Why is the Most Crucial Issue of our Times Ignored by All Presidential Candidates?

By California State Assemblyman Mike Gatto, Member of the Committee on Banking and Finance:

The large and eclectic field of presidential contenders is in full-out campaign-promise mode, as voters demand positions on everything from ISIS to ethanol. With the economy so fragile, now might be a good time to seek commitments on who our next president will appoint to the Federal Reserve, and statements on what the proper role of the Fed should be.

Recent history is too important to ignore. After the Fed lowered interest rates to zero during the recession, it found itself lacking options for further “stimulating” the economy. It therefore began what it called Quantitative Easing (QE), which works more or less as follows: A bank buys a treasury bond for $97 million. Assume this bond matures in one year, and will be repaid at $100 million, or (very roughly) a 3 percent annual interest rate.

Under QE, the Fed creates new money. In our example, it will create $98 million, to buy this bond. By doing so, the interest rate has decreased to approximately 2 percent. And the bank made an easy profit, risk-free, on top of any commissions. But if the bank fails to lend out those funds, it does little for the economy.

You might ask yourself why the quasi-governmental Federal Reserve doesn’t just buy bonds directly from the Treasury. “No,” they say, “that would be too close to just printing money for the government.” As if using a middleman and generating private profits makes the process significantly more palatable.

After easing for years, now the Fed seeks to raise rates. Of the available methods, it does not wish to force the government to repay loans, so it rolls over the bonds where possible. It also doesn’t want to sell the bonds right back to the banks, which might make it appear they were “churning” – generating transactions to earn fees. And the Fed’s typical pre-recession move – controlling the supply of money by soaking up bank reserves – would be ineffective now, since it created so much new money during the last decade.

So, what will the Fed do? It will offer interest to banks on the funds they hold on reserve. In other words, the Fed will pay banks to let their money stay put, instead of lending it to me and you. The percentages might seem small, but remember, this is risk-free profit, generated on vast sums. If you’re questioning these actions – bidding up an asset that private parties own, paying them a commission to buy it, and then paying interest on the money you gave them – you’re not alone.

Now that we’ve established that QE has profited banks, you might ask what it has done for the overall economy. Recently, certain economists have raised the possibility that it might have actually hurt it. Recall that conventional economics is often bad at predicting outcomes, like the extent that government spending (a theoretical stimulus) can “crowd out” private spending (and thus paradoxically hurt the economy) – or how the S&P downgrade of the United States’ credit rating in August 2011 counterintuitively caused U.S. borrowing costs to decrease.

These contrarian economists seek to explain why decades of Japanese efforts to spark inflation have had the opposite effect, and why similar efforts in the U.S. largely failed to reflate anything besides the stock market. They wonder if the reduction of interest rates has had a counterintuitive result.

Conventionally, the “real” interest rate is the nominal (or common) interest rate, minus inflation. Therefore, if your bank pays you 5 percent on a CD, but inflation eats up 4 percent, your real interest rate is 1 percent. Similarly, if you borrow money at 7 percent, but inflation (and wages, investment returns, etc.) rise by 6 percent, then you’re only really paying 1 percent on your loan. The contrarian economists theorize that real interest rates will always seek a certain level, independent of central-bank actions. Therefore, if the Fed depresses interest rates, inflation too will fall, to meet the real interest rate that the economy is pricing by itself. So if the Fed has driven down nominal interest rates to 1 percent, but the economy stubbornly sets a “real” interest rate of 1 percent, inflation will thus be zero.

I believe the real interest rate is more the result of a subtraction calculation, than an innate level on which one can base a re-arranged equation. But one wonders if the Federal Reserve, by raising their interest-rate target during a time when many questioned the move, perhaps wants to test this theory.

At any rate (pun intended), Americans are right to question whether the Fed’s actions have had the intended results, whether they’ve benefited anyone besides banks, and whether the Fed is experimenting with the economy at a time where everything feels pretty fragile. Let’s hope the presidential field understands these concepts and lets us know where they stand sometime soon.

By California State Assemblyman Mike Gatto. He represents California’s 43rd Assembly District (includes Los Angeles, Glendale, and Burbank) and serves on the California State Assembly Committee on Banking and Finance. www.asm.ca.gov/gatto

So the Fed’s actions have not had the “intended results,” as Gatto put it. But now there are big problems. And they’re not contained. Read…  This is How Financial Chaos Begins


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  33 comments for “Why is the Most Crucial Issue of our Times Ignored by All Presidential Candidates?

  1. Feb 15, 2016 at 2:44 pm

    The real discussion really ought to be restricting the FED to the role of lender of last resort so as to maintain liquidity in the credit market. Interest rates need to be set by the market. A board of academics cannot be allowed to set interest rates and manage an economy with tools such as quantitative easing, ZIRP and NIRP. It is impossible to eliminate fluctuations in the economy and attempts by the FED over the last 35 years have simply exacerbated these fluctuations with the creation of bubbles. My two cents.

    • John Doyle
      Feb 15, 2016 at 5:47 pm

      The Fed does not lend nor does it borrow. It just spends – to buy the government’s debts, like for the military or welfare. The Fed QE “purchased” assets to allow banks to lend out more freely. Eventually it hoped the banks would buy them back, but the money would be deleted.
      It doesn’t lend anything itself.
      What is needed is a government owned bank to compete with the profit motivated commercial banks. They used to exist, but the banksters got the pollies to remove them.

      Feb 15, 2016 at 6:31 pm

      The FED is a private corporation whose list of stock holders we are not allowed to know. Ever.

  2. Michael
    Feb 15, 2016 at 3:35 pm

    The banks bad bets were puchased by the FED and replaced with fresh hot money. Now we get to pay interest on that money. How does this not anger the average taxpayer.

    • Vern
      Feb 15, 2016 at 4:11 pm

      We are angry.

      Witness the Donald and Bernie (inchoate Republican Id and the Occupy Movement respectively) insurgencies on the status quo.

      Hopefully Bernie and a D Senate get the next SCOTUS pick. That makes repeal of Citizens United a real near term possibility. And in my opinion, the only way to really reign in the FED is to get the oligarchs out of our political process.

      • Roger
        Feb 15, 2016 at 4:42 pm

        Well Vern, you really do want to complete the progressive’s dream of radically transforming the USA. Maybe we can find a place to put all the socialists, Marxists, etc., so that the rest of us can live according to the principles set forth in our Constitution. Why don’t you just move to Cuba and not worry about who gets elected.

        • Nicko
          Feb 15, 2016 at 7:17 pm

          No room in Cuba, they are going capitalist. Perhaps Venezuela?

    • John Doyle
      Feb 15, 2016 at 5:40 pm

      You, taxpayer, don’t pay even one cent. The Fed never reuses any existing money. It’s not that kind of bank. It pays interest on money the banks have to keep in the reserve accounts, and also on its bonds. That interest is created money. All the Federal debts are paid with created money. The Fed does not recycle taxes.

  3. Petunia
    Feb 15, 2016 at 4:01 pm

    I made a trip to Goodwill today, on President’s Day, and the parking lot was full of shoppers. They are not at the mall shopping the sales, they are at the thrift store. That’s the state of the economy.

    • Vern
      Feb 15, 2016 at 4:20 pm

      I am “yoouuge” fan of Goodwill. Reduce, Reuse, Recycle.

      I haven’t bought a new piece of clothing, except shoes, in years.

      I admire Paulo’s comments: I don’t buy anything I don’t absolutely need. Not because I can’t afford it, but more as resistance against the corporate borg and the entanglements of “stuff.”

      We have reached peak “stuff” IMO.

    • robt
      Feb 16, 2016 at 5:07 pm

      Toronto, Canada. The Goodwill branch here went bankrupt, despite free contributions that were ‘stacked to the ceiling’ in their central warehouse, and 4 million dollars in subsidies from the government. They tried to get away with not paying the workers just by locking them out one morning, but the uproar was too much so they somehow found the money to pay the last week’s pay. The CEO, who makes 230,000 a year (but claims that she ‘hasn’t been earning it since early January’) is the only staff member left because she refused to resign.
      Welcome to the wacky world of ‘non-profit’.

  4. Mark
    Feb 15, 2016 at 5:17 pm

    The FED is not experimenting with economy now, it has been experimenting all the time.
    Any way, I will say same thing I said so many times before:”There is no better place in the world to weather financial or any other crisis but America”.

    • Retired
      Feb 15, 2016 at 5:42 pm

      The whole deal was a fraud from the very beginning!
      how can we critique something that is a fraud to begin with?
      As far as I can see,..even if we wanted to continue this debt based pyramid swindle,..there is no reason I can think of that would preclude the Fed’s duties transferred to the Treasury Department & being rid of the Fed.!

        Feb 15, 2016 at 6:33 pm

        The FED is a private corporation.

  5. Keith
    Feb 15, 2016 at 5:42 pm

    The global monetary system was designed by bankers for bankers and they get a cut at every step in the process of money creation.


    Hidden secrets of money website – episode 4

    (Just in case the link doesn’t come through)

      Feb 15, 2016 at 6:33 pm


  6. polecat
    Feb 15, 2016 at 6:26 pm

    Here’s a suggestion ; Try every living Federal Reserve Bankser (current & former), including all regional heads for sedition and treason, for destroying the ability of the citizenry to live their lives in a reasonably stable fashion, while the fraudulent banking industry got away with blatant graft and influence peddling??? Bring RICO charges against every fucking one of them !!

  7. Dan Romig
    Feb 15, 2016 at 6:28 pm

    Mr. Gatto certainly explained in very simple and direct terms what has been going on since 2008, and I thank him for doing so.

    The Wall Street big five have essentially been given cash by the Fed to hold and sit tight on at a nice, “… the percentages may seem small …” profit. But don’t worry, the NY Times and Krugman are here to make sure you think anybody who wants to audit or oversee the Fed is crazy wrong.

    ‘Retired’ is correct; the Fed’s duties belong to the Treasury. Unfortunately for JFK, on 4 June 1963, he signed an Executive Order to give his Treasury Department the power to issue currency. 171 days later, on 22 November, he was gunned down and killed.

    The only way for the USA to break free from this government sponsored theft of the masses, is for the masses to vote Libertarian. A vote for either party of the ‘lesser of two evils’ is just a vote for more financial enslavement by the status quo system that’s been in power for far too long.

    Feb 15, 2016 at 6:30 pm


    Unless one wants a bullet in the back of their head (Lincoln, Kennedy) you DO NOT discuss the FED. Ever.

    Not Trump, Rush, Hanity, Levine, Savage, Cruz, Hilary, Sanders.

    Nobody. They know who rules.

    • polecat
      Feb 15, 2016 at 6:53 pm

      well then, i guess society (the voting public) gets it instead..do i have that right?!

      • polecat
        Feb 15, 2016 at 7:34 pm

        by the way, the Feral Reserve did not exist during the reign of Lincoln.

        • Dan Romig
          Feb 15, 2016 at 8:48 pm

          In 1861, Lincoln began printing ‘debt free money’ which he informed the public was now legal tender for both public and private debts. By April 1862, just shy of $450 million of this money had been printed.

          Lincoln’s quote, “We gave the people of this republic the greatest blessing they ever had, their own paper money to pay their own debts.”

          In 1865 he addressed Congress stating, “I have two great enemies, the Southern Army in front of me , and the financial institutions in the rear. Of the two, the one in the rear is my greatest foe.” Shortly thereafter, on 14 April, he was gunned down and killed.

        • nick kelly
          Feb 16, 2016 at 12:48 pm

          The original thirteen colonies printed all kinds of scrip. Benjamin Franklin was a sort of central banker and mint in one. He would sit in his parlour and ponder how much he should print, then he would go into an adjoining room and print. At least once he wrote that he thought he had printed too much and that what a successor might call irrational exuberance was in evidence.
          There’s all kinds of pre-Fed paper out there and a group of bond holders in the UK still trying to chase Mississippi.
          The Fed can be criticized for sure but which central bank is doing a great job? It sure as hell isn’t China. And if you check in with the Guardian you here Brits raving about the evil doers over there. Quite a few of these comments sound paranoid.
          Here’s a thought- what if democracy our sacred cow is at least partly to blame? Back during our period of worshipping Greenspan- how many politicians campaigned for higher interest rates?
          How popular would it really be to say sorry no more government borrowing – we have to live within our means.
          In his book The Triumph of Politics David Stockman tells exactly how hard it was to pay for the Reagan tax cuts, at a time when military spending was rising fast. (They weren’t able to get the spending cuts needed so Reagan doubled two centuries of accumulated DEBT of the US, in four years. )
          As Michael Lewis (The Big Short, Boomerang etc.) has written- politicians figured out what Californians want: to have public services and not pay for them.
          And where can you borrow money when no one will lend it you- from the unborn.

  9. Spencer
    Feb 15, 2016 at 8:30 pm

    …”Let’s hope the presidential field understands these concepts and lets us know where they stand sometime soon.”…

    Still think a politician will save you? You know the answer. Oh, the right politician will save us.

    What a crock of you know what!

  10. Kevin Beck
    Feb 15, 2016 at 9:29 pm

    This issue about hiring the next Federal Reserve Chairman is less important than the proper solution to the problem.

    Every boom and bust cycle of the previous 100 years has been directly attributable to the lunkheads at the Federal Reserve. While abolition seems extremely unlikely, the better solution would be to redefine the mission of the Federal Reserve.

    The Federal Reserve should be bound to aim for maintaining the purchasing power of the dollar. No exceptions.

    To do otherwise is akin to asking the producer of any good or service to demand that the value of their product or service be worth less than when it is produced. How many business people would want to sell their product or service for less than what it cost to produce it?

    Yet this is exactly what the Federal Reserve (and every other central bank in the world) aims for when they say they want a weaker currency. And they are allowed to get away with it!

  11. rich
    Feb 15, 2016 at 9:36 pm

    Not all the candidates are ignoring the Fed. Bernie said in December:

    “The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time,” Sanders wrote. “Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages.”

    Writing that the Fed should not raise interest rates until unemployment rates are lower than 4 percent, Sanders suggested that the increase of interest rates should be done “only as a last resort — not to fight phantom inflation.”

    Read more: http://www.politico.com/story/2015/12/bernie-sanders-federal-reserve-nyt-217094#ixzz40IJARAHM

  12. Ptb
    Feb 15, 2016 at 10:15 pm

    The fed is around to save their friends and keep the govts ability to borrow money in tact. Buying bad paper and govt debt prove this.

  13. frederick
    Feb 16, 2016 at 3:27 am


  14. Cameron
    Feb 16, 2016 at 5:00 am

    1. The major candidates are not going to get into a discussion about the Fed Res because if they did 80% of the voters are so badly educated on economic issues they would barely understand what they were on about. This lot are far more interested in their sports, their toys, their TV shows, their latest piece of Icrap, wasting their time with trivia like Facebook and Twitter and numerous other activities. Economics and finance …pfft. Half of them cannot even manage their own lives. What do we have now? About 50 million on food stamps. Yeah they worry about the Fed.

    2. Furthermore the Federal political classes all know only too well it will take legislation to pass both houses to do anything to rein in the Fed or for that matter to effectively change the behaviour of the banks for the better. Say what you like but the chances of that happening in a form that will see any major or meaningful change are very low. If you have a horrible GFC caused by the financial sector and then still cannot achieve it what will it take?

    3. The President does not have the power to unilaterally affect the Fed so there is little point in presidential candidates beating their chest about it and then being called failures by voters because all the vested interests on both sides in Congress would not let him implement his or her policies.

    4. The financial sector, especially the banking industry, is the biggest contributor to individuals in elected office and to the major parties themselves. Since everyone in America seems to be perfectly and blindly happy with a corrupted political system that has to run on obscenely massive contributions of cash from all manner of private interest groups who naturally expect influence, favourable treatment and supportive legislation and favourable Government policy as payback for their large expenditures. If they don’t get it, the game as it is played up to today is up and the politicians all know it. Pres. Obama promised to rein in the excesses of the banks and look after main street (the real economy) at the expense of Wall St if needed after the GFC having won in late 2008. He did absolutely nothing when taking over from Jan 2009 except very sneakily run with the agenda of the finance industry and the Fed and the excesses have gotten worse as have both private and public indebtedness thanks to suicidal monetary policies and other policies that have done nothing except massively influence the gross misallocation of capital flows and run up ridiculous and totally unproductive asset bubbles that will all burst. And people actually think their vote every few years really counts for something when all that counts about 85% of the time is the money funneled to the politicians and what and who is behind all that cash which today we count in the billions.

    5. As others have mentioned the Fed is a private operation owned by financial institutions. It is not surprising therefore that the Fed will do exactly what their constituency want them to do, and what is favourable to their interests, whether or not that is in the interests of the broader economy and very clearly some of their measures are most definitely not. What is good for the banks is good for the economy they will tell you. If anyone has some compelling evidence that over many years the Fed has enacted some measures that are not favourable to the banking and finance sector I would like to examine it.

    Feb 16, 2016 at 6:37 am

    If you ever wondered what kind of insane advice must come from banks to their central bankers then cop this piece from the Zero Hedge article of 10 Feb, apparently originating from one of the mismanagers at the very troubled – again – DEUTSCHE BANK………………
    From Zero Hedge article ….

    “So finally, as emergency bond buyback plans are thrown out in desperation.. because that will not be enough to solve this problem, as a Deutsche banker readily admits…

    WHAT NEEDS TO BE DONE. Simple(he says)?

    “Recognize the problem. It is not oil, it is not in the banks..it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with over investment boom you cut you don’t raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.
    Draghi should follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.
    China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.
    And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there should be de-emphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.
    how about some fiscal stimulus
    on negative rates — instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers.. Cash shd be charged interest — put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.”
    Yeah what we need is just more of the same that has not worked either and you can just bet the Chinese will be rolling in the isles at this joker’s suggestion at what they must do to help his bank.
    But how about the DEUTSCHE banker’s last point. Yeah. Lets get all those dreadful savers and make them pay for saving and putting their money in the bank so we can either lend it out or otherwise bet it with 10 or 20 times leverage on some high risk trade. Then we will tax their withdrawals.

    Can you believe the front, arrogance and idiocy these wankers display?

  16. DCR
    Feb 16, 2016 at 12:37 pm

    When central banks’ interests align with governments’ desires to diminish the real burden of governments’ debts, you get confiscation through hyperinflation (interest rates high, and running below inflation).

    When central banks’ interests align with private bankers’ desires to preserve the fantasyland financial “values” driven by 15 years of central bank-imposed negative real interest rates, you get confiscation through progressively more negative nominal interest rates (interest rates negative, and running below deflation).

    In both scenarios the aim is to confiscate savers’ wealth to benefit the bankers’ friends.

    The Fed is not “setting a floor” on interest rates by paying interest on excess reserves (IOER), and the rate paid has little to no effect on the rate banks are willing to lend to corporate or individual borrowers. With $2.3 trillion in excess reserves, the only thing limiting banks’ lending is their cost of funds, and finding an entity to lend to at a spread above cost of funds who will actually pay back the loan (and if the bankers can pretend they will be paid back many bank CEOs don’t even much care about a future default, as they will be long gone with their bonuses before the eventual recognition of loan default). The only banks borrowing in the Fed funds market today borrow from entities which legally do not receive IOER (e.g. the government sponsored entities or GSEs), and banks only borrow Fed funds from them at a rate below the IOER rate to arbitrage the difference between the IOER rate and the Fed funds borrowed rate.

    The $11.5 billion paid annually in IOER (50 b.p. times $2.3 trillion in excess reserves) is nothing but a giant subsidy to the banking industry, which at the current 50 b.p. rate works out to ~$36 annually for every man, woman, and child in the United States ($11.5 billion/320 million citizens). And bear in mind this is in addition to the artificial gains earned by the banking industry as a result of the Fed lifting prices on treasury and mortgage markets with massive QE.

  17. unit472
    Feb 16, 2016 at 4:00 pm

    As the comments here indicate , people have various ‘theories’ about the Federal Reserve Bank and what it does. For politicians, this makes them wary of making it an issue less they be perceived as a kook. It is also the case that Fed ‘unconventional’ monetary policies have the effect of making life easier for D.C. politicians. Not only do lower interest rates reduce the cost of servicing the national debt, the Fed also returns to the Treasury the interest it receives on US government bonds. Janet Yellen said this financial legerdemain amounts to some $100 billion per year.

    That Central Bank QE, ZIRP and NIRP all make it possible for elected officials to duck the hard choices they would otherwise have to face is one big reason few of them are eager to challenge those policies.

  18. ERG
    Feb 17, 2016 at 9:58 am

    The Fed has to pretend for a bit longer that everything is peaches and cream to help maintain the narrative that supported the rate increase. They know it was a mistake, but they put themselves in a place where they had no choice. Their metrics are useless, their assumptions have no real connection to the world the rest of us live in, and they are perpetually more concerned about appearances than reality.

    Now, in a similar fashion, they have to stick to their story until it becomes so blatantly obvious the economy has turned to total crap, that they risk their reputation…again.

    Then you’re going to see The Mother of All QEs, or NIRPs, or Whatever-The-Hell-They-Decide-To-Call-It-This-Time.

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