Rather Than Sink Main Street by Raising Interest Rates, the Fed Could Save It. Here’s How. 

Inflation is plaguing consumer markets, putting pressure on the Federal Reserve to raise interest rates to tighten the money supply. But as Rex Nutting writes in a MarketWatch column titled “Why Interest Rates Aren’t Really the Right Tool to Control Inflation”:

It may be heresy to those who think the Fed is all-powerful, but the honest answer is that raising interest rates wouldn’t put out the fire. Short of throwing millions of people out of work in a recession, higher rates wouldn’t bring supply and demand back into balance, a necessary condition for price stability.

The Fed (and those who are clamoring for the Fed to raise rates immediately) have misdiagnosed the problem with the economy and are demanding the wrong kind of medicine. …

Prices are going up because crucial inputs—labor, electronics, energy, housing, transportation—are in short supply. Normally, the way to solve this imbalance would be to give workers and businesses incentives to increase their supply. …

The Fed has been assigned the job of fixing this. Unfortunately, the Fed doesn’t have the tools to do it. Monetary policy works (in theory) by tweaking demand, but it has no direct impact on supply.

The Dire Effects of the “Wrong Kind of Medicine”

Not only will raising interest rates not fix the supply crisis, but according to Alasdair Macleod, head of research at GoldMoney in London, U.K., that wrong medicine is likely to trigger the next financial crisis. He thinks it is imminent and will start in Europe, where negative interest rates brought the cost of doing repo trades to zero. As a result, the European repo market is now over €10 trillion ($11.4 trillion), far more than the capital available to unwind it (to reverse or close the trades). Rising interest rates will trigger that unwinding, says MacLeod, and the ECB lacks the tools to avoid the resulting crisis. Meanwhile, oil prices have risen over 50% and natural gas over 60% in Europe in the past year, “due to a supply crisis of its governments’ own making,” writes Macleod. Member governments are heavily in debt, yet European Central Bank president Christine Lagarde wants to borrow more to finance the transition to carbon neutral. Macleod writes darkly

As for the euro’s future, it seems unlikely that the ECB has the capability of dealing with the crisis that will unfold.… The deconstruction of this shabby arrangement should prove the end of the euro and possibly of the European Union itself. 

German journalist Ernst Wolff paints an even darker scenario. He contends that the globalist European leaders heading the World Economic Forum (WEF) are crashing the global economy intentionally, in order to clear the chessboard for the WEF’s “Great Reset.” They’re doing this, he says, because they have to. The global bankers’ boom-and-bust financial system is now so top-heavy and debt-laden that it cannot be sustained. Problem/reaction/solution: desperate people will welcome the WEF’s Great Reset, in which they will own nothing but will be offered a marginally adequate Universal Basic Income with onerous strings attached. This subsistence income will be doled out through a central bank digital currency (CBDC) controlled nationally by the country’s central bank and globally by the IMF as issuer of the reserve currency and, ultimately, of a single global currency. 

There are indications, however, that the U.S. Fed is not going along with this Eurocentric globalist push. Financial blogger Tom Luongo points to Jerome Powell’s clash with Christine Lagarde in May last year over her insistence that central banks require private banks to monitor the business of their clients, and to the Fed’s raising its repo rate to 0.25% in June, attracting investors earning zero interest in the European repo market into the U.S. dollar and away from the euro. Luongo suggests that the Fed’s resistance to the globalist plan comes from the Wall Street banks that own the New York Fed, which are not willing to give up the U.S. dollar’s status as global reserve currency and could be driven out of business by a CBDC distributed directly through individual central bank accounts. 

Preserving the current Wall Street-dominated system, however, hardly helps Main Street. The pandemic added $5 trillion to the fortunes of the billionaire class; but government-instituted lockdowns permanently shuttered more than 100,000 U.S. businesses and left vast portions of the population living on the edge. According to a recent study from Johns Hopkins University, the detrimental impact of global lockdowns substantially outweighed their public health benefits. 

Is It Time to Amend the Federal Reserve Act?

The U.S. dollar is backed by the full faith and credit of the United States: it retains its value because the American public is willing to take it in exchange for their goods and services. But the public has not been allowed access to the bottomless pool of central bank liquidity that backstops this public credit. 

According to Cornell Law School Prof. Robert Hockett, however, the framers of the Federal Reserve Act intended for Main Street businesses to be able to tap this liquidity pool. He argues that the Fed already has the monetary tools it needs to rescue the real, productive economy. They just haven’t been used – for over a century. The Fed can stay in its own lane and stimulate local production using monetary policy baked into the Federal Reserve Act itself.  

Cornell Law School’s Prof. Robert Hockett wrote in Forbes in March last year that the Federal Reserve System was originally designed to be “something akin to a network of regional development finance institutions. … Each of the twelve regional Federal Reserve Banks was to provide short-term funding directly or indirectly (through local banks) to developing businesses that needed it. This they did by ‘discounting’ – in effect, purchasing – commercial paper from those businesses.” Investopedia explains

Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities…. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates.

In determining what kinds of commercial paper to discount, wrote Hockett, “the Federal Reserve Act both was – and ironically remains – quite explicit about this: Fed discount lending is solely for ‘productive,’ not ‘speculative’ purposes.”  

In a follow-up article, Hockett explained that the drafters of the Federal Reserve Act, notably Carter Glass and Paul Warburg, were essentially following the Real Bills Doctrine (RBD). Previously known as the “commercial loan theory of banking,” it held that banks could create credit-money deposits on their balance sheets without triggering inflation if the money were issued against loans backed by commercial paper. When the borrowing companies repaid their loans from their sales receipts, the newly created money would just void out the debt and be extinguished. Their intent was that banks could sell their commercial loans at a discount at the Fed’s Discount Window, freeing up their balance sheets for more loans. Hockett wrote:

The RBD in its crude formulation held that so long as the lending of endogenous [bank-created] credit-money was kept productive, not speculative, inflation and deflation would be not only less likely, but effectively impossible. And the experience of German banks during Germany’s late 19th century Hamiltonian ‘growth miracle,’ with which the German immigrant Warburg, himself a banker, was intimately familiar, appeared to verify this. So did Glass’s experience with agricultural lending in the American South. 

According to Prof. Carl Walsh, writing in The Federal Reserve Bank of San Francisco Newsletter in 1991: 

The preamble sets out very clearly that one purpose of the Federal Reserve Act was to afford the means of discounting commercial loans. In its report on the proposed bill, the House Banking and Currency Committee viewed a fundamental objective of the bill to be the “creation of a joint mechanism for the extension of credit to banks which possess sound assets and which desire to liquidate them for the purpose of meeting legitimate commercial, agricultural, and industrial demands on the part of their clientele.”

“Liquidating” loans backed by “real bills” basically meant turning a company’s receivables into bank-issued credit that could be spent on the workers and materials needed to produce its goods and services, bringing supply in balance with demand. That “monetization” of debt might not drive up prices, but external factors obviously could. Today those factors include supply chain problems, worker shortages, and resource shortages. In the 1920s, the trigger was speculation in the stock market. 

The real bills policy was discredited after the stock market crash of 1929, due to overly-strict application by the Fed. As the tale is told in Wikipedia

Fed Board member Adolph C. Miller in 1929 launched his Direct Pressure initiative. It required all member banks seeking Federal Reserve discount window assistance to affirm that they had never made speculative loans, especially of the stock-market variety. No self-respecting banker seeking to borrow emergency reserves from the Fed was willing to undergo such interrogation, especially given that a “hard-boiled” Fed was unlikely to grant such aid. Instead, the banks chose to fail (and the Fed let them), which they did in large numbers, almost 9000 of them. 

But the policy’s original objective remains sound: “creation of a joint mechanism for the extension of credit to banks which possess sound assets and which desire to liquidate them for the purpose of meeting legitimate commercial, agricultural, and industrial demands on the part of their clientele.”

Walsh noted that discount window borrowing is currently available only for easing very short-term reserve shortages. When the Fed wants to expand bank lending, it purchases government securities from the banking sector, allowing bank reserves to expand. But he observed that this maneuver does not necessarily increase bank lending, and that some commentators argued that the Fed should be allowed to purchase existing loans from banks that could then use the funds to back new loans on the “real bills” theory. 

Compare North Dakota’s “Mini-Fed”

How might that work today? For some idea, we can look to the highly successful state-owned Bank of North Dakota, which has been described as a “mini-Fed” for the local banks of that state. Again quoting Wikipedia:

The BND serves as a wholesale bank for the state’s community banks and credit unions. It participates in loans created by the local banks by expanding their size, providing loan guarantees, and “buying down” interest rates. Additionally, it buys loans from bank portfolios as well as community bank stocks. The bank provides other banking services to local banks, such as clearing checks, acting as depository for their reserves, and providing federal funds.   

According to a May 2020 article in The Washington Post titled “North Dakota Businesses Dominated the PPP”:

Small businesses there secured more PPP [Paycheck Protection Plan] funds, relative to the state’s workforce, than their competitors in any other state …. 

What’s their secret? Much credit goes to the century-old Bank of North Dakota …. According to Eric Hardmeyer, BND’s president and chief executive, BND connected the state’s small bankers with politicians and U.S. Small Business Administration officials and even bought some of their PPP loans to help spread out the cost and risk.

… BND offers few retail services or direct loans, with the notable exception of student loans. Instead it partners with local banks, multiplying their lending power and guiding them through the ever-evolving global financial system….

BND has already rolled out two local successor programs to the PPP, intended to help businesses restart and rebuild. It has also offered deferments on its $1.1 billion portfolio of student loans.

Updating the Federal Reserve Act

The Paycheck Protection Plan was one of many relief programs established in March 2020 that were funded with Fed credit and capitalized with money from the Treasury. But Treasury backing would not actually be necessary to restore the Fed’s Discount Window to its original function. The Federal Reserve Act would just need a bit of tweaking to bring it into the 21st century. 

To start, Hockett says we need many more Federal Reserve branches than the original twelve, which are not distributed proportionately to today’s populations. The three-month limit on commercial loans and six-month limit on municipal government loans in Federal Reserve Act §10b also need to be extended; and we need a national funding agency for infrastructure, similar to the Reconstruction Finance Corporation that restored the depression-ridden U.S. economy in the 1930s. Hockett has drafted a bill for implementing his proposals, found here.

That could work for long-term production, but families faced with rising food and energy bills need help right now. Until production catches up with demand, the innovative Cornell professor suggests that the Fed can counteract the speculation that is driving up those prices with “Open Market Operations,” using its new Chicago Fed trading desk to short them in the market. Direct market intervention is highly controversial and could obviously be misused; but the tool exists, and, if properly directed, it could help satisfy the Fed’s mandate to maintain consumer price stability. For more on that rather complicated subject, see here and here.

To sum up: today’s price inflation was triggered not so much by “too much money” as by “too little supply,” due to lockdowns and mandates. The Fed can help restock consumer supplies using tools already in its toolbox. They include Open Market Operations to counteract speculation, and the Discount Window to purchase loans from local banks that would be willing to fund Main Street businesses if they had some help from the national Lender of Last Resort. We need the sort of Discount Window envisioned by the drafters of the Federal Reserve Act, one providing the liquidity to backstop bank advances against the future productivity of local businesses.  

___________________________________

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

18 Responses

  1. The free market is the tool, indirectly because only the free market can directly spend market gold medium into the real economy safely and legally.

    Real economic growth is the end in mind and it’s on the back of real growth that central banks can then raise interest rates safely and sanely without fear of an economic disaster.

    It’s the free market that now has the monetary stage and where the consumer has the spotlight.

    Free market capitalism’s emergence is a full team event. God insisted.

  2. 2024 US Senate elections, Ellen Brown secures seat in Congress. Might we see this news in broadcast and print media? America needs innovators of her creative magnitude and pragmatism.

  3. […] Rather Than Sink Main Street by Raising Interest Rates, the Fed Could Save It. Here’s How. | WEB O… […]

  4. If the problem is ‘buying stuff on credit when shelves are empty’ then there is another option. Rather than raising interest rates, the FED could put an interest ceiling on loans in order to cool down the economy. The most speculative and usurious credit will then be eliminated from the system. Regulation Q comes to mind.

  5. Powell has transitioned the U.S. banking system into a new regime, he has now joined Canada, the United Kingdom, Australia, New Zealand, Hong Kong and Sweden as a Central bank conducting monetary policy with just interest rates and not legal reserves. But interest is the price of credit, the price of money is the reciprocal of the price level.

    The money stock can never be managed by any attempt to control the cost of credit. The creation and destruction of money is not self-regulatory, it is self-reinforcing, The only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves.

    Using a price mechanism, pegging policy rates, to ration Fed credit is non-sense (“a price mechanism is a system by which the allocation of resources and distribution of goods and services are made on the basis of relative market price”).

    The effect of current open market operations on interest rates is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given change in policy rates, nobody knows until long after the fact. The consequence is a delayed, remote, and approximate control over the lending and money-creating capacity of the banking system.

  6. “Pushing on a string” only applied prior to the nominal legal adherence to the fallacious “Real Bills Doctrine” when terminated in 1932 – due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

    Today there is a surfeit of eligible collateral (> $30 trillion in governments). Gov’ts weren’t made eligible until the 1933 Glass-Steagall Act, or U.S. Banking Act of 1933, with the (with further liberalization of the eligible collateral accepted provided in the Banking Act of 1935 – “secured to the satisfaction of the Federal Reserve Bank”).

  7. The FED does not wish to save the system; however it may wish to prolong the biden Regime and kick the can down the road. The supply chain issues wherein a continuous 100 Container ships await to be unloaded off the coasts (Biden has not declared an emergency) and the Bankster fueled rise in Oil prices have been the main drivers of inflation and of course if transport costs go up 10% the box stores raise prices 20% or more. Month after month there are NET job Losses. The globalists want to let the system fail and put in their new Rigged system which unfortunately appears to mirror the CCP digital system.

  8. I remember California in 2000 was in short supply of electricity. The state was “running out of capacity” to supply demands due to data centers and more homes…lol. Turns out Enron was colluding with plant operators to shut down normal supply chains to spike market rates on purpose….shocker. Once they got rid of the market manipulation, Cali has had plenty of power ever since….SKUNKS CAUSE SUPPLY CONSTRAINTS ON PURPOSE TO MANIPULATE MARKETS. There is no labor or chip shortage without the plandemic…a psychotically over hyped flu.

  9. i’m skeptical of luongo’s take – if the wall street banks seek to prevent the collapse of the dollar why would they allow their minions in d.c. to use swift as a bludgeon against china and russia?

    the sanctions serve only to hasten the transition away from the dollar. it almost seems as if that is their true purpose.

    re: wolff’s theory – say for a moment that cyber polygon is real and it’s next on deck. the great reset folks will need a scapegoat to blame for the cyber-virus which takes down the internet/financial system. it’s only when viewed in this light that the ludicrous ukraine ‘invasion’ coverage starts to make sense.

    ie: cyber-attack-induced massive market/banking/internet crash, accounts frozen for weeks, everything the globalists desire, all because a ‘raging’ putin, ‘denied’ his way in ukraine, madly decides to ‘nuke’ the internet.

    and while we hang about wondering if we’ll ever get our money back, we’ll also be treated to 24/7 coverage of ex-military types advising biden to push the red button, repeatedly, and with due haste.

    fortunately that won’t be necessary, as the globalists will already have everything they desire, namely a populace begging for them to ride in to the rescue with their shiny new global digital currency.

    • Yep Bitcoin was created by a government or central bank and was a test to see if the brainwashed masses would fall for it. Proof why hasnt the creator cashed in a single Bitcoin when there worth 100’s of Billions. Ockams Razor “the simpliest answer is usually the correct answer” Bitcoin is tracable every transaction is recorded on the blockchain so it only makes sense it was created by a government or central bank. The new “CBDC” is coming the Fed has already released a paper on it. Total control of the populace. One bank controlling all transactions tow the line or get your wallet froze. And how idiotic to think digits in a computer is money. And on top of that you have to pay to use it. It’s intentional to collapse the dollar this has been planned for decades. Bitcoin come out right at the height of the last financial collapse. The problem is people are pathetically brainwashed.

      “Whoever controls the media, controls the mind”
      Jim Morrison

      “Ninety-nine percent of the people in the world are fools and the rest of us are in great danger of contagion.” ~ Thornton Wilder

  10. The debt they don’t declare amounts to trillions. The dólar can’t be saved. We are are just waiting for China to revalue it’s gold holdings and finally kill the dólar. The federal reserve is just an insider trading racket, profiting from the policies they implement.

  11. That’s a dumb a$$ idea. End the FED is the answer and go back to sound money. Money today doesn’t even fit the definition of money. #1 Money is a store of value. For the ignorant that means money today should have the same purchasing power tomorrow, next week or next year. Since money today does not fit that description it therefore is not money.
    Were in this mess because price inflation has outpaced wage inflation causing a pyramid scheme where money has flowed to the top of the pyramid and left the bottom of the pyramid in poverty. Sure for the elite this system works great but it has left the bottom 90% behind. More debt is not the answer. The answer is to do away with the corrupt Federal Reserve.
    It even states in our constitution that only specie(Gold and Silver) can be coined for money. So the whole Federal Reserve is a illegal institution. Perpetrated by a corrupt Congress.

    “The Central Bank is an institution of the most deadly hostility existing against the principles and form of our Constitution.” ~ Thomas Jefferson

    “Whoever controls the volume of money in any country is absolute master of all industry and commerce.” ~ James A. Garfield

    “A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army. We must not let our rulers load us with perpetual debt.” ~ Thomas Jefferson

    “Stock dealers and banking companies, by the aid of a paper system, are enriching themselves to the ruin of our country, and swaying the government by their possession of the printing presses, which their wealth commands and by any other means, not always honorable to the character of our countrymen.” ~ Thomas Jefferson

    “Real power is achieved when the ruling class controls the material essentials of life, granting and withholding them from the masses as if they were privileges.” ~ George Orwell

    “Paper money is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.” ~ Thomas Jefferson

    “A society becomes totalitarian when its structure becomes flagrantly artificial: that is, when its ruling class has lost its function but succeeds in clinging to power by force or fraud.” ~ George Orwell

    “When economic power became concentrated in a few hands, then political power flowed to those possessors and away from the citizens, ultimately resulting in an oligarchy or tyranny.” ~ John Adams

    “When a government betrays the people by amassing too much power and becoming tyrannical, the people have no choice but to exercise their original right of self-defense — to fight the government.” ~ Alexander Hamilton

    “What country can preserve its liberties if its rulers are not warned from time to time that their people preserve the spirit of resistance? Let them take arms.” ~ Thomas Jefferson

    “The masses never revolt of their own accord, and they never revolt merely because they are oppressed. Indeed, so long as they are not permitted to have standards of comparison, they never even become aware that they are oppressed.” ~ George Orwell

    “Until they became conscious they will never rebel, and until after they have rebelled they cannot become conscious.” ~ George Orwell

    PS. And crying about it and protesting will not work nor will changing elected officials.

    “Despotic governments can stand ‘moral force’ till the cows come home; what they fear is physical force.” ~ George Orwell

    “A little rebellion now and then… is a medicine necessary for the sound health of government.” ~ Thomas Jefferson

    “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.” ~ Thomas Jefferson

  12. […] source ellenbrown.com | Ellen Brown | Feb 13, […]

  13. The success of the central banking scheme developed into a far-reaching plan described by Council on Foreign Relations member President Clinton’s mentor, Georgetown Professor Carroll Quigley, “to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences…”
    https://www.academybookstore.org/ProductDetails.asp?ProductCode=MM

    Century of Enslavement: The History of The FED via .@corbettreport http://www.corbettreport.com/federalreserve/

    The Two Step Plan to National Economic Reform and Recovery https://web.archive.org/web/20190301185147/http://www.themoneymasters.com/monetary-reform-act/

  14. All one need look at is the climb in property (i.e., land) prices that began in 2010 to see that the dramatic lowering of interest rates has been capitalized into rising asking prices for residential property. Stagnant household savings and incomes has resulted in the turnover of hundreds of thousands of properties from owner-occupancy to investor-owned. Is it not interesting that those who measure inflation do not start with land price increases as the heart of inflation, even though such increases make their way through the entire economy. Our tax system at all levels adds fuel to the inflationary fire by: (a) treating gains on the sale of assets more favorably than ordinary income from wages; and (b) the almost universally-low effective rates of taxation on the potential annual rental value of locations in our towns and cities, on agricultural lands and on mineral-laden lands. The aggregate effect of conflicting public policies rewards rent-seeking activity over the production of tangible capital goods and useful services.

  15. […] There is a viable economic alternative to authoritarian centralized control of our nation if we the people continue to maintain focus and demand truth, even if only through a meme war. Ellen Brown, author of the book, Web of Debt, has been championing the solution since 2008: public banks. A recent writing here gives an updated view on the how to: https://ellenbrown.com/2022/02/13/rather-than-sink-main-street-by-raising-interest-rates-the-fed-cou… […]

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