I am left with a number of thoughts after reading this investigative report about the relationship of the Fed Reserve to the field of professional economists (http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html).
-- I was surprised at how few experts in the field of monetary theory there are (some 500 in total). I knew people (like myself) who are not only interested in economics, but in the monetary aspects of economics, are rare, but it was surprising to see how few experts exist.
-- Classic case of the problem of “institutional capture” of academy by big money.
For one, the “establishment institution” dominates employment in the field. Thus, everyone in the field has the natural incentive to conform their work to the interests of the establishment. Even aside from direct hiring, affiliation with and approval by the establishment confers status and opportunity within the field. These factors alone probably take care of 95% of the problem of conformity.
For two, the establishment captures all the gate-keeper positions in the field, thereby controlling hiring and advancement. When the majority of department chairs/journal reviewers are employed by the establishment, is there any question whose interests will be advanced throughout the publishing and hiring process?
-- The end result is a classic example of the problems of intellectual conformity. No one with a heterodox opinion is retained, and so, there is no check on the spread of false doctrine. This allows the establishment to be blindsided by unexpected events (such as the market crash of 2008), and leaves it unable to reform or adjust to new circumstances.
-- The Fed itself is not an “end point” or autonomous institution. The Fed itself suffers from institutional capture by Big Banking. Fed chairmen and governing board members are themselves placed in those positions due to their subservience to global banking interests. Thus, pointing out that establishment economists are beholden to the Fed, is the same as pointing out that they are beholden to the globalist banks.
--True diversity of economic theory has to be sought in the time before the Fed captured the profession, circa the 1970s. By all accounts, prior to that time, there was true diversity of opinion in the field, before everyone became “establishment men” beholden to the power of the Fed over their professional lives.
Showing posts with label Fed Reserve. Show all posts
Showing posts with label Fed Reserve. Show all posts
Wednesday, May 9, 2012
Friday, January 21, 2011
End the Fed - Save the Economy - Support Kucinich HR6550
Kucinich's End the Fed bill is causing the parasitic banking class and its media apologists to erupt in fits, because, plainly stated, the bill would drive a stake through their blood-sucking hearts. The bill is based on a cogent diagnosis of our current economic problems, and offers a brilliant solution that would positively revolutionize our national finances and government, reviving our national economy and improving our lives. As an opponent of elite financial power and an advocate for citizen rights and quality of life, I strongly support this bill.
The bill's two most important effects, that strike most directly at the heart of the financial elite's unjust powers:
a) The end of fractional reserve banking
b) The end of the national debt
The bill's two most important effects, that would result in a positive return for the average citizen:
c) The funding of full employment
d) The funding of infrastructure modernization
A) End of Fractional Reserve Banking - the source of financial elite power
Imagine your family is in financial trouble, and you have $100 cash in your wallet. So, you write a check for $500 to your mom, a check for $300 to your brother, and a check for $200 to your sister, and on top of that, you get to keep the $100 untouched in your wallet.
Of course, this would be an illegal fraud, UNLESS you are a bank, in which case it is called "fractional reserve lending with a 10% reserve ratio". In other words, under the 10% reserve ratio, you get to create $1000 in loans based on your $100 of cash. With a lower "reserve ratio", you could create more loans on top of your cash reserve.
That would be a pretty cool power, wouldn't it? The ability to create money at will, and charge interest on it, without actually loaning out your own cash. That's right! You even get to charge interest on the money you lend out, even though you never had the money to begin with! This is how banks create money, and thereby, create financial bubbles/bust and inflation/deflation cycles.
Kucinch's bill would end this ridiculous, illegal, and unjust abuse, which is the heart and soul of the power and influence of the financial establishment.
B) The end of the national debt - a yoke of perpetual slavery laid on the neck of the taxpaying public
Think about it: the ability to create a money supply is a sovereign power, meaning, the government does it. Since the government creates the supply of money, why would it need to borrow it? If you could literally create money, you would never need to borrow it, right? Why would you borrow money from someone else, and pay them back with interest, when you could create the money for yourself? It doesn't even make sense! The idea of a national debt is a repudiation of governmental sovereignty.
It is like a tribute payment, a tithe to the banking establishment. It's a line item in every budget that goes directly towards banking profits. It is nothing less than a government subsidy for the banking establishment.
Kucinich's bill would end this outrageous, immoral, and illogical exploitation of the tax-paying public.
C) The funding of full employment - bailing out the worker instead of the banks
The whole reason behind TARP and the other bank bailouts of the last 2 years was to avoid an economic collapse. But the collapse happened anyway, because the banks never "loaned" the money back to the public. Despite receiving interest free money from the government, credit cards continue to charge over 20%, small business loans have dried up, capital financing is limited, loans for the housing market have been heavily restricted, and thus, the economy has contracted leading to perpetually high unemployment.
Instead of bailing out banks, and hoping they loan the money back to the public to get the economy going, why not skip the middle man, and directly pay the public? This is called the funding of full employment. Lots of people need jobs, and there is lots of work to be done, so why not just pay those people directly to do the work?
Some libertarians object to the idea of expanding governmental scope like that, but let's think about the alternatives: government-administered overhead, or banking-administered overhead. It is one or the other, there is no escaping the "inefficiencies" or the "external controls" or "restrictions on freedoms". The way I see it, we either bow to the power of the financial elite-controlled banking establishment, or we use government to reign in their power and be a vehicle to advance the general good.
The idea that there is a "free market" is a total joke, a complete fiction, really. The parasite banking class has completely perverted our rules and laws to their own benefit. Kucinich's bill would seek to fight back and regain our real freedom from the financial oligarchy that currently rules.
D) The funding of infrastructure improvement - modernizing America
Why is China setting records for next-gen bullet trains and laying thousands of miles of new highways, while we are slashing budgets and can't even afford to repair our broken down streets, bridges, water lines, electrical grid, and so on? The answer is keyed to the money supply: we are suffocating from lack of money. We have millions of people able and willing to work, and millions of things which need to be done. A government jobs program is just the trick to meet those needs.
The alternative is what, borrow money to meet spending needs, under increasingly high interest rates? Think about it: either the government creates the money, or private banks create the money through fractional reserve banking!
The fear of hyperinflation is misguided. Either the money gets created to get the work done, or people continue to stay unemployed, and our infrastructure continues to crumble. The only question is: who creates the money. No one is going to print out worthless paper money under Kucinich's bill.
Money would be created only to finance work, which would "spend money into existence". This would lead to a stable money supply, with slight growth as a built-in feature. This is exactly what the Fed Reserve claims to attempt, and completely failed to deliver!
Which is better for a stable and healthy economy: debt-based money created by private banks to their personal enrichment, or a permanent no-interest no-debt money supply maintained by government according to popular will?
Creating the money through government program at least offers the possibility of pubic input, while avoiding the exploitation and injustice of usury. Allowing the parasitic banking elite to continue their control of our money supply simply guarantees more misery and exploitation, as the rich would continue to get richer.
Study the full text of Kucinch's proposal here, and please, help spread the word: http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
The bill's two most important effects, that strike most directly at the heart of the financial elite's unjust powers:
a) The end of fractional reserve banking
b) The end of the national debt
The bill's two most important effects, that would result in a positive return for the average citizen:
c) The funding of full employment
d) The funding of infrastructure modernization
A) End of Fractional Reserve Banking - the source of financial elite power
Imagine your family is in financial trouble, and you have $100 cash in your wallet. So, you write a check for $500 to your mom, a check for $300 to your brother, and a check for $200 to your sister, and on top of that, you get to keep the $100 untouched in your wallet.
Of course, this would be an illegal fraud, UNLESS you are a bank, in which case it is called "fractional reserve lending with a 10% reserve ratio". In other words, under the 10% reserve ratio, you get to create $1000 in loans based on your $100 of cash. With a lower "reserve ratio", you could create more loans on top of your cash reserve.
That would be a pretty cool power, wouldn't it? The ability to create money at will, and charge interest on it, without actually loaning out your own cash. That's right! You even get to charge interest on the money you lend out, even though you never had the money to begin with! This is how banks create money, and thereby, create financial bubbles/bust and inflation/deflation cycles.
Kucinch's bill would end this ridiculous, illegal, and unjust abuse, which is the heart and soul of the power and influence of the financial establishment.
B) The end of the national debt - a yoke of perpetual slavery laid on the neck of the taxpaying public
Think about it: the ability to create a money supply is a sovereign power, meaning, the government does it. Since the government creates the supply of money, why would it need to borrow it? If you could literally create money, you would never need to borrow it, right? Why would you borrow money from someone else, and pay them back with interest, when you could create the money for yourself? It doesn't even make sense! The idea of a national debt is a repudiation of governmental sovereignty.
It is like a tribute payment, a tithe to the banking establishment. It's a line item in every budget that goes directly towards banking profits. It is nothing less than a government subsidy for the banking establishment.
Kucinich's bill would end this outrageous, immoral, and illogical exploitation of the tax-paying public.
C) The funding of full employment - bailing out the worker instead of the banks
The whole reason behind TARP and the other bank bailouts of the last 2 years was to avoid an economic collapse. But the collapse happened anyway, because the banks never "loaned" the money back to the public. Despite receiving interest free money from the government, credit cards continue to charge over 20%, small business loans have dried up, capital financing is limited, loans for the housing market have been heavily restricted, and thus, the economy has contracted leading to perpetually high unemployment.
Instead of bailing out banks, and hoping they loan the money back to the public to get the economy going, why not skip the middle man, and directly pay the public? This is called the funding of full employment. Lots of people need jobs, and there is lots of work to be done, so why not just pay those people directly to do the work?
Some libertarians object to the idea of expanding governmental scope like that, but let's think about the alternatives: government-administered overhead, or banking-administered overhead. It is one or the other, there is no escaping the "inefficiencies" or the "external controls" or "restrictions on freedoms". The way I see it, we either bow to the power of the financial elite-controlled banking establishment, or we use government to reign in their power and be a vehicle to advance the general good.
The idea that there is a "free market" is a total joke, a complete fiction, really. The parasite banking class has completely perverted our rules and laws to their own benefit. Kucinich's bill would seek to fight back and regain our real freedom from the financial oligarchy that currently rules.
D) The funding of infrastructure improvement - modernizing America
Why is China setting records for next-gen bullet trains and laying thousands of miles of new highways, while we are slashing budgets and can't even afford to repair our broken down streets, bridges, water lines, electrical grid, and so on? The answer is keyed to the money supply: we are suffocating from lack of money. We have millions of people able and willing to work, and millions of things which need to be done. A government jobs program is just the trick to meet those needs.
The alternative is what, borrow money to meet spending needs, under increasingly high interest rates? Think about it: either the government creates the money, or private banks create the money through fractional reserve banking!
The fear of hyperinflation is misguided. Either the money gets created to get the work done, or people continue to stay unemployed, and our infrastructure continues to crumble. The only question is: who creates the money. No one is going to print out worthless paper money under Kucinich's bill.
Money would be created only to finance work, which would "spend money into existence". This would lead to a stable money supply, with slight growth as a built-in feature. This is exactly what the Fed Reserve claims to attempt, and completely failed to deliver!
Which is better for a stable and healthy economy: debt-based money created by private banks to their personal enrichment, or a permanent no-interest no-debt money supply maintained by government according to popular will?
Creating the money through government program at least offers the possibility of pubic input, while avoiding the exploitation and injustice of usury. Allowing the parasitic banking elite to continue their control of our money supply simply guarantees more misery and exploitation, as the rich would continue to get richer.
Study the full text of Kucinch's proposal here, and please, help spread the word: http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
Friday, November 19, 2010
China demonstrating use of key method in modern Jubilee - raising reserve requirements
The modern Jubilee method is for the government to pay off all debts using electronic checks. Inflation due to oversupply of money would be prevented by raising banking reserve requirements. Thus, all debts would be cancelled, without violating any contracts or causing inflation.
This week, China is demonstrating the technique of raising the reserve requirements to stem inflation. Most Americans are not familiar with this technique, because the Fed uses open market operations and interest rate adjustments to attempt to manipuate the money supply. These Fed methods are indirect methods, and used mainly because they involve huge financial transactions which enrich the Federal Reserve member banks who conduct those operations.
The Chinese method is direct, and doesn't enrich anyone. The Chinese government is not controlled by the bankers, but rather, the government controls the bankers, so they use the superior method for controlling inflation, not the superior method for enriching the bankers.
http://news.yahoo.com/s/ap/us_wall_street
This week, China is demonstrating the technique of raising the reserve requirements to stem inflation. Most Americans are not familiar with this technique, because the Fed uses open market operations and interest rate adjustments to attempt to manipuate the money supply. These Fed methods are indirect methods, and used mainly because they involve huge financial transactions which enrich the Federal Reserve member banks who conduct those operations.
The Chinese method is direct, and doesn't enrich anyone. The Chinese government is not controlled by the bankers, but rather, the government controls the bankers, so they use the superior method for controlling inflation, not the superior method for enriching the bankers.
http://news.yahoo.com/s/ap/us_wall_street
Tuesday, August 10, 2010
Does the Fed Create Money? A Clarification
Excellent comment by Ralph Sampson, over on Ellen Brown's blog, explaining exactly what is meant by the Fed creating money.
"From my perspective Ellen explains the monetary system well but she periodically injects points of confusion. Here is an example: she says the Fed prints federal resereve notes and lends them to the banks at interest and the banks in turn lend them to us. This is sort of true but not really.
The Fed creates some paper currencey (Federal Resereve Notes) but that is a small part of the money created by the banking system. (Even that is not true. The Fed orders the notes from the mint, more specifically the Burea of Printing and Ingraving, who creates them and charges the Fed for the service.)
The main concept is that the Fed authorizes, and sometimes creates, reserves that the member banks then use as an insurance pool to back the bookentry loans (making money out of thin air) they in turn make to legal entities which are made up of individuals and non flesh-and blood-legal entities.
To just casually say the Fed prints federal reserve notes which it lends is the principal paradigm of the monetary system is, again, just not true and confuses the readers trying to understand that system.
Most of the circulating money is credit, not currency and coin, where credit is the term for purchasing power in the form of entries in a financial journal that, these days, takes the form of computer bits in a digital memory somewhere."
"From my perspective Ellen explains the monetary system well but she periodically injects points of confusion. Here is an example: she says the Fed prints federal resereve notes and lends them to the banks at interest and the banks in turn lend them to us. This is sort of true but not really.
The Fed creates some paper currencey (Federal Resereve Notes) but that is a small part of the money created by the banking system. (Even that is not true. The Fed orders the notes from the mint, more specifically the Burea of Printing and Ingraving, who creates them and charges the Fed for the service.)
The main concept is that the Fed authorizes, and sometimes creates, reserves that the member banks then use as an insurance pool to back the bookentry loans (making money out of thin air) they in turn make to legal entities which are made up of individuals and non flesh-and blood-legal entities.
To just casually say the Fed prints federal reserve notes which it lends is the principal paradigm of the monetary system is, again, just not true and confuses the readers trying to understand that system.
Most of the circulating money is credit, not currency and coin, where credit is the term for purchasing power in the form of entries in a financial journal that, these days, takes the form of computer bits in a digital memory somewhere."
Friday, May 28, 2010
Damon Vrabel on Nationalizing the Federal Reserve
Some excellent analysis from Mr. Vrabel, who perfectly understands what is going on, and what needs to be done. It was refreshing to read his erudite perspective on the need for Constitutional control of the Banking Branch just a day after I published my own views on the subject. From his latest article (here http://canadafreepress.com/index.php/article/23683):
"The fact is we are in the mist of a global chess game being played above the heads of national governments in which debt and leverage are used to restructure the world under a new global money and banking system. I suggest Bernanke’s sole purpose is to hide the real role the Federal Reserve has played in this game while also helping to keep Congress from asserting its power.
The media likes to claim that voicing opposition to the Fed is lower class populism. But of course the media doesn’t think. It just promotes left or right groupthink for the few corporate powers that own the media. They don’t want you thinking about the question of a central bank. If they did, we might better understand the pros and cons.
The first con of the Fed’s form of central banking—it puts currency control in private hands. Rather than the Fed having power over the banks, its structure actually gives the primary dealer banks (mega firms like JP Morgan Chase, Goldman Sachs, and many foreign banks) significant power to tell it what to do. Entrenched powers behind these firms working together in cartel groups like the New York Fed and CFR have far more leverage than the president, i.e. an individual with no financial experience who rotates into office for a short period of time completely surrounded by bankers and their allies. The entire purpose of the Constitution and having a republic, despite its flaws, was to put power in the hands of the public vs. a concentrated private oligarchy. But the Fed system creates such an oligarchy, as many Americans now see since the crash of 2008.
Oligarchic monetary systems tend toward a 2-tiered society, money pushing rulers vs. money using servants who scramble to pay the rulers back plus interest. The ruling financial class eventually takes over the productive economy and then parasitically destroys the host upon which it lives as gambling and speculation replace savings and production as the engine of growth. Such is the power of a monetary system based on nothing but debt.
A debt-based monetary system enshrines usury, i.e. living off the backs of others by doing nothing but subjugating a population to systemic interest-bearing debt. So the foundation of our monetary system under the Federal Reserve is built upon immorality.
An oligarchic monetary system forces the great mass of the population into servitude. It effectively creates a predator/prey structure in society. In a system based purely on debt, the banking powers are able to super-inflate the system to drive up asset prices, and then deflate the system sucking value and assets up the pyramid to consolidate power. We saw this over the last 10 years. This is the biggest and brightest example of why Jefferson said “banking institutions are more dangerous than standing armies.” It’s also the best example of why the Constitution demands that government regulate the currency.
So how can we get the one pro of a central monetary authority regulating the value of the currency without any of the cons above? Do precisely what Ben says we shouldn’t do—reestablish the republic by putting currency regulation in the hands of public officials as the Constitutions says. If a country doesn’t have a sovereign currency, it doesn’t have a sovereign government. We are learning that painful lesson now as we see Greece being attacked and taken over by financial institutions. The same thing has happened to many countries in the past and it will happen in the future if governments don’t take charge. At that point everyone will know the truth—governments are held hostage by private financial interests. But more and more Americans are realizing the truth now and pushing for change.
However, the change is not as simple as ending the Fed. Without a transition plan, that would cause a disaster since it is the basis for the money supply. The key is to nationalize the Fed, and possibly its primary dealers during the transition phase, to keep them from holding us hostage with the threat of collapse. Then with honest public officials in Treasury and other agencies that don’t represent Goldman Sachs and the rest of the financial cartel—people like William Black, Brooksley Born, Janet Tavakoli, Michael Hudson, Eliot Spitzer, Harry Markopolos—it will be possible to restructure the monetary system. Other components of the solution involve the US Treasury printing sovereign US notes, state banking systems like North Dakota to restore state power, etc. (see details at Freedom’s Vision)
"The fact is we are in the mist of a global chess game being played above the heads of national governments in which debt and leverage are used to restructure the world under a new global money and banking system. I suggest Bernanke’s sole purpose is to hide the real role the Federal Reserve has played in this game while also helping to keep Congress from asserting its power.
The media likes to claim that voicing opposition to the Fed is lower class populism. But of course the media doesn’t think. It just promotes left or right groupthink for the few corporate powers that own the media. They don’t want you thinking about the question of a central bank. If they did, we might better understand the pros and cons.
The first con of the Fed’s form of central banking—it puts currency control in private hands. Rather than the Fed having power over the banks, its structure actually gives the primary dealer banks (mega firms like JP Morgan Chase, Goldman Sachs, and many foreign banks) significant power to tell it what to do. Entrenched powers behind these firms working together in cartel groups like the New York Fed and CFR have far more leverage than the president, i.e. an individual with no financial experience who rotates into office for a short period of time completely surrounded by bankers and their allies. The entire purpose of the Constitution and having a republic, despite its flaws, was to put power in the hands of the public vs. a concentrated private oligarchy. But the Fed system creates such an oligarchy, as many Americans now see since the crash of 2008.
Oligarchic monetary systems tend toward a 2-tiered society, money pushing rulers vs. money using servants who scramble to pay the rulers back plus interest. The ruling financial class eventually takes over the productive economy and then parasitically destroys the host upon which it lives as gambling and speculation replace savings and production as the engine of growth. Such is the power of a monetary system based on nothing but debt.
A debt-based monetary system enshrines usury, i.e. living off the backs of others by doing nothing but subjugating a population to systemic interest-bearing debt. So the foundation of our monetary system under the Federal Reserve is built upon immorality.
An oligarchic monetary system forces the great mass of the population into servitude. It effectively creates a predator/prey structure in society. In a system based purely on debt, the banking powers are able to super-inflate the system to drive up asset prices, and then deflate the system sucking value and assets up the pyramid to consolidate power. We saw this over the last 10 years. This is the biggest and brightest example of why Jefferson said “banking institutions are more dangerous than standing armies.” It’s also the best example of why the Constitution demands that government regulate the currency.
So how can we get the one pro of a central monetary authority regulating the value of the currency without any of the cons above? Do precisely what Ben says we shouldn’t do—reestablish the republic by putting currency regulation in the hands of public officials as the Constitutions says. If a country doesn’t have a sovereign currency, it doesn’t have a sovereign government. We are learning that painful lesson now as we see Greece being attacked and taken over by financial institutions. The same thing has happened to many countries in the past and it will happen in the future if governments don’t take charge. At that point everyone will know the truth—governments are held hostage by private financial interests. But more and more Americans are realizing the truth now and pushing for change.
However, the change is not as simple as ending the Fed. Without a transition plan, that would cause a disaster since it is the basis for the money supply. The key is to nationalize the Fed, and possibly its primary dealers during the transition phase, to keep them from holding us hostage with the threat of collapse. Then with honest public officials in Treasury and other agencies that don’t represent Goldman Sachs and the rest of the financial cartel—people like William Black, Brooksley Born, Janet Tavakoli, Michael Hudson, Eliot Spitzer, Harry Markopolos—it will be possible to restructure the monetary system. Other components of the solution involve the US Treasury printing sovereign US notes, state banking systems like North Dakota to restore state power, etc. (see details at Freedom’s Vision)
Friday, August 7, 2009
Storm Clouds Gather as Fed Secretly Monetizes Debt
Scary stuff follows. Keep in mind, the only thing propping up national GDP, and the financial system as we know it, is the Fed monetizing the debt.
http://market-ticker.org/archives/1304-BLATANT-Monetization-Uncovered.html
"...
Well now we know what happened: The Fed pretty clearly pre-arranged, either explicitly or by "suggestion", that the Primary Dealers take up the auction with the promise that The Fed would immediately monetize half what the Primary Dealer's took!
Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!
If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.
Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.
There is no other explanation for what just happened.
...
When it sinks in to the market's consciousness - we had two failed Treasury Auctions last week, both 5 and 7 year, yet we intend to try to borrow ANOTHER $400 billion next quarter and nearly $100 billion this coming week - the consequences could be extremely severe."
http://market-ticker.org/archives/1304-BLATANT-Monetization-Uncovered.html
"...
Well now we know what happened: The Fed pretty clearly pre-arranged, either explicitly or by "suggestion", that the Primary Dealers take up the auction with the promise that The Fed would immediately monetize half what the Primary Dealer's took!
Folks, this is beyond bad - it is pernicious and outrageous conduct by The Federal Reserve in conspiracy with the Primary Dealers, both of which are now desperately trying to prop up the US Government Bond Market through subterfuge rather than just buying up the bond issue from Treasury when originally put to the market!
If you think the economy and credit markets are "on the mend" why would The Fed do something like this? It would not be necessary unless The Fed was told (by those very same Primary Dealers) that they were going to be unable or unwilling to take down any more Treasury Debt.
Folks, let me be clear: The United States HAS OFFICIALLY HIT THE TREASURY DEBT WALL and The Fed and Treasury are engaged in subterfuge and conspiracy in an attempt to hide this from the market.
There is no other explanation for what just happened.
...
When it sinks in to the market's consciousness - we had two failed Treasury Auctions last week, both 5 and 7 year, yet we intend to try to borrow ANOTHER $400 billion next quarter and nearly $100 billion this coming week - the consequences could be extremely severe."
Thursday, April 9, 2009
The Pyramid Scheme of Money Creation and Destruction
Money is created and destroyed in one giant chain of credit clearing, both by the government and banks.
It officially starts in the creation of the monetary base by the Federal Reserve when it buys US Treasury securities. The Fed acquires Treasury securities, meaning it finances a loan to the US government. The Treasury then pays interest to the Fed for holding its bonds. The Fed pays for the Treasury bonds in cash, but it does not really pay the Treasury, it pays the people, by disbursing the cash to banks and citizens.
Say you get a loan from the bank. The bank gives you the money, but creates a loan you have to pay back. The loan is a negative balance for you, but a positive balance for the bank.
But where did the bank get the money? From the Fed! The Fed did the same thing for the bank that the bank did for you. The bank takes a loan from the Fed, getting cash to spend, but having a negative balance with the Fed, owing the Fed that money.
Ok, good so far, but where does the Fed get the money? The Fed gets the money from the Treasury. The Fed balances its cash distributions with assets of US bonds. Technically, the Fed gave a loan to the Treasury, and receives interest payments from Treasury just like anyone else when they buy a Treasury bond.
When the Fed buys bonds from the public, they are paying out money to the public, thereby expanding the money supply. When the Fed sells bonds to the public, they are taking money in from the public, thereby shrinking the money supply. When the Fed buys bonds directly from the Treasury, they are going through the motions of giving a cash loan to the Treasury, which really means distributing cash to the public, thereby expanding the money supply.
Why does the Treasury take loans from the Fed, and pay the Fed interest on those loans, rather than just distributing the money directly to the people? Good question. There are many people calling for the Treasury to do just that, taking direct control of the money supply and eliminating the role of the Fed.
However, it is a mistake to assume that this process starts at and is controlled by the Fed. In actually, most money is actually created by banks. When a bank gives you a loan, they give you the cash, an asset for you, and they get the loan note, an asset for them.
They are required to have a certain reserve cash amount, to be equal to about 10% of outstanding loans. But they don't check their reserves before they give you the loan. They give you the loan, then later, check to see if they have enough reserves to cover their outstanding loans. If they are short on reserves, they borrow the money from other banks, or directly from the Fed.
This is the Fed's role as lender of last resort. As the public demands more and more loans, the Fed is in the back of the whole system, creating more and more cash for the banks to loan out.
This is why Obama and his banking handlers are always talking about "getting credit going again" and other vacuous phrases. To them, the whole thing is a top down process, but one based on people's appetite for loans. So, to them, encouraging the people to spend more and go into greater debt makes perfect sense.
The whole system is leveraged to the hilt, due to the effects of fractional reserve banking. Because a loan at one bank deposited elsewhere becomes the basis for a new loan, which is then deposited elsewhere to become the basis of a new loan, the whole money system becomes a huge pyramid scheme built up on the much smaller value of original loans.
Thus, one bad loan destroys at least 10X its own value of money in the rest of the system. This inevitably happens in a debt deflation, as loans go bad on a large scale, the monetary system collapses, feeding further loan failure, and further monetary destruction. The so-called "credit crunch", which is a monetary black hole created by bad debt sucking in all the money around it and gaining strength as it goes.
This deflationary black hole wipes out the value of capital which had been bid upwards with debt leverage. The falling value of capital then wipes out the loans built upon that inflated capital base, dragging down the value of the remaining capital in a vicious cycle. Productive enterprises are wiped out and labor laid off as loans fail and debts become unpayable.
It's all quite inevitable given our system of credit money and fractional reserve banks. It happened even when our currency was on the gold standard, so that is no panacea. In fact, many blame the gold standard for prolonging the crisis, since it prevented the government from inflating the money supply to counteract the deflation.
The current government effort to reinflate the system with cash reserve injections and happy-face propaganda cannot work because it is targetted precisely backwards. The effort should not be to pump the banks full of capital, because the whole system is based on the demand of the people for more loans and their ability to pay them back. The government should let each and every bad bank fail, but provide massive stimulus checks directly to the people. That would do more than anything else to keep consumer confidence high and stimulate spending, far more than the vague terror caused by seeing our banking system on life support. Or, more simply, as I have been advocating from the start, cancel massive amounts of debt, which would stimulate optimism and spending without the pernicious effects of currency inflation.
It officially starts in the creation of the monetary base by the Federal Reserve when it buys US Treasury securities. The Fed acquires Treasury securities, meaning it finances a loan to the US government. The Treasury then pays interest to the Fed for holding its bonds. The Fed pays for the Treasury bonds in cash, but it does not really pay the Treasury, it pays the people, by disbursing the cash to banks and citizens.
Say you get a loan from the bank. The bank gives you the money, but creates a loan you have to pay back. The loan is a negative balance for you, but a positive balance for the bank.
But where did the bank get the money? From the Fed! The Fed did the same thing for the bank that the bank did for you. The bank takes a loan from the Fed, getting cash to spend, but having a negative balance with the Fed, owing the Fed that money.
Ok, good so far, but where does the Fed get the money? The Fed gets the money from the Treasury. The Fed balances its cash distributions with assets of US bonds. Technically, the Fed gave a loan to the Treasury, and receives interest payments from Treasury just like anyone else when they buy a Treasury bond.
When the Fed buys bonds from the public, they are paying out money to the public, thereby expanding the money supply. When the Fed sells bonds to the public, they are taking money in from the public, thereby shrinking the money supply. When the Fed buys bonds directly from the Treasury, they are going through the motions of giving a cash loan to the Treasury, which really means distributing cash to the public, thereby expanding the money supply.
Why does the Treasury take loans from the Fed, and pay the Fed interest on those loans, rather than just distributing the money directly to the people? Good question. There are many people calling for the Treasury to do just that, taking direct control of the money supply and eliminating the role of the Fed.
However, it is a mistake to assume that this process starts at and is controlled by the Fed. In actually, most money is actually created by banks. When a bank gives you a loan, they give you the cash, an asset for you, and they get the loan note, an asset for them.
They are required to have a certain reserve cash amount, to be equal to about 10% of outstanding loans. But they don't check their reserves before they give you the loan. They give you the loan, then later, check to see if they have enough reserves to cover their outstanding loans. If they are short on reserves, they borrow the money from other banks, or directly from the Fed.
This is the Fed's role as lender of last resort. As the public demands more and more loans, the Fed is in the back of the whole system, creating more and more cash for the banks to loan out.
This is why Obama and his banking handlers are always talking about "getting credit going again" and other vacuous phrases. To them, the whole thing is a top down process, but one based on people's appetite for loans. So, to them, encouraging the people to spend more and go into greater debt makes perfect sense.
The whole system is leveraged to the hilt, due to the effects of fractional reserve banking. Because a loan at one bank deposited elsewhere becomes the basis for a new loan, which is then deposited elsewhere to become the basis of a new loan, the whole money system becomes a huge pyramid scheme built up on the much smaller value of original loans.
Thus, one bad loan destroys at least 10X its own value of money in the rest of the system. This inevitably happens in a debt deflation, as loans go bad on a large scale, the monetary system collapses, feeding further loan failure, and further monetary destruction. The so-called "credit crunch", which is a monetary black hole created by bad debt sucking in all the money around it and gaining strength as it goes.
This deflationary black hole wipes out the value of capital which had been bid upwards with debt leverage. The falling value of capital then wipes out the loans built upon that inflated capital base, dragging down the value of the remaining capital in a vicious cycle. Productive enterprises are wiped out and labor laid off as loans fail and debts become unpayable.
It's all quite inevitable given our system of credit money and fractional reserve banks. It happened even when our currency was on the gold standard, so that is no panacea. In fact, many blame the gold standard for prolonging the crisis, since it prevented the government from inflating the money supply to counteract the deflation.
The current government effort to reinflate the system with cash reserve injections and happy-face propaganda cannot work because it is targetted precisely backwards. The effort should not be to pump the banks full of capital, because the whole system is based on the demand of the people for more loans and their ability to pay them back. The government should let each and every bad bank fail, but provide massive stimulus checks directly to the people. That would do more than anything else to keep consumer confidence high and stimulate spending, far more than the vague terror caused by seeing our banking system on life support. Or, more simply, as I have been advocating from the start, cancel massive amounts of debt, which would stimulate optimism and spending without the pernicious effects of currency inflation.
Wednesday, April 1, 2009
The 4th Branch of Government: the Banking System
Lawmakers have often believed they could ignore the big questions on how our money system is structured. Right from the Constitutional Convention delegates ignored society’s monetary power and the excellent record of government issued money in building colonial infrastructure and giving us a nation. They left the money power up for grabs instead of properly placing it in a fourth, monetary branch of government.
History shows that the money power will be a fourth branch whether we recognize it as such or not. It’s not safe to leave so much power and privilege in private hands! It’s counter to our system of checks and balances. The developing financial crisis requires us to re-evaluate and focus on it now. Lets fulfill our responsibility to get a real understanding of this problem and the solution.
As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said,
"I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money....I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue."
http://www.monetary.org/amacolorpamphlet.pdf (page 3)
History shows that the money power will be a fourth branch whether we recognize it as such or not. It’s not safe to leave so much power and privilege in private hands! It’s counter to our system of checks and balances. The developing financial crisis requires us to re-evaluate and focus on it now. Lets fulfill our responsibility to get a real understanding of this problem and the solution.
As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said,
"I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money....I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue."
http://www.monetary.org/amacolorpamphlet.pdf (page 3)
Friday, January 9, 2009
Remove Bernanke Now Before Its Too Late
The foolishness of Bernanke:
http://www.atimes.com/atimes/Global_Economy/KA06Dj04.html
Bernanke has been exposed as a fool who does not understand the economy,and he needs to be removed from his post, to prevent him from continuing to damage the economy any further with his false ideas:
Bernanke follows old route
In his 2000 article of faith, Bernanke was openly endorsing the "Greenspan put", the monetary stance from late 1980s on during which, whenever the economy slowed, the Fed would come to its rescue by radically lowering the Fed funds rate target even to the point of negative real yields as measured against inflation, and kept it there until a new boom bubble was solidly formed. The Greenspan put repeatedly pumped liquidity into the market to avert the price correction consequences of speculative excesses that caused the 1987 crash, then the geo-economic consequences of the First Gulf War in 1991, then the contagion effects from the Mexican peso crisis of 1994, then the Asian financial crisis of 1997 and the Russian default that caused the collapse of Long-Term Capital Management in 1998, then the phantom Y2K digital threat, then the bursting of the Internet dot.com bubble in 2000 and then the market panic from the 2001 9/11 terrorist attacks to launch the subprime housing bubble that burst in July 2007.
Accordingly, Bernanke was complacently confident that another application of the Greenspan put could again handle the housing bubble burst in July 2007. He appeared to have no inkling that the economy had been drawn closer each time since 1978 into a perfect storm of structured finance run amok.
On May 17, 2007, three months before the credit crisis broke out, Bernanke said in a speech on the subprime mortgage market at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition:
... given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.
The top US central banker did not see what Greenspan later called "the crisis of a century" coming at him at full speed to hit him in the face in four weeks. Even on August 31, 2007, six weeks after the credit crisis broke out in mid July, Bernake still spoke with surprising calm confidence in a speech on "Housing, Housing Finance, and Monetary Policy", delivered at the Federal
Reserve Bank of Kansas City's Annual Economic Symposium at Jackson Hole, Wyoming:
Importantly, the easing of some traditional institutional and regulatory frictions seems to have reduced the sensitivity of residential construction to monetary policy, so that housing is no longer so central to monetary transmission as it was. In particular, in the absence of Reg Q ceilings on deposit rates and with a much-reduced role for deposits as a source of housing finance, the availability of mortgage credit today is generally less
dependent on conditions in short-term money markets, where the central bank operates most directly.
Most estimates suggest that, because of the reduced sensitivity of housing to short-term interest rates, the response of the economy to a given change in the federal funds rate is modestly smaller and more balanced across sectors than in the past. These results are embodied in the Federal Reserve's large econometric model of the economy, which implies that only about 14% of the overall response of output to monetary policy is now attributable to movements in residential investment, in contrast to the model's estimate of 25% or so under what I have called the New Deal system.
The econometric findings seem consistent with the reduced synchronization of the housing cycle and the business cycle during the present decade. In all but one recession during the period from 1960 to 1999, declines in residential investment accounted for at least 40% of the decline in overall real GDP, and the sole exception - the 1970 recession - was preceded by a substantial decline in housing activity before the official start of the downturn.
In contrast, residential investment boosted overall real GDP growth during the 2001 recession. More recently, the sharp slowdown in housing has been accompanied, at least thus far, by relatively good performance in other sectors. That said, the current episode demonstrates that pronounced housing cycles are not a thing of the past.
My discussion so far has focused primarily on the role of variations in housing finance and residential construction in monetary transmission. But, of course, housing may have indirect effects on economic activity, most notably by influencing consumer spending. With regard to household consumption, perhaps the most significant effect of recent developments in mortgage finance is that home equity, which was once a highly illiquid asset, has become instead quite liquid, the result of the development of home equity lines of credit and the relatively low cost of cash-out refinancing.
Economic theory suggests that the greater liquidity of home equity should allow households to better smooth consumption over time. This smoothing in turn should reduce the dependence of their spending on current income, which, by limiting the power of conventional multiplier effects, should tend to increase macroeconomic stability and reduce the effects of a given change in the short-term interest rate. These inferences are supported by some empirical evidence.
Bernanke was still twiddling his theoretical thumb in the comfort of his institutional bunker while the whole financial world was falling under a credit fire storm. With the awesome data collection capability at his disposal, the Fed chairman's radar apparently totally missed the possibility of systemic collapse of the non-bank credit market on structured finance from chain-reaction effects of rising subprime mortgage default.
To be fair, Bernanke was in good company among establishment experts of equally unjustified complacency. Brookings Policy Brief Series #164 dated October 2007, three months after the credit crisis imploded, used as headline - "Credit Crisis: The Sky is not Falling". The brief by Anthony Downs, who describes himself on his website as the "World's Leading Authority" on real estate and urban affairs, asserts that " … the facts hardly indicate a credit crisis. As of mid-2007, data show that prices of existing homes are not collapsing. Despite large declines in new home production and existing home sales, home prices are only slightly falling overall but are still rising in many markets. Default rates are rising on subprime mortgages, but these mortgages - which offer loans to borrowers with poor credit at higher interest rates - form a relatively small part of all mortgage originations. About 87 percent of residential mortgages are not subprime loans, according to the Mortgage Bankers Association's delinquency studies. Subprime delinquency rates will most likely rise more in 2008 as mortgages are reset to higher levels as interest-only periods end or adjustable rates are driven upward. Unless the US economy dips dramatically, however, the vast majority of subprime mortgages will be paid. And, because there is no basic shortage of money, investors still have a tremendous amount of financial capital they must put to work somewhere."
However, while this complacent view was widely held in the financial establishment, not everybody was drinking the Cool-Aid. Instead of "tremendous amount of financial capital", the entire financial sector was seriously undercapitalized as distressed debts added up losses. Warnings had been publicly aired months before the credit crisis imploded in July 2007 by a few lonely voices that the subprime mortgage bubble would burst and its effect would spread globally, granted that such warnings had been summarily dismissed by the establishment media. (See Why the sub-prime mortgage bust will spread, Asia Times Online, March 17, 2007.)
Bernanke exposed
By December 2008, 18 months after the credit crisis broke out in July 2007, events have conclusively proved that Bernanke's faith in the magic of the Greenspan put had been misplaced. Decades of misapplication of Friedmanesque monetarism had driven the doctrine into theoretical bankruptcy. Monetarist measures not only fail to revive an economy caught in a global debt tsunami; there is also clear evidence that the liquidity cure devised by Greenspan has eventually run out of ammunition after the serial bubbles got bigger each time to paper over the previous one. The Greenspan put does not work for a stalled economy facing a liquidity trap of absolute preference for cash. It only adds more water to a raging flood of debt to threaten even the shrinking remaining high ground.
The flaw in his faith in self-regulating monetarism that Greenspan openly confessed before Congress apparently did not get through to Bernanke, who continues to apply the Greenspan put. Bernanke's futile monetary moves to save wayward financial institutions have managed only to increase the immunity of the deeply wounded economy against any Keynesian fiscal cure attempted by the next occupant of the White House and his economic team.
Bernanke made the same mistake of obstinate denial in the early phases of the economic meltdown from a debt crisis even after his acceptance eight years earlier of Friedman's counterfactual conclusion that the Fed in 1930 failed to act in time to respond effectively to the oncoming disaster with bold monetary countermeasures. Again, the world missed another opportunity to test if preemptive Keynesian fiscal cures would work.
More fundamentally, president Herbert Clark Hoover (1929–1933) should have applied Keynesian demand management through fiscal spending to maintain full employment immediately after the 1929 crash, if not before, rather than a timely monetary cure as proposed by Friedman in hindsight. No recovery from speculative excess can be expected without a policy-induced rise in employment and wage income to catch up with an asset price bubble. It was true in 1929; and it is true today.
Unfortunately, the rescue approach by the George W Bush administration led by Treasury Secretary Henry Paulson and the Bernanke Fed has been focused on saving distressed financial institutions by providing taxpayers' money to restructuring bad debts and de-leveraging overblown balance sheets. This approach inevitably pushes already stagnant wage income further down, with more layoffs and ruthless renegotiation of already draconian labor contracts, to cut operating cost. All this does is to reinforce the downward market spiral by transferring financial pain to innocent workers while not helping the economy with a needed revival of consumer demand.
Trillions of dollars of good taxpayer money are being thrown after bad debts concocted by unprincipled financiers into a crisis black hole. This money will have to be repaid in coming years by taxpayers while supply-siders are clamoring for tax cuts for corporations, on capital gains and for high-income earners. This means the future tax bill to pay for the Greenspan put will be borne by low- and middle-income wage earners. Thus far in this financial crisis, the Bernanke Fed has sown the seeds not for a quick recovery but for a decade or more of stagflation for the US and the global economy.
http://www.atimes.com/atimes/Global_Economy/KA06Dj04.html
Bernanke has been exposed as a fool who does not understand the economy,and he needs to be removed from his post, to prevent him from continuing to damage the economy any further with his false ideas:
Bernanke follows old route
In his 2000 article of faith, Bernanke was openly endorsing the "Greenspan put", the monetary stance from late 1980s on during which, whenever the economy slowed, the Fed would come to its rescue by radically lowering the Fed funds rate target even to the point of negative real yields as measured against inflation, and kept it there until a new boom bubble was solidly formed. The Greenspan put repeatedly pumped liquidity into the market to avert the price correction consequences of speculative excesses that caused the 1987 crash, then the geo-economic consequences of the First Gulf War in 1991, then the contagion effects from the Mexican peso crisis of 1994, then the Asian financial crisis of 1997 and the Russian default that caused the collapse of Long-Term Capital Management in 1998, then the phantom Y2K digital threat, then the bursting of the Internet dot.com bubble in 2000 and then the market panic from the 2001 9/11 terrorist attacks to launch the subprime housing bubble that burst in July 2007.
Accordingly, Bernanke was complacently confident that another application of the Greenspan put could again handle the housing bubble burst in July 2007. He appeared to have no inkling that the economy had been drawn closer each time since 1978 into a perfect storm of structured finance run amok.
On May 17, 2007, three months before the credit crisis broke out, Bernanke said in a speech on the subprime mortgage market at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition:
... given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.
The top US central banker did not see what Greenspan later called "the crisis of a century" coming at him at full speed to hit him in the face in four weeks. Even on August 31, 2007, six weeks after the credit crisis broke out in mid July, Bernake still spoke with surprising calm confidence in a speech on "Housing, Housing Finance, and Monetary Policy", delivered at the Federal
Reserve Bank of Kansas City's Annual Economic Symposium at Jackson Hole, Wyoming:
Importantly, the easing of some traditional institutional and regulatory frictions seems to have reduced the sensitivity of residential construction to monetary policy, so that housing is no longer so central to monetary transmission as it was. In particular, in the absence of Reg Q ceilings on deposit rates and with a much-reduced role for deposits as a source of housing finance, the availability of mortgage credit today is generally less
dependent on conditions in short-term money markets, where the central bank operates most directly.
Most estimates suggest that, because of the reduced sensitivity of housing to short-term interest rates, the response of the economy to a given change in the federal funds rate is modestly smaller and more balanced across sectors than in the past. These results are embodied in the Federal Reserve's large econometric model of the economy, which implies that only about 14% of the overall response of output to monetary policy is now attributable to movements in residential investment, in contrast to the model's estimate of 25% or so under what I have called the New Deal system.
The econometric findings seem consistent with the reduced synchronization of the housing cycle and the business cycle during the present decade. In all but one recession during the period from 1960 to 1999, declines in residential investment accounted for at least 40% of the decline in overall real GDP, and the sole exception - the 1970 recession - was preceded by a substantial decline in housing activity before the official start of the downturn.
In contrast, residential investment boosted overall real GDP growth during the 2001 recession. More recently, the sharp slowdown in housing has been accompanied, at least thus far, by relatively good performance in other sectors. That said, the current episode demonstrates that pronounced housing cycles are not a thing of the past.
My discussion so far has focused primarily on the role of variations in housing finance and residential construction in monetary transmission. But, of course, housing may have indirect effects on economic activity, most notably by influencing consumer spending. With regard to household consumption, perhaps the most significant effect of recent developments in mortgage finance is that home equity, which was once a highly illiquid asset, has become instead quite liquid, the result of the development of home equity lines of credit and the relatively low cost of cash-out refinancing.
Economic theory suggests that the greater liquidity of home equity should allow households to better smooth consumption over time. This smoothing in turn should reduce the dependence of their spending on current income, which, by limiting the power of conventional multiplier effects, should tend to increase macroeconomic stability and reduce the effects of a given change in the short-term interest rate. These inferences are supported by some empirical evidence.
Bernanke was still twiddling his theoretical thumb in the comfort of his institutional bunker while the whole financial world was falling under a credit fire storm. With the awesome data collection capability at his disposal, the Fed chairman's radar apparently totally missed the possibility of systemic collapse of the non-bank credit market on structured finance from chain-reaction effects of rising subprime mortgage default.
To be fair, Bernanke was in good company among establishment experts of equally unjustified complacency. Brookings Policy Brief Series #164 dated October 2007, three months after the credit crisis imploded, used as headline - "Credit Crisis: The Sky is not Falling". The brief by Anthony Downs, who describes himself on his website as the "World's Leading Authority" on real estate and urban affairs, asserts that " … the facts hardly indicate a credit crisis. As of mid-2007, data show that prices of existing homes are not collapsing. Despite large declines in new home production and existing home sales, home prices are only slightly falling overall but are still rising in many markets. Default rates are rising on subprime mortgages, but these mortgages - which offer loans to borrowers with poor credit at higher interest rates - form a relatively small part of all mortgage originations. About 87 percent of residential mortgages are not subprime loans, according to the Mortgage Bankers Association's delinquency studies. Subprime delinquency rates will most likely rise more in 2008 as mortgages are reset to higher levels as interest-only periods end or adjustable rates are driven upward. Unless the US economy dips dramatically, however, the vast majority of subprime mortgages will be paid. And, because there is no basic shortage of money, investors still have a tremendous amount of financial capital they must put to work somewhere."
However, while this complacent view was widely held in the financial establishment, not everybody was drinking the Cool-Aid. Instead of "tremendous amount of financial capital", the entire financial sector was seriously undercapitalized as distressed debts added up losses. Warnings had been publicly aired months before the credit crisis imploded in July 2007 by a few lonely voices that the subprime mortgage bubble would burst and its effect would spread globally, granted that such warnings had been summarily dismissed by the establishment media. (See Why the sub-prime mortgage bust will spread, Asia Times Online, March 17, 2007.)
Bernanke exposed
By December 2008, 18 months after the credit crisis broke out in July 2007, events have conclusively proved that Bernanke's faith in the magic of the Greenspan put had been misplaced. Decades of misapplication of Friedmanesque monetarism had driven the doctrine into theoretical bankruptcy. Monetarist measures not only fail to revive an economy caught in a global debt tsunami; there is also clear evidence that the liquidity cure devised by Greenspan has eventually run out of ammunition after the serial bubbles got bigger each time to paper over the previous one. The Greenspan put does not work for a stalled economy facing a liquidity trap of absolute preference for cash. It only adds more water to a raging flood of debt to threaten even the shrinking remaining high ground.
The flaw in his faith in self-regulating monetarism that Greenspan openly confessed before Congress apparently did not get through to Bernanke, who continues to apply the Greenspan put. Bernanke's futile monetary moves to save wayward financial institutions have managed only to increase the immunity of the deeply wounded economy against any Keynesian fiscal cure attempted by the next occupant of the White House and his economic team.
Bernanke made the same mistake of obstinate denial in the early phases of the economic meltdown from a debt crisis even after his acceptance eight years earlier of Friedman's counterfactual conclusion that the Fed in 1930 failed to act in time to respond effectively to the oncoming disaster with bold monetary countermeasures. Again, the world missed another opportunity to test if preemptive Keynesian fiscal cures would work.
More fundamentally, president Herbert Clark Hoover (1929–1933) should have applied Keynesian demand management through fiscal spending to maintain full employment immediately after the 1929 crash, if not before, rather than a timely monetary cure as proposed by Friedman in hindsight. No recovery from speculative excess can be expected without a policy-induced rise in employment and wage income to catch up with an asset price bubble. It was true in 1929; and it is true today.
Unfortunately, the rescue approach by the George W Bush administration led by Treasury Secretary Henry Paulson and the Bernanke Fed has been focused on saving distressed financial institutions by providing taxpayers' money to restructuring bad debts and de-leveraging overblown balance sheets. This approach inevitably pushes already stagnant wage income further down, with more layoffs and ruthless renegotiation of already draconian labor contracts, to cut operating cost. All this does is to reinforce the downward market spiral by transferring financial pain to innocent workers while not helping the economy with a needed revival of consumer demand.
Trillions of dollars of good taxpayer money are being thrown after bad debts concocted by unprincipled financiers into a crisis black hole. This money will have to be repaid in coming years by taxpayers while supply-siders are clamoring for tax cuts for corporations, on capital gains and for high-income earners. This means the future tax bill to pay for the Greenspan put will be borne by low- and middle-income wage earners. Thus far in this financial crisis, the Bernanke Fed has sown the seeds not for a quick recovery but for a decade or more of stagflation for the US and the global economy.
Friday, January 2, 2009
Bernanke's One Big Idea
Bernanke's one big idea: All-Powerful Central Banks can Prevent Economic Downturns. It's all a banker's world, in Bernanke's mind, with deflation and a banking collapse the worst possible scenarios. No reference to fundamentals of economics (like shoring up home values instead of bailing out banks), nor to the role of Fed-created inflation and debt in creating the destructive bubbles in the first place.
The most important lesson here: Bernanke admits that the Fed Reserve caused the Great Depression. We need to take him at his word, and get rid of this destructive monstrosity, which has now caused two Great Depressions. Stable money, balanced budgets, increased savings, and banks that operate for the public good, are all that it would take to prevent these bank-caused bubble-bust cycles. Banks are the problem, not the solution.
from an article Sept. 2000 (http://www.foreignpolicy.com/story/cms.php?story_id=3272)
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily. Consider three famous episodes: the U.S. stock market crash of 1929, Japan’s crash of 1990-1991, and the U.S. crash of 1987. The 1929 U.S. crash and the sharp decline in Japanese stock prices were both followed by decade-long economic slumps in each country. (The Japanese depression, despite much whistling in the dark by the country’s policymakers, still lingers.) By contrast, the macroeconomic fallout from the 1987 tumble on Wall Street was minimal. Why the difference?
A closer look reveals that the economic repercussions of a stock market crash depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers. After the 1929 crash, the Federal Reserve mistakenly focused its policies on preserving the gold value of the dollar rather than on stabilizing the domestic economy. By raising interest rates to protect the dollar, policymakers contributed to soaring unemployment and severe price deflation. The U.S. central bank only compounded its mistake by failing to counter the collapse of the country’s banking system in the early 1930s; bank failures both intensified the monetary squeeze (since bank deposits were liquidated) and sparked a credit crunch that hurt consumers and small firms in particular. Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity.
The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier. After effectively precipitating the crash in stock and real estate prices through sharp increases in interest rates (in much the same way that the Fed triggered the crash of 1929), the Bank of Japan seemed in no hurry to ease monetary policy and did not cut rates significantly until 1994. As a result, prices in Japan have fallen about 1 percent annually since 1992. And much like U.S. officials during the 1930s, Japanese policymakers were unconscionably slow in tackling the severe banking crisis that impaired the economy’s ability to function normally.
Central bankers got it right in the United States in 1987 when they avoided deflationary pressures as well as serious trouble in the banking system. In the days immediately following the October 19th crash, Federal Reserve Chairman Alan Greenspan—in office a mere two months—focused his efforts on maintaining financial stability. For instance, he persuaded banks to extend credit to struggling brokerage houses, thus ensuring that the stock exchanges and futures markets would continue operating normally. (U.S. banks, which unlike their Japanese counterparts do not own stock, were never in any serious danger from the crash.) Subsequently, the Fed’s attention shifted from financial to macroeconomic stability, with the central bank cutting interest rates to offset any deflationary effects of declining stock prices. Reassured by policymakers’ determination to protect the economy, the markets calmed and economic growth resumed with barely a blip.
There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.
The most important lesson here: Bernanke admits that the Fed Reserve caused the Great Depression. We need to take him at his word, and get rid of this destructive monstrosity, which has now caused two Great Depressions. Stable money, balanced budgets, increased savings, and banks that operate for the public good, are all that it would take to prevent these bank-caused bubble-bust cycles. Banks are the problem, not the solution.
from an article Sept. 2000 (http://www.foreignpolicy.com/story/cms.php?story_id=3272)
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily. Consider three famous episodes: the U.S. stock market crash of 1929, Japan’s crash of 1990-1991, and the U.S. crash of 1987. The 1929 U.S. crash and the sharp decline in Japanese stock prices were both followed by decade-long economic slumps in each country. (The Japanese depression, despite much whistling in the dark by the country’s policymakers, still lingers.) By contrast, the macroeconomic fallout from the 1987 tumble on Wall Street was minimal. Why the difference?
A closer look reveals that the economic repercussions of a stock market crash depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers. After the 1929 crash, the Federal Reserve mistakenly focused its policies on preserving the gold value of the dollar rather than on stabilizing the domestic economy. By raising interest rates to protect the dollar, policymakers contributed to soaring unemployment and severe price deflation. The U.S. central bank only compounded its mistake by failing to counter the collapse of the country’s banking system in the early 1930s; bank failures both intensified the monetary squeeze (since bank deposits were liquidated) and sparked a credit crunch that hurt consumers and small firms in particular. Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity.
The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier. After effectively precipitating the crash in stock and real estate prices through sharp increases in interest rates (in much the same way that the Fed triggered the crash of 1929), the Bank of Japan seemed in no hurry to ease monetary policy and did not cut rates significantly until 1994. As a result, prices in Japan have fallen about 1 percent annually since 1992. And much like U.S. officials during the 1930s, Japanese policymakers were unconscionably slow in tackling the severe banking crisis that impaired the economy’s ability to function normally.
Central bankers got it right in the United States in 1987 when they avoided deflationary pressures as well as serious trouble in the banking system. In the days immediately following the October 19th crash, Federal Reserve Chairman Alan Greenspan—in office a mere two months—focused his efforts on maintaining financial stability. For instance, he persuaded banks to extend credit to struggling brokerage houses, thus ensuring that the stock exchanges and futures markets would continue operating normally. (U.S. banks, which unlike their Japanese counterparts do not own stock, were never in any serious danger from the crash.) Subsequently, the Fed’s attention shifted from financial to macroeconomic stability, with the central bank cutting interest rates to offset any deflationary effects of declining stock prices. Reassured by policymakers’ determination to protect the economy, the markets calmed and economic growth resumed with barely a blip.
There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.
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