I have always agreed with Ron Paul that Fed secrecy is the enemy of common sense and sound policy. By shining the spotlight on Fed policy Paul has performed an invaluable service. The latest disclosures of Fed actions reinforce this view yet again.
Fed secrecy was never imposed to protect individual banks. It was imposed to protect the Fed itself from disclosure of policies that would never deserve or sustain public, consumer or investor support.
QE1 and QE2 were inherently irrational, unfair and absurd. They constituted a nearly permanent, exclusively top-down monetary bailout that continues today. They were based on the faulty policy of granting elite financial institutions access to capital paying virtually zero interest, which they could then receive interest payments for hoarding, which incentivized and guaranteed hoarding.
QE1 and QE2 were not Keynesian economics. They were trickle-down economics with Dickensian consequences. The benefits accrued at the top. The costs were assumed by the citizenry. The benefits were denied to the nation. Capital fueled speculation while workers, consumers, small businesses and growth firms remained starved in a grotesque misallocation of capital.
I applaud Ron Paul for bringing Fed policy to center stage, and respect him regarding matters where we differ. But there is an empty chair in this debate for the policies I propose, which reject the top-down policy the Fed has pursued, and reject the laissez-faire non-policy championed by Ron Paul and conservatives, which would doom the economy to a lost decade.
The president and his conservative economic advisers have failed to develop either creative policies or a compelling narrative about what deeply ails the economy, or how to cure it.
There is a vital role that only Fed monetary policy and government fiscal policies can fulfill when highly profitable companies hoard money they refuse to spend, and when profitable financial firms hoard money they refuse to lend.
Fed policy must adopt a major U-turn, but not the U-turn of disengagement that Ron Paul and conservatives call for. Government policy must adopt a U-turn that combines demand-side spending now and honest deficit reduction when acceptable growth resumes.
Instead of the top-down paradigm of current Fed policy, or the disengaged laissez-faire paradigm advocated by Paul and conservative monetarists, the Fed should proactively invest in demand-side and growth-side financial innovation. This would require far less capital with far better targeting than QE1 and QE2.
The Fed should invest in an infrastructure bank supporting job-creating projects that pay for themselves. Roads and bridges paid for by tolls could be financed through Fed loans that would be paid back to the Fed with a profit, and would lower the deficit, which falls by $3 trillion over 10 years for every 1 percent increase in GDP.
The Fed should reduce or eliminate interest paid for capital that is hoarded, which would conserve capital better used to finance infrastructure, and would end incentives for money hoarding.
Congress can enact a tax holiday for large firms repatriating massive sums of foreign capital, but only tied to certified job creation by those firms. The housing tax credit can be renewed and expanded. While infrastructure projects are funded, the capital gains tax can be slashed for intensively job-creating firms in a true grand bargain. There should be a substantial tax rebate to middle- and lower-income taxpayers to stimulate demand.
America needs new thinking for monetary and fiscal policy. Fed policy has failed. Government policy is inadequate. Ron Paul has advanced an important debate. Let’s extend that debate, end top-down and trickle-down policy, and act to help workers and consumers get the American economy moving again.
Brent Budowsky was an aide to former Sen. Lloyd Bentsen (D-Texas) and former Rep. Bill Alexander (D-Ark.), then chief deputy majority whip of the House. He holds an LL.M. in international financial law from the London School of Economics.