Last week, Bernie Sanders dropped out of the Democratic presidential race, leaving former Vice President and Senator Joe Biden as the presumptive nominee to challenge President Donald Trump this November.
In his announcement, Sanders explained that despite his withdrawal, “we have accomplished … a new vision for America.” And he’s right. However, this new vision had nothing to do with Sanders himself, but instead the government’s reaction to the COVID-19 pandemic.
Sanders calls himself a “democratic socialist” and has repeatedly praised communist leaders like Cuba’s Fidel Castro. Now, Americans will learn what it’s like to live in a country where the government has effectively nationalized the economy.
Sander’s call for initiatives like a guaranteed national income, ending foreclosures and evictions, along with student loan forgiveness have now come to pass, even if not in the exact form he visualizes:
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March’s $2 trillion federal bailout package authorizes the Treasury to send every working American a check up to $1,200, and Congress is now debating a second bailout package allowing these payments to continue.
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Americans who rent from a property owner with a federally backed mortgage can’t be evicted or charged penalties for failing to pay rent for 120 days.
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Homeowners who have a federally backed mortgage and can’t make the required payments get a 60-day moratorium on foreclosure and another 180 days of forbearance.
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The package also contains an automatic six-month forbearance for anyone with a federally held student loan.
Since the US was already borrowing more than $1 trillion annually before COVID-19, the $2 trillion price tag of the March bailout, and any future bailouts, will simply be added to the federal deficit. But why worry? Sanders’ economic advisor Stephanie Kelton extolled the virtues of an economic vision called “Modern Monetary Theory” (MMT). Kelton argues that like Germany in the 1920s, the US can simply print money to pay for its financial obligations.
After all, since the world abandoned all semblance of the gold standard in 1971, any government can literally create as much money as it wants out of thin air. And any government that issues its own currency can always pay its bills with the money it creates.
If investors don’t line up to buy the debt, the Fed will purchase it instead and add those “assets” to its balance sheet through the process of quantitative easing.
And that’s exactly what the Fed has been doing in the last few weeks. Total assets on its balance sheet have now ballooned to $6.13 trillion, with the largest components being Treasury securities Uncle Sam can’t sell to anyone else ($3.5 trillion) and mortgage-backed securities no one wants to buy($1.5 trillion).
Meanwhile, the Fed has stopped disclosing balance sheet data about individual banks. Instead, it published a remarkable article entitled “The Value of Opacity in a Banking Crisis” to defend this policy.
Keep in mind that it’s not Ma and Pa Consumer who regularly review this data. It’s the managers of pension funds, hedge funds, and other institutional investors who keep millions or even billions of dollars in America’s banks. Since these deposits far exceed the $250,000 threshold for deposit insurance, it’s likely they’d be withdrawn if these investors feel threatened. Otherwise, if the bank fails, their deposits will be bailed in.
Yet, the Federal Deposit Insurance Corporation (FDIC) recently released this video, accompanied by soothing music, to reassure Americans that the safest place to keep your money is in an FDIC-insured bank.
Let’s recap.
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Tens of millions of Americans are now receiving a guaranteed income, can’t be evicted or foreclosed upon if they’re late on their rental or mortgage payments, and no longer need to make student loan payments.
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Congress has embraced Modern Monetary Theory with a vengeance, adding more than $2 trillion to the federal debt in a single bill.
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Since no one else is buying this debt, the Fed has created more than $2 trillion out of thin air to purchase it. It’s also started withholding data on the balance sheets of federally chartered banks.
Sure, these initiatives are supposed to be temporary. And there’s no doubt – times are tough, as these miles-long lines for food banks can attest. But as economist Milton Friedman memorably stated, “Nothing is so permanent as a temporary government program.” And politically, they’ll be hard to reverse.
Bernie Sanders lost the nomination. But his ideas won the war. And now we must live with them, along with their consequences.
Just like Maximilian Bern.
