Federal Stimulus Reserve

Federal Stimulus Reserve

May 3, 2020

Idea: Create an Independently Administered Financial Reserve used for Fiscal Stimulus

Problem: Speed matters, when combating an economic crisis that can become a recession. The two instruments the government uses to combat a recession are Monetary Policy and Fiscal policy. Monetary Policy is provided by the Federal Reserve and Fiscal Policy is provided by Congress. The Federal Reserve has proven able to respond to economic crises with great speed and creativity to meet new challenges, especially during the financial crisis of 2007/2008. The Federal Reserve acts without political considerations and makes decisions based on economic facts. While a modest fiscal stimulus was passed by Congress in response to the 2007/2008 financial crisis, it was not big enough or passed in a timely manner to prevent a recession. In general, Congress takes a great deal of time to act, often politicizes stimulus funding, and allocates funding based on politics not economic need. During times of economic crisis, the economy needs money injected into trouble areas quickly and with precision. The Federal Reserve can do much of this, but only within the confines of monetary policy. Economic Crises require a coordination between monetary and fiscal policy that focuses on economic need

Description: To create independence, the Federal Stimulus Reserve should be modeled after the Federal Reserve System, including its own fiscal stimulus related mandate. While not necessary, it could have a central location in Washington DC and region branches like the Federal Reserve.

To provide funding for the Federal Stimulus Reserve, the profits of the Federal Reserve’s open market operations can be sent to the Federal Stimulus Reserve. The Federal Reserve makes a profit on it’s open market operations (buying and selling treasures) because it does not have normal financial operations costs and does not have to pay taxes. Given that recessions very generally happen every 7 to 10 years, the profits from the Federal Reserve's open market operations, added up each year for 7 to 10 years, can provide the basic funds for fiscal stimulus when an economic crisis happens. Once the crisis has been stabilized, the process of adding up the Fed’s open market profits can begin again.

The stimulus funds can be used to combat a variety of economic crises and help butres the efforts of the Federal Reserve. For example, if a crisis originates from a supply side shock, like oil shortages in the 70s, the Federal Stimulus Reserve can buy oil and sell it to outlets that sell it to consumers. The Federal Stimulus Reserve can give out small business loans, buy excess supply, etc...