Tag Archives: federal reserve

Fixing the Ecomony #1

Open the Federal Reserve discount window to states and local government. This initiative uses no taxpayer money, requires no action from Congress, could be implemented immediately and should save state and local governments, as much as $80-$100 billion, each year while providing badly needed economic stimulus or tax relief. In DC, this would be spun, “a trillion dollar stimulus over ten years.”

We already give access to the Fed’s discount window to banks – even non-member foreign banks (yes, among many others, Gaddafi-controlled, Central Bank of Libya-owned, Arab Banking Corp.); Wall Street and insurers of Wall Street including Goldman-Sachs, Morgan Stanley and AIG; and pseudo-banks/auto lenders including GMAC. Why not allow access for our sovereign state governments that are bound by balanced budget amendments –  many of whom now have higher credit ratings than the US government?

Can we do that? Sure. The Federal Reserve has long held the authority to lend to anyone or anything during unusual and exigent circumstances – and the Fed defines the circumstances. Under the 2010 Dodd-Frank Act, the Fed’s authority of extending credit has been changed from “specific individuals, partnerships and corporations” to also give access to “any program or facility with broad-based eligibility.”* Further, the Fed has authority to buy state and municipal securities directly (known as: quantitative easing).

Even without the emergency authority or the expanded authority, states have long been able to simply set up publicly-owned banks** for the specific purpose of Fed discount window access.

The Fed currently lends money from .015% to 1.25%. States and local government now have more than $2.8 trillion in bond debt*** – used to build roads, hospital, schools and universities, football stadiums for NFL teams, the infrequent mass transit project (liberal areas, only), infrastructure projects, attract industry, and other purposes. The Center on Budget and Policy Priorities reports that these bonds cost 4-5% of annual expenditures and recently, typical rates are from 4%-6%.

The potential for fixing the economy, however, doesn’t stop there. Individual states would have authority to use its access to the Fed discount window to finance utility construction and lower costs for consumers (according to the AJC, those in Georgia who will be subject to a $9 a month financing charge for the expansion at Plant Vogtle are ideal beneficiaries). Each state could use lower rate access to provide businesses with capital to expand and create jobs, financing to consumers for environmental improvement, offer lower cost student loans to its citizens, financing for non-profits and a host of other initiatives.

Is it inflationary? Sure, but when growth is at 1%, no worries.

Does it compete with the private sector financing? Yes, but to consider that bad, one should consider that most private financing is done with access to the Fed window and one would also have to answer why taxpayers should pay more?

Will it take a chunk of most lusted-after income out of the pockets of the greedy “masters of the universe” Wall Street investment bankers and hedge funders? Sure, and wouldn’t that be great?

As a by-product, wouldn’t it increase state and federal tax revenues, since so many wealthy investors use municipal bonds to make tax free income? Yep.

Wouldn’t former mayors, council people, senators and legislators who go into the lucrative bond business leveraging their former patronage to call in favors have to find another way to fleece taxpayers after they get out of office? Yes, that, too.

Wouldn’t it help Democrats more than Republicans? I doubt it. The Fed is not political and there are an awful lot of Republican governors who’d jump at the chance to have a little more room in their budgets. Most of those helped would be in the jobs it would save and the new jobs that could be created – jobs regardless of party affiliation.

Author’s note: This is first in a series of commonsense things we can do to fix our economy during this time when the House and Senate can agree on nothing. I invite your comment and suggestions.

Update: The article was updated on 8/8/11 at 1:42 PM.

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* Whatever the hell this could possibly mean will eventually be known when Congress approves the 4,000 rules to govern implementation of this bill. Until then, it is anyone’s guess.

** “In North Dakota, the publicly owned Bank of North Dakota (BND) acts as a “mini-Fed” for the state. Like the Federal Reserve of the 1930s and 1940s, the BND makes loans to local businesses and participates in loans made by local banks. The BND has helped North Dakota escape the credit crisis. In 2009, when other states were teetering on bankruptcy, North Dakota sported the largest surplus it had ever had. Other states, prompted by their own budget crises to explore alternatives, are now looking to North Dakota for inspiration.” – ZeroHedge.com

*** General obligation bonds (GOs), Revenue bonds, Conduit bonds, Insured bonds, Original Issue Discount bonds, Taxable bonds, Zero coupon bonds, Pre-Refunded bonds, Escrowed-to-Maturity (ETM) bonds, Housing bonds, Municipal Notes. Current total outstanding is a very difficult figure to come up with. The figure of $2.8 trillion is from Wall Street investment company estimates. The US Census Bureau’s Statistical Abstract was last updated for state and local government debt in 2007 (totaling almost $2.5 trillion), but does not include many types of municipal debt. Dependent upon the purpose, these instruments may or may not be tax free.

The Elephant in the Room

Elephant in the roomWe’ve all heard the mind-numbing numbers:  $14 trillion of national debt that will grow to $20 trillion by 2010, but is it real?

Technically, and by the political definition, yes. It is the cumulative difference between actual revenues and spending. But by any reasonable accounting standard, our definition of national debt is hoax. More precisely, it is a political hoax within a hoax.

Almost two-thirds of the national debt is owed to us – mostly to our own government and its agencies. So when the pundits of doom talk about the impending explosion of interest on the national debt, one should smirk, a bit. We have systematically plundered Social Security, Civil Service and Military retirement funds (and other trusts) – like corporate America, we are never going to pay our pensions back, we’re going to change the rules. The Federal Reserve has purchased trillions of our national debt (quantitative easing) – in effect, it has already been paid by devaluing our currency. We have also allowed “banks” to go to the Fed money window for trillions of dollars at almost no cost that they have turned around and used to buy huge amounts of our debt making incredible profits – paying them back is little more than accounting.

Only about one-third of our national debt is owned by American and overseas investors. Were the Fed sponsored debt already paid with imaginary dollars subtracted from the $14 trillion, we owe far less than than the 76% to GDP ratio we hear so often. It would be more like 25% – an amount that would rank us among the most solvent countries in the world.

How did we get in this situation? You know. The Bush, now Obama, tax cuts for the rich when combined with the unfunded wars, the bailout of Wall Street and the stimulus bill, total almost all of it. To their credit, the Dems, in passing the “Affordable” Health Care Act and losing the mid-terms, will save a couple of trillion in the next decade, but we trillions on the table as bribes to health insurance companies and big pharma to get the bill passed. The surplus to debt happened in less than ten years. It could be undone in less than 151.

Except… for the non-debt debt – the elephant2 in the room – our unfunded liabilities. It would take, perhaps, $100 trillion to fully fund our pension and veterans obligations while continuing to fund Medicaid and other off-the-book obligations. A $38 billion cut, which almost forced a government shutdown, is stomping on ants while the elephants are jumping over the wall. Silly politics. Televised sport and nothing else. Look for the reruns to begin airing in a few days.

The only responsible way to address the real debt, is to get politicians out of our accounting and health care3. Treat Social Security, Disability and Medicare as tax financed programs – without a cap, not pretend trust funds. Require all tax cuts, breaks and subsidies have a sunset provision that forces a new and separate vote to continue. Stop treating earned and unearned income differently. Plug the loopholes. Send all corporate lobbyists to Guantanamo subject to military tribunals. Pass legislation limiting political contributions so they can only be made by individuals. Require competitive bidding for all government contracts. Give the states access to the Fed money window. Get out of the wars, slash the Pentagon, NSA/CIA budgets, require a two-thirds vote in Congress to wage war and support the UN to be the world’s peace keeper. Pass immigration reform to get the 20 million here undocumented, to pay legal taxes and Social Security and have access to better paying jobs. Create a Roosevelt-like works program that offers an alternative to long-term unemployment. Require two years of community or military service for our young people and offer college as a reward. Invest in a national system of medical clinics, private or public, to implement much of Medicaid. Do something. Don’t just cut something. The systems, political, economic and accounting, are unsustainable and broken.

 

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1 By going back to historically low top rates, getting the hell out of the wars, requiring those too big to succeed without taxpayer funds to fail and getting people back to work. Duh.
2 Yes, it is ironic that the elephant is the symbol of the GOP.
3 I know, I know, I know, you are thinking, what the hell does he want to go and write about this for? Ignorance is bliss. Leave it to Nobel prize winning economists and people running for office to make this stuff up. Just couldn’t help myself.

Eating Dog is Bad for You

dogs_in_cageThis is especially true if the dog is eating you at the same time. Yet, the canine-ibalistic metaphor, dog eat dog, is the basis of our modern form of capitalism. Devour or be devoured.

On paper, some mergers may seem sufficiently benign as to benefit society. For example, it might be argued that the consolidation of our cell phone industry so that we can talk anywhere, is a good thing even though the costs are not going down. It might be argued that allowing media companies to buy other media companies created a scale of business which could simultaneously improve service, choice and lower cost, and that’s a good thing, if it happened that way. It might be argued that allowing Arthur Daniels Midland to gobble up the grains and seed producers has led to increased yield, more efficiency and a more dependable food supply, if we hadn’t let them corner the markets, drive up costs and wipe out most of the small farms around the world. Ditto oil companies. Ditto consumer products companies. Ditto the retailers. It might be argued that allowing our banks to merge across state lines and offer sophisticated financial products allowed them to compete in global markets and that was a good thing. Okay, you get the point, we’ve lived through consolidation of virtually every American industry.

What were the downsides to the chien du jour? When an acquisition or merger is pending, there is a lot at stake: stock prices and option value, interest rates on the borrowed money, poison pill benefits for management, risk of a bidding war, commissions on the transaction, etc. Most companies hire public relations counsel and equip lobbyists with unlimited campaign contributions to ensure the spin stays positive and the deals always are approved by the regulators. This results in a minimum of downside discussion. But let us look back at just one.

Banks. Once upon a time, there were state and federally charter banks in most every city in the country. Locally owned and managed. The people who ran these banks, your neighbors, made their own decisions and that made them powerful and important citizens in our little worlds. They were active in local boards and charities and were dependable contributors. They provided advice to small business. Acted as community leaders. They ran ads in their local newspapers and on their local broadcast stations. Hired local ad agencies, accountants and lawyers. Used local florist and caterers. Local printers and mailing houses. Local maintenance and janitorial firms. These banks managed their risks by lending to people they knew. This was not always fair, but it was the way it was. Each of these banks were subject to frequent audit to ensure the risks were sound.

Then along came the deregulation movement led by lobbyists for the biggest banks (more than $300 million was spent on lobbyists during the 20-years to deregulate banks) and the Depository Institutions Deregulation and Monetary Control Act of 1980 which, among other things, began the phased-repeal of the post-depression law (Glass-Steagall) that controlled speculation, forced state banks to follow the Federal rules, allowed banks to merge, cross state lines, gave all of them access to the Fed Discount Window, deregulated deposit interest, created the new rules for the second mortgages most of us have, and blurred the lines with the Savings & Loans. In 1987, overriding Fed Chairman Paul Volcker, the Federal Reserve Board voted to allow banks to join Wall Street in the securities and underwriting business. Subsequently, Reagan appointed JP Morgan director and pro-deregulation advocate Alan Greenspan as the new chairman. Add a few Bush years and a Republican Congress with a weak President Clinton and let the mergers begin.

So how’d all this turn out? Except for sign companies, not so good. The Savings & Loan industry was destroyed early on at a taxpayer cost of $160 billion. Largely as a result of mergers, the number of banks went from 15,084 in 1984 to 8,256 today. With each merger, many bank employees were either laid off or transferred. Operations centers were shuttered. 80 banks have failed. The cost to bailout troubled banks is expected to be some $4 trillion. Bank layoffs may total more than 160,000. Charity giving by banks has dried up. Bank presidents have been replaced by assistant vice-presidents on community boards. There is no local advertising to help keep the newspapers and local ad agencies afloat. Accountants, lawyers, caterers, janitors, all gone. Bank stock received in mergers is now trading in the single digits wiping out retirement and community wealth. No, not so good.

Maybe it is time we had a new leash law.