A former top advisor to Ben Bernanke, and two other “Fed Up” activists have a plan to revise the Fed by bringing the Fed fully into the government and adding diversity.
I suggest their plan, shown below, is akin to suggesting one can make cockroaches behave.
Please consider Former Fed Staffer, Activists Detail Plan to Overhaul Central Bank.
Dartmouth College’s Andrew Levin, who was a top adviser to former Fed Chairman Ben Bernanke, Jordan Haedtler of the left-leaning Center for Popular Democracy’s Fed Up campaign and the Economic Policy Institute’s Valerie Wilson say in a paper that their proposals amount to an important modernization of the Fed.
“The Fed’s structure is simply outdated, and that makes it harder for its decisions to serve the public,” Ms. Wilson said in a press call. “We are well aware we can’t create a dramatic shake-up” of the Fed, she said, explaining what she and her colleagues are calling for is “pragmatic and nonpartisan.”
The linchpin of the overhaul is bringing the 12 quasi-private regional Fed banks fully into government.
Mr. Levin and Fed Up have seen successes in their campaign to overhaul the central bank. Earlier this year, congressional Democrats and the campaign of Democratic presidential nominee Hillary Clinton endorsed their push to remove bankers from the boards overseeing the 12 regional Fed banks. Fed Up’s effort to promote diversity in a central bank that is still dominated largely by white males, not withstanding the current leadership of Chairwoman Janet Yellen, also has gained traction among Democrats.
A People’s Fed
Andrew Levin proposes a “People’s Fed“.
Problem of Control
Levin notes the Fed is unique in that it is a mostly-private enterprise. Fair enough. But do we really want our model to be similar to the pathetic performance of the bank of Japan or the EU?
Conflict of Interest
On the surface, that’s clearly a problem but would making the Fed public change anything?
Please note that ECB President Mario Draghi is an Ex-Goldman Sachs Managing Director.
This brings us to point number three of Levin’s misguided plan.
No Voice
Diversity for Diversity’s Sake
Diversity for the sake of diversity is pure nonsense. Black, white, red, or Latino makes no difference at all. The problem is group think, not race.
Every person at the Fed (central banks in general) has been trained in the same kind of Keynesian and monetarist thinking.
If “Fed Up” really wanted diversity it would seek diversity in thinking, not diversity in skin color.
Along those lines, one might propose Zero Hedge, Peter Schiff, or me. That would bring diversity to the group for sure. But that’s not the answer either.
My Proposal
While pissing and moaning about what is broken, Levin never explained why we need a Fed at all.
So why we need one?
The Fed, The ECB, the Bank of Japan, the Reserve Bank of Australia, etc., all have a proven track record of blowing bubble after bubble.
If we did not have a Fed, it wouldn’t be beholden to Goldman Sachs. And it would be as diverse as the free market. Nothing is more diverse than that.
Yet, diversity cannot and will not fix that problem because diversity is not the key problem.
The key problem is the central bank coupled with a Fiat credit system that can be expanded by central banks at will, in direct response to government deficit spending.
Not Possible to Overhaul Cockroaches
In essence, Levin proposes we fix the cockroaches. I propose we get rid of them.
Mike “Mish” Shedlock
If we did not have a Fed, Mish
Fiat exists in two forms, physical fiat (bills and coins) and account balances at the central bank (a.k.a. “reserve” account balances in the case of depository institutions).
So if the Fed is eliminated then the US Treasury would have to provide the accounting and transaction services currently handled by the Fed. Fine by me since no one expects the US Treasury to lend.
Btw, please note that if physical fiat is ever abolished then citizens would not be able to use their nation’s fiat AT ALL since citizen accounts are not allowed at the Federal Reserve. So if the US Treasury takes over from the Fed, let’s be sure to allow all citizens to have inherently risk-free accounts there so we can abolish government-provided deposit insurance.
Fiat is irrelevant. Money needs to be made of something and fiat is as good as anything.
Money is a 100% abstraction. It’s a concept that needs to be represented by something.Gold is another form of fiat since it must be valued in relation to something and that valuation can be debased as easily as anything. Fish heads would work the same if you could get past the smell problem and control the quantity in circulation.
Re the original question: Yes the Fed is needed, but only for a couple of things that comes to mind.
Occasionally, the economy goes into free fall because of extreme liquidity crises. Only the Fed has the ability to inject massive amounts of cash – temporarily – into the economy to prevent short term price collapses.
Unfortunately, they over-do it and, thus, the mess we are now in.
Traditionally, the Fed is the lender of last resort for banks in trouble, This also seems like a good idea.
The Fed in is current incarnation is a monstrosity. So are the other central banks.
There might be another minor duty or two that make sense.
Fiat is irrelevant. Money needs to be made of something and fiat is as good as anything. cdr
Fiat is often interpreted by goldbugs to mean inexpensive fiat (as if there were anything wrong with that, per se) but, as you say, it could be needlessly expensive fiat too.
Occasionally, the economy goes into free fall because of extreme liquidity crises cdr
I suspect the root cause of that is government privileges for private credit creation. But in any case, the proper way to fix liquidity crises, it would seem to me, is just distribute new fiat equally to the population for lending to or asset buying from those who need liquidity at market rates and prices. How to finance it? With 0% yielding sovereign debt sold directly to the central bank and bought back as the economy and tax collections allow. Why 0%? Because positive interest paying sovereign debt is welfare proportional to wealth, not need.
Traditionally, the Fed is the lender of last resort for banks in trouble, This also seems like a good idea. cdr
Not to me. Banks should be 100% private with 100% voluntary depositors and if they were then all remaining deposits with them would be, by definition, at-risk, not necessarily liquid, INVESTMENTS and why should we care if investors miscalculate?
There might be another minor duty or two that make sense. cdr
Well, fiat is a Nation’s money so it seems to me the citizens should be able to deal with it conveniently and safely via accounts at the central bank. It might make sense to allow foreigners to have accounts there too but for negative interest rates. Individual citizens, otoh, should be free from negative interest up to, say, $250,000 US, the current insured deposit limit in the US.
Andrew, anyone can create credit for anyone else. If I loan you $1, I created credit.
If I loan XYZ Partnership $1 billion and demand collateral, and then use the same collateral to borrow $1 billion from someone else, the same collateral supports 2x the original value. This is the stuff of massive credit failure and liquidity crises since little prevents the person I gave the collateral to from using it a 3rd time … and so on. The Fed isn’t needed for that. We can do it to ourselves without them nicely.
Yes, someone will claim that’s exactly what banks do with the fractional reserve system, but, so what? They presumably use proper risk management and pay for FDIC insurance, which also oversees them so most don’t run themselves out of business. Banks aggregate deposits so they can lend. This is how they make money and can ( theoretically) pay a decent rate of interest. By definition, your loan to me becomes a deposit in a bank eventually, which gets lent to someone else, which eventually becomes a deposit elsewhere. So what?
The Fed is needed, just not the Fed in its current incarnation. It’s a monstrosity from hell.
Actually banks are unique under the law. A stock broker for example cannot commingle investor funds with his own. He cannot legally lend out funds he holds on behalf of a client. This is a strict rule imposed to ensure investment fiduciaries don’t get into trouble lending client assets and having those loans go sour. Chartered banks are unique in this regard. They can and do commingle depositor accounts with their own lending activity. The demand accounts they create by lending are identical to the savings demand accounts they theoretically hold on behalf of savers. For this reason chartered banks uniquely can and do get into trouble when their loans sour. This is why we have a central bank.
If I loan you $1, I created credit. cdr
I don’t think so. What you’ve done is swap one asset, $1 in currency, in order to receive another asset, my IOU. You’ve not created any credit. Now suppose a bank lent me $1? In that case, the bank would have created a new deposit/liability for $1 in fiat and received a new asset, my IOU for $1 (plus interest). The bank would have created credit, a credit for fiat*.
If I loan XYZ Partnership $1 billion and demand collateral, and then use the same collateral to borrow $1 billion from someone else, the same collateral supports 2x the original value. This is the stuff of massive credit failure and liquidity crises since little prevents the person I gave the collateral to from using it a 3rd time … and so on. The Fed isn’t needed for that. We can do it to ourselves without them nicely. cdr
These are asset swaps too, I believe, but I concede your point that privileges for private credit creation play no necessary part in a liquidity crisis. Still, the proper remedy would be an equal fiat distribution to all adult citizens, imo.
Yes, someone will claim that’s exactly what banks do with the fractional reserve system, but, so what? They presumably use proper risk management and pay for FDIC insurance, which also oversees them so most don’t run themselves out of business. cdr
Basically, government provided deposit insurance instead of inherently risk-free accounts for all citizens at the central bank is a means to keep the deposits of the non and less so-called credit-worthy captive within the banking cartel in order to lower the borrowing costs of the banks and the most so-called credit-worthy. Do the deposits of the non and less so-called credit-worthy receive interest from the banks? Yes, but far less than they would in the absence of special privileges for the banks.
And there’s no way premiums can adequately cover systemic risk.
Banks aggregate deposits so they can lend. cdr
Partly true since payments by the monetary sovereign credit the reserve balances of depository institutions who in turn credit the accounts of their customers. But banks can also create deposits by simply lending them into existence (hence the familiar “loans create deposits”). But here’s the thing – the corresponding liabilities for those deposits are almost entirely a fraud wrt to the general population since, except for physical fiat (bills and coins), the population cannot even handle fiat since they are not allowed accounts at the central bank.
This is how they make money and can ( theoretically) pay a decent rate of interest. cdr
Except that banks can create deposits/liabilities that are largely fraudulent wrt to the general population. Hence the real interest rate for savers is often negative, e.g. try to save to buy a house.
By definition, your loan to me becomes a deposit in a bank eventually, which gets lent to someone else, which eventually becomes a deposit elsewhere. So what?
The Fed is needed, just not the Fed in its current incarnation. It’s a monstrosity from hell. cdr
The Fed is needed to:
1) create fiat for the monetary sovereign.
2) provide an inherently risk-free fiat accounting and transaction service to all citizens and their businesses, including banks.
I can’t imagine much more that a central bank should properly do.
*Which is why I’ll might howl for glee if physical fiat is abolished since then the general population shall not be able to redeem bank liabilities AT ALL**. In other words, bank liabilities toward the general population would be entirely fraudulent!
**Because the only other form of fiat is account balances at the central bank which the general population may not have!
I would say banks are even more unique than that. Banks create brand new money when they lend. They don’t reduce their supply of money when they lend. They just create new money out of thin air.
Hi Andrew,
Thanks for your comments. You stated “…the proper remedy would be an equal fiat distribution to all adult citizens”. This is interesting since it seems as though with our current system of currency creation via loans, those with more net capital get a bonus of potentially being first to spend larger amounts of new currency which can debase currency already in existence. This aspect seems like unequal treatment under our banking laws.
Do you think a system where all new currency is created by government (to help keep prices stable) and equally distributed to all adult citizens (or used for government funding) could provide the liquidity necessary to run our modern economy and afford more equal treatment? I think in this scenario banks would be required to use 100% reserves when loaning depositor’s currency (assuming said depositors agree to having their currency loaned).
How can the value of gold be debased “as easily as anything else” when there is a finite supply?
Money is a unit of measure. You can’t bring a bag of gold to buy a car. You need something portable and based on something relatively fixed in value over time. However, the money supply need to grow over time to support economic growth. If the gold supply is fixed, then the value of gold has to increase over time to support economic expansion. The thing that represents the value of gold is the denominator, which is flexible. Which, basically means gold is fiat … even if you use bags of gold at the store.
This is how gold sales people sell gold. It it were money, it would necessarily increase in value over time. The only way it couldn’t is if large new deposits were discovered. Or if all economic expansion stopped suddenly.
But, since gold is a commodity, it’s priced based on supply and demand for gold, like all other commodities. This is why prices rise and fall without regard to the economy at large.
Confused reasoning here about what is money, how it works in the economy. For one, fiat in the form we have it did not arise arbitrarily. It could not have as no one would have trusted it. It gained major currency status as a receipt for gold. And gold became money simply because it worked – notably without the need to expand supply. Fiat is fine if the custodians can be trusted to be responsible. Unfortunately, that isn’t the case and the degree of coordinated abuse now is certain to destroy the system. The sovereign debts have completely run away and will terminate with some combination of outright defaults and disorderly devaluation (monetization).
If fiat were as good as anything, we wouldn’t have an unbroken cycle of unbacked fiat currencies crashing and burning, and taking society with them….Because if a government can print unlimited money, it will…..
Fed lives matter?
If only the Fed had more transgender bathrooms, then all would be right with the world. Racial and ethnic quotas alone will never work. The secret sauce is transgender bathrooms, but they must be located in drug-free zones with adequate gun control. Otherwise, more price deflation is on the horizon and Trump will be elected president.
You forgot the ‘swear jars’.
Re diversity: Was Earl Butz ahead of his time, just politically incorrect in how he talked about it?
I encourage bringing diversity into the Fed. It will speed the day of dollarpocalypse.
People more concerned about their skin color, who have shorter time preferences, and seek to maximize the rake off to their own power groups will do the job of destruction beautifully.
Civilization is a European (and Asian) thing, with its associated races and cultures.
Am surprised that you have not commented on “wealth measurement,” Mish.
Forbes link [http://www.forbes.com/sites/timworstall/2016/08/19/cbos-very-bad-report-its-complete-nonsense-that-the-top-10-hold-76-of-all-us-wealth/#48eafacc1325]
CBO’s Very Bad Report – It’s Complete Nonsense That The Top 10% Hold 76% Of All US Wealth
“…There’re two huge holes in that. The first is that it entirely excludes any defined benefit pensions. That fireman retiring at 55 with a $60,000 a year pension we would think is reasonably wealthy really. This CBO method of measurement defines him as having no wealth – that $60 k a year off into the future doesn’t count. Nor do retiree health benefits and so on and on. It’s simply not a good measure of wealth, especially for the average family where home equity and a pension are likely to be the two major sources of whatever household wealth there is.
For example, someone who has saved into a 401 (k) to produce a $60k a year pension would be defined as having more than $1 million in wealth (yes, that’s the sort of amount you need for such a pension). Someone with a government pension which will pay him $60,000 a year, or even a corporate pension in many cases, will be described as having zero wealth. Whut?
It’s just not a good measure of wealth. Bernie’s Senatorial pension counts as $0 here, Bernie’s 401 (k) as wealth. Just not a good measure…”
Wait a few months for the coming Oh16 Crash to destroy those pensions, then we’ll revisit who owns what.
Wow, Joel has faith that pensions will payout full benefits?
Pensions are waayyy underfunded NOW … and after the next market downturn?
Those of us who know the history of the men behind the formation of the FED (and really all central banks) and the tortured history of the Red Shield, consider it to be the foremost criminal conspiracy in recorded history. The Wizard behind the curtain controls governments and legislators through bribery and murder. Time to bring out the guillotines.
The Fed’s mission is to “serve the banks” not “serve the public” unless stealing from the public has been somehow redefined as serving it in the new normal we apparently live in … 🙂
The mission of the Fed has never been “to serve the public”. They are simply the banker to the bankers. They insure that the check you write on First Nat bank is accepted at par by Second Nat bank. They also handle the banking for the treasury and maintain banking reserves. Obviously this is an oversimplification and I am not saying the Fed is perfect (far from it) but those that want to abolish the Fed and go back to some sort of convertible currency should be careful what they wish for.
but those that want to abolish the Fed and go back to some sort of convertible currency should be careful what they wish for. TosTrader
Indeed. Inexpensive fiat is the ONLY ethical money form for government use*, and though they are not currently allowed, all citizens, at least, should be allowed to use their Nation’s fiat via convenient, inherently risk-free accounts at the central bank itself.
*Otherwise the taxation authority and power of government is misused to unnecessarily benefit some private interest.
“They are simply the banker to the bankers.”
Yes. I have no problem with what you wrote.
The problem is the Federal Reserve going off the reservation manipulating interest rates (leading to asset bubbles) and opening the discount windows to non commercial banks (last downturn a lot of corps with financial arms allowed to use it – Harley Davidson, GE, etc) in attempt to provide liquidity where the problem is solvency.
There was an open market bid for those assets – just not one the players liked. Tough luck. Should have handled risk management better.
Don’t disagree,but I believe the issue is determining which organizations have liquidity issues versus solvency issues. How do you know at the moment? And can’t insolvent organizations cause illiquid, but solvent, organizations to become insolvent?
I don’t think, in the moment of a bank panic, you can know who is illiquid versus who is insolvent. Indeed, it is the inability of insolvent banks to cause illiquid banks to become insolvent themselves. If everyone new who was insolvent, you wouldn’t need a federal reserve because no one would lend to them to start with.
That doesn’t mean that there isn’t an immoral component to what the federal reserve does, just that said component is less a function of how the fr operates and more of how banks function.
hosed up that second sentence…
Don’t buy the Wall Street spin.
The “bank panic” was YEARS in the making.
Centered around mortgage backed securities. Massive fraud (no doc, low doc, robo signing, etc.) despite what POTUS / DOJ said … easy to see no fraud when you resist turning over a single rock. The end of the housing bubble saw lenders offering NINJA loans – no income no job no assets. ANYONE should have seen the trainwreck coming.
Lehman went down because their counterparties wouldn’t trade with them … they KNEW the quality of Lehman’s assets … because they helped originate them.
The failure was regulatory bodies not cracking down earlier. Federal Reserve should have stood aside and helped cleaned up the mess afterwards.
Now, before you say “well, everything would have melted down”, POTUS / Treasury Department should have initiated action to nationalize worst offenders (wipe out stockholders and major haircuts to bondholders before putting up taxpayer $$) and reassure the masses that the country will make it through turbulent times.
Putting duct tape on a broken system and saying everything back to normal was precisely the wrong response.
By the time the meltdown starts, I believe it is too late for fedgov to step in and clean up the mess. Too many contractual details to work through in terms of asset ownership. The way to do it is to not let banks get in that situation in the first place through intelligent regulation. But that may not be possible in the era of Citizens United.
“By the time the meltdown starts, I believe it is too late for fedgov to step in and clean up the mess.”
Nope. Not gonna buy that.
It came out after the fact that Hank Paulson had drafted the TARP legislation MONTHS in advance. They KNEW “it” was coming … just not sure of the “when”.
POTUS schedules a friday 4pm eastern time press conference. Announces a bank holiday coupled with nationalization of a few. Reassures the audience with a calming voice that their bank and money will still be there when holiday over … just that a few might have different owners / management. Panic averted (for the most part).
No doubt 2009 economically would have been worse, but the debris cleared away for an organic true recovery … the country would be MUCH better off now.
Did he really say a “People’s Bank”?
Shades of the USSR or The People’s Republic of China.
Are these people completely unaware of the optics they present or is it that they just don’t care to hide it anymore?
This will do nothing but transfer a systemically failing financial system completely under the wing of a few powerful politicians. No, the only way to deal with this problem, just like every other problem America faces today is to change the entire system. It’s a mistake repeated through the ages that one can take a failed model and make it work. It is this perversion of rational thought that defines the 2nd Stage of a Revolution.
We are currently in the first and the 3rd is its most violent, which begins when the 2nd Stage most certainly fails.
I’ve written about the Orderly Removal and Replacement of The Federal Reserve Bank in my book, “The Science of Liberty: American Reformation” (scienceofliberty.us), which calls for a classical gold standard incorporated into a “Suffolk Bank” styled central bank whose singular policy is to enforce solvency upon all member banks. It’s tried and true, and was the driving force behind the extraordinary growth of America from Jackson to Lincoln, lead by New England banks where the Suffolk was centered.
Simply put, you can’t put new wine into old wine skins; they burst.
“Earlier this year, congressional Democrats and the campaign of Democratic presidential nominee Hillary Clinton endorsed their push to remove bankers from the boards overseeing the 12 regional Fed banks.”
Less diversity.
This is EXACTLY what Barney Frank wanted a few years ago when there were 2 dissents on a FOMC vote. Regional federal reserve bank presidents are elected by their bank’s board of directors – ie: outside the realm of DC. That is why – on occasion – you get a tad of truthiness from a bank president such as Richard Fisher when he headed up the Dallas FRB.
This push for ALL members of FOMC to be appointed (by POTUS) in DC. How can anyone believe that will increase diversity? Just a steady diet of Wall Street / DC insiders.
Andrew Dickson White’s book ‘Fiat Money Inflation in France 1790’ is the classic regarding how a governing body, such as the Fed, becomes paralyzed by the need to restrict money growth in an economy……. Where are the guillotines????
https://www.amazon.com/Money-Inflation-France-Andrew-Dickson/dp/1466363118/ref=asap_bc?ie=UTF8
Fiat Money Inflation in France is as much about irrational human behavior as it is about financial crises and runaway inflation. White describes a disillusioned public who, under the influence of increasingly self-serving public officials and orators, accepted more and more ‘assignate’ printings even though the perils of such printings had been documented throughout history and were then blatantly obvious right before their eyes. Andrew Dickson White presented this analysis of the runaway inflation in France to dissuade the US Government of printing its own paper money. At the time, he was successful.
I smell a rat. The overhaul purpose is to benefit the Fed employees only. A bureaucrat by definition is one who works to provide him/her with more and more $$$$ while isolating themselves from having skin in the game.
They have lost the power to front run the markets and now are asking for taxpayers to compensate them for the low yields by which the citizenry is subject. My campaign is….FU FED
“…revise the Fed by bringing the Fed fully into the government and adding diversity.”
Nationalizing the FED? For diversity, how about adding bakers and candlestick makers to those setting FED policy. Non bankers might do a better job than the bankers are.
How will mandating Marxist Affirmative Action hacks be included in control of the Fed actually help in any meaningful way?
Do we really want the same folks who gave us the DOD’s accounting scandals, the guys who can’t pass a budget and tried to shutdown the government, the folks who let Madoff run wild for decades running the Federal Reserve? As bad as they are now, handing it over to Congress and the federal bureaucracy will not create an improvement.
Mish, your cockroach idea is pure genius. Instead of a fiat currency, we should have our currency backed by cockroaches. That way, we can automate the printing of our monetary backing, to match the printing of money, so that we can print money indefinitely, and never have it lose value!
Gold is SOOOOO passé, when you can have cockroaches.
The John Law phase of global government is upon us.
Better to just call the exterminator than to invent more diverse cockroaches…..
I realize that I have been wearing colored shades that have affected my perception of the true spectrum of colors that exist. Once removed I realized that the industrial world only respects one long term value and that is debt itself. Its creation, distribution, and growth define our very economy.
Without that one central product to bind the system together a new basis for society would need to be created. The very concept of Liberty would need to be redefined. Some system other than the current Debt-Stress-Role paradigm would need be instituted.
An individual has little choice in the matter of whether or not to engage in the use of debt that choice has been eliminated by forces that long ago took control of the system and made debt and debt service a compulsory part of the system. Therefore, the only choice left is; Where on the debt cycle one choose to enter?
For me the future is bleak as I have never learned the art of sleeping well knowing that debt is my constant companion or that choices have been made for me in regards to debts being created in my name without my knowledge or approval.
Whatever cockroaches are controlling the debt probably makes little difference so long as creation of debt is societies primary objective.
{The linchpin of the overhaul is bringing the 12 quasi-private regional Fed banks fully into government.}
That statement is a Trojan Horse. Banks want to bring the government under their control.
Gold standard. Its the only thing that has ever kept the printers under control.
It’s so messed up – just repeal legal tender, let it blow up and restart. If not, devaluation against a strong currency is probably the least chaotic way to bring debts back to down to manageable levels and preserve some form of the present system. Ironically, CBs may need to reintroduce specie for their own salvation.
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