By Joseph Plummer
The Federal Reserve has a very clear mission that includes three basic objectives: maximize employment, keep prices stable and keep interest rates reasonable. And before 2008, the Federal Reserve and other central banks were able to effectively manipulate the financial system — and, by extension, the economy — using very simple levers such as adjusting interest rates or changing reserve requirements. However, central banks are now relying on quantitative easing as a powerful tool to increase positive economic activity. This makes sense, as there is undoubtedly a limit to the impact of adjusted interest rates and reserve requirements.
The jury is still out on the effectiveness of quantitative easing though. This is yet another debt-driven tool. In other words, the tool is considered to be working when banks increase lending. There also seems to be a time-lag between when quantitative easing takes place and when banks increase lending. Furthermore, it is unclear how much more lending banks can do under the given regulatory framework. In other words, just because banks have more money to lend doesn’t mean they will be allowed to make riskier loans, nor should they be allowed to make risky loans. There is clearly a limit to a bank’s willingness and ability to loan money, as well as a limit to an individual’s willingness and ability to borrow money.
It is worth noting that when the Federal Reserve decides to use quantitative easing as an instrument, there are 22 “primary dealers” from which securities can be bought. In other words, there are 22 banks that are able to conduct transactions with the Federal Reserve. Not all of them are U.S. banks. This number changes from time to time, but in general those 22 banks are the only ones conducting business with the Federal Reserve. Those 22 banks are all profit-driven corporations. Of the 22, there are none that have missions or objectives that align with the Federal Reserve’s mission and objectives. These are corporations that find ways to profit whether the market goes up or down, whether prices are stable or not, whether interest rates are reasonable or not, and with complete disregard for the country’s rate of unemployment.
Banks are not bad. Banks are not evil. Banks provide much needed services to society. But, the purpose of corporate banks is not to stabilize prices, keep interest rates reasonable and decrease the unemployment rate.
Unlike banks, many philanthropic foundations and public charities have mission statements and objectives that align with the Federal Reserve’s objective of maximizing employment. This makes the nonprofit sector an ideal partner for the Fed. It seems to be within reason that the Federal Reserve could establish a new quantitative easing mechanism that injects capital into the nonprofit sector in such a way that stimulates economic growth in key areas. This could easily drive the unemployment level to an unprecedented low.
The latest round of quantitative easing (QE3) started in September 2012 at a rate of $40 billion per month and peaked in 2014 at a rate of $85 billion per month. At a rate of $40 billion per month, a year of quantitative easing channeled through the nonprofit sector would effectively double the sector’s operating budget. Likewise, at a rate of $85 billion per month, a year of quantitative easing channeled through the nonprofit sector would roughly quadruple the sector’s operating budget. To put those numbers in perspective, $40 billion is about 10 times bigger than the Gates Foundation’s annual giving. It’s almost as big as the Gates Foundation’s endowment ($42 billion).
As our global challenges continue to grow, the role of the Federal Reserve in addressing those challenges will also grow. And, as the Federal Reserve considers the next round of quantitative easing, it should also consider new mechanisms that utilize the superior mission alignment within the nonprofit sector. The Federal Reserve remains one of the most powerful organizations on the planet. However, the Fed’s effectiveness is yet to be determined.
Image credit: Flickr/Pictures of Money
Joseph Plummer is a degree candidate in the Executive Master of Natural Resources (XMNR) program at Virginia Tech, expecting to graduate in May 2016. He currently works for a non-profit organization that works with schools and school districts on renewable energy and sustainability initiatives.