities

    This week we examine bank clearing and the notion of a “pyramid” of liabilities with the government’s own IOUs at the top of that pyramid.

    This post was originally published on Real Progressives.

  • MMP Blog #14 Responses

    Comments and responses on the Modern Money Primer Part 14.

    This post was originally published on Real Progressives.

  • MMP Blog #10 Responses

    Originally published August 10, 2011 on the New Economic Perspectives blog. Thanks for comments. I am cutting off the responses early, and will keep this short, because I am in Euroland and preparing to fly back. Let me quickly respond to the six people who commented, and then provide a short answer to the homework …

    MMP Blog #10 Responses Read More »

    This post was originally published on Real Progressives.

  • Three Presidents Who Made Thanksgiving a National Holiday And What They Were Thankful For

    Three U.S. presidents were instrumental in establishing Thanksgiving as a regular national event. On October 3, 1789, George Washington declared the first federal Thanksgiving holiday. In 1863, Abraham Lincoln made it an annual federal holiday. And in 1941, Franklin Roosevelt signed a bill setting the date at the fourth Thursday of every November. All three presidents were giving thanks for bringing the country through a major financial crisis related to war, and they all achieved this feat through what Sen. Henry Clay called the “American system” of banking and finance – sovereign or government-issued money and credit.

    For Washington, the challenge was freeing the American colonies from the imperial rule of Britain, then the world’s leading military power, when the new government lacked a source of funding. Lincoln faced a similar challenge, leading the Northern states in a civil war while lacking a national bank or national currency to fund it. For Roosevelt, the challenge was bringing the country through the Great Depression and World War II, when 9,000 banks had gone bankrupt at the beginning of his first term and the country was again without a source of credit.

    In 1796, after 20 years of public service, George Washington warned in his farewell address to “cherish public credit” and avoid “accumulation of debt,” and to “avoid foreign entanglements” (“steer clear of permanent alliances with any portion of the foreign world”). He would no doubt be alarmed to see where we are 227 years later. We have a federal debt of $33.7 trillion, bearing an interest tab of nearly $1 trillion annually — over one-third of personal tax receipts. And we have a military budget from “foreign entanglements” that is also approaching one trillion dollars, devouring more than half the annual discretionary budget. Meanwhile, according to the American Society of Civil Engineers, the country is in serious need of infrastructure funding, tallied at $3 trillion or more; but our debt-strapped Congress has no appetite or capacity for further infrastructure outlays.

    However, Washington, Lincoln and Roosevelt faced financial challenges that were equally daunting in their day; and the country came through them and continued to thrive, using a funding device that Benjamin Franklin described as “a mystery even to the politicians.”

    Hamilton’s Revolutionary Fix: Debt-for-Equity Swaps

    To fund the Revolutionary War, the Continental Congress resorted to simply issuing the money as paper receipts for goods and services, as the colonial governments had done with their paper scrip. It was this that Franklin wrote was “a mystery even to the politicians, how we could pay with paper that had no previously fixed fund appropriated specifically to redeem it.” He said, “This currency as we manage it is a wonderful machine.” Thomas Paine called it a “cornerstone” of the Revolution.

    But the Continental dollar was not a pure fiat currency. It was “a zero-interest bearer bond.” That means it was a debt, which had to be repaid. By the end of the Revolutionary War, the new government was $77 million in debt — $40 million in domestic debt, $12 million in foreign debt, and $25 million in state debt incurred in the Revolution — with no apparent means of repayment.

    Alexander Hamilton, Washington’s Treasury Secretary, solved the problem with debt-for-equity swaps. State debt was accepted in partial payment for stock in the First Bank of the United States (BUS), paying a 6% dividend. The rest was to be paid in gold. The Bank leveraged this capital into credit, issued as the first U.S. currency.

    BUS loans were based on the fractional reserve model. Hamilton wrote, “It is a well established fact, that Banks in good credit can circulate a far greater sum than the actual quantum of their capital in Gold & Silver.” That was the model of the Bank of England (BOE), the financial engine of the oppressors; but there were fundamental differences between the BUS and BOE models. The BOE was privately owned and was operated for private profit. It was chartered to be an instrument of government policy capitalized exclusively by public debt. The government would pay the private lenders, who controlled what policies could be funded. What early American economists called the “British System” was geared to exploiting the colonies through “free trade” and the government through usurious interest payments.

    Hamilton’s BUS, by contrast, was to be a commercial bank, funding itself by generating credit for public works. Its primary purpose, following Hamilton’s Report on Public Credit, was to issue credit to the government and private interests for internal improvements and other economic development. Hamilton said a bank’s function was to generate active capital for agriculture and manufactures, increasing the quantity and quality of labor and industry. The BUS was intended to establish a sovereign currency, a banking system, and a source of credit to build the nation, creating productive wealth, not just financial profit.

    It was thus a national development bank, and so was the Second BUS chartered after the First BUS charter expired. Infrastructure and productivity flourished during that period, including completion of the Erie Canal. But Pres. Andrew Jackson thought only silver or gold coins qualified as an acceptable medium of exchange. He declared war on the bank and shut it down, leaving the country without a national currency or source of national credit for nearly three decades.

    Lincoln’s Greenbacks and the National Bank Act

    When President Lincoln came into office, he was faced with the prospect of a crippling war debt to British-backed banks at 24% to 36% interest. To avoid that “re-conquest by debt,” his government returned to the practice of the American colonists: it issued U.S. Notes or “Greenbacks,” actually doubling the money supply. The National Bank Act was also passed, allowing banks in the national banking system to issue National Bank Notes backed by the U.S. Treasury. To join the system, banks had to capitalize their banknotes in part with government debt.

    These new monies funded not only the war effort but rapid economic development. Most famous was completion of the Transcontinental Railroad, linking both sides of the nation by 1869 and returning a profit to the government. The telegraph system developed beside the railroad; railroad track expanded; and freight tonnage between New York and Chicago grew 75%. By the end of the war, 90 trains entered Chicago every day (vs. none in 1850). Factory output boomed, and mechanization allowed agriculture to flourish, despite one million men being under arms. The money supply was doubled but did not trigger price inflation after the war, because supply and demand rose together, keeping prices in balance.

    The Federal Reserve and “Checkbook Money”

    But Lincoln was assassinated, the Greenbacks were discontinued, silver was demonetized, and a deep depression followed. A major banking crisis in 1906 led to passage in 1913 of the Federal Reserve Act, modeled on the Bank of England. The twelve Federal Reserve Banks are all 100% owned by the private banks in their districts. The national currency is issued as “Federal Reserve Notes,” which are lent or sold to private banks and bond dealers. Rather than issuing dollars, the U.S. government issues debt (bonds, bills and notes), which it sells on the open market to the bond dealers at interest.

    Today private banks rather than the government issue most of the money supply by creating dollars on their books as loans. That practice dates back to the post-civil-war era. Before the 1860s, banks printed paper promissory notes called “banknotes” that were redeemable in gold or “real bills” (promises to deliver goods in the future). These notes were then lent to borrowers. Real bills could not be leveraged, since they were specific to particular goods; but gold could be and was, leading to bank runs when customers doubted their bank’s ability to repay all the claims against its gold. The National Bank Act stabilized that system by maintaining the value of National Bank Notes from state to state.

    In an effort to get state-chartered banks to join the national banking system, the National Bank Act imposed a heavy tax on their banknotes. But many banks avoided the tax by replacing banknotes with checkbooks: the loan amount was just written into the borrower’s account as a “deposit,” and the borrower wrote his own promissory note in the form of “checkbook money.” These deposits are counted in the money supply, and that is how banks now “create money” – nearly all of it.

    FDR and the Reconstruction Finance Corporation

    The Federal Reserve was supposed to prevent bank runs by providing reserves, but it obviously failed in that endeavor. The early 1930s saw the worst contagion of bank runs in history. Loose credit in the 1920s triggered speculative bubbles on leveraged borrowing; and when the bubble inevitably burst in the Crash of 1929, liquidation of assets was forced on the borrowers. Depositors rushed to withdraw funds, triggering runs; 9,000 banks failed; and $7 billion in deposits were frozen. The money supply shrank, yet the Fed did not intervene.

    To stimulate the economy and restore jobs, FDR’s government therefore reverted to Hamilton’s “American System.” The Reconstruction Finance Corporation (RFC), set up by President Hoover to save the banks, was repurposed and greatly expanded to leverage credit for manufacturing and development. Begun with a modest $500 million in capitalization, the RFC lent or invested over $40 billion from 1932 to 1957. It funded the New Deal and World War II and returned a net profit to the government of $690 million.

    The RFC was not a depository bank and did not take deposits. For liquidity it issued bonds, most of which were bought by the federal government. The RFC then made loans to local governments and productive small businesses at below-market rates. To repay the loans, cities that were over their general obligation bond limits issued “revenue bonds,” repaid with the revenues generated by the works funded by the loans.

    The RFC provided off-budget funding. According to James Butkiewicz, professor of economics at the University of Delaware:

    The RFC was an executive agency with the ability to obtain funding through the Treasury outside of the normal legislative process. Thus, the RFC could be used to finance a variety of favored projects and programs without obtaining legislative approval. RFC lending did not count toward budgetary expenditures, so the expansion of the role and influence of the government through the RFC was not reflected in the federal budget.

    The Chinese Economic Miracle

    Today the stellar model for infrastructure development is China, which went from one of the poorest countries in the world to global economic powerhouse in four decades. Among other achievements, between 2008 and 2019 China built 18,000 miles of high-speed rail, along with the world’s largest dam and power station. How was all that funded?  The government owns 80% of Chinese banking assets, including three massive “policy banks” designed to carry out the policies of the government. Government-owned banks fund the projects with credit, and fees generated by the projects repay the loans.

    Predominant among the policy banks is China Development Bank (CDB), the largest development bank in the world. It has a national network of local branches to coordinate policies and projects; but like the RFC, it does not take private savings. Rather, it issues bonds. CDB bonds make up 25% of the national bond market, second only to those of the Ministry of Finance (the Chinese Treasury). CDB bonds have a credit rating as high as the government’s and are in high demand.

    China’s publicly-owned banks issued so much credit for infrastructure and development that its money supply (M2) actually grew 2900% in the last 27 years, yet hyperinflation did not result. Why? China’s GDP shot up in tandem, keeping supply and demand in balance.

    Development Banks to the Rescue

    China’s massive infrastructure development has been credited with pulling the world out of the Great Recession, and its current tack is to repeat that effort. In 2022, the Chinese government pledged the yuan equivalent of $120 billion to the policy banks for infrastructure funding to revive the economy.

    We could do that too — revive the U.S. economy with a self-funding National Infrastructure Bank. H.R.4052, the National Infrastructure Bank Act of 2023, follows the Hamiltonian model. For capital, it proposes debt-for-equity swaps with federal bondholders, adding a 2% dividend on top of the bond payouts for enticement. The swap would be bonds for non-voting bank shares, which could be swapped back for the bonds after twenty years. Unlike the RFC, the NIB is proposed to be a depository bank, able to leverage its capital to create deposits as loans on its books. Cities could repay these low-interest loans with revenue bonds funded by the infrastructure they create, as in the 1930s.

    Abundance is the hallmark of Thanksgiving, and affordable credit is the key to abundance. If we can duplicate the feats of Washington, Lincoln, and FDR, we can turn debt into equity for an infrastructure bank that generates low-cost credit for development and create an abundant economy we can be thankful for!

    * This article was first published in Scheer Post.

    This post was originally published on Dissident Voice.

  • Nonviolent Direct Action on the Rise

    I’ve been arrested three times so far this year for nonviolent direct actions (nvda) on the climate crisis. I don’t think I’ve ever been arrested more than once in a single year before this year; since my first arrest in 1970 I’ve been arrested about 30 times.

    I risked arrest with about 100 others a week ago in southwest Virginia, fighting the Mountain Valley Pipeline (MVP). Five of us—not me–were arrested, four on purpose after locking down to four pipeline construction vehicles at two different construction sites. Both sites were pretty much shut down for the whole day, the main objective of these actions.

    In two of my three arrests this year, one at Chase Bank in DC in March and one at the Federal Reserve in NYC about a month ago, I was not one of the primary organizers. I responded to the initiative of others, glad they had done so and pleased to join in and contribute what I could in the action buildup.

    There have been many more, climate-focused, risk arrest actions this year, among them: many actions, probably at least 20, by the new and youth-led group Climate Defiance; the disruption of the corporate sponsored US Tennis Open in NYC in September; about 20 MVP resisters in total arrested since August in Appalachia; many thousands in the Netherlands; Greta Thunberg just last week; 20 people in Boston last month; 14 at the East Hampton Town Airport in July in NY; and more, probably many more.

    Next up as a major focus for US climate justice and other activists is the Asian Pacific Economic Consortium in San Francisco, Ca. in mid-November.

    Then there are the hundreds of members of Jewish Voices for Peace, including 12 rabbis, arrested last week at the White House calling for a much-needed ceasefire in Palestine/Israel. Almost certainly there are going to be more such nvda actions to try to prevent an escalation of this decades-long, murderous and brutal conflict.

    Both of these issues, the climate crisis and war in the Middle East, are very urgent. I think that the rise of climate nvda over the last six or so months is partly related to the many massive weather disasters around the world over the course of the hottest summer on record in the Northern Hemisphere. And the killings and kidnappings by Hamas in southern Israel, followed by the massive destruction wreaked upon Gaza afterwards by Israel, are a very big, very disturbing set of realities. It is to the credit of many groups in the USA and elsewhere that there has been such a rapid action response behind the call for an immediate ceasefire, something which polling reports is supported by a majority of US Americans.

    However, as important as nvda is as a tactic, it’s just that: a tactic. It is not a strategy for either the kind of deep and wide societal transformation we need or even for an ongoing campaign on a specific major issue.

    Take the fight against the Mountain Valley Pipeline. There is no question that the 932-consecutive-days tree sit from 2018 to 2021 by Appalachians Against Pipelines had a huge role in preventing the MVP from being completed. The actions now being organized by AAP are critical both for the delays in construction caused as well as to strengthen the morale of the overall movement, generate media coverage of the resistance and keep hope alive. But also important, right now, is the campaign being waged by others on the issue of corroded pipelines—pipelines that have literally been left outside exposed to the elements for as much as five years. That campaign has already had some impact on the actions of the federal agency, the Pipeline and Hazardous Materials Safety Administration, PHMSA, which is supposed to be regulating MVP. And also important is the monitoring of construction, observing and taking pictures of MVP’s violations to be used potentially in court filings, as well as to press regulators to step in.

    I’ve been part of activist groups in the past that had difficulty understanding this essential lesson of history: purist politics or the arrogant attitude of “my way is the only way” very rarely work. And if they do work in the short term, sooner or later the inherent problems with those ways of approaching the project of social change will lead to corruption, at least, if not an eventual failure overall.

    Each of us taking the kind of actions we believe will be most effective, while always being willing to listen to and dialogue about why others with similar political views see things differently—this is an essential building block to ultimate victory and a new world.

    This post was originally published on Dissident Voice.

  • Saule Omarova’s Plan to Remake the Financial System

    What would it look like if we subordinated finance to the public interest?

    This post was originally published on Dissent MagazineDissent Magazine.

  • Shoring Up the Green Party

    Many people are hopeful at the prospect of a 3rd party in US politics, but without a shift from current neoliberal austerity policies and outdated gold standard thinking, there can be no real change.

    Following are Warren Mosler’s responses & recommendations to sections of the Green Party platform related to money, debt, and macroeconomic policy.

    National Debt

    Greens will reduce our national debt. 

    MOSLER: The national debt is in fact a broad measure of the money supply in the economy. It is the dollars spent by government that have not yet been used to pay taxes. Those dollars are in the form of actual cash and bank deposits in accounts at the Federal Reserve Bank.

    US Treasury bonds, notes and bills are nothing more than time deposits- savings accounts- at the Fed. The only thing the US ‘owes’ when Treasury bonds mature, for example, is to debit that securities account and credit a reserve account, all at the Fed. Think of it as shifting the dollars from savings to checking. No taxpayers  or grandchildren involved. 

    So think of what you are proposing as eliminating the money supply and you can understand why each time the public debt has been reduced a serious depression or recession followed. 

    Our nation is in debt because our privatized Federal Reserve monetary system only creates and issues money as debt through loans. The government must constantly borrow more money due to the shortfall in tax revenue, thus steadily increasing the national debt. 

    MOSLER: First, the Fed is an agent of Congress, as per the Federal Reserve Act. All its profits go to the Treasury and all decisions are made by its political appointees who answer to Congress. Second, yes, the Treasury has to borrow but only as a matter of policy set by Congress, something left over from the gold standard days.

    But since the dollars that can be used to pay taxes can come only from government through its agents, close examination of Fed monetary operations shows the government as a whole must spend first before taxes can be paid. So what happens is the Fed is always standing by to lend to the primary securities dealers to facilitate their purchase of securities from the Treasury, so the Fed is standing by as needed to spend first after which those dollars can be used to buy securities from the Treasury. That’s why there’s never been any kind of problem ‘financing the debt’ as they say.   

    Our national debt has grown by trillions of dollars to finance tax cuts for America’s wealthiest citizens, war, corporate welfare and bailouts of Wall Street and the automotive industry. The burden of the increasing annual interest payments on the debt falls disproportionately on working people and the small business community. It is not sustainable. 

    MOSLER: First, I’ve proposed a permanent zero rate policy, so there never would be any interest payments. Second, the channel for that ‘burden’ would be the tax structure, which Congress continuously modifies for ‘fairness’ regardless of the composition of the government’s spending.    

    Green Solutions

    Reduce our national debt 

    Mosler: As above, I see no reason to shrink the money supply and most likely collapse the economy.  

    by increasing taxes on large corporations and polluters, 

    Mosler: First, large corporations pass through tax increases to consumers so that is highly regressive policy hurting the lowest income earners the most.  

    eliminating loopholes for the super-rich 

    Mosler: That should be done though it doesn’t alter their spending so it doesn’t make room for others to spend.  

    and decreasing expenditures in some areas, especially for war, armaments 

    Mosler: I’d specify details on what you’d like cut.   

    and corporate welfare. 

    Mosler: Same here, best to specify a few examples.  Everyone’s heard these generalities for a long time and they don’t have any credibility without details. 

    Pay off the national debt as it comes due when ‘Greening the Dollar’ is implemented. 

    Mosler: As above. This comes from a lack of understanding of monetary operations. 

    Monetary Reform (Greening the Dollar)

    A Green Public Money Future

    The crisis in our financial system makes it imperative that we restructure our monetary system. The present system of privatized money issuance and control has resulted in the misdirection of our financial resources to speculation, toxic financial instruments, and loans that create huge profits and wealth for the corporate few, but inadequate income and jobs for the common people. 

    Mosler: That actually comes from government regulation and supervision, and not the actual monetary operations. I have a list of proposals that directly addresses those issues. It’s not a matter of restructuring the monetary system. 

    It is both possible and necessary for Congress to take back its exclusive Constitutional power to create our money (Article 1 Section 8) without the creation of debt, 

    Mosler: That’s an oxymoron, as any money the state will accept for tax payment is accounted for as a liability of the state and therefore a ‘debt’ which is what today’s dollars are.  

    and assume the responsibility to spend this money directly into circulation to fund public benefits outlined in the Federal Budget. 

    Mosler: Close examination shows that for all practical purposes this is already the case.  

    Only with a Public Money System can the government direct our national wealth to the needs of the people through their local and state governments. 

    Mosler: It can be done and is done all the time by Congress through all kinds of grants and assistance.  

    A Public Money System will enable millions of good livelihoods, provide sufficient incomes, 

    Mosler: It already does that and policy can be put in place to do as much of that as desired.  

    shrink the debt burden 

    Mosler: As above, not a good idea…  

    and begin to close the wealth gap. 

    Mosler: My proposals do exactly that with our current monetary system.  

    Public money has not been issued since Greenbacks, introduced by President Lincoln in 1862, and circulating as public money until 1971. 

    Mosler: Our cash in circulation is the same thing.  

    To reverse the private control of issuing our nation’s money; 

    Mosler: It’s under public control via the Federal Reserve Act.  

    to reverse the immoral and undeserved concentration of national wealth and income resulting from that private control; 

    Mosler: Resulting from direct Congressional policy.  

    to place control over money within a more equitable public system of governmental checks and balances; and to end the regular recurrence of severe and disruptive financial crises that mark the Booms and Busts cycles of capitalism 

    Mosler: I have proposals to sustain full employment at all times.  

    The Green Party proposes the following three Public Money solutions to be enacted together: 

    Nationalize the 12 Federal Reserve Banks and transfer administrative functions of the Federal Reserve Board of Governors to a Bureau of the U.S. Treasury. 

    Mosler: They are already branches of the Fed which is already entirely a public bank.  

    All money created under the nationalized Federal Reserve System will be treated as publicly issued money. The private creation of money will cease and with it the reckless practices that have led to recurring economic crises. 

    Mosler: You are calling for an end to bank lending? My proposals dramatically narrow the scope of bank lending but don’t eliminate home mortgages, etc.

    All new money will be issued as a debt-free, permanently circulating asset by the federal government. 

    Mosler: That describes a permanent zero rate policy which I have long proposed.  

    A new Public Monetary Authority will be established under the Department of Treasury to scientifically determine the amount of money that can be safely created for the national economy to avoid inflation or deflation. 

    Mosler: That is already being done by the CBO and Fed forecasters. There’s no other way to do it that I know of.  

    The Monetary Authority will be empowered with full autonomy and independence to avoid political influence. 

    Mosler: A fourth branch of government? Elected officials? How do you keep it from getting politicized?  

    Although banks will continue as financial intermediaries, lending publicly-issued money at interest, and performing traditional banking functions they will no longer be allowed to create money, ending what is known as fractional reserve banking. 

    Mosler: That ended when we went off the gold standard. Banking today isn’t reserve constrained as it was then.  

    Specific guidance for a progressive publicly-controlled Monetary Authority can be found in a bill already entered into the U.S. Congress: H.R. 2990 112th Congress: National Emergency Employment Defense Act of 2011 (NEED Act). 

    Mosler: Haven’t seen it.

    All new money will be spent into circulation by the U.S. Government as authorized by Congress for public purpose. 

    Mosler: This is already the case as Congress already has as much control as it wants over bank lending.  

    This includes funding a 21st century infrastructure including education and health care. 

    Mosler: This can just as easily be done right now under current institutional arrangements.  

    Per capita spending guidelines for new money will assure a fair distribution across the nation, creating good livelihoods, re-invigorating local economies and funding government at all levels. Newly-created money will also be distributed directly to state and local governments.” 

    Mosler: Already the case and can be expanded by Congress within the current institutional structure. 

    Feel free to distribute this response. 

    Thanks! 

    Warren

    More policy / crisis management recommendations from Warren can be found here. The complete Collected Works of Warren Mosler compiled by Rajendra Rasu can be found here.

    This post was originally published on Real Progressives.

  • Towards a Libertarian/Austrian Modern Money Theory

    Originally posted on July 27, 2010 at the New Economic Perspectives blog.

    For reasons that I cannot fathom, the most vehement critics of Modern Money Theory (MMT) are the wingnut libertarians and Austrians (and, please, I use the term wingnut with some affection for our fellow fringe travellers). Any time there is an MMT post on this blog, or over at New Deal, Naked Capitalism, or the Huff, the comments are dominated by conspiracy theorists, haters of government, goldbugs, and victims of alien probings who are certain that MMT-ers are united in their effort to ramp up government until it consumes the entire economy. So let us try to mend fences.First, on one level, MMT is a description of the way a sovereign currency works. Love it or hate it, our sovereign government spends by crediting bank accounts. Over the past 20 years, MMT has investigated, analyzed, and documented the sordid operational details. We can lecture for hours on the balance sheet manipulations involving the Treasury, the Fed, the primary security dealers, the special depositories, and the regular private banks every time the Treasury buys a notepad from OfficeMax. We did the work, so you do not have to do it. And believe me, you do not want to do it. You can skip directly to the conclusion: “Yes, government spends by crediting bank accounts, taxes by debiting them, and sells bonds to provide an interest-earning substitute to low-earning reserves. Q.E.D.”A few libertarians and Austrians now get this, although instead of thanking us for a job well done, they immediately attack us for explaining how things work. Now, why would they do that? Because they fear that if we tell policymakers and the general public how things work, democratic processes will inevitably blow up the government’s budget as everyone demands that wine flow freely through the nation’s drinking fountains whilst workers retire from government jobs at age 28 on generous pensions provided at the public trough. And off we go to Zimbabwe land, with hyperinflation that destroys the currency and sucks the precious body fluids from our economy.

    Ok, understood. We fear inflation, too. That has always been our message, too. Indeed, “price stability” has always been one of the two key missions of UMKC’s Center for Full Employment and Price Stability (http://www.cfeps.org/). Maybe you do not like our proposed methods of battling inflation. Fine. Show us yours. I realize that many libertarians and Austrians believe that the only foolproof method for avoiding inflation is to go back to gold. Again, fine. But don’t criticize our labor “buffer stock” scheme for its political infeasibility! Going back to the gold standard is less likely than alien abduction. (Oh, sorry, no offence intended.) Anyway, we (also) do not want black helicopters flying around dropping bags of cash; and we (also) oppose government “pump-priming” demand stimulus—the libertarians and Austrians and even Milton Friedman are correct in their argument that this would generate inflation.

    So it is true that there is a second level to MMT: we use our understanding of the way money works to bring rational analysis to government policy-making. Since involuntary default is, literally, impossible for a sovereign government, we quickly move beyond fears about government deficits and debt ratios and all the other nonsense that currently grips Washington. Can we “afford” full employment? Yes. Can we “afford” Social Security? Yes. Can we “afford” to put wine in all the drinking fountains? Yes. The problem IS NOT, CANNOT BE about affordability. It is about resources. Unemployment is easy: by definition, someone who is unemployed is available to hire. So government can put them to work. Social Security is a little more difficult: can we move enough resources to the aged (plus their dependents, and people with disabilities) so that they can enjoy a comfortable, American-style, life? On all reasonable projections of demographics and US ability to produce, the answer is yes. The projections could turn out to be wrong. But if they do, affordability still will not be the problem—it will be a resource problem. Finally, wine in drinking fountains? There probably is not enough fine wine, but we could probably fill all the drinking fountains with cheap French wine. Again, it is a resource problem and if we convert the American prairies to wine production we could probably even resolve that one.

    Perhaps the most important policy pushed by most MMT-ers is the Job Guarantee/Employer of Last Resort proposal. This provides a federal-government funded job to anyone who wants to work, at a uniform, basic compensation (wages plus benefits). Our libertarian/Austrian fellow travelers seem to hate this program, again for unfathomable reasons. I suspect that they have misinterpreted this to be some kind of Big Government/Big Brother program based on a weird combination of force plus welfare. The claim is simultaneously that it “forces” everyone to work, and that it also pays everyone for not working. Actually, it is a purely voluntary program, only for those who want to work. Those who will not work cannot participate. Libertarians and Austrians ought to love it. It is not Big Brother. It is not even Big Government. The jobs do not have to be provided by government at all. No one has to take a job. It is consistent with, I think, the most cherished norms of freedom-loving libertarians and Austrians.

    So to sum up:

    1. MMT is consistent with any size of government. It can be a small libertarian government if you like. But it issues a sovereign floating currency. It supports the currency by imposing a tax payable in that currency.

    2. Job Guarantee/Employer of Last Resort is also consistent with any size of government. If you want a big private sector and small government sector, keep taxes and government spending low. That frees up resources to be used by the big private sector. But you will need the JG/ELR to take up the labor resources the private sector cannot fully employ.

    3. JG/ELR can be as decentralized as you want. I think there are massive incentive problems if you have federal government pay wages of for-profit firms. So I would have federal government pay the wages in the program but have the jobs actually created and managed by: not-for-profits, local government, maybe state government, maybe only as a final last resort the federal government. Argentina experimented with cooperatives and they looked to me to be highly successful.

    4. The problem with a monetary economy (you can call it capitalism if you like) is that from inception imposition of taxes creates unemployment (those looking for money to pay taxes). We scale this up to our modern almost fully monetized economy (you need money just to eat, watch TV, play on cell phones, etc) and we get everyone looking for money (and not just to pay taxes). It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax. The private sector alone will never (never has) provide full employment. ELR/JG is a logical and empirical necessity to support the private sector. It is a complement not a substitute for private sector employment.

    5. How can the belief that all ought to work, and contribute to society, rather than lay about and collect welfare be called socialism?

    31 RESPONSES TO “TOWARDS A LIBERTARIAN/AUSTRIAN MODERN MONEY THEORY”

    1. JM | July 27, 2010 at 9:16 pm |Bravo, Randall. To quote Milton Friedman, “Only a crisis, actual or perceived, produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”

    2. Anonymous | July 27, 2010 at 9:37 pm |Great post. I’m currently reading your book Understanding Modern Money. Thank you for your work.

    3. Benedict@Large | July 28, 2010 at 1:12 am |Very nicely laid out. You seem to have touched upon all the major points, but obviously you’ve taken the time to write this because you think you must be missing something. OK, you are.The right wing hates democracy. They do not trust the people. They fear them, in fact. They fear the uncertainty of a free vote.Oh, I know about all the flag waving and the rainbow of ribbon decals they put on their cars, all proclaiming that this is the best country EVER, but remember, these are also the folks who coined the expression, “Love it or leave it.” … Huh? That’s not how it works here. Love it or vote to change it is more to what the founders intended. And more to what the right wingers fear. (They were never much into that revolution thing anyways.)Look, if MMT does anything, it democratizes the money supply. And that is EXACTLY what the right wing doesn’t want.

    4. Greg | July 28, 2010 at 5:15 am |Well done RandallA nice, concise description of what MMT and ELR/JG are about.Somehow though I fear that the Gold Bugs/Libs are just too paranoid to reach. No amount of reason seems to get through. They are just too suspicious of society. They dont trust their fellow man enough. While many are decidedly non religious, Calvinism runs through their veins in ways they are unaware of.

    5. Anonymous | July 28, 2010 at 11:06 am |The one thing that bugs me about the JG is the amount of overhead needed. I sometimes get the uncomfortable feeling that people who recommend this program have never run a small business. Even if you break it down to the county level, it seems to me you would still need large overhead (in sum), which somehow has to expand and contract as the need to employ the unemployed waxes and wane. How is this problem addressed, and doesn’t the very existence of such an administrative function constitute ‘more government’ ?

    6. Scott Fullwiler | July 28, 2010 at 1:59 pm |Anonymous on 7/28 @10:06amSeveral things:1. Overhead could, in fact, be small in many cases, such as where the govt is mostly just cutting checks for wages of JG workers hired by non-profits. Similarly, it could be simply cutting checks to individuals enrolled in approved private sector job training programs. One shouldn’t limit oneself to a particular version of the JG–there are countless, creative options available for designing such a program.2. Yes, there would need to be some fluidity if it’s going to be effective at stabilizing prices and the macroeconomy overall. Some, if not most, of this could be via something akin to a temporary workers agency, which again wouldn’t call for huge overhead. Also, the amount of such fluidity can be a sizeable minority of the actual JG program, as we know that in typical recessions the number of unemployed may be as high as 10M (more now, of course) but this number actually only fluctuates by 10-20% over the course of the business cycle.3. Overall, even if the program required a LOT of overhead, it’s still quite preferable to spend the overhead to put people to work compared to the spending currently done to sustain an economic system with significant numbers of people not working, including all of the extra expenses on crime prevention, healthcare, and so forth. If you add up the total costs of unemployment–and there is some evidence that unemployment is at least indirectly related to virtually every socio-economic problem–it’s really unfathomable that an effectively designed and administered JG wouldn’t be a massive net economic gain overall.

    7. Scott Fullwiler | July 28, 2010 at 2:05 pm |Forgot to mention regarding overhead that the past experience with a number of jobs programs has been that non-wage expenditures was not high. For CETA, for instance, it was about 15%.

    8. Anonymous | July 28, 2010 at 3:37 pm |Well done Wray! However, one thing might explain Austrian nonconformity to MMT. They cherish too much Menger’s tale about money origin as a non-State institution in nature. So, how to fully accept a theory which emerges exactly from the opposite Austrians belive?Fabiano

    9. Dan | July 28, 2010 at 7:14 pm |The Libertarian/Austrian/Goldbug worldview treats the government and monetary system like they’re a person who can’t be trusted to eat healthily on their own, so they would have his stomach stapled shut involuntarily to remove the chance of him ever getting too fat. I think a true Libertarian should actually embrace MMT, because, far more than under any gold standard, it encourages free citizens to make choices. A people that had the freedom to easily vote themselves a large statist government but CHOSE not to would seem to me to be the height of the Libertarian ideal. But then again, I think I hit the nail on the head. They don’t trust the people. They don’t believe in democracy if democracy inevitably leads to the populace voting themselves a government that they find personally distasteful.

    10. Fuguez | July 28, 2010 at 9:06 pm |I am an “Austrian/Libertarian” wingnut – I see nothing wrong with MMT as I consider it a descriptive theory. Great Article.

    11. john lutz | July 29, 2010 at 11:35 am |Just returned from a 2 week / 3000 mi car trip thru the midwest, visiting friends and family.I was struck by the pervasive level of fear for our country’s future that has been stirred up by our leaders and media – from across the political & economic spectrum.While patiently debunking the standard myths (running out of money, US owned by China, hyperinflation, etc.), I refocussed conversation on all of the rich resources that surround us, as well as the inventiveness, resourcefulness and energy of our population.When this vast pool of opportunity is put in the balance with solving the “deficit problem” (an accounting number), fear changed perceptibly to hope and a positive outlook: let’s use our people & resources to invest in the future!Let’s get everyone back to work – go JG/ELR!Thank you Randall – I had your “Understanding Modern Money” in my hip pocket the whole way!

    12. beowulf | July 30, 2010 at 12:44 am |1935 Social Security Report recommendations; unemployment insurace listed second, old-age assistance mentioned third… but the first proposed benefit(which of course didn’t make it into the bill)—EMPLOYMENT ASSURANCESince most people must live by work, the first objective in a program of economic security must be maximum employment. As the major contribution of the Federal Government in providing a safeguard against unemployment we suggest employment assurance– the stimulation of private employment and the provision of public employment for those able-bodied workers whom industry cannot employ at a given time. http://www.ssa.gov/history/reports/ces/ces5.html

    13. Anonymous | July 30, 2010 at 12:51 am |This just seems to be a mental exercise without any consideration for the effects on society. Passing all this money to banks does not decrease unemployment or decrease poverty, it does not create jobs, it is just moved around globally for few peoples benefit.Imagine if the same amount was passed out to the taxpayer, to spend as they wish, then society could be as foolish with it as they wished and it would have no effect on the country’s debt as it can just print more. That however would be too democratic.

    14. Another Anonymous | July 30, 2010 at 2:37 am |The animus of Austrians against modern monetary theorists is long standing. I just happened to look at the description in Schumpeter’s History of G. F. Knapp’s book on money and it was nothing but mockery, with no attempt to even describe what Knapp said, but just dismissed him as absurd. Their problem is with “a sovereign floating currency” driven by taxes – this is evil incarnate – the UnGold. Divorced somehow from this belief, they might be good candidates for recruitment into the modern monetary army – at least they know the socially mainstream economics is not the intellectual mainstream. Some of them are truly mad; just a little bit worse, and they would start sending MMTers their worthless dollars.Anon, I live off my small bidness, and I recommend the JG. The “more government” overhead is minuscule in comparison to the losses everyone suffers due to involuntary unemployment.

    15. concerned with overhead, anon | July 30, 2010 at 9:51 am |Thanks for your comments, Scott Fullwiler. I need to digest. Another Anon: I’m not convinced it’s ‘minuscule’. And I only posted my comment/question because of this in the original post: “Job Guarantee/Employer of Last Resort is also consistent with any size of government. ” That didn’t ring true to me since I thought it would require massive (government) overhead to administer any such program. And even if it’s administered at the county level, summed over the whole nation you’re talking about massive increase in government, and most Americans would see it that way. Standing in line at an understaffed Department of Motor Vehicles office, one can’t help but wonder how it would be at an understaffed Department of Job Guarantee, where presumably the issue at hand is far more complex than submitting paperwork for a license renewal. And so not only do you need ‘big government’ for administration, but it needs to ebb and flow with the economy. With our unionized and inflexible government workers, I have to admit some skepticism. But like I said, I need to think about Scott’s comments and do more research when I have time. I like MMT, but I’m skeptical about the JG. But as a good Agnostic, I’m willing to be convinced by evidence and good argument. And I have first hand knowledge of the pain of unemployment, for what it’s worth. I have to depend on my savings, however, since I’m not eligible for unemployment. So the last option on my list – bank robbery – is quickly approaching. (I’m kidding of course… sort of..)

      • Yakira | December 17, 2012 at 2:03 am |Hi, Does anyone know of a way of chnaigng the way that emails look in your inbox so that you can see at a glance if they have been replied to without opening them to see if there is the text you replied on xxxx’ ? I’m looking for a simple way of telling when an email hasnt been replied to without having to do anything so the ideal way would be for all emails that have been given a reply to change colour in the inbox so its clear which emails have and havent been replied to. Any ideas anyone? Maybe an add on? We are an internet retailer and get hundreds of emails per day at times so i want an idiot proof way of missing an email to reply to. We use outlook 2007 at the moment.

      • Anonymous | July 30, 2010 at 5:08 pm |Thanks for comments. As I recall, New Deal jobs programs spent an amt equal to 25% of wage bill on overhead and materials. And recall a lot of these projects were massive construction projects (Boulder/Hoover dam–at the time one of the greatest human achievements of all). So that is the number I would aim for, with perhaps fedgovt providing 12.5% of wage bill for such costs, and the organizers/employers providing the rest.You can have a small govt/big private sector, with govt JG picking up the labor the private sector doesn’t want. It is perfectly plausible. The problem is that it will be highly financially unstable (ie: finance capitalism that crashed in 1929)–but if that is what our libertarian/Austrian friends want, we can give that another go. LRWray

      • Anonymous | July 30, 2010 at 5:28 pm |All: read this if you have any remaining questions about the JG:http://www.newdeal20.org/2010/07/30/a-diy-modern-day-wpa-program-16284/#comment-7912Put this guy in the cabinet, allocate $60B to the program, and we’d have full employment in 2 weeks. LRWray

      • Anonymous | August 11, 2010 at 11:15 am |I’ve been reading a lot of MMT lately. I like certain parts, but disagree with it on the basis that it calls for the same monetary system which is corrupt.I’d rather see a fully Nationalized Fed and a reduction in the private banking cartel. http://www.youtube.com/watch?v=4VaSh8MMo34Debt free notes. Why does the Government have to borrow money at interest? We know the Fed. is a private banking cartel, with their own set of interests. Putting the money power back in the hands of the government gives the people more control and say over their own governance.www.webofdebt.comI am afraid that the ordinary citizenwill not like to be told that bankscan and do create money…And they who controlthe credit of the nationdirect the policy of Governmentsand hold in the hollow of their handsthe destiny of the people”Reginald McKenna,past Chairman of the Board, Midlands Bank of England“I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue.”Congressman Wright Patman

      • Otis | August 13, 2010 at 11:27 am |I have a few questions regarding MMT:1. The notion that the government uses taxes to manipulate aggregate demand seems to be a “post hoc ergo prompter hoc” conclusion.2. The coercive use of taxation to create value for otherwise worthless currency will generate SOME demand for the currency but all one must do is obtain enough currency to discharge tax obligations. Other transactions can be effected using other means of exchange. The widespread use of fiat money is really just a matter of convenience but isn’t really a requirement. Isn’t this what happened in Zimbabwe? People paid their taxes in local fiat money and used foreign currency to conduct their business. Then the government started to demand payment of taxes in foreign currency. In Greece people are hoarding gold sovereigns because they fear an exit from the Euro. They are stating up front that they will not accept Greek fiat money.3. The Employer of Last Resort concept smells a bit like the Broken Window Fallacy.4. MMT also seems to be a justification of the status quo – almost like Leibniz’s “best of all possible worlds” argument. Everything is really ok if you just look at it upside down and backwards.The Austrian school does attract extremists of a certain stripe but as far as I can tell that’s a common theme no matter which blogs you follow, including MMT blogs. IMHO, the lesson of the Austrian school is that you ignore people (sentiment) at your peril. We just proved this with the first round of stimulus. People are blissfully ignorant of how the graphs say they should behave. As for the gold bugs, some are perma-bugs and others are new recruits like myself who are still trying to get the number of the truck that hit them in 2008. Gold’s recent behavior is a reflection of lack of confidence in fiat money. The gold standard is attractive to the conspiracy crowd because of the perception that it limits government and bank shenanigans. Given the past behavior of private central banks (e.g., Nicholas Biddle) they do have a certain point.I look forward to your response. Convert me. 😉

      • WalterW | August 21, 2010 at 9:27 am |> ELR provides a federal-government funded job> to anyone who wants to work, at a uniform,> basic compensation.> […]> The jobs do not have to be provided by > government at all.Interesting. That would mean I can start a company with all wages permanently being funded by the government. Over time, that will bankrupt all non-‘government wage funded’ businesses since no-one will be able to sustain competition against free labor (somewhat like what China did to US manufacturing, using its currency to engineer almost free labor). So the whole economy will end up with nothing but government funded equal wages (again, somewhat like China). But with demand for free labor probably close to unlimited, who or what mechanism should decide -the use of price having been crowded out- how to allocate the finite supply of labor? Chances are the misallocations will be humongeous and the ensuing crisis even bigger than our current one (oncemore: somewhat like China, though the jury is still out on their experiment – some 25 years and counting, too short to tell).

      • Vincent Cate | September 9, 2010 at 10:56 am |I think I can explain MMT to Austrians. I also think MMT people don’t understand that hyperinflation is bankruptcy for governments that print money.http://pair.offshore.ai/38yearcycle/#chartalism

      • Spadj | September 11, 2010 at 2:29 am |Vincent, you forget one cardinal fact: the money supply is endogenous – why print money, so that it leads to hypeinflation? Might it have something to do with wide-spread supply shocks before? If you look at Weimar Germany, Zimbawee, Chinese hyperinflation, Latin American hyperinflations etc., they often have one thing in common: massive supply shocks occur BEFORE the hyperinflation, which increases prices generally, and thus the public demand more notes to purchase these scare resources whose prices have risen, igniting a hyperinflationary spiral. It is a resources question, not a “printing money” question. Why print money? It makes no sense to print so much money.

      • Vincent Cate | September 12, 2010 at 12:13 pm |”- why print money, so that it leads to hyperinflation?”Your question makes it sound like you think governments make a decision to have hyperinflation. 🙂 With over 100 cases I am sure there was not one of them where the government decided to have hyperinflation. It seems governments get to where the deficit is over 40% of their spending and after a few years people don’t want to buy their bonds any more (enough people can see trouble coming). So they have to print lots of money just to keep all the employees and programs they are used to. Inflation starts but the government can’t stop printing money (still have all these employees and programs and now inflation is making life extra hard for people). So you get a feedback loop where more printing causes less bond buying and less real taxes which means the government has to get an even higher fraction of its spending money by printing money, etc. So things explode out of control. Nobody ever wanted hyperinflation or chose hyperinflation. Events just led to it. Below is a link to a good book on Hyperinflation history:http://www.amazon.com/Monetary-Regimes-Inflation-Political-Relationships/dp/1845427785/ref=sr_1_1?ie=UTF8&s=books&qid=1284042213&sr=8-1http://pair.offshore.ai/38yearcycle/#hyperinflation

      • WillORNG | September 21, 2010 at 1:20 pm |But there’s no need to sell bonds.You’ve not mentioned the Job Guarantee either.Money creation for government spending simply balances the non-government savings preference so inventories don’t fall and production/income growth is maintained. Prices are stable, no demand deficient deflation, no demand excess price inflation.If there is inflation, fiscal drag will take the edge off of this.Have you read this?http://bilbo.economicoutlook.net/blog/?p=3773

      • Dismayed | October 14, 2010 at 11:41 am |Thank you for your book, “Understanding Modern Money”, and for this excellent post. You’re helping flush out some of the crap my profs at U Chicago poured into my brain during my MBA studies in the 1980’s.

      • thomas | November 15, 2010 at 1:54 pm |Thank you Otis, for being the voice of reason. The rest of you are completely delusional.

      • rashid1891 | December 9, 2010 at 9:26 pm |I think I can explain MMT to Austrians. I also think MMT people don’t understand that hyperinflation is bankruptcy for governments that print money.and it is good

      • rashid1891 | December 9, 2010 at 11:50 pm |The gold standard is attractive to the conspiracy crowd because of the perception that it limits government and bank shenanigans. Given the past behavior of private central banks (e.g., Nicholas Biddle) they do have a certain point.

      • Vincent Cate | February 17, 2011 at 9:26 pm |”But there’s no need to sell bonds.”But this is part of reality, the bonds exist. If people stop buying bonds the government will have to create new money to pay off the bonds as they come due. About half the US debt is due in the next 12 months. So even though they don’t want to print too fast, if people stop buying US bonds they will print money like crazy.http://pair.offshore.ai/38yearcycle/#chartalismhttp://pair.offshore.ai/38yearcycle/#mmthyperinflation

      • WillORNG | February 26, 2011 at 7:34 am |Government creates money by spending and destroys it by taxing. Printing money is a red herring.If people stop buying bonds they’ll simply invest in other financial assets.To suggest that they’ll spend all that money sending a tsunami of demand to swamp supply is ludicrous.All government debt is simply net financial assets/saving.

      This post was originally published on Real Progressives.

    16. Fed Reserve Rate Hikes May Set Stage for Financial Crises in Global South

      The campaign to fight U.S. inflation by upping interest rates has been going on for a year and a half — and its impacts are being felt around the world. On July 26, 2023, the Federal Reserve announced another quarter-point hike. That means U.S. rates have now gone up 5.25 percentage points over the past 18 months. While inflation is now coming down in the U.S., the aggressive monetary policy may…

      Source

    17. The Federal Debt Trap: Issues and Possible Solutions

      “Rather than collecting taxes from the wealthy,” wrote the New York Times Editorial Board in a July 7 opinion piece, “the government is paying the wealthy to borrow their money.”

      Titled “America Is Living on Borrowed Money,” the editorial observes that over the next decade, according to the Congressional Budget Office (CBO), annual federal budget deficits will average around $2 trillion per year. By 2029, just the interest on the debt is projected to exceed the national defense budget, which currently eats up over half of the federal discretionary budget. In 2029, net interest on the debt is projected to total $1.07 trillion, while defense spending is projected at $1.04 trillion. By 2033, says the CBO, interest payments will reach a sum equal to 3.6 percent of the nation’s economic output.

      The debt ceiling compromise did little to alleviate that situation. Before the deal, the CBO projected the federal debt would reach roughly $46.7 trillion in 2033. After the deal, it projected the total at $45.2 trillion, only slightly less – and still equal to 115% of the nation’s annual economic output, the highest level on record.

      Acknowledging that the legislation achieved little, House Speaker Kevin McCarthy said after the vote that he intended to form a bipartisan commission “so we can find the waste and we can make the real decisions to really take care of this debt.” The NYT Editorial Board concluded:

      Any substantive deal will eventually require a combination of increased revenue and reduced spending …. Both parties will have to compromise: Republicans must accept the necessity of collecting what the government is owed and of imposing taxes on the wealthy. Democrats must recognize that changes to Social Security and Medicare, the major drivers of expected federal spending growth, should be on the table. Anything less will prove fiscally unsustainable.

      The Elephant in the Room

      Omitted was any mention of trimming the defense budget, which currently accounts for more than half of the federal government’s discretionary spending and nearly two-thirds of its contract spending. Rep. Ro Khanna (D-CA), who cast the sole dissenting vote on the recent $886 billion defense budget in the House Armed Services Committee, has detailed some of the Pentagon’s excesses. For decades, he writes, legacy military contractors have charged the federal government exorbitant sums for everything from fighter jets to basic hardware. Lockheed Martin, for example, has used its monopoly on F-35 fighter jets to profit from maintenance that only they can provide, with the work needed to support and upgrade existing jets projected to cost taxpayers over $1.3 trillion. TransDigm, another contractor responsible for supplying spare parts for the military, was found to be charging the Pentagon more than four times the market price for their products.

      Rep. Khanna concludes, “Keeping America strong starts at home. It means ensuring access to quality, affordable healthcare and education, strengthening our economy with good-paying jobs, and giving Americans the tools they need to pursue the American Dream.… Bloated military spending is not the answer.… We can’t continue to sign a blank check to price-gouging defense contractors while Americans struggle here at home.”

      In an address to the UN Security Council on Ukraine aid on June 29, 2023, Max Blumenthal added fuel to those allegations. He said:

      Just June 28th, as emergency crews work to clean up yet another toxic train derailment in the United States, this time on the Montana River, further exposing our nation’s chronically underfunded infrastructure and its threats to our health, the Pentagon announced plans to send an additional $500 million worth of military aid to Ukraine….

      This policy, … which sees Washington prioritize unrestrained funding for a proxy war with a nuclear power in a foreign land … while our domestic infrastructure falls apart before our eyes, exposes a disturbing dynamic at the heart of the Ukraine conflict – an international Ponzi scheme that enables Western elites to seize hard-earned wealth from the hands of average U.S citizens and funnel it into the coffers of a foreign government that even Transparency International ranks as consistently one of the most corrupt in Europe.

      The U.S. government has yet to conduct an official audit of its funding for Ukraine. The American public has no idea where their tax dollars are going. And that’s why this week we at the Grayzone published an independent audit of U.S. tax dollar allocations to Ukraine throughout the fiscal years 2022 and ’23.

      Among other dubious payments they found were $4.5 million from the U.S. Social Security Administration to the Kiev government, and $4.5 billion from USAID to pay off Ukraine’s sovereign debt, “much of which is owned by the global investment firm BlackRock. That amounts to $30 taken from every U.S citizen at a time when 4 in 10 Americans cannot afford a $400 emergency.”

      The Black Hole of the Pentagon Budget

      The Pentagon failed its fifth budget audit in 2022 and was unable to account for more than half of its assets, or more than $3 trillion. According to a CBS News report, defense contractors overcharged the Defense Department by nearly 40-50%; and according to the Office of the Inspector General for the Defense Department, overcharging sometimes reached more than 4,000%. The $886 billion budget request for FY2024 is the highest ever sought.

      Following repeated concerns about fraud, waste and abuse in the Pentagon, in June 2023 a bipartisan group of senators introduced legislation to ensure the Defense Department passes a clean audit next year. The Audit the Pentagon Act of 2023 would require the Defense Department to pass a full, independent audit in fiscal 2024. Any agency within the Pentagon failing to pass a clean audit would be forced to return 1% of its budget for deficit reduction.

      Sen. Bernie Sanders (I-Vt.) observed that the Pentagon “and the military industrial complex have been plagued by a massive amount of waste, fraud, and financial mismanagement for decades.… [W]e have got to end the absurdity of the Pentagon being the only agency in the federal government that has never passed an independent audit.”

      Sen. Chuck Grassley (R-Iowa) said the Pentagon “should have to meet the same annual auditing standards as every other agency…. From buying $14,000 toilet seats to losing track of warehouses full of spare parts, the Department of Defense has been plagued by wasteful spending for decades. … Every dollar the Pentagon squanders is a dollar not used to support service members, bolster national security or strengthen military readiness.”

      But defense audits have been promised before and have not been completed. In 2017, Michigan State University Prof. Mark Skidmore, working with graduate students and with Catherine Austin Fitts, former assistant secretary of Housing and Urban Development, found $21 trillion in unauthorized spending in the departments of Defense and Housing and Urban Development for the years 1998-2015. As reported in MSUToday, Skidmore got involved when he heard Fitts refer to a report indicating the Army had $6.5 trillion in unsupported adjustments (or spending) in fiscal 2015. Since the Army’s budget was then only $122 billion, that meant unsupported adjustments were 54 times the spending authorized by Congress. Thinking Fitts must have made a mistake, Skidmore investigated and found that unsupported adjustments were indeed $6.5 trillion.

      Four days after Skidmore discussed his team’s findings on a USAWatchdog podcast, the Department of Defense announced it would conduct its first-ever department-wide independent financial audit. But it evidently failed in that endeavor. As Bernie Sanders observes, the Pentagon has never passed an independent audit. It failed its fifth audit in 2022. Whether it will pass this sixth one, or whether the audit will lead to budget cuts, remains to be seen. The Pentagon budget seems to be untouchable.

      Tackling the Other Elephant: The Interest Monster

      If the sacrosanct military budget cannot be trimmed, what about that other massive budget item, interest on the federal debt? Promising proposals for clipping both the interest and the debt itself were made in conjunction with earlier debt ceiling crises. In November 2010, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, wrote:

      There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. If the Fed holds the debt, there is no interest burden for future taxpayers. The Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. And the Fed has other tools to ensure that the expansion of the monetary base required to purchase the debt does not lead to inflation.

      In 2011, Republican presidential candidate Ron Paul proposed dealing with the debt ceiling by simply voiding out the $1.7 trillion in federal securities then held by the Fed. As Stephen Gandel explained Paul’s solution in Time Magazine, the Treasury pays interest on the securities to the Fed, which returns 90% of these payments to the Treasury. Despite this shell game of payments, the $1.7 trillion in US bonds owned by the Fed is still counted toward the debt ceiling. Paul’s plan:

      Get the Fed and the Treasury to rip up that debt. It’s fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed.

      Congressman Alan Grayson, a Democrat, also endorsed this proposal.

      Taxing the Bubble Economy

      In a July 8, 2023 article on Naked Capitalism titled “The United States’ Financial Quandary: ZIRP’s Only Exit Path Is a Crash,” economist Michael Hudson points to the speculative bubbles blown by the Fed’s Zero Interest Rate Policy, dating back to the Great Recession of 2008-09. The result is a Ponzi scheme, says Hudson, and there is no way out but to write down the debt or let the economy crash.

      According to Fed insider Danielle DiMartino Booth, it is those speculative bubbles that Fed Chair Jerome Powell has attempted to pop with the drastic interest rate hikes of the last year, eliminating the “Fed Put,” the presumption that the Fed will always come to the rescue of the speculative market. That tack actually seems to be working; but the approach has resulted in serious collateral damage to mainstream businesses and the productive economic base. (See my earlier article here.)

      Another way to trim the fat from the “financialized” economy is a small financial transactions tax. That solution was also discussed in an earlier article (here), drawing on a 2023 book titled A Tale of Two Economies: A New Financial Operating System for the American Economy by Wall Street veteran Scott Smith. He argues that we are taxing the wrong things – income and physical sales. We actually have two economies – the material economy in which goods and services are bought and sold, and the monetary economy involving the trading of financial assets (stocks, bonds, currencies, etc.) – basically “money making money” without producing new goods or services.

      Drawing on data from the Bank for International Settlements and the Federal Reserve, Smith shows that the monetary economy is hundreds of times larger than the physical economy. The budget gap could be closed by imposing a tax of a mere 0.1% on financial transactions, while eliminating not just income taxes but every other tax we pay today. For a financial transactions tax (FTT) of 0.25%, we could fund benefits we cannot afford today that would stimulate growth in the real economy, including not just infrastructure and development but free college, a universal basic income, and free healthcare for all. Smith contends we could even pay off the national debt in ten years or less with a 0.25% FTT.

      Funding Infrastructure through a National Infrastructure Bank

      Another way to fund critical infrastructure without tapping the federal budget is through a 1930s-style work-around on the model of Roosevelt’s Reconstruction Finance Corporation. HR 4052, a proposal for a national infrastructure bank on that model, is currently before Congress and has widespread support. The proposed bank is designed to be a true depository bank, which can leverage its funds as all banks are allowed to do: with a 10% capital requirement, it can leverage $1 in capital into $10 in loans.

      For capitalization, the bill proposes to follow the lead of Alexander Hamilton’s First U.S. Bank: shares in the bank will be swapped for existing U.S. bonds. The shares will earn a 2% dividend and are non-voting. Control of the bank and its operations will remain with the public, an independent board of directors, and a panel of carefully selected non-partisan experts, precluding manipulation for political ends.

      America achieved its greatest-ever infrastructure campaign in the midst of the Great Depression. We can do that again today, and we can do it with the same machinery: off-budget financing through a government-owned national financial institution.

      Granted, these proposals are not likely to be implemented until we are actually facing another Great Depression, or at least a Great Recession; but Michael Hudson and other pundits are predicting that outcome in the not-too-distant future. It is good to have some viable alternatives on the table for consideration when, as in the 1930s, politicians are compelled to seek them out.

      • First published on ScheerPost.


      This content originally appeared on Dissident Voice and was authored by Ellen Brown.

      This post was originally published on Radio Free.

    18. NYT Says More Worker Suffering Needed to Bring Inflation Down

       

      Good news: Inflation is down! Way down, actually: It came in at 4% in May, after peaking at just over 9% last summer.

      But don’t get too excited. The New York Times is here to tell you that inflation is still a problem, and more suffering for the working class is the solution.

      In a recent episode of the Times’ flagship podcast the Daily (6/20/23), reporter Jeanna Smialek argued that the Fed may have more work cut out for itself. Discussing why inflation declined over the past year, she noted that it’s mostly the result of supply issues resolving. But inflation remains above the Fed’s 2% target:

      The part of inflation we’re worried about now is the part that’s not going to come down just because of a return to normal or because of luck, but the part that is going to require Fed policy.

      In other words, only the Fed can tame inflation.

      ‘Standard of living…has to decline’

      Fed Chair Paul Volcker

      Fed chair Paul Volcker: “The standard of living of the average American has to decline.”

      In the standard account, this is a key lesson of the last major period of high inflation that the US faced. Referred to as the Great Inflation, this era lasted from 1965 through 1982, and was finally brought to an end by Fed chair Paul Volcker.

      After assuming leadership of the Federal Reserve in 1979, Volcker announced, “The standard of living of the average American has to decline.” He then proceeded to curb inflation through a brutal campaign against the working class.

      The Volcker approach was, of course, not the only available method for slowing price increases. As the progressive economist James Galbraith (Medium, 6/17/23) wrote recently, the US has dealt with inflation differently in the past. During World War II, for instance, the government established the Office of Price Administration, which kept inflation in check through price controls (Guardian, 12/29/21).

      These were “abolished…in 1946, over popular protest,” and were later intellectually repudiated by economists and policymakers in favor of anti-government and pro-business ideology. As Galbraith puts it, “From this, the entire charade of dumping responsibility for ‘fighting inflation’ on the central bank emerges.”

      ‘Springing for that Jacuzzi’

      NYT: Powell Admires Paul Volcker. He May Have to Act Like Him.

      Volcker is “best remembered for waging an aggressive—and painful—assault on the swift price increases that plagued America in the early 1980s,” writes the New York Times (3/14/22). “The approach worked.”

      This charade has continued for decades, and has taken on renewed force in the last couple of years in the face of high inflation, with little to no pushback from corporate media. As current Fed chair Jerome Powell prepared for a new war on inflation in the spring of 2022, for instance, the Times (3/14/22) ran the headline: “Powell Admires Paul Volcker. He May Have to Act Like Him.”

      The piece, by Smialek, acknowledged that a Fed campaign against inflation comes with risks, but it gave Volcker the final word:

      Maintaining confidence that a dollar will be able to buy tomorrow what it can today “is a fundamental responsibility of monetary policy,” Mr. Volcker wrote in his 2018 memoir. “Once lost, the consequences can be severe and stability hard to restore.”

      Nowhere in the article was there any questioning of the idea that the Fed should be at the helm of inflation-fighting—that perhaps there’s an alternative, one less painful for the majority of the country. Instead, the unspoken assumption is that this is all the Fed’s responsibility. But that’s an assumption, a highly ideological one, not an unbending law of nature.

      Now, more than a year into the Fed’s campaign of interest rate hikes, the Times is continuing with the reportorial line that the Fed must be the one to bring down inflation. According to this line of reasoning, inflation must be tamed at the cost of lower incomes. That is the main channel through which Fed policy (i.e., interest rate hikes) works.

      Smialek knows this. She may choose to obscure the class dynamics of this approach by talking (6/20/23) about how rate hikes make people less “comfortable springing for that Jacuzzi bathtub and taking on the slightly higher rent that comes alongside it.” (You know, the classic dilemma faced by low-wage workers, who are disproportionately hit by rate hikes.) But, at the end of the day, she does recognize that raising rates is about reducing people’s incomes and thus their spending power. She just doesn’t seem to have an issue with that; it’s a necessary cost of the inflation-fighting business.

      ‘Not as good as 2%’

      NYT: Is the Inflation Battle Won? Not Yet.

      The good news, for the New York Times (6/21/23) is that “there are early signs that a labor market slowdown is underway…. Jobless claims have climbed in recent weeks.”  The bad news: “Hiring has remained robust, and the unemployment rate low.”

      And she wants everyone to know that, if we’re really serious about taming inflation, more could be required. Towards the end of the podcast, Daily host Michael Barbaro asked Smialek:

      Inflation is down overall quite a bit. But we’ve learned that a lot of it—the stuff we feel the most—isn’t truly the result of Fed policy, which is an important thing to understand…. But, Jeanna, if I’m a consumer, how much do I really care about what caused this relatively positive situation?…. Aren’t I just pretty happy that all of this stuff has happened?

      Smialek’s response:

      Sure. And, reasonably, you would be. But if you’re a consumer, you also don’t want this to be temporary. And 4% inflation is better than 9%, but it’s still not as good as 2%, which is what it used to be. So I think that that’s the thing to keep in mind.

      Interest rate hikes are the implied method for getting inflation back down to 2%, which is the Fed’s target level. But other commentators have a very different take on what remains to be done to contain inflation. Galbraith (Medium, 6/17/23), for one, sees historically high profit margins as the remaining issue that could keep inflation persistently elevated. The solution here, in his view, is strategic price controls. These would cap prices charged by companies in particular industries, taking away the companies’ ability to keep pushing prices up at rapid speed and instead forcing them “to focus, as they should, on quality and quantity.”

      Smialek doesn’t so much as mention this alternative approach. In a follow-up article (6/21/23) the day after the podcast, she instead focused on the question of how much interest rates will have to raise unemployment to bring inflation down to the 2% target. She ended the piece by quoting Jason Furman, a Harvard economist and former Obama adviser, who asserted, “People have been so crazily premature to keep declaring victory on inflation.”

      Just two paragraphs earlier, Furman had suggested that unemployment (the Fed’s favorite tool for lowering incomes and slowing price increases) might need to reach 10% to tame inflation. Whether it would be irresponsible to throw something like 10 million people out of work so that a loaf of bread costs $2.55 next year rather than $2.60 was not questioned.

      An arbitrary target

      Inflation During the 1980s

      As Neil Irwin wrote for the New York Times (12/21/14) almost a decade ago in an article about the origins of the 2% inflation target, “Inflation…hovered in the range of 3 to 4% through the mid-1980s, hardly remembered as an economic nightmare.” More specifically, in the wake of the Fed’s aggressive anti-inflation campaign in the early 1980s, inflation stabilized at 3.7% from 1983 through 1985, and registered an average level of 3.6% from 1983 through the end of the decade. (Author’s calculations based on data from the St. Louis Fed.)

      Even more glaring is that Smialek never once acknowledged, in the podcast or the follow-up article, that the 2% target is largely arbitrary, not based in economic law. Or that, when Volcker tamed inflation, he stabilized it at close to 4%, not 2%.

      Also not mentioned: Very mainstream economists, including the Times’ own Paul Krugman, have said recently that 2% is actually too low, and that a bit more inflation would be preferable (Financial Times, 11/28/22; New York Times, 12/2/22). Krugman, in fact, wrote decades ago:

      One of the dirty little secrets of economic analysis is that even though inflation is universally regarded as a terrible scourge, efforts to measure its costs come up with embarrassingly small numbers.

      For instance, studies have found that inflation doesn’t start to have a negative impact on growth until it is well above 4%.

      From Smialek’s article and her podcast appearance, you would have no idea about any of this. But you would have the strong impression that a major jump in unemployment could be required to get the situation under control.

      The effect, if not the goal, of this style of reporting is to narrow the conversation and create the appearance that there is no alternative to what the Federal Reserve is doing. In the Times’ narrative, inflation is a problem that must be tackled, and the only way to do so is through lowering incomes and potentially jacking up unemployment.

      This narrative may appeal to the paper’s upper-class readership, who are generally insulated from the worst effects of rate hikes. For the poor and working class, a deeper understanding of inflation might be welcome—and for people looking for an understanding of how economic policies affect different groups, it’s necessary.

      ACTION ALERT: You can send a message to the New York Times at letters@nytimes.com (Twitter: @NYTimes). Please remember that respectful communication is the most effective. Feel free to leave a copy of your communication in the comments thread.

      The post NYT Says More Worker Suffering Needed to Bring Inflation Down appeared first on FAIR.

      This post was originally published on FAIR.

    19. Why Is the Fed Seeking Advice From the Architect of Past Financial Meltdowns?

      As the leader of a body that determines the fate of the world behind closed doors, the head of the Federal Reserve is highly scrutinized. Observers, for example, used to guess what former Fed Chair Alan Greenspan was thinking about interest rates based on the weight of his briefcase. If the load was heavy, the reasoning stood, Greenspan had paperwork to convince the other members on the panel that…

      Source

      This post was originally published on Latest – Truthout.

    20. Amid New Banking Crisis, It’s Time to Change the Rules of the Game

      On CNN March 14, Roger Altman, a former deputy Treasury secretary in the Clinton administration, said that American banks were on the verge of being nationalized: The deposit base of the financial system has not actually been nationalized, but Congress is considering modifications to the FDIC insurance limit. Meanwhile, one state that does not face those problems is North Dakota…

      Source

      This post was originally published on Latest – Truthout.

    21. After Bank Collapses, US Regulators Urged to Impose Rules on Climate-Related Financial Risk



      In the wake of recent bank collapses and protests across the United States demanding financial institutions end fossil fuel financing, 50 climate, environmental justice, and Indigenous rights groups on Tuesday advocated for new regulations.

      “We the undersigned strongly urge financial regulators and Congress to learn from the collapse and bailout of Silicon Valley Bank (SVB) and rapidly implement new regulations to mitigate against climate-related financial risk,” the coalition wrote.

      “Climate-related risks are moving us toward a financial crisis. But regulators have not taken adequate steps to actually mitigate those risks.”

      The groups’ letter was sent to key leaders at the U.S. Treasury Department, Federal Reserve, Federal Deposit Insurance Corporation (FDIC), National Economic Council, and relevant U.S. House and Senate committees.

      After explaining how the SVB collapse is partly the result of poor management enabled by regulatory rollbacks under the Trump administration, the letter states that “this is only the latest example of a bank being wholly unprepared for a large and obvious financial risk.”

      The letter continues:

      It is a stark reminder of the chaos that can unfold when a financial institution has high exposure to a risky industry, and of the fact that the leaders of major financial institutions are frequently far more concerned with their short-term gains than with robust risk management measures that ensure their safety and the safety and soundness of the financial system. As a reminder of the latter, senior managers at SVB paid themselves millions in bonuses hours before their bank failed and the federal government financially backstopped it. Here again, stronger rules—including the Dodd-Frank executive compensation rules that remain unfinished—could have incentivized greater bank attention to risks.

      To prevent any potential for a cascade of bank runs after SVB’s collapse, federal regulators have now effectively set a precedent of guaranteeing all bank deposits in all banking institutions nationwide, to be backstopped by the Federal Deposit Insurance Fund and then taxpayer dollars. Moreover, the Federal Reserve has begun lending at extraordinarily generous terms to any other banks with assets whose real value has been curbed by interest rate hikes—in effect, the Fed is offering a first-of-its-kind, get-out-of-bank-failure-free card to any firms that made the same foreseeable mistake as SVB. Regulators justified this extraordinary shift in the structures of American finance by relying on emergency rules in place to prevent systemic risk to the financial system. In effect, regulators argued that SVB’s inability to mitigate one of the most obvious forms of financial risk—the potential for rising interest rates amid high inflation—constituted a grave risk to the whole financial system, and, thereby, the whole economy.

      “If management at a wide swath of banks failed to properly address a well-understood risk, they cannot be trusted to independently address other complex emerging risks,” the groups argued. “Regulators must intervene to protect the financial system from risks associated with climate change and the ongoing transition to a green economy.”

      The letter notes recent remarks from Treasury Secretary Janet Yellen about the economic and financial impact of the climate emergency as well as how, as it worsens, “banks of all sizes holding mortgage-backed bonds will see their assets drop in value” while “banks invested in the fossil fuel industry will eventually be saddled with stranded assets.”

      “Climate-related risks are moving us toward a financial crisis. But regulators have not taken adequate steps to actually mitigate those risks,” the coalition warned, calling on U.S. policymakers to:

      • Move with urgency and speed to implement proposed guidance for banks and financial institutions related to preparation for climate-related financial risks and to follow up with more detailed guidance;
      • Rapidly move forward on rigorous exams for banking institutions, including for medium-sized banks, regardless of industry pressure for light-touch supervision of climate-related risks; and
      • Please also see previous coalition letters recommending action on the Federal Reserve’s and the Treasury Department’s climate guidance.

      “Banks cannot be trusted to independently evaluate and protect against the systemic risks of the climate crisis in real-time. They also cannot be trusted to avoid creating risks for other institutions and the financial system through their support for fossil assets and greenhouse gas emissions,” the letter says. “This process requires regulators to set clear rules and ensure banks and financial institutions do not engage in unsafe behavior and do not create undue risks and costs for the financial system and the economy.”

      Signatories include Greenpeace USA, Lakota People’s Law Project, Sierra Club, and Third Act—who came together earlier this month for a “Stop Dirty Banks” national day of action, the first elderly-led mass climate demonstration in U.S. history.

      “Today is a major drive to take the cash out of carbon,” declared Third Act’s Bill McKibben. “We want JPMorgan Chase, Citi, Wells Fargo, and Bank of America to hear the voices of the older generation which has the money and structural power to face down their empty, weasel words on climate. We will not go to our graves quietly knowing that the financial institutions in our own communities continue to fund the climate crisis.”

      This post was originally published on Common Dreams.

    22. It’s Time to Change the Rules of the Banking Game



      On CNN March 14, Roger Altman, a former deputy Treasury secretary in the Clinton administration, said that American banks were on the verge of being nationalized:

      What the authorities did over the weekend was absolutely profound. They guaranteed the deposits, all of them, at Silicon Valley Bank. What that really means… is that they have guaranteed the entire deposit base of the U.S. financial system. The entire deposit base. Why? Because you can’t guarantee all the deposits in Silicon Valley Bank and then the next day say to the depositors, say, at First Republic, sorry, yours aren’t guaranteed. Of course they are.

      …So this is a breathtaking step which effectively nationalizes or federalizes the deposit base of the U.S. financial system.

      The deposit base of the financial system has not actually been nationalized, but Congress is considering modifications to the Federal Deposit Insurance Corporation (FDIC) insurance limit. Meanwhile, one state that does not face those problems is North Dakota, where its state-owned bank acts as a “mini-Fed” for the state. But first, a closer look at the issues.

      Bail In, Bail Out, or “Socialism for the Rich”?

      On Friday, March 10, Silicon Valley Bank (SVB) was put into receivership by the FDIC. The FDIC announced that deposits over the $250,000 insurance limit would get an advance dividend within the next week, and would receive a receivership certificate for the rest of the funds. Most of the depositors were venture-backed startups that needed to keep large deposits in the bank to meet payroll and pay suppliers, and over 95% of the deposits were uninsured and at risk of being lost. It was basically a “bail in” of the uninsured deposits, which would be recoverable only if funds were available after the bank’s assets had been sold.

      But that arrangement lasted only two days. On March 12, Signature Bank was put into receivership; and the FDIC, Treasury, and Federal Reserve jointly announced that all of the deposits at the two banks, not just those under the insurance limit, would be available for withdrawal on demand.

      At a Senate Finance Committee hearing on March 16, Treasury Secretary Janet Yellen said that the guarantee would not apply to all deposits at all banks. Rather, the determination would be made on a case-by-case basis.

      In a Bloomberg News interview on March 16, former FDIC Chair Sheila Bair criticized that decision. She observed that the two banks getting special treatment were not “systemically important,” and that the cost of the expanded guarantee was to be covered by a special assessment against all insured banks, including the small community banks that provide essential credit to local businesses. She argued that if guarantees were going to be given over the $250,000 limit, they should apply to deposits everywhere.

      Meanwhile, on March 12, the Federal Reserve announced that it had set up a special purpose vehicle of the sort arranged for Covid relief in March 2020, called the Bank Term Funding Program (BTFP). Like the Covid special purpose vehicles, it would be backstopped with $25 billion from the Exchange Stabilization Fund (ESF), a fund set up in 1934 to stabilize the exchange value of the dollar. The BTFP was to be available to any bank needing it, and many banks obviously did. Over $300 billion in short-term loans were withdrawn from the Fed’s various facilities just in the week after SVB’s collapse.

      This money is not, however, the sort of “free lunch” provided to troubled banks in the last financial crisis. The money is to be advanced as a loan for up to a year, at a hefty interest rate as of March 22 of 4.88%. According to a Federal Reserve press release, advances will be made to “eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”

      “Valued at par” means that banks can hold their long-term federal securities to maturity while acquiring ready cash against them to meet withdrawals, without having to “mark to market” and sell at a loss.

      The Systemic Flaw

      So what caused this crisis, and what can be done to remedy it?

      In the midst of the 2008 economic crisis, former Fed Chair Alan Greenspan conceded that there was a flaw in his perception of the financial operating system. For 40 years, he had believed that banks could “self-regulate” responsibly, a presumption that had proven to be flawed.

      In the case of SVB, however, the bank was not engaged in the sort of risky lending seen in the subprime crisis, and increased “stress testing” wouldn’t have saved it. It had put its deposits largely in federal securities, purported to be the safest assets available—so safe that they carry a “zero risk weighting” requiring no extra capital buffer. What went wrong was that they were long-term bonds at low interest. When rates shot up, the market value of the bonds dropped, since buyers prefer newer bonds paying higher interest. Bonds that could be sold were sold at a loss, and some marked “hold to maturity” could not be sold at all. As a result, SVB lacked the liquidity to meet the sudden unexpected demand for withdrawals.

      The flaw to which SVB and many other “troubled” banks have fallen victim is the age-old systemic problem of “borrowing short to lend long.” For centuries, banks have borrowed the money of depositors who expect to have it available on demand, and have invested it in long-term assets that cannot be immediately liquidated. The system works well so long as the depositors don’t panic and rush to pull their money out all at once. But when they do, if the problem is systemic, not just single banks but the whole banking system can collapse.

      We used to see this flaw dramatized every December, when TV networks ran the 1946 Christmas classic “It’s a Wonderful Life.” When the Bailey Brothers Building and Loan suffered a bank run, George Bailey (Jimmy Stewart) had to explain to the panicked depositors that their money had been lent to their neighbors. He was on the verge of suicide, when a guardian angel showed him how critical he and his bank had been to the community; and the neighbors pitched in and rescued the bank.

      Even closer to the situation today was the crisis of the savings and loan associations (S&Ls) of the 1980s, after the Federal Reserve raised interest rates dramatically to kill inflation. Most of the assets of the S&Ls were long-term fixed-rate mortgages. As rates rose, they had to pay more to attract deposits; but the amount they earned on their fixed-rate mortgages didn’t change. Losses mounted, but the S&L insurance fund, the FSLIC, lacked sufficient money to reimburse all the depositors at failed S&Ls so the regulators turned a blind eye and allowed them to keep operating as “zombies.” The matter was finally resolved with legislation in 1989 that placed S&L insurance under the FDIC and established the Resolution Trust Corporation to resolve the remaining troubled S&Ls. The ultimate cost to the taxpayers was estimated to be as high as $124 billion.

      As with George Bailey’s savings and loan, the flaw was not “fractional reserve” lending. The S&Ls pooled the money of their customers and lent only what they had. The systemic flaw was and still is that to make long-term loans, banks must borrow “other people’s money,” which is expected to be available on demand. Today the banks’ liquidity options include not just their own depositors but other banks’ depositors in the fed funds market, and pension funds and other institutional creditors lending in the repo market. But they all expect their money to be available on demand; and if the bank has lent it out in long-term loans, the bank can be caught short shuffling reserves around trying to meet that demand.

      The Failed Banks Were Not Nationalized, But Maybe They Should Have Been

      One option that was debated in the 2008-09 crisis was actual nationalization. As professor Michael Hudson wrote in February 2009:

      Real nationalization occurs when governments act in the public interest to take over private property… Nationalizing the banks along these lines would mean that the government would supply the nation’s credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today’s commercial bank lending policies.

      Gar Alperovitz, professor emeritus at the University of Maryland, also weighed in on the issue. In a 2012 New York Times article titled “Wall Street Is Too Big to Regulate,” he noted that the five biggest banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs—had amassed assets amounting to more than half the nation’s GDP. He wrote:

      With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses. If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions…

      Nationalization isn’t as difficult as it sounds. We tend to forget that we… essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock.

      Another example was Continental Illinois, the largest bank bankruptcy and the seventh-largest bank in the country when it failed in 1984. The FDIC wiped out existing shareholders, infused capital, took over bad assets, replaced senior management, and owned the bank for about a decade, running it as a commercial enterprise, selling it in 1994.

      What constituted a radical departure from capitalist principles in the last financial crisis was not “nationalization” but an unprecedented wave of bank bailouts, sometimes called “welfare for the rich.” The taxpayers bore the losses while the culpable management not only escaped civil and criminal penalties but made off with record bonuses. Banks backed by an army of lobbyists succeeded in getting laws changed so that what was formerly criminal behavior became legal. Instead of nationalization, we got TARP, the Troubled Asset Relief Program, in which toxic assets were purchased from financial institutions by the Treasury. Faced with the inequity of that solution, many economists recommended nationalization instead. Willem Buiter, chief economist of Citigroup and formerly a member of the Bank of England’s Monetary Policy Committee, wrote in the Financial Times in September 2009:

      Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses?

      If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities that are ultimately underwritten by the taxpayer. …Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money. [Emphasis added.]

      Those are all good arguments, but Congress is not likely to nationalize the whole banking system any time soon.

      What About Nationalizing the Liquidity Pool?

      Without going to those lengths, what could be made a public utility is the banks’ liquidity pool. Banks could borrow directly from the deep pocket of the central bank, the “lender of last resort” (or from the Treasury if it were reengineered so that it could issue money as credit without taxing or going into debt). Banks would still need to make “prudent” loans—loans to borrowers who had demonstrated an ability to pay the money back—since if they suffered substantial defaults, they would not be able to balance their books and could be put into bankruptcy. They would still charge interest to cover their costs, and they would still compete for borrowers by keeping their interest rates low, maintaining the principles of “market capitalism” operating now. Customer deposits could be sequestered separately from loans, e.g. at government-backed postal banks. In fact, sequestering customer funds is what brokerages (such as Schwab and Fidelity) do now. Rather than the bank gambling with your money, you gamble with it yourself. But that, of course, can be risky too!

      In any case sequestering deposits is not likely to happen either. What is being sought is what Roger Altman predicted—FDIC insurance coverage of the entire deposit base. In a March 17 letter first reported by Bloomberg News, the Midsize Bank Coalition of America called on regulators “immediately… to reinstate full deposit insurance coverage for depositors,” for two years. That was done in 2008, the letter noted, “and was one of the most effective tools used in the great financial crisis and it needs to be brought back immediately. Importantly, as happened previously, this increase in insurance should be paid for directly by the banks themselves by simply increasing the deposit insurance assessment on banks who choose to participate in this increased insurance coverage.”

      The concern for midsize banks is that depositors have been fleeing to giant “too big to fail” banks, perceiving them to be safer. But as Cornell professor Robert Hockett observes, midsize banks lend to the midsize businesses that are the backbone of the productive economy. He has drafted legislation to provide for universal deposit insurance, discussed in Forbes. However, it’s an uphill battle. Even Sheila Bair, who is clearly sympathetic to the plight of local banks, has reservations on full coverage. As reported on MSN.com:

      FDIC Chairwoman Sheila Bair said Tuesday that Congress should consider temporarily providing guarantees for deposits in transaction accounts used by employers to pay their workers—a move that some Democrats are considering.

      But Bair said it would be an “overreaction” to insure all bank deposits.

      “Unlimited insurance would be very expensive to do. It would be assessed on the banking system, backstopped by taxpayers, and would primarily help very, very wealthy people,” Bair said on Washington Post Live.

      Small community banks—defined as banks with $10 billion or less in assets—have spoken out against paying more to cover the failure of larger banks such as SVB.

      The Public Bank Option

      Meanwhile, one midsize bank that has escaped this furor is the Bank of North Dakota. With assets in 2021 of $10.3 billion and a return on investment of 15%, the BND is owned by the state, which self-insures it. There is no fear of bank runs, because the state’s revenues compose the vast majority of its deposits, and they must be deposited in the BND by law.

      The state’s local banks are also protected by the BND, which is forbidden to compete with them. Instead, it partners with them, helping with liquidity and capitalization. The BND has been called a “mini-Fed” for the state and its banks. That helps explain why North Dakota has more local banks per capita than any other state, at a time when other states have been losing banks to big bank mergers, causing the number of U.S. banks to shrink radically.

      U.K. professor Richard Werner recently published a briefing memo supporting the case for a public bank. It was prepared for the state of Tennessee, which is considering a sovereign state bank on the North Dakota model, but the arguments apply to all states. Benefits discussed include dividends, higher state-level tax revenues, greater job creation, greater local autonomy and resilience to shocks, more options for funding public sector borrowing and state pension funds, and protection of financial transaction freedom and privacy.

      Small and local is good, but even small regional banks need to pool their resources for maximum efficiency and security. A state-owned bank on the model of the Bank of North Dakota can provide low-interest loans, liquidity, and financial sovereignty, keeping financial resources in the state directed to public purposes, all while turning a profit for the state.

      This post was originally published on Common Dreams.

    23. Consumer Advocates Applaud as Federal Court ‘Yet Again’ Finds CFPB’s Funding Constitutional



      U.S. Sen. Elizabeth Warren, who established the Consumer Financial Protection Bureau in 2010, was among the consumer advocates celebrating on Thursday as a federal court in New York City ruled that the bureau’s funding structure is constitutional—rebuking years of right-wing and corporate attacks on the agency.

      The Massachusetts Democrat expressed hope that the U.S. Supreme Court, which is expected to hear arguments in a separate but related case later this year, “follows more than a century of law and historical precedent” and also rules in favor of the CFPB, which has regulated debt collectors, payday lenders, credit card companies, and other financial businesses for more than a decade.

      “Yet again, the constitutionality of the CFPB has been upheld, as it has been time and time before,” said Warren.

      The 2nd U.S. Circuit Court of Appeals ruled in favor of the bureau Thursday in a case stemming from a debt collector’s attempt to avoid a subpoena from the CFPB in 2017.

      A lower court ruled in the case in August 2020 that the bureau’s funding structure is constitutional, but the 5th U.S. Circuit Court of Appeals in New Orleans said last year in the case set to be heard by the Supreme Court that the funding violates the Constitution’s appropriations clause and the separation of executive and legislative powers.

      The CFPB is funded by the Federal Reserve rather than through appropriations voted on annually by lawmakers.

      Writing for the three-judge 2nd Circuit panel that voted unanimously in favor of the bureau, Judge Richard Sullivan noted that the justice system “has consistently interpreted the appropriations clause to mean simply that ‘the payment of money from the Treasury must be authorized by a statute,’”—which doesn’t apply to the CFPB since it receives no funding from the U.S. Treasury Department.

      An upcoming ruling by the Supreme Court that supports the 2nd Circuit’s finding would “mark a major win for everyday consumers impacted by abusive fees, predatory lenders, and corporate greed,” said government watchdog Accountable.US.

      “The CFPB is a vital voice for consumers and protects Americans from unfair and abusive practices,” said Rep. Nydia Velázquez (D-N.Y.). “We can’t allow these protections to be weakened.”

      This post was originally published on Common Dreams.

    24. Sanders Introduces Bill to Stop Bank CEOs From Serving as Fed Bank Regulators

      Gregory Becker is the CEO of Silicon Valley Bank, the second largest bank to fail in U.S. history. He was also, up until the day the bank failed on March 10, a member of the board of directors of the Federal Reserve Bank of San Francisco, one of 12 Federal Reserve Banks in the country charged with keeping institutions like Silicon Valley Bank healthy and solvent. Sen. Bernie Sanders (I-Vermont) is…

      Source

      This post was originally published on Latest – Truthout.

    25. The Fed Accused of ‘Playing With Fire’ After Latest Rate Hike



      Progressive economists and other experts blasted Federal Reserve leadership on Wednesday for raising interest rates yet again despite concerns about recent bank failures and how the quarter-point increase will impact the U.S. and global economies.

      “Once again, interest rate hikes are going to fall hardest on low-wage workers and the poor—the same people who have already been hurt the most by rising prices,” tweeted University of California, Berkeley professor and former Labor Secretary Robert Reich. “Higher rates could also imperil more banks, and risk even more financial chaos. The Fed is playing with fire.”

      Fed Chair Jerome Powell told reporters Wednesday that although the Federal Open Market Committee “did consider” a pause on rate increases following the Silicon Valley Bank (SVB) and Signature Bank failures, officials ultimately decided to raise the federal funds rate to a range of 4.75-5%, the highest level since 2007.

      “The Fed under Chair Powell made a mistake not pausing its extreme interest rate hikes,” declared Sen. Elizabeth Warren (D-Mass.) a fierce critic of nine consecutive rate hikes since last March as well as the Fed’s regulatory rollbacks that proceeded the bank collapses.

      “I’ve warned for months that the Fed’s current path risks throwing millions of Americans out of work. We have many tools to fight inflation without pushing the economy off a cliff,” added Warren, who has repeatedly called for ousting Powell.

      Patriotic Millionaires chair Morris Pearl—a bank bailout expert and former managing director at BlackRock—similarly contended that “the Fed’s decision to keep pushing forward with rate hikes no matter the circumstances is a dangerous mistake.”

      Describing such hikes as “a blunt instrument,” he stressed that high interest rates “are not well suited to the economic realities the country now faces—and will inevitably end up doing more harm than good.”

      Pearl continued:

      In our modern economy, high interest rates are simply not an effective way to fight inflation. Rate hikes have disproportionately hurt just a few sectors, like housing, automobiles, and some banks and investors, while leaving many of the nation’s largest employers relatively unscathed.

      Rising interest rates do nothing to address a major cause of inflation, corporate price gouging, and actually make another long-term cause, lack of investment in new housing, worse. Instead, the Fed is betting that lowering employment and cooling wage growth is the best solution to inflation.

      Higher interest rates may be a cure for inflation, but if they end up causing another banking crisis, or pushing the economy into a recession, the cure may be worse than the disease.

      An analysis released Wednesday by Accountable.US explained that “SVB’s failure was partly due partly to a ‘plunge’ in bond value and $1.8 billion in ‘paper losses’ amid the Fed’s rate hikes. By the end of 2022, the Federal Deposit Insurance Corporation (FDIC) had warned that U.S. banks were ‘sitting on $620 billion in unrealized losses’ that may make their balance sheets appear healthier than they really are.”

      The watchdog group found that “at the end of 2022, the five biggest U.S. banks—JPMorgan Chase, Bank Of America, Citigroup, Wells Fargo, and U.S. Bank—reported a total of $233 billion in unrealized losses on held-to-maturity securities, including $54 billion in unrealized losses on Treasury securities. These same banks reported a combined $39.4 billion in unrealized losses on available-for-sale securities, including $12.7 billion in losses on available-for-sale U.S. Treasuries.”

      Liz Zelnick, director of economic security and corporate power at Accountable.US, warned Wednesday that “hiking interest rates, even if more slowly, will devastate Main Street and Wall Street alike by wiping out millions of jobs while sending Treasury securities into a downward spiral,” acknowledging that the recent bank turmoil prevented an even bigger increase than 25 basis points.

      “A recession and broken financial system are not worth the price of higher interest rates that have failed miserably to curb the corporate greed epidemic helping to drive up costs,” Zelnick added. “To date, the Federal Reserve and Chairman Jerome Powell have been more than willing to let average American families bear the brunt of their job-killing strategy—but are they also willing to let their banker friends on Wall Street go down with the ship?”

      The Hill highlighted that ahead of Wednesday’s announcement, influential figures such as economist Paul Krugman and analysts for Goldman Sachs—in a Monday letter to investors—had advocated for pausing rate hikes.

      “Bank stress calls for a pause,” wrote Goldman Sachs analysts. “Banking is not just another sector of the economy because financial intermediation is vital to every sector. As a result, addressing stress in the banking system is the most immediate concern and must take priority over other less urgent goals for the moment. We expect that policymakers and staff economists at the Fed will have the same view.”

      During his Wednesday press conference, Powell insisted that “our banking system is sound and resilient with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound.”

      While Powell also emphasized the Fed’s commitment to learning from the recent SVB and Signature failures to prevent repeat events, both the bank collapses and a year of rate hikes have fueled calls for his ouster.

      Asked by CNN‘s Jake Tapper on Wednesday whether she had ever directly told President Joe Biden that he should fire Powell, Warren said she wouldn’t talk about private conversations “but what I will say is I’ve made it very clear as publicly as humanly possible that I didn’t think that he should be reconfirmed as chair of the Fed. And I think he’s doing a really terrible job.”

      “And he’s doing a terrible job on both fronts,” she said, referring to the Fed’s dual mandate. In terms of oversight, Powell “has spent five years weakening regulations over these multibillion-dollar banks,” and on monetary policy, he is “risking pushing our economy into a recession.”

      “What he’s trying to do is get two million people laid off, and one of the things that we need to understand: He wants to raise the unemployment rate by more than a point within a single 12-month period. We have done that before in this country. In fact, we have done it 12 times before. And out of all 12 times, how many times has it resulted in a recession?” she said. “The answer is 12.”

      This post was originally published on Common Dreams.

    26. Reckless Capitalist Banks Rescued by Government Socialism – Again!



      Once again, government socialism—ultimately backed by taxpayers—is saving reckless midsized banks and their depositors. Silicon Valley Bank (S.V.B) and Signature Bank in New York greedily mismanaged their risk levels and had to be closed down. The Federal Deposit Insurance Corporation (FDIC), in return, to avoid a bank panic and a run on other midsized banks went over its $250,000 insurance cap per account and guaranteed all deposits—no matter how large, which are owned by the rich and corporations—in those banks.

      Permitting such imprudent risk-taking flows directly from the Trump-GOP Congressional weakening of regulations in 2018, which was supported by dozens of Democrats, led by bank toady Senator Mark Warner (D-Va.). That bipartisan deregulation provided a filibuster-proof passage by the Senate.

      The other culprit is the Federal Reserve. Its very fast interest rate hikes reduced the asset value of those two banks’ holdings in long-term Treasury bonds, which reduced their capital reserves. With the “What, me worry?” snooze of the California Department of Financial Protection and Innovation, SVB had little supervision from state regulatory examiners and compliance enforcers.

      Actually, big depositors sniffed the shakiness of these two banks and acted ahead of the regulatory cops with mass withdrawals that sealed the fate of SVB. Imagine, SVB was giving out bonuses hours before its collapse. For this cluelessness, the bank’s CEO, Gregory Becker, took home about eleven million dollars in pay last year.

      All this was predicted by Sen. Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.). Warren, in particular, specifically opposed the 2018 Congressional lifting of stronger liquidity and capital requirements along with regular stress tests for banks with assets over $50 billion. Trump’s law allowed the absence of these safeguards to cover banks with assets up to $250 billion. Such de-regulation covered SVB and Signature.

      Signature Bank had former House Banking Committee Chair Barney Frank on its board of directors. His name is on the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed following the 2008 Wall Street collapse. Even Mr. Frank was clueless about what Signature’s CEO Joseph DePaolo was mismanaging. (DePaulo was paid $8.6 million last year.)

      Of course, the underfunded FDIC doesn’t have enough money to make good all the large depositors in these two banks. So, it is increasing the fees charged to all banks for such government insurance. The banks will find ways to pass these surchargers on to their customers.

      Other midsized banks may be shaky as more major depositors pull out and put their money into mega-giant banks like JPMorgan Chase, Bank of America, and Citigroup, which are universally viewed as “too big to fail.” The smaller businesses harmed by these closed banks are now on their own. No corporate socialism is as yet saving them.

      One of the provisions of the Dodd-Frank law was to require federal agencies to rein in bank executives’ pay that incentivizes recklessness and even fraud, as Public Citizen noted. Yet after 13 years, PC declared: “a hodgepodge of federal agencies—the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Reserve, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission—that is supposed to finalize the rule has so far failed to do so.”

      Defying mandates of Congress, often riddled with waivers from Capitol Hill, is routine for federal agencies. They know that when it comes to law and order for profiteering corporations, Congress is spineless. Have you heard of any resignations or firings from these sleepy regulatory agencies? Of course not. They continue to raise the ante for corporate socialist rescue even beyond their legal authority. For example, where does the FDIC get the authority to guarantee all the deposits in the failed banks when the Congressional limit is strictly $250,000 per account?

      Some people will remember Secretary of the Treasury Henry Paulson telling the Washington Post that there were “no authorities” for massive bank bailouts—think Citigroup in 2008 during a private weekend meeting in Washington, DC— but, he said, “someone had to do it.”

      Meanwhile, the American people remain fearful but silent over the safety of their bank deposits. They heard Treasury Secretary Janet Yellen tell Congress that the banking system “remains sound.” Some remember that’s what her predecessor said in the spring of 2008 about Fannie Mae and Freddie Mac—the safest investments after Treasury bonds. By the fall, both of these giants had collapsed taking millions of trusting shareholders down with them.

      Finally, all those brilliant economists at the Federal Reserve surely must know that when midsize banks lose almost 20% on the value of their 10-year Treasuries, due to the very fast interest rate hikes by Jerome Powell’s Fed, trouble is on the horizon. Why didn’t they anticipate this outcome and do some foreseeing and forestalling? Nah, why worry, didn’t you know that the Fed prints money?

      Or maybe the Federal Reserve (its budget comes from bank fees, not the Congress), couldn’t see beyond fighting inflation, something it did not take seriously in time over a year and a half ago. More than a few outside economists repeatedly gave the Fed fair warning. But then the Fed, hardly ever criticized by the mainstream press, was listening to its brilliant economists.

      Stay tuned. This rollercoaster ride is not over yet.

      This post was originally published on Common Dreams.

    27. Warren Says Trump-Picked Jerome Powell Has “Failed” as Chair of Federal Reserve

      Sen. Elizabeth Warren (D-Massachusetts) is intensifying her scrutiny of federal financial regulators in the wake of the second- and third-largest bank failures in U.S. history, calling for an independent investigation into agencies that she says contributed to the collapses and saying that Federal Reserve Chair Jerome Powell especially deserves blame. On Saturday, Warren called on the inspectors…

      Source

      This post was originally published on Latest – Truthout.