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. 

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This article was first posted on ScheerPost. Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of DebtThe Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com

From Lockdown to Police State: The “Great Reset” Rolls Out

Mayhem in Melbourne

On August 2, lockdown measures were implemented in Melbourne, Australia, that were so draconian that Australian news commentator Alan Jones said on Sky News: “People are entitled to think there is an ‘agenda to destroy western society.’”

The gist of an August 13th article on the Melbourne lockdown is captured in the title: “Australian Police Go FULL NAZI, Smashing in Windows of Civilian Cars Just Because Passengers Wouldn’t Give Details About Where They Were Going.”

Another article with an arresting title was by Guy Burchell in the August 7th Australian National Review: “Melbourne Cops May Now Enter Homes Without a Warrant, After 11 People Die of COVID — Australia, This Is Madness, Not Democracy.” Continue reading

Webinar, Center for Global Justice, “Why Banking Needs to Be Run as a Public Utility”

Last American Vagabond expounds on my BlackRock article and interview

He says what I didn’t! Good impassioned analysis of the subject —

Two video interviews — on RT America and Kim Iverson

Meet BlackRock, the New Great Vampire Squid

BlackRock is a global financial giant with customers in 100 countries and its tentacles in major asset classes all over the world; and it now manages the spigots to trillions of bailout dollars from the Federal Reserve. The fate of a large portion of the country’s corporations has been put in the hands of a megalithic private entity with the private capitalist mandate to make as much money as possible for its owners and investors; and that is what it has proceeded to do.

To most people, if they are familiar with it at all, BlackRock is an asset manager that helps pension funds and retirees manage their savings through “passive” investments that track the stock market. But working behind the scenes, it is much more than that. BlackRock has been called “the most powerful institution in the financial system,” “the most powerful company in the world” and the “secret power.” It is the world’s largest asset manager and “shadow bank,” larger than the world’s largest bank (which is in China), with over $7 trillion in assets under direct management  and another $20 trillion managed through its Aladdin risk-monitoring software. BlackRock has also been called “the fourth branch of government” and “almost a shadow government”, but no part of it actually belongs to the government. Despite its size and global power, BlackRock is not even regulated as a “Systemically Important Financial Institution” under the Dodd-Frank Act, thanks to pressure from its CEO Larry Fink, who has long had “cozy” relationships with government officials. Continue reading

When Profits and Politics Drive Science: The Hazards of Rushing a Vaccine at “Warp Speed”

More than 100 companies are competing to be first in the race to get a COVID-19 vaccine to market. It’s a race against time, not because the death rate is climbing but because it is falling – to the point where there could soon be too few subjects to prove the effectiveness of the drug.

So says Pascal Soriot, chief executive of AstraZeneca, a British-Swedish pharmaceutical company that is a frontrunner in the race. Soriot said on May 24th, “The vaccine has to work and that’s one question, and the other question is, even if it works, we have to be able to demonstrate it. We have to run as fast as possible before the disease disappears so we can demonstrate that the vaccine is effective.”

If the disease is disappearing of its own accord, why throw billions of dollars at developing a vaccine? The US Department of Health and Human Services (HHS) has already agreed to provide up to $1.2 billion to AstraZeneca and another $483 million to US frontrunner Moderna to develop their experimental candidates. “As American taxpayers, we are justified in asking why,” writes William Haseltine in Forbes. Continue reading

Another Bank Bailout Under Cover of a Virus

Insolvent Wall Street banks have been quietly bailed out again. Banks made risk-free by the government should be public utilities.  

When the Dodd Frank Act was passed in 2010, President Obama triumphantly declared, “No more bailouts!” But what the Act actually said was that the next time the banks failed, they would be subject to “bail ins” – the funds of their creditors, including their large depositors, would be tapped to cover their bad loans.

Then bail-ins were tried in Europe. The results were disastrous.

Many economists in the US and Europe argued that the next time the banks failed, they should be nationalized – taken over by the government as public utilities. But that opportunity was lost when, in September 2019 and again in March 2020, Wall Street banks were quietly bailed out from a liquidity crisis in the repo market that could otherwise have bankrupted them. There was no bail-in of private funds, no heated congressional debate, and no public vote. It was all done unilaterally by unelected bureaucrats at the Federal Reserve.

“The justification of private profit,” said President Franklin Roosevelt in a 1938 address, “is private risk.” Banking has now been made virtually risk-free, backed by the full faith and credit of the United States and its people. The American people are therefore entitled to share in the benefits and the profits. Banking needs to be made a public utility. Continue reading

Crushing the States, Saving the Banks: The Fed’s Generous New Rules

Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt.

No such threat looms over the banks, which have made out extremely well in this crisis. The Federal Reserve has dropped interest rates to 0.25%, eliminated reserve requirements, and relaxed capital requirements. Banks can now borrow effectively for free, without restrictions on the money’s use. Following the playbook of the 2008-09 bailout, they can make the funds available to their Wall Street cronies to buy up distressed Main Street assets at fire sale prices, while continuing to lend to credit cardholders at 21%.

If there is a silver lining to all this, it is that the Fed’s relaxed liquidity rules have made it easier for state and local governments to set up their own publicly-owned banks, something they should do post haste to take advantage of the Fed’s very generous new accommodations for banks. These public banks can then lend to local businesses, municipal agencies, and local citizens at substantially reduced rates while replenishing the local government’s coffers, recharging the Main Street economy and the government’s revenue base. Continue reading

A Universal Basic Income Is Essential and Will Work

A central bank-financed UBI can fill the debt gap, providing a vital safety net while preventing cyclical recessions.

According to an April 6 article on CNBC.com, Spain is slated to become the first country in Europe to introduce a universal basic income (UBI) on a long-term basis. Spain’s Minister for Economic Affairs has announced plans to roll out a UBI “as soon as possible,” with the goal of providing a nationwide basic wage that supports citizens “forever.” Guy Standing, a research professor at the University of London, told CNBC that there was no prospect of a global economic revival without a universal basic income. “It’s almost a no-brainer,” he said. “We are going to have some sort of basic income system sooner or later ….”

“Where will the government find the money?” is no longer a valid objection to providing an economic safety net for the people. The government can find the money in the same place it just found more than $5 trillion for Wall Street and Corporate America: the central bank can print it. In an April 9 post commenting on the $1.77 trillion handed to Wall Street under the CARES Act, Wolf Richter observed, “If the Fed had sent that $1.77 Trillion to the 130 million households in the US, each household would have received $13,600. But no, this was helicopter money exclusively for Wall Street and for asset holders.” Continue reading

Treasury Takeover? Interview with Sarah Westall and Harley Schlanger

Was the Fed Just Nationalized?

Did Congress just nationalize the Fed? No. But the door to that result has been cracked open.

Mainstream politicians have long insisted that Medicare for all, a universal basic income, student debt relief and a slew of other much-needed public programs are off the table because the federal government cannot afford them. But that was before Wall Street and the stock market were driven onto life-support by a virus. Congress has now suddenly discovered the magic money tree. It took only a few days for Congress to unanimously pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will be doling out $2.2 trillion in crisis relief, most of it going to Corporate America with few strings attached. Beyond that, the Federal Reserve is making over $4 trillion available to banks, hedge funds and other financial entities of all stripes; it has dropped the fed funds rate (the rate at which banks borrow from each other) effectively to zero; and it has made $1.5 trillion available to the repo market.

It is also the Federal Reserve that will be picking up the tab for this bonanza, at least to start. The US central bank has opened the sluice gates to unlimited quantitative easing, buying Treasury securities and mortgage-backed securities “in the amounts needed to support smooth market functions.” Last month, the Fed bought $650 billion worth of federal securities. At that rate, notes Wall Street on Parade, it will own the entire Treasury market in about 22 months. As Minneapolis Fed President Neel Kashkari acknowledged on 60 Minutes, “There is an infinite amount of cash at the Federal Reserve.” Continue reading

Socialism at Its Finest after Fed’s Bazooka Fails

In what is being called the worst financial crisis since 1929, the US stock market has lost a third of its value in the space of a month, wiping out all of its gains of the last three years. When the Federal Reserve tried to ride to the rescue, it only succeeded in making matters worse. The government then pulled out all the stops. To our staunchly capitalist leaders, socialism is suddenly looking good.  

The financial crisis began in late February, when the World Health Organization announced that it was time to prepare for a global pandemic. The Russia-Saudi oil price war added fuel to the flames, causing all three Wall Street indices to fall more than 7 percent on March 9. It was called Black Monday, the worst drop since the Great Recession in 2008; but it would get worse.  Continue reading

The Fed’s Baffling Response to the Coronavirus Explained

When the World Health Organization announced on February 24th that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points or over 10%. In an attempt to contain the damage, on March 3rd the Federal Reserve slashed the fed funds rate from 1.5% to 1.0%, in their first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.

Exasperated commentators on CNBC wondered what the Fed was thinking. They said a half point rate cut would not stop the spread of the coronavirus or fix the broken Chinese supply chains that are driving US companies to the brink. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan, the epicenter of the virus. At least 5 million companies globally have one or more tier-two suppliers in the region, meaning their suppliers get their supplies there; and 938 of the Fortune 1000 companies have tier-one or tier-two suppliers there. Moreover, fully 80% of US pharmaceuticals are made in China. A break in the supply chain can grind businesses to a halt. Continue reading

Mexico’s President AMLO Shows How It’s Done

While U.S. advocates and local politicians struggle to get their first public banks chartered, Mexico’s new president has begun construction on 2,700 branches of a government-owned bank to be completed in 2021, when it will be the largest bank in the country. At a press conference on Jan. 6, he said the neoliberal model had failed; private banks were not serving the poor and people outside the cities, so the government had to step in.

Andrés Manuel López Obrador (known as AMLO) has been compared to the United Kingdom’s left-wing opposition leader Jeremy Corbyn, with one notable difference: AMLO is now in power. He and his left-​wing coalition won by a landslide in Mexico’s 2018 general election, overturning the Institutional Revolutionary Party (PRI) that had ruled the country for much of the past century. Called Mexico’s “first full-fledged left-wing experiment,” AMLO’s election marks a dramatic change in the political direction of the country. AMLO wrote in his 2018 book “A New Hope for Mexico,” “In Mexico the governing class constitutes a gang of plunderers…. Mexico will not grow strong if our public institutions remain at the service of the wealthy elites.” Continue reading

Two power points: “A Deep Dive into Money and Banking” and “Funding the Green Transition with Public Banks”

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The Fed Protects Gamblers at the Expense of the Economy

Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.

This does not serve the real economy, in which products, services and jobs are created. However, the Fed is trapped into this speculative monetary expansion to avoid a cascade of defaults of the sort it was facing with the long-term capital management crisis in 1998 and the Lehman crisis in 2008. The repo market is a fragile house of cards waiting for a strong wind to blow it down, propped up by misguided monetary policies that have forced central banks to underwrite its highly risky ventures. Continue reading

Public Banking Solution TV interview, Nov. 2019

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The Public Banking Solution, 6.19 from Princeton TV on Vimeo.

 

Interview with Max Keiser Nov. 2019

The Key to the Environmental Crisis Is Beneath Our Feet

The Green New Deal resolution that was introduced into the U.S. House of Representatives in February hit a wall in the Senate, where it was called unrealistic and unaffordable. In a Washington Post article titled “The Green New Deal Sets Us Up for Failure. We Need a Better Approach,” former Colorado governor and Democratic presidential candidate John Hickenlooper framed the problem like this:

The resolution sets unachievable goals. We do not yet have the technology needed to reach “net-zero greenhouse gas emissions” in 10 years. That’s why many wind and solar companies don’t support it. There is no clean substitute for jet fuel. Electric vehicles are growing quickly, yet are still in their infancy. Manufacturing industries such as steel and chemicals, which account for almost as much carbon emissions as transportation, are even harder to decarbonize.

Amid this technological innovation, we need to ensure that energy is not only clean but also affordable. Millions of Americans struggle with “energy poverty.” Too often, low-income Americans must choose between paying for medicine and having their heat shut off. …

If climate change policy becomes synonymous in the U.S. psyche with higher utility bills, rising taxes and lost jobs, we will have missed our shot.

The problem may be that a transition to 100% renewables is the wrong target. Reversing climate change need not mean emptying our pockets and tightening our belts. It is possible to sequester carbon and restore our collapsing ecosystem using the financial resources we already have, and it can be done while at the same time improving the quality of our food, water, air and general health. Continue reading