Counterfactual fiction, showing what would be the ideal path through the crisis. Very unlikely though.
It all started with a rather childish standoff. It was late 2013. An increasingly recalcitrant Tea Party faction within the GOP was holding America hostage by refusing to vote on a budget unless president Obama took back his recently enacted health reform. With tempers frayed from the government shutdown, a mere nuisance in the great scheme of things, the ultra-right Republicans went on to blackmail over the debt ceiling. Do as we ask, they said, or in fifteen days America defaults.
Everyone warned this would not be pretty. In a rare alliance, Wall Street and the defence lobby, all major newspapers, and just about every economist and economic policy maker called on the Tea Partiers to end the nonsense. A default by the United States government would be unprecedented. US treasuries, held everywhere as collateral and reserve assets, would become uncertain in pricing. That would trigger a selloff and a paper collapse making every bank in the west technically insolvent (and China).
No-one blinked. President Obama correctly held his position, arguing that the threat of blackmail would become constant if one caves in today.
The days were running out. Markets jittered. Editorials proclaimed impending doom. Then the day when the Treasury said it would run out of money came. And passed. Nothing happened. Uncle Sam’s bills got paid. Markets started rising. Both parties proclaimed victory, although it would take a few more weeks to fully reveal what had taken place.
With other options exhausted, outgoing Fed chairman Bernanke and legendary chairwoman Yellen who was then the nominee hatched a plan. In the run up before day zero the Fed set about buying stock. Lots of stock. It was done quietly though the biggest Wall Street banks, and some 700 holding companies they set up to disguise the activity. Only the CEOs and a small group of traders at each bank knew. The Fed simply created cash and lent it to the banks, who then lent it to the shell companies that swept up every stock or fund on the US exchanges and many abroad. If it weren’t for the unprecedented scale of the operation markets would be crashing, aided by the front page articles (some of them politically pushed) predicting the crash. But the Fed took up shares as fast as scared investors were offloading them, no-one lost much money, and prices stayed almost table.
All in all, on the day the US government would supposedly default it was in possession of roughly 43.6% of US stocks.
When Uncle Sam needed money, the Fed started selling some of the stock at higher prices. It was also collecting massive dividends. The Fed returned these profits to the Treasury, as it ought to, and miraculously the Treasury was able to pay its bills. The Treasury refused to name where the money came from at first, and eventually issued a statement that money comes from “the profits from assets of the US government”. Newspapers took a few days to process what this meant. When they did, the Tea Party sank, for it had brought to America the nearest thing to Communism.
Over the next 18 months the numerous shell companies created to buy up the stock market were reorganized into the US Federal Wealth Fund, the largest economic actor in history. The fund expanded its holdings to its current mandate of 48-49.9% of US traded stock and since then has been generating 20-25% of annual revenues of the US government. The amount varies pro-cyclically, as the stocks owned by the Fund do better at times of boom. That in turn allows the government to build cash reserves and spend them in fiscal stimulus when the business cycle drops.
President Obama never asked for the debt ceiling to be raised, and it has not been raised since. No more borrowing has been necessary. To this day new Treasury bonds are issued to replace maturing ones, minus some, so that US debt declines at 0.05% a year in nominal terms. They’re kept mainly as an accounting device and an inflation-protected asset for investors. Inflation briefly rose to about 3% in the years after the Fed’s intervention and then fell back to a steady 1-2%. Since the massive monetary expansion by the Fed was held by investors, and was then pulled back in dividends and capital gains, it did not drive up consumer prices.
America is now, twenty years on, a much more egalitarian society, similar to the European nation of Norway. Counting the fund as representing all Americans, some 72% of wealth is owned by the lower 90% of the population. The bottom 50% own 63% of wealth roughly equally. Revenue from the fund has expanded Medicaid, Medicare, Social Security, and Obamacare (a slur that stuck) to cover all Americans with dignity. Taxes are actually higher than they were in 2013 by about 5%, or 11% for rich Americans, and no-one complains. Fuelled by broad middle-class incomes the economy has boomed, growing at 3-4% for two decades.
The ultra-conservatives of the Tea Party never intended to make the US a haven of egalitarian prosperity into the 21 century. They probably never heard of the ideas of Louis Kelso and other visionaries of egalitarian Capitalism. But we’re here today largely thanks to their misguided actions.