FacebookTwitterGoogle+RedditEmail

The Citadel is Breached: Congress Taps the Fed for Infrastructure Funding

shutterstock_284010668

For at least a decade, think tanks, commissions and other stakeholders have fought to get Congress to address the staggering backlog of maintenance, upkeep and improvements required to bring the nation’s infrastructure into the 21st century. Countries with less in the way of assets have overtaken the US in innovation and efficiency, while our dysfunctional Congress has battled endlessly over the fiscal cliff, tax reform, entitlement reform, and deficit reduction.

Both houses and both political parties agree that something must be done, but they have been unable to agree on where to find the funds. Republicans aren’t willing to raise taxes on the rich, and Democrats aren’t willing to cut social services for the poor.

In December 2015, however, a compromise was finally reached. On December 4, the last day the Department of Transportation was authorized to cut checks for highway and transit projects, President Obama signed a 1,300-page $305-billion transportation infrastructure bill that renewed existing highway and transit programs. According to America’s civil engineers, the sum was not nearly enough for all the work that needs to be done. But the bill was nevertheless considered a landmark achievement, because Congress has not been able to agree on how to fund a long-term highway and transit bill since 2005.

That was one of its landmark achievements. Less publicized was where Congress would get the money: largely from the Federal Reserve and Wall Street megabanks. The deal was summarized in a December 1st Bloomberg article titled “Highway Bill Compromise Would Take Money from US Banks”:

The highway measure would be financed in part by a one-time use of Federal Reserve surplus funds and by a reduction in the 6 percent dividend that national banks receive from the Fed. . . . Banks with $10 billion or less in assets would be exempt from the cut.

The Fed’s surplus capital comes from the 12 reserve banks. The highway bill would allow for a one-time draw of $19 billion from the surplus, which totaled $29.3 billion as of Nov. 25. . . .

Banks vigorously fought the dividend cut, which was estimated to generate about $17 billion over 10 years for the highway trust fund.

According to Zachary Warmbrodt, writing in Politico in November, the Fed registered “strong concerns about using the resources of the Federal Reserve to finance fiscal spending.” But former Federal Reserve Chairman Ben Bernanke, who is now at the Brookings Institute, acknowledged in a blog post that the Fed could operate with little or no capital. His objection was that it is “not good optics or good precedent” to raid an independent central bank. It doesn’t look good.

Rep. Peter DeFazio (D-Oregon), ranking member on the House Transportation Committee, retorted, “For the Federal Reserve to be saying this impinges upon their integrity, etc., etc. — you know, it’s absurd. This is a body that creates money out of nothing.”

DeFazio also said, “[I]f the Fed can bail out the banks and give them preferred interest rates, they can do something for the greater economy and for average Americans. So it was their time to help out a little bit.”

An Idea Whose Time Has Come

It may be their time indeed. For over a century, populists and money reformers have petitioned Congress to solve its funding problems by exercising the sovereign power of government to issue money directly, through either the Federal Reserve or the Treasury.

In the 1860s, Abraham Lincoln issued debt-free US Notes or “greenbacks” to finance much of the Civil War, as well as the transcontinental railroad and the land-grant college system. In the 1890s, populists attempted unsuccessfully to revive this form of infrastructure funding. In the Great Depression, Congress authorized the issuance of several billion dollars of US Notes in the Thomas Amendment to the 1933 Agricultural Adjustment Act. In 1999, Illinois Rep. Ray LaHood introduced the State and Local Government Economic Empowerment Act (H. R. 1452), which would have authorized the US Treasury to issue interest-free loans of US Notes to state and local governments for infrastructure investment.

Law professor Timothy Canova plans to reintroduce this funding model if elected to represent Florida’s 23rd Congressional district, where he is now running against the controversial Debbie Wasserman Schultz, current chair of the Democratic National Convention. Prof. Canova wrote in a December 2012 article:

. . . Wall Street bankers and mainstream economists will argue that greenbacks and other such proposals would be inflationary, depreciate the dollar, tank the bond market, and bring an end to Western civilization. Yet, we’ve seen four years of the Federal Reserve—now on its third quantitative-easing program—experimenting with its own type of greenback program, creating new money out of thin air in the form of credits in Federal Reserve Notes to purchase trillions of dollars of bonds from big banks and hedge funds. While the value of the dollar has not collapsed and the bond market remains strong, neither have those newly created trillions trickled down to Main Street and the struggling middle classes. The most significant effect of the Fed’s programs has been to prop up banks, bond prices, and the stock market, with hardly any benefit to Main Street.

In a January 2015 op-ed in the UK Guardian titled “European Central Bank’s QE Is a Missed Opportunity,” Tony Pugh concurred, stating of the US and European QE programs:

Quantitative easing, as practised by the Bank of England and the US Federal Reserve, merely flooded the financial sector with money to the benefit of bondholders. This did not create a so-called wealth affect, with a trickle-down to the real producing economy.

. . . If the EU were bold enough, it could fund infrastructure or renewables projects directly through the electronic creation of money, without having to borrow. Our government has that authority, but lacks the political will. The [Confederation of British Industry] has calculated that every £1 of such expenditure would increase GDP by £2.80 through the money multiplier. The Bank of England’s QE programme of £375bn was a wasted opportunity.

According to IMF director Christine Lagarde, writing in The Economist in November 2015:

IMF research shows that, in advanced economies, an increase in investment spending worth one percentage point of GDP raises the overall level of output by about 0.4% in the same year and by 1.5% four years after the spending increase.

In a December 2015 paper titled “Recovery in the Eurozone: Using Money Creation to Stimulate the Real Economy”, Frank van Lerven expanded on this research, writing:

For the Eurozone, statistical analysis of income and consumption patterns suggests that €100 billion of newly created money distributed to citizens would lead to an increase in GDP of around €232 billion. Using IMF fiscal multipliers, our empirical analysis further suggests that using the money to fund a €100 billion increase in public investment would reduce unemployment by approximately one million, and could be between 2.5 to 12 times more effective at stimulating GDP than current QE.

The Hyperinflation Myth

The invariable objection to exercising the government’s sovereign money-creating power is that it would lead to hyperinflation, but these figures belie that assumption. If adding €100 billion for infrastructure increases GDP by €232 billion, prices should actually go down rather than up, since the supply of goods and services (GDP) would have increased more than twice as fast as demand (money). Conventional theory says that prices go up when too much money is chasing too few goods, and in this case the reverse would be true.

In a November 2015 editorial, the Washington Post admonished Congress for blurring the line between fiscal and monetary policy, warning, “Many a banana republic . . . has come to grief using its central bank to facilitate government deficit spending.” But according to Prof. Michael Hudson, who has studied hyperinflations extensively, that is not why banana republics have gotten into trouble for “printing money.” He observes:

The reality is that nearly all hyperinflations stem from a collapse of foreign exchange as a result of having to pay debt service. That was what caused Germany’s hyperinflation in the 1920s, not domestic German spending. It is what caused the Argentinean and other Latin American hyperinflations in the 1980s, and Chile’s hyperinflation earlier.

Promising Possibilities

Any encroachment on the Fed’s turf is viewed by Wall Street and the mainstream media with alarm. But to people struggling with mounting bills and crumbling infrastructure, the development has promising potential. The portal to the central bank’s stream of riches has been forced open, if just a crack. The trickle could one day become a flow, a mighty river of liquidity powering the engines of productivity of a vibrant economy.

For that to happen, however, we need an enlightened citizenry and congressional leaders willing to take up the charge; and that is what makes Prof. Tim Canova’s run for Congress an exciting development.

More articles by:

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com.

Weekend Edition
December 14, 2018
Friday - Sunday
Andrew Levine
A Tale of Two Cities
Peter Linebaugh
The Significance of The Common Wind
Bruce E. Levine
The Ketamine Chorus: NYT Trumpets New Anti-Suicide Drug
Jeffrey St. Clair
Roaming Charges: Fathers and Sons, Bushes and Bin Ladens
Kathy Deacon
Coffee, Social Stratification and the Retail Sector in a Small Maritime Village
Nick Pemberton
Praise For America’s Second Leading Intellectual
Patrick Cockburn
The Yemeni Dead: Six Times Higher Than Previously Reported
Nick Alexandrov
George H. W. Bush: Another Eulogy
Brian Cloughley
Principles and Morality Versus Cash and Profit? No Contest
Michael Duggin
Climate Change and the Limits of Reason
Victor Grossman
Sighs of Relief in Germany
Ron Jacobs
A Propagandist of Privatization
Robert Fantina
What Does Beto Have Against the Palestinians?
Richard Falk – Daniel Falcone
Sartre, Said, Chomsky and the Meaning of the Public Intellectual
Robert Fisk
The Parasitic Relationship Between Power and the American Media
Stephen Cooper
When Will Journalism Grapple With the Ethics of Interviewing Mentally Ill Arrestees?
Jill Richardson
A War on Science, Morals and Law
Ron Jacobs
A Propagandist of Privatization
Evaggelos Vallianatos
It’s Not Easy Being Greek
Nomi Prins 
The Inequality Gap on a Planet Growing More Extreme
John W. Whitehead
Know Your Rights or You Will Lose Them
David Swanson
The Abolition of War Requires New Thoughts, Words, and Actions
J.P. Linstroth
Primates Are Us
Bill Willers
The War Against Cash
Jonah Raskin
Doris Lessing: What’s There to Celebrate?
Ralph Nader
Are the New Congressional Progressives Real? Use These Yardsticks to Find Out
Binoy Kampmark
William Blum: Anti-Imperial Advocate
Medea Benjamin – Alice Slater
Green New Deal Advocates Should Address Militarism
John Feffer
Review: Season 2 of Trump Presidency
Frank Clemente
The GOP Tax Bill is Creating Jobs…But Not in the United States
Rich Whitney
General Motors’ Factories Should Not Be Closed. They Should Be Turned Over to the Workers
Christopher Brauchli
Deported for Christmas
Kerri Kennedy
This Holiday Season, I’m Standing With Migrants
Mel Gurtov
Weaponizing Humanitarian Aid
Thomas Knapp
Lame Duck Shutdown Theater Time: Pride Goeth Before a Wall?
George Wuerthner
The Thrill Bike Threat to the Elkhorn Mountains
Nyla Ali Khan
A Woman’s Selfhood and Her Ability to Act in the Public Domain: Resilience of Nadia Murad
Kollibri terre Sonnenblume
On the Killing of an Ash Tree
Graham Peebles
Britain’s Homeless Crisis
Louis Proyect
America: a Breeding Ground for Maladjustment
Steve Carlson
A Hell of a Time
Dan Corjescu
America and The Last Ship
Jeffrey St. Clair
Booked Up: the 25 Best Books of 2018
December 13, 2018
John Davis
What World Do We Seek?
Subhankar Banerjee
Biological Annihilation: a Planet in Loss Mode
FacebookTwitterGoogle+RedditEmail