On October 9, 2013, Alan Grayson writes in Reuters:
Warren Buffett calls the debt ceiling a “nuclear weapon, too horrible to use.” Obama administration official Jason Furman says the consequence of a default on U.S. government debt is “too terrible to think about.” When asked about a default, Wells Fargo strategist James Kochan simply commented, “Holy cripes.”
With this crisis, America is risking financial Armageddon. The default of Lehman Brothers on its $613 billion of debt ignited a chain reaction in the financial system, nearly destroying the U.S. economy. A default by the U.S. government on $17 trillion of debt — debt that has been considered the safest in the world — could be far worse.
But at heart, this is not a debt problem. It is an accounting problem. The Treasury Department issues U.S. debt, and lots of it. So you would think that America is deeply indebted to its bondholders. Yet increasingly, it is the U.S. monetary authority, the Federal Reserve, and not private investors, who buys this debt.
So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government’s debt.
This wouldn’t solve the debt problem entirely. The Federal Reserve doesn’t own all U.S. government debt; it owns only roughly $2 trillion of it. (Well $2,076,927,000,000.00, as of last Wednesday, but who’s counting?)
Yet canceling this debt would give the government substantial room under the debt ceiling to manage its finances. It would end the debt ceiling standoff in Congress, and it would prevent a default.
The debt held on the balance sheet of the Federal Reserve can be canceled without any significant consequence, because it is a bookkeeping artifact corresponding to the money supply. In essence, the government owes this money to itself. If I owe money to myself, I can cancel that debt at will and without consequence, essentially taking it out of my left pocket and putting it in my right pocket.
Last year, the Federal Reserve declared a “profit” of roughly $91 billion, much of which came from interest payments from the U.S. Treasury. The Federal Reserve then quickly remitted nearly all of this profit right back to the U.S. Treasury.
The Federal Reserve does this every year. Reducing or eliminating this unearned “profit” actually will provide a more realistic view of federal finances.
I am a Democrat, and known as a progressive. But this idea was put forward a few years ago not by me, or by a member of my party, but by Republican Representative Ron Paul.
He thinks, as do I, that the Federal Reserve’s dramatic expansion of its balance sheet is simply a way of financing the government by printing money. The Fed isn’t really “buying” Treasury bonds, it is just letting the government finance its deficit by adding to the money supply.
If this plan were enacted, there conceivably might be some operational problems for the Fed, but nothing compared to the nightmare of a default on Federal debt. Some of the Fed’s Treasury debt facilitates Fed open market operations, which is part of how the central bank manages the money supply. Surely it would be much easier for the Fed to change its money supply management techniques, though, than to figure out how to manage open market operations using defaulted Treasury bonds.
While canceling the Treasury debt held on the Federal Reserve balance sheet might be considered unorthodox, it is no more unorthodox than the quantitative easing that has added much of this debt to the Fed’s balance sheet. In any event, preventing a financial meltdown, with its attendant risks of interest rate and price spikes as well as staggering employment losses, is certainly central to the Federal Reserve’s mandate of ensuring price stability, maximum employment and moderate, long-term interest rates.
Bernanke could alleviate the debt ceiling crisis simply by canceling the debt held on the Fed’s balance sheet. I’ve written to him, and asked him to do so.
Let’s hope that he does.
As my colleague and others at the Center for Economic and Social Justice (www.cesj.org) have stated previously, whatever powers banks have in controlling the U.S. currency would disappear if the Fed (and especially the New York Fed) was not handed these powers under the Federal Reserve Act of 1913, as it has been amended. Yes, as a matter of form, it is true that the Federal Government set up the Fed so that it would be “owned” by U.S. banks, and the larger banks are owned or controlled by powerful global bankers. However, the President and the Congress select the Chair of the Fed’s Board of Governors. And the Congress could amend the Federal Reserve Act so that each of the 12 regional Feds would be owned by the citizens of each region, treating the Fed as a sort of “fourth branch of the Federal Government” charged with monetizing private sector growth in industry, commerce and agriculture in each of the 12 regions, as expressed in Section 13(2) of the Federal Reserve Act of 1913, which states:
“Any Federal reserve bank may discount notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Board of Governors of the Federal Reserve System to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of this Act.”
This Section 13(2) power still exists. It has not be used since the U.S. went into the First World War and switched from what would have been asset-backed money to debt-backed money––a switch to government debt to cover government deficits. The power to create asset-backed money could be revived and used to democratize equal opportunity for every child, woman and man to have access to whatever capital credit is extended to finance growth of the private sector with interest-free money that would repay the loan with pretax dollars, as proposed by Louis Kelso as early as 1958. Then the poorest person in the region would get the same amount of interest-free capital credit each year as someone as rich as Bill Gates or Warren Buffett. In other words, as with leveraged Employee Stock Ownership Plans (ESOPs) invented and applied by Kelso under present laws for private sector workers, propertyless citizens would no longer depend on the enormous accumulated savings of the rich to get loans to become owners and growing new jobs in the productive private sector in any region of the country. Then, the logic of corporate finance–to invest in productive capital only when those assets are expected to pay for themselves out of expected future profits–would be available to enable every worker to become a capital owner. As with ESOP, the loans for buying shares pay off the principal and other costs of the loan with untaxed future profits of the company issuing those shares. Then those without “past savings” can and have become owners out of “future savings.” When both the leadership of both political parties or third parties wake up, then the Fed would become a “social tool” owned by the people and the rich plutocrats could not stop this reform of the system. Nothing would be taken from them but the current monopoly over the creation of money, supported by politicians who promote this unjust monopoly over money. (See the Summary of the proposed Capital Homestead Act designed by our Center for Economic and Social Justice for the comprehensive set of reforms for restoring full economic power for every citizen. See the Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm. See the full Act at http://cesj.org/homestead/strategies/national/cha-full.pdf
The main reason the economic system, especially control over money and finance, produces unjust concentration of economic power and corruption of a market system is that most people have been mis-educated by academia on the nature of money and how it could serve to achieve truly full equality of opportunity to enable all citizens to become fully empowered productive capital owners with ever-growing capital incomes over the course of their lives. Educators teach people how to work (assuming jobs are not displaced by robots), but never teach them how to gain equal ownership opportunity over labor-displacing technology. When the American people wake up, the left and the right will come together to demand a Just Third Way beyond both monopoly capitalism and all forms of socialism and communism. Then Americans will have launched and achieved an economically classless society, a worthy result of a truly peaceful and just Second American Revolution. And no one will have lost anything except the power to dominate and enslave others, or the frustration of going through life feeling that change is impossible.
Those willing to work together to bring about a more just future for themselves and the rest of society should join the Coalition for Capital Homesteading at www.capitalhomestead.org. For those with time to read books and articles of the ideas behind Capital Homestead, the www.cesj.org Web site is as good as any.
http://blogs.reuters.com/great-debate/2013/10/09/ending-the-debt-limit-crisis-dear-ben-bernanke/
You can certainly see your expertise in the article you write.
The world hopes for more passionate writers such as you who
are not afraid to say how they believe. At all times follow your heart.