Using ‘quantitative easing’ for productive investments instead of unproductive bailouts

Ellen Brown is my favourite monetary and economic analyst, and consistently comes with productive proposals that would make a huge difference for the population at large.

This is from a much longer analysis of quantitative easing, which I urge our readers to read in full here.

In this excerpt she comes to her conclusion, which is that the current mechanisms now used to bailout insolvent banks could be used for directly productive investments which would not have any inflationary effects:

“The Fed could use its QE tool not just to buy existing assets but to fund future productivity and employment, stimulating the depressed economy the way Franklin Roosevelt did but without putting the nation in debt at high interest to a private banking cartel.

The Fed could, for example, buy special revenue bonds issued by the states to finance large-scale infrastructure projects. They might build a high-speed train system of the sort seen in Europe and Asia. The states could issue special revenue bonds at 0% or 0.5% interest to finance the project, which could be repaid with user fees generated by the finished railroad. The same could be done to build modern hospitals, develop water projects and alternative energy sources, and so forth. All this could be done at the same extremely low interest rates now afforded to the banks, saving the states enormous sums in taxes.

Wouldn’t that sort of program be inflationary though? Not under current conditions, says author Bill Baker in a recent post. He notes that over 95% of the money supply is created by bank lending, and that when credit is destroyed, the money supply shrinks. The first round of QE did not actually increase the money supply, because the money printed by the Fed was matched by the destruction of money caused by debt default and repayment. To replace the debt-money lost in a shrinking economy, the Fed has already elected to embark on a program of quantitative easing. The question addressed here is just where to aim the hose.

Another interesting idea for QE3 was proposed by Ted Schmidt, associate professor of economics at Buffalo State College. Writing in early November, Schmidt anticipated the cut in social security taxes now being debated in Congress. Worried observers see these cuts as the first step to dismantling social security, which will in the future be called “underfunded” and too expensive for the taxpayers to support. Schmidt notes, however, that social security is a major holder of federal government bonds. The Fed could finance a $400 billion tax cut in social security by buying bonds directly from the social security trust fund, allowing the fund to maintain its current level of benefits. Among other advantages of this sort of purchase:

“[I]t does not raise the gross national debt, because it simply transfers bonds from one government entity (the Social Security trust fund) to a semi-government entity (the Fed); and . . . it gives the Fed the extra ammo (treasury bonds) it will need when the time comes to restrain inflationary pressures and pull reserves out of the banking system. (It does this by selling bonds to banks.)”

Schmidt concludes: “Enough is enough, Dr. Bernanke! It’s time to inject the patient with money that gets into the hands of working people and small businesses.”

The Fed’s lender-of-last-resort power has so far been used only to keep rich bankers rich and the rest of the population in debt peonage, a parasitic and unsustainable endeavor. If this power were directed into projects that increased productivity and employment, it could become a sustainable and very useful tool. We the People do not need to remain subject to a semi-private central bank that was ostensibly empowered by our mandate. We can take our Money Power back.”

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