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Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough?

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Posted on Jun 14, 2013
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Elizabeth Warren speaks at a campaign rally in Auburn, Mass.

By Ellen Brown, Web of Debt

(Page 2)

Banks Are Good Credit Risks Only Because They Are Backed by the Government

In a National Review article titled “Warren’s Student-loan Demagoguery,” Ian Tuttle argues that the discount window should not be available to students because the Fed defines that resource as “an instrument of monetary policy that allows eligible institutions to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions,” and because the discount window is “an emergency measure used to prevent runs on banks.”

It may be true that the Fed’s discount window is open only to banks, but the Federal Reserve Pact was passed by Congress and can be modified by Congress. The reasoning behind the policy needs to be re-examined.

The question is, why do banks routinely have “shortages of liquidity”?  What does that mean?  It means they have lent out depositor funds that don’t properly belong to them, gambling that they will be able to replace the money before the depositors demand it back. The banks have a binding commitment to return customer money “on demand.” They can make good on that commitment because, and only because, the Fed and the FDIC back them up in a massive shell game, in which they borrow from each other or the Fed overnight – just long enough to make their books appear to balance – and then give the money back the next day. Banks are good credit risks only because they have the backstop of the Fed and the government behind them. Without those guarantees, we would be back to the cycle of endless bank runs of the 19th and early 20th centuries.

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“Our students are just as important to our recovery,” says Warren, “as our banks.” What if students, too, were backed by the government’s guarantee? What if, as in Australia and New Zealand, students were not required to repay the investment in human capital represented by their educations until the economy provided them with jobs? What if the government made it a policy to provide them with jobs? This too has been done before, quite successfully. It was part of Roosevelt’s New Deal. As detailed by Prof. Randall Wray, citing N. Taylor’s The Enduring Legacy of the WPA:

The New Deal jobs programs employed 13 million people; the WPA was the biggest program, employing 8.5 million, lasting 8 years and spending about $10.5 billion. It took a broken country and in many important respects helped to not only revive it, but to bring it into the 20th century. The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 civilian and military buildings, 700 miles of airport runways; it fed 900 million hot lunches to kids, operated 1500 nursery schools, gave concerts before audiences of 150 million, and created 475,000 works of art. It transformed and modernized America.

In the 1930s, the government was in a worse financial position to achieve all this than it is now; but the commitment and the will were there, and the means were found. In World War II, the means were found again. The government always seems to be able to find the means to fund a war. We can just as easily find the means to fund our economic recovery. And if the funding comes from the Federal Reserve, the government need not be propelled into a mounting debt owed at mounting interest. The funds can be provided interest-free; and because they represent an investment in productive capital, the debt itself can be repaid with the fruits of the investment – the jobs that create the salaries that generate taxes and consumer demand.

The default rate on student loans is close to 10% today because there are no jobs available to repay the loans, and because the interest rate is so high that the debt is doubled or tripled over the life of the loan. Give students loans and jobs, and the default problem will cure itself.

Investing in our young people has worked before and can work again; and if Congress orders the Fed to fund this investment in our collective futures by “quantitative easing,” it need cost the taxpayers nothing at all. The Japanese have finally seen the light and are using their QE tool as economic stimulus rather than just to keep their banks afloat. We need to do the same.

Ellen Brown is an attorney, chairman of the Public Banking Institute and author of twelve books, including Web of Debt and the just-released sequel, The Public Bank Solution. Her websites are webofdebt.com and publicbanksolution.com.


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