California Free Press

How to Escape the Federal Debt Trap

Posted on December 10, 2024 by Ellen Brown

The U.S. national debt just passed $36 trillion, only four months after it passed $35 trillion and up $2 trillion for the year. Third quarter data is not yet available, but interest payments as a percent of tax receipts rose to 37.8% in the third quarter of 2024, the highest since 1996. That means interest is eating up over one-third of our tax revenues.

Total interest for the fiscal year hit $1.16 trillion, topping one trillion for the first time ever. That breaks down to $3 billion per day. For comparative purposes, an estimated $11 billion, or less than four days’ federal interest, would pay the median rent for all the homeless people in America for a year. The damage from Hurricane Helene in North Carolina alone is estimated at $53.6 billion, for which the state is expected to receive only $13.6 billion in federal support. The $40 billion funding gap is a sum we pay in less than two weeks in interest on the federal debt.

The current debt trajectory is clearly unsustainable, but what can be done about it? Raising taxes and trimming the budget can slow future growth of the debt, but they are unable to fix the underlying problem — a debt grown so massive that just the interest on it is crowding out expenditures on the public goods that are the primary purpose of government.

Borrowing Is Actually More Inflationary Than Printing

Several financial commentators have suggested that we would be better off if the Treasury issued the money for the budget outright, debt-free. Martin Armstrong, an economic forecaster with a background in computer science and commodities trading, contends that if we had just done that in the first place, the national debt would be only 40% of what it is today. In fact, he argues, debt today is the same as money, except that it comes with interest. Federal securities can be posted in the repo market as collateral for an equivalent in loans, and the collateral can be “rehypothecated” (re-used) several times over, creating new money that augments the money supply just as would happen if it were issued directly.

Chris Martenson, another economic researcher and trend forecaster, asked in a Nov. 21 podcast, “What great harm would happen if the Treasury just issued its own money directly and didn’t borrow it? … You’re still overspending, you still probably have inflation, but now you’re not paying interest on it.”

The argument for borrowing rather than printing is that the government is borrowing existing money, so it will not expand the money supply. That was true when money consisted of gold and silver coins, but it is not true today. In fact borrowing the money is now more inflationary, increasing the money supply more, than if it were just issued directly, due to the way the government borrows. It issues securities (bills, bonds and notes) that are bid on at auction by selected “primary dealers” (mostly very large banks). Quoting from Investopedia:

Because most modern economies rely on fractional reserve banking, when primary dealers purchase government debt in the form of Treasury securities, they are able to increase their reserves and expand the money supply by lending it out. This is known as the money multiplier effect.  

Thus, “the government increases cash reserves in the banking system,” and “the increase in reserves raises the money supply in the economy.” Principal and interest on the securities are paid when due, but they are paid with borrowed money. In effect, the debt is never repaid but just gets rolled over from year to year along with the interest due on it. The interest compounds, an increasing amount of debt-at-interest is generated, and the money supply and inflation go up.

U.S. Currency Should Be Issued by the U.S. Government

Well over 90% of the U.S. money supply today is issued not by the government but by private banks when they make loans.  As Thomas Edison argued in 1921, “It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.”

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How Unelected Regulators Unleashed the Derivatives Monster – and How It Might Be Tamed

Posted on August 4, 2024 by Ellen Brown

“It was not the highly visible acts of Congress but the seemingly mundane and often nontransparent actions of regulatory agencies that empowered the great transformation of the U.S. commercial banks from traditionally conservative deposit-taking and lending businesses into providers of wholesale financial risk management and intermediation services.” 
— Professor Saule Omarova, “The Quiet Metamorphosis, How Derivatives Changed the Business of  Banking” University of Miami Law Review, 2009

While the world is absorbed in the U.S. election drama, the derivatives time bomb continues to tick menacingly backstage. No one knows the actual size of the derivatives market, since a major portion of it is traded over-the-counter, hidden in off-balance-sheet special purpose vehicles. However, when Warren Buffet famously labeled derivatives “financial weapons of mass destruction” in 2002, its “notional value” was estimated at $56 trillion. Twenty years later, the Bank for International Settlements estimated that value at $610 trillion. And financial commentators have put it as high as $2.3 quadrillion or even $3.7 quadrillion, far exceeding  global GDP, which was about $100 trillion in 2022. A quadrillion is 1,000 trillion. 

Most of this casino is run through the same banks that hold our deposits for safekeeping. Derivatives are sold as “insurance” against risk, but they actually add a heavy layer of risk because the market is so interconnected that any failure can have a domino effect. Most of the banks involved are also designated “too big to fail,” which means we the people will be bailing them out if they do fail. 

Derivatives are considered so risky that the Bankruptcy Act of 2005 and the Uniform Commercial Code grant them (along with repo trades) “super-priority” in bankruptcy. That means if a bank goes bankrupt, derivative and repo claims are settled first, drawing from the same pool of liquidity that holds our deposits. (See David Rogers Webb’s The Great Taking and my earlier articles here and here.) A derivatives crisis could easily vacuum up that pool, leaving nothing for us as depositors — or for the “secured” creditors who are junior to derivative and repo claimants in bankruptcy, including state and local governments. 

As detailed by Pam and Russ Martens, publisher and editor, respectively of Wall Street on Parade, as of Dec. 31, 2023, Goldman Sachs Bank USA, JPMorgan Chase Bank N.A., Citigroup’s Citibank and Bank of America held a total of $168.26 trillion in derivatives out of a total of $192.46 trillion at all U.S. banks, savings associations and trust companies. That’s four banks holding 87 percent of all derivatives at all 4,587 federally-insured institutions then in the U.S. 

In June 2024, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board jointly released their findings on the eight U.S. megabanks’ “living wills” – their resolution or wind-down plans in the event of bankruptcy. The Fed and FDIC faulted all of the four largest derivative banks on shortcomings in how they planned to wind down their derivatives.

How Banks Guarding Our Deposits Became the Biggest Gamblers in the Derivatives Casino

Banks are not just middlemen in the derivatives market. They are active players taking speculative positions. In this century, writes Professor Omarova, the largest U.S. commercial banks have emerged “as a new breed of financial super-intermediary—a wholesale dealer in financial risk, conducting a wide variety of capital markets and derivatives activities, trading physical commodities, and even marketing electricity.” She notes that the Federal Reserve has allowed several financial holding companies to purchase and sell physical commodities (including oil, natural gas, agricultural products and electricity) in the spot market to hedge their commodity derivative activities, and to take or make delivery of those commodities to settle the transactions.

It was not Congress that authorized that expansive definition of permitted banking activities. It was the Office of the Comptroller of the Currency (OCC), part of the “administrative deep state,” that permanent body of unelected regulators who carry on while politicians come and go. As Omarova explains:

Through seemingly routine and often nontransparent administrative actions, the OCC effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions, whose safety and soundness were guarded through statutory and regulatory restrictions on potentially risky activities, into a new breed of financial “super-intermediaries,” or wholesale dealers in pure financial risk. … 

Moreover, some of the most influential of those decisions escaped public scrutiny because they were made in the subterranean world of administrative action invisible to the public, through agency interpretation and policy guidance. 

The OCC’s authority to regulate banks dates back to the National Bank Act of 1863, which grants national banks general authority to engage in activities necessary to carry on the “business of banking,” including “such incidental powers as shall be necessary to carry on the business of banking.” The “business of banking” is not defined in the statute. Omarova writes:

Section 24 (Seventh) of the National Bank Act grants national banks the power to exercise all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes. 

No mention is made of derivatives trading or dealing. 

The powers of banks were further limited by Congress in the Glass-Steagall Act of 1933, which explicitly prohibited banks from dealing in corporate equity securities, and by other statutes passed thereafter. However, the portion of the Glass-Steagall Act separating depository from investment banking was reversed in the Commodity Futures Modernization Act in 2000. Omarova writes that this allowed the OCC to articulate “an overly expansive definition of the ‘business of banking’ as financial intermediation and dealing in financial risk, in all of its forms, and … this pattern of analysis allowed the OCC to expand the range of bank-permissible activities virtually without any statutory constraint.” 

Off the Top of My Head

Tax Cuts for the Middlle Class; Tax Hikes on the Rich

by John Lawrence

The two issues Republicans have are tax cuts and border security. Don't cede these issues to Republicans. A majority of Americans want a secure border. This has nothing to do with LEGAL immigration or even with amnesty. Limiting amnesty to those applying for it legally does not require any changes in the law. What it does require is reinforcing the border so no one can get over it illegally. This would then require more resources devoted to reinforcing the border.   In terms of tax cuts, Democrats have to stress tax cuts for the middle class paid for by tax hikes on the rich. Kamala should go right after these issues. She needs to be extremely tough on both of them. Let's face it: Democrats are going to vote for her no matter what. However, at this point in time, most voters are independents. She needs to co-opt Trumplican issues. And don't be too worried about a plan. Does Trump have a plan? No, he just asserts, "I will do this. I will do that." Kamala should take a page out of Trump's book. Just say, "I will do this. I will do that." She doesn't need to spell out HOW she's going to do it in detail. For sure, Trump doesn't.

Now that Joe Biden has dropped out of the race, he doesn't have to do two jobs - being President and campaigning - while Trump just has one - campaigning. That's why Mike Johnson wants Biden to resign: so that Kamala will be saddled with the responsibilities of President instead of devoting full time to campaigning. Democrats know what the Democratic agenda is in terms of providing for and addressing the needs of the middle class and the poor. But she has to address the sweet spot - where the majority of voters are and what the majority of voters are concerned about. Of course the abortion issue resonates well for Democrats and all Americans.

This whole thing about a short campaign season for Kamala is ridiculous. Most countries don't let political campaigns last more than a couple of months by law. In France political campaigns just last a couple of weeks. In Canada the longest political campaign was 74 days. In Australia, the longest political campaign lasted 11 weeks. In Japan campaigning is allowed for 12 days. In countries where campaigns are limited by law, elections aren't controlled by big money interests as they are in the US. The longer the campaign season, the more big money controls elections and politics. In the US, if we don't want the very rich to control elections, not only the campaign period, but also the amount of money spent on political campaigns needs to be controlled.

The US is becoming a neo-medieval society in which the majority have no hope of home ownership, but are destined to work paycheck to paycheck and be renters for life. This means no asset accumulation while their rents increase even with low inflation or target inflation of 2%. 2% target inflation means at least 2% rent increases over the course of a renter's life. In addition to not having any asset accumulation those living paycheck to paycheck are vulnerable to credit card and car payment debt so that they are supporting the banking system with interest payments for their entire life.

More Banks to Fail? Not in North Dakota

Posted on September 1, 2023 by Ellen Brown from Web of Debt Blog

U.S. banks are again in the crosshairs. Standard and Poor’s has downgraded five new middle-tier banks and put three others on negative outlook. This follows sweeping downgrades earlier in August by Moody’s, which cut credit ratings on 10 banks and placed four of the 15 largest U.S. banks on review for possible downgrade. As with the banks going into receivership earlier this year, concerns include interest rate risk due to unrealized losses from long-term securities.

Meanwhile, the U.S. government itself has been downgraded by Fitch Ratings, which questions the government’s ability to finance its nearly $33 trillion federal debt. Just the interest on the debt is approaching $1 trillion annually — one third of the government’s federal income tax receipts — while the military budget is closing in on another $1 trillion, devouring over half the discretionary federal budget. That leaves virtually none to cover the nearly $6 trillion that, according to the American Society of Civil Engineers, is needed to repair America’s broken infrastructure, among other neglected service needs. 

While economists disagree on the overall economic outlook, conditions seem to be deteriorating across the board. Congress cannot agree on a budget, with threats of another government shutdown October 1 when the new fiscal year begins. The moratorium on student debt also ends on October 1, with 45% of borrowers saying they expect to go delinquent on their student loan debts. Credit card debt is at the highest level ever recorded, surpassing $1 trillion; with the average rate of interest at a new all-time record of 20.63 percent, and delinquencies surging dramatically. One trillion dollars in corporate debt is rolling over at much higher interest rates this year; layoffs and empty offices are decimating the commercial real estate market; and elevated interest rates are jeopardizing the home mortgage market, among other debt crises.

Where North Dakota Shines

One state, however, has escaped all this unscathed. North Dakota has the fastest growing GDP per capita in the country; and North Dakota banks are thriving, backstopped by the nation’s only state-owned bank. (“Who knew?” said Kevin O’Leary in a recent Fox News news clip.) According to the latest annual report of the Bank of North Dakota, “The Bank set a record net income of $191.2 million in 2022, up $47 million from 2021. Our asset size set a record as well — $10.2 billion. The return on investment was a healthy 19%. Standard & Poor’s (S&P) affirmed BND’s credit rating as A+/Stable.” 

The BND has been called the nation’s safest bank. Its stock cannot be short-sold, since it is not publicly traded; the bank cannot go bankrupt, because by law all of the state’s revenues are deposited in it; and it will not suffer a run, since the state, being the principal bank depositor, would not “run” on itself. Compare JP Morgan Chase, the nation’s largest bank, considered among the country’s safest because it is “too big to fail.” JPM has over $1 trillion in uninsured deposits, the type most likely to “run” or be pulled in a crisis, and it has total deposits of $2.38 trillion. The FDIC insurance fund now has a balance of only $116.1 billion – only 5% of JPM’s deposits. JPM also has major counterparty risk in the derivatives market, a multi-trillion-dollar global bubble called by the Bank for International Settlements a “ticking time bomb.” JPM has $61 trillion in total derivatives, or $628 billion in netted derivatives, five times those of Credit Suisse which went insolvent last spring. Credit Suisse had to be bought by the giant Swiss bank UBS to avoid a derivatives implosion among “globally systemically important banks,” of which Credit Suisse was one. 

Not just the BND but North Dakota’s local banks are very safe. The BND acts as a “mini-Fed” for them, helping with liquidity, capitalization, and regulation. It provides correspondent banking services, an active Fed Funds program, check clearing, cash management services, loan guarantees, and other banker’s bank services. No local banks have been in trouble this year (or in fact during this century), but if they were to suffer a bank run, the BND would be there to help. According to its former CEO Eric Hardmeyer, the BND has a pre-approved Fed Funds line set up with every bank in the state; and if that is insufficient for liquidity, the BND can simply buy loans from the troubled local bank as needed. 

Replicating the Model

Advocates in other states are working to replicate the BND model or variations of it, with some very promising business plans forthcoming. One analysis recently published by the Center for New York City Public Affairs at the New School measures the projected economic impact of a local New York City public bank, based on a business model put forth by local advocates. The analysis focuses on job creation, affordable housing development and preservation, and community development lending during the bank’s five-year start-up phase, the time projected to achieve a full lending portfolio. The authors concluded:

In just its five-year start-up phase, a New York City public bank has the potential to create thousands of jobs, while constructing and renovating nearly 20,000 units of affordable housing, directing over a billion dollars to climate infrastructure investments, and expanding the capacity of the city’s CDFI community banks and credit unions to meet the needs of low- and middle-income New Yorkers. …

By partnering with CDFI banks and credit unions and other responsible lenders, the public bank could enable these institutions to increase their lending by over $5.8 billion. Besides financing affordable housing and community development and climate infrastructure, the public bank’s loans would allow CDFIs to increase their capacity with respect to mortgage and consumer lending. … Loans for mortgages and small businesses will build wealth and ensure that a larger share of the City’s money keeps circulating in New York’s working-class communities. Public bank lending of $4.55 billion is estimated to create approximately 70,600 jobs in its start-up phase.

Other states pursuing legislation in 2023 involving the establishment of public banks include California, Oregon, Washington State, New Mexico, Massachusetts, Pennsylvania and New Hampshire. At the federal level, a much needed solution to the infrastructure crisis is a national infrastructure bank, proposed in HR 4052. We have faced these crises before and have come out the stronger for them. Alexander Hamilton dealt with what appeared to be an insurmountable sovereign debt crisis by establishing the First Bank of the United States as an infrastructure and development bank in 1791. That model was followed by Roosevelt’s government in pulling the country out of the 1930s Great Depression, and it can help put our economy on a more solid footing today.

___________________

This article was first posted on ScheerPost. 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 400+ blog articles are posted at EllenBrown.com.

Off the Top of My Head

The Sword of Damocles Which is the Debt Ceiling

by John Lawrence

The Federal Reserve can just create the money like they did with quantitative easing. They created the money and gave it to the banks. Now their balance sheet is $8.5 trillion. This is not a debt, but it is similar to the national debt which is $31 trillion. You could say that this $31 trillion is on the US' balance sheet or, similarly, the Federal Reserve has an $8.5 trillion debt. See if the Fed creates money, it's not a debt, but if the US Treasury needs money, it has to borrow it. What if no one wants to buy Treasury bonds? Well then, the Fed would buy them itself and just create the money to buy them and add it to its balance sheet. The debt ceiling is such a useless and bogus aspect of American democracy and has the potential of causing the US to default on its debts with disastrous consequences. The Fed never has to pay down its balance sheet nor does the US ever have to have its taxpayers pay off the national debt. The national debt is just an accounting mechanism as is the number on the Fed's balance sheet. As a sovereign fiat currency, the US can just create money. That's not to say that it should do this hap hazardly or willy nilly. But there was a lot of willy nillyness in the years after the Great Recession in 2008 when the Fed kept on quantitatively easing and creating money and giving it to the banks. However, the Fed is prohibited by law from creating money and giving it to poor people. Of course.

So why is the national debt so high? The simple answer is tax cuts for the rich. Americanprogress.org reported:

Tax cuts initially enacted during Republican trifectas in the past 25 years slashed taxes disproportionately for the wealthy and profitable corporations, severely reducing federal revenues. In fact, relative to earlier projections, spending is down, not up. But revenues are down significantly more. If not for the Bush tax cuts and their extensions—as well as the Trump tax cuts—revenues would be on track to keep pace with spending indefinitely, and the debt ratio (debt as a percentage of the economy) would be declining. Instead, these tax cuts have added $10 trillion to the debt since their enactment and are responsible for 57 percent of the increase in the debt ratio since 2001, and more than 90 percent of the increase in the debt ratio if the one-time costs of bills responding to COVID-19 and the Great Recession are excluded. Eventually, the tax cuts are projected to grow to more than 100 percent of the increase.

So why not tax the hell out of the rich, flood the coffers of the Treasury with cash and pay down the national debt? Or at least tax the rich as Biden has proposed doing? Biden famously changed the narrative from "tax and spend" to "no one making less than $400,000 will get a tax increase." So Republicans always want to reduce taxes on the rich and reduce or eliminate social programs which benefit mostly the poor and middle class. The alternative, which Democrats should loudly state, is to raise taxes on the rich and enact programs which benefit the poor and middle class. Voila, the budget is balanced. Raise taxes a little more on the rich and the national debt is paid down. Actually it doesn't matter what the figure of the national debt is. Foreign holders of US Treasury debt could be paid off tomorrow by virtue of the fact that the Fed could just with a few keystrokes on a computer create the money and take it on their balance sheet. This money would then be added, again with a few keystrokes on a computer, to China's or Japan's account at the Fed thus zeroing out the debt. Instead the US government goes on paying interest on its debt which could turn into a problem as it crowds out other budgetary items. Clearly, this is no way for the US government to conduct its business.

Off the Top of My Head

Chump Towers: Why the Worst is Yet to Come

by John Lawrence

Yesterday the Attorney General of New York sued Trump for bank fraud. But that is only the half of it. The other half is tax fraud. The referral to the IRS will take care of that. Trump's dilemma is that he overestimated his assets to get cheap bank loans and then turned around and underestimated his income to reduce his taxes. Most banks refused to deal with Trump. Even Deutsche bank, which is a sprawling behemoth in which the right division doesn't know what the left division is doing, refused to deal with Trump except for one enabler - Rosemary Vrablic.She oversaw hundreds of millions of dollars in loans to President Trump’s company. She resigned in 2021. According to the New York Times:

"Ms. Vrablic ... joined Deutsche Bank in 2006 from Bank of America.  Ms. Vrablic quickly made a name for herself as one of her division’s leading rainmakers. In 2011, she landed a prominent new client: Mr. Trump, who for decades had been mostly off limits to the mainstream banking world because of his tendency to default on loans. With her bosses’ approval, Ms. Vrablic agreed to a series of loans, totaling well over $300 million, for his newly acquired Doral golf resort in Florida, for his troubled Chicago skyscraper and for the transformation of the Old Post Office building in Washington into a luxury hotel."

Rosemary was a V.I.P. guest at Trump's inauguration. She was Trump's personal banker at Deutshe at a time when no other bank and most divisions of Deutsche would not even do business with him. Trump had a history of defaulting on loans and stiffing contractors. The article continues:

"Mr. Trump’s key contacts at his biggest financial backer are leaving at a perilous time for the departing president. He owes Deutsche Bank about $330 million, and the loans come due in 2023 and 2024. Mr. Trump provided a personal guarantee to get the loans, meaning that if he fails to pay them back, the bank can pursue his personal assets."

Attorney General, Letitia James, is suing Trump for $250 million for bank fraud in addition to essentially shutting down all his operations in the state of New York. But this might be a small amount when the IRS comes forth with its own accounting and accusations. A few hundred million here, a few hundred million there, pretty soon you're talking about real money. With Rosemary Vrablic gone, Trump has lost probably the last banker even willing to do business with him.

Deutsche bank is cooperating with the investigation. Stay tuned.

The Coming Global Financial Revolution: Russia Is Following the American Playbook

Posted on April 5, 2022 by Ellen Brown from Web of Debt blog

No country has successfully challenged the U.S. dollar’s global hegemony—until now. How did this happen and what will it mean?

Foreign critics have long chafed at the “exorbitant privilege” of the U.S. dollar as global reserve currency. The U.S. can issue this currency backed by nothing but the “full faith and credit of the United States.” Foreign governments, needing dollars, not only accept them in trade but buy U.S. securities with them, effectively funding the U.S. government and its foreign wars. But no government has been powerful enough to break that arrangement – until now. How did that happen and what will it mean for the U.S. and global economies?

The Rise and Fall of the PetroDollar

First, some history: The U.S. dollar was adopted as the global reserve currency at the Bretton Woods Conference in 1944, when the dollar was still backed by gold on global markets. The agreement was that gold and the dollar would be accepted interchangeably as global reserves, the dollars to be redeemable in gold on demand at $35 an ounce. Exchange rates of other currencies were fixed against the dollar. 

But that deal was broken after President Lyndon Johnson’s “guns and butter” policy exhausted the U.S. kitty by funding war in Vietnam along with his “Great Society” social programs at home. French President Charles de Gaulle, suspecting the U.S. was running out of money, cashed in a major portion of France’s dollars for gold and threatened to cash in the rest; and other countries followed suit or threatened to. 

In 1971, President Richard Nixon ended the convertibility of the dollar to gold internationally (known as “closing the gold window”), in order to avoid draining U.S. gold reserves. The value of the dollar then plummeted relative to other currencies on global exchanges. To prop it up, Nixon and Secretary of State Henry Kissinger made a deal with Saudi Arabia and the OPEC countries that OPEC would sell oil only in dollars, and that the dollars would be deposited in Wall Street and City of London banks. In return, the U.S. would defend the OPEC countries militarily. Economic researcher William Engdahl also presents evidence of a promise that the price of oil would be quadrupled. An oil crisis triggered by a brief Middle Eastern war did cause the price of oil to quadruple, and the OPEC agreement was finalized in 1974.

The deal held firm until 2000, when Saddam Hussein broke it by selling Iraqi oil in euros. Libyan president Omar Qaddafi followed suit. Both presidents wound up assassinated, and their countries were decimated in war with the United States. Canadian researcher Matthew Ehret observes:

We should not forget that the Sudan-Libya-Egypt alliance under the combined leadership of Mubarak, Qadhafi and Bashir, had moved to establish a new gold-backed financial system outside of the IMF/World Bank to fund large scale development in Africa. Had this program not been undermined by a NATO-led destruction of Libya, the carving up of Sudan and regime change in Egypt, then the world would have seen the emergence of a major regional block of African states shaping their own destinies outside of the rigged game of Anglo-American controlled finance for the first time in history.

The Rise of the PetroRuble

The first challenge by a major power to what became known as the petrodollar has come in 2022. In the month after the Ukraine conflict began, the U.S. and its European allies imposed heavy financial sanctions on Russia in response to the illegal military invasion. The Western measures included freezing nearly half of the Russian central bank’s 640 billion U.S. dollars in financial reserves, expelling several of Russia’s largest banks from the SWIFT global payment system, imposing export controls aimed at limiting Russia’s access to advanced technologies, closing down their airspace and ports to Russian planes and ships, and instituting personal sanctions against senior Russian officials and high-profile tycoons. Worried Russians rushed to withdraw rubles from their banks, and the value of the ruble plunged on global markets just as the U.S. dollar had in the early 1970s. 

The trust placed in the U.S. dollar as global reserve currency, backed by “the full faith and credit of the United States,” had finally been fully broken. Russian President Vladimir Putin said in a speech on March 16 that the U.S. and EU had defaulted on their obligations, and that freezing Russia’s reserves marks the end of the reliability of so-called first class assets. On March 23, Putin announced that Russia’s natural gas would be sold to “unfriendly countries” only in Russian rubles, rather than the euros or dollars currently used. Forty-eight nations are counted by Russia as “unfriendly,” including the United States, Britain, Ukraine, Switzerland, South Korea, Singapore, Norway, Canada and Japan. 

Putin noted that more than half the global population remains “friendly” to Russia. Countries not voting to support the sanctions include two major powers – China and India – along with major oil producer Venezuela, Turkey, and other countries in the “Global South.” “Friendly” countries, said Putin, could now buy from Russia in various currencies.

On March 24, Russian lawmaker Pavel Zavalny said at a news conference that gas could be sold to the West for rubles or gold, and to “friendly” countries for either national currency or bitcoin.

Energy ministers from the G7 nations rejected Putin’s demand, claiming it violated gas contract terms requiring sale in euros or dollars. But on March 28, Kremlin spokesman Dmitry Peskov said Russia was “not engaged in charity” and won’t supply gas to Europe for free (which it would be doing if sales were in euros or dollars it cannot currently use in trade). Sanctions themselves are a breach of the agreement to honor the currencies on global markets. 

Bloomberg reports that on March 30, Vyacheslav Volodin, speaker of the lower Russian house of parliament, suggested in a Telegram post that Russia may expand the list of commodities for which it demands payment from the West in rubles (or gold) to include grain, oil, metals and more. Russia’s economy is much smaller than that of the U.S. and the European Union, but Russia is a major global supplier of key commodities – including not just oil, natural gas and grains, but timber, fertilizers, nickel, titanium, palladium, coal, nitrogen, and rare earth metals used in the production of computer chips, electric vehicles and airplanes. 

On April 2, Russian gas giant Gazprom officially halted all deliveries to Europe via the Yamal-Europe pipeline, a critical artery for European energy supplies.

U.K. professor of economics Richard Werner calls the Russian move a clever one – a replay of what the U.S. did in the 1970s. To get Russian commodities, “unfriendly” countries will have to buy rubles, driving up the value of the ruble on global exchanges just as the need for petrodollars propped up the U.S. dollar after 1973. Indeed, by March 30, the ruble had already risen to where it was a month earlier. 

A Page Out of the “American System” Playbook

Russia is following the U.S. not just in hitching its national currency to sales of a critical commodity but in an earlier protocol – what 19th century American leaders called the “American System” of sovereign money and credit. Its three pillars were (a) federal subsidies for internal improvements and to nurture the nation’s fledgling industries, (b) tariffs to protect those industries, and (c) easy credit issued by a national bank.

Michael Hudson,  a research professor of economics and author of “Super-Imperialism: The Economic Strategy of American Empire” among many other books, notes that the sanctions are forcing Russia to do what it has been reluctant to do itself – cut reliance on imports and develop its own industries and infrastructure. The effect, he says, is equivalent to that of protective tariffs. In an article titled “The American Empire Self-destructs,” Hudson writes of the Russian sanctions (which actually date back to 2014): 

Russia had remained too enthralled by free-market ideology to take steps to protect its own agriculture or industry. The United States provided the help that was needed by imposing domestic self-reliance on Russia (via sanctions). When the Baltic states lost the Russian market for cheese and other farm products, Russia quickly created its own cheese and dairy sector – while becoming the world’s leading grain exporter.

Russia is discovering (or is on the verge of discovering) that it does not need U.S. dollars as backing for the ruble’s exchange rate. Its central bank can create the rubles needed to pay domestic wages and finance capital formation. The U.S. confiscations thus may finally lead Russia to end neoliberal monetary philosophy, as Sergei Glaziev has long been advocating in favor of MMT [Modern Monetary Theory]. …

What foreign countries have not done for themselves – replacing the IMF, World Bank and other arms of U.S. diplomacy – American politicians are forcing them to do. Instead of European, Near Eastern and Global South countries breaking away out of their own calculation of their long-term economic interests, America is driving them away, as it has done with Russia and China. 

Glazyev and the Eurasian Reset

Sergei Glazyev, mentioned by Hudson above, is a former adviser to President Vladimir Putin and the Minister for Integration and Macroeconomics of the Eurasia Economic Commission, the regulatory body of the Eurasian Economic Union (EAEU). He has proposed using tools similar to those of the “American System,” including converting the Central Bank of Russia to a “national bank” issuing Russia’s own currency and credit for internal development. On February 25, Glazyev published an analysis of U.S. sanctions titled “Sanctions and Sovereignty,” in which he stated:

[T]he damage caused by US financial sanctions is inextricably linked to the monetary policy of the Bank of Russia  …. Its essence boils down to a tight binding of the ruble issue to export earnings, and the ruble exchange rate to the dollar. In fact, an artificial shortage of money is being created in the economy, and the strict policy of the Central Bank leads to an increase in the cost of lending, which kills business activity and hinders the development of infrastructure in the country.

Glazyev said that if the central bank replaced the loans withdrawn by its Western partners with its own loans, Russian credit capacity would greatly increase, preventing a decline in economic activity without creating inflation.   

Russia has agreed to sell oil to India in India’s own sovereign currency, the rupee; to China in yuan; and to Turkey in lira. These national currencies can then be spent on the goods and services sold by those countries. Arguably, every country should be able to trade in global markets in its own sovereign currency; that is what a fiat currency is – a medium of exchange backed by the agreement of the people to accept it at value for their goods and services, backed by the “full faith and credit” of the nation. 

But that sort of global barter system would break down just as local barter systems do, if one party to the trade did not want the goods or services of the other party. In that case, some intermediate reserve currency would be necessary to serve as a medium of exchange. 

Glazyev and his counterparts are working on that. In a translated interview posted on The Saker, Glazyev stated:

We are currently working on a draft international agreement on the introduction of a new world settlement currency, pegged to the national currencies of the participating countries and to exchange-traded goods that determine real values. We won’t need American and European banks. A new payment system based on modern digital technologies with a blockchain is developing in the world, where banks are losing their importance. 

Russia and China have both developed alternatives to the SWIFT messaging system from which certain   Russian banks have been blocked. London-based commentator Alexander Mercouris makes the interesting observation that going outside SWIFT means Western banks cannot track Russian and Chinese trades.

Geopolitical analyst Pepe Escobar sums up the plans for a Eurasian/China financial reset in an article titled “Say Hello to Russian Gold and Chinese Petroyuan.” He writes:

It was a long time coming, but finally some key lineaments of the multipolar world’s new foundations are being revealed.

On Friday [March 11], after a videoconference meeting, the Eurasian Economic Union (EAEU) and China agreed to design the mechanism for an independent international monetary and financial system. The EAEU consists of Russia, Kazakhstan, Kyrgyzstan, Belarus and Armenia, is establishing free trade deals with other Eurasian nations, and is progressively interconnecting with the Chinese Belt and Road Initiative (BRI).

For all practical purposes, the idea comes from Sergei Glazyev, Russia’s foremost independent economist ….

Quite diplomatically, Glazyev attributed the fruition of the idea to “the common challenges and risks associated with the global economic slowdown and restrictive measures against the EAEU states and China.” 

Translation: as China is as much a Eurasian power as Russia, they need to coordinate their strategies to bypass the US unipolar system.

The Eurasian system will be based on “a new international currency,” most probably with the yuan as reference, calculated as an index of the national currencies of the participating countries, as well as commodity prices. … 

The Eurasian system is bound to become a serious alternative to the US dollar, as the EAEU may attract not only nations that have joined BRI … but also the leading players in the Shanghai Cooperation Organization (SCO) as well as ASEAN. West Asian actors – Iran, Iraq, Syria, Lebanon – will be inevitably interested.

Exorbitant Privilege or Exorbitant Burden?

If that system succeeds, what will the effect be on the U.S. economy? Investment strategist Lynn Alden writes in a detailed analysis titled “The Fraying of the US Global Currency Reserve System” that there will be short-term pain, but, in the long run, it will benefit the U.S. economy. The subject is complicated, but the bottom line is that reserve currency dominance has resulted in the destruction of our manufacturing base and the buildup of a massive federal debt. Sharing the reserve currency load would have the effect that sanctions are having on the Russian economy – nurturing domestic industries as a tariff would, allowing the American manufacturing base to be rebuilt. 

Other commentators also say that being the sole global reserve currency is less an exorbitant privilege than an exorbitant burden. Losing that status would not end the importance of the U.S. dollar, which is too heavily embedded in global finance to be dislodged. But it could well mean the end of the petrodollar as sole global reserve currency, and the end of the devastating petroleum wars it has funded to maintain its dominance. 

________________________________

This article was first posted on ScheerPost. 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. 

The Case for a Central Bank Digital Currency

by Ellen Brown

November 23, 2021

from Web of Debt blog

Whether the U.S. should have its own central bank digital currency (CBDC) is hotly debated. Several countries, including China, already have CBDCs in operation; but the U.S. Federal Reserve is proceeding with caution. Prof. Saule Omarova, President Biden’s nominee for Comptroller of the Currency, is in favor of a CBDC and has made a strong case for it; but many conservative commentators are opposed, and her nomination remains in doubt.

Omarova sees the CBDC as an extension of public banking, but even some public banking advocates are concerned about that development. One such advocate is British Prof. Richard Werner, who laid out his cautions five years ago in a paper presented at the 14th Rhodes Forum in Greece . Werner  argued that central banks are in the process of consolidating their powers. Having achieved total independence from government and total lack of accountability to the people, they now want to eliminate competition in the form of both paper money and bank-created credit-money and control the issuance of money completely. To do this, he said, they are driving both cash and bank credit out of business by imposing negative interest rates, which have already been tested in some European countries. Werner argued that negative interest rates were designed not to stimulate the economy but to create deflation and wreak further havoc — “havoc that they intend to instrumentalise to accelerate their goal of becoming the complete masters of our lives, by allowing only digital currency that they issue and control – and that they can monitor in terms of all transactions, and that they can switch off, if, for instance, some pesky dissident criticizes them too much.”

In 2016, that may have sounded radically conspiratorial. But as libertarian commentator George Gammon observed in a podcast episode this past summer called the “The Future of America: Social Scores, CBDC, Health Passports,” the technology is now in place to take us to that very dystopian future.  Federal governments already have the tools and legal framework to see everyone’s transactions and to order bank accounts closed. But a CBDC could facilitate the process, as Agustin Carstens, a member of the Financial Stability Board in Basel, observed at an annual meeting of the International Monetary Fund in October of last year. Carstens said that CBDC, unlike cash, gives the central bank absolute control over the rules and regulations respecting its use and the technology to enforce those rules.

Cause for Caution or Haste?

Those are serious concerns, but while the U.S. delays, George Gammon argues in another podcast that China could overtake the U.S. dollar as global reserve currency by issuing a “DigiYuan” through the Public Bank of China. It could then require its commercial partners in the vast Belt and Road Initiative to open accounts at the PBOC and take payment in that digital currency. In a third podcast, Gammon discusses another challenger to the dollar, the digital SDR (short for “Special Drawing Rights”, the currency issued by the International Monetary Fund). The digital SDR is preferred by the World Economic Forum as global reserve currency.

But Fed Chair Jerome Powell does not appear to be concerned. During a virtual panel at the Bank for International Settlements (BIS) Innovation Summit in March, he said, “Because we are the world’s principal reserve currency, we do not need to rush this project, and we don’t need to be the first to market.” More important, said Powell, is to get it right. At the October, 2020 IMF meeting at which Carstens spoke, Powell also said there were difficult policy and operational questions yet to be resolved, including protecting the currency against cyber attacks, counterfeiting and fraud; determining how it would affect monetary policy and financial stability; and preventing illicit activity while protecting user privacy and security.

Financial blogger Tom Luongo thinks the Fed has broken away from the Europe-centered central banking cartel and is actually our bulwark against it. Luongo points to Jerome Powell’s clash with Christine Lagarde in May over her insistence that central banks require private banks to monitor the business of their clients, and to the Fed’s raising its repo rate to 0.25% in June. Though an apparently insignificant percentage, 0.25% was enough to attract large investors hobbled with zero rates in Europe away from the euro and into the U.S. dollar.

Also noteworthy is that Powell is treading carefully in the CBDC space, acknowledging the need to protect user privacy and security. The Fed Chair said at that IMF meeting, “The real threshold question, for us, is does the public want or need a new digital form of central bank money to complement what is already a highly efficient, reliable and innovative payments system?”

Democratizing Money

Those questions were addressed by Prof. Omarova in an October white paper titled “The People’s Ledger: How to Democratize Money and Finance the Economy,” which does an excellent job of laying out the issues. She has been criticized for saying that the system she was proposing would “end banking as we know it,” but she clarified in that paper that she did not mean that private banks would disappear. They would just revert to being what they profess to be: intermediaries between depositors and borrowers. As the Bank of England has confirmed, today banks are not merely intermediaries. They actually create the money they lend as deposits on their books. In fact most of the circulating money supply is created in that way.

In Omarova’s model, the pooled deposits would be held at the Fed and would be borrowed by “qualifying lending institutions” (chiefly banks) from the Fed’s discount window at preferential rates. This idea is not so radical as it sounds. Banks have traditionally met their liquidity needs by borrowing deposits (“reserves”) from each other through the federal funds market. But that mechanism broke down in the 2008-09 credit crisis, because banks no longer trusted each other to be good for the loans.

Pooling deposits at the Fed, wrote Omarova, would eliminate the threat of bank runs (since the Fed’s deep pocket cannot run dry) and the threat of “bail-ins” (confiscation of private funds to recapitalize failed “too big to fail” banks, a requirement of the 2010 Dodd-Frank Act). It would also eliminate the need for massive bank regulation and “stress tests” to ensure adequate capital and liquidity, and the need for FDIC insurance, “ending the intractable TBTF problem.” It would stem the troubling wave of bank consolidations in order to acquire deposits; stem speculative trading by banks and hedge funds in financial instruments; shrink the derivatives casino to a small private market; and end the need for the Fed to engage in massive repo operations. The reasons are complicated, but Omarova explains them at length in her paper.

Private lending institutions could still take investor funds and make loans, but they would be “narrow banks” or “mutual funds,” limited to lending only the money they actually had. They could not create money on their books but would be “mere intermediaries” as they purport to be now.

Free FedAccounts for all would solve other pressing problems: they would service the unbanked and underbanked, would pay interest on deposits, and would avoid the sort of widespread failure to get timely relief payments to recipients seen in the 2020 crisis. For servicing depositors, says Omarova, community banking institutions (CBIs) could be licensed to assist.

Postal banks or local public banks (if we had them) would be other good alternatives. During the Great Depression of the 1930s, federal postal banking was a very popular public option, and there is renewed interest today in restoring that system. 

The People’s Ledger

As interesting as the deposit (liability) side of the Fed’s ledger is what could be done on the asset (or loan) side. Omarova calls it “The People’s Ledger.” Her white paper begins:

In 1896, William Jennings Bryan delivered his historic “Cross of Gold” speech, making a passionate plea for a monetary system that served the interests of the working people and increased the nation’s prosperity. Today, the precise contours of that political ideal are once again intensely contested. After decades of rising inequality, systemic instability, and relentless concentration of economic power, ordinary Americans are demanding a greater say in the distribution and use of financial resources. The Reddit-fueled GameStop rally, the dramatic rise of Bitcoin and other cryptocurrencies, the “universal basic income” and “public banking” movements—these are all discrete manifestations of the broader quest for more equitable and inclusive modes of finance.

Ultimately, however, it takes a system to beat a system.

This Article takes up the challenge of “beating” the currently dysfunctional U.S. financial system by reimagining its fundamental structure and redesigning its operation. It offers both a conceptual framework for analyzing the core structural dynamics of today’s finance, and a blueprint for reform that would radically democratize access to money and control over financial flows in the nation’s economy. [Citations omitted.]

Today, private banks rather than publicly accountable financial institutions are the chief creators of a national currency backed by “the full faith and credit of the United States.” The banks and their prime customers get the advantage of the “Cantillon effect”: those closest to the source of new money benefit first and most handsomely. They get the money cheaply and have control over where it goes. They can leverage it and speculate with it, pocketing the “seigniorage” as their own private profit; and they have no public mandate to invest it in a way that serves the people. Newly created money goes into speculative ventures, driving up demand without increasing supply, resulting in bubbles and busts, inflating consumer prices and widening the “wealth gap.”

A “People’s Ledger,” says Omarova, can limit the loans created with our deposits to truly productive endeavors. Under her proposal, “the Fed’s principal asset holdings would fall into three categories: (1) redesigned ‘discount window’ loans to qualifying lenders; (2) securities issued by existing and newly created public instrumentalities for purposes of financing large-scale public infrastructure projects; and (3) an expanded portfolio of trading assets maintained for purposes of financial-market stabilization.” Banks could still finance “non-qualifying” loans, but it would be “by issuing corporate debt and equity securities in capital markets, much in the same way as other corporations do.”

She clarifies that the Fed would not be making direct investment decisions, easing the current pressure on it to use its balance sheet for political purposes. Individual and business loans would be made by “qualifying lending institutions” drawing their liquidity from the Fed’s discount window. Loans characterized as “national development” would be made by an independent public institution she calls the National Investment Authority, “envisioned as the modern-day equivalent of the Reconstruction Finance Corporation (‘RFC’), the New Deal-era public institution that successfully led a massive nationwide capital mobilization campaign to aid Depression-struck sectors of the American economy.” That role could also be filled by the National Infrastructure Bank currently proposed in HR 3339, which is also modeled on the RFC.

Freeing the “Free” Market

What of Prof. Werner’s concerns about the centralization of power under a central banking system? His proposed solution is to reverse that agenda and decentralize power, by abandoning the big banks and supporting local not-for-profit community banks. This could also be done with decentralized cryptocurrencies. But it will be hard for either approach to gain the consumer and commercial confidence commanded by the U.S. dollar.

Omarova writes:

In part, depositors’ privacy concerns should be alleviated by (1) the continuing availability of physical cash, and (2) the CBI option for deposit services.A more complete solution, though, would likely require technology enabling sufficiently anonymous digital-dollar payments, subject to amount limitations and other conditions necessary to prevent criminal transactions. [Emphasis added.]

If Chairman Powell is indeed bucking the “globalists,” as Luongo contends, the Fed is likely to need its own CBDC to compete with the PBOC’s digital yuan and retain the U.S. dollar’s status in global markets. There are clearly reasons for concern, but if a program can be designed that protects against the risks perceived by its critics, a CBDC could be a powerful tool for “democratizing” money and credit; and Omarova’s academic paper lays out how this could be done. She argues that removing private banks from their privileged position as money creators and returning them to their traditional role as specialized intermediaries would return markets to their original state of “freedom.”

____________________________

This article was first posted on ScheerPost. 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

Joe Biden's Trillion Dollar Budget Plan

by John Lawrence

Don't worry about how to pay for it. Any nation with a sovereign currency (let alone the world's reserve currency) and a floating exchange rate can never go bankrupt. The Federal Reserve can issue the money. In fact in the real world this is exactly how it works for any budgetary legislation passed by Congress and signed by the President. Let's say, for example, Biden's $2 trillion infrastructure plan is signed by him into law. The US Treasury has an account at the Federal Reserve bank. Let's say there is only a trillion dollars in that account. What happens next is that the Fed just augments the Treasury's account by a trillion dollars by means of a few keystrokes on a computer. Bingo the government now has all the money it needs to spend on infrastructure. It didn't have to receive tax money in advance of the money it needed to spend. At the same time the Treasury Department creates a trillion dollars worth of Treasury bonds and sells them to the primary dealers who are required by law to buy them. These are mainly big Wall Street banks. These banks sell the bonds in the secondary market. If they can't find enough buyers, the Fed "adds liquidity to the market" by taking the Treasuries onto its balance sheet in return for marking up the Wall Street banks accounts at the Fed with the appropriate amounts of cash. Now everybody is happy. The US government has the money it needs in its Treasury's account at the Fed. The Wall Street banks have plenty of liquidity in their reserve accounts at the Fed, and the amazing thing is that it didn't require any money from additional taxes.

Another amazing thing is that most politicians are totally ignorant about how government financing actually works. The Republican Governor of Ohio, Mike DeWine gets on TV and opines about the fact that the US is going into too much debt and how will our grandchildren ever pay it off. "Here in Ohio," I'm paraphrasing," we have to pay our bills and pay down our debts. Every household has to be fiscally responsible and pay their debts." Well households and states are in a different category from the Federal government. They actually do have to pay their debts. So what he is claiming is a half truth. States and households cannot issue a sovereign currency whereas the Federal government can. States and households use the Federal government's currency. The big lie, however, is that the US government has to pay off its debts. It never does, and no entity can force it to do so. The other constraint that Larry Summers and others worry about is inflation or currency devaluation. Inflation could be a problem, and that problem, should it arise, can be dealt with by sucking money out of the economy by means of taxes. Biden's plan to tax the rich will suck some of their superfluous wealth out of the economy thus forestalling inflation while tending to reduce the runaway economic inequality that is now threatening democracy in the US.

The Federal government is not like a household or a state. Households and states actually do have to pay back the money they borrow plus interest. That's why it's so important that the various COVID rescue plans provide the states and municipalities with money. Otherwise, they could become financially insolvent and go bankrupt like Orange County in California did a few years ago. Birmingham, AL also got itself in hot water and went bankrupt. Countries in the Euro zone have the same problem as states in the US. They gave up their sovereign currencies when they joined the EU. So now countries like Greece and Italy have to beg the European Central Bank for relief, relief they could have provided for themselves if they had retained their sovereign currencies like Britain did. Britain will not have any problem with financial shortages because, like the US, its government can issue whatever currency is deemed necessary to weather any storm.

So in addition to the Big Lie that Trump won the election, politicians of both parties are perpetrating another Big Lie that the US actually has to borrow the money to pay for Biden's trillion dollar infrastructure and safety net programs. Some politicians, like Bernie Sanders and AOC, actually know the truth, and, evidently, they have convinced Joe Biden thereof as well although they won't actually come out and say it to the media: the US government can just issue money into the private economy. It doesn't need to borrow it or even tax for it in advance in order to spend. So the real policy of the Biden administration is not tax and spend. It's spend and maybe tax later, but target those taxes on the wealthiest among us. As opposed to the Republican philosophy of giving tax breaks to the wealthy and taking the social safety net away from the poor.

Off the Top of My Head

The Stock Market is Too Big to Fail

by John Lawrence, April 2, 2021

Just as the big Wall Street banks are too big to fail, so now is the stock market. The stock market will never take another radical dive downward because the Federal Reserve won't let it. The way the economy is shaping up Treasury bonds, which hardly pay any interest, are just a safe place to store your money and also for foreign nations which need the world's reserve currency (the US dollar) to have a savings account because they need dollars to conduct business. There is no worry that the US will have to pay off the trillion dollars in Treasuries that China owns because they need those dollars to do business with the US and other nations. If they did want to dump all their Treasuries for some reason the Fed could just create the money to pay them and effectively take the Treasuries on its own balance sheet.

So the stock market is the only game in town for those who want to actually "invest" their money. There is so much 401(k) money in the stock market that that is reason enough to never let it fail. Instead it will continue on its merry way upward while the Fed keeps interest rates at approximately zero so that not much in the way of interest will have to be paid on US debt. There is no reason to fear that Joe Biden's $2 trillion infrastructure plan will bankrupt the US. Since the US dollar is a sovereign currency, the Fed can print as much money as it wants. If international investors don't want to buy this debt, it ends up on the Fed's balance sheet which is an effective black hole from which it never has to emerge.

Then why is there all this kibuki theater about "how to pay for it," the $2 trillion infrastructure plan I mean. It's just that most Americans including most Congressmen are under the illusion that a country with a sovereign currency like the US faces any constraints in paying for anything. Well, there is one constraint - inflation. This is probably of little concern as long as the money is targeted at the lower middle class an the poor which haven't seen wages rise in 40 years. The real inflation in the economy is the asset inflation that the rich are mostly responsible for. That includes the stock market and real estate. Inflation in the stock market will be carefully controlled by the Fed. We've seen that the stock market moved up even during the pandemic. The real problem is inflation in the real estate market which has made housing unaffordable for many. It continues to get worse as the extra dollars the wealthy have to invest are driving up prices. That's why it makes sense to tax the rich ostensibly to pay for the infrastructure bill. The real reason, however, is that inequality is getting out of hand in the American and the world economy. Taxing the rich is the only effective means to reduce inequality to a reasonable level. It will also help to bring inflation in the real estate market under control.

The real problem that Biden's infrastructure bill will have to deal with is changing the nature of the US economy. When the economy was in full employment under Trump, there were still 4% unemployed. 5% unemployment is considered "full employment," but that still leaves about 15 million people out of work. Biden's infrastructure plan will put those 5% back to work. It had been considered by conservative neoliberal economists that 5% unemployment was necessary to ward off inflation, but that theory has been debunked by Modern Monetary Theory. While inflation will still be a concern with all of Biden's stimulus spending, the main concern is restructuring the US economy from an entertainment economy to a constructive labor economy. Trump's economy was arguably a full employment economy (except for the 4% unemployed), but it was an economy the jobs of which were mainly in the entertainment and military industries. In other words, in my opinion, it was an economy based on false unbeneficial values. An economy based on labor participation rebuilding American infrastructure will be an economy based on necessary and fundamentally beneficial values. This might mean that some of those presently employed in frivolous industries might be incentivized to change jobs. Reducing the entertainment and military sectors while increasing those employed rebuilding infrastructure would be, in my opinion, be a good thing.

 

Off the Top of My Head

How to Throw Republicans for a Loop: Biden Should Propose Tax Breaks for the Middle Class and Tax Increases for the Rich

by John Lawrence, February 25, 2021

The proper use of taxation is to reduce income and wealth inequality. Instead Republicans use tax breaks to primarily benefit the rich. Democrats should modify this playbook. The increasing income and wealth inequality among American citizens cries out for redress. Robin Hood needs to come out and play. There's no law that says tax breaks have to go primarily to the wealthy or be based on some proportionate percentage over all incomes. Democrats should get into the tax break game too. We know that taxes aren't necessary to fund the government. Sure they're part of it, but the government can spend whatever Congress authorizes regardless of whether or not there is money from taxes to pay for it. The shortfall is made up with Treasury bonds most of which end up on the balance sheet of the Federal Reserve just like the Fed used Quantitative Easing (QE), a fancy name that signified that the Fed issued trillions of dollars to bail out the Wall Street banks in 2008. In that case the Fed took MBSs (Mortgage Backed Securities), most of which were worthless onto its balance sheet as "collateral." The Fed can lend money to any entity it likes as long as it takes collateral onto its balance sheet. Much of this collateral is worthless such as defunct MBSs and even old bicycles!

In the article, "Modern Monetary Theory and the Changing Role of Tax in Society," by Andrew Baker and Richard Murphy, published online by Cambridge University Press we find the following:

"Tax is traditionally viewed as the main funding mechanism for government spending. Consequently, social policy is often seen as something determined and constrained by tax revenue. Modern Monetary Theory (‘MMT’) presents a reversal of the tax-spend cycle, by identifying a spend-tax cycle. Using the UK as an example, we highlight that one of MMT’s most important, but under-explored, contributions is its potential to re-frame the role of tax from both a macroeconomic and social policy perspective. We use insights on the money removal, or cancellation function of taxes, derived from MMT, to demonstrate how this also creates possibilities for using tax to achieve social objectives such as mitigating income and wealth inequality, increasing access to housing, or funding a Green New Deal. For social policy researchers the challenge arising is to use these insights to re-engineer tax systems and redesign social tax expenditures (STEs) for creative social policy purposes."

MMT is a game changer. Conventional thinking is that government can only spend money collected from taxes. But that is not how the system really works. As a sovereign currency, the Fed can just create US dollars with a few keystrokes on a computer. The budget deficit and national debt just become accounting entries on the Fed's balance sheet. We are not mortgaging our children's and grandchildren's future. This is money that never needs to be paid back, that our children never need to pay back. China is not holding this debt over our heads; China could be paid back tomorrow if need be. The US government operates on a different set of principles than the US states, European countries in the Euro zone, and households. All these entities do need to pay back loans. The US government does not because it can just create or issue the money which is how the Fed operates on a daily basis. Even local banks create money when a loan is taken out without the need for deposits. They just have to have collateral - usually 10% of deposits - in their reserve account at the Fed. So money can just be created by the Federal Reserve, but, obviously, it does not do so willy nilly. Like alcohol, this facility must be used responsibly. So that is what the debate should be about, not the size of the deficit or the national debt.

The national debt was a problem when the US dollar was on a gold standard. The US promised to redeem dollars - paper currency - for gold up until 1971. Obviously, there was not enough gold if, all of a sudden, China, let's say, wanted to take all its US dollars and demand gold at $35 an ounce. But in 1971 President Nixon took the US off the gold standard. He said the US would forevermore not redeem US currency for gold. At that point the US dollar became a "fiat" currency. That means that a dollar was worth a dollar just because the US government said it was. The US dollar did not become immediately worthless. People continued to use it, and it continued to retain its value vis a vis other currencies. In fact it's the world's reserve currency as Nixon made a deal with the Saudis only to accept payment for oil in US dollars. That alone meant that the other countries of the world needed US dollars if for no other reason than to buy oil. As a matter of fact today most business dealings of foreign countries are settled in US dollars. So the US dollar has a bright future at least for now.

The conclusion is that US households, businesses, US states and European nations that use the Euro need to pay back loans when they borrow money. A nation with a sovereign currency such as the US, the UK, Japan, China and others creates its money when its central bank issues it by means of keystrokes. No one can demand repayment or exchange of dollars for gold or anything else. If China wants to be paid back for the Treasury bonds it holds, the money in its Treasuries (savings) account at the Fed will be debited and credited to its checking account at the Fed. It's as simple as that. That money can be exchanged for Chinese currency on the open market at the prevailing exchange rate. But probably the Chinese would want to keep much of their financial assets in dollars rather than renminbi since their currency is pegged to the dollar and many of their business dealings are settled in dollars.

Off the Top of My Head

The Two Strands of Modern Economic Theory

by John Lawrence, February 12, 2021

Ellen Brown with her book Web of Debt pointed out that public banks could save states and municipalities millions in interest compared to Wall Street banks. She also pointed out that money is created by banks when they make loans with fractional reserve banking. They just create the money with keystrokes; it doesn't come out of deposits. Ergo, all money comes from debt, but that's only half the story. The other strand explains how the Federal Reserve just creates money by keystrokes. In The Deficit Myth, Stephanie Kelton explains how countries with sovereign currencies can create money that really is not debt, despite the fact that conventional thinking says it is. When households or states or countries in the Euro zone take on debt, they do have to pay it back. When countries with sovereign currencies create money, they don't have to pay it back. It's as simple as that.

When European countries gave up their sovereign currencies and adopted the Euro, they gave up the right to create the money they needed to pay bills so they need to borrow on capital markets which can charge them whatever interest they want. This is how Greece and Italy and other European countries got into problems. On the other hand the U.K. which never gave up its sovereign currency can just create the money it needs without going to the debt markets. In the same way Orange County and other US municipalities got into trouble with spiraling debt which had to be paid back. This can get out of hand because the more indebted a debtor gets, the higher interest rate they get charged so that in the worst case they are just borrowing money to pay interest. The US can never get in this debt trap because it never has to borrow money on the open market and the Fed can set interest rates however it wants. Once authorized by Congress and required by law Treasury bonds are issued and can always be paid because the Fed can just create the money to pay them.

Modern Monetary Theory (MMT) has established that deficit spending, whether that comes from tax breaks or government programs or currently for coronavirus relief, is just an accounting entry on the Fed's balance sheet. The national debt never needs to be paid off. Also any country that owns Treasuries - for instance, China - could have them paid off tomorrow if they chose to cash them all in by the Fed just debiting money from the savings account of the People's Bank of China at the Fed and crediting their cash account also at the Fed. Countries with sovereign currencies, ^i.e. the US dollar, the British pound, the Japanese yen etc, can all create money in this way by having their central banks do it with keystrokes on a computer. Greece, Italy, California and New York can't do this because they don't have sovereign currencies.

So there is a difference between debt acquired by households, firms and countries which don't issue their own sovereign currency and countries which have central banks that do. The US Federal Reserve can buy up Treasury bonds as necessary to provide as much money as is authorized by Congress to the US Treasury. By law they can't buy them directly from the Treasury but must buy them on the open market. However, US primary dealers - mainly Wall Street banks - are required to buy them and the Fed can buy them from the primary dealers by providing "liquidity" - dollars which the Fed creates with keystrokes - to the Wall Street banks. The Fed also controls interest rates which at this time are 0.25% or almost zero. So the $1.9 trillion relief package proposed by Biden is no problem either for the US Treasury or the Fed. That money could just end up on the Fed's balance sheet the way the trillions of dollars it created to bail out the Big Banks in the Great Financial Crisis of 2008 did. The fact is that, when the US government deficit spends, that adds money to the private economy, and right now the private economy is hurting because so many are out of work and not able to pay rent or mortgages or car payments. Money added to the economy by deficit spending (deficit being really a misnomer) can be readily absorbed by unemployed workers to pay their bills. The point is that taxes are not necessary for government spending.

So Web of Debt applies to the private economy and The Deficit Myth applies to the national economy. The first book advocates public banking which can save states and municipalities money on interest because they do have to pay their debts. The second book describes how governments with sovereign currencies can just create money which need never be paid off. However, this money creation facility should, like alcohol, be used responsibly; otherwise, inflation can occur. But when huge numbers of people are unemployed and states are having a hard time paying their bills, it is incumbent on the central government to help them. The same applies to European countries in the Euro zone. US lawmakers need to get up to date on how the real economy actually works. In truth Republicans have lost all legitimacy when it comes to their harping on deficit spending.

Off the Top of My Head

Mitch McConnell: "Loony Lies and Conspiracy Theories are Cancer for Republican Party"

by John Lawrence, February 3, 2021

Now even the leader of the Senate Republicans is admitting the Republican party is a joke. They've got nothing besides idol worship and rabbit holes. What do they stand for? White supremacy, bellicose machoism, xenophobia and solipsism masquerading as the American Dream. They stand for nothing except greasing their own palms and staying in power. McConnell at least and a few other principled Republicans like Liz Cheney, Mitt Romney and John Kasich actually are trying to reconstruct the Republican party based on conservative principles. Their problem is that their base is a bunch of wahoos that can't get enough of being entertained by Donald Trump or Marjorie Taylor Greene. Fantasy trumps reality for them.

The point is that in realistic terms the Republican party has nothing to offer. In a world that cries out for cooperation among great powers, they stand for bellicose machoism and bullying. In world where private enterprise is incapable of solving major outstanding problems like climate change and the pandemic, their emphasis on small government falls flat. In a world where it is becoming clear that taxes alone are not necessary for government spending, their pejorative negative hurled at Democrats - "tax and spend" - is meaningless. Their attempts at pulling the wool over Americans' eyes are becoming dispelled. Their fiscal policies have only served to increase economic inequality - to make the rich richer and the poor poorer. So what have they got? A base composed of looney tunes and no nothings and a head composed of the rich and powerful. It doesn't compute.

Republicans want to hearken back to a nostalgic past where black lives didn't matter, white people occupied all positions of prominence, Native Americans were extras in western movies and the concept of global warming had not even been formulated and was not on anybody's radar. They want things like they used to be. Well a lot has changed since then, whatever your definition of "then" is.  Forever wars are draining government finances that could be used in more productive ways. Global warming needs a MEOW solution - the Moral Equivalent of War. This calls for a large amount of government spending. It is becoming more evident, thanks to the exposition of Modern Monetary Theory, that the US government can never run out of money because the US dollar is a sovereign currency which can be created by a few keystrokes at the Fed. Even regular banks create money when they loan money for mortgages, auto loans etc. They don't need to have deposits before they make loans. It's called fractional reserve banking, and it's backed up by the US central bank, the Federal Reserve, which clears checks and is the loaner of last resort.

Government spending should not, however, represent fiscal profligacy or imprudence. The government should spend money responsibly which it has not been doing with spending on forever wars and tax breaks for the rich. IMHO Republican supported government spending has not been responsible spending. Fiscal conservatism should mean that money should solve actual problems and make the lives of most Americans better. So if Republicans want to be the party of fiscal conservatism in the future, they should be concerned that deficit spending does not lead to inflation or deflation, rather than just minimizing government spending other than on defense and tax breaks. Let's see if Republicans want to reformulate themselves on responsible terms or do they just want to continue to be the party of the rich.

Off the Top of My Head

Taxing the Rich Will Lessen the Need for Deficit Spending

by John Lawrence, January 29, 2021

Billionaires are upset because their hedge fund ploys in the Wall Street casino went awry when a group of average Joes countered their short sales of GameStop. Oh the tears that were shed. Billionaires losing millions gambling? Outrageous! Bernie Sanders tweeted: "Oh look, another billionaire is mad that he might have to pay more taxes while children in America go hungry and veterans sleep on the street. Cry me a river," Joe Biden's $1.9 trillion COVID relief bill will mean a lot of deficit spending which can be offset, however, by taxing these billionaires. A financial transaction tax would raise $2.4 trillion over the next decade—"enough to make public colleges tuition free and cancel student debt."

Casino Capitalism Lesson 1: Selling short. Here's how billionaire hedge fund managers planned to make a killing. They knew that GameStop was losing money and probably going out of business. GameStop closed 321 stores in 2019 alone and planned on closing even more stores by the end of 2020. So knowing that GameStop's stock was going down (it didn't take a big brain to figure that out), they sold its stock short. What that means is that they "borrowed" the stock from people that already owned it. Then they sold the stock at its value at that time. Some time later when they would have to "return" the stock to those they borrowed it from, they planned to buy it back at a lower price (it having gone down in the meantime) and pocket the difference. One might ask why the original owners of the stock would loan it in the first place since they must have known that the stock would be worth less when it was returned to them.

However, a group of "amateur" investors foiled the plans of the billionaires by buying GameStop stock thereby bidding up the price making it worth more when the short sellers had to return it, not less. That would mean that the short sellers would lose money instead of making money. That's when the billionaires cried, "Ouch!" Then the "amateurs" who bid up the stock could sell it at the higher price and make money. Woo Haa! Leon Cooperman, whose net worth is estimated to be around $3 billion, sniffed that "the reason the market is doing what it's doing is, people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates." In other words average people trading stocks are making the money that billionaires like him should have made. Boo Hoo!

Modern Monetary Theory maintains that all the money for the COVID relief bill could be raised from deficit spending because deficits don't matter without any need for increased taxation. Yet it would be prudent to raise taxes on the mega rich in order to decrease economic inequality which represents an enormous chasm between the billionaire class and everyone else. A new report found that the world’s 2,153 billionaires have more wealth than 4.6 billion people, underscoring the degree of global inequality. This would also offset any decrease in the value of the dollar that large deficit spending might bring about. In The Deficit Myth by Stephanie Kelton, she points out that the Federal Reserve which creates US dollars can never run out of money since the US dollar is a sovereign currency, but there is a concern about inflation if too much money is created which doesn't have a productive purpose in the economy. Since so many are unemployed and since there is a huge infrastructure deficit, this is not in danger of happening any time soon. There is no lack of money for government programs since they don't depend on tax flows, and money created by the Federal Reserve that ends up on the Fed's balance sheet never has to be paid back.

While the Fed can create as much money as it likes to bail out the banks without Congressional approval, which it did during the 2008 banking crisis, money created for government spending, such as the $1.9 trillion COVID relief bill, must have Congressional authorization. Fortunately, there is a process known as budget reconciliation which only requires a majority vote and the Democrats have the majority in the Senate. Therefore, the COVID relief bill cannot be filibustered by Republicans which they surely would do if they were in the majority. So it's clear that Republicans only represent the interests of the rich who will contribute to their campaigns and enrich them in return as long as they vote to nullify everything that might help the average person or raise taxes on them.

Off the Top of My Head

The Republican Game Plan is No Mystery: Obstruct Democratic Attempts to Help the Poor and Middle Class

by John Lawrence, January 24, 2021

The Washington Post article said it best: Right on schedule, Republicans pretend to care about deficits again. When they are in power, they run up the deficit by giving tax breaks to the rich. When Democrats are in power, they use the filibuster if necessary to deny Democrats any success in helping the American people who need help the most. They are deficit hawks, supposedly, but only when Democrats are in power. Knowing how this game operates by now, Democrats are prepared to do whatever is necessary to thwart it. The main tool at their disposal to get the COVID relief package passed is budget reconciliation which escapes the filibuster and only requires a majority vote in the Senate, exactly what Republicans have used to get their tax cuts passed. It seems clear that what the Republican party really stands for is aiding and abetting the rich while denying financial help and opportunities to the poor.

Even conventional economists like Larry Summers advocate for more Federal spending since interest rates are low. "We note that in a world of unused capacity and very low interest rates and costs of capital, concerns about crowding out of desirable private investment that were warranted a generation ago have much less force today. We argue that debt-to-GDP ratios are a misleading metric of fiscal sustainability that do not reflect the fact that both the present value of GDP has risen and debt service costs have fallen as interest rates have fallen." His point is, since interest rates are near zero, the US debt is not going to increase much as a result of paying interest on Treasury bonds. Furthermore, pump priming to get the economy up to full capacity as quickly as possible results in more taxes being collected by the Federal government which lowers deficit spending. Also, since the Fed sets interest rates, it can keep them at zero.

Furthermore, the piece de resistance is that in the final analysis deficits don't matter. The US Federal government can never run out of money since the US dollar is a sovereign currency. It can just be created by a few keystrokes on a computer by the Federal Reserve as it was when trillions of dollars were created to bail out the big banks. It is the same process that is used when the Federal government needs money. Instead of the Fed creating the money and moving it into the accounts of the big banks at the Fed, the money is created and moved into the account of the US Treasury which also exists at the Fed. This is the process that takes place when the amount of Federal government spending exceeds the amount the Federal government takes in from taxes. Republicans know this because of the $2 trillion that was created this way due to the Trump tax cuts.

So Republicans basically are lying to the American people as they have done so many times before when they pretend that money is not available to accelerate the COVID response or to provide relief to the American people or to rebuild infrastructure or to combat climate change. They are deluding the public. Democrats need to reeducate the American people about how the economy really works. Government debt just ends up on the Fed's balance sheet the same way that the trillions to bail out the big banks ended up on the Fed's balance sheet. Since the US dollar is a sovereign currency, there is never a need to pay it off. The US can never be in a situation of dependency on China or Japan or be constrained to pay off the Treasury bonds that they own since they could be paid off tomorrow again by a few keystrokes if necessary by moving money to their accounts at the Federal Reserve. Modern Monetary Theory has unmasked the way that the US economy really works in terms of how the US currency is created or destroyed by the US central bank - the Federal Reserve. In her book The Deficit Myth, Stephanie Kelton details this process.

So are there limitations on the creation of money by the Fed. Of course, but, as long as there is unused productive capacity in human or material terms, deficit spending can benefit not only the economy in general in terms of increasing GDP, but it can benefit the actual lives of people who are suffering because of food insecurity, rent and mortgage insecurity, health care insecurity, crumbling infrastructure and a desire to save the planet as a habitable place to live for their grandchildren. As the article points out, "the greater risk now, as Federal Reserve Chair Jerome H. Powell and others have warned in recent months, is that policymakers will do too little, rather than too much, to prevent permanent damage to the country’s productive capacity."  Janet Yellen, U.S. President-elect Joe Biden’s nominee to run the Treasury Department and former Fed Chairman, has also said that the government must “act big” with its next coronavirus relief package. So do Fed Chairmen and current and former Treasury Secretaries know more than Republican hacks who are spewing deficit hawk propaganda? You bet they do. They know how the relationship between the Fed and the US Treasury actually works. And it works how Stephanie Kelton outlines in her book.

Tackling the Infrastructure and Unemployment Crises: The “American System” Solution

by Ellen Brown

Posted on December 18, 2020

 

from Web of Debt Blog

A self-funding national infrastructure bank modeled on the “American System” of Alexander Hamilton, Abraham Lincoln, and Franklin D. Roosevelt would help solve not one but two of the country’s biggest problems.

Millions of Americans have joined the ranks of the unemployed, and government relief checks and savings are running out; meanwhile, the country still needs trillions of dollars in infrastructure. Putting the unemployed to work on those infrastructure projects seems an obvious solution, especially given that the $600 or $700 stimulus checks Congress is planning on issuing will do little to address the growing crisis. Various plans for solving the infrastructure crisis involving public-private partnerships have been proposed, but they’ll invariably result in private investors reaping the profits while the public bears the costs and liabilities. We have relied for too long on private, often global, capital, while the Chinese run circles around us building infrastructure with credit simply created on the books of their government-owned banks.

Earlier publicly-owned U.S. national banks and U.S. Treasuries pulled off similar feats, using what Sen. Henry Clay, U.S. statesman from 1806 to 1852, named the “American System” – funding national production simply with “sovereign” money and credit. They included the First (1791-1811) and Second (1816-1836) Banks of the United States, President Lincoln’s federal treasury and banking system, and President Franklin Roosevelt’s Reconstruction Finance Corporation (RFC) (1932-1957). Chester Morrill, former Secretary of the Board of Governors of the Federal Reserve, wrote of the RFC:

[I]t became apparent almost immediately, to many Congressmen and Senators, that here was a device which would enable them to provide for activities that they favored for which government funds would be required, but without any apparent increase in appropriations. . . . [T]here need be no more appropriations and its activities could be enlarged indefinitely, as they were, almost to fantastic proportions. [emphasis added] 

Even the Federal Reserve with its “quantitative easing” cannot fund infrastructure without driving up federal expenditures or debt, at least without changes to the Federal Reserve Act. The Fed is not allowed to spend money directly into the economy or to lend directly to Congress. It must go through the private banking system and its “primary dealers.” The Fed can create and pay only with “reserves” credited to the reserve accounts of banks. These reserves are a completely separate system from the deposits circulating in the real producer/consumer economy; and those deposits are chiefly created by banks when they make loans. (See the Bank of England’s 2014 quarterly report here.) New liquidity gets into the real economy when banks make loans to local businesses and individuals; and in risky environments like that today, banks are not lending adequately even with massive reserves on their books. 

A publicly-owned national infrastructure bank, on the other hand, would be mandated to lend into the real economy; and if the loans were of the “self funding” sort characterizing most infrastructure projects (generating fees to pay off the loans), they would be repaid, canceling out the debt by which the money was created. That is how China built 12,000 miles of high-speed rail in a decade: credit created on the books of government-owned banks was advanced to pay for workers and materials, and the loans were repaid with profits from passenger fees. 

Unlike the QE pumped into financial markets, which creates asset bubbles in stocks and housing, this sort of public credit mechanism is not inflationary. Credit money advanced for productive purposes balances the circulating money supply with new goods and services in the real economy. Supply and demand rise together, keeping prices stable. China increased its money supply by nearly 1800% over 24 years (from 1996 to 2020) without driving up price inflation, by increasing GDP in step with the money supply.   

HR 6422, The National Infrastructure Bank Act of 2020

A promising new bill for a national infrastructure bank modeled on the RFC and the American System, H.R. 6422, was filed by Rep. Danny Davis, D-Ill., in March. The National Infrastructure Bank of 2020 (NIB) is projected to create $4 trillion or more in bank credit money to rebuild the nation’s rusting bridges, roads, and power grid; relieve traffic congestion; and provide clean air and water, new schools and affordable housing. It will do this while generating up to 25 million union jobs paying union-level wages. The bill projects a net profit to the government of $80 billion per year, which can be used to cover infrastructure needs that are not self-funding (broken pipes, aging sewers, potholes in roads, etc.). The bill also provides for substantial investment in “disadvantage communities,” those defined by persistent poverty. 

The NIB is designed to be a true depository bank, giving it the perks of those institutions for leverage and liquidity, including the ability to borrow at the Fed’s discount window without penalty at 0.25% interest (almost interest-free). According to Alphecca Muttardy, a former macroeconomist for the International Monetary Fund and chief economist on the 2020 NIB team, the NIB will create the $4 trillion it lends simply as deposits on its books, as the Bank of England attests all depository banks do. For liquidity to cover withdrawals, the NIB can either borrow from the Fed at 0.25% or issue and sell bonds. 

Modeled on its American System predecessors, the NIB will be capitalized with existing federal government debt. According to the summary on the NIB Coalition website:

The NIB would be capitalized by purchasing up to $500 billion in existing Treasury bonds held by the private sector (e.g., in pension and other savings funds), in exchange for an equivalent in shares of preferred [non-voting] stock in the NIB. The exchange would take place via a sales contract with the NIB/Federal Government that guarantees a preferred stock dividend of 2% more than private-holders currently earn on their Treasuries. The contract would form a binding obligation to provide the incremental 2%, or about $10 billion per year, from the Budget. While temporarily appearing as mandatory spending under the Budget, the $10 billion per year would ultimately be returned as a dividend paid to government, from the NIB’s earnings stream. 

Since the federal government will be paying the interest on the bonds, the NIB needs to come up with only the 2% dividend to entice investors. The proposal is to make infrastructure loans at a very modest 2%, substantially lower than the rates now available to the state and local governments that create most of the nation’s infrastructure. At a 10% capital requirement, the bonds can capitalize ten times their value in loans. The return will thus be 20% on a 2% dividend outlay from the NIB, for a net return on investment of 18% less operating costs. The U.S. Treasury will also be asked to deposit Treasury bonds with the bank as an “on-call” subscriber. 

The American System: Sovereign Money and Credit

U.S. precedents for funding internal improvements with “sovereign credit” – credit issued by the national government rather than borrowed from the private banking system – go back to the American colonists’ paper scrip, colonial Pennsylvania’s “land bank”, and the First U.S. Bank of Alexander Hamilton, the first U.S. Treasury Secretary. Hamilton proposed to achieve the constitutional ideal of “promoting the general welfare” by nurturing the country’s fledgling industries with federal subsidies for roads, canals, and other internal improvements; protective measures such as tariffs; and easy credit provided through a national bank. Production and the money to finance it would all be kept “in house,” without incurring debt to foreign financiers. The national bank would promote a single currency, making trade easier, and would issue loans in the form of “sovereign credit.” ’

Senator Henry Clay called this model the “American System” to distinguish it from the “British System” that left the market to the “invisible hand” of “free trade,” allowing big monopolies to gobble up small entrepreneurs, and foreign bankers and industrialists to exploit the country’s labor and materials. After the charter for the First US Bank expired in 1811, Congress created the Second Bank of the United States in 1816 on the American System model. 

In 1836, Pres. Andrew Jackson shut down the Second U.S. Bank due to perceived corruption, leaving the country with no national currency and precipitating a recession. “Wildcat” banks issued their own banknotes – promissory notes allegedly backed by gold. But the banks often lacked the gold necessary to redeem the notes, and the era was beset with bank runs and banking crises.

Abraham Lincoln’s economic advisor was Henry Carey, the son of Matthew Carey, a well-known printer and publisher who had been tutored by Benjamin Franklin and had tutored Henry Clay. Henry Carey proposed creating an independent national currency that was non-exportable, one that would remain at home to do the country’s own work. He advocated a currency founded on “national credit,” something he defined as “a national system based entirely on the credit of the government with the people, not liable to interference from abroad.” It would simply be a paper unit of account that tallied work performed and goods delivered. 

On that model, in 1862 Abraham Lincoln issued U.S. Notes or Greenbacks directly from the U.S. Treasury, allowing Lincoln’s government not only to avoid an exorbitant debt to British bankers and win the Civil War, but to fund major economic development, including tying the country together with the transcontinental railroad – an investment that actually turned a profit for the government.

After Lincoln was assassinated in 1865, the Greenback program was discontinued; but Lincoln’s government also passed the National Bank Act of 1863, supplemented by the National Bank Act of 1864. Originally known as the National Currency Act, its stated purpose was to stabilize the banking system by eradicating the problem of notes issued by multiple banks circulating at the same time. A single banker-issued national currency was created through chartered national banks, which could issue notes backed by the U.S. Treasury in a quantity proportional to the bank’s level of capital (cash and federal bonds) deposited with the Comptroller of the Currency.

From Roosevelt’s Reconstruction Finance Corporation (1932-57) to HR 6422

The American president dealing with an economic situation most closely resembling that today, however, was Franklin D. Roosevelt. America’s 32nd president resolved massive unemployment and infrastructure problems by greatly expanding the Reconstruction Finance Corporation (RFC) set up by his predecessor Herbert Hoover. The RFC was a remarkable publicly-owned credit machine that allowed the government to finance the New Deal and World War II without turning to Congress or the taxpayers for appropriations. The RFC was not called an infrastructure bank and was not even a bank, but it served the same basic functions. It was continually enlarged and modified by Pres. Roosevelt to meet the crisis of the times until it became America’s largest corporation and the world’s largest financial organization. Its semi-independent status let it work quickly, allowing New Deal agencies to be financed as the need arose. According to Encyclopedia.com:

[T]he RFC—by far the most influential of New Deal agencies—was an institution designed to save capitalism from the ravages of the Great Depression. Through the RFC, Roosevelt and the New Deal handed over $10 billion to tens of thousands of private businesses, keeping them afloat when they would otherwise have gone under …. 

A similar arrangement could save local economies from the ravages of the global shutdowns today.

The Banking Acts 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). The initial capital came from a stock sale to the U.S. Treasury. With those modest resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. A small part of this came from its initial capitalization. The rest was financed with bonds sold to the Treasury, some of which were then sold to the public. The RFC ended up borrowing a total of $51.3 billion from the Treasury and $3.1 billion from the public.

Thus the Treasury was the lender, not the borrower, in this arrangement. As the self-funding loans were repaid, so were the bonds that were sold to the Treasury, leaving the RFC with a net profit. The RFC was the lender for thousands of infrastructure and small business projects that revitalized the economy, and these loans produced a total net income of over $690 million on the RFC’s “normal” lending functions (omitting such things as extraordinary grants for wartime). The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more–all while generating income for the government.

HR 6422 proposes to mimic this feat. The National Infrastructure Bank of 2020 can rebuild crumbling infrastructure across America, pushing up long-term growth, not only without driving up taxes or the federal debt, but without hyperinflating the money supply or generating financial asset bubbles. The NIB has growing support across the country from labor leaders, elected officials, and grassroots organizations. It can generate real wealth in the form of upgraded infrastructure and increased employment as well as federal and local taxes and GDP, paying for itself several times over without additional outlays from the federal government. With official unemployment at nearly double what it was a year ago and an economic crisis unlike the U.S. has seen in nearly a century, the NIB can trigger the sort of “economic miracle” the country desperately needs.  

---

This article was first posted on ScheerPost. 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

Shady Don Borrows Even More Money From Deutsche Bank

by John Lawrence, September 30, 2020

After stiffing Deutsche bank on several loans, Trump strikes up a relationship with Rosemary Vrablic who becomes his personal banker, a relationship bestowed on the richest clients. Other branches of the bank had already refused to do business with Trump, but Vrablic took Trump on as her personal client and was accorded a seat of honor at Trump's inauguration ceremony. In "Dark Towers. Deutsche Bank, Donald Trump and an Epic Trail of Destruction," NY Times Finance Editor David Enrich writes: "In addition to the concerns about Trump's reputation, the bank's financial straits made it much harder to continue justifying tens of millions of dollars of loans at rock-bottom interest rates  - which is what Trump had grown accustomed to. Trump by now [2016] owed the bank about $350 million, representing half of all of his outstanding debt. Deutsche was by far his biggest creditor, and Trump was the single biggest borrower from the private-banking division. To borrow that money, Trump had provided Deutsche with his personal financial guarantees. If he failed to pay the loans back, the bank could come after his personal assets, making his life - and his ability to project the public impression of massive wealth - exceedingly difficult."

In addition to the loans to Trump Deutsche had opened a $15 million credit line to Jared Kushner, Trump's son-in-law, and his mother. Weeks before the 2016 election Deutsche also agreed to refinance a $370 million loan to the Kushner family real estate company. Deutsche had also loaned money to Don Jr. for a venture that eventually failed. Eric Trump had told a journalist, "we don't rely on American banks. We have all the funding we need out of Russia." After Trump clinched the Republican nomination and indicated that Kushner would serve as his adviser, Deutsche reviewed some of the activities that their computers had raised red flags over. "Kushner's real estate company was moving money to a number of Russian individuals. That didn't mean there was anything improper - it certainly wasn't proof of money laundering - but it was unusual."

The author writes, "One of the many critiques of Trump was his shaky record as a businessman. Exhibit A was the fact that his companies had repeatedly filed for bankruptcy. So lousy was Trump's record, critics observed, that he had been frozen out of the banking system. 'He's written a lot of books about business - but they all seem to end at Chapter 11,' Hillary Clinton sneered in a June 2016 speech in Columbus, Ohio. 'Go figure. And over the years, he intentionally ran up huge amounts of debt on his companies and then he defaulted. He bankrupted his companies - not once, not twice, but four times.'"

A reporter for the NY Times was doing an article on Trump's excommunication from Wall Street. Trump called her to dispute the premise of her story. "I can do business with the biggest banks in the world," Trump told her.Trump cited his relationship with Deutsche. "They are totally happy with me, " he said. "Why don't you call the head of Deutsche bank. Her name is Rosemary Vrablic." Actually John Cryan was the bank's CEO, but Rosemary Vrablic was Trump's personal banker who, despite Deutsche's negative view of Trump, kept issuing him loans.

Off the Top of My Head

Shady Don Debates Joe Biden Tonight

by John Lawrence, September 29, 2020

The big news is not that Shady Don paid less than you on your income taxes. Everyone knows by now that the tax code is stacked in favor of the rich. The big news is that Shady Don has a $350 billion bill coming due in about 2 years, and who he owes this money to which hasn't been dropped yet by the NY Times. But they know, believe me, they know, and it will probably come out at a strategic time just before the election. The book, "Dark Towers, Deutsche Bank, Donald Trump and an Epic Trail of Destruction," details how Deutsche Bank considered making a loan to Shady Don in 1998. "Trump at the time was a casino magnate known for his occasional showbiz hijinks and his on-and-off dealings with organized crime figures. He was also a deadbeat, having defaulted on loans to finance his Atlantic City casinos and stiffing lenders, contractors, and business partners in other projects. Quite a few banks - including Citibank, Manufacturers Hanover (a predecessor of JPMorgan), the British lender NatWest, and of course Bankers Trust - had endured hundreds of millions of losses at the hands of Trump. Established banks were wary of what was known on Wall Street as 'Donald risk.'"

Deutsche bank was involved in a lot of shady dealings including money laundering for Russian oligarchs. The book details this situation: "That good relationship extended to helping wealthy Russians launder money into the United States - a crucial service, since few American banks were willing to accept the legal risks associated with moving suspect funds into the country. Oligarchs would move money to banks in neighboring Latvia. Those Latvian banks had "corresponding" relationships with Deutsche that allowed them to transfer money directly into American accounts set up in the names of innocuous-sounding shell companies." A lot of oligarch money went into the purchasing of condos in New York City and London. Although Deutsche had a weak compliance department, the Federal Reserve had sophisticated software to track suspicious money flows. It had been watching Russian cash going to Latvia and then to the US where it disappeared into the luxury real estate market. Whether or not Trump participated in these money laundering schemes is unknown at this point. Executives at Deutsche were expecting a large penalty but the Fed and the New York banking regulator let them off with a warning and a slap on the wrist.

Deutsche helped Trump find people to buy condos in his various properties. "... Deutsche steered very rich Russians into the Trump ventures, according to people who were involved in the deals - just a couple of years after American regulators had punished the bank for whisking Russian money into the U.S. financial system via Latvia. ... The [Deutsche] bankers also knew how filthy the New York real estate industry could be. They talked about Trump's well-documented ties to the organized crime world, and the possibility that Trump's real estate projects were Laundromats for illicit funds from countries like Russia, where oligarchs were trying to et money out of the country."

So Trump was defaulting on loans with one division of Deutsche bank while another division was authorizing loans. Deutsche compliance was seemingly non-existent. Many of these loans didn't affect Trump personally since they were taken out by LLCs. However, the latest $350 million loan coming due in 2 years was secured with Trump's personal assets. This is the loan the NY Times article said they didn't know who it was due to. The book "Dark Towers" makes it clear that the loan was made by Deutsche bank, the only bank that would do business with Trump after he had stiffed so many others including Deutsche bank itself.

The Neoliberal Looting of America

from the New York Times:

The private equity industry, which has led to more than 1.3 million job losses over the last decade, reveals the truth about free markets.

By Mehrsa Baradaran

Ms. Baradaran is the author of “The Color of Money: Black Banks and the Racial Wealth Gap.”

July 2, 2020

George Etheredge for The New York Times

“It’s hard to separate what’s good for the United States and what’s good for Bank of America,” said its former chief executive, Ken Lewis, in 2009. That was hardly true at the time, but the current crisis has revealed that the health of the finance industry and stock market is completely disconnected from the actual financial health of the American people. As inequality, unemployment and evictions climb, the Dow Jones surges right alongside them — one line compounding suffering, the other compounding returns for investors.

One reason is that an ideological coup quietly transformed our society over the last 50 years, raising the fortunes of the financial economy — and its agents like private equity firms — at the expense of the real economy experienced by most Americans.

The roots of this intellectual takeover can be traced to a backlash against socialism in Cold War Europe. The Austrian School economist Friedrich A. Hayek was perhaps the most influential leader of that movement, denouncing governments that chased “the mirage of social justice.” Only free markets can allocate resources fairly and reward individuals based on what they deserve, reasoned Hayek. The ideology — known as neoliberalism — was especially potent because it disguised itself as a neutral statement of economics rather than just another theory. Only unfettered markets, the theory argued, could ensure justice and freedom because only the profit motive could dispassionately pick winners and losers based on their contribution to the economy.

Neoliberalism leapt from economics departments into American politics in the 1960s, where it fused with conservative anti-communist ideas and then quickly spread throughout universities, law schools, legislatures and courts. By the 1980s, neoliberalism was triumphant in policy, leading to tax cuts, deregulation and privatization of public functions including schools, pensions and infrastructure. The governing logic held that corporations could do just about everything better than the government could. The result, as President Ronald Reagan said, was to unleash “the magic of the marketplace.”

The magic of the market did in fact turn everything into gold — for wealthy investors. Neoliberalism led to deregulation in every sector, a winner-take-all, debt-fueled market and a growing cultural acceptance of purely profit-driven corporate managers. These conditions were a perfect breeding ground for the private equity industry, then known as “leveraged buyout” firms. Such firms took advantage of the new market for high-yield debt (better known as junk bonds) to buy and break up American conglomerates, capturing unprecedented wealth in fewer hands. The private equity industry embodies the neoliberal movement’s values, while exposing its inherent logic.

Private equity firms use money provided by institutional investors like pension funds and university endowments to take over and restructure companies or industries. Private equity touches practically every sector, from housing to health care to retail. In pursuit of maximum returns, such firms have squeezed businesses for every last drop of profit, cutting jobs, pensions and salaries where possible. The debt-laden buyouts privatize gains when they work, and socialize losses when they don’t, driving previously healthy firms to bankruptcy and leaving many others permanently hobbled. The list of private equity’s victims has grown even longer in the past year, adding J. Crew, Toys ‘R’ Us, Hertz and more.

In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation. Beyond the companies directly controlled by private equity, the threat of being the next takeover target has most likely led other companies to pre-emptively cut wages and jobs to avoid being the weakest prey. Amid the outbreak of street protests in June, a satirical headline in The Onion put it best: “Protesters Criticized for Looting Businesses Without Forming Private Equity Firm First.” Yet the private equity takeover is not technically looting because it has been made perfectly legal, and even encouraged, by policymakers.

According to industry experts, 2019 was one of the most successful years for private equity to date, with $919 billion in funds raised. The private equity executives themselves can also garner tremendous riches. Their standard fee structure involves collecting around 2 percent of the investor money they manage annually, and then 20 percent of any profits above an agreed-upon level. This lucrative arrangement also lets them tap into the very favorable “carried interest” tax loophole, allowing them to pay much lower capital gains tax rates on their earnings, rather than normal income taxes like most people.

An examination of the recent history of private equity disproves the neoliberal myth that profit incentives produce the best outcomes for society. The passage of time has debunked another such myth: that deregulating industries would generate more vibrant competition and benefit consumers. Unregulated market competition actually led to market consolidation instead. Would-be monopolies squeezed competitors, accrued political power, lobbied for even more deregulation and ultimately drove out any rivals, leading inexorably to entrenched political power. Instead of a thriving market of small-firm competition, free market ideology led to a few big winners dominating the rest.

 

 

 

 

 

 

 

 

'Big Banks Couldn't Be Happier': Stocks Surge as Trump Regulators Gut Restrictions on Risky Wall St Gambling

Published on Friday, June 26, 2020

by Common Dreams

The rollback, noted the Wall Street Journal, hands "Wall Street one of its biggest wins of the Trump administration."

by Jake Johnson, staff writer

 

0 Comments

A view of the Wall Street street sign with the New York Stock Exchange during the coronavirus pandemic on May 25, 2020 in New York City. (Photo: Noam Galai/Getty Images)

Bank stocks jumped and lobbyists rejoiced Thursday after U.S. regulators voted to gut the so-called Volcker Rule, a set of regulations imposed in the wake of the 2008 Wall Street collapse limiting the ability of financial institutions to engage in high-risk behavior that threatens the systemic health of the economy.

"This is no longer the Volcker Rule. In the hands of revolving door regulators, it turns banks into Trump casinos. Will the inevitable Trump casino bankruptcy be far away?"
—Bartlett Naylor, Public Citizen

"Instead of protecting our financial system in the middle of an unprecedented economic crisis, Trump-appointed regulators are plowing ahead with their dangerous deregulatory agenda," tweeted Sen. Elizabeth Warren (D-Mass.). "The big banks couldn't be happier about it."

CNBC reported that the shares of JPMorgan Chase, Goldman Sachs, Wells Fargo, and Morgan Stanley "were all trading more than 2% higher" after the changes to the Volcker Rule were announced by five regulatory agencies, including the Federal Reserve, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation.

The changes, set to take effect on Oct. 1, will make it easier for big banks to devote more of their resources to investments in venture capital funds and other vehicles—the kind risky of speculation that sent the entire U.S. financial system into a tailspin in 2008.

Bank stocks jump as regulators ease Volcker Rule, JPMorgan Chase rises 2% https://t.co/3AdMsCj4TY pic.twitter.com/ooI5MAiXMH

— CNBC Now (@CNBCnow) June 25, 2020

Regulators on Thursday also eliminated a requirement that banks set aside a certain amount of financial cushion to protect against trading losses. The rollback could free up tens of billions of dollars for Wall Street banks.

The Wall Street Journal reported that the combined deregulatory moves hand "Wall Street one of its biggest wins of the Trump administration."

Sen. Jeff Merkley (D-Ore.), one of the authors of the original Volcker Rule regulations, warned in a statement Thursday that the changes further destabilize the U.S. financial system at a time when the economy is already reeling from the coronavirus crisis.

"Deregulation of the banks is exactly the wrong way to boost our economy in this moment," said Merkley. "The last thing we need is to follow a public health crisis that has cratered our economy with another Wall Street-driven financial meltdown."

"It was only a decade ago when millions of Americans paid the price for Wall Street gambling in lost jobs, homes, and life savings," Merkley continued. "Reopening the Wall Street casino is the wrong path forward, one that puts all Americans' financial stability at greater risk."

Bartlett Naylor, financial policy advocate at consumer group Public Citizen, echoed Merkley's warning in a statement Thursday.

"This is no longer the Volcker Rule," said Naylor. "In the hands of revolving door regulators, it turns banks into Trump casinos. Will the inevitable Trump casino bankruptcy be far away?"

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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

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 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.

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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.

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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.

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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.

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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.

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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.

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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.

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  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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.