Current Proposals
Posted by WARREN MOSLER on April 26th, 2008
Proposals that Happen to Be
within the Mainstream Paradigm
For the Fed:
- In general, don’t use the liability (deposit) side of banking as a source of market discipline.
- Specifically, eliminate most of the interbank markets by lending directly to US FDIC insured banks vs any/all ‘bank legal’ collateral in any size at the Fed’s target interest rate.
- This would reduce domestic FF/LIBOR type spreads to minimal levels, remove bank funding risks, and eliminate the need for the Fed’s TAF and the lending facility.
- Banks are already permitted to own only what is permissible by the OCC and other banking law, and fund it with FDIC (government) insured deposits. Therefore, unsecured Fed lending to FDIC insured banks does not add any ‘taxpayer risk’ that the government already accepts and directly manages.
For the Tsy:
- Encourage foreign CB’s to re-engage in ‘currency manipulation’ via buying USD to help their exporters.
- Encourage monetary authorities to accumulate their reserves in USD financial assets.
- Open a securities lending facility that offers all Treasury securities through repurchase agreements to the primary dealers in unlimited quantities at Fed Funds less 0.25%.
For Congress:
- Outlaw biofuels - way too dangerous to human life and may already be in the process of killing more humans than WWII.
- Manage the output gap with tax cuts or net spending increases.
- Stop worrying about US solvency (including solvency of social security).
- Use fiscal policy as a tool to meet real economic goals.
- Reduce energy consumption by lowering the national speed limit to 30 mph for private motor vehicle transportation over three years:
- Reduces driving.
- Decreases energy consumption per mile.
- Redirects where people live due to the implied price of travel time.
- Eliminate tax advantages for savings plans including pensions and individual retirement accounts:
- Savings does not function to fund investment.
- There are other viable options to having individual savers and money managers directing real investment.
- Outlaw passive commodity strategies for existing pension and retirement funds.
- Eliminate income taxes and use a national real estate tax to anchor the currency
- I estimate compliance costs at up to 15% of GDP.
- Compliance issues reward, encourage, and promote a culture of cheating that extends to all law.
- The infrastructure is already in place at the local level for a national real estate tax:
- Compliance and legal costs are minimal.
- The tax rates can be progressive based on values, efficiency, and other standards that advance public purpose.
- Use luxury taxes to moderate consumption that is outside of public purpose:
- These taxes function to reduce consumption.
- The success of these taxes is judged by how little they collect and thereby serve to reduce the targeted consumption.
- Eliminate sales taxes and other remaining transactions taxes as these function as internal tariffs:
- Transactions taxes work against internal comparative advantage.
- Transactions taxes work against specialization of labor.
- Legalize all recreational drugs:
- Takes the money out of illegal trafficking.
- Eliminates drug-related violence.
- Moves the social issue from the police to the churches.
- Do not allow healthcare costs to continue as a marginal cost of production (business should not fund healthcare, government should):
- Distorts pricing and optimal resource utilization.
- Workers do not tend to be less healthy than unemployed people.
Proposals that May Be
a Bit Outside of the Mainstream Paradigm
Offer a national service job to anyone willing and able to work which lets the market determine the budget deficit:
- An employed bufferstock is a more effective price anchor than today’s bufferstock of unemployed.
- Adds to useful output.
- Reduces real costs of negative social issues.
- Acts as a countercyclical fiscal ’stabilizer’.
Drop the Fed Funds rate to zero and leave it there permanently:
- Inflation is not a function of the nominal rate set by the Fed.
- Output and employment is not a function of interest rates.
- Nominal interest rates support the rentier class and thereby reduce real output at the expense of those working.
April 28th, 2008 at 8:46 pm
Warren- I have a question about your comment in section section II, dropping the FF rate to zero. After reading your paper “The Natural Rate of Interest is Zero” I had the same question come to mind. How does the Treasury/Fed logistically allow the rate to fall to zero? For example: if there is a 400B deficit does the Treasury only issue 350B in Treasuries (reserve drain)? I belive any excess reserves would cause rates to fall - correct? It is a continuous work in progress by the Fed to make sure the banking system is always in a net positive reserve position? In your paper you reference Japan’s experience in the 1990s and the nearly 0% interest rates since, how did the BOJ accomplish this or through what actions. Thank you and I hope you are doing well.
April 28th, 2008 at 8:54 pm
right, the fed simply keeps an excess agg reserve balance in its member bank accounts. i think the boj targeted something like 30t extra yen balances, thinking the extra quantity mattered.
in theory, it should only take an extra $.01 in reserves to keep the ff rate at 0. in practice maybe a billion or two should do it. but the fed can always buy secs and keep sufficient excess reserves to keep rates at 0
also, even easier, is to set the discount rate at 0 with no penalty or stigma.
April 28th, 2008 at 9:04 pm
So why doesn’t the Fed eliminate the FF market and pay an overnight rate on reserves held for member banks? If a bank is in a net negative reserve position they could borrow at the discount rate - assuming it would be higher than the O/N rate paid. Also, the Fed could pay a higher O/N rate on reserves when your system needed capital - corrrect?
April 28th, 2008 at 9:14 pm
So why doesn’t the Fed eliminate the FF market and pay an overnight rate on reserves held for member banks?
THEY ARE SLOWING GETTING AROUND TO THAT. FIRST STEP IS TO PAY INTEREST ON RESERVES. CONGRESS APPROVED IT BUT WITH A SEVERAL YEAR DELAY
If a bank is in a net negative reserve position they could borrow at the discount rate - assuming it would be higher than the O/N rate paid.
YES, THAT WOULD DRIVE UP THE COST OF FUNDS AND THE LENDING RATE FOR THAT BANK IF IT WASN’T ALLOWED TO BORROW FROM OTHER BANKS.
THIS ISN’T THE WAY THE FED WANT’S MONETARY POLICY CONDUCTED. THEY WANT THEIR TARGET RATE TO BE THE ANCHOR RATE FOR THE BANKING SYSTEM
Also, the Fed could pay a higher O/N rate on reserves when your system needed capital - corrrect?
? DON’T SEE HOW THAT WOULD ALTER CAPITAL? WHY WOULD THE RESERVE SYSTEM NEED CAPITAL? DO YOU MEAN BANK CAPITAL?
April 28th, 2008 at 9:25 pm
yes, bank capital
April 28th, 2008 at 9:33 pm
Paying a higher rate on reserves would be functionally the same as a ff hike.
banks raise capital outside the reserve system. they attract investment by offering the promise of superior returns.
May 1st, 2008 at 12:21 pm
Warren,
What do you mean when you say that the Fed, “shouldn’t use the liability side of the banking system as a source of market discipline?”
May 1st, 2008 at 11:44 pm
Hi Mike, what I mean is there should be no restriction on banks funding themselves at the Fed’s target rate.
The only reason to force bnaks ‘out to the market’ for funding based on their credit standing would be to make them subject to what is called the ‘market discipline’ of lenders examining borrowers for creditworthiness
May 7th, 2008 at 8:02 am
Warren - Do you still think that paying interest on bank reserves as Grep Ip speaks of today in the WSJ would gradually eliminate the need for the government to sell treasury debt?
May 7th, 2008 at 4:32 pm
yes, it functionally eliminates that need, as we discussed with Greg in the past, but that doesn’t mean the tsy won’t be required to do it anyway.
May 7th, 2008 at 11:34 pm
Don’t suppose he cited my paper from 2004, which made precisely this point— http://www.epicoalition.org/docs/paying-interest.htm
May 7th, 2008 at 11:57 pm
Just read the Ip article and related comments. Of course, the arguments againts paying interest are always the “additional” expenditures or–equivalently–”reduced” Fed profits remitted to the Treasury. Odd that nobody (including the Treasury or the Fed) recognizes that to the degree that paying interest reduces the Tsy’s issuance of longer-term sec’s (since the qty of reserve balances banks hold would be greater than without interest pmt) that earn more interest than the Fed’s target rate, total Tsy expenditures would actually be reduced, not increased.
May 8th, 2008 at 12:11 am
yes, almost seems they go out of their way to not show ‘consolidated’ results for fed/tsy