There are many proposals circulating for how to deal with this crisis which each deserve separate analysis. However, I want to cover an audacious and straight forward idea that I’ve half-jokingly batted around for years. That is, what if the Federal Reserve just… spent money?
The Federal Reserve of course has made some extraordinary interventions over the past week, including a program announced yesterday of questionable legality which finances a special purpose vehicle (basically a custom corporation to function as a “passthrough entity” so that actors can do what they want to do that they wouldn’t legally be able to otherwise) to purchase “investment grade” corporate bonds and exchange traded funds. This Special Purpose Vehicle has been capitalized by the Treasury so that it can withstand 30 billion in losses. I will be analyzing that proposal and what it means in more detail tomorrow. Despite these extraordinary interventions, their basic problem remains- they are not spending. They don’t generate income for the private sector which is what the private sector desperately needs. Forgiving these loans after the fact only generates disposable income years later, not now. Income for the private sector is a matter of fiscal policy, not monetary policy.
But what if the Federal Reserve conducted fiscal policy? In other words, what if it just spent money? This proposal is so mind-bendingly simple it repels our mind, much like how deceptively simple money creation itself is. The key here is that the Federal Reserve is not subject to congressional appropriations. It determines how large its operational budget should be and what it should be spent on. As law professor Peter Conti-Brown says in his book “The Power and Independence of the Federal Reserve”:
The bottom line is this; when Congress Removed the Fed from the annual appropriations process, as it has done with several agencies throughout history, it also imposed strict, statutory limits on how the Fed could generate these nonappropriated funds. One by one, those limits have disappeared, but not through legislative annulment. Time and changing circumstances have intervened. The law of the Fed's limited budgetary autonomy remains on the books; the practice of the Fed's unlimited budgetary autonomy is very different [...] The Fed thus has the ability to create from nothing the money it eventually uses to pay its employees, fund its conferences, and renovate its buildings
I’ve in fact seen this first hand and been a beneficiary of Federal Reserve fiscal policy. Last December I attended a day long conference at the Federal Reserve Bank of Saint Louis on fiscal and monetary policy coordination where my hotel was paid for by the Federal Reserve while my flight and transportation was reimbursed by them (I don’t know why the payment was ultimately made by the Dallas regional bank)

If the Federal Reserve can decide to give me money to attend a conference, why can’t it make other discretionary fiscal policy choices? If we must keep up the pretense of conferences, why not pay millions of Americans to attend daily teleconferences where they learn what the Federal Reserve does and discuss what this country should do with its physical resources moving forward? Or maybe conduct a “randomized control trial” where you pay every person an income and you randomly decide who gets tasks or not and measure outcomes.
Hell, let’s conduct an experiment where the Federal Reserve guarantees healthcare to every resident of the United States. This may be audacious, large and egregiously flout the spirit of congressional decision making but so do many other Federal Reserve actions done under emergencies. If congress wants to countermand the Federal Reserve, make them pass a bill limiting the Federal Reserve’s fiscal policy discretion (which should be limited) but authorize an “on balance sheet” rescue package as generous as the one the Federal Reserve was planning on conducting.
Ironically, I’m sending this out just as Joe Weisenthal (who’s Bloomberg TV Show I happen to be doing this afternoon to discuss fiscal automatic stabilizers) posted about how the Fed’s normal suite of operations doesn’t generate income (and financial net-worth) for the private sector and thus the memes are wrong. In normal times what Joe is saying would basically be true- congress would freak out if the Federal Reserve started spending hundreds of billions or even trillions of dollar- but these aren’t normal times and all options should be considered on the table. It’s really a norm, a careful political stalemate with congress that keeps the Federal Reserve from conducting large-scale fiscal policy, not any specific law.
Ultimately, I would greatly prefer that congress act adequately and quickly to this crisis. I think the use of legislative power to respond to our actual problems is important and key to taking the first step towards rebuilding democracy and a democratic culture in the United States. However, it is hard to make the case that if (or when…) congress fails to act, the Federal Reserve shouldn’t step in to provide the income the economy desperately needs. Unlike with certain debt purchases and lending programs, there is no statutory limitation on the Federal Reserve’s operational budget. I may worry about what it means democratically in the long run, but at this point we don’t have time for that.
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The ability to spend means also the ability to earn. This is a bad example where Central Banks geared toward profits and start speculating in international market. The most prominent example of this is Bank Negara (central bank of Malaysia) during 1980s and 1990s. It started to trade aggressively in Forex and traders would tail it, essentially handing it enormous power in market as a self reinforcing mechanism. The more trader it attracted, the more chance it is able to sway the market and take profit. As it happens, Bank Negara produced immense profit for few years. Until it got broke during Black Wednesday when Soros broke the bank of England.
You can see the story here: https://www.theedgemarkets.com/article/big-money-recollecting-bank-negara%E2%80%99s-massive-forex-losses
I must note however the Fed doesn't need to rake up profit merely by profiting in the market. If Congress was curious how Fed can funds all its funding and circumnavigate its authority to ask for money from Congress, Fed could simply come up with a printing machine and print unlimited money. It would have buyers across the world instantly in the forms of others central bank. In essence, it is selling money to other country to finance more money in US. This business been so lucrative that counterfeit business is booming across nations that are unable to access to Dollar.
The implications however would be huge. A unlimited funded organisation is an authority with unlimited power. This would not bode well with the constitution which vested the executive power to executive branch alone. The executive branch would not be able to retains its sole monopoly on executive power. Fed would replace it with no one able to check and balance.
I would prefer Congress not to ask how Fed is going to do fiscal and how it earn money. It exposed the power (or powerless) beneath it.
I however noted that when the first idea of Fed is mooted, Senator Aldrich consulted the financial interest of their time. If so, the bank would be setup for the profit solely for the banks and merchant in mind, perhaps subtly. Theoretically, France and England both experimented a lot when they created their central banks, including Mississippi Bubble and South Sea Bubble. Both intend to function as Central Banks that under private hands.
Hi Nathan - all of your stuff is riveting thank you. Would be interested in a comprehensive (as much as possible anyway) list of measures you think the Fed/Congress should have taken and should be taking in the future. 2 ways to present those would be useful I think :
1. stay within the mainstream framework (so closer to reality unfortunately)
2. go full MMT-compliant/cognizant