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  • Economic Collapse Continues Uninterrupted

    To conceal the economic and social decline that continues to unfold at home and abroad, major newspapers are working overtime to promote happy economic news. Many headlines are irrational and out of touch. They make no sense. Desperation to convince everyone that all is well or all will soon be great is very high. The assault on economic science and coherence is intense. Working in concert, and contrary to the lived experience of millions of people, many newspapers are declaring miraculous “economic growth rates” for country after country. According to the rich and their media, numerous countries are experiencing or are on the cusp of experiencing very strong “come-backs” or “complete recoveries.” Very high rates of annual economic growth, generally not found in any prior period, are being floated regularly. The numbers defy common sense.

    In reality, economic and social problems are getting worse nationally and internationally.

    “Getting back to the pre-Covid standard will take time,” said Carmen Reinhart, the World Bank’s chief economist. “The aftermath of Covid isn’t going to reverse for a lot of countries. Far from it.” Even this recent statement is misleading because it implies that pre-Covid economic conditions were somehow good or acceptable when things have actually been going downhill for decades. Most economies never really “recovered” from the economic collapse of 2008. Most countries are still running on gas fumes while poverty, unemployment, under-employment, inequality, debt, food insecurity, generalized anxiety, and other problems keep worsening. And today, with millions of people fully vaccinated and trillions of phantom dollars, euros, and yen printed by the world’s central banks, there is still no real and sustained stability, prosperity, security, or harmony. People everywhere are still anxious about the future. Pious statements from world leaders about “fixing” capitalism have done nothing to reverse the global economic decline that started years ago and was intensified by the “COVID Pandemic.”

    In the U.S. alone, in real numbers, about 3-4 million people a month have been laid off for 13 consecutive months. At no other time in U.S. history has such a calamity on this scale happened. This has “improved” slightly recently but the number of people being laid off every month remains extremely high and troubling. In New York State, for example:

    the statewide [official] unemployment rate remains the second highest in the country at just under 9%. One year after the start of the pandemic and the recession it caused, most of the jobs New York lost still have not come back. (emphasis added, April 2021).

    In addition, nationally the number of long-term unemployed remains high and the labor force participation rate remains low. And most new jobs that are “created” are not high-paying jobs with good benefits and security. The so-called “Gig Economy” has beleaguered millions.

    Some groups have been more adversely affected than others. In April 2021, U.S. News & World Report conveyed that:

    In February 2020, right before the coronavirus was declared a pandemic by the World Health Organization, Black women had an employment to population ratio of 60.8%; that now stands at 54.8%, a drop of 6 percentage points.

    The obsolete U.S. economic system has discarded more than half a million black women from the labor force in the past year.

    In December 2019, around the time the “COVID Pandemic” began to emerge, Brookings reported that:

    An estimated 53 million people—44 percent of all U.S. workers ages 18–64—are low-wage workers. That’s more than twice the number of people in the 10 most populous U.S. cities combined. Their median hourly wage is $10.22, and their median annual earnings are $17,950.

    The Federal Reserve reports that 37 percent of Americans in 2019 did not have $400 to cover an unanticipated emergency. In Louisiana alone, 1 out of 5 families today are living at the poverty level.  Sadly, “60% of Americans will live below the official poverty line for at least one year of their lives.” While American billionaires became $1.3 trillion richer, about 8 million Americans joined the ranks of the poor during the “COVID Pandemic.”

    And more inflation will make things worse for more people. A March 2021 headline from NBC News reads: “The price of food and gas is creeping higher — and will stay that way for a while.”  ABC News goes further in April 2021 and says that “the post-pandemic economy will include higher prices, worse service, longer delays.”

    Homelessness in the U.S. is also increasing:

    COVID-driven loss of jobs and employment income will cause the number of homeless workers to increase each year through 2023. Without large-scale, government employment programs the Pandemic Recession is projected to cause twice as much homelessness as the 2008 Great Recession. Over the next four years the current Pandemic Recession is projected to cause chronic homelessness to increase 49 percent in the United States, 68 percent in California and 86 percent in Los Angeles County. [The homeless include the] homeless on the streets, shelter residents and couch surfers. (emphasis added, January 11, 2021)

    Perhaps ironically, just “Two blocks from the Federal Reserve, a growing encampment of the homeless grips the economy’s most powerful person [Federal Reserve Chairman Jerome Powell].”

    Officially, about four million businesses, including more than 110,000 restaurants, have permanently closed in the U.S. over the past 14 months.  In April 2021 Business Insider stated that, “roughly 80,000 stores are doomed to close in the next 5 years as the retail apocalypse continues to rip through America.”  The real figure is likely higher.

    Bankruptcies have also risen in some sectors. For example, bankruptcies by North American oil producers “rose to the highest first-quarter level since 2016.”

    In March 2021 the Economic Policy Institute reported that “more than 25 million workers are directly harmed by the COVID labor market.” Anecdotal evidence suggests that there are more than 100 applicants for each job opening in some sectors.

    Given the depth and breadth of the economic collapse in the U.S., it is no surprise that “1 in 6 Americans went into therapy for the first time in 2020.” The number of people affected by depression, anxiety, addiction, and suicide worldwide as a direct result of the long depression is very high. These harsh facts and realities are also linked to more violence, killings, protests, demonstrations, social unrest, and riots worldwide.

    In terms of physical health, “Sixty-one percent of U.S. adults report undesired weight changes since the COVID-19 pandemic began.” This will only exacerbate the diabetes pandemic that has been ravaging more countries every year.

    On another front, the Pew Research Center informs us that, as a result of the economic collapse that has unfolded over the past year, “A majority of young adults in the U.S. live with their parents for the first time since the Great Depression.”   And it does not help that student debt now exceeds $1.7 trillion and is still climbing rapidly.

    Millions of college faculty have also suffered greatly over the past year. A recent survey by the American Association of University Professors (AAUP) found that:

    real wages for full-time faculty decreased for the first time since the Great Recession[in 2008], and average wage growth for all ranks of full-time faculty was the lowest since the AAUP began tracking annual wage growth in 1972. After adjusting for inflation, real wages decreased at over two-thirds of colleges and universities. The number of full-time faculty decreased at over half of institutions.

    This does not account for the thousands of higher education adjuncts (part-time faculty) and staff that lost their jobs permanently.

    In April 2021, the Center on Budget & Policy Priorities stated that, “millions of people are still without their pre-pandemic income sources and are borrowing to get by.” Specifically:

    • 54 million adults said they didn’t use regular income sources like those received before the pandemic to meet their spending needs in the last seven days.
    • 50 million used credit cards or loans to meet spending needs.
    • 20 million borrowed from friends or family. (These three groups overlap.)

    Also in April 2021, the Washington Post wrote:

    The pandemic’s disruption has created inescapable financial strain for many Americans. Nearly 2 of 5 of adults have postponed major financial decisions, from buying cars or houses to getting married or having children, due to the coronavirus crisis, according to a survey last week from Bankrate.com. Among younger adults, ages 18 to 34, some 59 percent said they had delayed a financial milestone. (emphasis added)

    According to Monthly Review:

    The U.S. economy has seen a long-term decline in capacity utilization in manufacturing, which has averaged 78 percent from 1972 to 2019—well below levels that stimulate net investment. (emphasis added, January 1, 2021).

    Capitalist firms will not invest in new ventures or projects when there is little or no profit to be made, which is why major owners of capital are engaged in even more stock market manipulation than ever before. “Casino capitalism” is intensifying. This, in turn, is giving rise to even larger stock market bubbles that will eventually burst and wreak even more havoc than previous stock market crashes. The inability to make profit through normal investment channels is also why major owners of capital are imposing more public-private “partnerships” (PPPs) on people and society through neoliberal state restructuring. Such pay-the-rich schemes further marginalize workers and exacerbate inequality, debt, and poverty. PPPs solve no problems and must be replaced by human-centered economic arrangements.

    The International Labor Organization estimates that the equivalent of 255 million full-time jobs have been lost globally as a result of government actions over the past 13-14 months.

    In March of this year, the Food and Agricultural Organization (FAO) of the United Nations reported that, “Acute hunger is set to soar in over 20 countries in the coming months without urgent and scaled-up assistance.” The FAO says, “”The magnitude of suffering is alarming.”

    And according to Reuters, “Overall, global FDI [Foreign Direct Investment] had collapsed in 2020, falling by 42% to an estimated $859 billion, from $1.5 trillion in 2019, according to the UNCTAD report.” UNCTAD stands for United Nations Conference on Trade and Development.

    The international organization Oxfam tells us that:

    The coronavirus pandemic has the potential to lead to an increase in inequality in almost every country at once, the first time this has happened since records began…. Billionaire fortunes returned to their pre-pandemic highs in just nine months, while recovery for the world’s poorest people could take over a decade. (emphasis added, January 25, 2021)

    According to the World Bank, “The COVID-19 pandemic has pushed about 120 million people into extreme poverty over the last year in mostly low- and middle-income countries.”  And despite the roll-out of vaccines in various countries:

    the economic implications of the pandemic are deep and far-reaching. It is ushering in a “new poor” profile that is more urban, better educated, and reliant on informal sector work such as construction, relative to the existing global poor (those living on less than $1.90/day) who are more rural and heavily reliant on agriculture. (emphasis added)

    Another source notes that:

    Pew Research Center, using World Bank data, has estimated that the number of poor in India (with income of $2 per day or less in purchasing power parity) has more than doubled from 60 million to 134 million in just a year due to the pandemic-induced recession. This means, India is back in a situation to be called a “country of mass poverty” after 45 years. (emphasis added)

    In Europe, there is no end in sight to the economic decline that keeps unfolding. The United Kingdom, for example, experienced its worst economy in literally 300 years:

    The economy in the U.K. contracted 9.9 percent in 2020, the worst year on record since 1709, the Office for National Statistics (ONS) said in a report on Friday (Feb. 12). The overall economic drop in 2020 was more than double in 2009, when U.K. GDP declined 4.1 percent due to the worldwide financial crisis. Britain experienced the biggest annual decline among the G7 economies — France saw its economy decline 8.3 percent, Italy dropped 8.8 percent, Germany declined 5 percent and the U.S. contracted 3.5 percent. (emphasis added)

    Another source also notes that, “The Eurozone is being haunted by ‘ghost bankruptcies,’ with more than 200,000 firms across the European Union’s four biggest nations under threat when Covid financial lifelines stop.” In another sign of economic decline, this time in Asia, Argus Media reported in April 2021 that Japan’s 2020-21 crude steel output fell to a 52-year low.

    Taken alone, on a country-by-country basis, these are not minor economic downturns, but when viewed as a collective cumulative global phenomenon, the consequences are more serious. It is a big problem when numerous economies decline simultaneously. The world is more interdependent and interconnected than ever. What happens in one region necessarily affects other regions.

    One could easily go country by country and region by region and document many tragic economic developments that are still unfolding and worsening. Argentina, Lebanon, Colombia, Turkey, Brazil, Mexico, Jordan, South Africa, Nigeria, and dozens of other countries are all experiencing major economic setbacks and hardships that will take years to overcome and will negatively affect the economies of other countries in an increasingly interdependent world. And privatization schemes around the world are just making conditions worse for the majority of people. Far from solving any problems, neoliberalism has made everything worse for working people and society.

    It is too soon for capitalist ideologues to be euphoric about “miraculous economic growth and success.” There is no meaningful evidence to show that there is deep, significant, sustained economic growth on a broad scale. There is tremendous economic carnage and pain out there, and the scarring and consequences are going to linger for some time. No one believes that a big surge of well-paying jobs is right around the corner. Nor does anyone believe that more schemes to pay the rich under the banner of high ideals will improve things either.

    Relentless disinformation about the economy won’t solve any problems or convince people that they are not experiencing what they are experiencing. Growing poverty, hunger, homelessness, unemployment, under-employment, debt, inequality, anxiety, and insecurity are real and painful. They require real solutions put forward by working people, not major owners of capital concerned only with maximizing private profit as fast as possible.

    The economy cannot improve and serve a pro-social aim and direction so long as those who produce society’s wealth, workers, are disempowered and denied any control of the economy they run. Allowing major decisions to be made by a historically superfluous financial oligarchy is not the way forward. The rich and their representatives are unfit to rule and have no real solutions for the recurring crises caused by their outmoded system. They are focused mainly on depriving people of an outlook that opens the path of progress to society.

    There is no way for the massive wealth of society to be used to serve the general interests of society so long as the contradiction between the socialized nature of the economy and its continued domination by competing private interests remain unresolved. All we are left with are recurring economic crises that take a bigger and bigger toll on humanity. To add insult to injury, we are told that there is no alternative to this outdated system, and that the goal is to strive for “inclusive capitalism,” “ethical capitalism,” “responsible capitalism,” or some other oxymoron.

    But there is an alternative. Existing conditions do not have to be eternal or tolerated. History shows that conditions that favor the people can be established. The rich must be deprived of their ability to deprive the people of their rights, including the right to govern their own affairs and control the economy. The economy, government, nation-building, and society must be controlled and directed by the people themselves, free of the influence of narrow private interests determined to enrich themselves at the expense of everyone and everything else.

    The rich and their political and media representatives are under great pressure to distort social consciousness, undermine the human factor, and block progress. The necessity for change is for humanity to rise up and usher in a modern society that ensures prosperity, stability, and peace for all. It can be done and must be done.

    This article was posted on Friday, April 23rd, 2021 at 11:09pm and is filed under Bankruptcies, COVID-19, Debt, Economic Inequality, Economy/Economics, Federal Reserve, Food Security, Global Capitalism, Housing/Homelessness, Hunger, Joe Biden, Lies, Media, Minimum Wage, Neoliberalism, Opinion, Poverty, Ruling Elite, Student Loans, Unemployment.

    This post was originally published on Radio Free.

  • Tackling the Infrastructure and Unemployment Crises: The “American System” Solution

    A self-funding national infrastructure bank modeled on the “American System” of Alexander Hamilton, Abraham Lincoln, and Franklin D. Roosevelt would help solve two of the country’s biggest problems.

    Millions of Americans have joined the ranks of the unemployed, and government relief checks and savings are running out; meanwhile, the country still needs trillions of dollars in infrastructure. Putting the unemployed to work on those infrastructure projects seems an obvious solution, especially given that the $600 or $700 stimulus checks Congress is planning on issuing will do little to address the growing crisis. Various plans for solving the infrastructure crisis involving public-private partnerships have been proposed, but they’ll invariably result in private investors reaping the profits while the public bears the costs and liabilities. We have relied for too long on private, often global, capital, while the Chinese run circles around us building infrastructure with credit simply created on the books of their government-owned banks.

    Earlier publicly-owned U.S. national banks and U.S. Treasuries pulled off similar feats, using what Sen. Henry Clay, U.S. statesman from 1806 to 1852, named the “American System” – funding national production simply with “sovereign” money and credit. They included the First (1791-1811) and Second (1816-1836) Banks of the United States, President Lincoln’s federal treasury and banking system, and President Franklin Roosevelt’s Reconstruction Finance Corporation (RFC) (1932-1957). Chester Morrill, former Secretary of the Board of Governors of the Federal Reserve, wrote of the RFC:

    [I]t became apparent almost immediately, to many Congressmen and Senators, that here was a device which would enable them to provide for activities that they favored for which government funds would be required, but without any apparent increase in appropriations. . . . [T]here need be no more appropriations and its activities could be enlarged indefinitely, as they were, almost to fantastic proportions. [emphasis added]

    Even the Federal Reserve with its “quantitative easing” cannot fund infrastructure without driving up federal expenditures or debt, at least without changes to the Federal Reserve Act. The Fed is not allowed to spend money directly into the economy or to lend directly to Congress. It must go through the private banking system and its “primary dealers.” The Fed can create and pay only with “reserves” credited to the reserve accounts of banks. These reserves are a completely separate system from the deposits circulating in the real producer/consumer economy; and those deposits are chiefly created by banks when they make loans. (See the Bank of England’s 2014 quarterly report here.) New liquidity gets into the real economy when banks make loans to local businesses and individuals; and in risky environments like that today, banks are not lending adequately even with massive reserves on their books.

    A publicly-owned national infrastructure bank, on the other hand, would be mandated to lend into the real economy; and if the loans were of the “self funding” sort characterizing most infrastructure projects (generating fees to pay off the loans), they would be repaid, canceling out the debt by which the money was created. That is how China built 12,000 miles of high-speed rail in a decade: credit created on the books of government-owned banks was advanced to pay for workers and materials, and the loans were repaid with profits from passenger fees.

    Unlike the QE pumped into financial markets, which creates asset bubbles in stocks and housing, this sort of public credit mechanism is not inflationary. Credit money advanced for productive purposes balances the circulating money supply with new goods and services in the real economy. Supply and demand rise together, keeping prices stable. China increased its money supply by nearly 1800% over 24 years (from 1996 to 2020) without driving up price inflation, by increasing GDP in step with the money supply.

    HR 6422, The National Infrastructure Bank Act of 2020

    A promising new bill for a national infrastructure bank modeled on the RFC and the American System, H.R. 6422, was filed by Rep. Danny Davis, D-Ill., in March. The National Infrastructure Bank of 2020 (NIB) is projected to create $4 trillion or more in bank credit money to rebuild the nation’s rusting bridges, roads, and power grid; relieve traffic congestion; and provide clean air and water, new schools and affordable housing. It will do this while generating up to 25 million union jobs paying union-level wages. The bill projects a net profit to the government of $80 billion per year, which can be used to cover infrastructure needs that are not self-funding (broken pipes, aging sewers, potholes in roads, etc.). The bill also provides for substantial investment in “disadvantage communities,” those defined by persistent poverty.

    The NIB is designed to be a true depository bank, giving it the perks of those institutions for leverage and liquidity, including the ability to borrow at the Fed’s discount window without penalty at 0.25% interest (almost interest-free). According to Alphecca Muttardy, a former macroeconomist for the International Monetary Fund and chief economist on the 2020 NIB team, the NIB will create the $4 trillion it lends simply as deposits on its books, as the Bank of England attests all depository banks do. For liquidity to cover withdrawals, the NIB can either borrow from the Fed at 0.25% or issue and sell bonds.

    Modeled on its American System predecessors, the NIB will be capitalized with existing federal government debt. According to the summary on the NIB Coalition website:

    The NIB would be capitalized by purchasing up to $500 billion in existing Treasury bonds held by the private sector (e.g., in pension and other savings funds), in exchange for an equivalent in shares of preferred [non-voting] stock in the NIB. The exchange would take place via a sales contract with the NIB/Federal Government that guarantees a preferred stock dividend of 2% more than private-holders currently earn on their Treasuries. The contract would form a binding obligation to provide the incremental 2%, or about $10 billion per year, from the Budget. While temporarily appearing as mandatory spending under the Budget, the $10 billion per year would ultimately be returned as a dividend paid to government, from the NIB’s earnings stream.

    Since the federal government will be paying the interest on the bonds, the NIB needs to come up with only the 2% dividend to entice investors. The proposal is to make infrastructure loans at a very modest 2%, substantially lower than the rates now available to the state and local governments that create most of the nation’s infrastructure. At a 10% capital requirement, the bonds can capitalize ten times their value in loans. The return will thus be 20% on a 2% dividend outlay from the NIB, for a net return on investment of 18% less operating costs. The U.S. Treasury will also be asked to deposit Treasury bonds with the bank as an “on-call” subscriber.

    The American System: Sovereign Money and Credit

    U.S. precedents for funding internal improvements with “sovereign credit” – credit issued by the national government rather than borrowed from the private banking system – go back to the American colonists’ paper scrip, colonial Pennsylvania’s “land bank”, and the First U.S. Bank of Alexander Hamilton, the first U.S. Treasury Secretary. Hamilton proposed to achieve the constitutional ideal of “promoting the general welfare” by nurturing the country’s fledgling industries with federal subsidies for roads, canals, and other internal improvements; protective measures such as tariffs; and easy credit provided through a national bank. Production and the money to finance it would all be kept “in house,” without incurring debt to foreign financiers. The national bank would promote a single currency, making trade easier, and would issue loans in the form of “sovereign credit.” ’

    Senator Henry Clay called this model the “American System” to distinguish it from the “British System” that left the market to the “invisible hand” of “free trade,” allowing big monopolies to gobble up small entrepreneurs, and foreign bankers and industrialists to exploit the country’s labor and materials. After the charter for the First US Bank expired in 1811, Congress created the Second Bank of the United States in 1816 on the American System model.

    In 1836, Pres. Andrew Jackson shut down the Second U.S. Bank due to perceived corruption, leaving the country with no national currency and precipitating a recession.  “Wildcat” banks issued their own banknotes – promissory notes allegedly backed by gold. But the banks often lacked the gold necessary to redeem the notes, and the era was beset with bank runs and banking crises.

    Abraham Lincoln’s economic advisor was Henry Carey, the son of Matthew Carey, a well-known printer and publisher who had been tutored by Benjamin Franklin and had tutored Henry Clay. Henry Carey proposed creating an independent national currency that was non-exportable, one that would remain at home to do the country’s own work. He advocated a currency founded on “national credit,” something he defined as “a national system based entirely on the credit of the government with the people, not liable to interference from abroad.” It would simply be a paper unit of account that tallied work performed and goods delivered.

    On that model, in 1862 Abraham Lincoln issued U.S. Notes or Greenbacks directly from the U.S. Treasury, allowing Lincoln’s government not only to avoid an exorbitant debt to British bankers and win the Civil War, but to fund major economic development, including tying the country together with the transcontinental railroad – an investment that actually turned a profit for the government.

    After Lincoln was assassinated in 1865, the Greenback program was discontinued; but Lincoln’s government also passed the National Bank Act of 1863, supplemented by the National Bank Act of 1864. Originally known as the National Currency Act, its stated purpose was to stabilize the banking system by eradicating the problem of notes issued by multiple banks circulating at the same time. A single banker-issued national currency was created through chartered national banks, which could issue notes backed by the U.S. Treasury in a quantity proportional to the bank’s level of capital (cash and federal bonds) deposited with the Comptroller of the Currency.

    From Roosevelt’s Reconstruction Finance Corporation (1932-57) to HR 6422

    The American president dealing with an economic situation most closely resembling that today, however, was Franklin D. Roosevelt. America’s 32nd president resolved massive unemployment and infrastructure problems by greatly expanding the Reconstruction Finance Corporation (RFC) set up by his predecessor Herbert Hoover. The RFC was a remarkable publicly-owned credit machine that allowed the government to finance the New Deal and World War II without turning to Congress or the taxpayers for appropriations. The RFC was not called an infrastructure bank and was not even a bank, but it served the same basic functions. It was continually enlarged and modified by Pres. Roosevelt to meet the crisis of the times until it became America’s largest corporation and the world’s largest financial organization. Its semi-independent status let it work quickly, allowing New Deal agencies to be financed as the need arose. According to Encyclopedia.com:

    [T]he RFC—by far the most influential of New Deal agencies—was an institution designed to save capitalism from the ravages of the Great Depression. Through the RFC, Roosevelt and the New Deal handed over $10 billion to tens of thousands of private businesses, keeping them afloat when they would otherwise have gone under ….

    A similar arrangement could save local economies from the ravages of the global shutdowns today.

    The Banking Acts of 1932 provided the RFC with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). The initial capital came from a stock sale to the U.S. Treasury. With those modest resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. A small part of this came from its initial capitalization. The rest was financed with bonds sold to the Treasury, some of which were then sold to the public. The RFC ended up borrowing a total of $51.3 billion from the Treasury and $3.1 billion from the public.

    Thus the Treasury was the lender, not the borrower, in this arrangement. As the self-funding loans were repaid, so were the bonds that were sold to the Treasury, leaving the RFC with a net profit. The RFC was the lender for thousands of infrastructure and small business projects that revitalized the economy, and these loans produced a total net income of over $690 million on the RFC’s “normal” lending functions (omitting such things as extraordinary grants for wartime). The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more–all while generating income for the government.

    HR 6422 proposes to mimic this feat. The National Infrastructure Bank of 2020 can rebuild crumbling infrastructure across America, pushing up long-term growth, not only without driving up taxes or the federal debt, but without hyperinflating the money supply or generating financial asset bubbles. The NIB has growing support across the country from labor leaders, elected officials, and grassroots organizations. It can generate real wealth in the form of upgraded infrastructure and increased employment as well as federal and local taxes and GDP, paying for itself several times over without additional outlays from the federal government. With official unemployment at nearly double what it was a year ago and an economic crisis unlike the U.S. has seen in nearly a century, the NIB can trigger the sort of “economic miracle” the country desperately needs.

    • This article was first posted on ScheerPost.

    This article was posted on Thursday, December 24th, 2020 at 10:32pm and is filed under Banks/Banking, China, Debt, Economy/Economics, Federal Reserve, Finance, Infrastructure, Infrastructure and Development Bank, Unemployment.

    This post was originally published on Radio Free.

  • Why the Fed Needs Public Banks

    The Fed’s policy tools – interest rate manipulation, quantitative easing, and “Special Purpose Vehicles” – have all failed to revive local economies suffering from government-mandated shutdowns. The Fed must rely on private banks to inject credit into Main Street, and private banks are currently unable or unwilling to do it. The tools the Fed actually needs are public banks, which could and would do the job.

    On November 20, US Treasury Secretary Steven Mnuchin informed Federal Reserve Chairman Jerome Powell that he would not extend five of the Special Purpose Vehicles (SPVs) set up last spring to bail out bondholders, and that he wanted the $455 billion in taxpayer money back that the Treasury had sent to the Fed to capitalize these SPVs. The next day, Powell replied that he thought it was too soon – the SPVs still served a purpose – but he agreed to return the funds. Both had good grounds for their moves, but as Wolf Richter wrote on WolfStreet.com, “You’d think something earth-​shattering happened based on the media hullabaloo that ensued.”

    Richter noted that the expiration date on the SPVs had already been extended; that their purpose was “to bail out and enrich bondholders, particularly junk-bond holders and speculators with huge leveraged bets”; and that their use had been “minuscule by Fed standards.” They had done their job, which was mostly to be “a jawboning tool to inflate asset prices.” Investors and speculators, confident that the Fed had their backs, had “created wondrous credit markets that are now frothing at the mouth,” making the bond speculators quite rich. However, in Mnuchin’s own words, “The people that really need support right now are not the rich corporations, it is the small businesses, it’s the people who are unemployed.” So why aren’t they getting the support? According to Richter:

    Powell himself has been badgering Congress for months to provide more fiscal support to small businesses and other entities because the Fed was not well suited to do so, which was the reason the Main Street Lending Program (MSLP) never really got off the ground.

    The reason the Fed is not well suited to the task is that it is not allowed to make loans directly to Main Street businesses. It must rely on banks to do it, and private banks are currently unable or unwilling to make those loans as needed. But publicly-owned banks would. Fortunately, Several promising public bank bills were recently introduced in Congress that could help resolve this crisis.

    The reason the Fed is not well suited to the task is that it is not allowed to make loans directly to Main Street businesses. It must rely on banks to do it, and private banks are currently unable or unwilling to make those loans as needed. But publicly-owned banks would. Fortunately, Several promising public bank bills were recently introduced in Congress that could help resolve this crisis.

    But first, a look at why the Fed’s own efforts have failed.

    The Fed Lacks the Tools to Inject Liquidity into the Real Economy

    Congress has charged the Federal Reserve with a dual mandate: to maintain the stability of the currency (prevent inflation or deflation) and maintain full employment.  Not only are we a long way from full employment, but the stability of the currency is in question, although economists disagree on whether we are headed for massive inflation or crippling deflation. Food prices and other at-home costs are up; but away-from-home costs (gas, flights, hotels, entertainment, office apparel) are down. Food prices are up not because of “too much money chasing too few goods” (demand/pull inflation) but because of supply and production problems (cost/push inflation). In terms of “output,” we are definitely looking at deflation. An August 2020 Bloomberg article quotes economist Lacy Hunt:

    [A]ccording to the figures of the Congressional Budget Office, the output gap will be a record this year and we will have a deflationary gap. In other words, potential GDP will be well above real GDP. And according to the CBO, we’re going to have a deflationary output gap through 2030.

    The Fed’s monetary policies, it seems, are not working. On November 11 and 12, according to Reuters:

    [T]he world’s top central bankers … tune[d] into the European Central Bank’s annual policy symposium … to figure out why monetary policy is not working as it used to and what new role they must play in a changed world – be it fighting inequality or climate change.

    … Central banks’ failure to achieve their targets is beginning to challenge a key tenet of monetary theory: that inflation is always a factor of their policy and that prices rise as unemployment falls.

    The Fed adopted a fixed 2% target in 2012. To achieve it, explains investment writer James Molony, they “have implemented unprecedented policies. Interest rates have been slashed, in some cases to near zero, and they have engaged in printing money in order to buy bonds and other assets, otherwise known as quantitative easing.”

    Lowering the interest rate is supposed to encourage lending, which increases the circulating money supply and generates the demand necessary to prompt producers to increase GDP. But the fed funds rate, the only rate the central bank controls, is nearly at zero; and the equivalent rates in the European Union and Japan are actually in negative territory. Yet in none of these three countries has the central bank been able to reach its inflation target.

    The Fed has now resorted to “average inflation targeting” – meaning it will allow inflation to run above its 2% target to make up for periods when inflation was below 2%. To turn up the economic heat, Chairman Powell has been pleading for more stimulus from Congress. If Congress issues bonds, increasing the federal debt, the Fed can buy the bonds; and the money spent into the economy will increase the money supply. But federal legislators have not been able to agree on the terms of a stimulus package.

    Why can’t the Fed do the job, though, itself? In a speech to the Japanese in 2002, former Fed Chairman Ben Bernanke argued (citing Milton Friedman) that it was relatively easy to fix a deflationary recession:  just fly over the people in helicopters and drop money on them. They would then spend it on consumer goods, creating the demand necessary to prompt productivity. So where are the Fed’s helicopters?

    “The Fed Doesn’t  ‘Do’ Money.”

    In a recent article titled “Where Is It, Chairman Powell?”, Jeffrey Snider, Head of Global Research at Alhambra Investments, questioned whether the Fed’s policies were creating inflation as alleged at all. He wrote:

    After spending months deliberately hyping a “flood” of digital money printing, and then unleashing average inflation targeting making Americans believe the central bank will be wickedly irresponsible when it comes to consumer prices, the evidence portrays a very different set of circumstances. Inflationary pressures were supposed to have been visible by now, seven months and counting, when instead it is disinflation which is most evident – and it is spreading.

    The problem, said Snider, is that “The Fed doesn’t do money, therefore there’s no way the Fed can have its monetary inflation.”

    The Fed doesn’t “do” money? What does that mean?

    As explained by Prof. Joseph Huber, chair of economic and environmental sociology at Martin Luther University of Halle-Wittenberg, Germany, we have a two-tiered money system. The only monies the central bank can create and spend are “bank reserves,” and these circulate only between banks. The central bank is not allowed to spend money directly into the economy or to lend it to local businesses. It is not even allowed to lend it directly to Congress. Rather, it must go through the private banking system. When the central bank buys assets (bonds or debt), it simply credits the reserve accounts of the banks from which the assets were bought; and banks cannot spend or lend these reserves except to each other. In an article titled “Repeat After Me: Banks Cannot And Do Not ‘Lend Out’ Reserves,” Paul Sheard, Chief Global Economist for Standard & Poor’s, explained:

    Many talk as if banks can “lend out” their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directly to commercial borrowers, so this concern is misplaced….

    Banks don’t lend out of deposits; nor do they lend out of reserves. They lend by creating deposits. And deposits are also created by government deficits. [Emphasis added.]

    The deposits circulating in the producer/consumer economy are created, not by the Fed, but by banks when they make loans. (See the Bank of England’s 2014 quarterly report here.) The central bank does create paper cash, but this money too gets into the economy only when other financial institutions buy or borrow it from the central bank in response to demand from their customers. The circulating money supply increases when banks make loans to businesses and individuals; and in risky environments like today’s, private banks are pulling back from Main Street lending, even with massive central bank reserves on their books.

    The Tools the Fed Needs to Get Liquidity into the Economy

    Private banks are not following through on the Fed’s attempted money injections, but publicly-owned banks would. In countries with strong government-owned banking systems, public banks have historically increased their lending when private banks pulled back. Public banks have a mandate to stimulate their local economies; and unlike private banks, they can do it and still turn a profit, because they have lower costs. They have eliminated the parasitic profit-extracting middlemen, and they do not have to focus on short-term profits to please their shareholders. They can pour their resources into improving the long-term prospects of the economy and its infrastructure, stimulating local productivity and strengthening the tax base.

    Three promising new bills are before Congress that would facilitate the establishment of a public banking system in the US.

    HR 8721, “The Public Banking Act”, was introduced on Oct. 30, 2020. As described on Vox, the Act would “foster the creation of public [state and local government-owned] banks across the country by providing them a pathway to getting started, establishing an infrastructure for liquidity and credit facilities for them via the Federal Reserve, and setting up federal guidelines for them to be regulated. Essentially, it would make it easier for public banks to exist, and it would give some of them grant money to get started.”

    Another bill, introduced in September by Sens. Bernie Sanders and Kirsten Gillibrand, is The Postal Banking Act, which the authors said would

    • Create $9 billion in revenue for the postal service, saving it from privatization;
    • Protect low-income or rural families and communities from predatory lending; and,
    • Reestablish postal banking to provide basic, low-cost financial services to those who cannot access banks

    The third bill, HR 6422, “The National Infrastructure Bank Act of 2020,” is modeled on Franklin Roosevelt’s Reconstruction Finance Corporation, which funded the rebuilding of the US economy in the Great Depression of the 1930s. According to its advocates, HR 6422 will build or restore over $4 trillion in infrastructure and create up to 25 million union jobs, while being “revenue neutral” (not burdening the federal government’s budget). The promise of HR 6422 and the model of the “American System” that inspired it – the innovative banking systems of Alexander Hamilton, Abraham Lincoln and Franklin Roosevelt – will be the subject of another article.

    • This article was first posted on ScheerPost.

    This article was posted on Thursday, December 3rd, 2020 at 4:16pm and is filed under Economy/Economics, Federal Reserve, Public banks.

    This post was originally published on Radio Free.