Ben Bernanke, Federal Reserve Chairman, has been in the business of printing money. His program is euphemistically called “Quantitative Easing (QE).” In September 2012 Bernanke announced QE3 in which the Fed would purchase $40 billion of mortgage backed securities per month indefinitely.
There had been QE1 and QE2 previously, which were one time injections of capital into the nations’ money supply. All theses QEs have resulted in one thing: interest rates have been brought down to practically zero. This may be great for people wanting to buy a car or a house, but for savers, like senior citizens, they have been robbed from gaining any interest on their savings accounts.
They might as well have put their money in their mattresses. However, the interest that the nation pays on its national debt has certainly been minimized and this has given the US budget deficit, already enormous, a little break.
The purpose of the Federal Reserve is to pursue full employment and stable prices. In practice the only thing the Fed can do to promote full employment is to lower interest rates in the hopes that people will borrow and spend more money. It can promote stable prices by raising interest rates in order to put a damper on inflation.
However, inflation is not the present problem. Employment is. QE injects money into the economy at the top in the hopes that it will trickle down to the average person in terms of consumer loans. The general idea of QE is that the Fed buys up financial assets, injects capital into the big banks and lowers interest rates.
This should get the economy moving again by encouraging people to borrow money. Only it has not worked out that way. Instead the money injected at the top of the economy, just like the Bush tax breaks for the rich, has resulted in making more money available for speculation.
At the street level the average person has been reluctant to go into even more debt by taking out more loans. This is why Bernanke has been practically begging the Congress to implement a fiscal policy to complement the Fed’s monetary policy. A fiscal policy would mean that the Federal government would have to borrow money or go into more debt and then spend that money into the economy in terms of such projects as infrastructure development.
A fiscal policy such as this would result in the injection of capital at a lower level than the Big Banks as construction workers would be hired lowering unemployment and presumably increasing GDP. They then might be more willing to take out a car loan, for example. Since the private sector isn’t hiring to any great extent, it remains for the government to act as employer of last resort.
The only problem is that conservative politicians are deadset against any expansion of government or any increase in government debt, in short, any stimulus. That leaves the situation in a stalemate with Ben Bernanke vainly trying to increase employment by giving money to people who don’t need it. This is the policy that Republicans also want to pursue through the tax code: reduce taxes on the rich in the hopes that they will create jobs.
The problem is that neither of these policies – tax breaks for the rich or printing money and giving it to the rich – has worked. Both of these policies inject money into the top of the economy, into the hands of the wealthiest people. Both of these policies are debt based: fiscal policy increases the US national debt by having the government issue more Treasury bonds while getting people to borrow more money to increase GDP increases consumer debt.
Ellen Brown critiques the whole idea of a debt based economy in her path breaking book, Web of Debt. She suggests that, instead of the US central bank, the Federal Reserve, being privately owned, Congress itself should own the nation’s central bank i.e. the central bank should be publicly owned. All the money that Ben Bernanke prints is fiat money. That is it’s not backed by gold or anything else. A dollar is worth a dollar just because the government says it is.
So instead of Ben Bernanke’s “helicopter money” (another name for quantitative easing which is just dropping money out of the sky), the government itself could issue the fiat money. That way no interest would be involved! The money would just be spent into the economy. When the government issues bonds that are bought up by the Federal Reserve (quantitative easing), it has to pay interest.
If the government, instead of the Federal Reserve, issues the fiat money, it doesn’t. Because the government and the Federal Reserve have to go through the big Wall Street banks, the banks profit and the people go into debt. If the American people owned the nation’s central bank, Wall Street profits and citizens’ debts could be eliminated or at least drastically reduced.
The American government has in the past issued its own fiat money. Abraham Lincoln issued fiat money, Greenbacks, that were used to win the Civil War, build the transcontinental railroad and provide the Land Grant colleges. Greenbacks were fiat money, totally. They weren’t backed by gold.
In the process he saved the nation an estimated $4 billion in interest. Other countries’ central banks are owned by their governments, for instance, Japan and China. Even the European Central Bank is publicly owned. Publicly owned central banks can increase the money supply without incurring ever more debt.
As Ellen Brown states on p. 384 of “Web of Debt,”:
Debt-free government-created money was the financial system that got the country through the American Revolution and the Civil War; the system endorsed by Franklin, Jefferson and Lincoln; the system that Henry Clay, Henry Carey and the American Nationalists called the “American system.” The government could simply acknowledge that it was pumping money into the economy.
It could explain that the economy needs the government’s money to prevent a dollar collapse, and that the cheapest and most honest way to do it is by creating the money directly and then spending it on projects that “promote the general welfare.” Laundering the money through non-producing middlemen is giving the people’s Constitutionally-ordained money-creating power away.
To summarize, the Fed’s quantitative easing only enriches the big banks like Goldman Sachs and JP Morgan Chase who use the money to speculate. It does little for the average person including savers who are not able to get any return on their savings. Government money could have been used to bail out under water mortgagees; instead it was used to bail out Wall Street.
A central bank that created fiat money and then spent it into the economy to do infrastructure rebuilding and improvement would do more to increase employment and raise GDP than the schemes that the Federal Reserve Bank and the Congress are now capable of because it would inject money at the bottom of the economy and not the top. Currently, both US fiscal policy and US monetary policy are flops.