Spread the Fed: From Federal Disintegration through Community QE to Central Bank Decentralization, Part 2

Spread the Fed: From Federal Disintegration through Community QE to Central Bank Decentralization, Part 2

Robert Hockett–

In the post immediately preceding this one, I observed that the twinned histories of American ambivalence toward centralized political governance on the one hand and central banking on the other place recent development in the realms of both pandemic response and American public finance into a helpful light. I then devoted the remainder of that post to broadly sketching the two histories just referenced. I now turn to the developments in pandemic response and public finance. Interpreted against their historical backdrop, I think, they tell us much about where American central banking will go – and probably indeed ought to go – next: namely, to a ‘better spread’ Fed.

Picking up where we left off, then, the Trump administration’s unwillingness to mobilize any national productive or mitigation response to the pandemic that might compare to our earlier Wilson and Roosevelt administrations’ responses to the First and Second World Wars has been widely discussed. Also now widely discussed is the dawning awareness that cities, states, and compacts of states are accordingly all we have left where collective address of those collective action challenges which are the national pandemic and its associated economic collapse are concerned. In effect, we have devolved back to a state of our union in which states and their subdivisions are our principal, if not sole, means of concerted national action. They are our new ‘administrative state,’ at least till we once again have a national executive that believes in both national administration and indeed even the national project.

It is against this backdrop – and as a response to the devolution just noted – that the Fed’s new Community and Small Business QE initiatives are best understood, particularly if we’re inclined toward ‘best lights’ or what I think of as ‘potential-optimizing’ styles of interpretation. As noted in introducing the present pair of posts, moreover, this backdrop does more than merely explain the emergence of new facilities. It also suggests what we still have to do if we wish to optimize them. I shall argue that this includes far more extensive distribution of the Federal Reserve System even than Community QE will occasion.

Continue reading

Spread the Fed: From Federal Disintegration through Community QE to Central Bank Decentralization, Part 1

Spread the Fed: From Federal Disintegration through Community QE to Central Bank Decentralization, Part 1

Robert Hockett–

Central banking and finance in the US have a curiously ‘dialectical’ history – a history mirroring, in interesting ways, that of our federal union itself. Both histories reflect ambivalence about, and hence oscillation both toward and away from, collective agency and its political manifestation in centralized governance. Tracing these parallel trajectories can shed helpful light upon certain features of American monetary history, finance-regulatory tendencies, and of course public finance. But it also affords us a more immediate benefit in this time of global pandemic and associated financial and economic distress: it provides clues as to where we are now, where we are going, and how to optimize where we’re going where finance, economic recovery, and resumed economic development are concerned.

More specifically, tracing the political and monetary histories just noted affords means of better understanding the full significance of several potentially ‘game-changing’ new lending facilities opened by the Federal Reserve this past spring: the Fed’s new Main Street Lending (MSL) facilities and its new Municipal Liquidity Facility (MLF), or what I have been calling, in a series of Columns, OpEds, and advisory memoranda, ‘Community QE’ and ‘Small Business QE.’ And understanding this fuller significance, in turn, illuminates pathways both to improving, vastly, these facilities’ operations, and to generalizing from them to a far better Fed – what I call a ‘re-distrubuted,’ or better ‘spread,’ Fed.

Here then is how my two posts will proceed. In the present post I’ll trace the paired histories with which I just opened this discussion – those of our ambivalence about centralized governance on the one hand, and central banking and currency-issuance on the other hand. Then in tomorrow’s follow-up post I’ll interpret Community QE against the backdrop of those histories, and explain how these histories help make sense of the ‘Spread the Fed’ proposal I put out earlier this year that will make liquidity creation more broadly available.

Continue reading

Money in Context: Part 2

This is the second post on ‘Money in Context.’ You can read the first post here

Robert Hockett –

The observation with which I closed Part 1 implicates a challenge – or perhaps better put, it extends an invitation. In light of the inherently infrastructural role played by payment systems and their associated monies in any ‘exchange economy’ or ‘commercial society’ such as our own, there is one urgent conclusion to draw.

I mean that we as a polity both can and must very soon establish a single digital payment platform and associated digital fiat currency freely available to literally every citizen and legal resident of our nation. It means that we must soon develop what I call a Democratic Digital Dollar and Fed- or Treasury-administered National Ledger available to all. This is where the arc I identified earlier – ‘from ledger to coinage and back’ – should, and I believe will, take us.

Continue reading

Money in Context: Part 1

This is the first of two posts on Money in Context. Read Part II here. 

Robert Hockett – 

We’ve all heard the adage. ‘Time is money.’ The utterer usually means that time can be spent earning money, so that to ‘waste time’ is to incur a pecuniary opportunity cost. But there’s another sense in which money is time – or at any rate like time. At a remarkable juncture (Book XI) in his Confessions, Augustine notes, apropos the question ‘what is time?,’ that he seems to know the answer before posing the question, but then draws a blank check once he poses it.

Money seems to me similar here, as does number. You feel confident you know what these things are if not asked. But then if you ask, you’re not sure what an answer should look like. And so you are suddenly standing on air. ‘What is money?’ I don’t know what to say. ‘What are numbers?’ Don’t know that either.

I think that there might be a common reason for the strange mix of familiarity and befuddlement in these cases. It has to do with the fact that these phenomena are deeply embedded in practical contexts – so much so that their contexts determine them. And so when you’re posed a naïve question that appears to beckon a simple one-sentence answer indifferent to linguistic pragmatics, you’re faced with a query whose surface syntax is in order but whose underlying semantics are not.

I’d like to elaborate and explore this hypothesis here. Then in a Part 2 post I’ll ‘apply’ a few lessons I think will emerge.

Continue reading

Promises All the Way Down: A Primer on the Money View

This post is part of a symposium on the Methods of Political Economy.

Elham Saeidinezhad

It has long been tempting for economists to imagine “the economy” as a giant machine for producing and distributing “value.” Finance, on this view, is just the part of the device that takes the output that is not consumed by end-users (the “savings”) and redirects it back to the productive parts of the machine (as “investment”). Our financial system is an ornate series of mechanisms to collect the value we’ve saved up and invest it into producing yet more value. Financial products of all sorts—including money itself—are just the form that value takes when it is in the transition from savings to investment. What matters is the “real” economy—where the money is the veil, and the things of value are produced and distributed.

What if this were exactly backwards? What if money and finance were understood not as the residuum of past economic activity—as a thing among other things—but rather as the way humans manage ongoing relationships between each other in a world of fundamental uncertainty? These are the sorts of questions asked by the economist Perry Mehrling (and Hyman Minsky before him). These inquiries provided a framework that has allowed him to answer many of the issues that mystify neoclassical economics.

On Mehrling’s “Money View,” every (natural or artificial) person engaged in economic activity is understood in terms of her financial position, that is, in terms of the obligations she owes others (her “liabilities”) and the obligations owed to her (her “assets”). In modern economies, obligations primarily take the form of money and credit instruments. Every actor must manage the inflow and outflow of obligations (called “cash flow management”) such that she can settle up with others when her obligations to them come due. If she can, she is a “going concern” that continues to operate normally. If she cannot, she must scramble to avoid some form of financial failure—bankruptcy being the most common. After all, as Mehrling argues, “liquidity kills you quick.” This “survival constraint” binds not only today but also at every moment in the future. Thus, generally, the problem of satisfying the survival constraint is a problem of matching up the time pattern of assets (obligations owed to an actor) with the time pattern of liabilities (obligations an actor owed to others). The central question is whether, at any moment in time, there is enough cash inflow to pay for the cash flows.

Continue reading

The Constitutional Theory of the Business Enterprise: Toward a Monetary Theory of Production

This post is part of a series on the Methods of Political Economy.

Jamee K. Moudud

Neoclassical economists see-saw between the twin poles of perfect markets and “market failure” in either advocating laissez faire or state intervention.  And yet this dichotomy rests on a fundamental mischaracterization of the business enterprise, its role in society, and markets more generally. This essay draws out a heterodox theory of the firm and argues that real-world business behavior can only be understood in light of insights from the Law and Political Economy (LPE) tradition. I draw on the classical economists as well as the Oxford Economists’ Research Group (OERG), especially P.W.S. Andrews.  The constitutional theory of the business enterprise (“small-c constitutional” as used by Sabeel Rahman and Christine Desan) discussed here fuses this economics literature with the Legal Realist framework, thereby creating a bridge between microeconomics, macroeconomics, and law. Development of this theory and its implications ought to be central to LPE approaches to understanding how firms do and might operate.

Continue reading

A Single Federal Usury Cap is Too Blunt an Instrument

NB: This post is part of a debate on the Loan Shark Prevention Act, a bill that would introduce a federal usury cap. Emma Caterine’s response is here.

Anne Fleming–

In May 2019, Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez unveiled the Loan Shark Prevention Act, a bill that would cap the cost of consumer credit nationwide. Under the bill, the total cost of a loan, calculated as an annualized percentage rate (APR), could not exceed 15%.

Although high credit card charges are the bill’s main target, payday loans rank among the most expensive forms of consumer credit in the United States. A typical payday loan from a storefront lender costs $15 per $100 borrowed. For a $350 loan that must be repaid in one lump sum in two weeks, the borrower would pay $52.50 in fees. This equates to a 391% APR.

Payday lenders argue that it is misleading to calculate the cost of their products in terms of an APR because payday loans are not marketed for long-term use. But most borrowers cannot repay their loans in full in two weeks. Instead, they pay only the fee and rollover the balance into a new two-week loan. In this way, consumers can end up in a months-long cycle of borrowing, paying hundreds of dollars in fees. This vicious cycle is especially concerning because most borrowers are low-income, just making ends meet. Furthermore, Hispanic and African-American households account for a disproportionate share of payday loan users.

In other words, high-cost credit is a real concern that policymakers must address. But a one-size-fits-all 15% APR cap is a blunt instrument for tackling this problem.

Continue reading

Money & Memory, Capital & Communion

NB: This post is part of the “Piercing the Monetary Veil” symposium. Other contributions can be found here.

Robert Hockett–

Imagine that I incur an obligation to you – an ‘affirmative’ obligation, let’s say. Perhaps it’s through violating some ‘negative’ obligation to you, wronging you in a manner that triggers a right to redress. Perhaps it’s through promising you something. Perhaps it’s through membership in some group, the members of which are expected to ‘pay dues’ of some sort.

In virtue of this obligation, I, the ower, am now ‘liable’ on the new obligation. You, the owner, now ‘hold’ a new asset – the asset that’s my liability. Here is the start of accounting. Of shared ledgers. All accounting at bottom is obligation-accounting, justice-accounting – tracking what’s due and by whom and to whom.

Liabilities that come into existence ex nihilo – by my promising you something ‘gratuitously,’ for example – give salient rise to a two-sided danger, something a lot like the Janus-faced monetary risk of ‘inflation’ and ‘deflation.’ For one can in principle promise more than she can deliver, thereby devaluing her promises in time. Or, fearing this prospect, she can ‘not make any promises,’ thereby impoverishing her life by depriving it of the rich fabric of association and shared action that lends and brings value to life in communion with others.

Promissory inflation and deflation, through devaluation or contraction, deprive life of much of its obligatory content. And life without obligation would be life without liabilities, life without assets. It would in that sense be life without worth, without wealth, without value. It would be life without any vindicatable expectation – life without ‘rights,’ without ‘wrongs,’ without ‘right or wrong.’

How dismal that would be.

Life with real value accordingly requires, not gold (more on which below), but observance of some ‘golden mean’ – the mean between wronging and not acting, the mean between over- and under-committing. And this is as true of us in our collective capacities as it is of us in our individual capacities.

Continue reading

Predatory Lending and the Predator State

NB: This post is part of the “Piercing the Monetary Veil” symposium. Other contributions can be found here.

Raul Carrillo–

Like most advocates of Modern Monetary Theory (MMT), I didn’t embrace the paradigm because I dig late-night chats about accounting identities. Rather, I found it while pursuing economic justice (following the lead of Angela Harris, Emma Coleman Jordan, and other allies). Today, I fight financial predators — banks, landlords, debt collectors, and agencies engaged in racialized wealth extraction — on the daily. And so, my MMT enthusiasm remains…practical.

Although the commentariat caricatures MMT as a rationalization for U.S. deficit spending, it’s something more powerful — a new interdisciplinary lens, shaped for eyes on the prize of justice. Most importantly, MMT is rooted in legal analysis; its neochartalist foundations help illuminate financial hierarchies — so we can better dismantle them around the world.

As elites literally claim human survival is “too expensive”, it’s crucial for movements to absorb this symposium’s chief insight: money itself, although not always starkly a creature of the “state”, is a creature of law, just like the institutions through which it flows.

When we analyze money as public software, rather than private hardware, we see political economy differently. For example, as Harris argues, any movement for economic justice must overcome the toxic trope of the “undeserving benefit recipient” (and the corollary trope of the put-upon khaki-clad patriarch). In my view, MMT helps us challenge this divide-and-conquer strategy, by undermining the technical premises of “taxpayer citizenship” — the racialized and gendered notion that rights should correspond to one’s nominal contributions to government coffers. When Stephanie Kelton reminds us that “money doesn’t grow on rich people”, she is making an inference LPE readers should appreciate: the wealthy do not get their money by generating it, but by mastering a system that routes tradeable legal claims on real resources that we collectively produce (i.e. “money”) to themselves. As I’ve emphasized, the coercion Robert Lee Hale described leads the rest of us not merely to work, but to work for legal tender, which can settle debts between individuals, but must satisfy debts to the state (most notably, taxes).

Continue reading

Reclaiming Public Fiscal Power for Transforming Precarity

Reclaiming Public Fiscal Power for Transforming Precarity

NB: This post is part of the “Piercing the Monetary Veil” symposium. Other contributions can be found here.

Martha T. McCluskey–

Basic legal ideas about taxation stand in the way of proposals for ambitious fiscal policies to address pervasive economic insecurity among both middle class and lower income households.

The conventional legal framework posits two primary functions for taxation. First, taxes raise revenue to finance government goods and services. Second, taxes redistribute resources, transferring money from some private interests to others based on ideas about distributional equity. Taxes also regulate private economic behavior, but this third function is generally treated as supplementary and subordinate, with economic ordering mainly directed by basic legal rules and the administrative state.

In orthodox law and economics, “optimal” tax policy achieves the two primary goals with the least “distortion” of private value-maximizing decisions in a presumed efficient and equitable market unsullied by taxes. This optimal tax theory aims to replicate a mythical market where money passively realizes and measures an underlying value fixed by barter-like exchanges of real goods, and services.

This seemingly benign conceptual frame implicitly locates economic productivity in a distinct and underlying private market sphere, with government taxing and spending cast as taking value from those who have created it. From this starting point, households can receive public support either as beneficiaries of forced public charity or as responsible consumers willing and able to pay an equivalent amount in taxes. If progressive taxing and spending programs are construed as involuntary, inherently inefficient, transfers of money from productive market winners to support less capable market losers, then that public support will tend to appear to generally inscribe rather than relieve conditions of precarity and powerlessness.

This conventional frame obscures how taxation creates money as a means for generating and distributing economic power and insecurity. Tax theory tends to ignore how law constructs and governs money, treating money as a neutral measure of social contribution.

Continue reading