Broader focus needed for the nation’s economy

To the Editor;

The Fed is meeting next week and it appears as though the Federal Reserve will increase interest rates for the first time since 2006. Since the financial crisis in 2008, there has been a larger concentration of wealth and speculation in financial markets. Historically when the Fed raises interest rates, it is a sign of a strong economy. However, the problem with the Fed’s new plan to raise interest rates is that it will only add to the wealth of the elite. Taxpayers will pay for the transfer of wealth, which will only increase inequality in our country.

Since 2011 there has been exponential growth in overall bank reserves held at the Fed. Now that the economy is rebounding, the Fed is implementing a plan to pay banks interest on the reserves they hold at the Fed, in order to raise interest rates. We cannot continuously pay banks to hold reserves, if we do banks reserves will continue to grow and taxpayers will pay more and more money annually to the same banks that are responsible for the financial crisis in 2007-08.

We need to change our current economic system and create a system that is equitable for everyone, not just for the elite. The U.S. market may be strong enough for the Fed to raise interest rates next week, but the global market will suffer as a result, specifically emerging markets. Increasing interest rates will cause investors to move money back into the U.S. from emerging markets because of the higher rate of return. A recent Wall Street Journal article discussed how developing countries are anxiously waiting for the Fed to act and once the Fed does act investors will move money back into the U.S. markets, which will weaken developing currencies and increase inflation in those countries.

The first solution proposed is 100 percent fractional reserves. With 100 percent fractional reserves banks would not be able to create money and would have no threat of being insolvent at any point. This is important because there will never be a need for taxpayers to bail out the financial system like they did in 2008. This would leave the creation of money up to the Fed and the government. The idea would be that we would eliminate vertical money, which is money created by banks, in favor of horizontal money, which is money created by the Fed and government. Currently money creation only benefits the wealthy; with 100 percent fractional reserves everyone would benefit from money creation.

Another solution is the elimination of “too big to fail” institutions. Since the financial crisis started in 2008 more financial institutions have merged, creating more “too big to fail” institutions. These mergers are a direct result of the cheap money created during the financial crisis and as a result developing economies are suffering. To eliminate these institutions banks cannot receive public subsidies like they do presently. Both creditors and shareholders must bear the costs when these institutions fail and not rely on the government to bail them out.

We need to shift from our current Anglo banking system to the Rhine model. In our current system banks are rewarded if someone defaults on their loans, which is encouraging banks to provide risky loans. If we switched to a Rhine model banks would be invested in people succeeding, and would gain nothing if the person fails. With the Rhine model both economic and social goals are taken into account, in our current Anglo system only economic goals are taken into consideration. With both social and economic goals taken into consideration countries that use the Rhine model fare better in human welfare measures.

In order to prevent a more severe financial crisis we must reevaluate what we think is economically beneficial to society. We need to focus less on economic growth and more on economic sustainability. If we shift our mindset to focus on economic sustainability we will also focus more on social and ecological sustainability. The three go hand in hand, and if we continue to focus solely on economic growth we will not be able to resolve any of the inequality issues our country currently faces.

Lucy McDermott

Editor’s note: McDermott, who grew up in Dover-Foxcroft and is a 2012 graduate of Foxcroft Academy, is a senior at the University of Vermont where she is studying economics.