Home > Main > 4 Ways to Change the Fed: A Users Manual

4 Ways to Change the Fed: A Users Manual

November 7, 2011 Leave a comment Go to comments

Here's the sizzle, the last post was the steak

I’ve had a few inbound links to the 4 Ways to Change the Fed .  That post was intended to be very detailed for long time readers – but unfortunately, not many people can understand it easily.

Here is a quick and easy guide to why we want to do these things.

#1. The Fed isn’t under any control at all.  It can do almost anything it wants with monetary policy. It’s not accountable to the president or congress in any meaningful way.  It’s like a rogue bank in the middle of our government, funded by our government, that tries to control our entire economy.

But the Fed flips the middle finger to U.S. citizens when they ask for accountability to minimizing unemployment.  It’s an anti-democratic institution that’s literally out of control.

The solution?  Place the Federal Reserve Under Treasury Control.

Why?  The Treasury reports directly to the President.  If we can trust the president with the nuclear launch codes, we can and should trust him with money.  Put the Fed under the Treasury.

#2.  Normally, banks issue debt, and companies issue stock.

But for the U.S. government, the bank (the fed) issues the stock, and the company (the treasury) issues the debt.

The the fed tries to alter the yield curve with their open market operations.  It’s ass-backwards.

It should be fixed, so people recognize the government can create money at will.  Not only that, this is the way its done in the constitution.

The solution? Have the Treasury and Fed switch places.  The Treasury issues money, the Fed sets the yield curve.

#3: The U.S. is the richest country in the known history of the world.  Yet,  somehow the richest country in the history of the world doesn’t have enough money. Does this seem completely stupid to you?

It should.  We’re can’t run out of money, because we can make all we need.  We can make the money to pay for China ripping us off, and to stimulate the economy.

The Solution? Make several trillion dollar coins.  Deposit them in the Treasury account at the Fed.

We now have the money to pay for programs.   Don’t spend too much- we might get inflation.

But do spend enough to get people working.   In fact, you can spend it on a huge tax cut for working people as #4 will tell us.

#4.  We know a simple fact: Businesses hire when they are swamped with demand!  Don’t believe me? Just ask Mitt Romney! (h/t beowulf!)

Business have high profits right now, but they don’t want to hire because the demand for their products is low.

So how can we boost demand when we need it – and cut back when we don’t need it any more?

The solution: Give people more money when times are tough, and cut back when times are good.

The best way to do this is through a payroll tax holiday.  When times are tough, people get laid off.  But if your buddy gets laid off, you’ll get a raise!

I hope this helps!

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  1. Dan Kervick
    November 7, 2011 at 8:44 pm | #1

    One question: If the Fed is simply made a department of the Treasury, how are Fed and Treasury switching places?

    Building on some of the ideas I was kicking around earlier, how about reform along these lines:

    Some have proposed a balanced budget amendment to the constitution. Now for basic Keynesian reasons, I think that would be a terrible idea. But suppose we had an “accountable budget amendment” that worked something like this (I’ll leave it to people like Beowulf who understand these matters better to propose detailed legislative mechanisms):

    1. In each budget cycle, after a budget bill is passed, Congress must pass an accountability addendum to the bill that specifies, for the total amount of the authorization, the percentages that are to come from (i) taxation, (ii) borrowing and (iii) direct central bank provision.

    2. Only after Congress has passed an accountability addendum to go with the budget bill does the bill go to the president for signature. The prescribed tax percentage in the accountability addendum must be consistent with the CBO estimate of the total tax revenues to be generated during that budget year by existing taxes and changes in taxes that are part of the revenue bill.

    3. The passed amount of central bank provision gets credited directly to a special Treasury account as soon as the legislation is signed into law.

    4. It is left in the hands of Treasury to manage the pace at which its spends out of each of its accounts over the course of the fiscal year, the schedule on which it issues debt, the maturities of the bonds, yields, etc.

    5. The central bank still retains some independence to manage price stability. If it decides that Congress and the White House are relying too much on direct central bank provision, it can tighten up interest rates to slow the pace of endogenous money creation on the bank lending side to offset the money creation going into government spending. Similarly, if it decides a crazy Congress is being too restrictive, it can loosen up rates.

    But …

    6. Fed governors are elected directly: the chairman nationally for a four-year term, the other governors elected regionally for two-year terms, with the terms staggered so that half of them face re-election each year. (This would probably require a constitutional amendment.) That’s where you get the direct Fed accountability.

  2. beowulf
    November 7, 2011 at 9:42 pm | #2

    “Authorization” is the legal term for a law that creates a government program (usually open-ended, sometimes sunsetting after 5 or 10 yrs so Congress has to re-authorize it). “Appropriations” is the term for the annual (with a few rare permanent exceptions, like debt service) process of “writing checks” to fund authorized programs. If the budget (that is, all the appropriation bills) aren’t passed by the first day of the fiscal year, Oct. 1, then Congress has to vote on temporary “continuing resolutions” that funds agencies without a new appropriation bill at the exact same level as the previous year (I forget if they tack on inflation and population growth adjustments) until the budget is passed.

    Congress is so freakin’ dysfunctional that they haven’t passed a budget since 2009. I don’t think the country has gone an entire fiscal year (Oct. 1 2010 to Oct. 1 20110) without passing a budget before.
    With all due respect Dan (and anyone who reads Matt Yglesias’s site knows Dan is sharpest commenter there, inclusive of Matt), adding additional steps on Congress’s end of Pennsylvania Avenue won’t help things. If they can’t be counted on to pass a budget, they can’t be counted on to pass a budget addendum. And you’re correct, adding direct election of Fed governors would require a constitutional amendment. There’s no precedent for any national elections other than for President and Vice President, so I don’t even know how it would operate (though New Hampshire will surely insist candidates face a primary there before any other state). :o)

  3. Dan Kervick
    November 7, 2011 at 9:51 pm | #3

    There’s no precedent for any national elections other than for President and Vice President, so I don’t even know how it would operate (though New Hampshire will surely insist candidates face a primary there before any other state).

    Damn straight. Up here in NH, we’ll make the Bernanke’s of the world pay homage and eat pot roast in our living rooms before we vote them the keys to the money supply.

    • beowulf
      November 7, 2011 at 10:36 pm | #4

      LOL, the funny thing is I didn’t know you lived in New Hampshire!

      But look at this way, if the Fed is put under the President’s control (through his Tsy Sec), we’ll know exactly which elected official is responsible for our monetary system. Then every 4 years, you and your neighbors can quiz the would-be presidents on their respective monetary policies as part of the job interview.

  4. beowulf
    November 7, 2011 at 10:12 pm | #5

    “One question: If the Fed is simply made a department of the Treasury, how are Fed and Treasury switching places?”
    There’s really no need to combine the Fed and the Treasury. Think of Treasury as the Navy and the Federal Reserve as the Marine Corps, a separate service with its own chain of command and yet it still reports to the Secretary of the Navy. Likewise, the Secretary of the Treasury could exercise “supervision and control” of the Fed without changing any of the letterhead. I think John Connally would have approved of that analogy (he was Kennedy’s Navy Sec and Nixon’s Tsy Sec). :o)

    I mentioned in the original post what the amended language should read (“striking the words ‘agent appears to conflict with the powers of the Secretary of the Treasury’ and replacing with the following: ‘banks is exercised’.”), but I was remiss not to quote the current section 246 in context:
    and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

  5. Matt Franko
    November 8, 2011 at 7:42 am | #6

    Beo,

    Does your plan include/preclude some sort of “Savings Bonds” that the Treasury can issue for savers? Perhaps 1 yr, 3yr, 5yr, 10 yr with fixed coupons? For savers? The Treasury can use these like the War Bonds back in WW2 if necessary…. Resp,

    • beowulf
      November 8, 2011 at 10:38 am | #7

      Tsy could, or to keep it in the spirit of things, the Secretary of the Treasury could simply order the Fed to create some kind of– “Federal Reserve Savings Bonds” system.

  6. November 12, 2011 at 7:30 pm | #8

    I’ve gone back and forth on this, but for theoretical, practical, and political reasons, I think indexing EITC to unemployment is better than jiggering payroll taxes.

    • beowulf
      November 12, 2011 at 9:22 pm | #9

      Steve, I can see your point on theoretical or economic grounds but on practical grounds (and thus politically since its easier to understand), its much simpler to adjust everyone’s payroll tax quarterly (or monthly) than it is to adjust EITC, which can’t really be recalculated until the tax return for the current year is filled out the following spring.

  7. November 13, 2011 at 12:27 am | #10

    Yeah there used to be Advanced EITC, which allowed people to take their credit on their paychecks. But:

    1. Congress killed it in 2010 — undoubtedly because it forced them to shift some costs into the current fiscal year, but probably also because:

    2. Only about 1% of of potential recipients opted for it, probably because A) they were never told about it, and 2) it was complicated to file for.

    Which raises the key point: EITC needs to be massively simplified, so it’s as simple as Social Security, and appears as simply on paystubs. (Weekly payments would also greatly increase its “salience”: people would notice it so its incentive effects would be greater.) There is at least one whole organization devoted to helping poor people file for and claim it, and there are lots of errors (which conservatives — no doubt with some [wildly overblown] accuracy — refer to as “fraud.”).

    But I’ve reversed my thinking on the payroll tax-cut approach, because of the rhetorical problem of the SS trust fund. Even if the trust fund doesn’t matter arithmetically, it definitely matters rhetorically.

    I wrote that up in the link below, but in brief, it’s a capitulation to the right, allowing them to corner us into either:

    A) Increasing an extremely regressive tax, like Reagan-following-Carter did (yes — potentially making it somewhat less regressive if we SCRAP THE CAP),

    or

    B) Denuding the trust fund, giving them a rhetorical axe to continually hit us with.

    http://www.asymptosis.com/is-the-social-security-trust-fund-a-liberal-own-goal.html

    EITC, greatly expanded, is the program we need in a country facing ever-expanding concentration of wealth and technological unemployment. The only thing going for the payroll tax approach is short- to medium-term political expediency (which is nothing to sneeze at…)

  8. November 13, 2011 at 12:31 am | #11

    IOW, paying with political expediency today — it’s something we can get done — for rhetorical/political cost in the future.

    • beowulf
      November 13, 2011 at 11:20 am | #12

      The trust fund isn’t out a penny. Payroll taxes go where all tax dollars go to die, the Treasury General Account. After the fact, the Secretary deposits an equivalent amount into SS trust funds The current smal ball payroll tax holiday has Tsy continue funding out of Treasury “with money not otherwise appropriated (Congress’s term for “out of thin air”) :as if there were no tax holiday.
      I suggested upping the ante by continuing this practice plus depositing an equivalent amount in coin seigniorage revenue into TGA, so neither trust fund nor federal budget is out of pocket anything.

      • November 13, 2011 at 11:29 am | #13

        “Payroll taxes go where all tax dollars go to die, the Treasury General Account”

        Right I totally get that, it’s what I said in my post.

        The problem is that absent platinum coins, the trust fund remains a key rhetorical/political crux. Denuding it gives SS haters ammunition. (Because SS supporters won’t/can’t admit that the trust fund is arithmetically immaterial.)

      • November 13, 2011 at 11:33 am | #14

        Oh wait, I guess I misunderstand. Tsy is continuing to deposit the same amount in the fund, even though revenues are down? Will continue to do so?

        That’s a different kettle…

        Allows righties to argue that SS isn’t paying for itself, which is also a powerful rhetorical axe…

  1. November 7, 2011 at 3:24 pm | #1
  2. November 8, 2011 at 12:57 pm | #2
  3. February 2, 2012 at 11:49 pm | #3

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