California Free Press

Another Bank Bailout Under Cover of a Virus

Published on

Monday, May 18, 2020

by

Common Dreams

Insolvent Wall Street banks have been quietly bailed out again. Banks made risk-free by the government should be public utilities.

 

by

Ellen Brown

•  
•  
•  
•  
•  

 6 Comments

The American people are therefore entitled to share in the benefits and the profits. Banking needs to be made a public utility. (Photo: Twitter/@publicbankla)

When the Dodd Frank Act was passed in 2010, President Obama triumphantly declared, “No more bailouts!” But what the Act actually said was that the next time the banks failed, they would be subject to “bail ins”—the funds of their creditors, including their large depositors, would be tapped to cover their bad loans.

When bail-ins were tried in Europe, however, the results were disastrous.

Many economists in the US and Europe argued that the next time the banks failed, they should be nationalized—taken over by the government as public utilities. But that opportunity was lost when, in September 2019 and again in March 2020, Wall Street banks were quietly bailed out from a liquidity crisis in the repo market that could otherwise have bankrupted them. There was no bail-in of private funds, no heated congressional debate, and no public vote. It was all done unilaterally by unelected bureaucrats at the Federal Reserve.

“The justification of private profit,” said President Franklin Roosevelt in a 1938 address, “is private risk.” Banking has now been made virtually risk-free, backed by the full faith and credit of the United States and its people. The American people are therefore entitled to share in the benefits and the profits. Banking needs to be made a public utility.

The Risky Business of Borrowing Short to Lend Long

Individual banks can go bankrupt from too many bad loans, but the crises that can trigger system-wide collapse are “liquidity crises.” Banks “borrow short to lend long.” They borrow from their depositors to make long-term loans or investments while promising the depositors that they can come for their money “on demand.” To pull off this sleight of hand, when the depositors and the borrowers want the money at the same time, the banks have to borrow from somewhere else. If they can’t find lenders on short notice, or if the price of borrowing suddenly becomes prohibitive, the result is a “liquidity crisis.”

Before 1933, when the government stepped in with FDIC deposit insurance, bank panics and bank runs were common. When people suspected a bank was in trouble, they would all rush to withdraw their funds at once, exposing the fact that the banks did not have the money they purported to have. During the Great Depression, more than one-third of all private US banks were closed due to bank runs.

But President Franklin D. Roosevelt, who took office in 1933, was skeptical about insuring bank deposits. He warned, “We do not wish to make the United States Government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future.” The government had a viable public alternative, a US postal banking system established in 1911. Postal banks became especially popular during the Depression, because they were backed by the US government. But Roosevelt was pressured into signing the 1933 Banking Act, creating the Federal Deposit Insurance Corporation that insured private banks with public funds.

Congress, however, was unwilling to insure more than $5,000 per depositor (about $100,000 today), a sum raised temporarily in 2008 and permanently in 2010 to $250,000. That meant large institutional investors (pension funds, mutual funds, hedge funds, sovereign wealth funds) had nowhere to park the millions of dollars they held between investments. They wanted a place to put their funds that was secure, provided them with some interest, and was liquid like a traditional deposit account, allowing quick withdrawal. They wanted the same “ironclad moneyback guarantee” provided by FDIC deposit insurance, with the ability to get their money back on demand.

It was largely in response to that need that the private repo market evolved. Repo trades, although technically “sales and repurchases” of collateral, are in effect secured short-term loans, usually repayable the next day or in two weeks. Repo replaces the security of deposit insurance with the security of highly liquid collateral, typically Treasury debt or mortgage-backed securities. Although the repo market evolved chiefly to satisfy the needs of the large institutional investors that were its chief lenders, it also served the interests of the banks, since it allowed them to get around the capital requirements imposed by regulators on the conventional banking system. Borrowing from the repo market became so popular that by 2008, it provided half the credit in the country. By 2020, this massive market had a turnover of $1 trillion a day.

Before 2008, banks also borrowed from each other in the fed funds market, allowing the Fed to manipulate interest rates by controlling the fed funds rate. But after 2008, banks were afraid to lend to each other for fear the borrowing banks might be insolvent and might not pay the loans back. Instead the lenders turned to the repo market, where loans were supposedly secured with collateral. The problem was that the collateral could be “rehypothecated,” or used for several loans at once; and by September 2019, the borrower side of the repo market had been taken over by hedge funds, which were notorious for risky rehypothecation. Many large institutional lenders therefore pulled out, driving the cost of borrowing at one point from 2% to 10%.

Rather than letting the banks fail and forcing a bail-in of private creditors’ funds, the Fed quietly stepped in and saved the banks by becoming the “repo lender of last resort.” But the liquidity crunch did not abate, and by March the Fed was making $1 trillion per day available in overnight loans. The central bank was backstopping the whole repo market, including the hedge funds, an untenable situation.

In March 2020, under cover of a national crisis, the Fed therefore flung the doors open to its discount window, where only banks could borrow. Previously, banks were reluctant to apply there because the interest was at a penalty rate and carried a stigma, signaling that the bank must be in distress. But that concern was eliminated when the Fed announced in a March 15 press release that the interest rate had been dropped to 0.25% (virtually zero). The reserve requirement was also eliminated, the capital requirement was relaxed, and all banks in good standing were offered loans of up to 90 days, “renewable on a daily basis.” The loans could be continually rolled over, and no strings were attached to this interest-free money – no obligation to lend to small businesses, reduce credit card rates, or write down underwater mortgages. Even J.P. Morgan Chase, the country’s largest bank, has acknowledged borrowing at the Fed’s discount window for super cheap loans.

The Fed’s scheme worked, and demand for repo loans plummeted. But unlike in Canada, where big banks slashed their credit card interest rates to help relieve borrowers during the COVID-19 crisis, US banks did not share this windfall with the public. Canadian interest rates were cut by half, from 21% to 11%; but US credit card rates dropped in April only by half a percentage point, to 20.15%. The giant Wall Street banks continued to favor their largest clients, doling out CARES Act benefits to them first, emptying the trough before many smaller businesses could drink there.

In 1969, Prime Minister Indira Gandhi nationalized 14 of India’s largest banks, not because they were bankrupt (the usual justification today) but to ensure that credit would be allocated according to planned priorities, including getting banks into rural areas and making cheap financing available to Indian farmers.  Congress could do the same today, but the odds are it won’t. As Sen. Dick Durbin said in 2009, “the banks … are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

Time for the States to Step In

Why are elected local governments, which are required to serve the public, penalized for shortfalls in their budgets caused by a mandatory shutdown, when private banks that serve private stockholders are not?

State and local governments could make cheap credit available to their communities, but today they too are second class citizens when it comes to borrowing. Unlike the banks, which can borrow virtually interest-free with no strings attached, states can sell their bonds to the Fed only at market rates of 3% or 4% or more plus a penalty. Why are elected local governments, which are required to serve the public, penalized for shortfalls in their budgets caused by a mandatory shutdown, when private banks that serve private stockholders are not?

States can borrow from the federal unemployment trust fund, as California just did for $348 million, but these loans too must be paid back with interest, and they must be used to cover soaring claims for state unemployment benefits. States remain desperately short of funds to repair holes in their budgets from lost revenues and increased costs due to the shutdown.

States are excellent credit risks—far better than banks would be without the life-support of the federal government. States have a tax base, they aren’t going anywhere, they are legally required to pay their bills, and they are forbidden to file for bankruptcy. Banks are considered better credit risks than states only because their deposits are insured by the federal government and they are gifted with routine bailouts from the Fed, without which they would have collapsed decades ago.

State and local governments with a mandate to serve the public interest deserve to be treated as well as private Wall Street banks that have repeatedly been found guilty of frauds on the public. How can states get parity with the banks? If Congress won’t address that need, states can borrow interest-free at the Fed’s discount window by forming their own publicly-owned banks. For more on that possibility, see my earlier article here.

As Buckminster Fuller said, “You never change things by fighting the existing reality. To change something, create a new model that makes the old model obsolete.” Post-COVID-19, the world will need to explore new models; and publicly-owned banks should be high on the list.

Ellen Brown is an attorney and founder of the Public Banking Institute. She is the author of twelve books, including the best-selling Web of Debt, and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.

Crushing the States, Saving the Banks: The Fed’s Generous New Rules

Published on Sunday, May 03, 2020

by Common Dreams

The new terms could be harnessed for local governments to own and operate their own banks.

by Ellen Brown

 

4 Comments

The Fed’s relaxed liquidity rules have made it easier for state and local governments to set up their own publicly-owned banks.  (Photo: Phillipp/cc/flickr)

Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt. 

No such threat looms over the banks, which have made out extremely well in this crisis. The Federal Reserve has dropped interest rates to 0.25%, eliminated reserve requirements, and relaxed capital requirements. Banks can now borrow effectively for free, without restrictions on the money’s use. Following the playbook of the 2008-09 bailout, they can make the funds available to their Wall Street cronies to buy up distressed Main Street assets at fire sale prices, while continuing to lend to credit cardholders at 21%.  

If there is a silver lining to all this, it is that the Fed’s relaxed liquidity rules have made it easier for state and local governments to set up their own publicly-owned banks, something they should do post haste to take advantage of the Fed’s very generous new accommodations for banks. These public banks can then lend to local businesses, municipal agencies, and local citizens at substantially reduced rates while replenishing the local government’s coffers, recharging the Main Street economy and the government’s revenue base.

The Covert War on the States

Payments going to state and local governments from the Coronavirus Relief Fund under the CARES Act may be used only for coronavirus-related expenses. They may not be used to cover expenses that were accounted for in their most recently approved budgets as of March 2020. The problem is that nearly everything local governments do is funded through their most recently approved budgets, and that funding will come up painfully short for all of the states due to increased costs and lost revenues forced by the coronavirus shutdown. Unlike the federal government, which can add a trillion dollars to the federal debt every year without fear of retribution, states and cities are required to balance their budgets. The Fed has opened a Municipal Liquidity Facility that may buy their municipal bonds, but this is still short-term debt, which must be repaid when due. Selling bonds will not fend off bankruptcy for states and cities that must balance their books. 

States are not legally allowed to declare bankruptcy, but Sen. McConnell contended that “there’s no good reason for it not to be available.” He said, “we’ll certainly insist that anything we borrow to send down to the states is not spent on solving problems that they created for themselves over the years with their pension programs.” And that is evidently the real motive behind the bankruptcy push. McConnell wants states put through a bankruptcy reorganization to get rid of all those pesky pension agreements and the unions that negotiated them. But these are the safety nets against old age for which teachers, nurses, police and firefighters have worked for 30 or 40 years. It’s their money. 

It has long been a goal of conservatives to privatize public pensions, forcing seniors into the riskier stock market. Lured in by market booms, their savings can then be raided by the periodic busts of the “business cycle,” while the more savvy insiders collect the spoils. Today political opportunists are using a crushing emergency that is devastating local economies to downsize the public sector and privatize everything.  

Free Money for Banks: The Fed’s Very Liberal New Rules

Unlike the states, the banks were not facing bankruptcy from the economic shutdown; but their stocks were sinking fast. The Fed’s accommodations were said to be to encourage banks to “help meet demand for credit from households and businesses.” But while the banks’ own borrowing rates were dropped on March 15 from an already-low 1.5% to 0.25%, average credit card rates dropped in the following month only by 0.5% to 20.71%, still unconscionably high for out-of-work wage earners. 

Although the Fed’s accommodations were allegedly to serve Main Street during the shutdown, Wall Street had a serious liquidity problem long before the pandemic hit. Troubles surfaced in September 2019, when repo market rates suddenly shot up to 10%. Before 2008, banks borrowed from each other in the fed funds market; but after 2008 they were afraid to lend to each other for fear the borrowing banks might be insolvent and might not pay the loans back. Instead the lenders turned to the repo market, where loans were supposedly secured with collateral. The problem was that the collateral could be “rehypothecated” or used for several loans at once; and by September 2019, the borrower side of the repo market had been taken over by hedge funds, which were notorious for risky rehypothecation. The lenders therefore again pulled out, forcing the Fed to step in to save the banks that are its true constituents. But that meant the Fed was backstopping the whole repo market, including the hedge funds, an untenable situation. So it flung the doors wide open to its discount window, where only banks could borrow.           

The discount window is the Fed’s direct lending facility meant to help commercial banks manage short-term liquidity needs. In the past, banks have been reluctant to borrow there because its higher interest rate implied that the bank was on shaky ground and that no one else would lend to it. But the Fed has now eliminated that barrier. It said in a press release on March 15:

The Federal Reserve encourages depository institutions to turn to the discount window to help meet demands for credit from households and businesses at this time. In support of this goal, the Board today announced that it will lower the primary credit rate by 150 basis points to 0.25% …. To further enhance the role of the discount window as a tool for banks in addressing potential funding pressures, the Board also today announced that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis. 

Banks can get virtually free loans from the discount window that can be rolled over from day to day as necessary. The press release said that the Fed had also eliminated the reserve requirement – the requirement that banks retain reserves equal to 10% of their deposits – and that it is “encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus.” It seems that banks no longer need to worry about having deposits sufficient to back their loans. They can just borrow the needed liquidity at 0.25%, “renewable on a daily basis.” They don’t need to worry about “liquidity mismatches,” where they have borrowed short to lend long and the depositors have suddenly come for their money, leaving them without the funds to cover their loans. The Fed now has their backs, providing “primary credit” at its discount window to all banks in good standing on very easy terms. The Fed’s website states:

Generally, there are no restrictions on borrowers’ use of primary credit….Notably, eligible depository institutions may obtain primary credit without exhausting or even seeking funds from alternative sources. Minimal administration of and restrictions on the use of primary credit makes it a reliable funding source.

What State and Local Governments Can Do: Form Their Own Banks

On the positive side, these new easy terms make it much easier for local governments to own and operate their own banks, on the stellar model of the century-old Bank of North Dakota. To fast-track the process, a state could buy a bank that was for sale locally, which would already have FDIC insurance and a master account with the central bank (something needed to conduct business with other banks and the Fed). The state could then move its existing revenues and those it gets from the CARES Act Relief Fund into the bank as deposits. Since there is no longer a deposit requirement, it need not worry if these revenues get withdrawn and spent. Any shortfall can be covered by borrowing at 0.25% from the Fed’s discount window. The bank would need to make prudent loans to keep its books in balance, but if its capital base gets depleted from a few non-performing loans, that too apparently need not be a problem, since the Fed is “encouraging banks to use their capital and liquidity buffers.” The buffers were there for an emergency, said the Fed, and this is that emergency.

To cover startup costs and capitalization, the state might be able to use a portion of its CARES Relief Fund allotment. Its budget before March would not have included a public bank, which could serve as a critical source of funding for local businesses crushed by the shutdown and passed over by the bailout. Among the examples given of allowable uses for the relief funds are such things as “expenditures related to the provision of grants to small businesses to reimburse the costs of business interruption caused by required closures.” Providing below-market loans to small businesses would fall in that general category. 

By using some of its CARES Act funds to capitalize a bank, the local government can leverage the money by 10 to 1. One hundred million dollars in equity can capitalize $1 billion in loans. With the state bank’s own borrowing costs effectively at 0%, its operating costs will be very low. It can make below-market loans to creditworthy local borrowers while still turning a profit, which can be used either to build up the bank’s capital base for more loans or to supplement the state’s revenues. The bank can also lend to its own government agencies short of funds due to the mandatory shutdown. The salubrious effect will be to jumpstart the local economy by putting new money into it. People can be put back to work, local infrastructure can be restored and expanded, and the local tax base can be replenished. 

The coronavirus pandemic has demonstrated not only that the US needs to free itself from dependence on foreign markets by rebuilding its manufacturing base but that state and local governments need to free themselves from dependence on the federal government. Some state economies are larger than those of entire countries. Gov. Gavin Newsom, whose state ranks as the world’s fifth largest economy, has called California a “nation-state.” A sovereign nation-state needs its own bank.

Ellen Brown is an attorney and founder of the Public Banking Institute. She is the author of twelve books, including the best-selling Web of Debt, and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

---

Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.

Why Are Working People Forced to Sacrifice for the Common Good But Not the Titans of Capitalism?

Published on Sunday, April 26, 2020

by Common Dreams

Why is it that lawmakers can order workers to stop working, and small business owners to lock their doors, but not order landlords, bankers, and Wall Street investors to also suspend their activities?

by Scott Klinger

 

24 Comments

Larry Kudlow, the director of Trump's National Economic Council. (Photo: Gage Skidmore / Flickr)

When I was a child, I heard my parents say that when we save our money it works for us. I remember having to dress up in my church clothes when I went to the bank to deposit my birthday checks or money I saved from my allowances. 

These ideas that banks and Wall Street are secular versions of church, and that money works for everyone are deeply at play in our society today. 

In the name of protecting the common good, Governors across the country have ordered people to stay at home, and all non-essential worksites shuttered. But aside from some states adopting short-term bans on evictions and foreclosures, no leaders have gone further in ordering the financial economy to “stop working” and set aside the primacy of their business interests for the common good by forgiving rents and waiving mortgage interest while deferring mortgage principal payments. 

"If federal leaders and state governors fail to demand that banks and Wall Street pause too, efforts to shore up families with stimulus checks and business owners with paycheck protection, will be undermined, as those funds will pass quickly through the hands of families and into the already full pockets of Wall Street, deepening inequality and increasing the pain of the many, for the benefit of the few. "

The shut-down of much of our economy has thrown millions out of work and into a perilous place, because while much of the human economy of workers working, small businesses serving, and people shopping for their everyday needs, has been all but stopped, financial services firms continues to work hard, collecting monthly rents, mortgages and other debts. Some small business owners—restaurateurs, hair salons, clothing, book and hardware store owners have received government loans to keep paying their workers, they’ve received no similar protection from landlords demanding their monthly rent while their businesses are closed.  This will wind up sinking many of the businesses we depend on and love. As the little virus attacks people’s bodies, the bigger disease of an overly powerful corporate capture of our economy continues to wreak havoc on families, small businesses, and communities long after the health crisis is resolved. 

If federal leaders and state governors fail to demand that banks and Wall Street pause too, efforts to shore up families with stimulus checks and business owners with paycheck protection, will be undermined, as those funds will pass quickly through the hands of families and into the already full pockets of Wall Street, deepening inequality and increasing the pain of the many, for the benefit of the few. 

As families scramble to get together their monthly mortgage payments, banks continue with business as usual. Last week, Federal Reserve Chairman Jerome Powell was asked by the David Wessell of Brookings Institution whether Big Banks would be allowed to continue to distribute tens of billions of dollars annually as shareholder dividends (half of which go to people in the top 1%), he replied, “That’s a perfectly normal thing in our capitalist system.” Normal has been thrown out the window for workers and small business owners, it should be for the titans of our economy as well. 

Why is it that Governors can order workers to stop working, and small business owners to lock their doors, but not order landlords, bankers, and Wall Street investors to also suspend their activities, to pause as labor and the commercial sector have? Why do people have to sacrifice but not the owners of capital? 

Some landlords have demonstrated compassion and solidarity with their tenants. New York City landlord Mario Salerno is one of them. At the beginning of April, tenants in each of Salerno’s 18 Brooklyn apartment building found notes taped to the door saying: “Due to the COVID-19 pandemic affecting all of us, I am waiving rent for the month of April, 2020. Stay safe, help your neighbors and wash your hands!!! Thank you, Mario.” When asked by the New York Times about the hundreds of thousands of dollars he stood to lose as a result of the rent forgiveness, Salerno said that was not important: “My concern is everyone’s health. I told them just to look out for your neighbor and make sure everyone has food on their table.” More landlords could follow Mr. Salerno’s example if they knew the mortgage payments that they owed on their rental properties could be deferred. 

In contrast, forty large corporations, many of whom are controlled by Wall Street private equity funds, have bought up more than two million units of rental housing in the United States. So, far all have been silent on the issue of rent forgiveness. Most picked up their properties, often at fire sale prices and with the help of federal government assistance, after the 2008 housing crisis. Unless these powerful firms are ordered to put public health and family well-being before corporate profits, they are likely to again swoop in and extend their control of America’s housing stock even further as millions of families and smaller landlords lose their homes and businesses. 

Ordering landlords and mortgage holders to change the terms of their contracts is not unprecedented. Following the 2008 housing crash, the Federal Home Ownership Refinance Program (HARP), gave mortgage holders the right to renegotiate their federally backed mortgages on more affordable terms. Its success allowed many families to keep their homes. 

I haven’t gotten dressed up to go to the bank in more than half a century, it is time our leaders stop treating Wall Street like a church, and to instead demand the same sacrifices of capital that they have of workers and merchants.

Scott Klinger is Senior Equitable Development Specialist at Jobs with Justice and an Associate Fellow at the Institute for Policy Studies.

---

Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.

Off the Top of My Head

Republicans Careful Not To Be "Overly Generous"

by John Lawrence, March 25, 2020

The $2 trillion coronavirus relief package is being held up because Republicans don't want to approve a provision giving unemployed workers $600 per week over and above their state unemployment benefits. This might actually give some workers more money per week than they were actually making when they were employed. Also gig workers such as me would be eligible for these benefits which makes Republicans absolutely apoplectic. My California unemployment benefits would be about $230 so $600. more would make my weekly take home $830 considerably more than what I usually make working about 30 hours a week. Republicans think this would be a total travesty of the free market system. But they miss the point.

What is necessary for the economy to keep working is for people to go out and spend money since consumption is 70% of GDP. Neel Kashkari, who was in charge of the $700 billion TARP bailout during the 2008 financial crisis said that the country would have been better off if the government had been "much more generous" to all homeowners, no matter how deserving they were. Instead, the country was overly generous to Wall Street banks no matter how undeserving they were. And that's just the crux of the matter. To keep the economy functioning the government has to be overly generous to average people who will go out and spend their money which contributes to the 70% consumption economy. The TARP program was supposed to help homeowners with their mortgages as well as the banks. It helped the banks, but fell far short of helping the homeowners.

The Week reported:

That's the key thing to understand: Under Geithner's TARP approach, returning the banks' balance sheets to health necessitated bleeding American families dry.

"Tim [Geithner] thought he was smart enough to have it both ways; that he could protect the bank executives and stockholders and get the same result when they actually restructure the banks," Silvers told The Week. "And he was wrong." That choice also goes a long way towards explaining why, even though the crisis in the financial system itself passed rather quickly, the massive collapse in employment took 10 grinding years to repair. It's why 10 million American families lost their homes, and why, almost a decade later, the bank bailouts remain a source of simmering rage, nihilism, and distrust among voters.

"It was an extremely costly mistake," Silvers concluded. "In terms of homeownership, jobs, small businesses, and perhaps most of all the American people's trust in their government."

The Home Affordable Mortgage Program (HAMP), which was a major part of TARP, was designed to keep 4 million homeowners out of foreclosure. However, only about 1.6 million people were helped. The failure was not for lack of funding. Hundreds of billions of dollars was available and could have gone directly to help struggling homeowners who were being driven out of their homes, but  “Treasury just sat on that money and didn’t do it,” Inspector General for the Troubled Asset Relief Program Neil Barofsky said.

So with that experience and that knowledge in mind, Democrats in Congress don't want to repeat the same mistake. They want money in the hands of the American people who will go out and spend it. Poorer Americans are more likely to spend any relief package given to them, and, if they end up getting more per week in unemployment benefits than they were making at their job, so much the better. The banks are already fully capitalized. Losing no time the Federal Reserve has already given $1.5 trillion to the banks and lowered interest rates to zero.

Off the Top of My Head

One Positive Thing: Lower Pollution and Greenhouse Gases

by John Lawrence, March 24, 2020

Among all the negative things that are happening because of the coronavirus, there is at least one positive thing: air pollution and the emission of greenhouse gasses (GHGs) is way down. The pandemic is shutting down industrial activity and temporarily slashing air pollution levels around the world according to satellite imagery. There are fewer cars on the roads, fewer airplanes flying, fewer ships at sea. The downturn in economic activity means that less power is being consumed; therefore, less coal is being shoveled into power plants around the world. It's a veritable demonstration that it is possible to reduce pollution, reduce global warming and in other ways have a cleaner, healthier planet.

Paul Monks, professor of air pollution at the University of Leicester, predicted there will be important lessons to learn. “We are now, inadvertently, conducting the largest-scale experiment ever seen,” he said. “Are we looking at what we might see in the future if we can move to a low-carbon economy? Not to denigrate the loss of life, but this might give us some hope from something terrible. To see what can be achieved. It seems entirely probable that a reduction in air pollution will be beneficial to people in susceptible categories, for example some asthma sufferers,” he said. “It could reduce the spread of disease. A high level of air pollution exacerbates viral uptake because it inflames and lowers immunity.” Agriculture could also get a boost because pollution stunts plant growth, he added.

One of the largest drops in pollution levels could be seen over the city of Wuhan in central China which was put under a strict lockdown in late January. The city of 11 million people serves as a major transportation hub and is home to hundreds of factories supplying car parts and other hardware to global supply chains. According to NASA, nitrogen dioxide levels across eastern and central China have been 10-30% lower than normal.

This period, when the pandemic is not under control, is an opportunity to think differently about the economy. What are essential goods and services? Definitely we need food, clean water and sanitation services. We need garbage collection. People need enough money to supply essential needs for themselves. We could also ask what are inessential needs? Some of these are going to sporting events, going to movie theaters especially when we can watch movies at home, going to music events at arenas especially when we can listen to music at home, going on cruises. With the increase of capabilities for working from home, going into the office is not a necessity for a lot of workers. This can be increased with the result that there will be fewer cars on the road, less rush hour traffic and less GHG emissions. Getting cars off the road is a long term goal for a green economy. This would mean fewer car sales, but it would be better for the environment.

We should ask what are essential activities to keep people healthy and safe and think about doing away with other activities which don't increase the health and welfare of human beings. After dithering for years over the homeless situation, homeless people are being put up in motels and hotels post haste as a public health issue. This is a positive development and goes to show that the homeless situation could have been ameliorated years ago if we had the will to do it. The provision of money to average Americans will not hurt the economy. It will only help the economy. During the 2008 Great Recession trillions of dollars were given to the banks to bail them out. Much of this money went to bail out investors and hedge funds which had made huge bets on the economy. Many of these bets paid off, and their bets were covered in full by the Federal Reserve when the individual Wall Street banks couldn't cover them. Obviously, these rich people did not need that money to continue to cover their own 'essential needs' or the needs of their families. It was money given to gamblers while Joe six pack got zilch. We don't need an economy which caters to rich gamblers and showers them with money when they bet the economy will go down bringing suffering to millions.

At this point the Fed has the capability of bailing out the average American family especially if they have lost their jobs so they can continue to eat and pay rent. This support for average Americans will function also to stabilize the economy and maintain GDP but at a lower level. Perhaps the 70% level that consumption contributes to GDP cannot be maintained, but this might actually be a good thing by eliminating things that are not essential to the health and welfare of the population while driving air pollution and greenhouse gasses down. Neel Kashkari President of the Minneapolis branch of the Federal Reserve siad on 60 Minutes that the Fed needs to be "overly generous" to the average family, something they weren't when the economy tanked in 2008. The Fed is committed to not letting any banks or major US businesses go under. They could just as well make sure that no American families go under. Andrew Yang's idea of a Universal Basic Income (UBI) not only helps families survive. It will help the economy survive.

Off the Top of My Head

China Out Capitalizes Capitalist Nations

by John Lawrence, March 23, 2020

Who would have thunk it? China has taken capitalist financial methods to the next level with the result that it is progressing more rapidly in material abundance and a consumer society than the proto-capitalist nations of the world: the US and Europe. Sure, politically, they are an authoritarian nation. But that expedites their development since all institutions are on the same wavelength. In particular their central bank, the People's Bank of China (PBC) funds infrastructure projects all over the world. This keeps China a full employment society. They put all the Chinese people to work building infrastructure which expands the money supply in a very widespread way. Essentially the PBC provides loans for all these projects which means it creates the money just as US banks do when they create loans or the Federal Reserve does when it provides "liquidity" to the markets through quantitative easing (QE).

The Federal Reserve has actually expanded the range of market interventions it can do. It used to be that the Fed could only set interest rates. That was it. Now it can buy corporate bonds, state and local bonds and give money directly to corporations to keep them afloat. In fact it can act more like the PBC which interacts directly in the Chinese economy. The Fed can take debts directly onto its balance sheet where they may remain forever. This is exactly what it did in the 2008 financial crash. It provided cash directly to banks in return for mortgage backed securities and Treasury bonds thus providing liquidity to the banks so that they would not go under. Now the banks are well capitalized, and, since they know that the Fed stands ready to bail them out again, they have no worries. In fact the term "bail them out" is actually a misnomer at this point. It can be replaced with "provide them with cash" as necessary.

There was an interesting interview on 60 Minutes with Neel Kashkari, Obama's Assistant Secretary of the Treasury, who was in charge of the Troubled Assets Relief Program (TARP) during the Great Recession. He noted that TARP, which was supposed to help out actual people with their mortgages did not go far enough. They were too stingy with it, and not very many people got helped. He says that this prolonged the recession. Instead of being stingy as they were, they should have been "overly generous." That is the lesson he learned. So now in the coronavirus recession, his advice is that the Fed should be overly generous in providing relief to actual everyday people and not just to banks. At this time the banks are doing very well, thank you.

It is well known that money is created by the banks themselves when they create a loan which they do with a couple of keystrokes on a computer. Why is this possible? Because money has no relationship to gold or any other precious metal any more. That's why it's called "fiat money." So what bankers and economists are realizing (which has been the secret of China's success all along resulting in their bringing 800 million people out of poverty in 40 years) is that the US central bank, the Federal Reserve can do the exact same thing. It can create fiat money just like the banks do, like Wall Street does. The only concern is that money so created would lead to inflation, but, as Kashkari noted, there was no inflation even after the Fed created trillions of dollars in 2008 most of which went directly to bankers, hedge funds and rich individuals and not to the average American. Now Kashkari, who is President of the Minneapolis branch of the Federal Reserve, is saying that the Fed could provide liquidity to the American people and not just to the banks. How this will probably happen is by Congress passing a bill on the "fiscal side" as they say. Then they will sell more Treasury bonds to cover the increased deficit. Wall Street banks will buy them since other countries are decreasing their purchase of US debt, and then the Fed will provide liquidity (cash) to Wall Street taking the Treasury bonds onto its balance sheet where they will reside forever probably. This is why the national deficits and debt are no problem because the Fed can print money to cover them ad infinitum. It's as if the Fed provided money directly to the US economy, but, by law, they have to do so indirectly.

Ellen Brown understood this possibility long before Neel Kaskari had his "awakening."

America’s chief competitor in the trade war is obviously China, which subsidizes not just worker costs but the costs of its businesses. The government owns 80% of the banks, which make loans on favorable terms to domestic businesses, especially state-owned businesses. Typically, if the businesses cannot repay the loans, neither the banks nor the businesses are put into bankruptcy, since that would mean losing jobs and factories. The non-performing loans are just carried on the books or written off. No private creditors are hurt, since the creditor is the government, and the loans were created on the banks’ books in the first place (following standard banking practice globally).

Precisely! So no need to worry about another Great Recession or Depression. The US could effectively provide a Universal Basic Income (UBI) to its citizens indefinitely as Andrew Yang proposed.

As observed by Jeff Spross in a May 2018 Reuters article titled “China’s Banks Are Big. Too Big?”:

[B]ecause the Chinese government owns most of the banks, and it prints the currency, it can technically keep those banks alive and lending forever.…

It may sound weird to say that China’s banks will never collapse, no matter how absurd their lending positions get. But banking systems are just about the flow of money.

Spross quoted former bank CEO Richard Vague, chair of The Governor’s Woods Foundation, who explained, “China has committed itself to a high level of growth. And growth, very simply, is contingent on financing. Beijing will come in and fix the profitability, fix the capital, fix the bad debt, of the state-owned banks … by any number of means that you and I would not see happen in the United States.”

There is no reason why the US could not emulate China. From an economic point of view QE or a UBI would not be inflationary as long as the dollars provided to the system were either invested in new plants and equipment, infrastructure or consumption. What is needed now is about $10 trillion worth of Green Infrastructure, a Green New Deal funded indirectly by the Fed. This money can be provided to the American people and not only rich billionaires as was done in 2008 and as China is providing directly to its workers who are kept busy building infrastructure in the Belt and Road initiative. It would also ease economic inequality and not induce inflation as long as the money is widely distributed.

Coronavirus Crisis, Says Coalition, Must Force Wall Street to Finally Recognize Perils of Climate Shocks 'Barreling Towards Us'

Published on Friday, March 20, 2020

by Common Dreams

"In this recovery we face a clear choice: bail out the fragile fossil financial system and lock in the next climate crash, or keep building a resilient green financial infrastructure that will serve as a stable foundation going forward."

by Jessica Corbett, staff writer

 

16 Comments

Protesters picketing outside a JP Morgan Chase branch on Manhattan in November 2019 as part of a growing national movement to hold the bank accountable for its central role in funding the global fossil fuel industry. (Photo: Erik McGregor/LightRocket via Getty Images)

Stop the Money Pipeline, a coalition that aims to end Wall Street's funding of climate destruction, is calling on Congress to hold the line against the financial industry—and give it no special deregulatory treatment—as the federal government responds to the economic fallout from the coronavirus.

"Now is not the time to relax rules on financial institutions' ability to weather future crises, particularly the climate crisis, the impacts of which continue to unfold even as we deal with COVID-19," Moira Birss, climate and finance director of Amazon Watch, said in a statement Friday.

"Instead, policymakers should be bolstering the resilience of the financial system to safely handle the climate shock that is barreling towards us," Birss added, "by requiring banks, asset managers, and other financial institutions to responsibly phase out financing and investments in fossil fuels and transition to a green economy."

@gilliantett Our Stop the Money Pipeline coalition of 90+ organizations is calling on policymakers to use this moment to strengthen the financial system to handle climate risks: https://t.co/bkOspPPt2C

— Jamie Henn (@jamieclimate) March 20, 2020

President Donald Trump has already signed a pair of bills related to the pandemic and federal lawmakers are negotiating a third trillion-dollar coronavirus package. Trump and his allies are also pursuing a multibillion-dollar bailout of the U.S. oil industry, which has been impacted by the global outbreak and a price war.

"In this recovery we face a clear choice: bail out the fragile fossil financial system and lock in the next climate crash, or keep building a resilient green financial infrastructure that will serve as a stable foundation going forward," said Rainforest Action Network (RAN) climate and energy senior campaigner Jason Opeña Disterhoft.

"Wall Street has already shown us they will choose profit over prudence," Opeña Disterhoft continued. "Lawmakers, regulators, and civil society must ensure that we make the safe choice for all of our futures."

Specifically, Stop the Money Pipeline is calling for:

• Restricting the ability of financial institutions to invest in fossil fuel extraction and production.
• Repealing the authority for banks to own physical assets like oil refineries, pipelines, tankers, power plants, and coal mines and trade commodities, specifically including such fossil fuels as crude oil, fracked gas, and coal.
• Establishing a Community Climate Investment Mandate: Financial institutions with a federal charter have a duty to invest a certain percentage into climate change mitigation and resilience efforts.
• Incorporating climate risk into the prudential regulatory and supervisory framework for systemically important financial institutions.

The demands came just a few days after the release of Banking on Climate Change: Fossil Fuel Finance Report 2020—which, in the words of RAN climate and energy lead researcher Alison Kirsch, "paints a deeply disturbing picture of how financial institutions are driving us toward climate disaster."

The report, from RAN and other groups, found that since the 2015 Paris climate accord, 35 big banks have collectively poured $2.7 trillion into the fossil fuel industry. The top funder was JPMorgan Chase, a key target of Stop the Money Pipeline, at nearly $269 billion. Behind Chase were three other U.S. banks: Wells Fargo at $198 billion, Citi at $188 billion, and Bank of America at $157 billion.

The numbers are in! Big banks have epically failed to respond to the #climatecrisis. Fossil finance IS climate damage, & against all logic & compassion 💔, banks are increasing funding for dirty energy. See how your bank stacks up https://t.co/MKPJjmZSL4 #DefundClimateChange pic.twitter.com/ztZbAWMhsf

— RAN (@RAN) March 18, 2020

Some of the environmental activists behind Stop the Money Pipeline's new demands for Congress highlighted the report's findings in their calls to action on the coronavirus.

"Big banks have continually increased their funding for fossil fuels in the years since the Paris agreement, putting our communities and our economy at risk of massive disruption due to climate change," said Sierra Club campaign representative Ben Cushing said. "As Washington and communities across the country are working to address the [COVID-19] pandemic, it's critical that Congress ensures that relief efforts go to protecting the most vulnerable and in need, not corporate polluters or those financing their operations."

Author and 350.org co-founder Bill McKibben was arrested while protesting at a Chase branch for the campaign's launch in January.

"Wall Street's record is horrible—they've been pouring money into fossil fuels even after the Paris climate accords," McKibben said Friday. "If bankers need the help of society, then society can demand that they commit to helping with the other grave crisis we face."

The calls for Congress to consider the climate crisis while addressing the COVID-19 pandemic aligned with comments from other activists in recent weeks, as the virus has infected over 258,000 people and led to over 11,000 deaths worldwide. As Common Dreams reported Wednesday, a growing chorus of advocates is urging political leaders to seize the opportunity to both revive the world's economy and battle the climate emergency by implementing a global Green New Deal.

---

Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.

Off the Top of My Head

The Federal Reserve's Role is to Bail Out Wall Street, Not the American People

by John Lawrence, March 21, 2020

The purpose of the Federal Reserve is to bail out the banks, not to bail out you. During the Great Recession of 2008, the Fed gave trillions to the banks. The average Joe that couldn't pay his mortgage lost his home to foreclosure. Banks only keep a portion of their money as reserves. They create loans out of thin air. If someone can't make payments on a loan, the bank will foreclose. If the loan is secured by property, that property will become the bank's property. If at the same time more people want to take their deposits out of the bank than the bank has in reserves, the bank is in trouble. That's where the Federal Reserve comes in. It floods the bank with liquidity meaning the cash to pay out to the bank's customers who want their money back. At the same time the Fed may take the bank's non performing loans onto its balance sheet. No one cares if the Fed has a bunch of non performing loans on its balance sheet. They can just stay there ad infinitum.

What happened during the Great Recession was that, thanks to financial instruments called derivatives, banks were liable for a lot more money than simple mortgages and other retail loans. They had committed to covering bets like interest rate swaps or collateralized debt obligations (CDOs) without understanding the liabilities they had agreed to. Derivatives represent gambles. A hedge fund will bet that an underlying security will go up or go down. When they win their bets, as they did in 2008, mainly due to foreclosures, it is similar to a run on the bank only a lot more money is at stake. Certain banks and financial institutions did not have the money to pay off the bet. So the Fed stepped in and paid off the bet for them. This was how the financial crisis was resolved. All the gamblers were made whole by the Federal Reserve. All the bets were paid off and very few financial institutions had to go out of business. Lehman Brothers was one institution that did go bankrupt and was liquidated.

The Fed can control how much money is sloshing around in the economy by raising or lowering the prime interest rate. That's the interest rate a bank pays to borrow money. The bank then charges the average Joe a lot higher interest rate, and they make money on the spread. Obviously, the Fed doesn't want the retail banks to make foolish loans that won't be paid back because then it will have to bail out the banks that made such loans. However, this is exactly what led to the 2008 financial crisis. The banks were making "liar loans" base on stated income. A waitress could go into the bank and just state her income was $125,000. a year. There was no checking. She was given a mortgage to buy a house. Then, when she couldn't make the payments on the house, the bank foreclosed. When the bank couldn't resell the house and get its money back, the bank's reserves were diminished and finally it couldn't meet its obligations. That's when the Fed stepped in with more liquidity. The Fed just created money out of thin air the same way the banks created money for loans, and flooded the banking system with it.

Average people lost their homes and their jobs, but investors and gamblers who had bet that the economy would collapse were paid off. This is the solution that Obama oversaw that was created by his protege Tim Geithner, Obama's Secretary of the Treasury. Now the question might be asked why the gamblers who had bet that the economy would fail were paid in full because the Federal Reserve created the money out of thin air to pay them while there was no money created to bail out the American people who had lost their homes and their jobs. Why was their no money created to alleviate the suffering? That's because that's not the Fed's job. The Fed's job is to bail out the banks. Hedge fund manager John Paulson made an estimated $2.5 billion during the crisis by betting against the housing market.

It doesn't take a genius to see that the US might have better spent its money by more widely distributing the trillions that the Fed created rather than paying off a hedge fund manager to the tune of a couple billion dollars, but again that's not the Fed's job. It should have been Obama's job to step in and demand that investor/gamblers not be paid, and that the Fed's trillions of dollars that it created go to the average John and Jayne that lost everything. But that's not how things work in the US capitalist economy. The Fed is not beholden to the American people. It's only beholden to the banks, and even there, it can decide which ones it wants to fail (Lehman Bros.) and which ones it wants to bail out (every other bank).

The trillions of dollars created by the Federal Reserve in its Quantitative Easing (QE) program go directly into the hands of investors meaning rich people. This does not "trickle down" to the American public. So it's no mystery why economic inequality is increasing, why the rich are getting richer and the poor are getting poorer. Much is made about how the Federal Reserve is "independent" from the Federal government. That's because it is a privately owned, wholly owned subsidiary of the big banks. It is literally owned by Wall Street and it's only beholden to Wall Street. It only serves the American public in the sense that it keeps the financial system operating smoothly supposedly.

Consider the alternative. A public bank, one beholden to the American people or its representatives, would have been able to direct the money flow at least partially to the direct alleviation of suffering of the American people during a recession or a depression. The Reconstruction Finance Corporation served the role during the Great Depression of getting money directly to state and local governments and to the American people. It supported banks as well, but the monies also flowed directly into the economy without having to take the form of loans created by the Wall Street banks. It was more hands on in bailing out certain industries.

A public bank, such as exists in North Dakota, can make loans directly to people and small businesses. It doesn't deal in fancy derivatives and is accountable not to the banking system but to the people in general. In North Dakota's case it's accountable to the people of North Dakota to whom it returns its profits. The Central Bank of the United States could be a public bank on the national level which would replace the Federal Reserve with the mandate of supporting the American people directly as well as the banking structure. It would not deal in derivatives which only benefit hedge funds and drive inequality.

The coronavirus could induce another Great Depression depending on how long it lasts. However, don't expect the Federal Reserve to protect the American people although it will protect Wall Street. No investor/gambler need fear losing their money. In fact the John Paulsons of the world, who have probably already taken out fantastic bets that the economy will go down, stand to make billions supplied of course by the Federal Reserve which will create the money out of thin air. This sloshing around of money will be scooped up by the billionaire class. Then the Federal government will come through on the fiscal side to supply aid of some sort to the American people while adding all this money to the national debt.

Off the Top of My Head

The Fed Gives More Money to the Rich. None to You.

by John Lawrence, March 13, 2020

The Federal Reserve just announced that it would give $1.5 trillion to the rich, and lower interest rates to zero. That means more money available for gambling in the Wall Street Casino. According to the Federal Reserve Act, "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." So the Fed traditionally raised interest rates when the economy was expanding too rapidly leading to too much inflation and reduced them when the economy was contracting and there was too much unemployment. However, what it is doing now and has been doing since 2008 is pouring money into the coffers of the big Wall Street banks with a spigot that is hardly ever turned off.

Most of the money coming from the Fed's spigot #1 never goes to the average Joe or Jane and #2 goes directly into gambling by Wall Street in an attempt to keep financial instruments such as the stock and bond markets from collapsing. There is so much money sloshing around in the coffers of rich people that it has no impact on the real economy. There is full employment and no inflation so the Fed shouldn't have to do anything because those are the twin goals it was set up to achieve. It wasn't set up to make sure the stock market never sold off. Yet this is what it is now all about. The economy has become so financialized that limiting inflation and controlling interest rates is some archaic thing that the Fed is hardly concerned with any more.

The New York Times reported:

The unscheduled move - the latest in a series of actions aimed at providing liquidity and reassurance as the outbreak grows and brings areas of the country to a veritable halt - came as U.S. stocks plunged nearly 10% in their biggest one-day losses since the 1987 market crash. The outbreak, which originally was thought to pose a limited threat to the U.S. economy, is now increasingly seen as the event that could bring a record-long economic expansion to an end, but with little clarity yet as to how severe the downturn might be.The economy is already being hit with waves of event and travel cancellations. Broadway and Disneyland are going dark and the professional sports industry is for now on hold. ...

"The Fed is likely to do more soon, including cutting rates to likely zero," Ebrahim Rahbari, chief currency strategist for Citi, said in a note to clients Thursday.

That would represent a dramatic turn of events for the Fed, reversing in a matter of months a decade's worth of effort to move interest rates back towards something like a normal level - only to see the twin shocks of a global trade war and now a global health emergency push them back down.

Interest rates at zero means pouring even more free money into the economy. That's the Fed's response to every situation now: free money for rich people. Nothing for the average Joe or Jane because if the average Joe or Jane had more consuming power, that would lead to higher prices, and, therefore, price inflation, another headache for the Fed.

Ronald Reagan did more to break the inflation of the 70s and 80s by breaking the unions. Once the country was deunionized there was no more wage inflation because workers were no longer in a position to demand higher wages. Their work was off shored to China where workers worked for pitiful wages so that American consumers could buy products at low prices. So there was no price inflation. So the Fed turned its mission instead into pouring money into the economy in the hopes that this would keep everybody working. But there is so much of this money sloshing around among rich people that they are not investing in new enterprises which is what is needed to keep the economy humming. So they are gambling with it instead and these gambles also add to GDP when they win.

Much of the American economy has to do with professional sports and entertainment. So when you have professional sports and Disneyland shut down due to the coronavirus, this naturally leads to a recession. People aren't traveling or going on cruises. This leads to a recession. Since the US GDP is 70% consumption, you can't have entertainment being shut down without diminishing consumption by a great amount. Entertainment and professional sports is a goodly percentage of consumption. Because of the coronavirus most nonessential consumption is being shut down. The bar and restaurant business is being shut down. The only businesses who are doing good are the toilet paper and bottled water industries.

So what the Fed is doing by adding $1.5 trillion to the economy at this time has nothing to do with getting people to go to events or eat out more often. It is just to satisfy the whims of rich stock and bond market investors who must be appeased at all costs.

The Fed’s Baffling Response to the Coronavirus Explained

by Ellen Brown, from truthdig, March 9, 2020

A man taking precautions amid the coronavirus outbreak walks past the New York Stock Exchange. (Mark Lennihan / AP)

When the World Health Organization announced on Feb. 24 that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points, or 10%. In an attempt to contain the damage, the Federal Reserve on March 3 slashed the fed funds rate from 1.5% to 1.0%, in its first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.

Exasperated commentators on CNBC wondered what the Fed was thinking. They said a half-point rate cut would not stop the spread of the coronavirus or fix the broken Chinese supply chains that are driving U.S. companies to the brink. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan, the epicenter of the virus. At least 5 million companies globally have one or more tier-two suppliers in the region, meaning that their suppliers get their supplies there; and 938 of the Fortune 1,000 companies have tier-one or tier-two suppliers there. Moreover, fully 80% of U.S. pharmaceuticals are made in China. A break in the supply chain can grind businesses to a halt.

So what was the Fed’s reasoning for lowering the fed funds rate? According to some financial analysts, the fire it was trying to put out was actually in the repo market, where the Fed has lost control despite its emergency measures of the last six months. Repo market transactions come to $1 trillion to $2.2 trillion per day and keep our modern-day financial system afloat. But to follow the developments there, we first need a recap of the repo action since 2008.

Repos and the Fed

Before the 2008 banking crisis, banks in need of liquidity borrowed excess reserves from each other in the fed funds market. But after 2008, banks were reluctant to lend in that unsecured market, because they did not trust their counterparts to have the money to pay up. Banks desperate for funds could borrow at the Fed’s discount window, but it carried a stigma. It signaled that the bank must be in distress, since other banks were not willing to lend to it at a reasonable rate. So banks turned instead to the private repo market, which is anonymous and is secured with collateral (Treasuries and other acceptable securities). Repo trades, although technically “sales and repurchases” of collateral, are in effect secured short-term loans, usually repayable the next day or in two weeks.

The risky element of these apparently secure trades is that the collateral itself may not be reliable, because it may be subject to more than one claim. For example, it may have been acquired in a swap with another party for securitized auto loans or other shaky assets — a swap that will have to be reversed at maturity. As I explained in an earlier article, the private repo market has been invaded by hedge funds, which are highly leveraged and risky; so risk-averse money market funds and other institutional lenders have been withdrawing from that market. When the normally low repo interest rate shot up to 10% in September, the Fed therefore felt compelled to step in. The action it took was to restart its former practice of injecting money short-term through its own repo agreements with its primary dealers, which then lent to banks and other players. On March 3, however, even that central bank facility was oversubscribed, with far more demand for loans than the subscription limit.

The Fed’s emergency rate cut was in response to that crisis. Lowering the fed funds rate by half a percentage point was supposed to relieve the pressure on the central bank’s repo facility by encouraging banks to lend to each other. But the rate cut had virtually no effect, and the central bank’s repo facility continued to be oversubscribed the next day and the following. As observed by Zero Hedge:

"This continuing liquidity crunch is bizarre, as it means that not only did the rate cut not unlockadditional funding, it actually made the problem worse, and now banks and dealers are telegraphing that they need not only more repo buffer but likely an expansion of QE [quantitative easing].

The Collateral Problem

As financial analyst George Gammon explains, however, the crunch in the private repo market is not actually due to a shortage of liquidity. Banks still have $1.5 trillion in excess reserves in their accounts with the Fed, stockpiled after multiple rounds of quantitative easing. The problem is in the collateral, which lenders no longer trust. Lowering the fed funds rate did not relieve the pressure on the Fed’s repo facility for obvious reasons: Banks that are not willing to take the risk of lending to each other unsecured at 1.5% in the fed funds market are going to be even less willing to lend at 1%. They can earn that much just by leaving their excess reserves at the safe, secure Fed, drawing on the Interest on Excess Reserves it has been doling out ever since the 2008 crisis.

But surely the Fed knew that. So why lower the fed funds rate? Perhaps because it had to do something to maintain the façade of being in control, and lowering the interest rate was the most acceptable tool it had. The alternative would be another round of quantitative easing, but the Fed has so far denied entertaining that controversial alternative. Those protests aside, QE is probably next after the Fed’s orthodox tools fail, as the Zero Hedge author notes.

The central bank has become the only game in town, and its hammer keeps missing the nail. A recession caused by a massive disruption in supply chains cannot be fixed through central-bank monetary easing alone. Monetary policy is a tool designed to deal with demand — the amount of money competing for goods and services, driving prices up. To fix a supply-side problem, monetary policy needs to be combined with fiscal policy, which means Congress and the Fed need to work together. There are successful contemporary models for this, and the best are in China and Japan.

The Chinese Stock Market Has Held Its Ground

While U.S. markets were crashing, the Chinese stock market actually went up by 10% in February. How could that be? China is the country hardest hit by the disruptive COVID-19 virus, yet investors are evidently confident that it will prevail against the virus and market threats.

In 2008, China beat the global financial crisis by pouring massive amounts of money into infrastructure, and that is apparently the policy it is pursuing now. Five hundred billion dollars in infrastructure projects have already been proposed for 2020 — nearly as much as was invested in the country’s huge stimulus program after 2008. The newly injected money will go into the pockets of laborers and suppliers, who will spend it on consumer goods, prompting producers to produce more goods and services, increasing productivity and jobs.

How will all this stimulus be funded? In the past, China has simply borrowed from its own state-owned banks, which can create money as deposits on their books, as all depository banks do today (see here and here). Most of the loans will be repaid with the profits from the infrastructure they create, and those that are not can be written off or carried on the books or moved off the balance sheet. The Chinese government is the regulator of its banks, and rather than putting its insolvent banks and businesses into bankruptcy, its usual practice is to let nonperforming loans just pile up on bank balance sheets. The newly created money that was not repaid adds to the money supply, but no harm is done to the consumer economy, which actually needs regular injections of new money to fill the gap between debt and the money available to repay it. In all systems in which banks create the principal but not the interest due on loans, this gap continually widens, requiring continual infusions of new money to fill the breach (see my earlier article here). In the last 20 years, China’s money supply has increased by 2,000% without driving up the consumer price index, which has averaged around 2% during those two decades. Supply has gone up with demand, keeping prices stable.

The Japanese Model

China’s experiences are instructive, but borrowing from the government’s own banks cannot be done in the U.S., because our banks have not been nationalized and our central bank is considered to be independent of government control. The Fed cannot pour money directly into infrastructure but is limited to buying bonds from its primary dealers on the open market.

At least, that is the Fed’s argument, but the Federal Reserve Act allows it to make three-month infrastructure loans to states, and these could be rolled over for extended periods thereafter. The repo market itself consists of short-term loans continually rolled over. If hedge funds can borrow at 1.5% in the private repo market, which is now backstopped by the Fed, states should get those low rates as well.

Alternatively, Congress could amend the Federal Reserve Act to allow it to work with the central bank in funding infrastructure and other national projects, following the path successfully blazed by Japan. Under Japanese banking law, the central bank must cooperate closely with the Ministry of Finance in setting policy. Unlike in the U.S., Japan’s prime minister can negotiate with the head of its central bank to buy the government’s bonds, ensuring that the bonds will be turned into new money that will stimulate domestic economic growth; and if the bonds are continually rolled over, this debt need never be repaid.

The Bank of Japan has already “monetized” nearly 50% of the government’s debt in this way, and it has pulled off this feat without driving up consumer prices. In fact, Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Deflation continues to be a greater concern than inflation in Japan, despite unprecedented debt monetization by its central bank.

The Independent Federal Reserve Is Obsolete

In the face of a recession caused by massive supply-chain disruption, the U.S. central bank has shown itself to be impotent. Congress needs to take a lesson from Japan and modify U.S. banking law to allow it to work with the central bank in getting the wheels of production turning again. The next time the country’s largest banks become insolvent, rather than bailing banks out, Congress should nationalize them. The banks could then be used to fund infrastructure and other government projects to stimulate the economy, following China’s model.

---

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of thirteen books including her latest, "Banking on the People: Democratizing Money in the Digital Age."

Sanders Says He 'Welcomes Hatred of Crooks Who Destroyed Our Economy' After Blankfein Suggests He May Vote Trump Over Bernie

Published on Friday, February 21, 2020

by Common Dreams

"I don't like that at all," the billionaire former Goldman Sachs CEO said of Sanders' wealth tax proposal.

by Jake Johnson, staff writer

 

97 Comments

Former Goldman Sachs CEO Lloyd Blankfein speaks onstage during a New York Times Dealbook event on November 1, 2018 in New York City. (Photo: Michael Cohen/Getty Images for The New York Times)

Sen. Bernie Sanders on Friday said he welcomes "the hatred of the crooks who destroyed our economy" after former Goldman Sachs CEO Lloyd Blankfein suggested he might vote for President Donald Trump in November if Sanders wins the Democratic nomination.

"I think I might find it harder to vote for Bernie than for Trump," Blankfein, a life-long Democrat, told the Financial Times in an interview published Friday. "There's a long time between now and then. The Democrats would be working very hard to find someone who is as divisive as Trump. But with Bernie they would have succeeded."

Sanders quickly responded to Blankfein's comments on Twitter:

I welcome the hatred of the crooks who destroyed our economy. https://t.co/aZcdCFpeqt

— Bernie Sanders (@BernieSanders) February 21, 2020

Blankfein said Sanders' proposed wealth tax on the ultra-rich is "just as subversive of the American character" as Trump's demonization of "groups of people who he has never met."

"I don't like that at all," Blankfein said. "I don't like assassination by categorization. I think it's un-American. I find that destructive and intemperate... At least Trump cares about the economy."

Blankfein, who has an estimated net worth of $1.3 billion, told FT that he is not rich, but "well-to-do."

"I can't even say 'rich,'" said the former banker. "I don't feel that way. I don't behave that way."

The FT interview was not the first time Blankfein has spoken out against Sanders, a longtime critic of Wall Street. Following Sanders' victory in the New Hampshire Democratic primary earlier this month, Blankfein tweeted that the Vermont senator is "just as polarizing as Trump and he'll ruin our economy and doesn't care about our military."

Blankfein's past criticisms of Sanders earned the former banker a spot on the senator's "anti-endorsement list" released last September.

"Lloyd Blankfein became a billionaire after his investment bank received an $824 billion taxpayer bailout from the Federal Reserve and the Treasury Department, paid over $5.5 billion in fines for mortgage fraud, avoided paying any federal income taxes in 2008, and lectured Congress to cut Social Security, Medicare, and Medicaid," reads Blankfein's section on Sanders' anti-endorsement page.

---

Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.

The Disaster of Negative of Interest Rates

by Ellen Brown, Web of Debt blog

Posted on September 29, 2019 by Ellen Brown

President Trump wants negative interest rates, but they would be disastrous for the U.S. economy, and his objectives can be better achieved by other means.

The dollar strengthened against the euro in August, merely in anticipation of the European Central Bank slashing its key interest rate further into negative territory. Investors were fleeing into the dollar, prompting President Trump to tweet on Aug. 30:

The Euro is dropping against the Dollar “like crazy,” giving them a big export and manufacturing advantage… And the Fed does NOTHING!

When the ECB cut its key rate as anticipated, from a negative 0.4% to a negative 0.5%, the president tweeted on Sept. 11:

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.

And on Sept. 12 he tweeted:

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!

However, negative interest rates have not been shown to stimulate the economies that have tried them, and they would wreak havoc on the U.S. economy, for reasons unique to the U.S. dollar. The ECB has not gone to negative interest rates to gain an export advantage. It is to keep the European Union from falling apart, something that could happen if the United Kingdom does indeed pull out and Italy follows suit, as it has threatened to do. If what Trump wants is cheap borrowing rates for the U.S. federal government, there is a safer and easier way to get them.

The Real Reason the ECB Has Gone to Negative Interest Rates

Why the ECB has gone negative was nailed by Wolf Richter in a Sept. 18 article on WolfStreet.com. After noting that negative interest rates have not proved to be beneficial for any economy in which they are currently in operation and have had seriously destructive side effects for the people and the banks, he said:

However, negative interest rates as follow-up and addition to massive QE were effective in keeping the Eurozone glued together because they allowed countries to stay afloat that cannot, but would need to, print their own money to stay afloat. They did so by making funding plentiful and nearly free, or free, or more than free.

This includes Italian government debt, which has a negative yield through three-year maturities. … The ECB’s latest rate cut, minuscule and controversial as it was, was designed to help out Italy further so it wouldn’t have to abandon the euro and break out of the Eurozone.

The U.S. doesn’t need negative interest rates to stay glued together. It can print its own money.

EU member governments have lost the sovereign power to issue their own money or borrow money issued by their own central banks. The failed EU experiment was a monetarist attempt to maintain a fixed money supply, as if the euro were a commodity in limited supply like gold. The central banks of member countries do not have the power to bail out their governments or their failing local banks as the Fed did for U.S. banks with massive quantitative easing after the 2008 financial crisis. Before the Eurozone debt crisis of 2011-12, even the European Central Bank was forbidden to buy sovereign debt.

The rules changed after Greece and other southern European countries got into serious trouble, sending bond yields (nominal interest rates) through the roof.  But default or debt restructuring was not considered an option; and in 2016, new EU rules required a “bail in” before a government could bail out its failing banks. When a bank ran into trouble, existing stakeholders–including shareholders, junior creditors and sometimes even senior creditors and depositors with deposits in excess of the guaranteed amount of €100,000–were required to take a loss before public funds could be used. The Italian government got a taste of the potential backlash when it forced losses onto the bondholders of four small banks. One victim made headlines when he hung himself and left a note blaming his bank, which had taken his entire €100,000 savings.

Meanwhile, the bail-in scheme that was supposed to shift bank losses from governments to bank creditors and depositors served instead to scare off depositors and investors, making shaky banks even shakier. Worse, heightened capital requirements made it practically impossible for Italian banks to raise capital. Rather than flirt with another bail-in disaster, Italy was ready either to flaunt EU rules or leave the Union.

The ECB finally got on the quantitative easing bandwagon and started buying government debt along with other financial assets. By buying debt at negative interest, it is not only relieving EU governments of their interest burden, it is slowly extinguishing the debt itself.

That explains the ECB, but why are investors buying these bonds? According to John Ainger in Bloomberg:

Investors are willing to pay a premium–and ultimately take a loss–because they need the reliability and liquidity that the government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth.

In short, they are captive buyers. Banks are required to hold government securities or other “high-quality liquid assets” under capital rules imposed by the Financial Stability Board in Switzerland. Since EU banks now must pay the ECB to hold their bank reserves, they may as well hold negative-yielding sovereign debt, which they may be able to sell at a profit if rates drop even further.

Wolf Richter comments:

Investors who buy these bonds hope that central banks will take them off their hands at even lower yields (and higher prices). No one is buying a negative yielding long-term bond to hold it to maturity.

Well, I say that, but these are professional money managers who buy such instruments, or who have to buy them due to their asset allocation and fiduciary requirements, and they don’t really care. It’s other people’s money, and they’re going to change jobs or get promoted or start a restaurant or something, and they’re out of there in a couple of years. Après moi le déluge.

Why the U.S. Can’t Go Negative, and What It Can Do Instead

The U.S. doesn’t need negative interest rates, because it doesn’t have the EU’s problems but it does have other problems unique to the U.S. dollar that could spell disaster if negative rates were enforced.

First is the massive market for money market funds, which are more important to daily market functioning in the U.S. than in Europe and Japan. If interest rates go negative, the funds could see large-scale outflows, which could disrupt short-term funding for businesses, banks and perhaps even the Treasury. Consumers could also face new charges to make up for bank losses.

Second, the U.S. dollar is inextricably tied up with the market for interest rate derivatives, which is currently valued at over $500 trillion. As proprietary analyst Rob Kirby explains, the economy would crash if interest rates went negative, because the banks holding the fixed-rate side of the swaps would have to pay the floating-rate side as well. The derivatives market would go down like a stack of dominoes and take the U.S. economy with it.

Perhaps in tacit acknowledgment of those problems, Fed Chairman Jay Powell responded to a question about negative interest rates on Sept. 18:

Negative interest rates [are] something that we looked at during the financial crisis and chose not to do. After we got to the effective lower bound [near-zero effective federal funds rate], we chose to do a lot of aggressive forward guidance and also large-scale asset purchases. …

And if we were to find ourselves at some future date again at the effective lower bound–not something we are expecting–then I think we would look at using large-scale asset purchases and forward guidance.

I do not think we’d be looking at using negative rates.

Assuming the large-scale asset purchases made at some future date were of federal securities, the federal government would be financing its debt virtually interest-free, since the Fed returns its profits to the Treasury after deducting its costs. And if the bonds were rolled over when due and held by the Fed indefinitely, the money could be had not only interest-free but debt-free. That is not radical theory but is what is actually happening with the Fed’s bond purchases in its earlier QE. When it tried to unwind those purchases last fall, the result was a stock market crisis. The Fed is learning that QE is a one-way street.

The problem under existing law is that neither the president nor Congress has control over whether the “independent” Fed buys federal securities. But if Trump can’t get Powell to agree over lunch to these arrangements, Congress could amend the Federal Reserve Act to require the Fed to work with Congress to coordinate fiscal and monetary policy. This is what Japan’s banking law requires, and it has been very successful under Prime Minister Shinzō Abe and “Abenomics.” It is also what a team of former central bankers led by Philipp Hildebrand proposed in conjunction with last month’s Jackson Hole meeting of central bankers, after acknowledging the central bankers’ usual tools weren’t working. Under their proposal, central bank technocrats would be in charge of allocating the funds, but better would be the Japanese model, which leaves the federal government in control of allocating fiscal policy funds.

The Bank of Japan now holds nearly half of Japan’s federal debt, a radical move that has not triggered hyperinflation as monetarist economists direly predicted. In fact, the Bank of Japan can’t get the country’s inflation rate even to its modest 2 percent target. As of August, the rate was an extremely low 0.3%. If the Fed were to follow suit and buy 50% of the U.S. government’s debt, the Treasury could swell its coffers by $11 trillion in interest-free money. And if the Fed kept rolling over the debt, Congress and the president could get this $11 trillion not only interest-free but debt-free. President Trump can’t get a better deal than that.

______________________________

This article was first posted on Truthdig.com. Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com. 

Off the Top of My Head

California Paves the Way for Public Banks!

by John Lawrence, October 4, 2019

While the rest of the nation dithers and wrings their collective hands over Trump, California is moving forward passing a bill on rent control, gig workers and now PUBLIC BANKING. Thanks to Ellen Brown's pioneering work, California will now become the second state in the nation (after North Dakota) to have a public bank. This means that billions of dollars won't be sent to Wall Street any more but will stay in the state. More money will be available for affordable housing, student loans at affordable rates, infrastructure and tax relief. Just possibly savers may finally get a reasonable rate of interest on savings accounts. And when the next financial crisis comes, California will weather the storm in much better shape than the rest of the nation just as North Dakota did in 2018.

This was hailed as a “stunning rebuke to the predatory Wall Street megabanks that crashed the global economy in 2007-08.” “Today’s signing sends a strong message that California is putting people before Wall Street profits,” said Assemblyman David Chiu (D-San Francisco), who co-authored the bill (AB 857) with Assemblyman Miguel Santiago (D-Los Angeles). “We finally have the option of reinvesting our public tax dollars in our communities instead of rewarding Wall Street’s bad behavior,” he said. “This new law prioritizes communities and neighborhoods by empowering localities to use public dollars for their own public good: from investing in affordable housing projects and building new schools and parks, to accessible loans for students and businesses,” Santiago, the bill’s co-author, said in a statement.

At first the law limits to 10 the number of public banks that can be actualized. That means that probably only California's largest cities will create them. Certainly Los Angeles, San Francisco and San Diego should be among the first to go through the rigorous process of forming a public bank. The LA Times reported:

The law provides a path for cities and counties to pursue a public-bank license that has several “checks and balances built in, with layers of oversight and accountability” said Sushil Jacob, a senior attorney with the Lawyers’ Committee for Civil Rights of the San Francisco Bay Area. The committee is part of the California Public Banking Alliance, which pushed for the new law.

For example, the city or county would have to establish a separate corporation with an independent board of directors, and it would have to obtain approval from the Federal Deposit Insurance Corp. to obtain deposit insurance, Jacob said.

The new public bank and its business plan also would need approval from the state Department of Business Oversight, and “the public has to be given the opportunity to weigh in on the [bank’s] viability study before a local agency can approve it,” he said.

“There also are startup costs involved, such as hiring consultants and developing a business plan,” and it’s expected that the state’s largest cities and counties, such as Los Angeles and San Francisco, would be among the first jurisdictions to apply, Jacob said.

The process likely would take one to two years, he added.

If this process works well for cities and counties, the next step would be the establishment of a public bank for California as a state and not just allow them in cities and counties. There is a lot more money involved at the state level than at the local level like the CalPERS pension fund and state tax revenues. The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families". In fiscal year 2012–13, CalPERS paid over $12.7 billion in retirement benefits, and in fiscal year 2013 it is estimated that CalPERS will pay over $7.5 billion in health benefits. As of June 30, 2014, CalPERS managed the largest public pension fund in the United States, with $300.3 billion in assets. As of 2018, the agency had $360 billion in assets.

Next City reports:

Today in the U.S., state and local governments hold $502 billion in bank deposits (not to mention $4.3 trillion in state and local public pensions). Progress on public banks in California will be closely watched in other states and cities where organizers and public officials have been pushing for public banks — including Washington State, New Mexico, Michigan, New Jersey, the District of Columbia, New York City, Philadelphia, Chicago, the Twin Cities, Portland, Seattle, and elsewhere.

Ellen Brown's latest book is "The Making of a Democratic Economy." She has also written "Banking on the People - Democratizing Money in the Digital Age," "The Public Bank Solution," and "Web of Debt." She is largely responsible for the public banking movement. Other articles on public banking have appeared in the San Diego Free Press: Public Banking: How a Public Bank Could Benefit San Diego – Part 4.

The bugaboo in this whole thing could be the need for Federal Deposit Insurance. Trump could get his hands in there and put the kabosh on the whole thing. However, the need for a marijuana bank is an incentive to follow through on the creation of public banks as well as a distaste for Wells Fargo and all the illegal behavior they have been involved in. Jamie Dimon and Lloyd Blankfein are not amused.

The Disaster of Negative Interest Rates

Published on Monday, September 30, 2019

by Common Dreams

President Trump wants negative interest rates, but they would be disastrous for the U.S. economy, and his objectives can be better achieved by other means.

by Ellen Brown

 

1 Comments

Federal Reserve Board Chairman Jerome Powell. (Photo by Alex Wong/Getty Images)

The dollar strengthened against the euro in August, merely in anticipation of the European Central Bank slashing its key interest rate further into negative territory. Investors were fleeing into the dollar, prompting President Trump to tweet on Aug. 30: 

The Euro is dropping against the Dollar “like crazy,” giving them a big export and manufacturing advantage… And the Fed does NOTHING!

When the ECB cut its key rate as anticipated, from a negative 0.4% to a negative 0.5%, the president tweeted on Sept. 11: 

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.

And on Sept. 12 he tweeted: 

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest! 

However, negative interest rates have not been shown to stimulate the economies that have tried them, and they would wreak havoc on the U.S. economy, for reasons unique to the U.S. dollar. The ECB has not gone to negative interest rates to gain an export advantage. It is to keep the European Union from falling apart, something that could happen if the United Kingdom does indeed pull out and Italy follows suit, as it has threatened to do. If what Trump wants is cheap borrowing rates for the U.S. federal government, there is a safer and easier way to get them.  

The Real Reason the ECB Has Gone to Negative Interest Rates

Why the ECB has gone negative was nailed by Wolf Richter in a Sept. 18 article on WolfStreet.com. After noting that negative interest rates have not proved to be beneficial for any economy in which they are currently in operation and have had seriously destructive side effects for the people and the banks, he said:

However, negative interest rates as follow-up and addition to massive QE were effective in keeping the Eurozone glued together because they allowed countries to stay afloat that cannot, but would need to, print their own money to stay afloat. They did so by making funding plentiful and nearly free, or free, or more than free.

This includes Italian government debt, which has a negative yield through three-year maturities. … The ECB’s latest rate cut, minuscule and controversial as it was, was designed to help out Italy further so it wouldn’t have to abandon the euro and break out of the Eurozone.

The U.S. doesn’t need negative interest rates to stay glued together. It can print its own money.

EU member governments have lost the sovereign power to issue their own money or borrow money issued by their own central banks. The failed EU experiment was a monetarist attempt to maintain a fixed money supply, as if the euro were a commodity in limited supply like gold. The central banks of member countries do not have the power to bail out their governments or their failing local banks as the Fed did for U.S. banks with massive quantitative easing after the 2008 financial crisis. Before the Eurozone debt crisis of 2011-12, even the European Central Bank was forbidden to buy sovereign debt. 

The rules changed after Greece and other southern European countries got into serious trouble, sending bond yields (nominal interest rates) through the roof.  But default or debt restructuring was not considered an option; and in 2016, new EU rules required a “bail in” before a government could bail out its failing banks. When a bank ran into trouble, existing stakeholders–including shareholders, junior creditors and sometimes even senior creditors and depositors with deposits in excess of the guaranteed amount of €100,000–were required to take a loss before public funds could be used. The Italian government got a taste of the potential backlash when it forced losses onto the bondholders of four small banks. One victim made headlines when he hung himself and left a note blaming his bank, which had taken his entire €100,000 savings. 

Meanwhile, the bail-in scheme that was supposed to shift bank losses from governments to bank creditors and depositors served instead to scare off depositors and investors, making shaky banks even shakier. Worse, heightened capital requirements made it practically impossible for Italian banks to raise capital. Rather than flirt with another bail-in disaster, Italy was ready either to flaunt EU rules or leave the Union. 

The ECB finally got on the quantitative easing bandwagon and started buying government debt along with other financial assets. By buying debt at negative interest, it is not only relieving EU governments of their interest burden, it is slowly extinguishing the debt itself.

That explains the ECB, but why are investors buying these bonds? According to John Ainger in Bloomberg: 

Investors are willing to pay a premium–and ultimately take a loss–because they need the reliability and liquidity that the government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth.

In short, they are captive buyers. Banks are required to hold government securities or other “high-quality liquid assets” under capital rules imposed by the Financial Stability Board in Switzerland. Since EU banks now must pay the ECB to hold their bank reserves, they may as well hold negative-yielding sovereign debt, which they may be able to sell at a profit if rates drop even further.  

 Wolf Richter comments: 

Investors who buy these bonds hope that central banks will take them off their hands at even lower yields (and higher prices). No one is buying a negative yielding long-term bond to hold it to maturity.

Well, I say that, but these are professional money managers who buy such instruments, or who have to buy them due to their asset allocation and fiduciary requirements, and they don’t really care. It’s other people’s money, and they’re going to change jobs or get promoted or start a restaurant or something, and they’re out of there in a couple of years. Après moi le deluge. 

Why the U.S. Can’t Go Negative, and What It Can Do Instead

The U.S. doesn’t need negative interest rates, because it doesn’t have the EU’s problems but it does have other problems unique to the U.S. dollar that could spell disaster if negative rates were enforced. 

First is the massive market for money market funds, which are more important to daily market functioning in the U.S. than in Europe and Japan. If interest rates go negative, the funds could see large-scale outflows, which could disrupt short-term funding for businesses, banks and perhaps even the Treasury. Consumers could also face new charges to make up for bank losses. 

Second, the U.S. dollar is inextricably tied up with the market for interest rate derivatives, which is currently valued at over $500 trillion. As proprietary analyst Rob Kirby explains, the economy would crash if interest rates went negative, because the banks holding the fixed-rate side of the swaps would have to pay the floating-rate side as well. The derivatives market would go down like a stack of dominoes and take the U.S. economy with it. 

Perhaps in tacit acknowledgment of those problems, Fed Chairman Jay Powell responded to a question about negative interest rates on Sept. 18:

Negative interest rates [are] something that we looked at during the financial crisis and chose not to do. After we got to the effective lower bound [near-zero effective federal funds rate], we chose to do a lot of aggressive forward guidance and also large-scale asset purchases. …

And if we were to find ourselves at some future date again at the effective lower bound–not something we are expecting–then I think we would look at using large-scale asset purchases and forward guidance.

I do not think we’d be looking at using negative rates.

Assuming the large-scale asset purchases made at some future date were of federal securities, the federal government would be financing its debt virtually interest-free, since the Fed returns its profits to the Treasury after deducting its costs. And if the bonds were rolled over when due and held by the Fed indefinitely, the money could be had not only interest-free but debt-free. That is not radical theory but is what is actually happening with the Fed’s bond purchases in its earlier QE. When it tried to unwind those purchases last fall, the result was a stock market crisis. The Fed is learning that QE is a one-way street. 

The problem under existing law is that neither the president nor Congress has control over whether the “independent” Fed buys federal securities. But if Trump can’t get Powell to agree over lunch to these arrangements, Congress could amend the Federal Reserve Act to require the Fed to work with Congress to coordinate fiscal and monetary policy. This is what Japan’s banking law requires, and it has been very successful under Prime Minister Shinzō Abe and “Abenomics.” It is also what a team of former central bankers led by Philipp Hildebrand proposed in conjunction with last month’s Jackson Hole meeting of central bankers, after acknowledging the central bankers’ usual tools weren’t working. Under their proposal, central bank technocrats would be in charge of allocating the funds, but better would be the Japanese model, which leaves the federal government in control of allocating fiscal policy funds. 

The Bank of Japan now holds nearly half of Japan’s federal debt, a radical move that has not triggered hyperinflation as monetarist economists direly predicted. In fact, the Bank of Japan can’t get the country’s inflation rate even to its modest 2 percent target. As of August, the rate was an extremely low 0.3%. If the Fed were to follow suit and buy 50% of the U.S. government’s debt, the Treasury could swell its coffers by $11 trillion in interest-free money. And if the Fed kept rolling over the debt, Congress and the president could get this $11 trillion not only interest-free but debt-free. President Trump can’t get a better deal than that.

---

  Ellen Brown is an attorney and founder of the Public Banking Institute. She is the author of twelve books, including the best-selling Web of Debt, and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

---

Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.

Off the Top of My Head

Oh What Tangled Webs They Weave

by John Lawrence, September 24, 2019

It turns out that Hunter Biden was appointed to the board of a gas company in Ukraine, Burisma, where he received $50,000 a month for his services. This was at a time when Joe Biden was Obama's point man in dealing with Ukraine. The whole thing starts smelling fishy. Joe Biden demanded that the Ukrainian prosecutor be fired before the US would give Ukraine $1 billion. Now Trump is under fire for holding up Ukrainian aid until they investigate the Bidens. Ukraine is a political football and a swamp which both parties are mired in. However there is a happy outcome to the situation - Elizabeth Warren is ahead of Joe Biden in the polls! Thank God! I want Warren, not Biden, to be the Democratic nominee for President. Joe Biden's time has come and gone. Both Trump and Biden can say there was no wrongdoing all they want, but they both have their hands dirty. No relative of a vice President should be getting $50 K a month for sitting on some board in a country that his father is dealing with.

It seems that the Bidens are mucking around in the same territories that Hillary Clinton was - taking money from rich donors who want special favors in return. In Hillary's case it was whispering into Lloyd Blankfein's ear in return for a check for $250,000. He is the chairman of Goldman Sachs. There were three paid speeches she gave to Goldman Sachs, for which she earned a total of $675,000. These money grubbing Democrats as well as the whole Republican party which are nothing but a bunch of money grubbers need to be thrown out. Who does that leave us with? Bernie Sanders, Elizabeth Warren and a few other progressive and moderate Democrats. I would like to see Elizabeth Warren and Cory Booker run as a team for President and vice President of the US. That would be a great combination, gender wise and ethnicity wise. Cory's politics are also more on the moderate side which gives some balance to the ticket.

Joe Biden thinks he can cover up his past voting record where he voted for everything the banking industry wanted. He's from Delaware headquarters of the credit card industry. The Washington Examiner reported:

Former Vice President Joe Biden bills himself as one of the regular guys and gals, but as a Democratic Senator from Delaware, he cozied up to credit card executives while championing their cause in Congress, making it tougher for average Americans to file for bankruptcy.

“Joe Biden pretends that he’s middle-class Joe, and in reality he’s corporate Joe,” Adam Levitin, a law professor at Georgetown University who specializes in bankruptcy, commercial law, and financial regulation, told the Washington Examiner.

Biden was a key architect of and whip for the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which made it harder for consumers to declare bankruptcy. At the time, bankruptcy filings were at a peak of more than 2 million and legislators worried that the system was being abused. After the bill became law, bankruptcy filings fell by 70 percent.

“Someone once analogized what happened in 2005 as someone looking at a hospital and saying, ‘oh my God, emergency admissions are way up. So the solution is to reduce the hours of the emergency room,’” Bruce A. Markell, a professor of bankruptcy law and practice at Northwestern University, told the Washington Examiner.

Lenders like Citigroup, Bank of America, JP Morgan, Chase and Wells Fargo aggressively lobbied for changes to the bankruptcy code. Delaware-based credit card company MBNA, which Bank of America acquired in 2006, was one of the most ardent supporters of the bill.

Biden’s senate campaign committees received $208,175 from MBNA employees from 1989 through 2010, the second-largest source of contributions, according to the Center for Responsive Politics’ OpenSecrets.org. In the 2006 election cycle, employees from Citigroup employees donated $18,825, those from Bear Stearns donated $15,000 and from Goldman Sachs donated $10,500.

In total, Biden received $1,126,375 from those in the securities and investment industry, $304,475 from finance and credit company workers, and $295,900 from commercial bank employees.

Biden’s ties to MBNA and banks span beyond political contributions from its employees. Home sales, family jobs, and free trips caused critics to dub him “the senator from MBNA.”

So good ol' middle class Joe, the defender of Joe Six Pack and Joe Lunch Box is really a guy who defended the banking industry and supported stricter standards that made it impossible for people in distress to declare bankruptcy. For years, Biden made it his mission to block student debt forgiveness, leaving many young people facing a lifetime of debt. Student debt broke $1.5 trillion in the first quarter of 2018 according to the Federal Reserve, outstripping auto loan ($1.1 trillion) and credit card debt ($977 billion) significantly, with 1.1 million people owing over $100,000 for their educational expenses. Twenty percent of student borrowers default on their loan payments.

And this guy wants to appeal to millennials? Elizabeth Warren has an impeccable record on these issues. She started the Consumer Financial Protection Agency whose mission was to do just the opposite of what Joe Biden was doing - protect middle class Americans. And by the way, the "senator from MBNA's" son, Hunter, was also an employee of MBNA.

Off the Top of My Head

Negative Yielding Debt and the The Inverted Yield Curve

by John Lawrence, August 21, 2019

The world is awash in money so investors try to determine where to park it to get the maximum return. Right now $15 trillion is being parked at banks who are charging for the privilege. About a third of the tradeable bonds in the world have negative yields. J.P. Morgan strategists point out that four countries — Denmark, Germany, Netherlands and Finland — now have negative yields across their full spectrum of rates. The era of Quantitative Easing that was ushered in to prevent a collapse of the global banking system in 2008 has led to a world in which interest rates are very low and in some parts of the world they are negative. “We’re the only country that has an integer in front of our bond yields. We have 90% of the world’s investment-grade debt. We actually have rule of law and we have a decent economy. All the money is going to come here,” Bass, founder and chief investment officer of Hayman Capital Management, told CNBC’s David Faber on Tuesday. True.

Although the US bond market still has positive yields, investors are worried about the dreaded "inverted yield curve." This happens when the short term interest rate is higher than the long term rate. Normally, you would expect a higher rate of return the longer you tied up your money. So why would you buy a 10 year Treasury bond for a lower rate of return than you would get for a 2 year Treasury bond? It would only be true if you expected interest rates to go even lower, and then you could sell that bond in the bond market at a profit. And why would investors expect interest rates to go even lower? Because that's how you head off a recession - you make money easy to borrow. Supposedly that's how you get business people to make productive investments and hire more people. Voila! No recession. No wonder Trump wants the Fed to lower interest rates. Free money. Yea!

Although borrowing money is almost cost free for banks and large investors, the opposite is the case for you and me, Mr. ans Mrs. John Q Public. We are getting screwed with exorbitant interest rates on our credit cards and student loans. Credit card rates are the highest they've ever been. According to the Federal Reserve's data for the first quarter of 2019, the average APR across all credit card accounts was 15.09% — the highest rate recorded since 1994. So the average American pays through the nose for his or her debt while getting essentially zero interest on their savings account. What's wrong with this picture? Free money is available for banks and large investors,while Joe Six Pack pays through the nose. Well, Joe Six Pack is doing his civic duty  because he is keeping inflation low.

But then consider Trump's tariff war with China. All of a sudden American consumers are going to pay more for a whole range of products manufactured in China. What this means is - INFLATION. And what that means is RECESSION because the American consumer will start buying less. Since consumption is 70% of GDP, all of a sudden GDP starts going down and - voila - we're in recession. People will start wondering why everything is so expensive while banks are getting free money, and they are paying through the nose on credit cards while receiving no interest on savings accounts.

Central banks around the world are printing money and giving it to rich people. That's why the national debt is nothing to worry about. It will just be swallowed and digested by the Federal Reserve, the US' central bank, which has swallowed and digested $4.5 trillion in the past. It could swallow the whole US national debt if necessary just by printing money the way other central banks, notably, China do.

The take away of all this is that the world is awash in free money that rich people can easily access while the average person gets screwed. Interest rates are going to zero because rich people will pay banks to park their money while highly profitable banks charge an arm and a leg for credit card and student loan debt.

How to Pay for It All: An Option the Candidates Missed

Posted on July 10, 2019 by Ellen Brown

from Web of Debt blog

The Democratic Party has clearly swung to the progressive left, with candidates in the first round of presidential debates coming up with one program after another to help the poor, the disadvantaged and the struggling middle class. Proposals ranged from a Universal Basic Income to Medicare for All to a Green New Deal to student debt forgiveness and free college tuition. The problem, as Stuart Varney observed on FOX Business, was that no one had a viable way to pay for it all without raising taxes or taking from other programs, a hard sell to voters. If robbing Peter to pay Paul is the only alternative, the proposals will go the way of Trump’s trillion dollar infrastructure bill for lack of funding.

Fortunately there is another alternative, one that no one seems to be talking about – at least no one on the presidential candidates’ stage. In Japan, it is a hot topic; and in China, it is evidently taken for granted: the government can generate the money it needs simply by creating it on the books of its own banks. Leaders in China and Japan recognize that stimulating the economy is not a zero-sum game in which funds are just shuffled from one pot to another. To grow the economy and increase GDP, demand (money) must go up along with supply. New money needs to be added to the system; and that is what China and Japan have been doing, very successfully.

Before the 2008-09 global banking crisis, China’s GDP increased by an average of 10% per year for 30 years. The money supply increased right along with it, created on the books of its state-owned banks. Japan under Prime Minister Shinzo Abe has been following suit, with massive economic stimulus funded by correspondingly massive purchases of the government’s debt by its central bank, using money simply created with computer keystrokes.

All of this has occurred without driving up prices, the dire result predicted by US economists who subscribe to classical monetarist theory. In the 20 years from 1998 to 2018, China’s M2 money supply grew from just over 10 trillion yuan to 180 trillion yuan ($26T), an 18-fold increase. Yet it closed 2018 with a consumer inflation rate that was under 2%. Price stability has been maintained because China’s Gross Domestic Product has grown at nearly the same fast clip, by a factor of 13 over 20 years.

In Japan, the massive stimulus programs called “Abenomics” have been funded through its central bank. The Bank of Japan has now “monetized” nearly 50% of the government’s debt, turning it into new money by purchasing it with yen created on the bank’s books. If the US Fed did that, it would own $11 trillion in US government bonds, four times what it holds now. Yet Japan’s M2 money supply has not even doubled in 20 years, while the US money supply has grown by 300%; and Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Abe’s stimulus programs have not driven up prices. In fact deflation remains a greater concern than inflation in Japan, despite unprecedented debt monetization by its central bank.     

China’s Economy: A Giant Ponzi Scheme or a New Economic Model? 

Critics have long called China’s economy a Ponzi scheme, doomed to collapse in the end; and for 40 years China has continued to prove the critics wrong. According to a June 2019 report by the Congressional Research Service:

Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty. China has become the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves.

This massive growth has been funded with credit created on the books of China’s banks, most of which are state-owned. Even in the US, course, most money today is created on the books of banks. That is what our money supply is – bank credit. What is different about the Chinese model is that the Chinese government can and does intervene to direct where the credit goes. In a July 2018 article titled “China Invents a Different Way to Run an Economy,” Noah Smith suggests that China’s novel approach to macroeconomic stabilization by regulating bank credit represents a new economic model, one that may hold valuable lessons for developed economies. He writes:

Many economists would see this approach as hopelessly ad hoc, haphazard, and interventionist — not the kind of thing any developed country would want to rely on. And yet, it seems to have carried China successfully through several crises, while always averting the catastrophic financial crash that outside observers have been warning about for years.

Abenomics, Helicopter Money and Modern Monetary Theory

Noah Smith has also written about Japan’s unique model. After Prime Minister Abe crushed his opponents in October 2017, Smith wrote on Bloomberg News, “Japan’s long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power—govern pragmatically, focus on the economy and give people what they want.” He said everyone who wanted a job had one; small and midsize businesses were doing well; and the BOJ’s unprecedented program of monetary easing had provided easy credit for corporate restructuring without generating inflation. Abe had also vowed to make both preschool and college free.

Like China’s economic model, Abenomics has been called a Ponzi scheme, funded by central bank-created “free” money. But whatever it is called, the strategy has been working for the economy. Even the once-dubious International Monetary Fund has declaredAbenomics a success.

The Bank of Japan’s massive bond-buying program has also been called “helicopter money” — a policy in which the central bank directly finances government spending by underwriting bonds – and it has been compared to Modern Monetary Theory, which similarly posits that the government can spend money into existence with central bank funding. As Nathan Lewis wrote in Forbes in February 2019:

In practice, something like “MMT” has reached a new level of sophistication these days, exemplified by Japan. . . . The Bank of Japan now holds government bonds amounting to more than 100% of GDP. In other words, the government has managed to finance itself “with the printing press” to the amount of about 100% of GDP, with no inflationary consequences. [Emphasis added.]

Japanese officials have resisted comparisons with both helicopter money and MMT, arguing that Japanese law does not allow the government to sell its bonds directly to the central bank. As in the US, the government’s bonds must be sold on the open market, a limitation that also prevents the US government from directly monetizing its debt. But as Bank of Japan Deputy Governor Kikuo Iwata observed in a 2013 Reuters article, where the bonds are sold does not matter. What is important is that the central bank has agreed to buy them, and it is here that US banking law diverges from the laws of both Japan and China.

Central Banking Asia-style

When the US Treasury sells bonds on the open market, it can only hope the Fed will buy them. Any attempt by the president or the legislature to influence Fed policy is considered a gross interference with the sacrosanct independence of the central bank.

In theory, the central banks of China and Japan are also independent. Both are members of the Bank for International Settlements, which stresses the importance of maintaining the stability of the currency and the independence of the central bank; and both countries revised their banking laws in the 1990s to better reflect those policies. But their banking laws still differ in significant ways from those of the US.

In Japan, the Bank of Japan is legally free to set interest rates, but it must cooperate closely with the Ministry of Finance in setting policy. Article 4 of the 1997 Bank of Japan Act says:

The Bank of Japan shall, taking into account the fact that currency and monetary control is a component of overall economic policy, always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

Unlike in the US, Prime Minister Abe can negotiate with the head of the central bank to buy the government’s bonds, ensuring that the debt is in fact turned into new money that will stimulate domestic economic growth; and he is completely within his legal rights in doing it.

The leverage of China’s central government over its central bank is even stronger than the Japanese prime minister’s. The 1995 Law of the People’s Republic of China on the People’s Bank of China states:

The People’s Bank of China shall, under the leadership of the State Council, formulate and implement monetary policies, guard against and eliminate financial risks, and maintain financial stability.

The State Council has final decision-making power on such things as the annual money supply, interest rates and exchange rates; and it has used this power to stabilize the economy by directing and regulating the issuance of bank credit, the new Chinese macroeconomic model that Noah Smith says holds important lessons for us.

The successful six-year run of Abenomics, along with China’s decades of unprecedented economic growth, have proven that governments can indeed monetize their debts, expanding the money supply and stimulating the economy, without driving up consumer prices. The monetarist theories of US policymakers are obsolete and need to be discarded.

“Kyouryoku,” the Japanese word for cooperation, is composed of characters that mean “together strength” – “stronger by working together.” This is a recognized principle in Asian culture and it is an approach we would do well to adopt. What US presidential candidates from both parties should talk about is how to modify the law so that Congress, the Administration and the central bank can work together in setting monetary policy, following the approaches successfully modeled in China and Japan.

________________________________________

First posted under another title at TruthDig.com. Ellen Brown is an attorney, founder and chair of the Public Banking Institute, and author of thirteen books, including Banking on the People: Democratizing Money in the Digital Age (June 2019), Web of Debt, and The Public Bank Solution.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Off the Top of My Head

Does China Have a New Model of Capitalism That Works Better?

by John Lawrence, July 12, 2019

Who would have thunk it? China has a model of capitalism which outcompetes the American model. This is laid out in the companion article by Ellen Brown: How to Pay for It All: An Option the Candidates Missed. Progressive Democrats have all kinds of plans for the economy as Ellen states. The Republican response is how you gonna pay for it? Ellen has the answer. Or rather China and Japan have the answers. Their economies are booming. Their economic growth is phenomenal. Their people are fully employed. China, with its Belt and Road initiative, is building infrastructure not only in China but all over the world. All the US power structure can do is whimper, "Yeah, but they are going into debt and their system will collapse. It's a Ponzi scheme." Yet it seems to be working very well while the US falters, not even being able to maintain its infrastructure, much less modernize it.

The US central banking model is antiquated compared to the Chinese and Japanese models. Simply stated, the US Federal Reserve can only bail out the big banks because it is owned by the big banks, as it did in 2008. The Chinese and Japanese models are continuously bailing out the whole "real" economy, something the US cannot do. The US model makes the rich richer and the poor poorer. The Asian models are such that the central government, not the big banks, can direct where investment flows to. It is really quite simple.

Now Bernie Sanders, Elizabeth Warren and AOC are catching on to the fact that there is something to Ellen Brown's work, that all the things they want to bring about in American society are possible if we just change the model of a privately owned Central Bank (the Fed) and make it responsive to public rather than private needs.

See her book: Banking on the People, Democratizing Money in the Digital Age.

How to Pay for It All: An Option the Candidates Missed

Posted on July 10, 2019 by Ellen Brown, Web of Debt blog

The Democratic Party has clearly swung to the progressive left, with candidates in the first round of presidential debates coming up with one program after another to help the poor, the disadvantaged and the struggling middle class. Proposals ranged from a Universal Basic Income to Medicare for All to a Green New Deal to student debt forgiveness and free college tuition. The problem, as Stuart Varney observed on FOX Business, was that no one had a viable way to pay for it all without raising taxes or taking from other programs, a hard sell to voters. If robbing Peter to pay Paul is the only alternative, the proposals will go the way of Trump’s trillion dollar infrastructure bill for lack of funding.

Fortunately there is another alternative, one that no one seems to be talking about – at least no one on the presidential candidates’ stage. In Japan, it is a hot topic; and in China, it is evidently taken for granted: the government can generate the money it needs simply by creating it on the books of its own banks. Leaders in China and Japan recognize that stimulating the economy is not a zero-sum game in which funds are just shuffled from one pot to another. To grow the economy and increase GDP, demand (money) must go up along with supply. New money needs to be added to the system; and that is what China and Japan have been doing, very successfully.

Before the 2008-09 global banking crisis, China’s GDP increased by an average of 10% per year for 30 years. The money supply increased right along with it, created on the books of its state-owned banks. Japan under Prime Minister Shinzo Abe has been following suit, with massive economic stimulus funded by correspondingly massive purchases of the government’s debt by its central bank, using money simply created with computer keystrokes.

All of this has occurred without driving up prices, the dire result predicted by US economists who subscribe to classical monetarist theory. In the 20 years from 1998 to 2018, China’s M2 money supply grew from just over 10 trillion yuan to 180 trillion yuan ($26T), an 18-fold increase. Yet it closed 2018 with a consumer inflation rate that was under 2%. Price stability has been maintained because China’s Gross Domestic Product has grown at nearly the same fast clip, by a factor of 13 over 20 years.

In Japan, the massive stimulus programs called “Abenomics” have been funded through its central bank. The Bank of Japan has now “monetized” nearly 50% of the government’s debt, turning it into new money by purchasing it with yen created on the bank’s books. If the US Fed did that, it would own $11 trillion in US government bonds, four times what it holds now. Yet Japan’s M2 money supply has not even doubled in 20 years, while the US money supply has grown by 300%; and Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Abe’s stimulus programs have not driven up prices. In fact deflation remains a greater concern than inflation in Japan, despite unprecedented debt monetization by its central bank.     

China’s Economy: A Giant Ponzi Scheme or a New Economic Model? 

Critics have long called China’s economy a Ponzi scheme, doomed to collapse in the end; and for 40 years China has continued to prove the critics wrong. According to a June 2019 report by the Congressional Research Service:

Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty. China has become the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves.

This massive growth has been funded with credit created on the books of China’s banks, most of which are state-owned. Even in the US, course, most money today is created on the books of banks. That is what our money supply is – bank credit. What is different about the Chinese model is that the Chinese government can and does intervene to direct where the credit goes. In a July 2018 article titled “China Invents a Different Way to Run an Economy,” Noah Smith suggests that China’s novel approach to macroeconomic stabilization by regulating bank credit represents a new economic model, one that may hold valuable lessons for developed economies. He writes:

Many economists would see this approach as hopelessly ad hoc, haphazard, and interventionist — not the kind of thing any developed country would want to rely on. And yet, it seems to have carried China successfully through several crises, while always averting the catastrophic financial crash that outside observers have been warning about for years.

Abenomics, Helicopter Money and Modern Monetary Theory

Noah Smith has also written about Japan’s unique model. After Prime Minister Abe crushed his opponents in October 2017, Smith wrote on Bloomberg News, “Japan’s long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power—govern pragmatically, focus on the economy and give people what they want.” He said everyone who wanted a job had one; small and midsize businesses were doing well; and the BOJ’s unprecedented program of monetary easing had provided easy credit for corporate restructuring without generating inflation. Abe had also vowed to make both preschool and college free.

Like China’s economic model, Abenomics has been called a Ponzi scheme, funded by central bank-created “free” money. But whatever it is called, the strategy has been working for the economy. Even the once-dubious International Monetary Fund has declaredAbenomics a success.

The Bank of Japan’s massive bond-buying program has also been called “helicopter money” — a policy in which the central bank directly finances government spending by underwriting bonds – and it has been compared to Modern Monetary Theory, which similarly posits that the government can spend money into existence with central bank funding. As Nathan Lewis wrote in Forbes in February 2019:

In practice, something like “MMT” has reached a new level of sophistication these days, exemplified by Japan. . . . The Bank of Japan now holds government bonds amounting to more than 100% of GDP. In other words, the government has managed to finance itself “with the printing press” to the amount of about 100% of GDP, with no inflationary consequences. [Emphasis added.]

Japanese officials have resisted comparisons with both helicopter money and MMT, arguing that Japanese law does not allow the government to sell its bonds directly to the central bank. As in the US, the government’s bonds must be sold on the open market, a limitation that also prevents the US government from directly monetizing its debt. But as Bank of Japan Deputy Governor Kikuo Iwata observed in a 2013 Reuters article, where the bonds are sold does not matter. What is important is that the central bank has agreed to buy them, and it is here that US banking law diverges from the laws of both Japan and China.

Central Banking Asia-style

When the US Treasury sells bonds on the open market, it can only hope the Fed will buy them. Any attempt by the president or the legislature to influence Fed policy is considered a gross interference with the sacrosanct independence of the central bank.

In theory, the central banks of China and Japan are also independent. Both are members of the Bank for International Settlements, which stresses the importance of maintaining the stability of the currency and the independence of the central bank; and both countries revised their banking laws in the 1990s to better reflect those policies. But their banking laws still differ in significant ways from those of the US.

In Japan, the Bank of Japan is legally free to set interest rates, but it must cooperate closely with the Ministry of Finance in setting policy. Article 4 of the 1997 Bank of Japan Act says:

The Bank of Japan shall, taking into account the fact that currency and monetary control is a component of overall economic policy, always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

Unlike in the US, Prime Minister Abe can negotiate with the head of the central bank to buy the government’s bonds, ensuring that the debt is in fact turned into new money that will stimulate domestic economic growth; and he is completely within his legal rights in doing it.

The leverage of China’s central government over its central bank is even stronger than the Japanese prime minister’s. The 1995 Law of the People’s Republic of China on the People’s Bank of China states:

The People’s Bank of China shall, under the leadership of the State Council, formulate and implement monetary policies, guard against and eliminate financial risks, and maintain financial stability.

The State Council has final decision-making power on such things as the annual money supply, interest rates and exchange rates; and it has used this power to stabilize the economy by directing and regulating the issuance of bank credit, the new Chinese macroeconomic model that Noah Smith says holds important lessons for us.

The successful six-year run of Abenomics, along with China’s decades of unprecedented economic growth, have proven that governments can indeed monetize their debts, expanding the money supply and stimulating the economy, without driving up consumer prices. The monetarist theories of US policymakers are obsolete and need to be discarded.

“Kyouryoku,” the Japanese word for cooperation, is composed of characters that mean “together strength” – “stronger by working together.” This is a recognized principle in Asian culture and it is an approach we would do well to adopt. What US presidential candidates from both parties should talk about is how to modify the law so that Congress, the Administration and the central bank can work together in setting monetary policy, following the approaches successfully modeled in China and Japan.

________________________________________

First posted under another title at TruthDig.com. Ellen Brown is an attorney, founder and chair of the Public Banking Institute, and author of thirteen books, including Banking on the People: Democratizing Money in the Digital Age (June 2019), Web of Debt, and The Public Bank Solution.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

The Bankers’ “Power Revolution”: How the Government Got Shackled by Debt

Posted on May 31, 2019 by Ellen Brown

This article is excerpted from my new book Banking on the People: Democratizing Money in the Digital Age, available in paperback June 1.

The U.S. federal debt has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $22 trillion in April 2019. The debt is never paid off. The government just keeps paying the interest on it, and interest rates are rising.

In 2018, the Fed announced plans to raise rates by 2020 to “normal” levels — a fed funds target of 3.375 percent — and to sell about $1.5 trillion in federal securities at the rate of $50 billion monthly, further growing the mountain of federal debt on the market. When the Fed holds government securities, it returns the interest to the government after deducting its costs; but the private buyers of these securities will be pocketing the interest, adding to the taxpayers’ bill.

In fact it is the interest, not the debt itself, that is the problem with a burgeoning federal debt. The principal just gets rolled over from year to year. But the interest must be paid to private bondholders annually by the taxpayers and constitutes one of the biggest items in the federal budget. Currently the Fed’s plans for “quantitative tightening” are on hold; but assuming it follows through with them, projections are that by 2027 U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Donald Trump’s trillion-dollar infrastructure plan every year, and it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds.

Where will this money come from? Crippling taxes, wholesale privatization of public assets, and elimination of social services will not be sufficient to cover the bill.

Bondholder Debt Is Unnecessary

The irony is that the United States does not need to carry a debt to bondholders at all. It has been financially sovereign ever since President Franklin D. Roosevelt took the dollar off the gold standard domestically in 1933. This was recognized by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, in a 1945 presentation before the American Bar Association titled “Taxes for Revenue Are Obsolete.”

“The necessity for government to tax in order to maintain both its independence and its solvency is true for state and local governments,” he said, “but it is not true for a national government.” The government was now at liberty to spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency.

Then, and only then, would the government need to levy taxes — not to fund the budget but to counteract inflation by contracting the money supply. The principal purpose of taxes, said Ruml, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’”

The government could be funded without taxes by drawing on credit from its own central bank; and since there was no longer a need for gold to cover the loan, the central bank would not have to borrow. It could just create the money on its books. This insight is a basic tenet of Modern Monetary Theory: the government does not need to borrow or tax, at least until prices are driven up. It can just create the money it needs. The government could create money by issuing it directly; or by borrowing it directly from the central bank, which would create the money on its books; or by taking a perpetual overdraft on the Treasury’s account at the central bank, which would have the same effect.

The “Power Revolution” — Transferring the “Money Power” to the Banks

The Treasury could do that in theory, but some laws would need to be changed. Currently the federal government is not allowed to borrow directly from the Fed and is required to have the money in its account before spending it. After the dollar went off the gold standard in 1933, Congress could have had the Fed just print money and lend it to the government, cutting the banks out. But Wall Street lobbied for an amendment to the Federal Reserve Act, forbidding the Fed to buy bonds directly from the Treasury as it had done in the past.

The Treasury can borrow from itself by transferring money from “intragovernmental accounts” — Social Security and other trust funds that are under the auspices of the Treasury and have a surplus – but these funds do not include the Federal Reserve, which can lend to the government only by buying federal securities from bond dealers. The Fed is considered independent of the government. Its website states, “The Federal Reserve’s holdings of Treasury securities are categorized as ‘held by the public,’ because they are not in government accounts.”

According to Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, the prohibition against allowing the government to borrow directly from its own central bank was written into the Banking Act of 1935 at the behest of those bond dealers that have an exclusive right to purchase directly from the Fed. A historical review on the website of the New York Federal Reserve quotes Eccles as stating, “I think the real reasons for writing the prohibition into the [Banking Act] … can be traced to certain Government bond dealers who quite naturally had their eyes on business that might be lost to them if direct purchasing were permitted.”

The government was required to sell bonds through Wall Street middlemen, which the Fed could buy only through “open market operations” – purchases on the private bond market. Open market operations are conducted by the Federal Open Market Committee (FOMC), which meets behind closed doors and is dominated by private banker interests. The FOMC has no obligation to buy the government’s debt and generally does so only when it serves the purposes of the Fed and the banks.

Rep. Wright Patman, Chairman of the House Committee on Banking and Currency from 1963 to 1975, called the official sanctioning of the Federal Open Market Committee in the banking laws of 1933 and 1935 “the power revolution” — the transfer of the “money power” to the banks. Patman said, “The ‘open market’ is in reality a tightly closed market.” Only a selected few bond dealers were entitled to bid on the bonds the Treasury made available for auction each week. The practical effect, he said, was to take money from the taxpayer and give it to these dealers.

Feeding Off the Real Economy

That massive Wall Street subsidy was the subject of testimony by Eccles to the House Committee on Banking and Currency on March 3-5, 1947. Patman asked Eccles, “Now, since 1935, in order for the Federal Reserve banks to buy Government bonds, they had to go through a middleman, is that correct?” Eccles replied in the affirmative. Patman then launched into a prophetic warning, stating, “I am opposed to the United States Government, which possesses the sovereign and exclusive privilege of creating money, paying private bankers for the use of its own money. … I insist it is absolutely wrong for this committee to permit this condition to continue and saddle the taxpayers of this Nation with a burden of debt that they will not be able to liquidate in a hundred years or two hundred years.”

The truth of that statement is painfully evident today, when we have a $22 trillion debt that cannot possibly be repaid. The government just keeps rolling it over and paying the interest to banks and bondholders, feeding the “financialized” economy in which money makes money without producing new goods and services. The financialized economy has become a parasite feeding off the real economy, driving producers and workers further and further into debt.

In the 1960s, Patman attempted to have the Fed nationalized. The effort failed, but his committee did succeed in forcing the central bank to return its profits to the Treasury after deducting its costs. The prohibition against direct lending by the central bank to the government, however, remains in force. The money power is still with the FOMC and the banks.

A Model We Can No Longer Afford

Today, the debt-growth model has reached its limits, as even the Bank for International Settlements, the “central bankers’ bank” in Switzerland, acknowledges. In its June 2016 annual report, the BIS said that debt levels were too high, productivity growth was too low, and the room for policy maneuver was too narrow. “The global economy cannot afford to rely any longer on the debt-fueled growth model that has brought it to the current juncture,” the BIS warned.

But the solutions it proposed would continue the austerity policies long imposed on countries that cannot pay their debts. It prescribed “prudential, fiscal and, above all, structural policies” — “structural readjustment.” That means privatizing public assets, slashing services, and raising taxes, choking off the very productivity needed to pay the nations’ debts. That approach has repeatedly been tried and has failed, as witnessed for example in the devastated economy of Greece.

Meanwhile, according to Minneapolis Fed president Neel Kashkari, financial regulation since 2008 has reduced the chances of another government bailout only modestly, from 84 percent to 67 percent. That means there is still a 67 percent chance of another major systemwide crisis, and this one could be worse than the last. The biggest banks are bigger, local banks are fewer, and global debt levels are higher. The economy has farther to fall. The regulators’ models are obsolete, aimed at a form of “old-fashioned banking” that has long since been abandoned.

We need a new model, one designed to serve the needs of the public and the economy rather than to maximize shareholder profits at public expense.

_____________________

An earlier version of this article was published in Truthout.org. Ellen Brown is an attorney, founder of the Public Banking Institute, and author of thirteen books including Web of Debtand The Public Bank Solution. Her latest book is Banking on the People: Democratizing Money in the Digital Age, published by the Democracy Collaborative. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Banking on the People. Ellen Brown's New Book.

Hi, my new book, nearly 3 years in the making, is finally in print. It’s called “Banking on the People: Democratizing Money in the Digital Age” and is published by the Democracy Collaborative. The release date is June 1 and it's available for pre-order here. As our democracy hangs in the balance, I hope this book allows many more people to understand why having control over the money supply is central to the idea of democracy, and what we can do to wrest that control from big private banks and put it squarely in the hands of the people.

From the back cover:

Today most of our money is created, not by governments, but by banks when they make loans. This book takes the reader step by step through the sausage factory of modern money creation, explores improvements made possible by advances in digital technology, and proposes upgrades that could transform our outmoded nineteenth century system into one that is democratic, sustainable, and serves the needs of the twenty-first century.

***

"Banking on the People is a compelling and fast-moving primer on the new monetary revolution by the godmother of the public banking movement now emerging throughout the country. Brown shows how our new understanding of money and its creation, long concealed by bankers and others capturing the benefits for their own purposes, can be turned to support the public in powerful new ways."

 --  Gar Alperovitz, professor emeritus at the University of Maryland, Co-Founder of The Democracy Collaborative and author of America Beyond Capitalism and other books

"More lucidly that any other expert I know, Ellen Brown shows in Banking on the People how we can break the grip of predatory financialization now extracting value from real peoples’ productive activities all over the world. This book is a must read for those who see the promising future as we seek to widen democracies and transform to a cleaner, greener, shared prosperity."

 --  Hazel Henderson, CEO of Ethical Markets Media and author of Mapping the Global Transition to the Solar Age and other books

"Ellen Brown shows that there is a much better alternative to Citibank, Wells Fargo and Bank of America. Public banks can safeguard public funds while avoiding the payday loans, redlining, predatory junk-mortgage loans and add-on small-print extras for which the large commercial banks are becoming notorious."
 
 --  Michael Hudson, Research Professor of Economics at the University of Missouri, Kansas City, and author of Killing the Host and other books

"Banking on the People offers a tour de force for those activists, NGOs, and academics wanting to understand the forces at play when we talk about the democratization of finance. A must read!"  

 -- Thomas Marois, Senior Lecturer, SOAS University of London, author of States, Banks and Crisis and other publications

Best wishes,
Ellen
http://EllenBrown.com
http://PublicBankingInstitute.org 

The Venezuela Myth Keeping Us From Transforming Our Economy

by Ellen Brown, from truthdig, February 7, 2019

Alex Lanz / CC BY-NC-ND 2.0

Modern Monetary Theory (MMT) is getting significant media attention these days, after Rep. Alexandria Ocasio-Cortez said in an interviewthat it should “be a larger part of our conversation” when it comes to funding the “Green New Deal.” According to MMT, the government can spend what it needs without worrying about deficits. MMT expert and Bernie Sanders adviser professor Stephanie Kelton says the government actually creates money when it spends. The real limit on spending is not an artificially imposed debt ceiling but a lack of labor and materials to do the work, leading to generalized price inflation. Only when that real ceiling is hit does the money need to be taxed back, but even then it’s not to fund government spending. Instead, it’s needed to shrink the money supply in an economy that has run out of resources to put the extra money to work.

Predictably, critics have been quick to rebut, calling the trend to endorse MMT “disturbing” and “a joke that’s not funny.” In a Feb. 1 post on the Daily Reckoning, Brian Maher darkly envisioned Bernie Sanders getting elected in 2020 and implementing “Quantitative Easing for the People” based on MMT theories. To debunk the notion that governments can just “print the money” to solve their economic problems, he raised the specter of Venezuela, where “money” is everywhere but bare essentials are out of reach for many, the storefronts are empty, unemployment is at 33 percent and inflation is predicted to hit 1 million percent by the end of the year.

Blogger Arnold Kling also pointed to the Venezuelan hyperinflation. He described MMT as “the doctrine that because the government prints money, it can spend whatever it wants . . . until it can’t.” He said:

To me, the hyperinflation in Venezuela exemplifies what happens when a country reaches the “it can’t” point. The country is not at full employment. But the government can’t seem to spend its way out of difficulty. Somebody should ask these MMT rock stars about the Venezuela example.

I’m not an MMT rock star and won’t try to expound on its subtleties. (I would submit that under existing regulations, the government cannot actually create money when it spends, but that it should be able to. In fact, MMTers have acknowledged that problem; but it’s a subject for another article.) What I want to address here is the hyperinflation issue, and why Venezuelan hyperinflation and “QE for the People” are completely different animals.

What Is Different About Venezuela

Venezuela’s problems are not the result of the government issuing money and using it to hire people to build infrastructure, provide essential services and expand economic development. If it were, unemployment would not be at 33 percent and climbing. Venezuela has a problem the U.S. does not, and will never have: It owes massive debts in a currency it cannot print itself, namely, U.S. dollars. When oil (its principal resource) was booming, Venezuela was able to meet its repayment schedule. But when the price of oil plummeted, the government was reduced to printing Venezuelan bolivars and selling them for U.S. dollars on international currency exchanges. As speculators drove up the price of dollars, more and more printing was required by the government, massively deflating the national currency.

It was the same problem suffered by Weimar Germany and Zimbabwe, the two classic examples of hyperinflation typically raised to silence proponents of government expansion of the money supply before Venezuela suffered the same fate. Professor Michael Hudson, an actual economic rock star who supports MMT principles, has studied the hyperinflation question extensively. He confirms that those disasters were not due to governments issuing money to stimulate the economy. Rather, he writes, “Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.”

Venezuela and other countries that are carrying massive debts in currencies that are not their own are not sovereign. Governments that are sovereign can and have engaged in issuing their own currencies for infrastructure and development quite successfully. I have discussed a number of contemporary and historical examples in my earlier articles, including in Japan, China, Australia and Canada.

Although Venezuela is not technically at war, it is suffering from foreign currency strains triggered by aggressive attacks by a foreign power. U.S. economic sanctions have been going on for years, causing the country at least $20 billion in losses. About $7 billion of its assets are now being held hostage by the U.S., which has waged an undeclared war against Venezuela ever since George W. Bush’s failed military coup against President Hugo Chávez in 2002. Chávez boldly announced the “Bolivarian Revolution,” a series of economic and social reforms that dramatically reduced poverty and illiteracy as well as improved health and living conditions for millions of Venezuelans. The reforms, which included nationalizing key components of the nation’s economy, made Chávez a hero to millions of people and the enemy of Venezuela’s oligarchs.

Nicolás Maduro was elected president following Chávez’s death in 2013 and vowed to continue the Bolivarian Revolution. Recently, as Saddam Hussein and Moammar Gadhafi had done before him, he defiantly announced that Venezuela would not be trading oil in U.S.dollars following sanctions imposed by President Trump.

The notorious Elliott Abrams has now been appointed as special envoyto Venezuela. Considered a war criminal by many for covering up massacres committed by U.S.-backed death squads in Central America, Abrams was among the prominent neocons closely linked to Bush’s failed Venezuelan coup in 2002. National security adviser John Bolton is another key neocon architect advocating regime change in Venezuela. At press conference on Jan. 28, he held a yellow legal pad prominently displaying the words “5,000 troops to Colombia,” a country that shares a border with Venezuela. Clearly, the neocon contingent feels it has unfinished business there.

Bolton does not even pretend that it’s all about restoring “democracy.” He blatantly said on Fox News, “It will make a big difference to the United States economically if we could have American oil companies invest in and produce the oil capabilities in Venezuela.” As President Nixon said of U.S. tactics against Salvador Allende’s government in Chile, the point of sanctions and military threats is to squeeze the country economically.

Killing the Public Banking Revolution in Venezuela

It may be about more than oil, which recently hit record lows in the market. The U.S. hardly needs to invade a country to replenish its supplies. As with Libya and Iraq, another motive may be to suppress the banking revolution initiated by Venezuela’s upstart leaders.

The banking crisis of 2009–10 exposed the corruption and systemic weakness of Venezuelan banks. Some banks were engaged in questionable business practices. Others were seriously undercapitalized. Others still were apparently lending top executives large sums of money. At least one financier could not prove where he got the money to buy the banks he owned.

Rather than bailing out the culprits, as was done in the U.S., in 2009 the government nationalized seven Venezuelan banks, accounting for around 12 percent of the nation’s bank deposits. In 2010, more were taken over. Chávez’s government arrested at least 16 bankers and issued more than 40 corruption-related arrest warrants for others who had fled the country. By the end of March 2011, only 37 banks were left, down from 59 at the end of November 2009. State-owned institutions took a larger role, holding 35 percent of assets as of March 2011, while foreign institutions held just 13.2 percent of assets.

Over the howls of the media, in 2010 Chávez took the bold step of passing legislation defining the banking industry as one of “public service.” The legislation specified that 5 percent of the banks’ net profits must go toward funding community council projects, designed and implemented by communities for the benefit of communities. The Venezuelan government directed the allocation of bank credit to preferred sectors of the economy, and it increasingly became involved in private financial institutions’ operations. By law, nearly half the lending portfolios of Venezuelan banks had to be directed to particular mandated sectors of the economy, including small business and agriculture.

In a 2012 article titled “Venezuela Increases Banks’ Obligatory Social Contributions, U.S. and Europe Do Not,” Rachael Boothroyd said that the Venezuelan government was requiring the banks to give back. Housing was declared a constitutional right, and Venezuelan banks were obliged to contribute 15 percent of their yearly earnings to securing it. The government’s Great Housing Mission aimed to build 2.7 million free houses for low-income families before 2019. The goal was to create a social banking system that contributed to the development of society rather than simply siphoning off its wealth. Boothroyd wrote:

… Venezuelans are in the fortunate position of having a national government which prioritizes their life quality, wellbeing and development over the health of bankers’ and lobbyists’ pay checks. If the 2009 financial crisis demonstrated anything, it was that capitalism is quite simply incapable of regulating itself, and that is precisely where progressive governments and progressive government legislation needs to step in.

That is also where, in the U.S., the progressive wing of the Democratic Party is stepping in—and why Ocasio-Cortez’s proposals evoke howls in the media of the sort seen in Venezuela.

Article I, Section 8, of the Constitution gives Congress the power to create the nation’s money supply. Congress needs to exercise that power. The key to restoring our economic sovereignty is to reclaim the power to issue money from a commercial banking system that acknowledges no public responsibility beyond maximizing profits for its shareholders. Bank-created money is backed by the full faith and credit of the United States, including federal deposit insurance, access to the Fed’s lending window, and government bailouts when things go wrong. If we the people are backing the currency, it should be issued by the people through their representative government.

Today’s government, however, does not adequately represent the people, which is why we first need to take our government back. Thankfully, that is exactly what Ocasio-Cortez and her congressional allies are attempting to do.

---

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution." A thirteenth book titled "The Coming Revolution in Banking" is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

 

The Financial Secret Behind Germany’s Green Energy Revolution

by Ellen Brown, from truthdig

JAN 24, 2019|TD ORIGINALS

Wind farmer Jan Marrink poses by his wind turbines in Nordhorn, Germany. (Martin Meissner / AP)

The “Green New Deal” endorsed by Rep. Alexandria Ocasio-Cortez, D.-N.Y., and more than 40 other House members has been criticized as imposing a too-heavy burden on the rich and upper-middle-class taxpayers who will have to pay for it. However, taxing the rich is not what the Green New Deal resolution proposes. It says funding would come primarily from certain public agencies, including the U.S. Federal Reserve and “a new public bank or system of regional and specialized public banks.”

Funding through the Federal Reserve may be controversial, but establishing a national public infrastructure and development bank should be a no-brainer. The real question is why we don’t already have one, as do China, Germany and other countries that are running circles around us in infrastructure development. Many European, Asian and Latin American countries have their own national development banks, as well as belong to bilateral or multinational development institutions that are jointly owned by multiple governments. Unlike the U.S. Federal Reserve, which considers itself “independent” of government, national development banks are wholly owned by their governments and carry out public development policies.

China not only has its own China Infrastructure Bank but has established the Asian Infrastructure Investment Bank, which counts many Asian and Middle Eastern countries in its membership, including Australia, New Zealand and Saudi Arabia. Both banks are helping to fund China’s trillion-dollar “One Belt One Road” infrastructure initiative. China is so far ahead of the United States in building infrastructure that Dan Slane, a former adviser on President Donald Trump’s transition team, has warned, “If we don’t get our act together very soon, we should all be brushing up on our Mandarin.”

The leader in renewable energy, however, is Germany, called “the world’s first major renewable energy economy.” Germany has a public sector development bank called KfW (Kreditanstalt für Wiederaufbauor “Reconstruction Credit Institute”), which is even larger than the World Bank. Along with Germany’s nonprofit Sparkassen banks, KfW has largely funded the country’s green energy revolution.

Unlike private commercial banks, KfW does not have to focus on maximizing short-term profits for its shareholders while turning a blind eye to external costs, including those imposed on the environment. The bank has been free to support the energy revolution by funding major investments in renewable energy and energy efficiency. Its fossil fuel investments are close to zero. One of the key features of KfW, as with other development banks, is that much of its lending is driven in a strategic direction determined by the national government. Its key role in the green energy revolution has been played within a public policy framework under Germany’s renewable energy legislation, including policy measures that have made investment in renewables commercially attractive.

KfW is one of the world’s largest development banks, with assetstotaling $566.5 billion as of December 2017. Ironically, the initial funding for its capitalization came from the United States, through the Marshall Plan in 1948. Why didn’t we fund a similar bank for ourselves? Simply because powerful Wall Street interests did not want the competition from a government-owned bank that could make below-market loans for infrastructure and development. Major U.S. investors today prefer funding infrastructure through public-private partnerships, in which private partners can reap the profits while losses are imposed on local governments.

KfW and Germany’s Energy Revolution

Renewable energy in Germany is mainly based on wind, solar and biomass. Renewables generated 41 percent of the country’s electricity in 2017, up from just 6 percent in 2000; and public banks provided over 72 percent of the financing for this transition. In 2007-09, KfW funded all of Germany’s investment in Solar Photovoltaic. After that, Solar PV was introduced nationwide on a major scale. This is the sort of catalytic role that development banks can play—kickstarting a major structural transformation by funding and showcasing new technologies and sectors.

KfW is not only one of the biggest financial institutions but has been ranked one of the two safest banks in the world. (The other, Switzerland’s Zurich Cantonal Bank, is also publicly owned.) KfW sports triple-A ratings from all three major rating agencies—Fitch, Standard and Poor’s, and Moody’s. The bank benefits from these top ratings and the statutory guarantee of the German government, which allow it to issue bonds on very favorable terms and therefore to lend on favorable terms, backing its loans with the bonds.

KfW does not work through public-private partnerships, and it does not trade in derivatives and other complex financial products. It relies on traditional lending and grants. The borrower is responsible for loan repayment. Private investors can participate, but not as shareholders or public-private partners. Rather, they can invest in “Green Bonds,” which are as safe and liquid as other government bonds and are prized for their green earmarking. The first “Green Bond—Made by KfW” was issued in 2014 with a volume of $1.7 billion and a maturity of five years. It was the largest Green Bond ever at the time of issuance and generated so much interest that the order book rapidly grew to $3.02 billion, although the bonds paid an annual coupon of only 0.375 percent. By 2017, the issue volume of KfW Green Bonds reached $4.21 billion.

Investors benefit from the high credit and sustainability ratings of KfW, the liquidity of its bonds, and the opportunity to support climate and environmental protection. For large institutional investors with funds that exceed the government deposit insurance limit, Green Bonds are the equivalent of savings accounts—a safe place to park their money that provides a modest interest. Green Bonds also appeal to “socially responsible” investors, who have the assurance with these simple and transparent bonds that their money is going where they want it to. The bonds are financed by KfW from the proceeds of its loans, which are also in high demand due to their low interest rates, which the bank can offer because its high ratings allow it to cheaply mobilize funds from capital markets and its public policy-oriented loans qualify it for targeted subsidies.

Roosevelt’s Development Bank: The Reconstruction Finance Corporation

KfW’s role in implementing government policy parallels that of the Reconstruction Finance Corporation (RFC) in funding the New Deal in the 1930s. At that time, U.S. banks were bankrupt and incapable of financing the country’s recovery. President Franklin D. Roosevelt attempted to set up a system of 12 public “industrial banks” through the Federal Reserve, but the measure failed. Roosevelt then made an end run around his opponents by using the RFC that had been set up earlier by President Herbert Hoover, expanding it to address the nation’s financing needs.

The RFC Act of 1932 provided the RFC with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). With those resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. As with KfW’s loans, its funding source was the sale of bonds, mostly to the Treasury itself. Proceeds from the loans repaid the bonds, leaving the RFC with a net profit. The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms and much more; it funded all of this while generating income for the government.

The RFC was so successful that it became America’s largest corporation and the world’s largest banking organization. Its success, however, may have been its nemesis. Without the emergencies of depression and war, it was a too-powerful competitor of the private banking establishment; and in 1957, it was disbanded under President Dwight D. Eisenhower. That’s how the  United States was left without a development bank at the same time Germany and other countries were hitting the ground running with theirs.

Today some U.S. states have infrastructure and development banks, including California, but their reach is very small. One way they could be expanded to meet state infrastructure needs would be to turn them into depositories for state and municipal revenue. Rather than lending their capital directly in a revolving fund, this would allow them to leverage their capital into 10 times that sum in loans, as all depository banks are able to do, as I’ve previously explained.

The most profitable and efficient way for national and local governments to finance public infrastructure and development is with their own banks, as the impressive track records of KfW and other national development banks have shown. The RFC showed what could be done even by a country that was technically bankrupt, simply by mobilizing its own resources through a publicly owned financial institution. We need to resurrect that public funding engine today, not only to address the national and global crises we are facing now but for the ongoing development the country needs in order to manifest its true potential.

---

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution." A thirteenth book titled "The Coming Revolution in Banking" is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Central Banks Have Gone Rogue, Putting Us All at Risk

From truthdig

by Ellen Brown

SEP 13, 2018TD ORIGINALS

COMMENTS

 

marcokalmann / Flickr

Excluding institutions such as Blackrock and Vanguard, which are composed of multiple investors, the largest single players in global equity markets are now thought to be central banks themselves. An estimated 30 to 40 central banks are invested in the stock market, either directly or through their investment vehicles (sovereign wealth funds). According to David Haggith at Zero Hedge:

Central banks buying stocks are effectively nationalizing U.S. corporations just to maintain the illusion that their “recovery” plan is working. … At first, their novel entry into the stock market was only intended to rescue imperiled corporations, such as General Motors during the first plunge into the Great Recession, but recently their efforts have shifted to propping up the entire stock market via major purchases of the most healthy companies on the market.

The U.S. Federal Reserve, which bailed out General Motors in a rescue operation in 2009, was prohibited from lending to individual companies under the Dodd-Frank Act of 2010, and it is legally barred from owning equities. It parks its reserves instead in bonds and other government-backed securities. But other countries have different rules, and central banks are now buying individual stocks as investments, with a preference for big tech companies like Amazon, Apple, Facebook and Microsoft. Those are the stocks that dominate the market, and central banks are aggressively driving up their value. Markets, including the U.S. stock market, are thus literally being rigged by foreign central banks.

The result, as noted in a January 2017 article at Zero Hedge, is that central bankers, “who create fiat money out of thin air and for whom ‘acquisition cost’ is a meaningless term, are increasingly nationalizing the equity capital markets.” Or at least they would be nationalizing equities, if they were actually “national” central banks. But the Swiss National Bank, the biggest single player in this game, is 48 percent privately owned, and most central banks have declared their independence from their governments. They march to the drums not of government but of private industry.

Marking the 10th anniversary of the 2008 collapse, former Fed chairman Ben Bernanke and former Treasury secretaries Timothy Geithner and Henry Paulson wrote in a Sept. 7 New York Times op-edthat the Fed’s tools needed to be broadened to allow it to fight the next anticipated economic crisis, including allowing it to prop up the stock market by buying individual stocks. To investors, propping up the stock market may seem like a good thing, but what happens when the central banks decide to sell? The Fed’s massive $4-trillion economic support is now being taken away, and other central banks are expected to follow. Their U.S. and global holdings are so large that their withdrawal from the market could trigger another global recession. That means when and how the economy will collapse is now in the hands of central bankers.

Moving Goal Posts

The two most aggressive central bank players in the equity markets are the Swiss National Bank and the Bank of Japan.  The goal of the Bank of Japan, which now owns 75 percent of Japanese exchange-traded funds, is evidently to stimulate growth and defy longstanding expectations of deflation. But the Swiss National Bank is acting more like a hedge fund, snatching up individual stocks because “that is where the money is.”

About 20 percent of the SNB’s reserves are in equities, and more than half of that is in U.S. equities. The SNB’s goal is said to be to counteract the global demand for Swiss francs, which has been driving up the value of the national currency, making it hard for Swiss companies to compete in international trade. The SNB does this by buying up other currencies, and because it needs to put them somewhere, it’s putting that money in stocks.

That is a reasonable explanation for the SNB’s actions, but some critics suspect it has ulterior motives. Switzerland is home to the Bank for International Settlements, the “central bankers’ bank” in Basel, where central bankers meet regularly behind closed doors. Dr. Carroll Quigley, a Georgetown history professor who claimed to be the historian of the international bankers, wrote of this institution in” Tragedy and Hope” in 1966:

[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.  This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central bank,s which were themselves private corporations.

The key to their success, said Quigley, was that they would control and manipulate the money system of a nation while letting it appear to be controlled by the government. The economic and political systems of nations would be controlled not by citizens but by bankers, for the benefit of bankers. The goal was to establish an independent (privately owned or controlled) central bank in every country. Today, that goal has largely been achieved.

In a paper presented at the 14th Rhodes Forum in Greece in October 2016, Dr. Richard Werner, director of international development at the University of Southampton in the United Kingdom, argued that central banks have managed to achieve total independence from government and total lack of accountability to the people, and that they are now in the process of consolidating their powers. They control markets by creating bubbles, busts and economic chaos. He pointed to the European Central Bank, which was modeled on the disastrous earlier German central bank, the Reichsbank. The Reichsbank created deflation, hyperinflation and the chaos that helped bring Adolf Hitler to power.

The problem with the Reichsbank, said Werner, was its excessive independence and its lack of accountability to German institutions and Parliament. The founders of post-war Germany changed the new central bank’s status by significantly curtailing its independence. Werner wrote, “The Bundesbank was made accountable and subordinated to Parliament, as one would expect in a democracy. It became probably the world’s most successful central bank.”

But today’s central banks, he said, are following the disastrous Reichsbank model, involving an unprecedented concentration of power without accountability. Central banks are not held responsible for their massive policy mistakes and reckless creation of boom-bust cycles, banking crises and large-scale unemployment. Youth unemployment now exceeds 50 percent in Spain and Greece. Many central banks remain in private hands, including not only the Swiss National Bank but the Federal Reserve Bank of New York and the Italian, Greek and South African central banks.

Banks and Central Banks Should Be Made Public Utilities

Werner’s proposed solution to this dangerous situation is to bypass both the central banks and the big international banks and decentralize power by creating and supporting local not-for-profit public banks. Ultimately, he envisions a system of local public money issued by local authorities as receipts for services rendered to the local community. Legally, he noted, 97 percent of the money supply is already just private company credit, which can be created by any company, with or without a banking license. Governments should stop issuing government bonds, he said, and instead fund their public sector credit needs through domestic banks that create money on their books (as all banks have the power to do). These banks could offer more competitive rates than the bond markets and could stimulate the local economy with injections of new money. They could also put the big bond underwriting firms that feed on the national debt out of business.

Abolishing the central banks is one possibility, but if they were recaptured as public utilities, they could serve some useful purposes. A central bank dedicated to the service of the public could act as an unlimited source of liquidity for a system of public banks, eliminating bank runs since the central bank cannot go bankrupt. It could also fix the looming problem of an unrepayable federal debt, and it could generate “quantitative easing for the people,” which could be used to fund infrastructure, low-interest loans to cities and states, and other public services.

The ability to nationalize companies by buying them with money created on the central bank’s books could also be a useful public tool. The next time the mega-banks collapse, rather than bailing them out, they could be nationalized and their debts paid off with central bank-generated money.

There are other possibilities. Former assistant treasury secretary Paul Craig Roberts argues that we should also nationalize the media and the armaments industry. Researchers at the Democracy Collaborative have suggested nationalizing the large fossil fuel companies by simply purchasing them with Fed-generated funds. In a September 2018 policy paper titled “Taking Climate Action to the Next Level,” the researchers wrote, “This action might represent our best chance to gain time and unlock a rapid but orderly energy transition, where wealth and benefits are no longer centralized in growth-oriented, undemocratic, and ethically dubious corporations, such as ExxonMobil and Chevron.”

Critics will say this would result in hyperinflation, but an argument can be made that it wouldn’t. That argument will have to wait for another article, but the point here is that massive central bank interventions that were thought to be impossible in the 20th century are now being implemented in the 21st, and they are being done by independent central banks controlled by an international banking cartel. It is time to curb central bank independence. If their powerful tools are going to be put to work, it should be in the service of the public and the economy.

---

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution."

Banks Are Becoming Obsolete in China—Could the U.S. Be Next?

by Ellen Brown, from truthdig

AUG 22, 2018TD ORIGINALS

COMMENTS

 

Alipay in the U.K.: Alibaba's proprietary payment platform, Alipay, has shown up in advertisements overseas, such as this one in London's Tottenham Court subway station. (Ged Carroll / Flickr)(CC BY 2.0)

The U.S. credit card system siphons off excessive amounts of money from merchants. In a typical $100 credit card purchase, only $97.25 goes to the seller. The rest goes to banks and processors. But who can compete with Visa and MasterCard?

It seems China’s new mobile payment ecosystems can. According to a May 2018 article in Bloomberg titled “Why China’s Payment Apps Give U.S. Bankers Nightmares”:

The future of consumer payments may not be designed in New York or London but in China. There, money flows mainly through a pair of digital ecosystems that blend social media, commerce and banking—all run by two of the world’s most valuable companies. That contrasts with the U.S., where numerous firms feast on fees from handling and processing payments. Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them.

The nightmare for the U.S. financial industry is that a major technology company—whether one from China or a U.S. giant such as Amazon or Facebook—might replicate the success of the Chinese mobile payment systems, cutting banks out.

According to John Engen, writing in American Banker in May 2018, “China processed a whopping $12.8 trillion in mobile payments” in the first ten months of 2017. Today even China’s street merchants don’t want cash. Payment for everything is handled with a phone and a QR code (a type of barcode). More than 90 percent of Chinese mobile payments are run through Alipay and WeChat Pay, rival platforms backed by the country’s two largest internet conglomerates, Alibaba and Tencent Holdings. Alibaba is the Amazon of China, while Tencent Holdings is the owner of WeChat, a messaging and social media app with more than a billion users.

Alibaba created Alipay in 2004 to let millions of potential customers who lacked credit and debit cards shop on its giant online marketplace. Alipay is free for smaller users of its platform. As total monthly transactions rise, so does the charge; but even at its maximum, it’s less than half what PayPal charges: around 1.2 percent. Tencent Holdings similarly introduced its payments function in 2005 in order to keep users inside its messaging system longer. The American equivalent would be Amazon and Facebook serving as the major conduits for U.S. payments.

WeChat and Alibaba have grown into full-blown digital ecosystems—around-the-clock hubs for managing the details of daily life. WeChat users can schedule doctor appointments, order food, hail rides and much more through “mini-apps” on the core app. Alipay calls itself a “global lifestyle super-app” and has similar functions.

Both have flourished by making mobile payments cheap and easy to use. Consumers can pay for everything with their mobile apps and can make person-to-person payments. Everyone has a unique QR code and transfers are free. Users don’t need to sign into a bank or payments app when transacting. They simply press the “pay” button on the ecosystem’s main app and their unique QR code appears for the merchant to scan. Engen writes:

A growing number of retailers, including McDonald’s and Starbucks, have self-scanning devices near the cash register to read QR codes. The process takes seconds, moving customers along so quickly that anyone using cash gets eye-rolls for slowing things down.

Merchants that lack a point-of-sale device can simply post a piece of paper with their QR code near the register for customers to point their phones’ cameras at and execute payments in reverse.

A system built on QR codes might not be as secure as the near-field communication technology used by ApplePay and other apps in the U.S. market. But it’s cheaper for merchants, who don’t have to buy a piece of technology to accept a payment.

The mobile payment systems are a boon to merchants and their customers, but local bankers complain that they are slowly being driven out of business. Alipay and WeChat have become a duopoly that is impossible to fight. Engen writes that banks are often reduced to “dumb pipes”—silent funders whose accounts are used to top up customers’ digital wallets. The bank bears the compliance and other account-related expenses, and it does not get the fees and branding opportunities typical of cards and other bank-run options. The bank is seen as a place to deposit money and link it to WeChat or Alipay. Bankers are being “disintermediated”—cut out of the loop as middlemen.

If Amazon, Facebook or one of their Chinese counterparts duplicated the success of China’s mobile ecosystems in the U.S., they could take $43 billion in merchant fees from credit card companies, processors and banks, along with about $3 billion in bank fees for checking accounts. In addition, there is the potential loss of money market deposits, which are also migrating to the mobile ecosystem duopoly in China. In 2017, Alipay’s affiliate Yu’e Bao surpassed JPMorgan Chase’s Government Money Market Fund as the world’s largest money market fund, with more than $200 billion in assets. Engen quotes one financial services leader who observes, “The speed of migration to their wealth-management and money-market funds has been tremendous. That’s bad news for traditional banks, where deposits are the foundation of the business.”

An Amazon-style mobile ecosystem could challenge not only the payments system but the lending business of banks. Amazon is already making small-business loans, finding ways to cut into banks’ swipe-fee revenue and competing against prepaid card issuers; and it evidently has broader ambitions. Checking accounts, small business credit cards and even mortgages appear to be in the company’s sights.

In an October 2017 article titled “The Future of Banks Is Probably Not Banks,” tech innovator Andy O’Sullivan observed that Amazon has a relatively new service called “Amazon Cash,” where consumers can use a barcode to load cash into their Amazon accounts through physical retailers. The service is intended for consumers who don’t have bank cards, but O’Sullivan notes that it raises some interesting possibilities. Amazon could do a deal with retailers to allow consumers to use their Amazon accounts in stores, or it could offer credit to buy particular items. No bank would be involved, just a tech giant that already has a relationship with the consumer, offering him or her additional services. Phone payment systems are already training customers to go without bank cards, which means edging out banks.

Taking those concepts even further, Amazon (or eBay or Craigslist) could set up a digital credit system that bypassed bank-created money altogether. Users could sell goods and services online for credits, which they could then spend online for other goods and services. The credits of this online ecosystem would constitute its own user-generated currency. Credits could trade in a digital credit clearing system similar to the digital community currencies used worldwide, systems in which “money” is effectively generated by users themselves.

Like community currencies, an Amazon-style credit clearing system would be independent of both banks and government; but Amazon itself is a private for-profit megalithic system. Like its Wall Street counterparts, it has a shady reputation, having been variously charged with worker exploitation, unfair trade practices, environmental degradation and extracting outsize profits from trades. However, both President Trump on the right and Sen. Elizabeth Warren on the left are now threatening to turn Amazon, Facebook and other tech giants into public utilities.

This opens some interesting theoretical possibilities. We could one day have a national nonprofit digital ecosystem operated as a cooperative, a public utility in which profits are returned to the users in the form of reduced prices. Users could create their own money by “monetizing” their own credit, in a community currency system in which the “community” is the nation—or even the world.

---

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution." A thirteenth book titled "The Coming Revolution in Banking" is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Off the Top of My Head

The 'Make a Killing and Get Out' Economy

by John Lawrence, June 9, 2018

Even the big guys expect the American economy to crash again as it did in 2018. But they don't care. They will have made their money by then. They don't care if the chickens come home to roost on the Federal debt either. If the US becomes too insufferable, they will take their money and go elsewhere. Any country would accept a million dollar bribe in order to get in. So we see the banks are at it again. They have eviscerated Dodd-Frank, the banking legislation that was supposed to say to the banking industry and the rest of America, NEVER AGAIN. Hah, they know it will happen again. Their profits are predicated on the fact that it will happen again and they don't care. They will have made their killing by then.

Same goes for CEOs. They don't care if they get fired a few years down the line after they have made their killing. They don;'t care if their company becomes unprofitable at some point in time. They just want to get that stock price up as far as possible before the collapse, get their bonuses and options and get out. They will have made their killing before their company becomes a worthless hulk. Hedge fund managers think the same way. They're not interested in building a company of value for the long term. No, they will lay off their employees to please Wall Street. Get that stock price up, Wall Street tells them, and they comply because their personal profits are based on the stock price, not how well they build the company for the long term.

Short term profits are all that's important to those who wield power in the global economy presided over by the almighty dollar. We have already seen what happens to countries that don't play ball: sanctions or the threat of sanctions. That wouldn't be possible if the US dollar did not hold sway. Even US allies are being forced to do things against their better judgment because the US told them to do it. Of course we have total nut cases running the US at the present time. They also are only in it for the money and the power. Power is an aphrodisiac. The more of it they have, the more of it they want.

If the economy comes crashing down, if the national debt becomes unpayable, if there is no money for social security or Medicare, the prevailing power and money brokers could care less. They will have made their killing and gotten out leaving the rest of us with the hollowed out shell of debt we'll be paying off for centuries..

All-Time Highs for Stock Buybacks and Bank Profits as Workers Languish in Trump's America

Published on Tuesday, May 22, 2018 by Common Dreams

"We've got to repeal the outrageous corporate welfare of this tax plan and pass real tax reform that actually helps working families—not the one percent," said Sen. Bernie Sanders

by Jake Johnson, staff writer

 

8 Comments

For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there's a big problem with their story—banks are making record profits," Sen. Elizabeth Warren (D-Mass.) concluded in a tweet on Tuesday. (Photo: Alex Proimos/Flickr/cc)

As America's largest corporations continue their unprecedented stock buyback spree in the wake of President Donald Trump's $1.5 trillion tax cut, new government data published on Tuesday showed that U.S. banks are also smashing records thanks to the GOP tax law, raking in $56 billion in net profits during the first quarter of 2018—an all-time high.

"The Trump/Republican tax plan has been nothing but a giant gift to corporations so that executives and shareholders can get richer."
—Sen. Bernie Sanders (I-Vt.)

 

The new data, released by the Federal Deposit Insurance Corporation (FDIC), comes as the House of Representatives is gearing up to pass a bipartisan deregulatory measure that would reward massive Wall Street banks like JPMorgan Chase and Citigroup while dramatically increasing the risk of another financial crisis.

As Common Dreams reported, the Senate easily passed the bill in March with the help of 16 Democrats.

The banking industry's record-shattering profits fit with an entirely predictable pattern that has emerged following the passage of the GOP tax bill last December: America's most profitable corporations are posting obscene profits and using that cash to reward wealthy shareholders through stock buybacks while investing little to nothing in workers, despite their lofty promises.

"For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there's a big problem with their story—banks are making record profits."
—Sen. Elizabeth Warren (D-Mass.)

 

According to a CNN analysis published on Sunday, "S&P 500 companies showered Wall Street with at least $178 billion of stock buybacks during the first three months of 2018." As Common Dreams reported earlier this month, major corporations are on track to send $1 trillion to rich investors through buybacks and dividend increases by the end of the year.

Most Americans, meanwhile, have said they are seeing very few noticeable benefits from the massive tax cuts and—according to a new study by United Way—nearly half of the U.S. population is still struggling to afford basic necessities like food, housing, and healthcare.

"The Trump/Republican tax plan has been nothing but a giant gift to corporations so that executives and shareholders can get richer," Sen. Bernie Sanders (I-Vt.) wrote in a Facebook post on Tuesday. "We've got to repeal the outrageous corporate welfare of this tax plan and pass real tax reform that actually helps working families—not the one percent."

How corporations are spending their tax breaks:

✅ Stock buybacks for their wealthy investors

❌ Long-term investments in their workershttps://t.co/sR1x3OYzoq

— Tax March (@taxmarch) May 22, 2018

Instead of addressing the deep-seated financial struggles much of the American public is facing even as the stock market continues to soar and as Trump boasts of an economic boom, Congress is preparing to provide an even greater windfall to wealthy bankers on Tuesday by gutting crucial post-crisis regulations and putting taxpayers on the hook for yet another bailout.

This morning, it was announced that America’s banking sector hit a new record high of $56 billion in net income in the first quarter of 2018.

This afternoon, the House is set to pass the #BankLobbyistAct to supposedly "provide relief" to the banking sector. What a shameful day. pic.twitter.com/OYNUc7FQf6

— Public Citizen (@Public_Citizen) May 22, 2018

"For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there's a big problem with their story—banks are making record profits," Sen. Elizabeth Warren (D-Mass.) concluded in a tweet on Tuesday. "Congress has done enough favors for big banks—the House should reject the Bank Lobbyist Act."

This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License

Fox in the Hen House: Why Interest Rates Are Rising

by Ellen Brown, from truthdig, April 20, 2018

Scene of the action: The Federal Reserve headquarters in Washington, D.C. AgnosticPreachersKid / Wikimedia Commons (CC BY-SA 3.0)

On March 31 the Federal Reserve raised its benchmark interest rate for the sixth time in three years and signaled its intention to raise rates twice more in 2018, aiming for a Fed funds target of 3.5 percent by 2020. LIBOR (the London Interbank Offered Rate) has risen even faster than the Fed funds rate, up to 2.3 percent from just 0.3 percent 2 1/2 years ago. LIBOR is set in London by private agreement of the biggest banks, and the interest on $3.5 trillion globally is linked to it, including $1.2 trillion in consumer mortgages.

Alarmed commentators warn that global debt levels have reached $233 trillion, more than three times global GDP, and that much of that debt is at variable rates pegged either to the Fed’s interbank lending rate or to LIBOR. Raising rates further could push governments, businesses and homeowners over the edge. In its Global Financial Stability report in April 2017, the International Monetary Fund warned that projected interest rises could throw 22 percent of U.S. corporations into default.

Then there is the U.S. federal debt, which has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $21 trillion now. Adding to that debt burden, the Fed has announced it will be dumping its government bonds acquired through quantitative easing at the rate of $600 billion annually. It will sell $2.7 trillion in federal securities at the rate of $50 billion monthly beginning in October. Along with a government budget deficit of $1.2 trillion, that’s nearly $2 trillion in new government debt that will need financing annually.

If the Fed follows through with its plans, projections are that by 2027, U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Trump’s original trillion-dollar infrastructure plan every year. And it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds. Where will this money come from? Even crippling taxes, wholesale privatization of public assets and elimination of social services will not cover the bill.

With so much at stake, why is the Fed increasing interest rates and adding to government debt levels? Its proffered justifications don’t pass the smell test.

‘Faith-Based’ Monetary Policy

In setting interest rates, the Fed relies on a policy tool called the “Phillips curve,” which allegedly shows that as the economy nears full employment, prices rise. The presumption is that workers with good job prospects will demand higher wages, driving prices up. But the Phillips curve has proved virtually useless in predicting inflation, according to the Fed’s own data. Former Fed Chairman Janet Yellen has admitted that the data fail to support the thesis, and so has Fed Governor Lael Brainard. Minneapolis Fed President Neel Kashkari calls the continued reliance on the Phillips curve “faith-based” monetary policy. But the Federal Open Market Committee (FOMC), which sets monetary policy, is undeterred.

“Full employment” is considered to be 4.7 percent unemployment. When unemployment drops below that, alarm bells sound and the Fed marches into action. The official unemployment figure ignores the great mass of discouraged unemployed who are no longer looking for work, and it includes people working part-time or well below capacity. But the Fed follows models and numbers, and as of this month, the official unemployment rate had dropped to 4.3 percent. Based on its Phillips curve projections, the FOMC is therefore taking steps to aggressively tighten the money supply.

The notion that shrinking the money supply will prevent inflation is based on another controversial model, the monetarist dictum that “inflation is always and everywhere a monetary phenomenon”: Inflation is always caused by “too much money chasing too few goods.” That can happen, and it is called “demand-pull” inflation. But much more common historically is “cost-push” inflation: Prices go up because producers’ costs go up. And a major producer cost is the cost of borrowing money. Merchants and manufacturers must borrow in order to pay wages before their products are sold, to build factories, buy equipment and expand. Rather than lowering price inflation, the predictable result of increased interest rates will be to drive consumer prices up, slowing markets and increasing unemployment—another Great Recession. Increasing interest rates is supposed to cool an “overheated” economy by slowing loan growth, but lending is not growing today. Economist Steve Keen has shown that at about 150 percent private debt to GDP, countries and their populations do not take on more debt. Rather, they pay down their debts, contracting the money supply. That is where we are now.

The Fed’s reliance on the Phillips curve does not withstand scrutiny. But rather than abandoning the model, the Fed cites “transitory factors” to explain away inconsistencies in the data. In a December 2017 article in The Hill, Tate Lacey observed that the Fed has been using this excuse since 2012, citing one “transitory factor” after another, from temporary movements in oil prices to declining import prices and dollar strength, to falling energy prices, to changes in wireless plans and prescription drugs. The excuse is wearing thin.

The Fed also claims that the effects of its monetary policies lag behind the reported data, making the current rate hikes necessary to prevent problems in the future. But as Lacey observes, GDP is not a lagging indicator, and it shows that the Fed’s policy is failing. Over the last two years, leading up to and continuing through the Fed’s tightening cycle, nominal GDP growth averaged just over 3 percent, while in the two previous years, nominal GDP grew at more than 4 percent. Thus “the most reliable indicator of the stance of monetary policy, nominal GDP, is already showing the contractionary impact of the Fed’s policy decisions,” says Lacey, “signaling that its plan will result in further monetary tightening, or worse, even recession.”

Follow the Money

If the Phillips curve, the inflation rate and loan growth don’t explain the push for higher interest rates, what does? The answer was suggested in an April 12 Bloomberg article by Yalman Onaran, titled “Surging LIBOR, Once a Red Flag, Is Now a Cash Machine for Banks.” He wrote:

The largest U.S. lenders could each make at least $1 billion in additional pretax profit in 2018 from a jump in the London interbank offered rate for dollars, based on data disclosed by the companies. That’s because customers who take out loans are forced to pay more as Libor rises while the banks’ own cost of credit has mostly held steady.

During the 2008 crisis, high LIBOR rates meant capital markets were frozen, since the banks’ borrowing rates were too high for them to turn a profit. But U.S. banks are not dependent on the short-term overseas markets the way they were a decade ago. They are funding much of their operations through deposits, and the average rate paid by the largest U.S. banks on their deposits climbed only about 0.1 percent last year, despite a 0.75 percent rise in the Fed funds rate. Most banks don’t reveal how much of their lending is at variable rates or indexed to LIBOR, but Onaran comments:

JPMorgan Chase & Co., the biggest U.S. bank, said in its 2017 annual report that $122 billion of wholesale loans were at variable rates. Assuming those were all indexed to Libor, the 1.19 percentage-point increase in the rate in the past year would mean $1.45 billion in additional income.

Raising the Fed funds rate can be the same sort of cash cow for U.S. banks. According to a December 2016 Wall Street Journal article titled “Banks’ Interest-Rate Dreams Coming True”:

While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward. … Bank of America … says a 1-percentage-point rise in short-term rates would add $3.29 billion. … [A] back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank’s expected 2016 pretax profit. …

As observed in an April 12 article on Seeking Alpha:

About half of mortgages are … adjusting rate mortgages [ARMs] with trigger points that allow for automatic rate increases, often at much more than the official rate rise. …

One can see why the financial sector is keen for rate rises as they have mined the economy with exploding rate loans and need the consumer to get caught in the minefield.

Even a modest rise in interest rates will send large flows of money to the banking sector. This will be cost-push inflationary as finance is a part of almost everything we do, and the cost of business and living will rise because of it for no gain.

Cost-push inflation will drive up the consumer price index, ostensibly justifying further increases in the interest rate, in a self-fulfilling prophecy in which the FOMC will say: “We tried—we just couldn’t keep up with the CPI.”

A Closer Look at the FOMC

The FOMC is composed of the Federal Reserve’s seven-member Board of Governors, the president of the New York Fed and four presidents from the other 11 Federal Reserve Banks on a rotating basis. All 12 Federal Reserve Banks are corporations, the stock of which is 100 percent owned by the banks in their districts; and New York is the district of Wall Street. The Board of Governors currently has four vacancies, leaving the member banks in majority control of the FOMC. Wall Street calls the shots, and Wall Street stands to make a bundle off rising interest rates.

The Federal Reserve calls itself independent, but it is independent only of government. It marches to the drums of the banks that are its private owners. To prevent another Great Recession or Great Depression, Congress needs to amend the Federal Reserve Act, nationalize the Fed and turn it into a public utility, one that is responsive to the needs of the public and the economy.

---

Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution."

 

Off the Top of My Head

Bitcoin and the Blockchain

by John Lawrence, April 2, 2018

One of my favorite shows on RT is the Kaiser report, mainly because Kaiser is such a nut and Stacy Herbert is so cute. They are big proponents of Bitcoin. It took me a long time to figure out what Bitcoin is all about. Supposedly, it is an alternate form of currency that has some specific properties. I must say right off the bat that I'm not a big fan, and I'll tell you why in this report.

The blockchain is a computer program that traces every bitcoin throughout its whole life. Every transaction is recorded and it's possible to go back through the blockchain and see every transaction that every bitcoin has ever been involved in. So what? Is that really necessary in order to have a viable alternative currency? Every bitcoin user has a wallet that's encrypted so nobody but you can get at your money. If you lose your key, however, you've lost your money because only you possess this private key. Anyone can deposit money in your wallet, but only you can take it out. That's where the term "cryptocurrency" comes from.

Kaiser makes a big deal about how the dollar is a fiat currency, but bitcoin is not. Since the dollar is not backed up by gold or another precious metal that is "mined," the dollar is just as good as the American government says it is and people believe it to be. That's the meaning of fiat. Now bitcoin is supposedly not a fiat currency because bitcoins are "mined" through some computer algorithm that makes it difficult to get at them. Really? Not fiat because they are "mined"? That seems to me like a lot of hogwash. Then I've read that they are also given as rewards to computer programmers who "verify" the transactions. These guys are volunteers. Really? A financial system run by volunteers?

Bitcoin transactions are favored by criminals laundering money and more white collar types trying to escape paying taxes because supposedly the government has no way of finding out what's going on with buying and selling. But the government would have as much access to the blockchain as anyone else so those that think that the government has no way of monitoring these transactions have another think coming. Just because bitcoin transactions are not routed through a bank does not mean that they can't be monitored, taxed and traced by government.

So how does bitcoin differ from Paypal or M-Pesa, the Kenyan mobile phone based money transfer and microfinancing service? Or how does it differ from a simple debit card? The answer you mostly get is that bitcoin is a store of value just like the dollar and it's not a fiat currency. It's a store of value only because a number of people have invested in it and driven up the price of a bitcoin just like a stock. Its value can rise and fall just like a stock. You need an exchange to convert bitcoins to dollars just like with a stock. Paypal and M-Pesa are financial services based on the local currency. But although the transactions are digital as are most banking transactions these days, they are easily convertible to the local currency.

One of the advantages in bypassing banks when doing financial transactions is getting away from the finance charges that banks impose on every financial transaction. This could be accomplished, however, by means of a public bank that imposed more moderate charges or no charges at all for certain transactions. Certainly it would be more convenient if financial transactions could be accomplished using a mobile phone. There are some proprietary platforms for this today such as Apple Pay. Apple Pay is similar to M-Pesa. Of course Apple takes a cut of every financial transaction, and the technology is similar to a credit card.

I would like to see a public bank like the Bank of North Dakota develop a digital technology that could be used for financial transactions bypassing the traditional banks and their credit cards which still charge exorbitant interest rates while the banks themselves pay no interest on savings accounts and get their money for free by means of quantitative easing from the Fed.

Off the Top of My Head

Quantitative Easing for the People

by John Lawrence

During the banking crisis of 2008, the Federal Reserve bought up the debts of the big banks. They said in effect, "Oh poor Wells Fargo, you have a debt you can't pay? Here take this money and pay it off." Wouldn't it be nice if the Fed did this for average folk. "Oh, you have a car payment you can't make. Here take this money and pay it." Or "Take this money and pay off your student loan." Fat chance the Fed would ever help out the average folk, the hoi polloi. Why? Because the Fed is privately owned by the Big Banks. It is privately owned by Wall Street. It does not represent We the People.

The Fed shoveled money out the door to Wall Street. The government, meaning We the Taxpayers, did also. Treasury Secretary Hank Paulson with his hair on fire demanded the $700 billion TARP bailout. Beyond that the Fed committed to another $29 trillion giveaway to the Big Banks. However, the hoi polloi got foreclosed on right and left. There was no bailout for them. The Home Affordable Modification Program, known as HAMP did little to modify mortgages in favor of the average person.

This is from The Guardian:

Chris Cooley never missed a payment on his mortgage in Long Beach, California. Every month, Wells Fargo would debit him $3,100 for the four-unit building; one of the units was his, and the other three he rented out for income to cover the mortgage. In 2009, when the housing crisis hit, Cooley needed a way to reduce his mortgage. He renegotiated his loan through the Home Affordable Modification Program, known as Hamp. Initially, it was a success: his mortgage payments fell in half, to $1,560.

So it was surprising when a ReMax agent, sent on behalf of Wells Fargo, knocked on the door in December 2009 and told Cooley the building no longer belonged to him. The bank planned to take the building he had lived in and rented out for a decade – and list the property for sale.

So much for government help.

But it turned out that Cooley was not getting government help; without his knowledge, Wells Fargo had put him on what was only a trial Hamp payment program. He had been rejected for a permanent mortgage modification – only Wells Fargo never informed him about the rejection, he says, nor did they give him a reason why.

What followed was what most homeowners would consider a nightmare. While Cooley tried to stave off foreclosure to save his home and livelihood, Wells Fargo paid the other renters living in the property $5,000 to move out behind his back, and then denied Cooley further aid – because his income, which he drew from the rentals, was too low. “They took my income away from me, and then they couldn’t give me a loan because I had no income,” Cooley said. “What a wonderful catch-22.”

The bank held his final trial payment in a trust and never applied it to his loan (to this day, Cooley has never received that money back). For two years, Cooley appealed to Wells Fargo for some alternative form of relief, sending in paperwork time and again, talking to different customer service representatives who knew nothing about his situation, and generally running in place without success.

Tired of fighting, Cooley ended up leaving his home, and became just one of the seven million foreclosure victims in the US since the bursting of the housing bubble in 2007.

“Wells Fargo stole my home, plain and simple,” he said.

Nice guys at Wells Fargo. But by now everyone knows they are crooks and scam artists. They have been implicated in scam after illegal scam and fraud after illegal fraud. The only consequences have been multiple slaps on the wrist. A little over 30,000 HAMP modifications from 2009 remain active. That same year there were over one million foreclosures which shows the scale of the problem HAMP failed to fix. But for the banks nothing was too good.

Refusing to 'Play Dead for Big Banks,' Warren Gives Fellow Senators 17 Chances to Put Consumers First

Published on Thursday, March 08, 2018 by Common Dreams

"The Senate is expected to pass the #BankLobbyistAct—with Democratic support. But I'm not going down without a fight."

by Jake Johnson, staff writer

 

9 Comments

"The fight over the Bank Lobbyist Act isn't over yet," Warren wrote on Twitter, unveiling 17 amendments that, if passed, would uphold strict oversight of big banks. (Photo: Sen. Elizabeth Warren/Facebook)

Thanks to the help of 16 Senate Democrats and Sen. Angus King (I-Maine), a Wall Street deregulation measure disguised as a "community banking" bill is barreling toward passage—but Sen. Elizabeth Warren (D-Mass.) vowed Wednesday to not let the bill sail through without forcing votes on a series of amendments aimed at showing Americans whose side their lawmakers are really on.

"The Senate is expected to pass the #BankLobbyistAct—with Democratic support. But I'm not going down without a fight."
—Sen. Elizabeth Warren"The fight over the Bank Lobbyist Act isn't over yet," Warren wrote on Twitter, unveiling 17 amendments that, if approved, would uphold strict oversight of big banks and shield consumers from Wall Street fraud and abuse. "I'm not going to roll over and play dead for the big banks."

First introduced last November by Sen. Mike Crapo (R-Idaho), the officially named "Economic Growth, Regulatory Relief, and Consumer Protection Act" (S.2155) could hit the Senate floor for a final vote as soon as Thursday after it easily cleared a procedural hurdle earlier this week.

Far from what its title suggests, progressive lawmakers and independent analysts argue the legislation would dismantle many consumer protections, provide huge gifts to Wall Street firms, and—according to the Congressional Budget Office (CBO)—significantly increase the likelihood of future taxpayer-funded bank bailouts.

In an effort to let the American people know whether their senators are on the side of "working families or the big banks," Warren announced her plan on Wednesday to push for votes on amendments to the bill that, if implemented in its current form, would "turn over the keys to our economy to the same people who crashed it ten years ago."

"The Senate is expected to pass the #BankLobbyistAct—with Democratic support. But I'm not going down without a fight," Warren declared.

Below is a full list of the amendments accompanied by a short summary of their contents. The full amendments can be viewed on Warren's Twitter page.

'The Charade Is Over': CBO Reveals Democrat-Backed Bill Really Just Big Gift to Wall Street

Published on Tuesday, March 06, 2018 by Common Dreams

"The Wall Street crash of 2008 showed the American people how fraudulent many of these large banks are. The last thing we should be doing is deregulating them."

by Jake Johnson, staff writer

 

13 Comments

Sen. Mark Warner (D-Va.) listens to testimony from Secretary of Treasury Steve Mnuchin during a Senate Finance Committee hearing concerning fiscal year 2018 budget proposals for the Department of Treasury and tax reform, on Capitol Hill, May 25, 2017 in Washington, D.C. (Photo: Drew Angerer/Getty Images)

Providing further evidence that the bank deregulation bill currently sailing through the Senate—with the essential help of 12 Democrats and Sen. Angus King (I-Maine)—is more about enriching large financial institutions than helping community banks, the Congressional Budget Office (CBO) estimated in a report unveiled late Monday that the bipartisan measure would exempt big banks from strict regulations and significantly increase the likelihood of future taxpayer bailouts.

"Any Democrat voting to advance this bill ought to just retire and start working directly as a lobbyist for the big banks."
—Kurt Walters, Rootstrikers

 

"A major feature of the bill is exempting about two dozen financial companies with assets between $50 billion and $250 billion from the highest levels of regulatory scrutiny from the Federal Reserve," notes the Washington Post's Jeff Stein, who first reported on the CBO's findings.

According to the CBO, such exemptions would give large institutions—including so-called "too big to fail" banks—more freedom to engage in the kind of risky behavior that led to the 2008 financial crash, thus making them more likely to collapse again.

"This banking bill is a disaster," Sen. Bernie Sanders (I-Vt.) said in a statement responding to the CBO's findings. "The Wall Street crash of 2008 showed the American people how fraudulent many of these large banks are. The last thing we should be doing is deregulating them. Why would any member of Congress vote to move us closer to another taxpayer bailout of large financial institutions?"

Sen. Sherrod Brown (D-Ohio) also seized upon the CBO's report on Monday as confirmation of what the bill's opponents have been saying for months.

The independent budget scorekeeper confirmed what we know – this bank giveaway bill will cost taxpayers. Hardworking Americans shouldn’t have to pay for favors to Wall Street, foreign megabanks and their lobbyists. -SB https://t.co/WqfMWNJOig

— Sherrod Brown (@SenSherrodBrown) March 6, 2018

The Economic Growth, Regulatory Relief, and Consumer Protection Act—or, as critics call it, the "Bank Lobbyist Act"—was introduced by Sen. Mike Crapo (R-Idaho) last November, and currently boasts 12 Democratic co-sponsors, in addition to Sen. Angus King (I-Maine): Doug Jones (Ala.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Jon Tester (Mont.), Mark Warner (Va.), Claire McCaskill (Mo.), Joe Manchin (W.Va.), Tim Kaine (Va.), Gary Peters (Mich.), Michael Bennet (Colo.), Chris Coons (Del.), and Tom Carper (Del.).

With the legislation scheduled for a procedural vote on Tuesday, Kurt Walters, campaign director at the advocacy group Rootstrikers, suggested in a statement on Monday that "any Democrat voting to advance this bill ought to just retire and start working directly as a lobbyist for the big banks."

"The charade is over," Walters added. "The CBO's report just destroyed any case that this bill is 'community banking' legislation. A neutral arbiter just confirmed that this bill would increase the risk of future bank bailouts and gave even odds that it would let Wall Street giants CitiBank and JPMorgan pile on more risk. In what universe does this make sense as policy? In what universe is this what voters are clamoring for?"

 

This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License

Off the Top of My Head

Microfinance is Helping World's Poor Do Business

by John Lawrence, February 27, 2018

While Bitcoin, supposedly finance's alternative to traditional banks, is fluctuating all over the place thus being more of a speculative investment rather than a means of doing business, another mobile based banking service, completely independent of traditional banks, called M-Pesa is enabling people in the poorest parts of the world to do business with extremely low transaction charges. The service enables its users to:

*deposit and withdraw money
*transfer money to other users
*pay bills
*purchase airtime and

transfer money between the service and, in some markets like Kenya, a bank account. A partnership with Kenya-based Equity Bank launched M-KESHO, a product using M-PESA’s platform and agent network, that offers expanded banking services like interest-bearing accounts, loans, and insurance.

M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodafone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. It has since expanded to Afghanistan, South Africa, India and in 2014 to Romania and in 2015 to Albania. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services (Lipa na M-Pesa) easily with a mobile device.

One might ask how does this service differ from Bitcoin and other blockchain type forms of money currently all the rage in the western world. The difference seems to be that M-Pesa is a practical service that fulfills a need - inexpensive financial transactions that bypass the more expensive banking system. M-Pesa allows for digital wallets just as Bitcoin does.

Supposedly Bitcoin is unhackable, but is it really? Mt.Gox, which was an exchange on which one could buy and sell Bitcoin, lost $400 million dollars. And is the blockchain really necessary in order to secure financial transactions? I don't think so. I don't think every unit of currency needs to be tracked from its birth to its grave which is what Bitcoin does. I think the blockchain is a hoax.

Bitcoin has a way of creating "bitcoins' called mining similar to mining for gold only in this case everything is digital and there is no actual physical substance involved. Hokey to say the least when all you are trying to do are simple financial transactions like M-Pesa is capable of.

One might ask how would a public bank be able to make use of a facility like M-Pesa to enable very low cost financial transactions. This would be similar to a debit card, but would also enable small loans without a huge amount of paperwork and hence higher cost - sort of a debit/credit card combination.

Ellen Brown, author of Web of Debt and The Public Bank Solution, is currently writing a book on the comparison of Bitcoin and public banking. Maybe she can enlighten us as to how a solution like M-Pesa can fit into the public banking solution. There are some exciting things happening that will change the role of traditional banking.

Regulation Is Killing Community Banks – Public Banks Can Revive Them

by Ellen Brown

Posted on October 30, 2017 by Ellen Brown on Web of Debt

Crushing regulations are driving small banks to sell out to the megabanks, a consolidation process that appears to be intentional.

Publicly-owned banks can help avoid that trend and keep credit flowing in local economies.

At his confirmation hearing in January 2017, Treasury Secretary Stephen Mnuchin said, “regulation is killing community banks.” If the process is not reversed, he warned, we could “end up in a world where we have four big banks in this country.” That would be bad for both jobs and the economy. “I think that we all appreciate the engine of growth is with small and medium-sized businesses,” said Mnuchin. “We’re losing the ability for small and medium-sized banks to make good loans to small and medium-sized businesses in the community, where they understand those credit risks better than anybody else.”

The number of US banks with assets under $100 million dropped from 13,000 in 1995 to under 1,900 in 2014. The regulatory burden imposed by the 2010 Dodd-Frank Act exacerbated this trend, with community banks losing market share at double the rate during the four years after 2010 as in the four years before. But the number had already dropped to only 2,625 in 2010.  What happened between 1995 and 2010?

Six weeks after September 11, 2001, the 1,100 page Patriot Act was dropped on congressional legislators, who were required to vote on it the next day. The Patriot Act added provisions to the 1970 Bank Secrecy Act that not only expanded the federal government’s wiretapping and surveillance powers but outlawed the funding of terrorism, imposing greater scrutiny on banks and stiff criminal penalties for non-compliance. Banks must now collect and verify customer-provided information, check names of customers against lists of known or suspected terrorists, determine risk levels posed by customers, and report suspicious persons, organizations and transactions. One small banker complained that banks have been turned into spies secretly reporting to the federal government. If they fail to comply, they can face stiff enforcement actions, whether or not actual money-laundering crimes are alleged.

In 2010, one small New Jersey bank pleaded guilty to conspiracy to violate the Bank Secrecy Act and was fined $5 million for failure to file suspicious-activity and cash-transaction reports. The bank was acquired a few months later by another bank. Another small New Jersey bank was ordered to shut down a large international wire transfer business because of deficiencies in monitoring for suspicious transactions. It closed its doors after it was hit with $8 million in fines over its inadequate monitoring policies.

Complying with the new rules demands a level of technical expertise not available to ordinary mortals, requiring the hiring of yet more specialized staff and buying more anti-laundering software. Small banks cannot afford the risk of massive fines or the added staff needed to avoid them, and that burden is getting worse. In February 2017, the Financial Crimes Enforcement Network proposed a new rule that would add a new category requiring the flagging of suspicious “cyberevents.” According to an April 2017 article in American Banker:

[T]he “cyberevent” category requires institutions to detect and report all varieties of digital mischief, whether directed at a customer’s account or at the bank itself. . . .

Under a worst-case scenario, a bank’s failure to detect a suspicious [email] attachment or a phishing attack could theoretically result in criminal prosecution, massive fines and additional oversight.

One large bank estimated that the proposed change with the new cyberevent reporting requirement would cost it an additional $9.6 million every year.

Besides the cost of hiring an army of compliance officers to deal with a thousand pages of regulations, banks have been hit with increased capital requirements imposed by the Financial Stability Board under Basel III, eliminating the smaller banks’ profit margins. They have little recourse but to sell to the larger banks, which have large compliance departments and can skirt the capital requirements by parking assets in off-balance-sheet vehicles.

Off the Top of My Head

LA to Form Public Bank For Cannabis Deposits

by John Lawrence

Los Angeles is considering the formation of a public bank so that the cannabis industry has some place to deposit their money. Since cannabis is illegal at the Federal level, Wall Street banks like Wells Fargo cannot accept their money as deposits. However, since cannabis is legal at the state level in some states like California, a public bank similar to the Public Bank of North Dakota which is wholly state owned is the logical solution.

The Bank of North Dakota, the only publicly owned bank in the country, has paid $85 million into various state government funds over the last four years, according to its most recent annual report. It makes low-interest student loans and farm loans and helps finance local public-works projects, all priorities set by state leaders.

So instead of sending city or state deposits off to Wall Street banks like Wells Fargo which have been shown to be fraudulent and which play games with pension fund money including siphoning it off for their own benefit, why not keep the money in the state for the purposes of benefiting the people of the state.

One of the key questions surrounding the establishment of a public bank is how to capitalize it. This would seem to be solved initially by taking deposits from the cannabis industry. After the bank was established other deposits from city and state tax revenues could be deposited in the public bank without Wall Street taking a cut. There is also the question of Federal institutions and oversight that would be denied to a bank taking cannabis money. They could mainly be gotten around except for one. To be able to process checks, wire transfers and electronic payments — in other words, to interact with the rest of the financial system — banks must have an account with one of the nation’s 12 regional Federal Reserve banks. That conundrum remains to be solved unless the Federal Reserve Bank of San Francisco, the central bank for California and eight other western states, decides to accept LA's application even if it accepts cannabis money.

Ellen Brown, author of The Public Bank Solution and Web of Debt is considered the foremost expert in this field and several cities and states are actively looking into the establishment of public banks to serve the people of their respective jurisdictions and cut out Wall Street profits.

More Banking Follies

Published on Saturday, August 19, 2017

by Common Dreams

 

by

Christopher Brauchli

 

5 Comments

"Wells Fargo was just beginning to recover from the reputational losses it suffered from what, in Trumpian terms would be described as “fake” bank accounts, when it was disclosed that its employees had discovered a new way of bilking customers-insurance sales connected with car loans," Brauchli writes. (Photo: Alex Proimos/Flickr/cc)

A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests . . . and held together by the cohesive power of the vast surplus in the banks.
—John Calhoun, May 27, 1836 Speech

It was a sad coincidence. It occurred within a couple days after the public was apprised of Wells Fargo’s new foray into discovering ways to make more money by bilking its customers.

It was not, of course, a first for that venerable institution. Last year it was learned that millions of customers of the bank had bank accounts and credit cards opened for them by employees of the bank, without being authorized to do so by the customer. If the employee had not only opened the account, but had caused the bank to deposit, for example, $1000 into the account in order to give it life, the practice would not have upset the unsuspecting customers. Instead, the employees simply opened the accounts and, instead of depositing money into them, charged the account holders fees for creating the accounts and associated fees for services that accompanied the new accounts.

That, of course, did not please the customers and, when the practice was discovered, caused the bank to pay a $185 million dollar fine and $142 million to the millions of its customers who were victims of the bank’s practices. Wells Fargo was just beginning to recover from the reputational losses it suffered from what, in Trumpian terms would be described as “fake” bank accounts, when it was disclosed that its employees had discovered a new way of bilking customers-insurance sales connected with car loans.

In late July 2017, we learned that approximately 500,000 bank clients were sold car insurance when taking out car loans with the bank, even though they already had car insurance. According to reports, the bank will pay $80 million to clients who were bilked. Whether fines will be imposed on the banks will not be known until some time in the future. (In fairness to Wells Fargo it should be noted that in 2013 JPMorgan Chase paid $13 billion in fines and penalties for some of its activities. It makes Wells Fargo’s recent activities seem trivial.) The other event of note that happened at the end of July was purely coincidental.

Off the Top of My Head

The Banksters Got Away With Fraud Because They Were Too Big to Jail

Now the Trump Administration is Getting Away With Crime Because He's Too Big to Fail

by John Lawrence

Wells Fargo has committed all sorts of crimes. Wells Fargo employees opened up a vast number of new checking and credit accounts without account holders’ consent or knowledge. They stole customer's identities and sold them life insurance policies they never bought. "This is a huge case of fraud," said Beth Givens, executive director the Privacy Rights Clearinghouse, a nonprofit San Diego-based consumer advocacy organization. "At its face value, these individuals' identities have certainly been stolen." So why is Wells Fargo still in business?

In addition to the fact that they were charged overdraft and maintenance fees, some customers also dealt with — and, surely, are currently dealing with — significant hits to their credit scores as a result of not staying current on accounts they didn’t even know they had. They’ll likely have difficulty securing home and car loans at reasonable rates for years to come, simply because their bank decided to defraud them. This was criminal activity on a massive scale, and it is going to have lingering effects on innocent people’s abilities to live their lives.

Now the latest criminal activity is the overcharging of small business. For several years, Wells Fargo's merchant services division overcharged small businesses for processing credit card transactions, a lawsuit alleges. Business owners who tried to leave Wells Fargo were charged "massive early termination fees," according to the lawsuit filed in US District Court.

The message being sent to Americans is that these banks can engage in criminal activity and get away with it. At most they will be charged a small (for them) fine. Same things happened for all the criminal activity engaged in by Wall Street that led to the 2008 Great Recession. The Justice Department under Eric Holder declined to prosecute. No one went to jail.

Message to US lawmakers: you can get away with criminal activity with impunity as long as you're big, powerful and important enough. This message hasn't been lost on Donald Trump who has been cutting corners, skirting the law ever since he was elected President. He will undoubtedly get away with it because he has immunity to prosecution just because of the fact he's President. No Republican Congress is going to impeach him. No President gets impeached except by the opposing party when they are in control of Congress which, unfortunately, isn't the case right now.

So the US marches down the road to dictatorship.

Saving Illinois: Getting More Bang for the State’s Bucks

Published on

Monday, July 24, 2017

 by

Common Dreams

Illinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Or the state could turn its sizable pension fund into a self-sustaining public bank.

 

by

 Ellen Brown

 

 7 Comments

"If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route." (Photo: Andrew Harrer/Bloomberg via Getty Images)

Illinois is insolvent, unable to pay its bills. According to Moody’s, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. Of these, $119 billion are tied to shortfalls in the state’s pension program. On July 6, 2017, for the first time in two years, the state finally passed a budget, after lawmakers overrode the governor’s veto on raising taxes. But they used massive tax hikes to do it – a 32% increase in state income taxes and 33% increase in state corporate taxes – and still Illinois’ new budget generates only $5 billion, not nearly enough to cover its $15 billion deficit.

Adding to its budget woes, the state is being considered by Moody’s for a credit downgrade, which means its borrowing costs could shoot up. Several other states are in nearly as bad shape, with Kentucky, New Jersey, Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion and probably more, according to expert estimates. They are paying out more than they are taking in, and they are falling short on their projected returns. Most funds aim for about a 7.5% return, but they barely made 1.5% last year.

If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route. The state could follow the lead of Detroit and cut its public pension funds, but Illinois has a constitutional provision forbidding that as well. It could follow Detroit in privatizing public utilities (notably water), but that would drive consumer utility prices through the roof. And taxes have been raised about as far as the legislature can be pushed to go.

The state cannot meet its budget because the tax base has shrunk. The economy has shrunk and so has the money supply, triggered by the 2008 banking crisis. Jobs were lost, homes were foreclosed on, and businesses and people quit borrowing, either because they were “all borrowed up” and could not go further into debt or, in the case of businesses, because they did not have sufficient customer demand to warrant business expansion. And today, virtually the entire circulating money supply is created when banks make loans When loans are paid down and new loans are not taken out, the money supply shrinks. What to do?

What if People Owned the Banks, Instead of Wall Street?

From the Nation:

From Seattle to Santa Fe, cities are at the center of a movement to create publicly owned banks.

By Jimmy Tobias

May 22, 2017

Demonstrators protest against the Wall Street bailout outside Chase in Times Square. (AP Photo / Edouard H.R. Gluck)

 

When Craig Brandt marched into the City Council chambers in Oakland, California, in the summer of 2015, he was furious about fraud.

The long-time local attorney and father of two had been following the fallout from the Libor scandal, a brazen financial scam that saw some of the biggest banks on Wall Street illegally manipulate international interest rates in order to boost their profits. By some estimates, the scheme cost cities and states around the country well over $6 billion. In June of 2015, Citigroup, JPMorgan Chase, and Barclays, among other Libor-rigging giants, pleaded guilty to felony charges related to the conspiracy and agreed to pay more than $2.5 billion in criminal fines to US regulators. But, for Brandt, that wasn’t enough. He wanted the banks banished, blocked from doing business in his city.

“I was totally pissed about it,” he says. “It was straight-up fraud.”

So, in a small act of stick-it-to-the-man defiance, Brandt drafted a resolution that barred the municipality from working with any firm that had either committed a felony or had recently paid more than $150 million in fines. He presented the homespun and eminently reasonable legislation to city officials and urged them to adopt it.

“The city councilors said they couldn’t do it,” Brandt says. “If they did, they wouldn’t have a bank left to work with. They said there wouldn’t be any bank big enough to take the city’s deposits.” Oakland, it seemed, was hopelessly dependent on ethically dubious and occasionally criminal financial titans. Brandt, however, was undeterred.

After the City Council turned him down, he started looking for other ways to wean Oakland off Wall Street. That’s when he fell in with a group of locals who have been nursing an audacious idea. They want their city to take radical action to combat plutocracy, inequality, and financial dislocation. They want their city to do something that hasn’t been done in this country in nearly a century, not since the trust-busting days of the Progressive Era. They want their city to create a bank—and, strange as the idea may seem, it’s not some utopian scheme. It’s a cause that’s catching on.

Across the country, community activists, mayors, city council members, and more are waking up to the power and the promise of public banks. Such banks are established and controlled by cities or states, rather than private interests. They collect deposits from government entities—from school districts, from city tax receipts, from state infrastructure funds—and use that money to issue loans and support public priorities. They are led by independent professionals but accountable to elected officials. Public banks are a way, supporters say, to build local wealth and resist the market’s predatory predilections. They are a way to end municipal reliance on Wall Street institutions, with their high fees, their scandal-ridden track records, and their vile investments in private prisons and pipelines. They are a way, at long last, to manage money in the public interest.

How the Rich Get Richer

Sovereign Debt Jubilee, Japanese-Style

Posted on June 27, 2017 by Ellen Brown

Japan has found a way to write off nearly half its national debt without creating inflation. We could do that too.

Let’s face it. There is no way the US government is ever going to pay back a $20 trillion federal debt. The taxpayers will just continue to pay interest on it, year after year.

A lot of interest.

If the Federal Reserve raises the fed funds rate to 3.5% and sells its federal securities into the market, as it is proposing to do, by 2026 the projected tab will be $830 billion annually. That’s nearly $1 trillion owed by the taxpayers every year, just for interest.

Personal income taxes are at record highs, ringing in at $550 billion in the first four months of fiscal year 2017, or $1.6 trillion annually. But even at those high levels, handing over $830 billion to bondholders will wipe out over half the annual personal income tax take. Yet what is the alternative?

Japan seems to have found one. While the US government is busy driving up its “sovereign” debt and the interest owed on it, Japan has been canceling its debt at the rate of $720 billion (¥80tn) per year. How? By selling the debt to its own central bank, which returns the interest to the government. While most central banks have ended their quantitative easing programs and are planning to sell their federal securities, the Bank of Japan continues to aggressively buy its government’s debt. An interest-free debt owed to oneself that is rolled over from year to year is effectively void – a debt “jubilee.” As noted by fund manager Eric Lonergan in a February 2017 article:

The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40%). BoJ holdings are part of the consolidated government balance sheet. So its holdings are in fact the accounting equivalent of a debt cancellation. If I buy back my own mortgage, I don’t have a mortgage.

If the Federal Reserve followed the same policy and bought 40% of the US national debt, the Fed would be holding $8 trillion in federal securities, three times its current holdings from its quantitative easing programs.

The Federal Reserve Bank is Wall Street's Best Friend

by John Lawrence

Wall Street Controls the Bets in the Casino Economy

From Century of Enslavement: The History of the Federal Reserve

The Federal Reserve controls interest rates in the US, and the Federal Reserve is privately owned by the big Wall Street banks that it supposedly controls. Only it doesn't really control them so much as it represents their interests. The powers that be would have you believe that the Federal Reserve, which is the US' central bank, is publicly owned, that is, that it's a government institution accountable to the people. Nothing could be further from the truth. Bernie Sanders commented: "The conflicts of interest are so apparent that they're laughable," Sanders told CNN's Wolf Blitzer "Here you have the Fed, which is supposed to regulate Wall Street. Then you have the CEO of the largest Wall Street company on the board which [it] is supposed to be regulating. This is the fox guarding the henhouse." He was speaking of Jamie Diamond, CEO of JPMorgan Chase.

Jamie Diamond is a billionaire, and he donates to the Democratic party. He's a Democrat, obviously a very influential one. No wonder Hillary was getting paid $250K per speech. After leaving office as Secretary of State in 2013, Clinton embarked on a career speaking to banks, securities firms and other financial institutions. Tax returns show that her minimum fee was $225,000 per speech. So Jamie was no stranger to her. Neither was Lloyd Blankfein, CEO of Goldman Sachs. He supported Hillary in more ways than one in the last election. He's also a Democrat. Is it any wonder the Democratic party does not want to alienate Wall Street?

The Fed supposedly has a "dual mandate" as far as the government is concerned. It is supposed to maximize employment and regulate interest rates. In other words it is supposed to keep inflation under control. But this amounts to a 'wish list' since neither the government or the people "own" the Federal Reserve bank. It is owned privately by the banks which it supposedly regulates. Also, its "mandate" to maximize employment has nothing to do with how well employees are paid, only that they are "employed." Most of the jobs being created these days are low level service jobs paying minimum wage or slightly above it. In reality the Fed operates in such a way as to increase income inequality.

Interest rate swaps are based on either the Fed's prime rate or on the LIBOR rate. That’s because the prime and LIBOR rates, two important benchmarks to which these loans are often pegged, have a close relationship to the federal funds rate. And the banks themselves determine all these rates either directly or indirectly. The LIBOR is an average interest rate calculated through submissions of interest rates by major banks across the world. The LIBOR scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades. LIBOR underpins approximately $350 trillion in derivatives so the banks themselves were in a position to make sure that their bets on interest rate swaps were covered in their favor at the expense of other naive parties like pension funds.

“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson.” – FDR letter to Colonel Edward House, Nov. 21 1933

Is it any wonder that, after the 2008 financial crisis, Wall Street banks and other financial institutions were bailed out and middle class homeowners with underwater mortgages were left to twist in the wind? The Fed flooded the market with liquidity by buying up toxic securities, securities which would have caused bankruptcies of major financial institutions if nothing was done about it. They also lowered interest rates to zero so the Big Banks could borrow money from the Fed at no interest and then make money off the spread by charging average citizens interest rates well above zero. This not only bailed out the Big Banks; it kept the debt based American economy going in full swing. Student loan debt soared. Credit card debt soared. And savers got no return on their savings accounts. Take that, senior citizens.

How a Bank Actually Works

Mumbo Jumbo and Sleight of Hand

From CNBC:

Basics of Banking: Loans Create a Lot More Than Deposits

John Carney | @carney

Tuesday, 26 Feb 2013 | 5:57 PM ETCNBC.com

265

SHARES

The Denver Post | Getty Images

International Trust Bank, Denver 1956

When someone says "loans create deposits," usually that means at least that the marginal impact of new lending will be to create a new asset and a new liability for the banking system. But in our system it's actually a bit more complicated than that.

A bank makes a loan to a borrowing customer. This simultaneously, creates a credit and a liability for both the bank and the borrower. The borrower is credited with a deposit in his account and incurs a liability for the amount of the loan. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. All four of these accounting entries represent an increase in their respective categories: the bank's assets and liabilities have grown, and so has the borrower's.

It's worth noting that at least two more types of liabilities are also created at this moment: a reserve requirement is created and a capital requirement is created. These aren't standard financial liabilities. They are regulatory liabilities.

The reserve requirement arises with the creation of the deposit (the bank's liability), while the capital requirement arises with the creation of the loan (the bank's asset). So loans create capital requirements, deposits create reserve requirements.

 

Crash and Burn!

by the Man in the Bowler Hat

Crash and burn!  That’s what happens to a belief system which runs into the harsh wall of reality.  Here the term “Harsh wall of reality” means some kind of constraint or logical inconsistency.  So ever wonder why there are problems in the economy?  Its because we believe in money and ignore the math!

…“math” demonstration showing that money is an ∞ “problem”

                    _______       ____________

5 cents = √ 25 cents = √ (1/4 of a dollar) = 1/2 of a dollar

so without “faith” in money its game over because “math” shows (5 cents ⇔ 1/2 of a dollar)

Consider prior to the great recession of 2007/2008 there was a tacit belief that stated income loans were credit worthy risks and we should have an ownership society where everyone “owned” their home.  In other words it was believed anyone should be able to get a loan even if they had to lie about how much money they had AND that there would be no problems as a consequence. One decade on from the onset of the great recession of 2007/2008, we are still feeling the adverse effects of a belief system in lending which ignored the ability of borrowers to pay back loans to banks.  

Now the year of our lord 2017 is upon us and economist say we are well into the recovery stage, yet what does that mean?  History its been said never repeats, but it rhymes; so what’s next?  How the economic machine works isn’t something that is immediately intuitive, but just as night follows day, there will be another economic downturn.  The only unknowns are when will it start and to what degree will people suffer.

Looking back to the turn of the century, we see the dot com bomb involved stocks associated with the internet.  As a result the next economic bubble wasn’t associated with stocks because people learned not to trust stocks.  Long story short, we have seen economic down turns associated with “tech” that people might buy as teens or twenty somethings.  The following economic down turn was associated with “housing” that people might buy when starting families in their thirties or forties.  So what’s next?  If the pattern continues, my guess is the next down turn in the economy is going to involve something to do with “retirement.”

In order to understand the economic problem associated with “retirement” think of a pension.  Basically a pension is money put into a bank during an individuals working years and is suppose to earn interest so that the savings grow to be a big nest egg.  The harsh reality is, public pension “sustainability” (as things currently exist) like the idea of a mermaid is just a fantasy.  Basically the “big” nest egg, isn’t all that big.

The math is pretty simple to understand, basically the amount(s) saved does not grow large enough to cover the promised pension payments made by $hit for brains politicians.  Said another way, the belief in pensions is going to eventually crash and burn because in the long run, more money was promised to be paid out, than is possible to gather.  

Politicians who are suppose to be leaders, will do nothing to prevent a pension crisis because they will never receive a vote or any credit to fix, let alone acknowledge the issue.  Hence its not a matter of “if” but “when” the proverbial $hit hits the fan and causes a big mess.

There is a saying “All news is local.”  Essentially this means our view of the world is shaped by where we live.  Since my home town is that other city in California (not San Francisco and not quite L.A.), lets look at what no one wants to admit to in the city whose other nick name is “Enron by the Sea.”  FYI perhaps this moniker arose because it was sunny and TPTB were too busy drinking a beer at the beach.  In my neck of the woods, the problem being swept under the carpet is for three decades there has been the practice of a 13th pension payment, which the local public pension board approved yet again for 2016 despite a recently reported $380 million “debt” spike.

To put figures into context, for the finances to work out there is an assumption that the custodian(s) of pension account will look at certain performance benchmarks; more or less the portfolio needs to grows @ 7.125% each year to be “sustainable”.  Yet the latest reported FY return is just a hair above 1% (far below the target of 7.125%).  So using nothing more than elementary school math, the numbers indicate the “debt” grows ever larger and the business as usual three decade old practice of a 13th pension payment only exacerbates the problem. Basically more is being paid out than is being brought in; so by ignoring the problem, things start to add up,… to a debt of a few billion!

Backing up just a bit, in finance there are two competing ways of valuing a pension fund.  Politicians use the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities).  Then there is the market approach, which reflects more hard-nosed math which politicians don’t want voters and tax payers to think about, because guess who gets stuck with the bill.  Another useful concept to understand what is happening is to employ the idea of a math “fractal” (which is SmartyPants way of saying a never-ending pattern that looks the same at different size levels).  Perhaps a simpler way to ponder a math fractal, is imagine a nested doll.

Bottom line, applying the idea of fractal math to public pensions, reveals a pattern of pensions being under funded happens at the city, county, state then national level.  For example, calculation done by Stanford University researchers using “the market approach,” indicate the fiscal gap (for the state of California) is in the TRILLION dollar range.  Looking at the national level, the fractal pattern again repeats,…  Research by Laurence Kotlikoff indicates that in the United States the total fiscal gap if you include unfunded liabilities like Medicare and Medicaid and Social Security is $200+ trillion. This is ten times the size of the national debt.

Perhaps this might be considered sacrilegious, but looking at the numbers and the trends, this tells me god is eventually going to go medieval on the economy…

The path of the righteous man is beset on all sides by the iniquities of the selfish and the tyranny of evil men.  Blessed is he, who in the name of charity and good will, shepherds the weak through the valley of darkness, for he is truly his brother’s keeper and the finder of lost children.  And I will strike down upon thee with great vengeance and furious anger those who would attempt to poison and destroy my brothers.  And you will know my name is the Lord when I lay my vengeance upon thee.

Ezekiel 25:17

 Next time, biblical plagues…

Why Banks Love Public Debt

The Triple Bottom Line

by the Man in the Bowler Hat

 

As a kid I remember hearing lots of quotes from the Bible and have to confess, most of it went in one ear and promptly went out the other.  But that is normal, and why kids (as well as adults) have to be repeatedly exposed to a subject in the hopes something sticks.  There is also the fact that we all learn to master a subject different ways, so that is why I thought it might be interesting to blog about money and banking using stuff I was exposed to as a kid.  Lets face it the bible is a pretty big text with lots of general concepts.  So given various verses like:

 

A wise man thinks ahead; a fool doesn’t, and even brags about it!

Proverbs 13:16

 

Six days you are to do your work, but on the seventh day you shall cease from labor so that your ox and your donkey may rest...

Exodus 23:12

 

No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money.

Matthew 6:24

 

which are about ideas like planning ahead, the need for rest and money, how do you think these quotes play a role in your life?  Back in the day since I went to parochial school, I actually had to take tests on this stuff.

 

Looking back I’d say its just not normal for a kid to put things into context because at that stage, life experiences were limited.  Its only when one grows older and deals with the real world, is it possible to even start pondering what is the answer to life, the universe and everything and figure out if there is a pragmatic way to balance these concepts in normal every day life.

 

So what’s the optimal “lifestyle” solution if one wants to follow the general teachings in the good book that would work for believers as well as non-believers and incorporates the idea of the capitalist mentality of looking at the bottom line?

 

If I was to bet money on the topic, I would say the short answer is “The triple bottom line” philosophy!  For those religiously inclined, perhaps parallels between the idea of the triple bottom line and the idea of the holy trinity might be a way of trying to relate the topics.  I could just imagine my old parochial school teacher saying; “The holy trinity” bottom line is, its in the business of saving souls!  Ah, memory lane…

 

Looking at the issue from a business stand point, to be sustainable three different factors should be taken into account:profit, people and planet.   

 

Suppose the business was a local farm.  Looking at the triple bottom line, for a permaculture farm to be sustainable, basically ordinary “people” (i.e. consumers) need to demand a product (like organic vegetables) so there will be “profits” to motivate the farmer to continue planting more crops.  In this example if the farmer isn’t a good custodian of their small part of the “planet” (and does dumb stuff like poisoning the soil, so organic vegetables can no longer grow), then the farm goes out of business.

 

Think the triple bottom line only works in certain business sectors like farming?  Well DHL is taking the shipping business back-to-the-basics, enacting a revolutionary delivery program to illustrate that shipping can be more efficient. How? They now use couriers on bicycles in many European countries, including Germany and the Netherlands.  DHL estimates that this change alone will reduce their carbon dioxide emissions by 152 metric tons per year.

 

Back to thinking “local.”  One does not need to be a rocket scientist to understand that a local business like a community farm, needs local community consumers to buy the produce in order to keep the business as an on going concern, (which in turn encourages trade and development).

 

Now lets do a thought experiment, and think about a brick-and-mortar bank.  Basically the function of a bank in an economy is to bind together all the players in the economic system, by managing the supply of money.  Consider what happens if the bank isn’t a local community institution; in this case the product is “money” and profits get sucked out of the local community.  Bottom line, the local economy suffers when an outside player takes a cut.  As POTUS would tweet, #’SAD!’

 

Suppose, if there were a local community bank which was enthusiastically supported by local consumers and honest local politicians, the question that begs to be asked is,… will the local economy with a public bank be better off?  All signs point to “yes!”

 

Next time, what is a public bank?

Dear President Trump: Breaking Up (Banks) Isn’t So Hard to Do

Published on

Thursday, June 08, 2017

by

TomDispatch

 

What's your pleasure: A new Glass-Steagall or another economic meltdown?

by

 Nomi Prins

6 Comments

Activists have been calling for the restoration of Glass-Steagall since the Occupy Wall Street protests in 2011. (Photo: Scott Teresi/flickr/cc)

Donald, listen, whatever you’ve done so far, whatever you’ve messed up, there’s one thing you could do that would make up for a lot.  It would be huge!  Terrific!  It could change our world for the better in a big-league way!  It could save us all from economic disaster!  And it isn’t even hard to grasp or complicated to do.  It’s simple, in fact.  Reinstitute the Glass-Steagall Act. Let me explain.

In the world of romance, if you break up with someone, it’s pretty simple (emotional complications aside).  You’re just not together anymore. In the world of financial regulation, it used to be as simple as that, too. It was like installing a traffic light at a dangerous intersection to avoid deaths. In 1933, when the Glass-Steagall Act was passed, it helped break up the biggest banks of the day and for good reason: they had had a major hand in triggering the most disastrous economic depression our country ever experienced.

Certain divisions of those banks were no longer allowed to coexist with others. The law split the parts of banks that placed bets by creating and trading certain risky securities and those that took deposits and provided loans.  In other words, it ensured that the investment bank and the commercial bank would no longer cohabit. Put another way, it separated bankers with a heinous gambling habit from those who only wanted a secure nest egg. It was simplicity itself.

After 1933, the gamblers and savers went their separate ways, which proved a boon for the economy and the financial system for nearly seven decades. Then legislators, lobbyists, bankers, and regulators started to chisel away at the wall separating those two kinds of banks. By November 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act that repealed the Glass-Steagall Act totally. The abusive marriages of gamblers and savers could once again be consummated.

And who doesn’t remember the result: the financial crisis of 2007-2008 that led to taxpayer-funded bailouts, subsidies, loans, and sweetheart fraud-settlement deals. Just as the Crash of 1929 had been catalyzed by the manufacturing of shady “trusts” stuffed with shady securities, this crisis was enabled by the big banks that engineered complex assets stuffed with subprime mortgages and other loans that were sold around the world.

Dishonest Money Dwindles Away

by the Man in the Bowler Hat   

Dishonest money dwindles away, but whoever gathers money little by little makes it grow.

Proverbs 13:11

 

So you want to be rich?  Seems its a preoccupation by many.  DISCLOSURE: having a bit more money in the “bank” than the average person in the overall population is a comfort, that allows for a few more options.  For example, ever hear of the pejorative expression “fuck you money?”  This simply means that there is a personal level of saving in the bank, that makes it possible to concentrate on non-monetary incentives or interests (like blogging) a lot more than on monetary ones.  Sadly IMHO human nature being what it is, too many individuals do not seem to be able to differentiate a “want” from a “need” and therefore do not find an inner peace or realize that money can’t buy happiness.  So this manifests itself in various self destructive behaviors like always trying to get more money any way possible (i.e. “greed” which is one of the so called deadly sins).

 

Back to the topic at hand, answering the question what is a bank and why is it important.

 

Basically the way I look at things, a “bank” is a place where an individual stores things of value to be used later on in times of need.  Bet you were surprised I did not include anything specifically about money or mention the economy, which is the conventional way of looking at things.  This is because as a kid I was taught that education is something of value and that once you have it, its something (like a moral compass) which can’t be stolen or taken away once its obtained.  Basically, building upon the foundation of knowledge it's possible put away something that has the potential to grow into “fuck you money” in a brick-and-mortar bank.

 

As for actual mechanics of a traditional bank, basically its function is to be an institution to maintain deposits, make loans, and directly control the checkable deposits portion of the economy’s money supply.  In other words banks act as the middle man or glue that binds together all the players in the economic system. In theory banks or other financial institutions like credit unions are suppose to serve the financial needs of the community. Mainly by  providing loans, banks and other financial institutions maintain and build up the economy.

 

With respect to loans, the SOP of a bank should be to use the “Five C’s” (capacity, character, capital, collateral and conditions) check list to verify creditworthiness, by an in depth study of:

 

“Capacity” - the debt-to-income ratio, in other words how much does a person or business owe compared to how much they earn (the lower the ratio, the more confident a bank will be in the capacity to repay the money)

 

“Character” - here a banker will look at the track record of a person or business and ask questions like is there a good record of paying your bills on time and in full (which is an indication of fiscal responsibility and trustworthiness)

 

“Capital” - the bottom line “value” of your assets minus your liabilities

 

“Collateral” - an asset (for example, a home) that a lender has a right to take ownership of and use to pay off the debt, if the loan payments cannot be made as agreed

 

“Conditions” - the overall environment (economic and other wise), in other words do conditions look favorable or unfavorable

 

Sadly the fly in the ointment of the theory in the “traditional banking” system is the human factor which can cause corruption and mismanagement.  Basically this is because a bank is an institution which processes “money” and is run by people with different skill sets and a collective moral compass that perhaps is broken or non existent.  Bottom line, an institution is only as strong as the people setting the tone of management and the front line persons following the lead.

 

Last thought for now,… The conventional view of a traditional bank is, it starts off with investors who exchange their money for shares in the institution. The theory is the money raised by selling shares in a startup brick-and-mortar bank, is akin to the idea that a small seed mustard that is planted, grows to dominate the land scape. The hard reality is a pure profit motive takes over and smaller banks merge with other smaller banks or are out right bought by bigger banks in a process called, M&A which is short hand for mergers and acquisitions.  The capitalist bottom line thinking goes if a little is good, then lots is very, very, very GOOD! Or looked at another way, depending upon the dose, its poison.

 

Next time, what is the triple bottom line?

The Savings and Stability of Public Banking

Posted April 11, 2017

By Ralph Nader

April 11, 2017

As a society obsessed by money, we pay a gigantic price for not educating high school and college students about money and banking. The ways of the giant global banks – both commercial and investment operations – are as mysterious as they are damaging to the people. Big banks use the Federal Reserve to maximize their influence and profits. The federal Freedom of Information Act provides an exemption for matters that are “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” This exemption allows financial institutions to wallow in secrecy. Financial institutions are so influential in Congress that Senator Durbin (D, IL) says “[The banks] frankly own this place.”

Although anti-union, giant financial institutions have significant influence over the investments of worker pension funds. Their certainty of being bailed out because they are seen as “too big to fail” harms the competitiveness of smaller, community banks and allows the big bankers to take bigger risks with “other people’s money,” as Justice Brandeis put it.

These big banks are so pervasive in their reach that even unions and progressive media, such as The Nation magazine and Democracy Now have their accounts with JP Morgan Chase.

The government allows banks to have concentrated power. Taxpayers and Consumers are charged excessive fees and paid paltry interest rates on savings. The bonds of municipalities are are also hit with staggering fees and public assets like highways and public drinking water systems are corporatized by Goldman Sachs and other privatizers with sweetheart multi-decade leases.

Then there are the immense taxpayer bailouts of Wall Street, such as those in2008-2009 after the financial industry’s recklessness and crimes brought down the economy, cost workers 8 million jobs, and shredded the pension and mutual fund savings of the American people.

Standing like a beacon of stability, responsiveness and profitability is the 98 year-old, state-owned Bank of North Dakota (BND). As reported by Ellen Brown, prolific author and founder of the Public Banking Institute (Santa Clarita, California), “The BND has had record profits for the last 12 years” (avoiding the Wall Street crash) “each year outperforming the last. In 2015 it reported $130.7 million in earnings, total assets of $7.4 billion, capital of $749 million, and a return on investment of a whopping 18.1 percent. Its lending portfolio grew by $486 million, a 12.7 percent increase, with growth in all four of its areas of concentration: agriculture, business, residential and student loans…”

North Dakota’s economy is depressed because of the sharp drop in oil prices. So the BND moved to help. Again, Ellen Brown:

“In 2015, it introduced new infrastructure programs to improve access to medical facilities, remodel or construct new schools, and build new road and water infrastructure. The Farm Financial Stability Loan was introduced to assist farmers affected by low commodity prices or below-average crop production. The BND also helped fund 300 new businesses.”

All this is in a state with half the population of Phoenix or Philadelphia.

A California coalition is forming to establish a state-owned bank for California. Coalition organizers say a California State Bank will cut the state’s long-term financing costs in half, compared to what avaricious Wall Street is charging. The nation’s largest state (equivalent to the world’s sixth largest economy) can free itself from massive debt accumulation, bid-rigging, deceptive interest-rate swaps and capital appreciation bonds at 300% interest over time.

What assets does the state have to make this bank fully operational? California has surplus funds which total about $600 billion, including those in a Pooled Money Investment account managed by the State Treasurer that contains $54 billion earning less than 1 percent interest.

Money in these funds is earmarked for specific expenditure purposes, but they can be invested – in a new state bank. To escape from a Wall Street that is, in Brown’s words “sucking massive sums in interest, fees and interest rate swap payments out of California and into offshore tax havens,” a state bank can use its impressive credit power to develop infrastructure in California.

Huge state pension funds and other state funds can provide the deposits. Each one billion dollar capital investment can lend $10 billion for projects less expensively and under open stable banking control by California. Presently, California and other states routinely deposit hundreds of billions of dollars in Wall Street banks at minimal interest, turn around and borrow for infrastructure construction and repair from the Wall Street bond market at much higher interest and fees.

This is a ridiculous form of debt peonage, a lesson Governor Jerry Brown has yet to learn. He and other officials similarly uninformed about how the state of California can be its own banker should visit publicbankinginstitute.org and read Ellen Brown’s book, The Public Bank Solution.

Legislation for public banks is being pursued in the states of Washington, Michigan, Arizona and New Jersey, as well as the cities of Philadelphia and Santa Fe. Look for county commissioners and state treasurers to come on board when they see the enormous safeguards and savings that can be secured through “public banks” in contrast to the convoluted casino run by unaccountable Wall Street gamblers and speculators.

A longtime backer of public banking, retired entrepreneur Richard Mazess, hopes that national civic groups like Public Citizen, Common Cause, People for the American Way and Consumer Watchdog can get behind the proposal. “Public, not private, infrastructure is essential for an equitable economy,” he says.

California already has a public infrastructure bank called the IBank. Mr. Mazess and others believe that expanding the existing IBank into a depository institution would be more likely to pass through the California legislature. The deposits would come from public institutions, and NGOs (not from private persons). These pension funds and other public deposits would become reserves and serve as the basis for safely leveraged loans to public projects at a conservative tenfold multiplier. No derivatives or other shenanigans allowed.

Before that proposal can be enacted, however, there needs to be much more education of state legislators and the public at large.

Such enlightenment would illuminate the enormous savings, along with the restoration of state sovereignty from the absentee, exploitative grip of an unrepentant, speculating, profiteering Wall Street that believes it can always go to Washington, DC for its taxpayer bailouts.

Amazon Go: The End of Jobs?

by John Lawrence from the San Diego Free Press

Amazon Go is the latest job destroyer by virtue of the fact that it is a grocery store with no check-out lines. High tech devices will monitor every item you put in your high tech grocery basket so you just load up and go. Your credit card will be charged the correct amount. It isn't clear if a robot will bag your groceries or if you'll do that yourself. This feat of automation is only the harbinger of things to come. With artificial intelligence and robots, jobs will be automated out of existence except for a few software engineers who will design the various systems.

So far there is only one store open and that's in Seattle, but soon ... soon check-out cashiers can kiss their jobs good-bye. By the same token truck drivers will be losing their jobs to self-driving trucks. This technology is well along (it's in beta as they say in the tech world). Already self checkout is underway at Home Depot and many supermarkets. Amazon Go is just taking self-checkout to the next level. I suppose, if they're out of an item, Amazon Prime will have it delivered to your house by drone within a few hours. Bank tellers have already been replaced by ATM machines although a few are still needed for those sticky situations that only a human can deal with.

I suppose the shopping experience will also include text messages or alerts which sense what you want to purchase and then try to upsell you. Why buy that hunk of cheese when for just a few dollars more you could get artisan cheese made locally at a vintage shop? And as for coupons, that will all be handled electronically. You would just scan them with your smartphone, and they would automatically be deducted from your bill. As you continue to shop, Amazon would be gathering valuable information about your purchases so it can suggest other items you might be interested in.

It’s not that retail tech companies haven’t already been hard at work tracking people as they explore physical stores and shop. A host of companies with names like RetailNext, Euclid, and Nomi, among others, are all part of this trend. It’s in a store’s interest to track people because they can target and upsell customers on more products and in-store promotions. When you go home and go online, the first ad you see might be for a product that the data acquired during your shopping experience suggests that you might need or want.

Just Tell Alexa What You Need

The Amazon app Alexa already responds to voice commands in your home. It's not a stretch that this technology might be incorporated in your smartphone so all you'd need to do is say "Hey, Alexa, where's the craft beer, and also I need a bouquet of flowers." Then Alexa might come back and say, "Why don't you get that special someone a box of chocolates too?" Then you'd say, "That's a great suggestion, Alexa, I'd like a dozen red roses, but I want to have them delivered to her home on Valentine's day." Alexa would come back, "No problem, Mr. Mertz." You see Alexa already knows the address of that special someone.

Or why even go to the store? Just tell Alexa your shopping list and she'll have it delivered within the next couple of hours. You'll need a personal robot, however, to put all the stuff away. That may be coming soon.

Amazon is capable of deploying an array of cameras and sensors to control this whole process but all it really needs is a souped up RFID (Radio Frequency IDentification). So instead of running each product through a bar code scanner, each product would have a label containing a little chip that would transmit it's ID to a receptor wherever that receptor is located. It could be in the shopping cart or at the door. There might be a number of them located throughout the store. It's a bar code on steroids.

And for fast food - it will be automated too as advocated by Trump's pick for Secretary of Labor (now defunct), the owner of Carl's Jr and Hardee's, Andrew Puzder. No need for minimum wage workers any more. Robots don't require bathroom breaks or sick leave. Puzder can now get back to automating minimum wage workers out of his fast food chains.

Robot Baristas Will Make Your Coffee

It's not only grocery stores and supermarkets that will be automated. Robotic baristas will churn out your coffee drinks without the need for the intervention of human hands. Cafe X has created an automated barista and a “coffee shop”. According to Forbes:

Cafe X is 100% automated from the ordering and payment system that can be from within the app or the order/payment screens on the front of the system to the preparation and delivery of the coffee. The system is by far faster than any current coffee shop experience. Once the amortization of the system has been met, the cost to operate this “coffee shop” is orders of magnitude lower than the 2.5 baristas a single system replaces.

According to the San Diego Union, February 22, 2017:

Franco’s barista was a robot. It’s part of an automated coffee shop called Cafe X — the latest example of the San Francisco’s dual infatuations: artisanal coffee and automated technology.

“It’s incredibly convenient,” said Franco, who has used Cafe X twice since it opened Jan. 30. “And the coffee is really good, too.”

Moments earlier, Franco had ordered her coffee using the Cafe X mobile app. Now a white robotic arm, the same kind used in car manufacturing facilities, was moving around a paper cup, pushing on syrup levers and brewing her a hot cup of coffee.

“I prefer this because you don’t have to wait,” said Franco, whose coffee was made in less than a minute. “It even accepts PayPal.” ...

On the speed front, Cafe X can make a hot espresso beverage in less than a minute and is able to pump out 120 coffee drinks in an hour. A Cafe X kiosk can occupy as little as 50 square feet, although its footprint in San Francisco’s Metreon shopping mall is a little over 100 square feet and was most recently home to another automated tenant: a Bank of America ATM.

Encased in plexiglass, the kiosk contains two coffee machines equipped to brew Americanos, espressos, cappuccinos, lattes and flat whites. Customers can order their drink from the Cafe X mobile app or at one of two iPads mounted outside the kiosk. The entire transaction is cashless, and customers even get a notification on their phone when their coffee is ready.

“It’s similar to calling an Uber,” said Hu, who sees his kiosk as filling a void. “It’s for people who want a grab-and-go coffee, who want consistency.” ...

Automation helps keep costs low for business owners, which in turn makes products and services more affordable for consumers, Ling said. That’s why automation — particularly in the food service and hospitality industries — seems inevitable. ...

“This is just the leading edge,” said Martin Ford, author of “Rise of the Robots: Technology and the Threat of a Jobless Future.” “The really significant thing will be when the big chains — the McDonalds, the Burger Kings, the Starbucks — begin to adopt these technologies. Eventually it is going to create a big problem for us.”

As of May 2015, the largest overall occupations in the United States, according to the Bureau of Labor Statistics, were retail salespersons (4.6 million), cashiers (3.5 million), and food preparation and service workers (3.2 million).

Ford quotes the co-founder of a start-up dedicated to the automation of gourmet hamburger production: “Our device isn’t meant to make employees more efficient. It’s meant to completely obviate them.”

Basically every job that doesn't have to do with the FIRE (Finance, Insurance and Real Estate) sector or the military-industrial complex is in the process of being eliminated. However, janitorial jobs, child care and fruit and vegetable picking will probably always be with us. It might be hard to get anyone to fill those job positions as Trump plans to deport most of the people who have been doing them. Any job that could remotely be considered manufacturing will be gone. That's why corporations are investing more in the US rather than abroad. However, their investments are not creating jobs; they're eliminating them.

According to Our Automated Future by Elizabeth Kolbert:

During the recent Presidential campaign, much was said—most of it critical—about trade deals like the North American Free Trade Agreement and the Trans-Pacific Partnership. The argument, made by both Bernie Sanders and Donald Trump, was that these deals have shafted middle-class workers by encouraging companies to move jobs to countries like China and Mexico, where wages are lower. Trump has vowed to renegotiate NAFTA and to withdraw from the T.P.P., and has threatened to slap tariffs on goods manufactured by American companies overseas. “Under a Trump Presidency, the American worker will finally have a President who will protect them and fight for them,” he has declared.

[But], such talk misses the point: trying to save jobs by tearing up trade deals is like applying leeches to a head wound. Industries in China are being automated just as fast as, if not faster than, those in the U.S. Foxconn, the world’s largest contract-electronics company, which has become famous for its city-size factories and grim working conditions, plans to automate a third of its positions out of existence by 2020.The South China Morning Post recently reported that, thanks to a significant investment in robots, the company already has succeeded in reducing the workforce at its plant in Kunshan, near Shanghai, from a hundred and ten thousand people to fifty thousand. “More companies are likely to follow suit,” a Kunshan official told the newspaper.

Jobs in Oil Fields Decline Despite Trump

So-called President Trump promised to bring back all those good paying blue collar jobs by going full steam ahead with oil production. But guess what? The oil companies are going full steam ahead with automation eliminating all those good paying jobs. Some of the workers losing their jobs in the oil patch are even migrating to the renewable energy industry! Did Trump get it wrong? In an article entitled Texas Oil Fields Rebound From Price Lull, But Jobs Are Left Behind, Clifford Krauss writes:

Oil and gas workers have traditionally had some of the highest-paying blue-collar jobs — just the type that President Trump has vowed to preserve and bring back. But the West Texas oil fields, where activity is gearing back up as prices rebound, illustrate how difficult it will be to meet that goal. As in other industries, automation is creating a new demand for high-tech workers — sometimes hundreds of miles away in a control center — but their numbers don’t offset the ranks of field hands no longer required to sling chains and lift iron. ...

Indeed, computers now direct drill bits that were once directed manually. The wireless technology taking hold across the oil patch allows a handful of geoscientists and engineers to monitor the drilling and completion of multiple wells at a time — onshore or miles out to sea — and supervise immediate fixes when something goes wrong, all without leaving their desks. It is a world where rigs walk on their own legs and sensors on wells alert headquarters to a leak or loss of pressure, reducing the need for a technician to check.

The message is that blue collar jobs, jobs for those with only a high school education, are going bye-bye. There's not much that Trump can do about it to assuage his Red State base, the "forgotten men." So he will be left in the position of convincing them that those jobs have come back as an alternative fact of an alternative reality, something he and his cohorts are really good at.

Professional Jobs Will Be Taken Over By Robots Too

Machines are also getting smarter so that not only are they replacing manual laborers, but they are replacing people employed in white collar jobs as well. For instance, a highly skilled radiologist may soon be replaced by a machine whose powers of pattern recognition exceed those of humans. So while the doctor may find his job going by the wayside, his executive assistant's job could be more secure. After all bringing him his coffee and delivering it with a smile is something far more difficult for a robot.

The belief that the digital revolution, automation and robotization will create more jobs than they destroy is wishful thinking according to Charles Hugh Smith.

Charles Hugh Smith writes in A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful:

Issuing more STEM degrees doesn’t create jobs for the graduates.

This faith that technology will magically create more jobs than it destroys is wishful thinking. This theology arose as a result of the transition from low-skill agricultural labor to low-skill factory labor in the First Industrial Revolution (1750 – 1860, steam, railways, factories, etc.) and the Second Industrial Revolution (1870-1930) (mass production, electric lights, autos, aircraft, radio, telephones, movies). Each transition offered millions of new low-skill jobs to those displaced by technology and created increasing numbers of higher-skill jobs in design, technology, marketing and management. But history is not repeating itself in the latest Industrial revolution....

Since automation/software is now eating higher-skill jobs, advancing the skills of workers does not automatically create jobs for them. Pushing the entire populace to get a college diploma does not automatically create jobs that require college diplomas.

The conventional narrative overlooks a key dynamic in the Third Industrial Revolution: the number of skilled workers needed to eliminate entire industries of highly skilled employees is much smaller than the work forces being eliminated. 

Some are suggesting that everyone needs to have a universal basic income since their labor power will not be needed in the future. Robert Reich thinks that there has to be a way to recycle money from the owners of the robots to all the people those robots will displace so that money can continue to circulate and the American economy which depends 70% on consumption will continue to function. How else are consumers to consume unless they have the wherewithal to do so? Researchers estimate that half of all US jobs will be automated in the next two decades.

Smith disagrees with Reich because he doesn't believe that taxing the Googles, Facebooks and Apples of the world will generate enough money to support the masses in a super welfare state. Besides that he doesn't believe that just being a consumer can ever satisfy human needs for having productive and dignified work. A society of people who do nothing but consume will lead not to a utopia but to a dystopia because human beings have a need to be something more than just consumers.

But perhaps both Smith and Reich miss the point. There is no need to recycle money from the taxation system to provide a basic income for everyone. A Central Bank that was controlled by the people instead of by Wall Street, which is what we have now, could generate money the way Abraham Lincoln did. Lincoln endorsed the printing of $450 million in US Notes or “greenbacks” during the Civil War. The greenbacks not only helped the Union win the war but triggered a period of robust national growth and saved the taxpayers about $14 billion in interest payments. Instead of debt based money created by Wall Street through loans, the government could just print and distribute it directly to the people.