Fed should flex its power to recharge economy
Federal Reserve Board Chairman Ben Bernanke speaks during a press conference in Washington June 20, 2012. / AFP/Getty Images
(The Nation) Rome is burning while Congress fiddles. The president is out on the road trying to secure a second term, while the economy once again teeters on the brink of bad possibilities. The governors of the Federal Reserve Board seem to understand this better than most of Washington's power hitters. But what can the Fed do? The central bank has already dispensed trillions to the financial system and pulled interest rates down to rock-bottom levels. Yet the economy doesn't respond. Banks won't lend, businesses won't hire. Anxious consumers stopped buying, the order books are bare.
Miles Kimball, an imaginative economics professor at the University of Michigan, has stepped forward to propose an ingenious solution for the Fed's dilemma. The government should create a "federal credit card" and send one to every adult in the nation, enabling each person to borrow $2,000 at a very low interest rate and not pay back any of the money until after the economy has fully recovered. The provocative kicker in Kimball's proposal is that the Federal Reserve would itself provide the financing, not Congress or the president through the federal budget. And he argues that the central bank can do this with its unique power to create money.
A federal line of credit, Kimball suggests, could become a new, fast-acting channel for economic stimulus -- more potent than the usual methods like tax rebates, and far less costly. That's because consumers would not get any benefit from this government assistance unless they use the card -- that is, borrow and spend -- and do so before the government's offer expires. After all, this is exactly what the economy needs. Why give the money in tax breaks for banks or businesses, which may not use it for the intended purpose? Why not deliver the aid to consumers, who will?
Kimball argues that this novel approach could deliver a strong, quick jolt to the stagnant economy, $400 billion or more. Yet it would add very little to the federal budget deficit, because the Federal Reserve operates under its own, independent balance sheet. Further, it's not free money but a temporary loan, like the trillions in short-term loans the Federal Reserve gave the banking system at the height of the crisis. The low-priced credit would immediately help pressed families scrambling to pay the rent, young people without jobs and especially the desperately poor, who are "unbanked" and victimized by predatory lenders charging usurious interest rates for "payday" loans. "A big advantage of national lines of credit," Kimball explained, "is that, once triggered, the details of spending are worked out through the household decision-making process, which is relatively nimble compared to corporate and government decision-making processes."
The banking industry would go nuts, of course. Its lobbyists would rail against unfair competition (just as many citizens complained about the unfairness of the bank bailouts). But the homely truth about capitalism is that it cannot function without a constant cycle of new borrowing and debt. Despite popular moralistic aphorisms ("neither a borrower nor a lender be"), the capitalist process requires that someone is always lending and someone else is always borrowing. If risk-averse creditors refuse to lend and struggling consumers or businesses are prevented from borrowing, only the federal government has the power to intervene and get the money moving again. If the government does not step up, stagnation endures.
A federal credit card sounds far too radical for the conservative central bank. But it actually offers a viable solution to the Fed's stymied monetary policy. Professor Kimball has already introduced it to Federal Reserve governors themselves, at a private conference for "academic consultants" who advise the central bank. None of the governors commented one way or the other afterward, and it is highly unlikely Kimball's idea will be tried. It would probably require Congressional blessing, and Congress is hobbled by do-nothing paralysis. Nevertheless, policy advocates and citizens should push Fed governors and politicians to explore the concept seriously.
Kimball's account of his proposal, "Getting the Biggest Bang for the Buck in Fiscal Policy," can be found at his blog, supplysideliberal.com. As the title suggests, Kimball describes himself as a conservative economist with an intriguing mix of liberal impulses. As a conservative, he argues that the tax system can distort and damage economic output. As a liberal, on the other hand, he is open to income redistribution in some circumstances. "Whenever it can be done without shrinking the overall size of the pie, a dollar in the hands of the poor is socially more valuable than a dollar in the hands of the rich," Kimball writes.
Either way, Kimball's proposition deserves prompt debate, because it shows how the Federal Reserve's management of the economy can be fundamentally reformed in progressive ways. Clearly, monetary policy is not working now -- at least not enough to restore prosperity. Kimball argues that government should put aside the fiction of an "independent central bank" and instead learn to coordinate the Fed's monetary policy with fiscal policy, controlled by Congress and the White House. The policy tools should be blended, he said, to create "a flavor somewhere between traditional monetary policy and traditional fiscal policy." That would avoid the destructive "game of chicken" in which the two realms pull the economy in opposite directions, as they are doing now.
William Greider is a national affairs correspondent at The Nation. The opinions expressed in this commentary are solely those of the author.
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When the economy faulters 6 months after the cards come out do you do it again? Then again? Then again? What about when the balance has to be paid back - will you argue that the old debt should be forgiven while you are issuing new cards?
Putting cash if everyone's pocket is simple w/o loans: Allow people to have money left over after their visit to the gas station and grocery store - two nondiscretionary spending items. You do this by eliminating ethanol, winter/summer blends and allow domestic drilling. In two years the economy will be booming. All w/o debt spending.
Somewhere north of 360 BILLION dollars of more national debt - with no payback time at all. And of those people who have almost no income do you really expect them to pay that back? And what keeps this money from going into drugs, liquor or other underground economy spending? The credit card?? Seriously?? It won't take an hour for people to figure out how to get cash and buy anything they want.
If this guy is a brilliant economist it speaks very poorly of a rather louse and inexact science that can never seem to get anything right. there certainly isn't any common sense in those complex equations.
Ahhh..hmmmm..when did we see that experiment...oh yeah, between 2002 and 2007. Just as soon as all the banks managed to merge themselves into finanancial institutions that were too big to fail. Right after the repeal of the Glass-Steagall Act and the passing of the ridiculous Gramm-Leach-Bliley Act.
Guess what bub, Glass-Steagal has not be reinstated and Gramm-Leach-Bliley is still failing.
You got nothing until you fix what the Govt broke in 1999-2000.
If there's any way I can avoid it I'll never borrow another dime in my life because I resent the rich getting richer on the backs of the poor, and I'm pretty darned close to poor. There isn't nearly enough money to go around on the lower levels because it's all the time being skimmed to the top.
There's one way to fix this recession, and it's not up to the government to do it. It's up to corporations to bring jobs BACK to this country even if it means smaller profits. How many would be willing to do that?
My business grew 32-38% every year until 2009, and not since. I do need to expand but, I'm simply waiting for Romney to get elected so I can proceed with my business expansion.
Encouraging borrowing now is a huge mistake.