Aiming at public purpose while reducing government discretionary power, increasing spending power, fixing the banking system, restoring states’ budgets, keeping inflation in check, achieving full employment, easing tensions in the mortgage market, and ensuring sufficient liquidity at all times.

1.  A full payroll tax holiday where the US Treasury makes all FICA payments for us.  The restored spending power allows households to make their mortgage payments, which ‘fixes the banks’ from the ‘bottom up.’  It also helps keep prices down as competitive pressures will cause many businesses to lower prices due to the tax savings even as sales increase.

2.  A $500 per capita Federal distribution to all the States to sustain employment in essential services, service debt, and reduce the need for State tax hikes.  This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP are restored.

3.  A Federally funded $8/hr job for anyone willing and able to work that includes healthcare.  The economy will improve rapidly with my first two proposals and the private sector far more readily hires people already working vs people idle and unemployed.  In 2001 Argentina, population 34 million, implemented this proposal, putting to work 2 million people who had never held a ‘real’ job.  Within 2 years 750,000 were employed by the private sector.

4.  Return banking to public purpose, by banning all banking activities that do not serve public purpose. Banks should no longer engage into secondary market transactions, proprietary trading, lending vs. financial assets, business activities beyond approved lending and providing banking accounts and related services, contracting in LIBOR (only fed funds), subsidiaries of any kind, offshore lending, contracting in credit default insurance.

5. Reorganize monetary policy by having the Fed lend in the fed funds market to all member banks to ensure permanent liquidity.  Demanding collateral from banks is disruptive and redundant, as the FDIC already regulates and supervises all bank assets.

6. Remodel the Treasury securities market, by having the Treasury issue nothing longer than 3 month bills.  Longer term securities serve to keep long term rates higher than otherwise.

7. Improve the FDIC by removing the $250,000 cap on deposit insurance (liquidity is no longer an issue when fed funds are available to solvent banks), and by not taxing the good banks for losses by bad banks (all that does is raise interest rates).

8. Adopt new practices in the mortgage market by having the Treasury directly funding the housing agencies to eliminate hedging needs and directly targeting mortgage rates at desired levels.  Likewise, homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the government at the lower of the mortgage balance or fair market value of the home.

9.  Remove the ’self imposed constraints’ (relics from the Gold Standard) that are disruptive to operations and serve no public purpose by eliminating ceilings on US Treasury debt denominated in dollars, and by reinstating US Treasury ‘overdrafts’ at the Fed.

10. Increase Federal taxes only to cool down an overheating economy, and not to ‘pay for’ anything (as taxes function to regulate aggregate demand, not to raise revenue per se).

The total amount of bank deposits has nothing to do with the saving attitude, or with the spending decisions, of bank accounts’ holders. A new bank deposit can only be created through two main channels. In one, deposits are born twins with bank loans to the non-bank private sector (households or firms). In the other, deposits are born twins with bank reserves as a result of payments made by the public sector (Treasury or Central bank) to the non-bank private sector. A third process, yet smaller in importance, is when the banking sector makes net payments to the non-bank private sector.

The bank loan channel: This is when a bank makes a new loan.

Once the new balance is made available to the client-borrower, this will increase the total deposits in the banking system. By the end of the day, the banking system has more loans in its portfolio (assets) and more deposits to honor (liabilities), while the non-bank private sector has more deposits (assets) and more loans due (liabilities). In the process, the total amount of reserves held by the banking system has not changed.

Conversely, the total amount of deposits declines when the non-bank private sector makes any payments to a bank (such as interest payments, loan principals, or a purchase of a bank product).

Thus, for any time period, the net creation of deposits through this channel equals the amount of bank loans made to the non-bank private sector net of principals and interests payments received.

Public sector’s payment channel: This is when the public sector sends a check to the non-bank private sector.

If the check is issued by a national state with monetary sovereignty (i.e., the unit of money issued is a national state liability not pegged to any other asset the nation state must hold as guarantee), than the check will never bounce. When the non-bank private sector’s recipient deposits the check, the banking system acquires an equivalent amount of reserves via a credit entered by the central bank. By the end of the day, the banking system has more reserves (assets) and more deposits to honor (liabilities), while the non-bank private sector has more deposits (assets).

Conversely, the total amount of deposits declines when the non-bank private sector makes any payments to the public sector (such as taxes, or purchases). Thus, for any time period, the net creation of deposits through this channel equals the amount of all government and central bank net payments.

The banking system net factor: This is when a bank makes a payment to the non-bank private sector for reasons other than making loans, such as payments of salaries to bank employees, rents paid to landlords, interests paid to depositors, dividends paid to shareholders, and any other outlays (for current output, existing real assets, or outstanding financial assets). By the end of the day, the banking system has settled a number of its liabilities by creating deposits in the name of the payees, and the non-bank public has more deposits (assets).

Conversely, the total amount of deposits declines when the non-bank private sector makes any payments to the banking system (such as fees).

Thus, for any time period, the effect of this channel equals the outflow of funds of total banks’ expenses net of total banks’ receipts.

No, it never does. The total amount of deposits in the banking system cannot change as a result of spending decisions by households or firms (technically, the “non-bank private sector”). Spending decisions can only move deposits from one account to another, and cannot cause a change in overall deposits.

When a private entity spends, it instructs a bank to transfer a balance from its own account to somebody else’s account. When a private entity saves, it simply refrains from spending out of its owned deposits. An increase, or a reduction, of overall spending in the economy will increase, or reduce, the amount of payments banks must settle but will not change the total deposits amount.

Even portfolio reallocation decisions do not change the total amount of deposits. Consider, for example, a tendency to sell stocks at current market prices: Those who sell stocks will receive deposits from the buyers (you can only sell if there is a buyer!), and again the net total is being unchanged. If the selling tendency is generalized, buyers of stocks will offer declining prices for stocks, and by the end of the day stock prices are lower with an unchanged overall deposits amount.

Not even cross-border transactions can change the total amount of deposits in any national banking system: they only shift property of funds between domestic and foreign depositors. When a payment from ‘abroad’ is received, for example, a balance is transferred from the account (in the domestic banking system) in the name of a foreigner to the account (in the same domestic banking system) in the name of a resident.

Conclusion: The overall amount of deposits does not depend on spending decisions by the non-bank private sector.