Proposals that Happen to Be
within the Mainstream Paradigm

For the Fed:

  1. In general, don’t use the liability (deposit) side of banking as a source of market discipline.
  2. Specifically, eliminate most of the interbank markets by lending directly to US FDIC insured banks vs any/all ‘bank legal’ collateral in any size at the Fed’s target interest rate.
    1. This would reduce domestic FF/LIBOR type spreads to minimal levels, remove bank funding risks, and eliminate the need for the Fed’s TAF and the lending facility.
    2. Banks are already permitted to own only what is permissible by the OCC and other banking law, and fund it with FDIC (government) insured deposits. Therefore, unsecured Fed lending to FDIC insured banks does not add any ‘taxpayer risk’ that the government already accepts and directly manages.

For the Tsy:

  1. Encourage foreign CB’s to re-engage in ‘currency manipulation’ via buying USD to help their exporters.
  2. Encourage monetary authorities to accumulate their reserves in USD financial assets.
  3. Open a securities lending facility that offers all Treasury securities through repurchase agreements to the primary dealers in unlimited quantities at Fed Funds less 0.25%.

For Congress:

  1. Outlaw biofuels – way too dangerous to human life and may already be in the process of killing more humans than WWII.
  2. Manage the output gap with tax cuts or net spending increases.
  3. Stop worrying about US solvency (including solvency of social security).
  4. Use fiscal policy as a tool to meet real economic goals.
  5. Reduce energy consumption by lowering the national speed limit to 30 mph for private motor vehicle transportation over three years:
    1. Reduces driving.
    2. Decreases energy consumption per mile.
    3. Redirects where people live due to the implied price of travel time.
  6. Eliminate tax advantages for savings plans including pensions and individual retirement accounts:
    1. Savings does not function to fund investment.
    2. There are other viable options to having individual savers and money managers directing real investment.
    3. Outlaw passive commodity strategies for existing pension and retirement funds.
  7. Eliminate income taxes and use a national real estate tax to anchor the currency
    1. I estimate compliance costs at up to 15% of GDP.
    2. Compliance issues reward, encourage, and promote a culture of cheating that extends to all law.
    3. The infrastructure is already in place at the local level for a national real estate tax:
      1. Compliance and legal costs are minimal.
      2. The tax rates can be progressive based on values, efficiency, and other standards that advance public purpose.
    4. Use luxury taxes to moderate consumption that is outside of public purpose:
      1. These taxes function to reduce consumption.
      2. The success of these taxes is judged by how little they collect and thereby serve to reduce the targeted consumption.
  8. Eliminate sales taxes and other remaining transactions taxes as these function as internal tariffs:
    1. Transactions taxes work against internal comparative advantage.
    2. Transactions taxes work against specialization of labor.
  9. Legalize all recreational drugs:
    1. Takes the money out of illegal trafficking.
    2. Eliminates drug-related violence.
    3. Moves the social issue from the police to the churches.
  10. Do not allow healthcare costs to continue as a marginal cost of production (business should not fund healthcare, government should):
    1. Distorts pricing and optimal resource utilization.
    2. Workers do not tend to be less healthy than unemployed people.

Proposals that May Be
a Bit Outside of the Mainstream Paradigm

Offer a national service job to anyone willing and able to work which lets the market determine the budget deficit:

  1. An employed bufferstock is a more effective price anchor than today’s bufferstock of unemployed.
  2. Adds to useful output.
  3. Reduces real costs of negative social issues.
  4. Acts as a countercyclical fiscal ‘stabilizer’.

Drop the Fed Funds rate to zero and leave it there permanently:

  1. Inflation is not a function of the nominal rate set by the Fed.
  2. Output and employment is not a function of interest rates.
  3. Nominal interest rates support the rentier class and thereby reduce real output at the expense of those working.

44 Responses

  1. Warren- I have a question about your comment in section section II, dropping the FF rate to zero. After reading your paper “The Natural Rate of Interest is Zero” I had the same question come to mind. How does the Treasury/Fed logistically allow the rate to fall to zero? For example: if there is a 400B deficit does the Treasury only issue 350B in Treasuries (reserve drain)? I belive any excess reserves would cause rates to fall – correct? It is a continuous work in progress by the Fed to make sure the banking system is always in a net positive reserve position? In your paper you reference Japan’s experience in the 1990s and the nearly 0% interest rates since, how did the BOJ accomplish this or through what actions. Thank you and I hope you are doing well.

  2. right, the fed simply keeps an excess agg reserve balance in its member bank accounts. i think the boj targeted something like 30t extra yen balances, thinking the extra quantity mattered.

    in theory, it should only take an extra $.01 in reserves to keep the ff rate at 0. in practice maybe a billion or two should do it. but the fed can always buy secs and keep sufficient excess reserves to keep rates at 0

    also, even easier, is to set the discount rate at 0 with no penalty or stigma.

  3. So why doesn’t the Fed eliminate the FF market and pay an overnight rate on reserves held for member banks? If a bank is in a net negative reserve position they could borrow at the discount rate – assuming it would be higher than the O/N rate paid. Also, the Fed could pay a higher O/N rate on reserves when your system needed capital – corrrect?

  4. So why doesn’t the Fed eliminate the FF market and pay an overnight rate on reserves held for member banks?


    If a bank is in a net negative reserve position they could borrow at the discount rate – assuming it would be higher than the O/N rate paid.



    Also, the Fed could pay a higher O/N rate on reserves when your system needed capital – corrrect?


  5. Paying a higher rate on reserves would be functionally the same as a ff hike.

    banks raise capital outside the reserve system. they attract investment by offering the promise of superior returns.

  6. Warren,

    What do you mean when you say that the Fed, “shouldn’t use the liability side of the banking system as a source of market discipline?”

  7. Hi Mike, what I mean is there should be no restriction on banks funding themselves at the Fed’s target rate.

    The only reason to force bnaks ‘out to the market’ for funding based on their credit standing would be to make them subject to what is called the ‘market discipline’ of lenders examining borrowers for creditworthiness

  8. Warren – Do you still think that paying interest on bank reserves as Grep Ip speaks of today in the WSJ would gradually eliminate the need for the government to sell treasury debt?

  9. yes, it functionally eliminates that need, as we discussed with Greg in the past, but that doesn’t mean the tsy won’t be required to do it anyway.

  10. Just read the Ip article and related comments. Of course, the arguments againts paying interest are always the “additional” expenditures or–equivalently–“reduced” Fed profits remitted to the Treasury. Odd that nobody (including the Treasury or the Fed) recognizes that to the degree that paying interest reduces the Tsy’s issuance of longer-term sec’s (since the qty of reserve balances banks hold would be greater than without interest pmt) that earn more interest than the Fed’s target rate, total Tsy expenditures would actually be reduced, not increased.

  11. yes, almost seems they go out of their way to not show ‘consolidated’ results for fed/tsy

  12. Nominal interest rates support the rentier class and thereby reduce real output at the expense of those working.

    That is a fallacy of composition error.

    Rentier profits are equal to total demand net of wages, imports, and taxes on production and imports.

    Interest rates only affect rentier profits to the degree that they change some of these variables.

    When a household borrows to buy output, no rentier is “saving” the deposit and receiving the interest as a return. The corresponding deposit account is credited to the business and allows for spending in excess of wages paid — it is the principle amount borrowed that adds to rentier profits as it adds to total non-wage demand.

    To the degree that the loan is repaid, this reduces non-wage demand and subtracts from rentier profits.

    So all that matters is aggregate borrowing net of repayment. What happens to the interest payments? They recouped via claims on banks, but must be paid from wages.

    In the aggregate, consumers are just passthrough, and it is as though the rentiers incurred a liability (economic, not legal) to keep boosting wages fast enough so that the interest payments can be made. This is why government demand boosts in debt-crisis need to be accompanied by tax increases on rentiers or else you have a wealth distribution shift engineered by government as it makes bad loans good.

    re: interest on reserves,

    It is unnecessary to tie debt issuance to interest rate management. Just raise reserve requirements by $1 for each $1 of deficit spending — these are all administrative costs that you can impose on banks however you want. As the monopoly issuer and bank regulator, it is very easy for government to keep banks in a net debtor position. 100% reserve banking with loanable funds supplied separately by government is the cleanest solution — the amount of money that banks can loan out should not be a function of the sum of past deficits, but can be managed separately.

  13. my point was that a system that allows a rentier class to consume without working is losing real output in that those people would otherwise have to work to consume.

    if you want to assume they would just die of starvation in the woods rather than work, then yes, no real output is lost by supporting them, just a shift in what’s consumed from others who work and produce to the rentiers.

  14. I think you misunderstand my argument…

    “Rentier” is not a person, but a classification of an income stream, specifically surplus profits, or any income not earned from working but just from holding claims on others working. Whether or not the rentier also has another job that also pays wage income is irrelevant. I am not against a relatively constant level of surplus profits over time, but let’s not pretend that these decrease when interest rates fall — the data is pretty clear on this.

    As you say, surplus profits do not fund investment — which is what makes them rentier income — but rather these profits increase whenever demand increases net of wages paid out and real investment funds spent.

    It is because of this that any government attempts to boost sales without boosting wages paid results in an increase in rentier income, all things equal. In the same way, households can increase rentier income if they increase aggregate borrowing net of debt aggregate debt repayment, again all things equal.

  15. P.S. — I would be interested in your response to the bank proposal — why not require that government supply all loanable funds directly to banks (at whatever rate you want to charge).

    Then banks become intermediaries between government “wholesale” loanable funds and the individual borrowers, underwriting them and earning a premium. There is no now need for an overnight rate at all — if a bank qualifies someone for a loan, the government supplies the funds for the loan, provided that the bank has sufficient pledged capital (preferably cash or treasuries). You can charge whatever wholesale rate you want, and break the relationship between the amount of deposits in the system and your target lending rates.

  16. ok, semantics. i use the word rentier and rentier class to define people living off interest and dividends etc. vs working for a living.

    if they are working full time that’s another story.

    we already have banking as you outlined. the fed sets the term structure of rates (directly or indirectly or by default) and banks are funded with fdic insured deposits that reflect that fed policy.

    and the govt also determines the list of ‘legal’ bank assets.

    then toss in capital requirements to influence how risk is priced.

    not to mention my proposal for the fed to lend unsecured to all member banks in unlimited quantities to totally keep the liability side from being the place for market discipline.

    so i think we agree.

      1. @WARREN MOSLER,

        Sorry, I should have been more specific: How do you account for non-working retired people who are living off of accumulated savings? Don’t they need to be able to earn interest? Should we not encourage saving for retirement?

  17. No, I am saying, do not let banks loan out deposits at all. If I go to borrow money from a bank, and the bank approves me, it takes a loan from the Fed. As I pay the bank, the bank repays the Fed, earning a spread. If I miss a payment, it goes out of bank capital, which should only be cash. The bank makes money by assuming credit risk this way, but cannot make money from spreads.

    You can still have investment banks that play spread games in the credit markets, but these should not accept deposits, receive no Fed backing, and only qualified investors should be able to participate.

    That way, you get rid of short term rates entirely, the interest the bank pays is decided by the Fed, and this has nothing to do with how many bonds there are in proportion to deposits. The interbank lending market goes away, and the government has real-time information on loan performance.

    The idea of needing to use deposits to fund loans is a gold-coin holdover, right? There is no need for it, is there?

    regarding rentiers, you can use tax policy or other tools to address people getting “too much” of their income from surplus profits, but I don’t think this accomplishes anything for the economy as whole. The key point is to put a ceiling on surplus profits at the company level, so that wage expenses become “cheaper” versus passing that money on, after a certain threshold. If you don’t do this, then average wages will decline during expansions, and the middle class shrinks. This is the only way you can limit rentier profits — playing with short term rates (or even long term rates) does nothing for increasing or decreasing surplus profits.

    1. “No, I am saying, do not let banks loan out deposits at all. If I go to borrow money from a bank, and the bank approves me, it takes a loan from the Fed.”

      I’m saying the two are functionally identical since the deposits are fdic insured and, with my proposal, the banks can borrow from the fed as well.

      since ‘loans create deposits’ and deposits can exist only as deposits (and cash as needed, which is relatively small)
      the appearance remains that banks ‘lend out deposits’

      1. No, I mean they would only borrow from the Fed, not depositors or the private credit markets.

        Bank capital is a cash account with the Fed. If I am approved for a 100,000 loan, the bank must borrow 100,000 from the Fed, paying whatever interest is required.

        If someone wants to lend their own money (not the Fed’s), then they can play in the private credit markets, but do not access fed facilities, and cannot accept depositors.

      2. They would only do this for free if they thought establishing customer relationships would aid them in underwriting or in selling financial services to customers.

        Banks could provide depositor services for a fee, or there could be other institutions that do this. If you want, government can provide some basic depositor services for free — we have public libraries, swimming pools, parks, schools, etc.

        Depositor services are trivial in the overall scheme of things — no reason to spend trillions on bailouts or to pay banks interest on massive reserves just because of gold-standard institutional arrangements. Keeping the horizontal plane in check is much more important.

        The “horizontal” component should not be able to swell just because the vertical component is growing.

      3. @RSJ,

        I like RSJ’s proposal because it seems easier to explain to people. I can’t seem to get my head around Warren’s ideas on this front mainly because the jargon becomes a bit mind numbing. RSJ’s analogy to wholesale made his proposal clear to me.

        Can Warren restate his above position in a way a layman like myself can comprehend?

        If I understand the Sovereign currency thing properly, what purpose do the banks really serve other than as distributors of government currency between the treasury & the people. Do we need a private banking system at all? Could the Treasury just have its own banking arm with branches etc. ? Wouldn’t all of this be a lot simpler to explain if we didn’t have to deal with all these private banking middlemen complicating things?

      4. banks are public/private partnerships.

        the actual reason to have private capital in first loss position is to depoliticize the pricing of risk.

        it’s a political decision.

  18. “Legalize all recreational drugs” is in the mainstream paradigm????

    You, me, and Ron Paul must constitute a mainstream. I haven’t run for office, but the two of you haven’t gotten much traction on that issue.

    1. @John O’Connell,

      Warren, is it safe to assume you would apply high luxury taxes to these, and also apply appropriately strict regulation to production, importation and availability (e.g. stiff penalties for providing drugs to minors), as well as extensive funding for anti-drug-abuse education in schools.

  19. Warren, regarding biofuels, do you include petroleum in your definition of same? If not, why do you consider biofuels in particular something to be outlawed, as opposed to petroleum?


      1. @WARREN MOSLER,
        Biofuels are not necessarily sourced from foodstuffs, but that’s not what I was after. Rather, what exactly do you mean by “way too dangerous to human life and may already be in the process of killing more humans than WWII” ? Are you referring to biofuels exclusively there, or combusted fuels in general?

  20. Warren, would you agree that under certain circumstances, fines for illegal activity amount to a luxury tax, and therefore should be scaled according to the offending party’s ability to pay, in order to maintain effectiveness?

  21. What about China, OPEC, Japan, UK all hoarding US Tsy’s ?

    Why not force them to spend them which by default is in our
    currency zone … ?

  22. Please explain how saving does not fund investment and how investment is funded. Also, do you distinguish between savings in debt and equity form here, as the interest rate proposals would not directly affect return available to equity investors (savers) ?

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