Reforming The Fed-- A Guest Post From Mike Gatto

An old friend of mine is running for the state Assembly. I've discouraged her and told her the legislature in Sacramento is so riven with corruption and cronyism that nothing meaningful can get done. Fortunately, she's chosen to ignore me. I say "fortunately" because despite the institutional corruption in Sacramento, determined legislators, willing to spend years fighting the establishment-- the way Ted Lieu did when he was in the Assembly and then the Senate-- can and do break through. My old friend running now, Eloise Reyes, is a person like that. But so is a new friend, my own Assemblymen, Mike Gatto (Burbank, Glendale, Los Feliz, Silverlake, East Hollywood, Atwater, Franklin Hills).

Recently I was fascinated by a bill of his, proposing to reclaim the sidewalks and streets for the people. "The public owns the streets," he told the local NPR station. "They don't belong to a valet company. They don't even belong to the city government. They belong to the public." I called him to talk about the bill. He answered my questions and the video at the very bottom more or less explains the bill. But he quickly steered the conversation to income inequality and how he, as a legislator in Sacramento, can do his part to ameliorate that. I asked him if he'd be willing to write a guest post for DWT... and he did:


When You Vote For President, You're Also Electing The Next Head Of The Fed
-by Assemblyman Mike Gatto

We policymakers who care about income inequality and over-concentrated wealth have redoubled our efforts lately to help those in poverty and preserve what remains of the middle class. But there is a large, shadowy force that regularly espouses policies that worsen income inequality, and I don't mean Rush Limbaugh. It's our Federal Reserve.

Readers of this blog are likely familiar with some of the facts. American wealth disparity now exceeds the vast chasm of the Gilded Age, immediately before the Great Depression. Income inequality in the U.S. is so extensive that our own CIA compares us to kleptocracies like Cameroon and Russia. A short, ten-minute drive through Los Angeles is all that is necessary to reveal this. California of the future runs the risk of devolving into Marie Antoinette’s France, where the carefree rich ostentatiously display their fortunes, while scores of commoners look on with a mix of envy and rage.

How did this happen? Decades of federal policies caused it, but of those policies, nothing has more profoundly altered our society than the Fed's practice of “Quantitative Easing” (QE). Here's the concept: 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% annual interest rate.

Under QE, the Fed simply creates new money, in our example, $98 million, to buy the bond from the bank. By doing so, the interest rate has decreased to approximately 2 percent. And the insertion of the bank as a profit-seeking middleman, instead of buying the bond directly from the Treasury, is intentional. The bank scores an easy profit, risk-free, on top of any commissions. But if the bank fails to lend those funds, it does little for the rest of the economy.

So QE has profited big banks, but what has it has done for the overall economy? Economics 101 postulates that “printing” money leads to inflation, and the Fed has printed trillions in the last decade. The traditional conception of inflation is from a price perspective-- the cost of goods rising over time. When our grandparents tell us that a loaf of bread used to cost a nickel, it is inflation we blame for the price increases.

But these concepts no longer tell the whole story, because the economy has changed. Whereas a century ago, people primarily bought basic goods, now they consume more diversely. Traditional inflation indicators don't include many of the expenses the working class encounters. And the cost of living for working people has indeed risen. Everything from utility bills to the cost of an education have skyrocketed.

To avoid runaway inflation, our nation had to change. The last domino before runaway inflation is wage inflation. To keep up with the rising cost of living, wages usually increase too. But this has not happened. The average family today makes about as much as they did in 1980.

What has kept both wages and the cost of tchotchkes down is globalization-- free-trade agreements and other policies put in place by Congress, corporations, and covetous world leaders. Globalization manifests itself in the U.S. as “outsourcing,” taking jobs like manufacturing, previously done by well-paid Americans, to sweatshops overseas.

Ponder this for a moment: Many American families can no longer afford the goods we want, from air conditioners to iPhones, unless they are made overseas with $5-a-day labor. American companies can keep the cost of toys and microwaves low because they no longer need to pay an American worker to make them. Consequently, things like underemployment and the decline of private-sector unions are also tied to our federal monetary policies.

And the vast sums of newly printed money cascading down Wall Street has to be invested somewhere. Asset inflation is the other half of this ugly picture. Stock, bond, and real-estate prices have risen enormously in the last two decades. Asset inflation unsurprisingly benefits those who hold assets.

And therein lies the gap between the rich and the poor that everyone is talking about. The property and stock-market bubbles, which the Fed now acknowledges it created, have benefited the gentry, because they own far more stocks and real estate than wage earners. When those assets disproportionately expand in value while wages stagnate, the result is tremendous wealth disparity. Yet when the bubbles contract, it is the middle-class wage earners who foot the bailout bill.

Are there small-scale solutions available to policymakers? Sure. For example, I support raising the minimum wage. But many of these efforts amount to using a squirt bottle to extinguish a three-alarm fire. They are not enough. Raising someone’s pay from $25,000 a year to $29,000 every decade will not foster a more egalitarian society if easy-money policies continue to expand disproportionately the vast fortunes of the fantastically rich.

One would hope that in exchange for the social consequences outlined above, our federal monetary policies at least rescued our economy. But recently, many economists have questioned even that. I would hope that more citizens, more lawmakers, and more presidential candidates would start questioning some of these policies. The people who created our nation explicitly prohibited royalty, and warned that vast concentrations of wealth could make our nation like the tumultuous Old World societies many tried to escape. I fear that we are enshrining an inequality in our society that will take generations to change.


UPDATE: And That Parking Bill Of Rights...

This is the kind of legislation that makes life a little better for regular people who don't get driven around in limos.