The Federal Reserve

Washington, D.C. 20551

 

Dear FRB Members:

 

It seems incredulous to me that the Federal Reserve has the authority to print money and make it available to large banks for the purpose of lending that money to individuals and to small businesses to stimulate economic growth, but you no authority to see that they do so.  When short term interest rates are very low, for example, banks can borrow that money and direct it into the stock market at very high returns. The incentive is clear:  borrow at 0.25 percent, get a 30 percent return, and--ouila!—they’ve just made 11,900 percent on that money!  Why would they want to do something as mundane as to lend that money to small businesses and to individuals at 4 percent?  When asked why they do not lend money to individuals and to small businesses, bankers reply incoherently “It’s too risky!”  And so, M1 and the economy languish, while M2 and stock prices soar.  Put another way, the rich get richer while the other 90 percent wait and wait for a little trickle down.  Oh, for the bad old days of the Glass-Steagall Act!

 

We might also note that since 2009, U.S. wealth has soared nearly $30 trillion with 90 percent of that total going to those in the top 10 percent.  It would appear to any reasonable person that bankers have the Fed and us right where they want us, thanks to messrs. Gramm, Leach, and Bliley.

 

Still. you are not powerless in this scenario.  You could have a greater voice in creating new jobs, new incomes, new tax revenues, and in reducing budget deficits and debt.  Here is a start:

 

Track (M2 – M1) and show the velocity of that measure, or at least the opportunity cost of money that flows from it.  Show how it increases at the expense of the economy; how money intended for job growth actually goes into wealth growth for the wealthy; and show which banks are denying economic growth in favor of helping their wealthy clients.  We know that new money must be put into circulation if it is to create economic growth.  Conversely, new money that flows into savings and investments has no effect at all on GDP growth, job growth, income growth, tax revenue growth, or deficit reduction.  If only $1 trillion of M2 – M1 since 2009 had gone into M1, the economy would have grown by an additional $6 trillion in GDP, by $5.1 trillion in more personal incomes; by 4.8 million more jobs, and tax revenues at all levels would have increased by $2.4 trillion.

 

A second suggestion is to make a lot more money available to community banks, to credit unions, to co-ops, and to the Small Business Administration.  They are the real job creators.

 

The Fed needs to represent the 90 percent of residents who are being denied their just due.  Of the 200 to 300 Ph.D. economists in your domain, at least 90 percent of them know this bit of elementary economics.  But none to my knowledge are vocal about it.  Do they fear for their jobs? 

 

Empowering America with the truth is the best form of job security for everyone.  It may take a lot of truth to stimulate bankers to act in the country’s interest.  But it’s worth a try.

 

Sincerely,

 

 

 s/

Edward Phillips