The Federal Budget is the wrong place to pay for the destruction of assets (worth money) by natural disasters. The nation’s central bank exists to prevent the destruction of money, and so it should pay for disaster relief.
The Federal Reserve Bank (‘the Fed’) controls the creation of money to support the growth of the economy. It fights the unwanted contraction of the total amount of money and other assets. Contraction of asset values can lead to a condition that is the opposite of the familiar inflation with rising prices, namely deflation, or prices of the average good declining.
Deflation is difficult for employers, including the government: few of us workers want to do the same job for less pay next year. More below.
Therefore the Fed takes expansive monetary policy action whenever a deflationary
threat appears. This action includes lowering interest rates to encourage corporate
borrowing, and creating money via buying US government debt with “money” that the
Fed creates out of thin air. Yes, really, that’s the job of the Fed, to write checks on
itself, and pay them with money created out of thin air.
This newly created money goes into circulation, and ultimately creates more demand
for goods and services. Newly created money partially staves off the deflationary effect
of not enough money being available in the economy, due to problems caused by large
financial corporations, like a banking crisis or the collapse of a speculative bubble.
This is rightly viewed (by the right and left) as the Fed covering up the self-inflicted
tragedies of corrupt large Wall Street financial corporations.
So, why can’t the Fed act to help individuals suffering from unavoidable natural disaster
tragedies? When a common natural disaster strikes, such as a hurricane, it destroys
assets that were already working in the economy, such as roads.
The simple replacement of these roads doesn’t add to our national wealth, it simply
gets us back to where we already were.
The Fed should be charged with creating new money (already its job) by writing checks
to pay for storm clean up, road repair, and the like.
Congress, the budget and the national debt concerns should have nothing to do with
natural disaster relief. The Fed should simply be directed by FEMA to create money to
pay for natural disaster repair. Individuals suffering after natural disasters should also
be eligible to receive payments, with verification of loss by FEMA. (Possibly an initial
amount could be paid immediately, and a later analysis could be done after the
determination of insurance and other payments are made.)
Think about it: Since the assets are destroyed, the Fed isn’t really ‘creating new
money’. Instead it’s replacing money (roads and homes are worth money) that was
destroyed. Roads, bridges and public buildings are not usually insured, so the Fed
could pay to replace those right away. No solution is perfect, and problems will arise
with this solution. We have to try it to learn how to perfect this method.
But the logic is inescapable:
1) Why politicize and delay one of the most basic functions of government – protecting
the stock of public assets like roads, schools and communities?
2) The Fed has no budget or constraints on its spending – it creates money instantly
every day. And the Fed already fights demand destruction – and there’s nothing like a
road or bridge being destroyed to lower economic activity.
There is no reason for disaster relief to be part of the budget. It should be part of the
Fed’s efforts to support the economy. And there’s no reason that budget delays should
cause stricken areas to wait years for repair – the Fed can pay within days. People
and communities deserve prompt assistance – and so does the economy of the affected
regions.