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? Greider says, does the status quo really look any better?
Congress is a human institution and therefore fallible. Mistakes will be made, for sure. But we might ask ourselves, If Congress were empowered to manage monetary policy, could it do any worse than those experts who brought us to ruin?
If you’re thinking “yes they can,” Greider’s got a few ideas as to how we would keep Congress from giving in to their worst instincts.
[Congress could create] an internal reorganization aimed at building its expertise and educating members on how to develop a critical perspective. Congress has already created models for how to do this. The Congressional Budget Office is a respected authority on fiscal policy, reliably nonpartisan. Congress needs to create something similar for monetary policy.
Instead of consigning monetary policy to backwater subcommittees, each chamber should create a major new committee to supervise money and credit, limited in size to members willing to concentrate on becoming responsible stewards for the long run. The monetary committees, working in tandem with the Fed’s board of governors, would occasionally recommend (and sometimes command) new policy directions at the federal agency and also review its spending….
Congress also needs a “council of public elders”–a rotating board of outside advisers drawn from diverse interests and empowered to speak their minds in public. They could second-guess the makers of monetary policy but also Congress. These might include retired pols, labor leaders, academics and state governors–preferably people whose thinking is no longer defined by party politics or personal ambitions. The public could nominate representatives too. No financial wizards need apply.
I’m a pretty serious lefty, and I’m a strong believer in democracy. But I’m having trouble imagining how a “Council of public elders” would in any way slow down Congress from printing money like mad. Even if Greider admits, handing this kind of responsibility over to Congress is a pretty tall order:
Setting monetary policy is a very different process from enacting laws. The Fed operates through a continuum of decisions and rolling adjustments spread over months, even years. Congress would have to learn how to respond to deeper economic conditions that may not become clear until after the next election. The education could help the institution mature.
Congress maturing… I feel a John Stewart segment coming on.
I completely buy Greider’s core argument:
The Fed was never independent in any real sense. Its power depended on taking care of its one true constituency in banking and finance.
And I think a democratic approach to financial policy makes a lot of sense. But Greider’s concoction needs more work. A dash of Checks and Balances, perhaps? Or maybe first we work on rebuilding the ecosystem swirling in & around Congress so it can handle a simpler dish — like, say, creating a health care system that lowers cost and increases quality. I’m not sure. But it needs something, because right now I’m having a hard time swallowing it.
