magic liquidity wand over Wall Street. Now it’s time to enlist this tool in the
service of the people.
The Fed’s invisible hand first really became visible with
the bailout of AIG. House Speaker Nancy Pelosi said
in June 2009:
the bailout of AIG. House Speaker Nancy Pelosi said
in June 2009:
"Many of us were, shall we say, if not surprised,
taken aback when the Fed had $80 billion to invest -- to put into AIG just out
of the blue. All of a sudden we wake up one morning and AIG has received $80
billion from the Fed. . . . So of course we're saying, Where's this money come
from? ‘Oh, we have it. And not only that, we have more.’”
taken aback when the Fed had $80 billion to invest -- to put into AIG just out
of the blue. All of a sudden we wake up one morning and AIG has received $80
billion from the Fed. . . . So of course we're saying, Where's this money come
from? ‘Oh, we have it. And not only that, we have more.’”
How much more -- $800 billion? $8 trillion?
The stage magician smiles coyly and rolls up his
sleeves to show that there is nothing in them. “Try $12.3 trillion,” he says.
sleeves to show that there is nothing in them. “Try $12.3 trillion,” he says.
That was the figure recently revealed
for the Fed’s “emergency lending programs” to bail out the banks.
for the Fed’s “emergency lending programs” to bail out the banks.
“$12.3 trillion of our taxpayer money!” shout the
bemused spectators as pigeons emerge from the showman’s gloved hands. “We could
have used that money to build roads and bridges, pay down the state’s debts,
keep homeowners in their homes!”
bemused spectators as pigeons emerge from the showman’s gloved hands. “We could
have used that money to build roads and bridges, pay down the state’s debts,
keep homeowners in their homes!”
“Not exactly tax money,” says the magician with his
mysterious Mona Lisa smile. “When did you have $12.3 trillion in tax money
sitting idle?”
mysterious Mona Lisa smile. “When did you have $12.3 trillion in tax money
sitting idle?”
Not only did he not use “tax money;” it seems he hardly
used “money” at all. He just advanced numbers on a computer screen, amounting
to credit against collateral, replacing the credit that would have been
advanced by the money market before the Fatal Day the Money Market Died. According
to CNNMoney
–
used “money” at all. He just advanced numbers on a computer screen, amounting
to credit against collateral, replacing the credit that would have been
advanced by the money market before the Fatal Day the Money Market Died. According
to CNNMoney
–
“[T]he Federal Reserve made $9 trillion in overnight
loans to major banks and Wall Street firms during the Wall Street crisis . . .
. All the loans were backed by collateral and all were paid back with a very
low interest rate to the Fed -- an annual rate of between 0.5% to 3.5%. . . .
loans to major banks and Wall Street firms during the Wall Street crisis . . .
. All the loans were backed by collateral and all were paid back with a very
low interest rate to the Fed -- an annual rate of between 0.5% to 3.5%. . . .
“In addition to the loan program for bond dealers, the
data covered the Fed's purchases of more than $1 trillion in mortgages, and
spending to back consumer and small business loans, as well as commercial paper
used to keep large corporations running. . . .
data covered the Fed's purchases of more than $1 trillion in mortgages, and
spending to back consumer and small business loans, as well as commercial paper
used to keep large corporations running. . . .
“Most of the special programs set up by the Fed in
response to the crisis of 2008 have since expired, although it still holds
close to $2 trillion in assets it purchased during that time. The Fed said it
did not lose money on any of the transactions that have been closed, and that
it does not expect to lose money on the assets it still holds.”
response to the crisis of 2008 have since expired, although it still holds
close to $2 trillion in assets it purchased during that time. The Fed said it
did not lose money on any of the transactions that have been closed, and that
it does not expect to lose money on the assets it still holds.”
Or so it is reported in the media. . . .
The pigeons slip back up the sleeve from whence they
came, a sleeve that was empty to start with.
came, a sleeve that was empty to start with.
The Central Bank as Lender of Last Resort
Where did the Fed get this remarkable power? Central banks
are “lenders of last resort,” which means they are authorized to advance as
much credit as the system requires. It’s all keystrokes on a computer, and the
supply of this credit is limitless. According to Wikipedia:
are “lenders of last resort,” which means they are authorized to advance as
much credit as the system requires. It’s all keystrokes on a computer, and the
supply of this credit is limitless. According to Wikipedia:
“A lender of last resort is an
institution willing to extend credit when no one else will. Originally the term
referred to a reserve financial institution, most often the central bank of a
country, that secured well-connected banks and other institutions that are
too-big-to-fail against bankruptcy.”
institution willing to extend credit when no one else will. Originally the term
referred to a reserve financial institution, most often the central bank of a
country, that secured well-connected banks and other institutions that are
too-big-to-fail against bankruptcy.”
Why is this backup necessary? Because, says
Wikipedia matter-of-factly, “Due to fractional reserve banking, in
aggregate, all lenders and borrowers are insolvent.” The entry called “fractional
reserve banking” explains:
Wikipedia matter-of-factly, “Due to fractional reserve banking, in
aggregate, all lenders and borrowers are insolvent.” The entry called “fractional
reserve banking” explains:
“The bank lends out some or most of the deposited funds,
while still allowing all deposits to be withdrawn upon demand. Fractional
reserve banking necessarily occurs when banks lend out funds received from deposit
accounts, and is practiced by all modern commercial banks.”
while still allowing all deposits to be withdrawn upon demand. Fractional
reserve banking necessarily occurs when banks lend out funds received from deposit
accounts, and is practiced by all modern commercial banks.”
All commercial banks are insolvent. They are unable
to pay their debts when they come due, because they have double-counted their
deposits. A less charitable word, if this hadn’t all been validated with
legislation, might be “embezzlement.” The bankers took your money for
safekeeping, promising you could have it back “on demand,” then borrowed it
from the till to clear the checks of their borrowers. Modern banking is a
massive shell game, and the banks are in a mad scramble to keep peas under the
shells. If they don’t have the peas, they borrow them from other banks or the
money market short-term, until they can come up with some longer-term source.
to pay their debts when they come due, because they have double-counted their
deposits. A less charitable word, if this hadn’t all been validated with
legislation, might be “embezzlement.” The bankers took your money for
safekeeping, promising you could have it back “on demand,” then borrowed it
from the till to clear the checks of their borrowers. Modern banking is a
massive shell game, and the banks are in a mad scramble to keep peas under the
shells. If they don’t have the peas, they borrow them from other banks or the
money market short-term, until they can come up with some longer-term source.
Ann
Pettifor writes, “the banking system has been turned on its head, and
become a borrowing machine.” Rather than lending us their money, they are
borrowing from us and lending it back. Banks can borrow from each other at the
fed funds rate of 0.2%. They get the very cheap credit and lend it to us as
much more expensive credit.
Pettifor writes, “the banking system has been turned on its head, and
become a borrowing machine.” Rather than lending us their money, they are
borrowing from us and lending it back. Banks can borrow from each other at the
fed funds rate of 0.2%. They get the very cheap credit and lend it to us as
much more expensive credit.
They got away with this shell game until September 2008,
when the Lehman Brothers bankruptcy triggered a run on the money markets. Panicked
investors pulled their short-term money out, and the credit market suddenly
froze. The credit lines on which businesses routinely operated froze too,
causing bankruptcies, layoffs and general economic collapse.
when the Lehman Brothers bankruptcy triggered a run on the money markets. Panicked
investors pulled their short-term money out, and the credit market suddenly
froze. The credit lines on which businesses routinely operated froze too,
causing bankruptcies, layoffs and general economic collapse.
The shell game would have been exposed for all to see, if the
Federal Reserve had not stepped in and played its “lender of last resort” card.
Quoting Wikipedia again:
Federal Reserve had not stepped in and played its “lender of last resort” card.
Quoting Wikipedia again:
“A lender of last resort serves as a
stopgap to protect depositors, prevent widespread panic withdrawal, and
otherwise avoid disruption in productive credit to the entire economy caused by
the collapse of one or a handful of institutions. . . .
stopgap to protect depositors, prevent widespread panic withdrawal, and
otherwise avoid disruption in productive credit to the entire economy caused by
the collapse of one or a handful of institutions. . . .
“In the United States the Federal Reserve serves
as the lender of last resort to those institutions that cannot obtain credit
elsewhere and the collapse of which would have serious implications for the
economy. It took over this role from the private sector ‘clearing houses’ which
operated during the Free Banking Era; whether public or private, the
availability of liquidity was intended to prevent bank runs.
as the lender of last resort to those institutions that cannot obtain credit
elsewhere and the collapse of which would have serious implications for the
economy. It took over this role from the private sector ‘clearing houses’ which
operated during the Free Banking Era; whether public or private, the
availability of liquidity was intended to prevent bank runs.
“. . . [T]his role is undertaken by the
Bank of England in the United Kingdom (the central bank of the UK), in the
Eurozone by the European Central Bank, in Switzerland by the Swiss
National Bank, in Japan by the Bank of Japan and in Russia by the Central Bank
of Russia.”
Bank of England in the United Kingdom (the central bank of the UK), in the
Eurozone by the European Central Bank, in Switzerland by the Swiss
National Bank, in Japan by the Bank of Japan and in Russia by the Central Bank
of Russia.”
If all central banks do it, it must be okay, right? Or is
it just evidence that the entire international banking scheme is sleight of
hand? All lenders are insolvent and are kept in the game only by a
lender-of-last-resort power given to central banks by central governments -- given,
in other words, by we-the-people. Yet we-the-people are denied access to this
cornucopia, and are forced to pick up the tab for the banks. Most states are
struggling with budget deficits, and some are close to insolvency. Why is the
Fed’s magic wand not being waved over them?
it just evidence that the entire international banking scheme is sleight of
hand? All lenders are insolvent and are kept in the game only by a
lender-of-last-resort power given to central banks by central governments -- given,
in other words, by we-the-people. Yet we-the-people are denied access to this
cornucopia, and are forced to pick up the tab for the banks. Most states are
struggling with budget deficits, and some are close to insolvency. Why is the
Fed’s magic wand not being waved over them?
QE3: Some Creative Proposals
According to financial blogger Edward Harrison, that might
soon happen. He quotes a Bloomberg article by David Blanchflower, whom Harrison
describes as “a former MPC [Monetary Policy Committee] member at the Bank of
England but also an American-British dual citizen professor who is very plugged
in at the Fed.” Blanchflower wrote
on October 18:
soon happen. He quotes a Bloomberg article by David Blanchflower, whom Harrison
describes as “a former MPC [Monetary Policy Committee] member at the Bank of
England but also an American-British dual citizen professor who is very plugged
in at the Fed.” Blanchflower wrote
on October 18:
“I was at the Fed last week in Washington for one of its
occasional meetings with academics . . . .
occasional meetings with academics . . . .
“The Fed is especially concerned about unemployment and
the weak housing market. . . .
the weak housing market. . . .
“Quantitative easing remains the only economic show in
town given that Congress and President Barack Obama have been cowed into
inaction.
town given that Congress and President Barack Obama have been cowed into
inaction.
“Quantitative easing” (QE) involves central bank
purchases with money created on a computer screen. Blanchflower asked:
purchases with money created on a computer screen. Blanchflower asked:
“What will they buy? They are limited to only
federally insured paper, which includes Treasuries and mortgage-backed
securities insured by Fannie Mae and Freddie Mac. But they are also allowed
to buy short-term municipal bonds, and given the difficulties faced by state
and local governments, this may well be the route they choose, at least for
some of the quantitative easing. Even if the Fed wanted to, it couldn’t
buy other securities, such as corporate bonds, as it would require Congress’s
approval, which won’t happen anytime soon.” [Emphasis added.]
federally insured paper, which includes Treasuries and mortgage-backed
securities insured by Fannie Mae and Freddie Mac. But they are also allowed
to buy short-term municipal bonds, and given the difficulties faced by state
and local governments, this may well be the route they choose, at least for
some of the quantitative easing. Even if the Fed wanted to, it couldn’t
buy other securities, such as corporate bonds, as it would require Congress’s
approval, which won’t happen anytime soon.” [Emphasis added.]
You don’t need to understand all this financial jargon to
pick up that a central banking insider who has sat in on the Fed’s meetings says
that for the Fed’s next trick, it could and “may well” fund the bonds of local
governments. Harrison comments:
pick up that a central banking insider who has sat in on the Fed’s meetings says
that for the Fed’s next trick, it could and “may well” fund the bonds of local
governments. Harrison comments:
“The Fed can legally buy as many municipal bonds as it
wants without congressional approval. . . . This is a big story. Blanchflower
is essentially saying that the U.S. government can bail out both the housing
market via Fannie and Freddie paper purchases and the state governments via
Muni purchases. And, of course, the banks get to dump these assets onto the Fed
who will hold them to maturity. I guarantee you this will have a very nice kick
since it is the states where the biggest employment cuts are.”
wants without congressional approval. . . . This is a big story. Blanchflower
is essentially saying that the U.S. government can bail out both the housing
market via Fannie and Freddie paper purchases and the state governments via
Muni purchases. And, of course, the banks get to dump these assets onto the Fed
who will hold them to maturity. I guarantee you this will have a very nice kick
since it is the states where the biggest employment cuts are.”
A big story indeed, opening very interesting
possibilities. The Fed could use its QE tool not just to buy existing assets
but to fund future productivity and employment, stimulating the depressed
economy the way Franklin Roosevelt did but without putting the nation in debt
at high interest to a private banking cartel.
possibilities. The Fed could use its QE tool not just to buy existing assets
but to fund future productivity and employment, stimulating the depressed
economy the way Franklin Roosevelt did but without putting the nation in debt
at high interest to a private banking cartel.
The Fed could, for example, buy special revenue bonds
issued by the states to finance large-scale infrastructure projects. They might
build a high-speed train system of the sort seen in Europe and Asia. The states
could issue special revenue bonds at 0% or 0.5% interest to finance the
project, which could be repaid with user fees generated by the finished railroad.
The same could be done to build modern hospitals, develop water projects and
alternative energy sources, and so forth. All this could be done at the same
extremely low interest rates now afforded to the banks, saving the states
enormous sums in taxes.
issued by the states to finance large-scale infrastructure projects. They might
build a high-speed train system of the sort seen in Europe and Asia. The states
could issue special revenue bonds at 0% or 0.5% interest to finance the
project, which could be repaid with user fees generated by the finished railroad.
The same could be done to build modern hospitals, develop water projects and
alternative energy sources, and so forth. All this could be done at the same
extremely low interest rates now afforded to the banks, saving the states
enormous sums in taxes.
Wouldn’t that sort of program be inflationary though? Not
under current conditions, says author Bill Baker in a recent post. He notes
that over 95% of the money supply is created by bank lending, and that when
credit is destroyed, the money supply shrinks. The first round of QE did not actually
increase the money supply, because the money printed by the Fed was matched by
the destruction of money caused by debt default and repayment. To replace the
debt-money lost in a shrinking economy, the Fed has already elected to embark
on a program of quantitative easing. The question addressed here is just where
to aim the hose.
under current conditions, says author Bill Baker in a recent post. He notes
that over 95% of the money supply is created by bank lending, and that when
credit is destroyed, the money supply shrinks. The first round of QE did not actually
increase the money supply, because the money printed by the Fed was matched by
the destruction of money caused by debt default and repayment. To replace the
debt-money lost in a shrinking economy, the Fed has already elected to embark
on a program of quantitative easing. The question addressed here is just where
to aim the hose.
Closing the Social Security Gap
Another interesting idea for QE3 was proposed by Ted
Schmidt, associate professor of economics at Buffalo State College. Writing in early
November, Schmidt anticipated the cut in social security taxes now being
debated in Congress. Worried observers see these cuts as the first step to
dismantling social security, which will in the future be called “underfunded”
and too expensive for the taxpayers to support. Schmidt notes, however, that
social security is a major holder of federal government bonds. The Fed could finance
a $400 billion tax cut in social security by buying bonds directly from the social
security trust fund, allowing the fund to maintain its current level of
benefits. Among other advantages of this sort of purchase:
Schmidt, associate professor of economics at Buffalo State College. Writing in early
November, Schmidt anticipated the cut in social security taxes now being
debated in Congress. Worried observers see these cuts as the first step to
dismantling social security, which will in the future be called “underfunded”
and too expensive for the taxpayers to support. Schmidt notes, however, that
social security is a major holder of federal government bonds. The Fed could finance
a $400 billion tax cut in social security by buying bonds directly from the social
security trust fund, allowing the fund to maintain its current level of
benefits. Among other advantages of this sort of purchase:
“[I]t does not raise the gross national debt, because it
simply transfers bonds from one government entity (the Social Security trust
fund) to a semi-government entity (the Fed); and . . . it gives the Fed the
extra ammo (treasury bonds) it will need when the time comes to restrain
inflationary pressures and pull reserves out of the banking system. (It does
this by selling bonds to banks.)”
simply transfers bonds from one government entity (the Social Security trust
fund) to a semi-government entity (the Fed); and . . . it gives the Fed the
extra ammo (treasury bonds) it will need when the time comes to restrain
inflationary pressures and pull reserves out of the banking system. (It does
this by selling bonds to banks.)”
Schmidt concludes: “Enough is enough, Dr. Bernanke! It’s
time to inject the patient with money that gets into the hands of working
people and small businesses.”
time to inject the patient with money that gets into the hands of working
people and small businesses.”
The Fed’s lender-of-last-resort power has so far been used
only to keep rich bankers rich and the rest of the population in debt peonage,
a parasitic and unsustainable endeavor. If this power were directed into
projects that increased productivity and employment, it could become a
sustainable and very useful tool. We the People do not need to remain subject
to a semi-private central bank that was ostensibly empowered by our mandate. We
can take our Money Power back.
only to keep rich bankers rich and the rest of the population in debt peonage,
a parasitic and unsustainable endeavor. If this power were directed into
projects that increased productivity and employment, it could become a
sustainable and very useful tool. We the People do not need to remain subject
to a semi-private central bank that was ostensibly empowered by our mandate. We
can take our Money Power back.
Ellen Brown is an attorney and the author of eleven
books, including WEB OF DEBT:
The Shocking Truth About Our Money System and How We Can Break Free. Her
websites are webofdebt.com, ellenbrown.com, and public-banking.com.
books, including WEB OF DEBT:
The Shocking Truth About Our Money System and How We Can Break Free. Her
websites are webofdebt.com, ellenbrown.com, and public-banking.com.
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