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THE FEDERAL RESERVE AND THE RENEWAL OF AMERICA (PART I)

August 5, 2013

THE FEDERAL RESERVE AND THE RENEWAL OF AMERICA (PART I)

This essay is based on an article written by William Greider in the October-November (2012) edition of the Nation. I had the great pleasure of meeting and talking with Mr. Greider in December (2011).

Ben Bernanke, chairman of the Federal Reserve and a Republican first appointed by George Bush, heads the “Fed,” as it is either affectionately or hatefully known, depending upon whether one’s interests are or are not being served by its efforts to fulfill its “dual mandate.” Its dual mandate is to strive for: (1) maximum employment and (2) stable money (aka low inflation). As usual, the devil is in the details. Just what legitimate powers may the Fed exercise in the course of fulfilling its mandate? That question has, unsurprisingly, fallen into the snare of politicians – and even regional presidents of the Fed.

Bernanke, though a Republican, apparently has been listening lately to one of his old colleagues at Princeton University, Paul Krugman, professor of economics, author and New York Times writer. Our Fed chairman is now buying $85 billion of treasury paper per month, a move he says he will continue until employment stabilizes. The theory is that by keeping interest rates near zero businesses will be encouraged to reopen their shops and offices and employment will consequently increase. Though such a move shores up and fuels speculation in the stock and bond markets (which I have criticized), his essential policy approach does follow the basic premise of Keynesian economics, i.e., in times of deep recession or depression, only the federal government has the ability to reverse things with its interventions (though I sometime look askance at the particular “intervention” selected).

The Republican Party, though its rich members love cheap money and shored up securities markets  on behalf of it Wall Street big bank patrons (along with at least two Fed regional presidents), has reverted to the stiff-necked pre-FDR Calvinist doctrine that right wingers espoused after 1929; the idea that nothing can be done to relieve economic misery except to let nature take its course. The New Deal made mincemeat of that laissez faire view of the moneyed interests some seventy-five years ago, but (refueled by the tea party crackpots) they are back again today, peddling the same tired bromides.

With some scattered dissent, conservatives are opposed to monetary expansion. I suppose one of the reasons they favor “tight money” is because they have most of it and can therefore control its flow and use. Thus if some Fed chairman wants monetary expansion which might place such “new” money beyond the control of those who already have almost all of it, such a policy must be rejected. Bernanke is the new “bad guy” among Republicans, though a Republican himself.

Republicans are still peddling long-discarded ideas that there is something mystical about free markets, that economic principles of supply and demand are somehow above the brutal fray of commerce, that Adam Smith’s “invisible hand” really exists. This is all hogwash. Economies are man-made and they are what we make them. No divine definition or even correlation is involved. Laissez faire policies based on such ancient nostrums are to be ignored unless (in the context of current reality in the marketplace) they happen to fit contemporary needs of the economy. Keynesianism does not reject all laissez faire answers – IF THEY ARE WORKING. Keynesianism is above all pragmatic, so if the Republican view of tight money is working to correct problems in our economy, then they are to be adopted. When they quit working, they are to be discarded. Economies need wiggle room and Republican views on monetary expansionism may or may not be good for the economy at a point in time. Right now tight money would compound our economic anguish, balloon interest rates, increase unemployment and roadblock any hope for our economy’s recovery. Both Keynesians and laissez faire exponents should understand this.

Actually, Paul Krugman and William Grieder correctly criticize Bernanke for not doing more than he is now with his purchase of treasury paper. Since (and in accord with my criticism) pumping more money into the banking system (WHERE MUCH OF IT FEEDS SPECULATION – WITNESS THE DOW), they say that Bernanke should figure out a way to get such new money into the sectors of commerce or industry that really need it. They are right. Why pass it through the banking system so that Wall Street banks can extract their pound of flesh and control its further use? What if, for instance, the Fed were to create special facilities for directed lending (just as it did recently for the imperiled banking system) that gets the banks to relax lending terms for credit-starved sectors like small businesses, and if the bankers refuse to play, then it could offer the same deal to financial institutions that are not banks?

The banks would scream socialism, but it is not, and even if it were, it’s already socialism since the banks are now given charge of money the Fed’s “socialists” are creating. Their real complaint is that they may lose their status of middleman and be marginalized in their control of such funds for further use. Why should banks enjoy the status of deciding what sectors of the economy will be financed? It is not their money and it is not their economy. It’s ours. Why can’t the Fed make such decisions? The issue of whether it is within the Fed’s authority and whether they may legitimately loan to specific sectors has already been decided, and, ironically, it was decided when the Fed loaned new money directly to the banks (in need of “socialist” bailouts), the very ones who would now scream socialism.

Just imagine! If the Fed guaranteed private-public bonds needed to finance the long-neglected overhaul of our nation’s common assets, if it could give a bold new beginning to economic renewal by collaborating on debt reduction for trillions of dollars for millions of underwater home mortgages (thus releasing trillions of dollars into the aggregate demand of the economy), if it could help organize and finance major infrastructure projects (like modernizing the national electrical grid, roads and bridges, building high-speed rail systems, cleaning up after Sandy etc.), then try to imagine what such a positive Keynesian intrusion (sans mysticism) would do for our economy. Can you spell PROSPERITY FOR ALL?

Here’s my short-list take: Non-exportable jobs would be created by the millions, unemployment would vanish, work we need to be done would be done, huge revenue increases to the government would end current deficits and attack long term debt, ancillary industries would be stimulated etc. etc. I could go on and on, but the reader will get the idea. This is an idea whose time has come (since we can’t get a gridlocked congress dedicated to protection of its special interests to move off dead center).

Is such a plan within the power of the Fed? Is an “Investment bank” (as suggested by some and already beginning in England) feasible? Does the Fed (a creature of statute) have the statutory authority to engage in such activities? Would it need further authority and/or clarification of existing authority to  involve itself in such activities? Are such proposed activities an encroachment on congressional authority, or does the Fed already have such untapped but unused statutory authority to pursue such a renewal of America scheme I have briefly outlined above? I will discuss these issues in Part II.  GERALD  E

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