Ron Paul’s Solution to the Debt Ceiling Impasse

geochem1st

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I like it:

"Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget.

The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.

In addition, there’s a second reason why Representative Paul’s plan is such a good idea. As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed. In this case, the interest payments would be a burden to the Treasury since the Fed would no longer be collecting (and refunding) the interest.

To be sure, there would be consequences to the Fed destroying these bonds. The Fed had planned to sell off the bonds to absorb reserves that it had pumped into the banking system when it originally purchased the bonds. These reserves can be created by the Fed when it has need to do so, as was the case with the quantitative easing policy. Creating reserves is in effect a way of “printing money.” During a period of high unemployment, this can boost the economy with little fear of inflation, since there are many unemployed workers and excess capacity to keep downward pressure on wages and prices. However, at some point the economy will presumably recover and inflation will be a risk. This is why the Fed intends to sell off its bonds in future years. Doing so would reduce the reserves of the banking system, thereby limiting lending and preventing inflation. If the Fed doesn’t have the bonds, however, then it can’t sell them off to soak up reserves.

But as it turns out, there are other mechanisms for restricting lending, most obviously raising the reserve requirements for banks. If banks are forced to keep a larger share of their deposits on reserve (rather than lend them out), it has the same effect as reducing the amount of reserves. To take a simple arithmetic example, if the reserve requirement is 10 percent and banks have $1 trillion in reserves, the system will support the same amount of lending as when the reserve requirement is 20 percent and the banks have $2 trillion in reserves. In principle, the Fed can reach any target for lending limits by raising reserve requirements rather than reducing reserves.

As a practical matter, the Fed has rarely used changes in the reserve requirement as an instrument for adjusting the amount of lending in the system. Its main tool has been changing the amount of reserves in the system. However, these are not ordinary times. The Fed does not typically buy mortgage backed securities or long-term government bonds either. It has been doing both over the last two years precisely because this downturn is so extraordinary. And in extraordinary times, it is appropriate to take extraordinary measures—like the Fed destroying its $1.6 trillion in government bonds and using increases in reserve requirements to limit lending and prevent inflation.

In short, Representative Paul has produced a very creative plan that has two enormously helpful outcomes. The first one is that the destruction of the Fed’s $1.6 trillion in bond holdings immediately gives us plenty of borrowing capacity under the current debt ceiling. The second benefit is that it will substantially reduce the government’s interest burden over the coming decades. This is a proposal that deserves serious consideration, even from people who may not like its source."

Ron Paul

:hmm:
 

jeff_farkas

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I need to read this a few more times but it's interesting. :)
 

180gROC

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As far as I know the Fed is a private bank. I think if Congress asked the Fed to burn a trillion or 2 in government bonds the Fed would tell Congress to pound sand.

Last I saw Congress couldn't even get the Fed to tell it how much who got bailed out and why.
 

180gROC

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Ron Paul wants to tell the Fed to pound sand. Ron Paul wants to RID the world of the Fed, and have Congress print money again.

And I fully support Ron Paul in that regard.

The article was written as if the Fed were a part of the Treasury Department or something...
 

geochem1st

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As far as I know the Fed is private bank. I think if congress asked the Fed to burn a trillion or 2 in government bonds the Fed would tell congress to pound sand.

The Fed is subject to the Congress:

"The System is, however, subject to oversight by the U.S. Congress. The Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government; therefore, the description of the System as “independent within the government” is more accurate."

"The Board of Governors of the Federal Reserve System is a federal government agency. The Board is composed of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate."
http://www.federalreserve.gov/pf/pdf/pf_1.pdf
 

180gROC

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I LOVE watching the vids of the Fed dodging and weaving questions and giving no information in congressional hearings.

Yeah... it's written down that they are subject to the Congress. That's for sure.
 

180gROC

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Oh most certainly. The congress are the Fed's "middle management". They are all on the take. The whole lot of them.

The Fed is a private institution, with private interests.
 

Thumpalumpacus

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Oh most certainly. The congress are the Fed's "middle management". They are all on the take. The whole lot of them.

The Fed is a private institution, with private interests.

If the political will existed, the Fed could be snuffed out.
 

180gROC

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If the political will existed, the Fed could be snuffed out.

Yes indeed.

I felt bad for speaking in absolutes as soon as I did it. There may be a small part of Congress not on the take. Maybe...

I would love to see Ron Paul or someone like him as potus.
 

vintageJIM

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don't you just luv how threads like this go to 5, 10, maybe 15 pages, and then TBTB just send the thread into oblivion?

sorry, not contributing to the wastefulness ...................
 

jason_mazzy

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Wow intelligent people in here. I have kept my political views quiet, but i see there are a few people who actually believe in liberty, round these parts.
 

KSG_Standard

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I like Dr. Paul's idea. Then the Fed could start slowly raising interest rates and the Congress could rewrite the tax code. One of the things that needs to happen is that banks need to start relying on customer deposits for their reserves, instead of borrowed money from the Fed. Raising the interest rates and changing the tax code to incentivize savings would be nice.

Maybe Dr. Paul would make a good Treasury Secretary since so many folks find him unelectable for POTUS. IMO, we need a Libertarian POTUS and more Libertarians in Congress to boot.:thumb:
 

geochem1st

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I like Dr. Paul's idea. Then the Fed could start slowly raising interest rates and the Congress could rewrite the tax code. One of the things that needs to happen is that banks need to start relying on customer deposits for their reserves, instead of borrowed money from the Fed. Raising the interest rates and changing the tax code to incentivize savings would be nice.

Maybe Dr. Paul would make a good Treasury Secretary since so many folks find him unelectable for POTUS. IMO, we need a Libertarian POTUS and more Libertarians in Congress to boot.:thumb:

Since the interest rate swap derivatives market is the largest derivatives market in the world, it has a powerful hold over setting of those rates. Raising the rates too fast would trigger thousands of derivative defaults.

The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were $437 Trillion US Dollars for OTC interest rate contracts, and $342 Trillion for OTC interest rate swaps.

I think that the best way to manage the banks is to force them to increase their reserves, as Ron Paul pointed out.
 

EnjoGuitar

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I'm too lazy/uninterested to get into politics. At any rate, I don't enjoy them either, so that's why I ask the following question:

Why does it seem Ron Paul's chances of becoming POTUS are next to nothing? It's clear that you guys like him and support his views/policies, but I hear people trashing him all the time, why's that?

Thanks to anyone that takes the time to answer my question.
 

jason_mazzy

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Because we have been embedded to believe that your vote doesn't count unless you vote for the big guy. But if everyone voted their true picks you would see some upsets!
 

PraXis

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Dr. Ron Paul has no chance to win the GOP nomination because they are owned by the same people who control the Democratic party.

However, if by some miracle, he WAS nominated, he would win in a landslide, especially with the independents... anti-war/meddling, pro-states rights.. he's the only classical liberal (aka modern libertarian) that we have.

Other than him (and his son of course) the only politicians not owned by the banksters are probably Kucinich and Sanders....I disagree with these two most of the time, but I respect the Drs. Ron and Rand Paul, Kucinich, and Sanders far above everyone else in DC.
 

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