On November 27, Bloomberg News
reported the results of its successful case to
force the Federal Reserve to reveal the lending
details of its 2008-09 bank bailout. [1] Bloomberg
reported that by March 2009, the Fed had committed
US$7.77 trillion in below-market loans and
guarantees to rescuing the financial system; and
that these nearly interest-free loans came without
strings attached.
The Fed insisted that
the loans were repaid and there have been no
losses, but the Bloomberg report said the banks
reaped a $13 billion windfall in profits; and
"details suggest taxpayers paid a price beyond
dollars as the secret funding helped preserve a
broken status quo and enabled the biggest banks to
grow even bigger."
The revelations
provoked shock and outrage among commentators. But
in a letter to the leaders of the House and Senate
Committees focused on the financial services
industry, Fed chairman Ben Bernanke responded on
December 6 that the
figures were greatly
exaggerated. He said the loans were being
double-counted: short-term loans rolled over from
day to day were counted as separate cumulative
loans rather than as a single extended loan.
Bloomberg was quick to rebut, denying any
exaggerated claims. [2] But either way, the banks
were clearly getting perks not available to the
rest of us. As former congressman Alan Grayson
observed in a December 5 editorial:
The main, if not the sole,
qualification for getting help from the Fed was
to have lost huge amounts of money. The Fed
bailouts rewarded failure, and penalized
success. ...
During all the time that
the Fed was stuffing money into the pockets of
failed banks, many Americans couldn't borrow a
dime for a home, a car, or anything else. If the
Fed had extended $26 trillion in credit to the
American people instead of Wall Street, would
there be 24 million Americans today who can't
find a full-time job? [3]
All in
the name of liquidity It was all explained,
said Grayson, with "the Fed's all-time favorite
rationale for everything it does, 'increasing
liquidity'." In 2008, bank liquidity dried up
after Lehman Brothers collapsed, and the banks
could not get the cheap, ready credit on which
their lending scheme depends. The Fed then stepped
in as "lender of last resort", doing what it had
to do to keep the banking scheme going.
Left unexplained is why the banks' need
for "liquidity" justifies such extraordinary
measures. Why do banks need cheap and ready access
to funds? Aren't they the lenders rather than the
borrowers of funds? Don't they simply take in
deposits and lend them out?
The answer is
no. Today when banks make loans, they extend
credit first, then fund the loans by
borrowing from the cheapest available source. [4]
If deposits are not available, they borrow from
another bank, the money market, or the Federal
Reserve.
Rather than loans being created
from deposits, loans actually create
deposits. They create deposits when checks are
drawn on the borrower's account and deposited in
another bank. The originating bank can then borrow
these funds (or others created by the same process
at another bank) at the Fed funds rate - currently
a very low 0.25%. In effect, a bank can create
money in the form of "bank credit", lend it to a
customer at high interest, and borrow it back at
very low interest, pocketing the difference as its
profit.
If all this looks like sleight of
hand, it is. The process has been compared to
"check kiting," defined in Barron's Business
Dictionary as:
[An] illegal scheme that establishes
a false line of credit by the exchange of
worthless checks between two banks. For
instance, a check kiter might have empty
checking accounts at two different banks, A and
B. The kiter writes a check for $50,000 on the
bank A account and deposits it in the bank B
account. If the kiter has good credit at bank B,
he will be able to draw funds against the
deposited check before it clears, that is, is
forwarded to bank A for payment and paid by bank
A. Since the clearing process usually takes a
few days, the kiter can use the $50,000 for a
few days and then deposit it in the bank A
account before the $50,000 check drawn on that
account clears.
Setting things
right As suspicious as all this appears,
the economy actually needs an expandable credit
system, and an expandable credit system needs a
lender of last resort. What is wrong with the
current scheme is that it discriminates against
Main Street in favor of Wall Street. Banks can
borrow very cheaply, while individuals,
corporations and governments pay "whatever the
market will bear". The banker middlemen take their
cut in a scheme in which money is actually
manufactured in the process of lending it. The
profits are siphoned off to the 1% at the expense
of the 99%.
To fix the system, the profits
need to be returned to the 99%. How that could be
done was suggested by radio host and political
commentator Thom Hartmann in a recent editorial:
Have the central bank owned by the
US government and run by the Treasury
Department, so all the profits ... go directly
into the Treasury and you and I pay less in
taxes... [6]
For a model on the local
level, he pointed to the Bank of North Dakota:
The good people of North Dakota ...
established something very much like this - the
Bank of North Dakota - and it's kept the state
in the black, and kept its farmers,
manufacturers and students protected from the
predations of New York banksters for nearly a
century. It's time for every state to charter
their own state bank, just like North Dakota
did, and for the Treasury Department to either
buy the Fed from the for-profit banks that own
it, or simply nationalize it.
We have
been distracted here and in Europe by a sudden
panic over our "sovereign debt" crises, when the
real crisis is that our debt is not
sovereign. We are indentured to a Wall Street
money machine that creates our money and lends it
back to us at interest, money our sovereign
government could be creating itself, with full
democratic oversight and accountability to the
people.
We have forgotten our roots, when
the American colonists thrived on a system of
money created by the people themselves, debt-free
and interest-free. The continued dominance of the
Wall Street money machine depends on that
collective amnesia. The fact that this memory is
surfacing again may be the machine's greatest
threat - and our greatest hope as a nation.
Ellen Brownis an attorney and president of the Public Banking InstituteIn Web of Debt, her latest of 11 books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites areWebofDebt.com and EllenBrown.com.
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