Tuesday, November 25, 2008

Financing Bail-Outs and Other Job Creating Projects

In my blog of Sept 22, I suggested that the Federal reserve Bank and Treasury simply write checks on themselves rather than borrowing and paying interest. Since then, I read where the Fed is now paying banks interest on their deposits at the Fed. I wrote to the Fed and asked how this was financed. They replied that they would credit the banks' accounts at the Fed. That sounds like direct money creation by the Fed. If they can do it for paying the bank's interest on their deposits, they can do it for paying banks and Freddie Mac for their bad loans or General Motors or individuals whose unemployment checks are stopping.
The question that I frequently receive from those who I tell about zero interest public debt is "Wouldn't that be inflationary?" My answer is that it could be, but no more so if the money is created by any other process, including buying government bonds from banks, which they now do as part of their open market monetary policy. The Federal Reserve has the job of deciding if the economy has unused capacity. That is the judgment they make when they use monetary policy to stimulate the economy. They could continue to be responsible for this estimate and provide a limit for any Congressional job creating appropriations.


Adam T said...

Thanks for the continued "heads up" Doc... and it is nice to know that knowledgeable people will take the time to write the FED... and that the FED actually writes back! I chalk it up in the "Hope" column. Thanks,


Ralph said...

Allen: I agree, and would add a further point, as follow. Even where money has been created by more conventional means involving, as Allen puts it, “ borrowing and paying interest”, this borrowing and paying interest can be extinguished or dispensed with as follows.

Have the central bank quantitatively ease whatever amount of government debt you want (i.e. print money and buy up the debt). Then tear up the relevant Treasuries (or “gilts” as they are called in the UK). I explain in a light hearted manner how to do this here: http://ralphanomics.blogspot.com/2009/10/200bn-off-national-debt-at-stroke.html