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How the FED can jump start the economy without funneling money "through" banks but rather by pumping it directly into the economy through you and me

Wed Oct 27, 2010 10:21 AM EDT

politics, economy, fed, billions, qe, qualitative-easing

Let's all help spread the wealth around this time

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The Fed is about to pump billions into the economy using the method of “qualitative easing.” What this means is basically the Fed is going to print money and funnel it to "through" the banks to get it into the economy. The problem with this method is that the money is funneled into banks and the banks may simply sit on the additional cash in order to increase their capital reserves in to offset possible defaults or use the money to buy government bonds—in either of these situations, the money does not get into the economy but the bankers love it. So how can the Fed get this money into the economy? It’s not difficult if we use a populist approach and funnel the money directly into the economy through we the people.

Reports indicate that the Fed is going to start with 500 billion dollars. That’s right: $500,000,000,000. That’s also $2,000 multiplied by two hundred fifty million. To avoid the bottleneck created by banks, a populist approach would have the Fed give the money directly to adults who have social security numbers. The Fed simply mails each of us a check for $2,000. I'd probably spend most or all of mine, you’d probably do the same, and the money would go into circulation much more efficiently than any other method. Unlike funneling money through banks which might or might not loan it out, this money would quickly fuel spending across the nation and jump start the consumer economy.

The banks won’t like this because they won’t benefit directly. They have a lot of political clout and are closely tied to whatever administration is in power. Tough luck, I say, they need to let this stimulus get to the people and begin circulating in the economy.

A lot of folks will like this direct stimulus package: mothers and grandmothers, fathers and grandfathers, carpenters, auto mechanics, plumbers, as well as big retailers and small businesses like grocery stores, computer stores, restaurants, shoe stores, and lots more. This is a populist way of jump starting the economy and getting money circulating.

And what great timing: just before Christmas!

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Public Discussion (41)

You can count me in... I'll pass the money on to grocers and waiters as soon as I can! As for the bankers who won't get their additional money, they'll get just what each of us gets and they too can pass it on.

9 votes

#1 - Wed Oct 27, 2010 10:24 AM EDT

Babylon of Gerbil

The problem is the fed has no money. They will simply borrow from the Chinese and devalue our dollar even more. We must face the reality. We are bankrupt and righting hot checks. We aren't even able to pay our debt holders.

3 votes

#2 - Wed Oct 27, 2010 11:36 AM EDT

The fed is going to do what it calls a qualitative easing which, essentially, is the fed creates money ex nihilo -- it prints it. This is going to happen. What I am suggesting is another way of getting the money into our economy. Rather than funneling it through banks--which don't always send it on for the reasons I cite--just give it to the people and we'll get it into the economy by spending it.

3 votes

#2.1 - Wed Oct 27, 2010 12:06 PM EDT

You'd be paying that $2000 back with a lot of interest over the years, on top of the debt we're already going to have to pay for. And I'd stick mine straight into my savings account.

2 votes

#3 - Wed Oct 27, 2010 12:11 PM EDT

The money's going out however it goes--routed through the banks or routed through you and me. I'd rather it goes through us... wouldn't you?

4 votes

#3.1 - Wed Oct 27, 2010 12:21 PM EDT

Qualitative easing refers to the Fed gradually purchasing Treasury securities in an attempt to manage the rate of inflation (as opposed to the $1.7 billion purchase they made last year). It isn't a definite decision yet, Bernake might very well announce explicit ceilings for yields on longer-maturity Treasury debt as an alternative.

And no, I don't want Obama to put us further into debt by giving each of us $2,000. As to whether or not I think qualitative easing is a good idea and will help get inflation where it should be, or whether I favor the explicit ceilings, I can't honestly say I understand options well enough to have a valid recommendation.

1 vote

#3.2 - Wed Oct 27, 2010 1:26 PM EDT

The "hole" is the same whether we are given the money to pump into the economy or the fed uses the money to purchase financial instruments. Here's one definition:

The term quantitative easing (QE) describes a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

A central bank implements QE by first crediting its own account with money it creates ex nihilo ("out of nothing"). It then purchases financial assets, including government bonds, agency debt, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus hopefully induce a stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.

The key sentence is in bold. Basically, the fed creates money out of nothing--that's the same as printing it. If the aim is to get this created money into the economy, then I think the plan above is even better than the play of giving it to the banks. As the source for the above quote continues:

Risks include the policy being more effective than intended, spurring hyperinflation, or the risk of not being effective enough, if banks opt simply to sit on the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio

Distributing the money directly to citizens avoids the second risk above.

3 votes

#3.3 - Wed Oct 27, 2010 1:46 PM EDT

Not printing money out of nothing in the first place would be even better. It isn't a done deal so I will keep hoping. It will come out of our taxes eventually.

#3.4 - Wed Oct 27, 2010 1:58 PM EDT

Why do you want it to come out of our taxes? Ex nihilo sounds good to me.

1 vote

#3.5 - Wed Oct 27, 2010 2:01 PM EDT

ex nihilo means it comes out of your account immediately in the form of instant inflation. It's like a tax they don't have to bother collecting and applies to everybody equally.

To your other point consumers paying off credit cards is the same impact as banks increasing reserves when speaking of money supply. Many people are in debt and many people would likely use it to pay off debt so it's probably more likely a form of the second scenario would occur in a direct to taxpayer distribution than via the banks.

2 votes

#3.6 - Wed Oct 27, 2010 2:07 PM EDT

There was a period in between "hoping" and "it will come out of our taxes." I was pointing out that we will pay for it somehow.

1 vote

#3.7 - Wed Oct 27, 2010 2:14 PM EDT

KlyeN, to your second point:if the money went to the banks via the individual paying off debt, the bank would then have more money and could loan it out (or sit on it or invest it). It seems we're at least putting an extra step between the Fed and the banks.

We're in agreement about the first step--the point is to encourage/create inflation and avoid the huge problem of deflation.

1 vote

#3.8 - Wed Oct 27, 2010 2:16 PM EDT

kafx, I missed that... sorry. But do we pay for it if we need some inflation? The country does well with a single digit inflation rate. Our dollars losing some value is the same thing as inflation, right?

1 vote

#3.9 - Wed Oct 27, 2010 2:18 PM EDT

ex nihilo means it comes out of your account immediately in the form of instant inflation. It's like a tax they don't have to bother collecting and applies to everybody equally.

It is like a tax, but it doesn't apply to everyone equally ... it mostly takes wealth away from people or institutions with large US dollar cash reserves, like China's central bank, or large US corporations that are sitting on piles of money. So if cash reserves are being devalued by inflation, maybe companies will start spending all that cash on expanding their business, a.k.a. economic growth and more jobs. Sounds great to me.

2 votes

#3.10 - Wed Oct 27, 2010 2:24 PM EDT

The purpose of QE is to expand the money supply. Consumers paying debt off at best keeps the supply the same - best meaning the banks really do instantly relend all of it back out. That mitigates the impact ( expansion ) of the overall supply they are going for.

Perfect is no inflation and no deflation. There is a difference in money supply growth and inflation. Inflation means more money supply growth than was warranted by economic growth. That gets confusing when it's so hard to measure inflation in the first place.

The negatives of deflation are worse than inflation. So the target is to mess up on the inflation side of things since the tools are not exact. That's why a single digit inflation rate is 'good'. That doesn't mean inflation is good just that central banks aren't perfect at managing it and worry about deflation.

Dollars losing real purchasing value is inflation. This policy hurts people with most of their wealth in dollar denominated assets - which in the end means the middle class. The poor do not have much to devalue and the rich have things which maintain value ( as well as foreign holdings ) so it's really a tax aimed at the middle class.

1 vote

#3.11 - Wed Oct 27, 2010 2:31 PM EDT

Anyway, expanding the money supply--the purpose of that is to avoid deflation and increase inflation. That's what would happen if the money were given to citizens. Granted, some citizens might use it to pay down a debt. But others would use it on food, clothing, etc. Seems to me that would help inflate prices (more people spending money on the same products). So: why is this not at least as good as funneling the money to the banks and, perhaps, even better, since the banks can't just sit on the money.

3 votes

#3.12 - Wed Oct 27, 2010 2:52 PM EDT

The reason they want to do it this way is if they invent $1 billion and give it to consumers they inflate the overall supply by ~$1 billion. If they give it to banks to relend out in the fractional banking system then $1 billion on the books inflates $10 billion overall. Only lending money out ( fractionally ) increases the money supply so consumers spending it doesn't increase the supply at all just the initial creation would. This is exactly the hyperinflation worry part because maybe $1 billion ends up being $6 trillion ( to exaggerate ).

The multiplier you were talking about is the economic activity not the money supply. Increasing economic activity is the ultimate goal but the immediate goal is increasing the money supply.

Yes in the end both methods giving to banks or to consumers inflates the money supply the question is by how much. Giving to consumers is essentially a 1 to 1 ratio while giving to banks is a 1 to some potentially high number ratio. Bank A gets $100 and loans $90 to Bank B who loans $81 and so on. Along the way sometimes it isn't loaned to other banks and stops the chain of money creation. If Bank A only lends to non-banks then it stops at a 1 to 10 ratio.

2 votes

#3.13 - Wed Oct 27, 2010 3:30 PM EDT

If I understand you correctly, the bank's mulitplier is based on the fact that it can loan out MORE than the initial money it receives? Is that correct? Thanks, TL

1 vote

#3.14 - Wed Oct 27, 2010 3:34 PM EDT

Yes that's fractional reserve banking.

2 votes

#3.15 - Wed Oct 27, 2010 5:44 PM EDT

THANK YOU KyleN, this is the fly in the ointment of the proposal I was suggesting. I have to study it and I will before I respond further. But thank you.

1 vote

#3.16 - Thu Oct 28, 2010 3:06 AM EDT

Very nice, clear writing.

The banks won’t like this because they won’t benefit directly. They have a lot of political clout and are closely tied to whatever administration is in power.

I would love $2000 heading into the holiday season and would gladly support local merchants in buying gifts. I'd also be tempted to pay down a couple of credit card accounts which are managed by the big banks (i.e. Wells Fargo for Sleep Experts).

3 votes

#4 - Wed Oct 27, 2010 12:21 PM EDT

Thanks, ann. I wonder why no one has sugested this before? Is there a flaw deep in this proposal?

3 votes

#4.1 - Wed Oct 27, 2010 12:23 PM EDT

Is there a flaw deep in this proposal?

I don't think so. The big banks have the ear of the fed; they're like bed buddies. But who advocates for the people? I don't hear much from our elected representatives on this issue. I do have hopes for Elizabeth Warren.

3 votes

#4.2 - Wed Oct 27, 2010 12:38 PM EDT

Concerned Citizen-1303521

Is there a flaw deep in this proposal?

A huge one.

Bank's interest and support is more important to politicians than citizens' interest and support.

2 votes

#4.3 - Wed Oct 27, 2010 1:28 PM EDT

That's not a flaw in the remedy--its a problem in getting remedy adopted.

3 votes

#4.4 - Wed Oct 27, 2010 1:48 PM EDT

The difference is they are hoping $1 of QE = $10 of impact ( or whatever the reserve rate is ). Giving $1 to a consumer on the other hand is usually $1 of impact. A 'failed' QE policy is one whose impact is about the same as the cost.

It's a theoretically similar concept to traditional Keynesian spending. Government spends $1, the animal spirits multiplier makes it worth $10. So I find it amusing fans of Keynes take issue with this derivative. Not talking about you in specific but I've read many similar articles lately since the US has been considering doing this - again.

I think QE is a bad idea, but the reason it's bad is the ex nihilo money making not who gets it.

1 vote

#4.5 - Wed Oct 27, 2010 1:57 PM EDT

You are overlooking that as money is spent/made at the people level, it has a multiplier effect. I'm not sure what this is (what the mulitple is): but it's when you buy a loaf of bread for $2, the grocer purchase $2 worth of something else, the seller of that product now has $2 to use to pay a worker, the worker now has $2 to buy more bread... etc. That is one kind of multip effect and one that would get an economy off the ground. Nothing very theoretical about it.

3 votes

#4.6 - Wed Oct 27, 2010 2:05 PM EDT

UnAmericanLiberal

You won't get a straight answer from reich wingers. They'd answer that the money should go to corporations VIA banks. They couldn't tell you why. Most likely because Sean Hannazi told them their position like any held by reich wingers. This is why if you ask the simple question "would you rather have our fake printed money given to people or corporations? They'll avoid answering by stating "they shouldn't be printing money in the first place." But it's clear, if we're going to print fake money, the reich would rather hand it to the rich and corporations.

4 votes

#4.7 - Wed Oct 27, 2010 4:40 PM EDT

I'm sure that's true. I like the phrase "reich wingers." Nice. Did you make it up?

3 votes

#4.8 - Wed Oct 27, 2010 5:01 PM EDT

UnAmericanLiberal

Nah it's been around Newsvine since I started coming here.

#4.9 - Thu Oct 28, 2010 5:16 PM EDT

Most of this money would likely go right back to the banks as people use it to pay off their debts.

1 vote

#5 - Wed Oct 27, 2010 1:56 PM EDT

It might not... and if it did, the banks would be in a position to loan it out again, much as if it had been funneled directly to them. But this is quite different--it permits the kind of effect in an economy that I allude to in 4.6.

4 votes

#5.1 - Wed Oct 27, 2010 2:07 PM EDT

Oh yeah, it would definitely boost the velocity of money, problem is it wouldn't boost the fat bankers bonuses.

2 votes

#5.2 - Wed Oct 27, 2010 2:29 PM EDT

Boosting the velocity of money would boost the economy... and be a benefit overall.

1 vote

#5.3 - Wed Oct 27, 2010 2:53 PM EDT

Maybe if we the people spent millions buttering up the government it actually would, I'm not going to hold my breath.

Here is what I expect, exactly what you said first scenario... they print it, give it to the banks who use it to pay out multimillion dollar bonuses and buy out some of the smaller banks...

3 votes

#6 - Wed Oct 27, 2010 2:27 PM EDT

Yeah, that's the kind of thing--plus making money buying government bonds--using "our" money to make money for themselves and their stock holders and the economy be damned.

2 votes

#6.1 - Wed Oct 27, 2010 2:54 PM EDT

Exactly, so its a conflict of interest and guess who wins every time?

1 vote

#6.2 - Wed Oct 27, 2010 3:13 PM EDT

Usually, yes. But if this is a viable solution, we should jaw-bone it.

1 vote

#6.3 - Wed Oct 27, 2010 3:19 PM EDT

T is for T-time

This is just another money scheme. Printing more money always results in the devaluation of our dollar. Why would you do that? The reason is that no one in office has the guts to tell us we are, in fact, bankrupt! Brilliant!

#7 - Wed Oct 27, 2010 3:17 PM EDT

One reason for devaluing a currency is to avoid a deflationary spiral which would drag the economy down down down. Although devaluing a currency is inflationary, inflationary risks--especially in today's economic climate--are significantly less dangerous than deflationary ones.

1 vote

#7.1 - Wed Oct 27, 2010 3:21 PM EDT

warrior wheatman

Obama played the hand he was dealt: credit crisis, economy in tailspin. He couldn't give the finger to all the 'well respected intellectual economic experts', he had to sweet-talk them to change, in return he gained respect from the status-quo. He can now do what you suggested: have congress send every citizen $2000, instead of it going through the Fed.

As others have said, it isn't as accelerative as going through the fractional banking system; thus less scary inflationally, yet more direct democratically.

In the past we needed the central bank for its monetary policy. Now thanks to technology, congress can handle this through fiscal policy.

#8 - Thu Oct 28, 2010 6:01 AM EDT

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