Reform or replace the Fed?

I have mixed feelings about Congressman Kucinich.  He has represented the Cleveland Ohio area during the period when that city declined from the status as one of this richest and most important cities in USA to the poster child for deindustrialization.  Some actually blame him for the decline of Cleveland but that is just wrong.  What is true that he has fought a largely ineffective rearguard action to stem that decline.  And while it is true that he has lost a majority of the battles he has fought, it is also true that almost no one on planet earth has a much better track record against the forces of neoliberalism.

In the meantime, Kucinich has run for President several times and has attracted a small but loyal following over the years.  And while some of his ideas have seemed wildly impractical (Department of Peace, anyone?) his economic positions have been surprisingly sound.  And lately, he has decided to take on the Fed--which of course is not surprising because it is the logical institution to target in any period of economic decline.  He calls this effort the ‘‘National Emergency Employment Defense Act of 2010.’’


The press release from Dec. 17 sums it up.

Washington D.C. (December 17, 2010) –As the nation struggles with long-term unemployment at rates not seen in generations, contracted credit and the hoarding of public dollars by the banks, Congressman Kucinich (D-OH) today introduced a dramatic new proposal to establish fiscal integrity, reassert Congressional sovereignty and regain control of monetary policy from private banks. The National Emergency Employment Defense Act of 2010 would allow the federal government to directly fund badly-needed infrastructure repairs and fund education systems nationwide by spending money into circulation without increasing the national debt. The bill would end the current practice of fractional reserve lending, whereby the economy depends upon private financial institutions to lend money into circulation.

Congressman Kucinich stated, “The staggeringly bad employment and economic numbers represent a massive problem which cries out for bold action. Rather than crossing our fingers and hoping that banks will finally lend some of the billions of public dollars they haven’t thus far seen fit to lend, we can take action. My bill would replace the Federal Reserve System’s dependence on private banks to create credit. In its place, a Monetary Authority under the Treasury Department would directly inject liquidity into the economy by purchasing much needed public infrastructure repair. Today, we have idle capital, millions of able-bodied but unemployed workers, unused equipment, and record low interest rates. These conditions are the best possible time to make a long-term investment in our nation’s infrastructure. My bill would do exactly that.”

Naturally, the defenders of the conventional wisdom on monetary policy are going berserk.   Here is a typical reaction from the folks at Business Insider.  What I found surprising about this is some of the essentially enlightened comments to this article.  Seems like the criticisms of the Fed are beginning to reach critical mass.  On reader pointed out (correctly) that Kucinich's bill would merely restate the monetary powers found in USA's Constitution.

Flawed 'End The Fed' Bill From Rep. Kucinich Would Give Congress Near Unlimited Power To Print Money

Mike "Mish" Shedlock, Global Economic Intersection | Dec. 22, 2010

Representative Dennis Kucinich has introduced a bill to end the Fed. Unfortunately his proposal grants Congress ability to create money at will for virtually any purpose. Kucinich specifically mentions full employment, stabilizing social security, and to "lend new money into circulation as authorized by Congress and to provide means for public investment in capital infrastructure".

In other words Kucinich want Congress to have the power to print money into existence for any reason it wants. Here are a few snips from Kucinich's End the Fed Bill that show what I mean.

IN THE HOUSE OF REPRESENTATIVES Mr. KUCINICH introduced the following bill

To create a full employment economy as a matter of national economic defense; to provide for public investment in capital infrastructure; to provide for reducing the cost of public investment; to retire public debt; to stabilize the Social Security retirement system; to restore the authority of Congress to create and regulate money, modernize and provide stability for the monetary system of the United States, retire public debt and reduce the cost of public investment, and for other public purposes. more

Anyone who has actually read my take on the assumptions surrounding private central banking will realize they aren't all THAT different from what Mr. Kucinich is proposing.  Regular readers of this blog will be able to point out that I have already written several posts on the possibilities of state-owned banks.  Yet compared to what Kucinich is proposing, state-owned banks are pretty lame.  However, they are FAR from worthless, IMHO.

Here is a paper on the subject written by the folks who have obviously gotten Kucinich's ear on monetary policy.  I cannot disagree with the details of this piece.

Why States Going into the Banking Business Would be a Distraction, not a Solution to their Fiscal Problem

by Jamie Walton, AMI researcher

“We may not be able to stop them, but we can join them. We the people need to play the bankers’ game ourselves.”1 – that was written by one of the promoters of the notion that the state governments should go into the fractional reserve banking business to beat Wall Street at its own game and solve their fiscal problems.

What an insult to humanity! How about a dose of morality and common sense. Isn't that like saying: “We’re victims of organized financial crime, so lets join the criminals!”

Trying to beat Wall Street at its own game is obviously not the answer. As Albert Einstein once said, "We can't solve problems by using the same kind of thinking we used when we created them." 

Forty-eight States currently have budget deficits and many are sharply cutting services to try to close ‘fiscal’ gaps opening up to an average 24% by 2010.

Some attention has recently been given to the idea that State governments can get out of their fiscal problems by setting up their own banks. This is mainly a distraction away from genuine reform of the system, as encapsulated in the proposed draft American Monetary Act (more about that below).

The argument being put forward is that State governments can increase their revenues without increasing taxes by collecting profits from State-run banks. The proposal suggests that State governments go into the banking business and “fan” their deposits into 10 or 12 times as much in loans, using ‘fractional reserve’ or ‘capital adequacy’ rules, to cover fiscal gaps with bank profits. more