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.
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| 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.
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| 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.
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| 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.
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| 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.
