Consider NGDP targeting

 Nominal GDPs are bets by the bankers. It is the estimated amount of liquidity ex ante.

When you tax collateral, arbitrarily, you get less banking, fewer trained bankers making NGDPs. The Fed chases its tail until it owns most of the collateral, banking is shut and the Fed is left taxing the lesser amount of collateral held in concentrated hands. 

This is an impossibility, a steep downward loop. Congress cannot adapt in time, this is a sudden big tax overhaul just to get the Fed tax off the back of banking. Powell and Bernanke have put a huge blunt shock in front of Congress, in the middle of an election and scarcely a small state governor with room temperature IQ.

And that is why Congress is stuck, this is not loose money, collateral is way overburdened and money is tight for all except those willing to pay the tax.  The immediate effect is dead stop in the Swamp and in the big states. These politicians are overwhelmed, and have been deceived by their favorite economists. Never be able to sort this out, unless, those plan B notes get shuffled closer to the top on their Overtons.

The numbers are easy here.  Government generally pays about 2.5% at most, on its ten year debt, if you take total interest payments / total debt.  But the Fed tax was running a hundred billion before covid and will likely run just under two hundred billion.  That is a 1% tax on bonds, yearly, a reduction of about 2/5 of their yield capacity.  You will get 40% less regulated banking.   That is 40% fewer retail middle class bank accounts, very tight money, tighter than you have ever seen. It is a spiral for the reasons stated earlier, velocity drops, so our ability find accounts willing to pay the tax goes down as iLog(i), more than linear. We lose breadth and depth.   

Sometime in 2021 we will see this cliff approaching. Negative rates are no help, that is just a reformulated central bank tax. When we see the cliff, then suddenly, everyone will want to save the banking network. The way to save central banking network is to put the choice of inflation tax back onto Treasury, and the Senate.  Taxing is absolutely none of the business for banks, nothing of the sort. 

The New Fed contract can agree to that authority, a right to coin, actually, under an enforceable contract.  That inflation tax is renewable, it is still partially a central bank burden, a slight monopoly fee. We want that fee at a quarter point (with a bound to half point)  and the Treasury inflation at 1.75.   The Fed needs about a 100 billion in market risk capacity, a half point. Everything else it does is a liquidity trade.

But the fixed monopoly  fee is contractual, a trade for valuable government bonds. The New Fed can go to court and enforce the inflation contract. The intent is to make defeating the contract worthless when waiting for contract renewal is just as good. Experience shows that a good 'This time is different' takes at least five years to promulgate.  In five years we can say, 'do it at the renewal'. 

This mess should be handled before the upcoming tax battles, and the tax battles are long and drawn.  But there is no tax solution, at this point, the can is not kicking. We cannot kick until we have bankers. Congress and the governors and the Swamp in general will be overwhelmed trying to find that Fed tax.