The 300 year old experiment in driving the economy by creating money is over. We've overpopulated the planet and consumed most of its resources. Creating more money to incentivize higher production, or growth – whether done fairly or not -- just won't work anymore.
The Federal
Reserve may for a time be able to manage a money supply appropriate more or
less to a plateaued economy, even an economy as unfair as the one it maintains.
But from now on any economy will be less and less able to deliver the goods and
services expected by ever greater numbers of people. We face at best
a long, slow squeeze, a zero-sum game with a shrinking pie. At worse we face a
more acute crisis participated by some trigger event: runaway global warming, a
large terrorist event or war, another major financial crash.
This time it's
different. We face a true economic/ecological depression, not another financial
depression, as so often in the past. Back in the
1930s, as on earlier occasions, we had a financial depression, that is, a
speculative boom followed by a financial crash. At that time we still had
plenty of productive resources and potential, room for population growth, and
relatively few externalized costs.
The problem then
was the refusal of the central banks or their equivalents to carry out any kind
of quantitative easing (QE) or deficit spending when it could have worked; they
choose instead to accept insolvency and liquidation on a large scale. But when the
necessary stimulus came – in the form of a world war – the resources were there
for the economy to rebound and debts to be absorbed. Today the
potential for growth is gone. We had a classic financial crash in 2008,
but few have noticed that it coincided with a profound, if slow-motion, global
eco-crash. Both are still unfolding, and are now deeply intertwined.
Some recent
history will be useful to understand how we got to this point:
The Fed, since
the 2008 crash, has been using its power to create money to do two things:
first, to recapitalize banks which otherwise would have failed, and, second, to
absorb the excess debt of the US government. As a result, the
big commercial banks have avoided insolvency and the federal government has
been able to run continued deficits without rising interest rates.
The Fed
recapitalized the banks by buying their toxic assets (mostly worthless
mortgage-backed securities), and it absorbed excess US government debt by
direct purchase of long-term government securities (quantitative easing). But this
monetary "cure" for the financial crisis has turned out to be worse
than the disease.
Buying the
banks' toxic assets rewarded their moral hazard, their propensity to take risks
in hopes of greater profits for themselves while deflecting the responsibility
for losses onto others. Buying long-term
government debt from the banks further increased their liquidity. More
importantly, it guaranteed a market for Treasury bonds -- which likely would
not otherwise have found adequate buyers – keeping the government solvent, but
artificially so.
As a result of
Fed bond purchases, interest rates on government securities, which normally would
have risen to attract more buyers, were kept artificially low. These low rates
were expected to encourage lending by the banks and to restimulate the economy,
while minimizing interest payments on the government's rapidly expanding debt. As we can now
see, six years later, the economy has not responded. Banks found far fewer
borrowers than expected to put that all money to work, and the debt burden has
exploded.
Unable to
offload their bloated balance sheets, banks invested much of their excess cash
in new speculative bubbles, especially in the equity markets which have soared
to all-time highs. Although the
banks not only survived but prospered, and the government has so far been able
to meet its obligations, this new wealth went mostly not to the general public
but to the infamous 1 percent who were able, in one way or another, to
participate in the speculative bubbles unleashed by the banks.
Defenders of QE
and the Fed argue that this policy averted a much greater threat of financial
collapse, and that in due course economic recovery will take advantage of all
that pent-up money in the financial system. A growing economic pie, as so often
in the past, they tell us, will more than make up for the increased debt burden
necessitated by QE, and in the end benefit all.
Critics of QE
and the Fed on the other hand argue that the system is inherently designed to
concentrate wealth in few hands, that the primary motive of Fed policy is to
bail out the big banks and their investors, not serve the public, and, above
all, that an enormous amount of new debt is being created in the process, debt
that will saddle future generations of taxpayers and which seems unlikely ever
to be paid off.
A growing
progressive movement proposes to take monetary policy away from the Fed and put
it directly under government control, either through a system of national pubic
banking, or through issuance of a government-issued currency, modeled on Civil
War greenbacks. Rather than prop
up big banks, as in 2008, the idea is to use the money-creating power of
central government in various ways to bail out individuals and deserving
enterprises.
For instance, all
deposits could be guaranteed, even in insolvent banks, by extending FDIC as
needed. Similarly, underwater mortgages, unpayable health-care bills, onerous
student loans, and out-of-control liabilities could be paid off directly by a
reformed Fed or a new public bank, relieving millions of citizens of crushing
financial burdens. At the same time, vast government-funded infrastructure
programs could pump even more money into the economy.
Similarly,
Treasury bonds purchased by the Fed could be cancelled, as suggested by Congressman
Alan Grayson and others. The money paid for those bonds would be put back into
circulation, without any need to continue to service those obligations. These and
similar approaches, it is claimed, would put trillions of dollars of assets
directly into people's pockets. Social justice would be served and the economy
would be reignited.
This progressive
monetary agenda puts great faith in the ability of a centralized government to
act in the public interest. It presupposes that the government is reasonably
accountable to the public. Given the current corruption and dysfunction in
Washington, however, it is doubtful that this faith is warranted. A government-run
monetary system, without drastic
political reform, would almost certainly reflect the interests of
lobbyists, government contractors, and other special interests. It would almost
certainly end up creating an elite, perhaps every bit as exclusive as the
current crop of one per centers spawned by Wall Street.
Progressives
might object that even an imperfect system of financial redistribution would be
better than what we have now. But they have to show how that would be so, and
recent attempts at financial "reform" on the national level, such as
Dodd-Frank, have conspicuously failed to break the grip of the traditional
"money power."
The deeper
dilemma here is that the traditional and progressive approaches both presuppose
that the creation in some form of top-down fiat money will stimulate the
economy. The Fed would do it through the traditional banking system, with all
its flaws; the progressive critics of the Fed would do it through direct action
by big government, in spite of its lack of public accountability. Unfortunately, the
common assumption they share -- that we can spend our way out of financial
difficulty -- no longer obtains.
There are fewer
economic opportunities not because of a lack of money, but because the global
economy has bumped up against the limits of growth (resource scarcity plus
increasing externalized costs like pollution, climate change, overpopulation,
etc.). This isn't the
place to argue for the limits of growth. A vast – and to this writer,
persuasive -- literature on the subject has been developed since the 1970s.
Those limits –
mostly dismissed by "growth" enthusiasts -- are the real
problem. And it's a problem not only for the banking system and
traditional lending, as well as for government spending, but for all of us. Tragically, it
would remain a problem even if debt-free fiat money were funneled directly into
the hands of certain consumers, or private investors, or into government
sponsored infrastructure projects. Even if such
policies leveled the economic playing field, which is unlikely, they would not
address the larger ecological disaster before us.
It's the
difference between the Titanic going down with first class passengers getting
preferential access to the lifeboats vs. everyone on the ship getting equal
access to those lifeboats. Our moral preference might be for equal access, but,
in the absence of well established egalitarian procedures and customs, equal
access is also like to mean chaos and pandemonium. In the meantime, no matter
what, the ship is going down.
If the
purchasing power now locked up in big bank financial statements would have been
distributed among the general population, especially those most in need, they
would have had a better shot, to be sure, at claiming their share of dwindling
resources. And a better
infrastructure – a smart grid, a modernized rail system, renewable energy,
broadband for all, etc. – would have helped as well.
In the short
run, all that would have meant a better economy and a real measure of social
justice. But, in the absence of real prospects for renewed economic growth, it
would also, in the longer run, arguably have exacerbated the larger crisis by
piling further demands on an already stressed eco-system with finite resources. The inconvenient
truth, the elephant in the room, is that we have plateaued as an economy, and
are headed down, how far we do not know. The kind of financial system
appropriate to a drastically different kind of life has yet to be contemplated
either by defenders of the status quo, or most of their critics.
