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

By Ellen Brown, Web of Debt.

In a landmark infrastructure bill passed in December, Congress finally penetrated the Fed’s “independence” by tapping its reserves and bank dividends for infrastructure funding.

The bill was a start. But some experts, including Congressional candidate Tim Canova, say Congress should go further and authorize funds to be issued for infrastructure directly.

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 €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.

__________________

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. Listen to “It’s Our Money with Ellen Brown” on PRN.FM.

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  • Charles Fasola

    This is, finally, a step in the right direction. The next steps in the fight against money creation by debt issuance by private banks, which ultimately allows big banking, corporations and the .000006 percent to control government consist of nationalization of the Federal Reserve incorporating it into the US Treasury, the elimination of fractional reserve lending and 100% reserve requirements for private bank lending. Currently the private banking syndicate uses their power of money creation to control the money supply. That which controls the creation of money controls the government and government policy.

    • Nexusfast123

      Along with the creation of a national public bank the banking system as a whole should be nationalised while it is being split up and all the frivolous and fancy financial instruments stripped out along with high speed trading. The divisions between retail, commercial, insurance, investor operations reinstated along with a highly regulated financial instruments operation as some will be needed to support markets. Banks should be a bit boring like utilities and with the same reward structure.

  • jadan

    She’s baaack! As the archaic monetary system of the oligarchs collapses around our ears and misery and deprivation seem to be waiting for us just ahead, Ellen Brown’s moment has arrived. She understands “modern money mechanics” and the operations of this smug and autocratic monetary authority. The money power can be wrested from the clutches of these tyrants one little piece at a time. When just a little of the fat gets skimmed off into public works projects, the economy will recover with remarkable alacrity and the central bankers will loose their legitimacy. End the Fed! That’s the long term solution for a society that likes to call itself democratic. Much good can happen in this emerging crisis!

  • Carl_Herman

    Great article, Ellen; thank you!

    The mechanics of creating what we use for money should, obviously, maximize public benefits. The current model creates what we use as debt owed to private banks to maximize their profits. New mechanics could:

    1. Create debt-free money for direct payment of public goods and services. This produces game-changing triple benefits of the employment, upgraded infrastructure, and overall falling prices because infrastructure returns more economic output than investment cost. This is like creating money as a positive number.

    2. Create public banks for at-cost and in-house credit. This is also game-changing as it reduces infrastructure funding costs by 50% from the current model of selling debt securities. For example, where I live the Bay Bridge upgrade cost $6 billion, but with another $6 billion for debt-service costs. The best overall example of this breakthrough: a state bank issuing 5% mortgages and a 5% credit card would abundantly receive more than enough income to eliminate all other forms of state tax. This is like creating what we use for money as a negative number, and perhaps an essential tool to balance the money supply.

    If/when we win, good-faith experimentation will show us the proper balance of creating money as a positive and/or negative number. Unimaginable today, unleashed economics has the tools to accurately account and transparently communicate data to best guide our work.

  • December 28, 2015 America’s wealth gap reaches new record; societal tensions rise as economic collapse looms

    The report, based on data from the Federal Reserve, indicates that the median wealth for high-income families is now nearly seven times that of middle-class households. Median wealth, determined by subtracting debts from assets, was found to be unchanged over the past three years for middle-income families, standing at $96,500 after adjusting for inflation.

    http://www.naturalnews.com/052448_wealth_gap_economic_collapse_social_chaos.html#ixzz3vegJH8v3

  • January 11, 2016 On the verge of bankruptcy: 62 percent of Americans have less than $1,000 in savings

    As reported by CNN Money, the Dow Jones Industrial Average had its worst four-day start in the history of Wall Street, with trillions in wealth vanishing on fears that China’s “infrastructure first” economy is in dire need of transformation to a consumer-driven model.

    http://www.naturalnews.com/052590_down_economy_American_workers_lack_of_savings.html#ixzz3wxlaf6JH

  • ahuxley

    “…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…”

    It doesn’t look good…???

    This from a top operative of one of the world’s most prodigious criminal organizations…?
    Gimme me a break, Ben…!
    Oh, and you’ve been a very bad boy. Go to your room.