Re: Kelso's Fed proposal and Inflation

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

I would add to Davids Spitzley remarks that at present Central Banks have a
very "blunt" policy instrument in controlling inflation through interest
rate policy.  Ddemand for consumption, the purchase of existing assets like
housing, factories, shares, derivatives or the creation of new speculative
instruments or financing the means to increase productivity to reduce
demand for resources to "reverse" inflation.
The purchase of commercial bank loans to finance the expansion of
Democratically owed productive assets which are fully insured against
failure of becoming self-financing procreative assets by the non-bank
sector provides a surgically sharp policy instrument. Credit expansion by
the banking system is guaranteed to be contracted either from the cashflows
of more productive assets which produce more output while reducing bank
credit or the price of collateral assets guaranteeing this result are
reduced by the need to liquidate them to pay back the bank loan.    By the
central bank discounting '"qualified" loans at nearly a zero discount rate
the insurance premium replaces interest.  This allows the allocation of
such "qualified" bank loans to be undertaken by the market price of the
insurance premium to guarantee the loan.  In other words, finance is
allocated by the perceived risk premium rather than by government
controlled interest rates.

Shann

 used for creating inflationAt 06:13 AM 10/11/1999 , you wrote:
>Alan Zundel <IPGmail@aol.com> wrote:
>> It seems they
>[they being economists - David]
>>  are arguing that Kelso's plans either try to make something out of nothing 
>> (both consumption and investment go  up at the same time) or is 
>> expanding credit in an inflationary way.  I think they are wrong, but don't 
>> know how to refute them.  (Not even sure I fully understand the 
>> arguments.)
>
>Most of the objections seem to stem from an assumption that Kelso's 
>proposals would just open up the Fed like a fire hydrant and spray money in 
>all directions.  This is vehemently denied by his supporters, and it does 
>not seem to me to be a necessary consequence of the proposal.  
>
>Basically, Kelso suggested that rather than purchase T-bills or loan funds 
>to banks to inject previously non-existent dollars into the economy, the Fed 
>should purchase previously approved loans made by commercial banks to 
>capital democratization vehicles (such as ESOPs, CSOPs, etc.).  Such a plan 
>could allow lower interest rates on loans to said vehicles, and thus it 
>could help accelerate the process of "capital diffusion" (my personal term 
>for the process of spreading capital ownership to the general population).  
>There is no requirement that the Fed create mint new money simply for this 
>purpose; it simply suggests that there might be better ways for any planned 
>new money to be introduced into the economy.
>
>There are lots of other details one could consider in addressing the 
>inflation argument (100% reserve requirements, etc.) , but I need to get 
>back to building databases, so I'll stop here...

Shann Turnbull
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