Signaling that the recovery is still fragile, the Federal Reserve stunned financial markets and many experts by delaying a pullback in its massive stimulus program and then downgrading its outlook for economic growth.
Citing worries about the looming budget showdown in Washington and the recent boost in long-term interest rates, Fed officials said they would keep buying $85 billion worth of bonds a month in a bid to drive rates back down and give a little more support to the sluggish economy and, especially, the weak job market.
The surprise decision Wednesday sent stocks rocketing within minutes as investors welcomed the continuation of the central bank’s easy-money policies.
Yet underlying the Fed’s action was the sobering reality that the economy, after more than four years of recovery, has yet to show sustained vigor and remains fragile, with new threats on the horizon.
Chairman Benjamin Bernanke and other members of the Federal Reserve need to wake-up and implement Section 13 paragraph 2, which directs the Federal Reserve to create credit for local banks to make loans where there isn’t enough savings in the system to finance economic growth.
While journalists continue to proclaim that the Federal Reserve is pursuing its dual mandate to control inflation and maximize employment, and provide low-interest loans to business, the reality is it is not so doing. Instead, the Fed’s quantitative easing helps the big banks but does little for the economy. The purchase of bonds issued by the Treasury introduces new money into the system not backed by real productive capital assets, but instead government debt. And instead of providing capital credit loans to businesses, the big banks are investing in the speculative gains of the stock exchanges, which in turn is driving the Dow up.
The Federal Reserve was intended in part to replace the government debt-backed United States Notes (Greenbacks), National Bank Notes, and Treasury Notes of 1890 with private sector asset-backed Federal Reserve Notes.
U.S. entry into World War I was financed on debt, which resulted in backing the new Federal Reserve Notes with government debt rather than private sector assets. This was being paid down when the 1929 Crash came, fueled by money creation for speculation on Wall Street, driving the Dow up to unheard-of levels.
The Keynesian New Deal was financed on debt, and then World War II (against Keynes’s own recommendation!), causing debt to balloon. The idea that only government debt can back a currency instead of private sector assets has resulted in a global economy where an asset-backed reserve currency simply doesn’t exist any more.
In 1935 Dr. Harold G. Moulton, then president of the Brookings Institution, presented a counter proposal to the New Deal that was based on private sector initiative backed up with asset-backed instead of debt-backed financing. It was completely ignored.
Bernanke has yet to support the policies that will result in substantial double-digit GDP growth while simultaneously broadening, private sector individual ownership in FUTURE wealth-creating,income-generating productive capital assets.
What is needed is to implement the Capital Homestead Act. (http://foreconomicjustice.org/?p=8942) with interest-free capital credit loans made available via super-IRA-typle CHA accounts, repaid with the future earnings of the investments. Thus, instead of the Federal Reserve slashing bankers’ cost of money, the capital credit loans would be directed to enrich ordinary Americans by systematically broadening private sector individual ownership of the formation of FUTURE productive capital investment to empower EVERY American to accumulate over time a viable capital trust (super-IRA) portfolio of stock in diversified companies and reap the full earnings payout of corporate earnings as dividend income to support their livelihood and retirement.
Right now the Federal Reserve creates money by loaning it to banks, who re-loan it multiple times because of fractional banking rules. With Capital Homesteading, money would be created by loaning it directly to citizens via banks at near-zero interest to invest in FUTURE wealth-creating, income-generating (full dividend payout) productive capital assets formed by producer companies. To build real wealth and also phase out our near-defunct social security scheme, the new full-reserve money would go into a long-term retirement account to be invested in dividend-paying, asset-backed shares of corporations. That way, money power would be spread to all citizens. The middle class would be invigorated using the principle of compounding interest, instead of being decimated by mushrooming public and personal debt.
The Federal Reserve could play a more positive role, removing artificial barriers to equal citizen access to acquiring and owning productive capital wealth. By creating asset-backed money for production, supported by growth-oriented tax policies, the Federal Reserve could truly help promote shared prosperity in a market system.
With businesses increasingly faced with less “customers with money” they have no prospects for growth. And those that do have prospects are increasingly denied capital credit to expand. Others are dramatically reducing operational costs (including a reduction in labor workers) to sustain profitability and operations. The result is the consumer populous is not able to get the money to buy the products and services produced because their sole source of income is a job. And as tectonic shifts in the technologies of production continue to destroy jobs and devalue the worth of labor, the situation worsens, because the system’s invisible structure restricts ownership expansion of wealth-creating, income-generating productive capital assets due to the requirement of “past savings.” And yet you can’t have mass production without mass human consumption. What needs to be adjusted is the opportunity to produce, not the redistribution of income after it is produced. It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.
The purpose of production in a market economy is the consumption of products and services by the consumers who make up the economy. But without income, the non-capital ownership class, the 99 percenters, cannot afford to purchase the products and services they desire. But when incomes rise among consumers who have the need and desire to improve their material standard of living, the market demand for products and services strengthens, which in turn increases production and results in a growth economy.
To solve this problem and stimulate economic growth, we need to lift ownership-concentrating Federal Reserve System credit barriers and other institutional barriers that have historically separated owners from non-owners and link tax and monetary reforms to the goal of expanded capital ownership. This can be done under the existing legal powers of each of the 12 Federal Reserve regional banks, and will not add to the already unsustainable debt of the Federal Government or raise taxes on ordinary taxpayers. We need to free the system of dependency on Wall Street or the accumulated savings and money power of the rich and super-rich who control Wall Street. The Federal Reserve System has stifled the growth of America’s productive capacity through its monetary policy by monetizing public-sector growth and mounting Federal deficits and “Wall Street” bailouts; by favoring speculation over investment; by shortchanging the capital credit needs of entrepreneurs, inventors, farmers, and workers; by increasing the dependency of with usurious consumer credit; and by perpetuating unjust capital credit and ownership barriers between rich Americans and those without savings. The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today––management and banks––that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The first layer of risk would be taken by the commercial credit insurers, backed by a new government corporation, the Capital Diffusion Reinsurance Corporation, through which the loans could be guaranteed. This entity would fulfill the government’s responsibility for the health and prosperity of the American economy.
The Federal Reserve Board is already empowered under Section 13 of the Federal Reserve Act to reform monetary policy to discourage non-productive uses of credit, to encourage accelerated rates of private sector growth, and to promote widespread individual access to productive credit as a fundamental right of citizenship. The Federal Reserve Board needs to re-activate its discount mechanism to encourage private sector growth linked to expanded capital ownership opportunities for all Americans. Through such economic democratization reforms, economic growth would be freed from the slavery of past savings, while creating a domestic source of new asset-backed, interest-free money and expanded bank credit to finance new capital formation repayable out of future savings (earnings).
See the Just Third Way Master Plan for America’s future at http://foreconomicjustice.org/?p=5797 and the Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm
See “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624 and “The Income Solution To Slow Private Sector Job Growth” at http://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490.
http://www.latimes.com/business/la-fi-fed-stimulus-20130919,0,6452388.story
