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Congress Must Amend The Federal Reserve Act Before The Next Recession

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Congress Must Amend The Federal Reserve Act Before The Next Recession by John Mauldin, Mauldin Economics

When there is another recession, the Federal Reserve is going to cut rates back to 0% and will likely enter into another round of aggressive quantitative easing.

They will do this even though their own economists don’t think quantitative easing works all that well as far as Main Street is concerned. QE is very good at propping up stock prices, but it didn’t do much for the economy and just made the rich richer—breeding a lot of resentment.

The Fed, however, won’t have another option with the current Federal Reserve Act. Interest rates and QE are the only tools left in their bag.

The Fed’s Hands Are Tied

The Fed would like to pursue a different type of quantitative easing, but the Federal Reserve Act limits what they can do. Congress would have to amend that act for the Fed to buy other types of assets or move money more directly into the economy.

You may not have been paying much attention to the debate going on about the Federal Reserve, but I can tell you, there is zero appetite in the Congressional leadership to bring up anything like the Federal Reserve Act. Doing so has the potential to be a real circus, but the US economy needs some amendments to the Federal Reserve Act.

The US Economy Needs More Stimulus Tools

Specifically, we need to authorize the Federal Reserve–the next time they feel the need to stimulate the economy—to be able to issue 40-year 1% bonds that can be used to repair the infrastructure of states and municipalities all across the nation.

These should cover self-liquidating projects that are capable of paying off the bonds, just as any general revenue bond issuer would, over the 40 years.

No boondoggles and no bridges to nowhere. Focus on water systems, electric grids, bridges, roads, public transportation, airports—things that everybody understands as basic infrastructure. Estimates are that we need to spend about $2 trillion (on the low side) to bring our infrastructure up to date.

This way we are giving them another tool to use.

Let’s Get Creative

Of course, that doesn’t help us right away. We all remember the last time we tried to find “shovel-ready projects” to do stimulus. Turned out there weren’t so many. So what can we do in the meantime?

We get creative. It turns out the Federal Reserve has added about $3 trillion to its balance sheet in the past few years. That money is sitting in US government bonds and government-guaranteed mortgage assets.

As those assets mature, the Fed is reinvesting the money back into other bonds and mortgage assets.

While authorizing those new infrastructure bonds, we can give the Fed the right to buy them today. As soon as a commission to oversee the issuance of the bonds is up and running, cities, counties, and states can begin to offer their projects for immediate funding.

And those projects will create hundreds of thousands, if not millions, of jobs as they come online during the first few years. That is stimulus we can believe in, and it will help forestall a recession.

Further, all those new jobs will carry salaries that increase consumer spending in local communities and generate a wave of related private investment.

Sounds good, right? If only the implementation were as easy…

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