ABSTRACT
This chapter outlines a comprehensive restructuring program for the Federal Reserve System, giving it broad authority in the area of credit allocation. Undertaking a structural overhaul of the Federal Reserve in a period of pervasive financial problems is consonant with the evolution of central banking in the United States. In this proposal, the central bank would still be responsible for short-term money and interest rate management, but its relative focus would shift to long-term promotion of productive investment, financial stabilization, and sustainable growth. Equally important, the extent to which the Fed’s activities are accountable to democratic processes would increase dramatically.
The chapter considers four systemic problems that, evaluated as a whole, demonstrate the need for the proposed transformation. These are the long-term pattern of deepening financial fragility, the bias for short-term over long-term investment and planning commitments, the lack of democratic accountability within both public and private institutions operating in the financial market, and the declining capacity of existing government policies to counter these systemically embedded fractures.
In addition, the proposal offers a vehicle for addressing somewhat separate, but equally serious, questions. The first is the need to undertake two long-term processes of industrial conversion—out of military production on the one hand and into environmentally benign production techniques on the other. The second is to increase opportunities for high-wage, high-productivity jobs in the United States, given the intensified downward wage pressure resulting from globalization of our labor and financial markets.
The specific features of the restructuring proposal are drawn entirely from programs that have been used or at least seriously considered in the United States or other market economies. They include:
322Increasing democratic accountability through direct election, within each region of the country, of the directors of the 12 Federal Reserve district banks;
Increasing the role of discount-window reserve creation relative to open market operations. This will give district banks more direct regulatory authority over the lending activities of private intermediaries, enabling them to promote financial stability and the productive uses of funds. It will also redistribute downward Federal Reserve decisionmaking power, creating more effective channels for accountability;
Establishing differential asset reserve requirements for all U.S. intermediaries. Preferred uses of credit, such as investing in environmentally benign technologies, will thus become significantly less costly for intermediaries than nonpreferred uses, such as mergers and buy-outs.
The chapter also addresses the practicality of these proposals in terms of historical experiences with government credit allocation policies, both in the United States and elsewhere. It then considers criticisms of credit allocation policies. It concludes that the program is feasible. Moreover, the program can be implemented within the existing U.S. institutional structure, with minimal demands on the federal budget and while maintaining substantial flexibility for the private sector in financial markets.
