Hokey doke, we’ve come to the conclusion that the Federal Reserve system, the central bank of the United States, needs a few tweaks to put it back on the rails and conform to the purpose for which it was originally intended: provide liquidity for private sector growth. Yes, there’s some stuff about regulating clearinghouse operations and so on, but the main purpose was to make certain that the private sector would always have “accommodation” for qualified industrial, commercial, and agricultural development, not finance government.
|New Capital Formation, a Qualified Capital Project|
So, how can this be done? Well, for starters. . . .
Let’s look at a “Special Discount Rate” for qualified capital projects. It helps, of course, if we know what a “discount rate” is to begin with.
The discount represents the fee charged by the Federal Reserve on the loans it makes to its member banks based on the present value and risk of the “underlying,” that is, the assets backing the loans.
The discount rate is not an interest rate. It is the rate used to calculate the amount “held back” by the Federal Reserve when a commercial bank rediscounts (“sells”) loans to the central bank in exchange for new currency or demand deposits.
For example, if a bank selling a bundle of loans with a face value of $1 million at the term of one year had its loans rediscounted by the Federal Reserve at 0.5%, the bank would receive $995,000 in new currency or demand deposits. It would thus be paying to the central bank an effective service fee of $5,000 when the loans were repaid.
|Qualified agricultural, commercial and industrial projects can be financed.|
The special discount rate for expanded ownership credit extended by qualified financial institutions would be set at 0.5% or less, whatever is calculated to be the cost of creating and administering new money through the expansion of bank credit. This service fee would return to the original idea of central bank rediscounting, where the rate charged by the central bank would cover only the administrative costs of the Federal Reserve and other government banking agencies that regulate commercial banks and other institutions controlling the flow of money and productive credit.
It would not allow the Federal Reserve any profits for its role in monetizing expanded citizen access to capital credit. Qualifying lenders would be free to add their own markup above their cost of money to cover their administrative costs, risk premiums and profit, with overall transaction charges set by the market.
No Central Bank Allocations of Credit. The fear most often expressed when the reactivation of the discount window is discussed is that the Federal Reserve will begin allocating productive credit to businesses based solely on political considerations. This can be guarded against by implementing a private-sector checks-and-balances mechanism, something like a new Glass-Steagall, but with a lot more teeth.
|Innovation and creativity would flourish.|
Participating banks and financial institutions would handle all credit allocations, subject to market competition, with special safeguards to prevent government allocations of credit or the use of such funds for speculative purposes, consumer loans, or public sector projects. The Federal Reserve properly opposes political allocations of credit, which this proposal is designed to avoid.
Local lenders, not the Federal Reserve, would determine the technical financial feasibility of each loan and the demand for new credit. An additional control is included automatically because no money can actually be created until and unless the Federal Reserve accepts qualified loans.
Asset-Backed Currency and Collateralization. In conformance with sound central banking practice, all newly created money and bank credit would be asset-backed. Assets would be in the form of pledged shares acquired with the loans discounted at the Federal Reserve, plus guarantees and collateralized assets of the enterprise needing capital.
|Insurance can replace Fatcat collateral.|
The new capital owners would also be insulated against having their personal assets seized, just as corporate shareholders are today, if future profits do not cover the cost of capital credit.
As a substitute for traditional collateral requirements (a major barrier to expanded ownership among the poor and middle-class), Congress and the Federal Reserve would encourage the establishment of commercial loan default insurance and reinsurance pools (like FHA mortgage insurance), funded by the risk premium portion of debt service charges.
In contrast to the handling of the savings and loan crisis, the full faith and credit of the Federal Government should not stand behind these bank loans or insurers of capital credit in the event of default by companies issuing expanded ownership shares. In order to encourage responsible lending practices by member banks, capital credit insurance might cover only 80-90% of the unpaid balance of a defaulted loan.