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Why Fed resists spending profits on U.S. needs

Just this once?

In my Sunday column, James M. Meyer, the veteran Philadelphia stock-picker, Wharton/NYU grad, financial-accounting guru and chief investment officer who oversees $1.2 billion at Tower Bridge Advisors in West Conshohocken, made a novel proposal:

As long as interest rates are still low, why doesn't Congress get the Fed to sell premium-priced Treasury and mortgage securities -- among the $4 trillion the Federal Reserve accumulated in its long effort to get Americans spending again ("quantitative easing") -- and use profits to pay for the road, bridge, port, airport, and other upgrades to our worn national infrastructure, which our Presidential candidates have promised?

The Fed objects:

- Cutting the deficit -- what Treasury usually does with Fed profits, by law -- "is deflationary. Spending is stimulative... So whatever harm might be done by selling assets, could be offset if the profits were reinvested in productive infrastructure."

- "The situation today is unique. Excess liquidity worldwide has never been greater." Selling assets could briefly spook some investors, but "the impact would be more than offset if the proceeds from any sale were invested in productive infrastructure projects."

- "Classic economic and monetary policies aren't working because they have been overused for too long a period... Too much money is sloshing around, (yet) consumers and corporations are hesitant to spend and to borrow. If they don't raise interest rates and the economy turns (bad) again they are going to have to further load up the balance sheet." 

So might as well unwind some of it now, for a good cause, while there's time.

In this new paper, Fed economist David Reifschneider reviews the way "observers have expressed concern that the Federal Reserve will not have adequate scope to respond to future econmic downturns, thereby making them deeper..."