In the face of President Donald Trump’s efforts to reduce the size of the federal government and the slashing of the federal budget, states, cities, and universities can target the Federal Reserve to demand access to 0% lines of credit.
Here are the central talking points of this article:
- States and cities are not helpless. The money for what we need is there if we demand it.
- The money is there for banks and corporations; it’s time we make it available for us.
- Jerome Powell doesn’t need to go along with Trump and create a recession. He can give us the same money power he gives banks to prevent an economic disaster.
- In 2020, the Fed opened up the money power to states and cities. We need them to do it again, before it’s too late.
States, cities, and universities are facing a potentially catastrophic level of austerity from Republicans in Congress and the White House. The massive budget cuts to healthcare, education, transit, and any discretionary program related to “equity” (alongside tax cuts and deregulation) would intensely constrain the possibilities for expanding social services and benefits for workers at the local level.
The federal government is the legal authority of the U.S. monetary system and faces different constraints on its power to mobilize resources than states, cities, and universities do. While the former brings money into existence through spending and “deletes” money through taxation, the latter do not have access to this “money power” and must tax and borrow in order to spend. The dollars created through federal spending can be called “government money.”
However, the federal government is not the only entity with the money power. Banks create money through loans. When a borrower gets a mortgage, for example, a deposit is created that introduces new dollars into the system, and repayment of the loan “deletes” that money out of circulation. Banks are delegated access to the money power from their legal charter, which grants them rights and responsibilities with the Federal Reserve, federal deposit insurance, and other regulations. The dollars created through bank lending can be called “bank money,” which makes up more than 95% of money in circulation.
States, cities, and universities fiscal policy exists downstream from government money and bank money. Their lack of access to money power is a fundamental political problem by design. The federal government retaining the sole power to create government money keeps states and cities subordinate to Washington as a power center; the Federal Reserve granting access only to privately owned banks means our society prioritizes private wealth accumulation first above social needs. As Congress and the president push to stop the flow of new government money, states and cities can use this as an opportunity to refocus on bank money and the discrepancy between giving private banks the money power instead of the public.
The Federal Reserve can resolve this unjust dynamic by opening up the money power to states, cities, and universities directly. Just as it offers credit to banks at policy-dictated interest rates, the Fed can create credit facilities for states and cities at a policy rate that will further its mandate of price stability and maximum employment. Toward that end, the best default interest rate would be permanently at 0%.
The Fed did open credit access to states and cities during the Covid-19 pandemic via the Municipal Liquidity Facility (MLF). However, they set a policy rate at a premium to the prevailing interest rate on offer by the municipal securities market. This backstop facility stabilized the municipal debt market in the immediate wake of lockdowns and their economic impacts but was only used by the state of Illinois and New York City’s Metropolitan Transit Authority (MTA). While the MLF was created using the Fed’s “emergency powers” under section 13(3) of the Federal Reserve Act, analysts such as Nathan Tankus affirm that ongoing credit lines to states and cities are plainly legal under the Fed’s normal statutory authority.
The upshot of an unlimited 0% line of credit from the Fed would be a profound expansion of the potential fiscal space for states, cities, and universities. In economic downturns, they would be able to “monetize” similarly to the federal government: expand public spending to lower unemployment and increase economic activity, while increasing taxes and fees to pay back the 0% loan over time. They would also save a significant amount on the interest paid to bondholders and debt servicing costs. This is why in 2021, the Philadelphia City Council unanimously passed a resolution calling on the Fed to do just this proposal, which states and cities could build upon today.
It is important to note that this would not be the same unrestricted capacity for mobilizing resources as the federal government. While an unrestricted 0% line of credit would be the ideal, the practical negotiation around implementation would be around constraints to address “moral hazard” concerns, which may include restrictions on the budget priorities or decisions made by states and cities. But just as with the Payroll Protection Program, which was a forgivable loan program provided to businesses during the Covid-19 pandemic, or as proposed by proponents of student debt cancellation, loans to states and cities could be de facto converted into grants through cancellation as needed. Over the long term, a public bank would be the ideal coordinating mechanism for a state, city, or university interfacing with the Federal Reserve, rather than their comptroller or treasurer’s office.
The economic crisis created by the Trump administration’s policies will likely initiate a next wave of “disaster capitalism,” gutting public services and outsourcing jobs to the private sector (and “AI”). The Fed has a duty to act to prevent the price instability and unemployment rise we can anticipate from this willful negligence and malice. It will only do so if the public recognizes the money power where it exists and makes clear that we will not accept inaction in the face of economic catastrophe.
