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4 Ways to Change the Fed

beowulf's picture
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Cross-posted from The Traders Crucible
http://traderscrucible.com/2011/11/03/4-...

I've listed below possible legislative language to 1. place the Fed under Tsy control, 2. authorize Tsy to issue US Notes to fund spending and the Fed to issue debt obligations to control interest rates, 3. Use coin seigniorage to offset budgetary costs of net interest, trade deficit and an automatic payroll tax holiday system, and 4. an automatic payroll tax holiday system (naturally). Sen. Sanders would do well to allocate any budgetary savings to new spending lest it simply be saved up for future tax cuts by the next Republican president.


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1. Putting Fed (both FRB and the regional Banks) under control of the Secretary of the Treasury
Current law (12 USC 246) reads:
"Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary."

Amend that with:
Section 246 of Title 12, United States Code, is amended by striking the words "agent appears to conflict with the powers of the Secretary of the Treasury" and replacing with the following: "banks is exercised".

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2. Tsy and the Fed swap jobs, with Tsy creating the dollars it needs to spend and the Fed issuing the bonds it needs to control interest rates.

Section 5115 of Title 31, United States Code, is amended by striking subsection (b) and inserting, after subsection (a), the following: "(b) The Secretary of the Treasury may in his discretion deposit United States currency notes, in paper or electronic form, in the general fund of the Treasury as necessary to issue warrants for money drawn on the Treasury consistent with appropriations."

Section 248 of Title 12, United States Code, is amended by inserting, after subsection (r ), the following: "(s) Authority to issue obligations (1) The Board is authorized, with the approval of the Secretary of the Treasury (“Secretary”), to issue publicly and have outstanding obligations of such amount, having such maturities and bearing such rate or rates of interest as may be determined by the Board. Such obligations may be redeemable at the option of the Board before maturity in such manner as may be stipulated therein. So far as is feasible, the debt structure of the Board shall be commensurate with its asset structure. (2) The Board is also authorized to issue its obligations to the Secretary and the Secretary may in his discretion purchase or agree to purchase any such obligations. The Secretary may sell, upon such terms and conditions and at such price or prices as he shall determine, any of the obligations acquired by him under this subsection. (3) Obligations of the Board issued pursuant to this section shall be lawful investments, and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority or control of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States, or any agency or instrumentality of any of the foregoing, or any officer or officers thereof."
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If the Fed needs a revenue source to pay interest on its obligations (language above taken from Federal Financing Bank statute), the Fed already has the authority to levy and adjust its transaction fees.
Subsection (c) of Section 248a, Title 12, United States Code is amended by inserting, after clause (4), the following: "(5) schedule of fees may be adjusted, in whole or part, to pay interest on obligations issued by the Board."
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According to the Tsy website, US Notes are exempt from the debt ceiling ("Total Public Debt Subject to Limit is defined as the Total Public Debt Outstanding less the Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, old debt issued before 1917, and old currency called United States Notes as well as Debt held by the Federal Financing Bank…").
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3. The return of the platinum coin (with an assist from the Tea Party)

There's a Tea Party-backed House bill (HR 2977) introduced recently that seeks to to replace dollar bills with dollar coins. The bill''s section (d) would put coin seigniorage profits on-budget, which is actually a wonderful idea. That could mean (to extend the principle) that a payroll tax holiday wouldn't add to the deficit so long as seigniorage proceeds equal to the "tax holiday transfer of funds" were deposited in TGA every year. Likewise, the demand leakage created by our chronic $600B trade deficit could be offset without increasing the budget deficit or imposing trade barriers. Where I take the Tea Party bill in an unexpected directions begins with "The total deposits".

The ninth proviso of section 5136 of title 31, United States Code, is amended by inserting, after ‘miscellaneous receipts’ the following: "and such amount shall be included as an estimated receipt of the Government and a receipt of the Government under paragraphs (6) and (7), respectively, of section 1105(a) in any budget submitted under such section. The total deposits of said miscellaneous receipts each year shall be no less than the annual sum of Secretary's estimates of Tax Holiday Transfer of Funds, Net Interest and Trade Deficit."

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Between replacing debt service costs with US Notes and/or rebating back net interest with coinage, uncapping SS FICA (see below) and offsetting the cost of the trade deficit, there's more than enough revenue to fund Sen. Sanders's universal healthcare bill without raising taxes or increasing the deficit. Of course a tax increase combined with a tax holiday could actually be a net tax decrease (see "unearned income Medicare contribution" below). Note, including net interest isn't really necessary if Tsy and Fed actually did swap jobs; also, the trade deficit could be replaced by OMB's similarly sized (just shy of $600B), Total Investment Outlays for Major Physical Capital, Research and Development, and Education and Training (Table 9.1 in President's Budget).
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4. Enable Tsy to automatically set a counter-cyclical fiscal policy with an adjustable payroll tax holiday (No reason not to uncap Social Security FICA at the same time). As Greg Mankiw has pointed out, "Keynes also favored the payroll tax as a countercyclical policy instrument"
http://gregmankiw.blogspot.com/2009/02/m...

Chapter 21 of title 26, United States Code is amended by inserting, after Section 3128, the following:
"3129. PAYROLL TAX HOLIDAY.

(a) Tax Holiday Transfer of Funds-
‘(1) IN GENERAL- There are hereby appropriated to the Social Security and Medicare trust funds, out of money in the Treasury not otherwise appropriated, an amount equal to the reduction in FICA taxes described by subsection (b).
?‘(2) ALLOCATION AMONG FUNDS- Amounts shall be appropriated to such funds under paragraph (1) in the same proportions as amounts would (but for this section excepting subsections (f) and (g)) be appropriated to such funds under the Social Security Act and the Railroad Retirement Act of 1974.
(b) Reduction in Payroll Taxes-
‘(1) IN GENERAL- The rate of each FICA tax for each quarter (determined without regard to this section except for subsections (f) and (g)) shall be reduced by the number of percentage points equal to--
‘(A) such rate, multiplied by
?‘(B) the tax holiday percentage determined by the Secretary of the Treasury for such quarter.

‘(2) TAX HOLIDAY PERCENTAGE- The tax holiday percentage shall be Secretary of the Treasury's estimate of U3 unemployment rate, reduced by 2.5 percentage points, the resulting percentage then multiplied by ten (10). The tax holiday percentage shall not exceed 100%.
FOR EXAMPLE, if U3 rate is estimated to be 10%, it is first reduced to 7.5%, then multiplied by 10 to derive 75% as the current quarter's payroll tax holiday percentage.

(c ) Upon enactment of this Act, the Secretary of the Treasury shall notify employers of tax holiday percentage for each quarter in any manner as the Secretary deems appropriate.

(d) Definitions-
'(1) FICA TAX- The term ‘FICA tax’ means--
‘(A) the tax imposed by section 3101 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3201 as is determined by reference to the tax imposed by section 3101),
?‘(B) the tax imposed by section 3111 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3221 as is determined by reference to the tax imposed by section 3111, and
?‘(C) the tax imposed by section 1401 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3211 as is determined by reference to the taxes imposed by sections 3101 and 3111).
'(D) the tax imposed by section 1441 of the Internal Revenue Code of 1986.

‘(2) SOCIAL SECURITY AND MEDICARE TRUST FUNDS- The term ‘Social Security and Medicare trust funds’ mean--
‘(A) the Federal Old-Age and Survivors Insurance Trust Fund established by section 202 of the Social Security Act,
?‘(B) the Social Security Equivalent Benefit Account established under section 15A of the Railroad Retirement Act of 1974. and
'(C ) the Federal Hospital Insurance Fund established by section 1817 of the Social Security Act.

(e) Determination under subsections (a) and (b) shall be made on the basis of estimates by the Secretary. Proper adjustments shall be made to the extent prior estimates were in excess of or less than more accurate amounts.

(f) Eliminating Social Security FICA Cap and high-wage Medicare surcharge-
(1) Subsection 3121(a) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 1.
(2) Subsection 1402(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 1.
(3) Subsection 3101(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 2.
(4) Subsection 1401(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 2.

(g) Conforming unearned income Medicare contribution rate to standard FICA rate-
'(1) Subsection 1441(a)(1) of the Internal Revenue Code of 1986 is amended by striking the words "3.8 Percent" and replacing with the following: "15.3 percent".
'(2) Subsection 1441(a)(2) of the Internal Revenue Code of 1986 is amended by striking the words "3.8 Percent" and replacing with the following: "15.3 percent".

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beowulf's picture
Submitted by beowulf on

Thank you. Ultimately, Milton Friedman was right, it takes a shock to the system to enact a new way of doing things.

My belief is there will always be another crisis, after which Congress WILL pass a dramatic reform bill. It might as well be a reverse shock doctrine plan instead of the ordinary kind, and for that to happen, all the groundwork has to be completed beforehand so it can just be taken off the shelf for Congress to vote on.

letsgetitdone's picture
Submitted by letsgetitdone on

The shock may come when the Greeks decide to overthrow their very undemocratic democracy, and Europe collapses causing falling dominoes whose effect spreads to the US banks causing their insolvency again.

At that point bailout will mean electoral defeat for anyone who who tries it, and with no bailout, the banks go into resolution and the Street loses political power big. Then many things will be able to get done including reverse shock doctrine.

Submitted by lambert on

Can we condense it down so that we can propagate it, like coin seignorage.

For example, Treasury and the Fed swapping places because each one is doing the other's job is easy to understand -- if in fact I do understand!

beowulf's picture
Submitted by beowulf on

The idea is to to combine the preferred fiscal policy of Milton Friedman ("Directs the Treasury Department to issue U.S. Notes"), the preferred monetary policy of Fed Vice Chair Janet Yellen ("the central bank wants authority to issue its own debt") and the preferred counter-cyclical policy of Lord Keynes ("Keynes says he is “converted” to Meade’s idea of altering the social security payroll tax over the business cycle.").

Treasury could cut everyone's taxes if it spent its own money and let the Fed lend for itself.
:o)

beowulf's picture
Submitted by beowulf on

Like a good shrink (or bartender), TC understands me better than I do myself:
http://traderscrucible.com/2011/11/07/4-...

Here is a quick and easy guide to why we want to do these things.

#1. The Fed isn’t under any control at all. It can do almost anything it wants with monetary policy. It’s not accountable to the president or congress in any meaningful way. It’s like a rogue bank in the middle of our government, funded by our government, that tries to control our entire economy.
But the Fed flips the middle finger to U.S. citizens when they ask for accountability to minimizing unemployment. It’s an anti-democratic institution that’s literally out of control.


The solution? Place the Federal Reserve Under Treasury Control.
Why? The Treasury reports directly to the President. If we can trust the president with the nuclear launch codes, we can and should trust him with money. Put the Fed under the Treasury.

#2. Normally, banks issue debt, and companies issue stock.
But for the U.S. government, the bank (the fed) issues the stock, and the company (the treasury) issues the debt.
The the fed tries to alter the yield curve with their open market operations. It’s ass-backwards.
It should be fixed, so people recognize the government can create money at will. Not only that, this is the way its done in the constitution.

The solution? Have the Treasury and Fed switch places. The Treasury issues money, the Fed sets the yield curve.

#3: The U.S. is the richest country in the known history of the world. Yet, somehow the richest country in the history of the world doesn’t have enough money. Does this seem completely stupid to you? It should. We’re can’t run out of money, because we can make all we need. We can make the money to pay for China ripping us off, and to stimulate the economy.

The solution? Make several trillion dollar coins. Deposit them in the Treasury account at the Fed.
We now have the money to pay for programs. Don’t spend too much- we might get inflation.
But do spend enough to get people working. In fact, you can spend it on a huge tax cut for working people as #4 will tell us.

#4. We know a simple fact: Businesses hire when they are swamped with demand! Don’t believe me? Just ask Mitt Romney!
Business have high profits right now, but they don’t want to hire because the demand for their products is low. So how can we boost demand when we need it – and cut back when we don’t need it any more?


The solution: Give people more money when times are tough, and cut back when times are good.
The best way to do this is through a payroll tax holiday. When times are tough, people get laid off. But if your buddy gets laid off, you’ll get a raise!
I hope this helps!

Submitted by [Please enter a... (not verified) on

Deficit spending is already controlled by Congress and the President (who signs the bills). The Fed should be buying securities during deflations (recessions and depressions) and selling them during inflations. Isn't that in the law? If not, would it just be easier to pass this into law?

Submitted by [Please enter a... (not verified) on

If you could get it passed, I'd support it. But I think we don't need to change the current rôles of the Fed and Treasury. We just need to get everyone to recognize that when the Fed buys a T security, it redeems whatever debt the United States government had to whatever bank held it. The pile of securities at the Fed do not represent debt that the United States owes to the Fed. MMTers need to recognize that the following sequence of operations produce the same outcome as the Treasury issuing greenbacks to cover deficit spending: Congress has deficit to spend. Treasury issues securities to cover deficit. Securities are sold at public auction to banks. There is now a debt of the United States government to the banks. But don't stop there! The banks have diminished reserves equal to the securities they hold, having sent the loan money from an account in their bank to the account of the Treasury at the Fed. That limits what they can further lend, and so they see restoration of their reserves. So, they put the securities back up at auction. (They can't go to the Treasury because they know it didn't have the money to do deficit spending and thus borrowed from them). This time the Fed buys their securities with money it creates and issues out of thin air into their reserves. As a government agency buying with government money it creates, the Fed redeems the debt of the United States government to the banks. Banks' money borrowed is now debt-free. Fed has also increased the money supply by an amount equal to the deficit spending money plus interest. The Fed takes possession of the securities for the United States. They do not represent a debt at this time to anyone. Certainly not to the Fed because to claim that it is owed for the securities would be like a bank clerk claiming to be paid for the securities it has bought from bank customers for the bank with bank money. That is invalid claim. The Fed is authorized to buy and sell securities. It can sell those it now holds to fight inflation. And, Beowulf, you say that the Fed cannot redeem the debt because it is not the issuer of the securities. I see this at a Treasury url: "Treasury securities are safe and secure, backed by the full faith and credit of the United States government." Note that it is not backed by the Treasury but the government. Treasury is just an agent of the government. And so is the Fed, aside from its being independent of political influence. That means, as an agent of the government, the Fed could redeem the debt just by buying the securities. It is authorized to buy and sell T securities. It uses them to manage the money supply.
O.K. how is this equivalent to a Treasury issuing greenbacks and spending them (under authorization of Congress). Congress has deficit. Treasury issues debt-free greenbacks. Treasury spends the greenbacks on whatever programs the Congress' deficit spending authorizes. The banks have whatever money they had before this in their reserves. The Treasury's greenbacks increase the money supply equal to the deficit spending. The Fed issues securities as needed and sells them to banks to counter inflation. (Who pays the Fed the transaction fees? Does Fed send Treasury the bill?) When inflation is past, the Fed can buy them back (and send transaction fee bill to Treasury. Treasury pays with greenbacks (debt-free)).
I admit this is a more straightforward system, and if you could get everything changed in a new law governing the Treasury and the Fed, I'd be happy with it. But we don't need to change the current system to get essentially the same thing you are proposing in its results. We just need to get the Fed, the Administration, the Secy of Treasury, and the Congress and American people to recognize that the Fed has already paid off the debt on all the securities it holds.
Beowulf has said that the debt-ceiling law specifies the ceiling in the number and value of securities held at various places, and would still apply even though the securities at the Fed no longer count as debt. Couldn't that be challenged because the intended purpose of the law is to limit appropriations that create borrowing and debt measured in securities. While there is initially a debt, it is not located at the Fed, and if the Fed redeems it in possessing the securities, it is not a debt. Isn't there a principal in law that a law that mandates something contrary to its intended purpose, is illegal?
Anyway, I welcome Beowulf's opinion.

Submitted by [Please enter a... (not verified) on

Beowulf@: "According to the Tsy website, US Notes are exempt from the debt ceiling ("Total Public Debt Subject to Limit is defined as the Total Public Debt Outstanding less the Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, old debt issued before 1917, and old currency called United States Notes as well as Debt held by the Federal Financing Bank…" It seems to me that if the Fed has already redeemed for the government every security it has bought and possesses, that they do not constitute debt outstanding as you cite the debt-ceiling law.