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In Defense Of Bernanke's Helicopters: The Banker-Owned Federal Reserve May Finally Be Acting Federal
The full article is well worth the read.
Nervous pundits are predicting the end of American life as we know it, after Fed Chairman Ben Bernanke announced on March 18 that he would be dropping yet another trillion dollars in helicopter money – up to $300 billion to buy long-term government bonds and an additional $750 billion to buy private debt, with the Term Asset-backed Securities Loan Facility (TALF) to be opened up for the sake of consumers and small businesses. The dollar immediately experienced its worst drop in 25 years, amid worries that the Fed’s intervention would spur hyperinflation. Typical of the concerned commentators expressing these sentiments was Mark Larson, who wrote in "Money and Markets" on March 20:
"This is Banana Republic-type stuff! And I’m not talking about the clothing store. Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes. We’re essentially monetizing our country’s debt and deliberately devaluing our country’s currency."
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Those fears may be well founded, but it is also possible that this is a watershed moment of another sort. We may look back upon it as the moment when the Federal Reserve finally adjusted its focus and started to act more like a government central bank, one that advanced "the full faith and credit of the United States" for the benefit of the United States and its citizenry, rather than just for the bankers who have held the government and its central bank hostage for so long. President Obama suggested a move in that direction when he said on the Tonight Show with Jay Leno on March 19:
"[W]e’re taking a lot of steps to . . . open up separate credit lines outside of banks for small businesses so that they can get credit -- because there are a lot of small businesses out here who are just barely hanging on. Their credit lines are starting to be cut. We’re trying to set up a securitized market for student loans and auto loans outside of the banking system. So there are other ways of getting credit flowing again." [Emphasis added.]
The Fed now appears to be taking on the role of lender of last resort not just for its member banks but for consumers and businesses generally. Provisos and cautions aside, its new "quantitative easing" policy at least has the potential to be harnessed to serve the government and the people it represents; and that is a promising development.
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The potential for the Fed to acts as a truly "federal" central bank that issues loans to the public and returns the profits to the government has been there since the 1960s; but until now, the Fed and the Administration have not made much use of it. The Fed has used its dollar-issuing power only to the extent necessary to provide the reserves to backstop bank runs
Bernanke’s Greenback Solution
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Lowering interest rates was not the only way to get new money into the economy. He said, "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." Note that he said the government (not the central bank) has a printing press, and that the government could print money at essentially no cost. The implication was that the government could create money without paying interest and without having to pay it back to the Fed or the banks.
That fairly well characterizes the money created by "quantitative easing" today. The Fed rebates the interest only after deducting its costs, which are no doubt quite generous; but in 2008, it reported that it rebated 85% of the interest it received to the Treasury.3 Since interest on long-term bonds is now under 3%, that means the interest paid by the government is less than ½ % – clearly the best deal in town, particularly since the Chinese and other foreigners are now balking at buying more U.S. debt. This is comparable to what Australia did in the 1930s, when it avoided the serious depression conditions suffered in other countries by funding public projects with credit advanced by its government-owned central bank at a fraction of one percent interest.4
Not only are the Fed’s loans nearly interest-free, but they are never paid back. The federal debt has not been paid off since 1838, when Andrew Jackson shut down the Second U.S. Bank. "Balancing the budget" just involves "servicing" the debt with interest. Money that comes from an interest-free loan that is rolled over indefinitely is essentially debt-free legal tender.
.
.
.
.
.
.
"This is Banana Republic-type stuff! And I’m not talking about the clothing store. Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes. We’re essentially monetizing our country’s debt and deliberately devaluing our country’s currency."
.
.
.
.
.
.
Those fears may be well founded, but it is also possible that this is a watershed moment of another sort. We may look back upon it as the moment when the Federal Reserve finally adjusted its focus and started to act more like a government central bank, one that advanced "the full faith and credit of the United States" for the benefit of the United States and its citizenry, rather than just for the bankers who have held the government and its central bank hostage for so long. President Obama suggested a move in that direction when he said on the Tonight Show with Jay Leno on March 19:
"[W]e’re taking a lot of steps to . . . open up separate credit lines outside of banks for small businesses so that they can get credit -- because there are a lot of small businesses out here who are just barely hanging on. Their credit lines are starting to be cut. We’re trying to set up a securitized market for student loans and auto loans outside of the banking system. So there are other ways of getting credit flowing again." [Emphasis added.]
The Fed now appears to be taking on the role of lender of last resort not just for its member banks but for consumers and businesses generally. Provisos and cautions aside, its new "quantitative easing" policy at least has the potential to be harnessed to serve the government and the people it represents; and that is a promising development.
Harnessing the Federal Reserve for Federal Purposes
The key to this potential is something that is little known or appreciated: the Fed now rebates all of its profits to the government after deducting its costs.1That means that it is actually the government that gets the benefit of the interest on the Fed’s loans; and that is how it should be, since the U.S. dollar today is backed by nothing but "the full faith and credit of the United States." The dollar is the government’s credit – its promise to repay value for value, nothing more. If the government is taking the risk that credit will not be repaid, the government should get the interest on the loans. .
.
.
.
.
The potential for the Fed to acts as a truly "federal" central bank that issues loans to the public and returns the profits to the government has been there since the 1960s; but until now, the Fed and the Administration have not made much use of it. The Fed has used its dollar-issuing power only to the extent necessary to provide the reserves to backstop bank runs
Bernanke’s Greenback Solution
.
.
.
.
.
.
Lowering interest rates was not the only way to get new money into the economy. He said, "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." Note that he said the government (not the central bank) has a printing press, and that the government could print money at essentially no cost. The implication was that the government could create money without paying interest and without having to pay it back to the Fed or the banks.
That fairly well characterizes the money created by "quantitative easing" today. The Fed rebates the interest only after deducting its costs, which are no doubt quite generous; but in 2008, it reported that it rebated 85% of the interest it received to the Treasury.3 Since interest on long-term bonds is now under 3%, that means the interest paid by the government is less than ½ % – clearly the best deal in town, particularly since the Chinese and other foreigners are now balking at buying more U.S. debt. This is comparable to what Australia did in the 1930s, when it avoided the serious depression conditions suffered in other countries by funding public projects with credit advanced by its government-owned central bank at a fraction of one percent interest.4
Not only are the Fed’s loans nearly interest-free, but they are never paid back. The federal debt has not been paid off since 1838, when Andrew Jackson shut down the Second U.S. Bank. "Balancing the budget" just involves "servicing" the debt with interest. Money that comes from an interest-free loan that is rolled over indefinitely is essentially debt-free legal tender.
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