Posted 10 years ago on April 17, 2013, 7:55 p.m. EST by LeoYo
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Remaking the Federal Reserve, Building Public Banks and Opting Out of Wall Street
Wednesday, 17 April 2013 00:00 By Margaret Flowers and Kevin Zeese, Truthout | Op-Ed
Creating a Finance System That Serves the People, Part II
In Part I of this series, we examined breaking up the too-big-to-fail-or- jail banks, regulating them - especially their massive and risky derivatives trading - and more aggressively enforcing laws and regulations against security fraud.
In Part II, we examine how to remake the Federal Reserve into a transparent, democratic institution that serves the necessities of the people and the economy, not just the bankers; how to develop public banks in every state and many cities throughout the nation; and how people can opt out of Wall Street right now.
In other articles and on our web site, we examine the broader economy and how to remake it by putting in place economic democracy so that people have greater control over their economic lives and more influence over the direction of the economy.
It is worth restating that we do not see the proposals here as final, but more as an opportunity to continue the discussion so Americans can develop a finance system that serves and protects them.
Transform the Federal Reserve
A fundamental question for the new finance system is the role of the Federal Reserve and whether it should remain in private hands. The Federal Reserve is a privately owned US central bank that acts behind closed doors to create money and set interest rates, and it presently puts the interests of the big banks first. The Federal Reserve was originally created by Congress in 1913 and can be altered, nationalized or even dismantled by Congress.
The Fed is a private entity that is controlled by the banks. The 12 Regional Reserve Banks issue shares of stock to its member banks. The Fed is not operated for profit, and the stock may not be sold, traded or pledged as security for a loan. It does pay dividends that are, by law, 6 percent per year. But more importantly, the stock provides banks with votes to elect six of the nine members of the board of governors of the regional banks.
As Leo Panitch told The Real News Network, it is "not just that the banks are too powerful outside the Treasury and Fed. The Treasury and Fed are part of the Wall Street nexus, and they are organized in such a way, and the people who work in them are trained in such a way, as to be reproducing the current system."
There is widespread agreement among economists that there is a need for a central bank to regulate the money supply by setting interest rates and to be a lender of last resort in a financial crisis. However, Bill Black argues that the Fed can be made very small and mechanical in its setting of interest rates, rather than maintaining the current approach, which depends on what members of the Federal Reserve Board of Governors decide.
Further, the Fed needs to be made utterly transparent. "There is no reason for anything the Fed does to be opaque" says Black. In 2010, an "audit the Fed" bill passed in Congress despite aggressive opposition by the Fed. It was not the broad, open audit originally proposed by former Texas Republican Congressman Ron Paul and Rep. Alan Grayson (D-Florida), but it did provide a snapshot audit of a limited time of Fed activity.
As a result of the Government Accountability Office (GAO) audit of the Fed, Senate sponsor Bernie Sanders of Vermont said, "We now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world." Among the investigation's key findings was that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland. These decisions were all made without the public, media or elected officials' knowledge, and they would have remained secret without an audit.
In addition, the audit found conflicts of interest. For example, the CEO of JPMorgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Sanders urged that "No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed."
But the fundamental question is: who should control the money supply? The control of the money supply may be one of the most important functions of government, but currently it is controlled by the Federal Reserve. The Fed creates funds digitally and makes them available to private banks at a low interest rate, which the banks can then use as they like to invest, add to their personal reserves and/or make loans of up to ten times the amount of their holdings.
At present, the government can only issue bonds that are sold to the Fed, banks or investors with the funds raised by those bond issues used for federal spending. These bonds are loans that must be repaid with interest by the government. So in effect, the government places itself in a position of debt by borrowing money from the banks, and then taxpayer dollars are used to pay the debt with interest. If the government created its own (debt-free) money instead, taxpayers would get more value for their dollars and the system could be more democratic and transparent, and could function for the public good.
Henry Ford said, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Why? Because, as Thomas Edison pointed out, "If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good ... It is absurd to say our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people."
As part of the economic track of the 2011 Democracy Convention, Greg Coleridge argued that the US Constitution gives the government the power to create money; Article I, Section 8 says: "The Congress shall have power ... to coin money, regulate the value thereof, and of foreign coin." The creation of money is a public function, perhaps more important than any other part of the commons. As Coleridge points out, public money means we create our own money debt-free rather than borrowing from banks and building up debt.
The American Monetary Institute has put forward a thorough model of remaking the finance system to take power from the banks and give it to the people through the government. The institute point to a bill introduced by former Congressman Dennis Kucinich (D-Ohio), HR 2990, which dismantles the Federal Reserve and puts the necessary functions in the Department of Treasury, where a monetary authority is created to prevent inflationary and deflationary impacts. It would prevent banks from creating money through fractional reserve lending. Instead, money would be created by the government, which spends it into circulation for necessary programs - for example, infrastructure, education, health care.
Economist Jack Rasmus also urges that we "democratize" the Fed and require it to function as a national, Bank of North Dakota-like "public banking institution that would provide cost-only loans to the consumer sector (mortgage, auto, student, installment, etcetera), finance public investment corps for alternative energy, lend to community infrastructure projects, and totally remove the private banks from its board of governors and open market committee decision-making process."
Moving the money creation function into the federal government would place it within the US constitutional system of checks and balances to work for the whole society, not only for the bankers and the privileged. Rather than the banker's corporation, the Federal Reserve, creating money, the Fed would be replaced by a US Central Bank operating within the Department of the Treasury (as one option) which would create money.
Further, Coleridge argues, that there is good reason for governments to control the money supply because there are times when more money is needed in the economy and times when the money supply needs be slowed. When money is created by government, it is an asset and not debt to banks. We should be funding necessary projects and paying our debts with debt-free money. Money should be made for the benefit of the entire economy, not for the benefit of bankers.
Under such a system, the creation of money would be used to serve the interests of society. The money would be created and spent into circulation by the federal government for infrastructure, including the human infrastructure of education and health care. For example, the American Society of Civil Engineers grades US infrastructure D+ and sees an urgent need for over $3.6 trillion in spending to bring existing infrastructure to safe levels by 2020. As the federal government spends money on infrastructure and other urgent needs and funds local and state governments, this money is paid out to contractors, who pay their suppliers and laborers, who pay for their living expenses, and, ultimately, that money gets deposited into banks, which are then in a position to make loans.
Some creative thinking is needed to develop a new central banking system. We should open our minds to a wide range of options. For example, in addition to the approach described here, the finance system could be a fourth branch of government, elected directly by the people; or with a combination of elected and appointed governors to represent different parts of society, for example: energy, housing, health care, workers, transportation. The current system is not working and needs rethinking so that it serves the needs of the people and the society, not only the desires of financiers.