On October 9, 2013, G.I. writes in The Economist:
Ms Yellen is not alone in believing that unemployment is a bigger problem than inflation now. So did Larry Summers, the front runner for the job until Democratic opposition forced him to withdraw last month. Most of her colleagues on the Fed’s policymaking Federal Open Market Committee agree. But she has felt that way longer, and more strongly. She pushed, publicly, in 2012 to hold interest rates near zero for longer than the Fed then expected, to hasten the fall in unemployment, even if it meant inflation briefly rising above 2%. She was the principle architect of the Fed’s current statement of long-term goals and operating principles which notes the equivalent importance of the Fed’s goals of full employment and low inflation and the circumstances under which it might put more weight on one versus the other.
Her preoccupation with employment goes back a long time. Her thesis adviser at Yale was James Tobin, a liberal lion and future Nobel prize winner. Her initial research was in international development but she made her mark studying labour markets. The theory of the “efficiency wage,” developed with her husband and future Nobel laureate George Akerlof, posited that workers who felt poorly paid were less productive. Knowing this, employers would pay them more than the market-clearing wage, which would raise unemployment. Ms Yellen and Mr Akerlof also demonstrated how firms and individuals might rationally decline to adjust wages or prices in response to a monetary shock. That collective behavior would produce recessions. By setting Keynesian macroeconomic theory upon microeconomic foundations, this work helped build the “New Keynesian” paradigm which is how most central banks still view the world.
In 1996, during her first stint on the Federal Reserve Board, she also took on the Fed’s hawks by advocating a target of 2% inflation rather than zero. Low positive inflation made it easier to achieve real wage adjustment, and for the Fed to engineer negative real interest rates (ironically, Mr Summers made the case first, in 1991.) That view has weathered events well.
Ms Yellen’s longtime advocacy of a 2% target virtually guarantees that she would tighten rather than let inflation become embedded above that level. “There are no doves on the [FOMC] when it comes to defending” the 2% target, says Larry Meyer of Macroeconomic Advisers who served with Ms Yellen on the Fed in the 1990s. Roberto Perli, a former Fed staffer now with Cornerstone Macro, says, “[Ms] Yellen herself would most likely welcome a reemergence of domestic inflation and, consequently, the opportunity to tighten policy as it would mean that the economy would be finally firing on all cylinders again.”
But inflation is no longer what separates hawks from doves. Hawks these days complain that the Fed’s expansive monetary policy distort financial prices, breed risk-taking, and strips the discipline from fiscal authorities. Fed officials share some of those concerns but Ms Yellen less than most. As vice-chairman, she helped Mr Bernanke nudge the FOMC towards its current, expansive stance, marked by a commitment to keep the federal funds rate at zero (where it has been since late 2008) at least until unemployment has dropped to 6.5% or lower, and to keep buying $85 billion per month of bonds with newly printed money (“quantitative easing,” or QE) until the labour market has improved substantially.
Ms Yellen has been publicly silent on monetary policy for months but likely sided strongly with Mr Bernanke on the decision to forego a taper for now. Once in office, she will probably pursue the same path he would have—a gentle taper coupled with a firm commitment to keep the funds rate at zero. Where Ms Yellen may differ is “if the economy fails to strengthen as anticipated and inflation stays very low”, says Krishna Guha, a former official at the New York Fed and now an analyst at ISI Group. Ms Yellen “would fight to keep buying assets at $85 billion a month for as long as she could deliver the committee…But even with Yellen there are not the votes for QE Infinity, and cost-benefit analysis would eventually rear its head again.”
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. Hopefully Yellen will.
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-type 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.
Here’s where the asset-based money would come from:
As a citizen of the United States, Joe Lunchbucket gets a notice in the mail from the Government that the U.S. Congress passed the Capital Homestead Act of 2014. A government survey of the capital growth needs of the economy has determined that in the coming year new and existing small and large for-profit companies want to sell $2.31 trillion worth of newly-issued, full dividend-payout, full voting shares to buy capital assets to meet their growth and modernization needs to meet the demands of their U.S. and global customers.
The Act gives all companies a way to save costs, meet new customer demand for new and better products and services, and even begin to construct and modernize new infrastructure through citizen-owned for-profit corporations.
The notice informs JLB about a new right of citizenship under the Act. Like access to the political ballot, Joe has the right, if he chooses, to receive a free government-issued Capital Credit Card. For the coming year this will entitle Joe to receive free of charge capital credit to purchase with interest-free “new money $7,000 worth of the newly-issued shares of “qualified” companies. Joe will not be at risk if the bank loan cannot be paid off, because the loan will be insured by one of several licensed private capital credit insurance companies. The loan will also be reinsured by a for-profit capital credit reinsurance company established by many capital credit insurers.
Joe’s loan will be entirely backed by the anticipated profits in the form of dividends on each of the “qualified” shares that Joe, with his advisors, decides he wishes to buy. The capital credit insurance pool with added insulation from personal risk if the shares fail to earn a dividend. After the loan on each of the shares is repaid, Joe will receive dividends directly as “supplemental income” over and above income received from his work and all other sources.
The notice would also inform Joe that he should go down to his local commercial bank that is a member of the Federal Reserve System to set up in his name a “Capital Homestead Account” (CHA). The CHA, like an Individual Retirement Account (“IRA”), is a “tax-shelter” for Joe to accumulate each year income-producing investments for meeting his future consumption expenses. Joe’s CHA is designed to distribute dividend incomes during Joe’s working career as well as when Joe retires or becomes disabled. Joe’s Capital Credit Card would authorize his CHA “tax shelter” to be the legal vehicle for receiving each loan to purchase and insulate Joe from taxation when he buys “qualified” shares from the market.
Each loan for buying shares would take the form of the bank’s promissory note, which is backed by the borrower’s “bill of exchange”, which in turn is backed by the present value of the full untaxed stream of future profits paid out to Joe’s CHA. These anticipated (but obviously uncertain) future profits would in turn be turned into “future savings” when future tax-free dividends from tax-free profits are used to pay back the money borrowed by Joe’s CHA. Future profits would be generated through the production and sale of future consumer goods and services produced by the company issuing the shares bought by Joe’s CHA.
The bank subtracts from the loan principal borrowed by Joe’s CHA a discount to cover its own service fees and capital credit risk premiums. Each bank’s promissory note to a borrower like Joe is a form of asset-backed “money” (over and above money issued by the government in the form of coins and official currency). Banks can take Joe’s bills of exchange directly to the discount window of the regional Federal Reserve Bank to be used to “purchase” (reduced by a Fed discount) newly-issued new currency or Fed deposit accounts under Section 13, paragraph 2 of the Federal Reserve Act. In other words, “asset-backed money” and new capital credit can be created in ways that it can be repaid entirely with “future savings”, making it possible for every citizen to become a capital owner, without attacking private property rights or depending on past accumulations of existing owners.
Support the Agenda of The Just Third Way Movement athttp://foreconomicjustice.org/?p=5797
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice
Support the Capital Homestead Act athttp://www.cesj.org/homestead/index.htm andhttp://www.cesj.org/homestead/summary-cha.htm
See “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.orghttp://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624and “The Income Solution To Slow Private Sector Job Growth” athttp://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490.
http://www.economist.com/blogs/freeexchange/2013/10/federal-reserve
