American Perestroika for Prosperity amid Stability

Restructuring the Federal Reserve According to Constitution

June 11, 2009

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

Sub:  Restructuring Federal Reserve according to the constitutionally mandated free market economy

Dear Honorable President and Members of Congress,

The Congress has wisely created the Federal Reserve System to prevent creditors from choking the economy during depressions.  The Federal Reserve is very necessary for a constitutionally mandated free market economy devoid of such chokeholds. 

The Federal Reserve, however, has been continually creating money to cover gambling losses of banks.  This has perpetuated moral hazard, which allows a few agents to blackmail the taxpayers, continually.  Banking moral hazard is a severe chokehold on the economy, as depicted vividly by the current financial meltdown.  It expands the burden on taxpayers without limit.  When the newly created money flows to inefficient gamblers, the effective producers face the brunt due to an erosion of their household net worth leading to financial depression.  As the vast majority of effective producers are so sapped by continual money injections made by the Federal Reserve to cover banking losses, individual depressions spread into an economy wide meltdown. 

We are now facing a widespread depression despite unprecedented medical and technological breakthroughs.  Such breakthrough would have made the nation prosperous and the currency strong if the banking moral hazard were not perpetuated.   

The issue confronting now is how to establish optimal policies to prevent the Federal Reserve from perpetuating banking moral hazard and to ensure that banks efficiently serve the effective producers of globally competitive goods, services and ideas. 

The Federal Reserve should have been structured as an independent agent of the vast majority of effective producers who comprise the Country and prop the nation, as outlined in my previous memos and the paper in the footnote.[1] The restructuring has to be consistent with the constitutionally mandated market economy. 

Currently, most of the influential BOD members of the twelve Federal Reserve Banks are being chosen from the banking industry.  Very few members, if at all, among the Governors, Vice Chairman and Chairman of the Board of Governors of the Federal Reserve System have ever had training or experience in the complex financial instruments of the real world banking industry, let alone optimal policies for regulating such industry.  My efforts during 1994-1995 to persuade the BOG to start a new section on Optimal Bank Regulation were not successful.      

There should be no surprise now about why the Federal Reserve failed to foresee the crisis, let alone devise preemptive optimal policies.  It did not even want to see a crisis when presented with vivid analysis.  The Federal Reserve used data from a moral hazard plagued banking industry to argue before the Congress during testimonies in October 2003–in the wake of my Safe Banking policy proposal submitted to the Congress in March 2003–that banks were able to self-discipline and that the taxpayers would not be burdened.  An agent serving the best interests of my blackmailers cannot credibly assure me that he has all signals from the blackmailers about my safety and soundness. 

The present structure of the Federal Reserve is the primary source of moral hazard in banking.  This structure has not served the best interest of taxpayers.  It never will serve the best interest of taxpayers.  The current structure will only serve the best interest of bankers who produce very little to make the nation prosperous or the currency strong.  The current Federal Reserve structure will only continue to blackmail taxpayers to print money for the bankers when gambles fail and to usurp cooked up “profits” during favorable times.      

The Federal Reserve should be restructured to ensure the constitutionally mandated free market economy needed to enhance long run national competitiveness, individual prosperity and social stability.        

With best regards,

Sankarshan Acharya



[1]Acharya, S. (1991-2009): “OPTIMAL GOVERNANCE FOR PROSPERITY AMID STABILITY,

A New Economic Philosophy for Democratic Capitalism, Realizing a Common Dream – Free Market Economy,” http://www.pro-prosperity.com/Research/Prosperity%20Amid%20Stability%20-%20A%20New%20Economic%20Paradigm.pdf