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November 10, 2014 at 01:10 PM
We are in a middle-class depression. This was confirmed by a 2.1 percent reduction in the U.S. Economy (GDP) during the first quarter of 2014. Let’s start by looking at an article I wrote five years ago, published in a January 2009 newsletter.
“Looking forward, my thoughts are of concern. In 2009, the names will be different. We will hear about the Jones, Smiths and Johnsons. This year, the top stories will be the American families that are devastated by the credit markets freezing up. Unemployment (which is historically reported on the low side) will hit 10 percent.”
At the time I wrote this unemployment was 7.3 percent. President Obama declared that when the $831 billion stimulus is passed the unemployment rate would peak at only 8 percent. Who was right? I was. In October 2009, the national unemployment rate hit exactly 10 percent.
In the 2009 article, I added:
“Because 25 percent of all American homes are worth less than their mortgages (underwater), the reduction of interest rates to almost 0 percent by the Federal Open Market Committee (FOMC) will not ignite a real-estate craze the way that Alan Greenspan’s 1 percent federal funds rate did in 2003. Save what you can and spend wisely. We are probably halfway through this mess.”
Unfortunately for middle-class Americans, I was right again. The “Great Recession” ended in June 2009—pretty much exactly as I had forecast.
As I wrote in 2009, the economic crisis has been caused by every U.S. representative and senator regardless of political affiliation. My solution is a simple one: The United States needs a fiscal-policy agency — and we need it now. We currently have no less than 20 federal departments.
We don’t need another “department” that over time just becomes another political wing of the party in power. We need an independent agency like the U.S. Federal Reserve Board (Fed).
As an independent agency, the Fed dictates monetary policy. Monetary policy (that is, interest rates) is the tool by which the government tries to control the money supply, the availability of money and the cost of money.
This is usually done in one of two ways. The first method is the buying and/or selling of U.S. Treasury bonds, notes or bills. When the Fed sells U.S. Treasuries to the public, it reduces the money supply. When it buys existing debt, it increases the money supply. (This is now known as quantitative easing.)
The second, and most common, method is by adjusting interest rates. Higher rates reduce the available money supply (or cash in) circulation; lower rates increase the money supply. (The federal funds rate — the interest rate at which a bank lends funds maintained at the Federal Reserve to another bank overnight — has been at 0 percent to 0.25 percent for more than five years.)
I propose a fiscal-policy agency to set tax rates and the federal budget. I know this cannot happen without a Constitutional amendment. We all know that amendments are very difficult to pass. It would take a tsunami of support from the masses.
Let’s face it, Congress is not going to give up the best part of its job (spending our money) without a fight. Was Eric Cantor’s election loss the first sign that the general public is waking up? (By the way, I loved that he was upset by an economist.)
A fiscal-policy agency would implement tax rates and the annual government budget. A cap should be imposed on the growth of the budget equal to the inflation rate. This new department would work in conjunction with the Fed to maintain a stable financial landscape.
