The tools that the Federal Reserve Bank has to manage the supply and cost of money have proved to be weak during this time of the Great Recession where there is too much saving and interest rates are at practically zero. After years of work restarting the economic flame we are beginning to see it expand and grow so that we can reduce the amount of kindling provided by the bond buying program called “quantitative easing” and consider restricting some air flow to the flame with increased interest rates in the coming year. Janet Yellen, Chairman of The Federal Reserve Bank, is now dancing with the concern over distortions to the financial system these many years of zero yield creates with the will not to blow out the tenuous flame that the economy has achieved with an upward movement of interest rates. Employment is a mandate given to the Federal Reserve Bank by the Congress where there has been no real movement by the Fed because it has no arrow or idea of one. The other tool for economic management is Congress voting for a stimulus or a significant deficit. The problem is that Washington is always months late, billions short and unfocused. How can we get some of this stimulus tool into the Fed’s quivir?
As we work our way out of the Great Recession, albeit slowly and with spotty result, there are many decrying the wasted opportunity to build and rebuild America’s infrastructure at a time when there is slack in our productive capacity. While reading in the New York Times “E.P.A. Cuts Size of Loan New York Sought for Tappan Zee Bridge” and Martin Wolf’s The Shifts and The Shocks the thought occurred that possibly there is a bond buying variant of former Chairman Ben Bernanke’s quantitative easing program that the Fed could develop for it’s jobs mandate. Wolf’s conclusion is that the austerity policies as practiced by the Euro Zone is a prescription for a decades long depression in Southern Europe. Nobel Laureate Paul Krugman’s economic prescription of a strong stimulus is correct and unfortunately The Congress was incapable of passing the blowtorch with sufficient heat needed to ignite the fuel that quantitative easing provided. What if the Federal Reserve had a municipal bond buying facility that would fund projects it determines are for a productive investment and at a time needed to stimulate the economy?
Currently the Federal Reserve maintains a federal funds window with which banks use to cover their liquidity needs in exchange for acceptable collateral. The system has proved to be useful in the maintenance of a well operating economy. The proposed Municipal Window of First Resort could prove to be a special instrument that the Fed would use as an accelerator to stimulate the economy and create jobs when it deems it necessary. A proposal to issue bonds for a project, such as the rebuilding of the Tappan Zee Bridge, is examined by the Fed directly and given a quick yeah or neah in a similar manner that the Supreme Court decides what cases to adjudicate. A go decision funds the project quickly and economically while a neah vote puts the project through the usual commercial bank channels. When the Fed decides a stimulus is needed it lets the word out it is looking for good projects to fund. Those state legislatures with an engaged public may have many shovel ready projects to offer the Fed for economical funding. Those who don’t, won’t.
At times First Resort accepts many projects to improve our roads, ports and rail services as a means to increase economic activity and job creation and when the economy gets overheated the Fed makes its disinterest in funding more projects known and leaves it to commercial banks to fund or not. Under this system the Fed could maintain the normal four to six percent interest rate economy in general and yet buy the full issuance of projects at zero or even, and this requires a turn in thinking, below zero subsidy rates where the Fed actually pays for the port, road or rail facility in question! It would not be a two tier market because by buying the full issuance there is no market, just an event. Nor is there a right that a properly constructed and tested project has to be approved. These unique funding events are to be at the whim of the Federal Reserve Bank when using its judgment on how best to manage the economy and thereby make it more responsive.
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