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.
* 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.