The article appearing in The Patriot Update on May 10, 2012 really never discusses “just what actually needs to happen” and leaves the turnstile turning with no clear understanding of how the Federal Reserve can be reformed to empower ALL Americans to acquire private, individual ownership in an expanding economy’s income-producing productive capital assets using insured pure capital credit.
In a rare moment of bipartisan unity, lawmakers and economists on both sides of the aisle largely agreed on two points: The Federal Reserve System as it stands is hurting America and something must be done to stop it. Just what exactly needs to happen, however, was the subject of considerable debate during a Subcommittee on Domestic Monetary Policy hearing Tuesday chaired by sound-money advocate and GOP presidential contender Rep. Ron Paul (R-Texas).
The problem is that they are all focused on one-factor “labor worker” economics.
Instead they should study the essential points presented in the Capital Homestead Act relative to reforming the Federal Reserve:
• Promote Private Sector Growth Linked To Broadened Ownership.
Recreate in the 21st Century the conditions that resulted from the first Homestead Act of 1862, including full employment, declining prices, and widespread, individual and effective ownership of income generating assets. Set a realistic long-term target, based on the nation’s industrial growth potential, to achieve a minimum Capital Homestead stake for every American family. As an initial measure, this could be geared conservatively toward an equity accumulation of, for example, $150,000 over the next 20 years.
• Stop Federal Reserve Monetization Of Government Debt.
Terminate use of the Federal Reserve’s powers to create debt-backed money, to support foreign currencies, or to buy and sell primary or secondary Treasury securities. This would reduce excessive Federal Government spending and improve accountability. It would force the Federal Government to borrow for deficits directly from savers in the open markets.
• Stabilize The Value Of The Currency.
Require the Federal Reserve to create a stable, asset-backed currency to encourage ownership by ALL citizens of productive private sector assets rather than non-productive public sector debt or future ownership monopolies.
• Reduce Dependency On Past Savings For Financing Growth.
Require the Federal Reserve to distinguish between “sound” and “unsound” uses of credit, by providing interest-free money to expand bank credit to enable every American to become an owner of a viable accumulation of new income-producing assets. This would reduce America’s dependency on past savings, corporate retained earnings, or foreign government wealth funds advantaged by America’s growing trade imbalances
Require The Federal Reserve System To Supply Sufficient Money And Credit.
Require the Federal Reserve System to supply sufficient money and credit through local banks to meet the liquidity and broadened ownership needs of an expanding market-disciplined economy. Such “Fed monetized” loans would be subject to appropriate feasibility standards administered by the banks and limited only by the goal of maintaining a stable value for the dollar. Unsound uses of credit, such as the speculative credit that created subprime home mortgages and the global financial meltdown, would be financed from the accumulations of those wealthy Americans and foreigners who could afford the risks.
• Democratize Ownership Of The Federal Reserve.
Provide every citizen a single, lifetime, non-transferable voting share in the nation’s central bank and in one of the 12 regional Federal Reserve banks. This will ensure that the Fed’s board of governors is broadly representative of all groups affected by Fed policy, and that power over future money creation is spread widely among all citizens.
• Discourage Monopolies And Monopolistic Ownership.
Link all economic reforms to methods that discourage privileged access to monopolistic accumulations of private property ownership of the means of production. Enforce anti-trust laws by providing access to interest-free capital credit to encourage broadly owned new competitors to enhance and sustain market-oriented growth.
Using conventional methods of finance, over $2 trillion of new productive assets (or about $7,500 worth for every man, woman and child) are added annually to both the private sector and public sector of the U.S. economy. Virtually none of this newly created capital is financed in ways that create any new owners when it is formed. Theoretically, all or at least most of these assets could be financed in ways that they could be broadly and privately owned.
Binary economics would require that inclusionary self-liquidating capital credit be made accessible to corporate employees and other current non-owners of productive capital in order to turn them into economically independent capital owners. And, in the same way that the currently wealthy use credit to increase their wealth, and thus their incomes, this would be done without unreasonable self-deprivation during the working lives of people economically enfranchised under a comprehensive national expanded ownership strategy.
As the logic and techniques of binary corporate finance are extended throughout the economy, all new incremental productive power can automatically be built into individuals who have unsatisfied needs and wants–without diminishing their take-home pay or past accumulation of savings. This will break the monopoly of capital ownership held by the currently wealthy–those with functionally excessive productive power in terms of their consumer needs and wants. The savings of the currently wealthy would then flow into the most risky and speculative ventures, or for insuring capital credit for the non-rich, or for supplying consumer credit and other nonproductive forms of credit.
“Pure credit” can be defined as productive credit extended by a commercial bank, other financial institutions or a central bank in a manner independent of past savings, so that the amount borrowed plus all transaction costs are secured and repayable with future savings from the capital assets acquired with such credit. Limiting the extension of “pure credit” by the central bank to current non-owners and leaving the pool of past savings open for use by the currently wealthy and for nonproductive government and consumer borrowing would result in a noninflationary expansion of the ownership of capital assets. Such high-powered credit would enable private lenders to expand the money supply for feasible private sector projects by discounting their “eligible” asset acquisition loan paper with the central bank. This expansion of the money supply could continue as long as underutilized resources, people and technology are available for supplying more marketable goods and services to the economy. “Pure credit” would thus free the economy to grow to the full physical limits of its workforce, available resources, technology, and the projected additional buying power of new domestic and foreign consumers.
After each increment of new capital has paid for itself from the future earnings (future savings) that it produces, effective demand and effective supply would be synchronized by normal market forces–and this would continue to do so as long as the new capital became a source of an expanded income for the poor and those in the middle-class who today do not have adequate and secure incomes to meet their needs. Binary economics would enable them to produce and earn more as owners of “procreative” capital in order to meet these needs.
From the standpoint of corporate productiveness, the binary economics approach would build all increases in capital productiveness (i.e., value added by capital assets) into workers and other non-owners. New owners would then be entitled to all the income increases attributable to their growing shares of corporate ownership. Artificial pressures for increases in labor and welfare incomes that add to costs and therefore go into the price of products sold (e.g., more pay for less work) would tend to diminish. Removing artificial restraints on capital creation would enable output to soar.
Once the cost of creating such capital is liquidated and the new money is cancelled out, the productive assets continue to produce wealth and incomes for its owners many times their original formation cost. Hence, where capital incomes are distributed broadly within a nation of owners, prices can eventually be reduced, while making the economy as a whole work more efficiently and equitably.
A Two-Tiered Interest Solution For Separating Good From Bad Uses Of Credit
Should the Federal Reserve establish a two-tiered interest structure that sharply differentiates between participatory and productive uses of credit and exclusionary and/or nonproductive uses of credit? Under such a system, the first or higher tier, as at present, would be based on market-determined yields on already accumulated savings available to the economy (“old money”). Interest rates on old money would contain whatever “inflation premium” is appropriate to offset the direct and indirect inflationary effects of present monetary, fiscal, employment and income maintenance policies. The lower tier would be based upon “new money” created exclusively for financing private sector capital expansion in ways that democratize access to future capital ownership and profits, a counter-inflationary process the Center for Economic and Social Justice calls “Capital Homesteading.”9 As illustrated below, Capital Homesteading would provide all citizens with on self-liquidating capital credit to purchase new and transferred capital secured by future profits of viable enterprises.
The lower tier of expanded bank credit for Capital Homesteading projects would be grounded on a Federal Reserve discount rate or “service fee” of 0.5 percent or so to cover all central banking costs. The markup above each bank’s cost of money (estimated at 2 to 4 percent for low-risk capital credit) would be market-driven, based wholly on (1) the risk of loan default (the “risk premium”), (2) the cost of administering the loan, and (3) a reasonable profit for the lending institution in competition with other lenders.
The Senate and House Banking Committees should enact legislation designed to:
(1) Establish a public or quasi-public Capital Credit Reinsurance Corporation (or encourage private insurance companies to perform this function) to insure banks, insurance companies, and other lenders who make loan financing to Employee Stock Ownership Plan (ESOP) Trusts and similar credit mechanisms, such as the ISOP, CSOP and CIC. (This would be similar to the way the Federal Housing Agency insures mortgages on home financing but without making the government the insurer of last resort.)
(2) Amend Section 13 of the Federal Reserve Act to mandate that the Federal Reserve Board and Federal Reserve Banks increase the money supply responsively in ways that enable banks and other qualified lenders to make “qualified” Capital Homesteading loans on feasible (i.e., self-liquidating) projects by discounting the loan paper at a discount rate reflecting real Fed costs (i.e., “pure credit” rates that exclude any inflation premium), pursuant to regulations to be adopted by the Federal Reserve System. The Fed might also require as a condition of eligibility that such loans be insured by capital credit insurers and, for more security, that the insurers pool their risks with a capital credit reinsurance facility.
(3) Establish a counterpart of Fannie Mae and Freddie Mac to set national lending standards and insurance criteria for Capital Homesteading loans, with the power to package loans made by qualified financial institutions for discounting with the Federal Reserve System.13
(4) Remove the power that the Federal Reserve now has to change directly the quantity of money in circulation through purchase and sale of government securities via the Open Market Committee, thus preventing future monetization of government deficits and forcing government into the competitive market to fund government debt. It should be noted that the new money added for Capital Homesteading would substitute dollar-for-dollar with the reduction in open market purchases of government debt paper.
(5) Eliminate the power of the Federal Reserve to control growth of the economy by raising and lowering interest rates, thereby allowing all interest costs above the lender’s “cost of money” under the two-tiered interest rate system to be set entirely by competitive market forces.
In effect, these new policies would amount to launching and promoting a counter-inflationary alternative to today’s exclusionary and wealth-concentrating monetary policy. With new consumer power linked directly to the productiveness of new productive assets, the economy would grow at the full extent of its human and nonhuman capacity instead of being artificially constrained by the Federal Reserve System.
http://cesj.org/homestead/summary-cha.htm
http://cesj.org/socialsecurity/safeguards-cha.htmlhttp://cesj.org/binaryeconomics/price-money.html
