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August 6, 2013


We have seen in Part II of this essay that the Fed has made its resources available to banks, non-banks, corporations, individuals and even World War I bonuses to veterans both before  and after Section 13.1 of the Federal Reserve Act was adopted, and all without specific congressional approval. This suggests a broad mandate to act by our central bank and a liberal reading of just what the Fed can do under its twin charges of providing for (1) maximum employment and (2) insuring a stable money supply (aka watch-dogging inflation).

When all the arguments and counter-arguments have been presented and it is time to make a decision, then what precisely is the question to be decided? It is this: Does the Fed have the authority under Section 13.1 of the Act and a history of established precedent to establish and finance an “Investment Bank of the United States” for the purpose of channeling both public and private resources for the further purpose of public investment in the common good without congressional approval?

I say it does. Why? It already has such approval both in practice and in law, and more specifically, its authority to bring together public and private resources into such an “investment bank” is clearly based on its duty to provide for “maximum employment.” In carrying out such a duty, the Fed has the right to issue all the directives and other such protocols necessary to bring about the result of meeting its responsibility to maximize employment by the establishment of such a bank (which would include but not be limited to terms and conditions of bonding for costs of the projects to be financed etc.).

Very well, one might argue, but is an arm of the government (The Fed) the appropriate funding entity to start banks and do an end around congress to appropriate the funds necessary for infrastructure repair, investments in education etc.? The short answer is that the congress is asleep (and brawling like juveniles when awake on political matters unrelated to investment in America), and we have millions of unemployed Americans who could and should be working on investments for America’s future, ranging from a national electrical grid to crumbling bridges, roads and streets, investments in the vocational education of our people (where we have shortages of labor and some employers are proposing to bring in aliens under visa to alleviate the shortage) etc.

The Fed doesn’t appropriate money; it creates money. It could, in lieu of an investment bank that would invest in America, for instance, lower the reserve requirements for banks that would make loans to private enterprise companies who do infrastructure renewal or schools involved in vocational education. The Fed would not necessarily need to come up with any funds in such a situation, nor would it have to come up with money for the “investment bank” I propose. Its guarantees (with appropriate oversight of projects) to private entrepreneurs who do the work would be sufficient to jump-start a massive reinvestment in America’s future and employ millions of Americans who are currently sitting on their hands waiting for reason to return in the halls of congress. The ultimate result of Fed guarantees is to re-involve trillions of dollars sitting in corporate coffers these days waiting for something to happen. With Fed guarantees, it is that idle capital that would be invested. Congressional appropriations are unnecessary (as though there is even a hint that the present congress is interested in investment for the common good).

As William Greider notes, “Fed money is not exactly “free,” but it has this great virtue for government; it doesn’t cost the taxpayers anything. Fed expenditures do not show up in the federal budget, nor do they add anything to the national debt. In a sense, this freshly created money belongs to the people – all of us – and can be used in unusual ways to advance the shared public interest.”

One of the “unusual ways” in which we can advance the public interest (among other such suggested answers to the underwater mortgage situation) is a plan sponsored by Senator Jeff Merkley of Oregon. With some 20 million families with underwater mortgages, including those not backed by Fannie Mae and Freddie Mac, a government-created trust could buy up the refinanced mortgages, thus reducing (but not forgiving) payments to be made by those who are underwater. The virtue of such a plan is that the trust could substantially lower the payments by those underwater and thus release billions of dollars of demand into our moribund economy (as well as keeping their homes). A further virtue is that the banks and other financiers of such shaky mortgages would be paid off and thus enabled with such sudden capital to make more loans. It would be good for both borrowers and lenders (and their assignees). The release of billions of dollars in new aggregate demand in the economy by former underwater consumers will result in greater employment as consumers return to the shops and markets of America with money in their pockets, and all at little or no cost (and perhaps even a profit) to taxpayers since the mortgages will be ultimately paid. (As an obvious instrument of reduction of unemployment – one of the Fed’s twin mandates – this would be a program that the Fed could and should institute since it positively treats both maximization of employment and increases in revenues to both business and our treasury.)

There are other things the Fed could do as an instrument of credit policy in requiring banks to support our recovery with more plentiful lending. It could, for instance, and as mentioned above in another context, alter reserve requirements for loans deemed to support our economic recovery. It could stop paying interest on the trillions in reserves banks are now sitting on and start charging a penalty rate for banks that won’t use their lending capacity. It could lower reserve requirements for loans made to targeted categories, like small businesses, for instance. The Fed has the weapons; it needs the resolve to use them. The foregoing are just a few of the ideas that could play out in getting our economy out of the doldrums. There are dozens more. One involves the possibility of moving Chinese investors out of the two percent range of treasuries into, let’s say, a 100 billion dollar investment in a U.S. high-speed rail.

This essay is about a possible investment bank. While creating such a bank for the purposes outlined may be unlikely, I think if done at all it can be done without congressional approval and oversight – and it’s just as well, since congress shows no interest in investing in America and its people in any event, preferring to spend its time in a political insult game rather than governing. Some of this part is unrelated to the possible creation of an investment bank but is set out to suggest to readers the enormous (if underutilized) power of the Fed in its role as our central bank – and what it COULD do.

I here recommend that the Fed not only create an investment bank for the purposes enumerated above; I also recommend that they crack the regulatory whip on banks to make targeted loans (such as to small businesses and infrastructure contractors). With an economy that is barely above underwater and trillions sitting on idle, we need the positive movement that the Fed can give us. Let’s go!  GERALD  E


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