William Greider‘s promoting an interesting idea about how to radically restructure the Federal Reserve. The crux of his idea comes from one of the least understood powers of the Federal reserve: it can essentially create money.
During the past year, the Fed has flooded the streets with money–distributing trillions of dollars to banks, financial markets and commercial interests–in an attempt to revive the credit system and get the economy growing again…. Where did the central bank get all the money it is handing out? Basically, the Fed printed it, out of thin air. That is what central banks do.
Greider argues this power could be used to do more than just bail out Wall Street.
If Ben Bernanke can create trillions of dollars at will and spread them around the financial system, could government do the same thing to finance important public projects the people want and need? Daring as it sounds, the answer is, Yes, we can….
the essential thing to understand is that [the Fed's] power relies on democratic consent–the people’s trust, their willingness to accept the currency and use it in exchange. This is not entirely voluntary, since the government also requires people to pay their taxes in dollars, not euros or yen. But citizens conferred the power on government through their elected representatives. Newly created money is often called the “pure credit” of the nation. In principle, it exists for the benefit of all.
In this emergency, Bernanke essentially used the Fed’s money-creation power in a way that resembles the “greenbacks” Abraham Lincoln printed to fight the Civil War…. If Congress chooses to take charge of its constitutional duty, it could similarly use greenback currency created by the Federal Reserve as a legitimate channel for financing important public projects–like sorely needed improvements to the nation’s infrastructure. Obviously, this has to be done carefully and responsibly, limited to normal expansion of the money supply and used only for projects that truly benefit the entire nation (lest it lead to inflation).
What kind of projects does he have in mind?
President Obama has announced the goal of building a high-speed rail system. Ours is the only advanced industrial society that doesn’t have one (ride the modern trains in France or Japan to see what our society is missing). Trouble is, Obama has only budgeted a pittance ($8 billion) for this project. Spain, by comparison, has committed more than $100 billion to its fifteen-year railroad-building project. Given the vast shortcomings in US infrastructure, the country will never catch up with the backlog through the regular financing of taxing and borrowing.
Instead, Congress should create a stand-alone development fund for long-term capital investment projects (this would require the long-sought reform of the federal budget, which makes no distinction between current operating spending and long-term investment). The Fed would continue to create money only as needed by the economy; but instead of injecting this money into the banking system, a portion of it would go directly to the capital investment fund, earmarked by Congress for specific projects of great urgency. The idea of direct financing for infrastructure has been proposed periodically for many years by groups from right and left. Transportation Secretary Ray LaHood co-sponsored legislation along these lines a decade ago when he was a Republican Congressman from Illinois.
Would anybody other than a crazy person hand this kind of power over to Congress? Continue reading
