The Federal Reserve was set up by bankers for bankers, and it has served them well. Out of the blue, it came up with $12.3 trillion in nearly interest-free credit to bail the banks out of a credit crunch they created. That same credit crisis has plunged state and local governments into insolvency, but the Fed has now delivered its ultimatum: there will be no “quantitative easing” for municipal governments.
On January 7, according to the Wall Street Journal, Federal Reserve Chairman Ben Bernanke announced that the Fed had ruled out a central bank bailout of state and local governments. “We have no expectation or intention to get involved in state and local finance,” he said in testimony before the Senate Budget Committee. The states “should not expect loans from the Fed.”
So much for the proposal of President Barack Obama, reported in Reuters a year ago, to have the Fed buy municipal bonds to cut the heavy borrowing costs of cash-strapped cities and states.
The credit woes of state and municipal governments are a direct result of Wall Street’s malfeasance. Their borrowing costs first shot up in 2008, when the “monoline” bond insurers lost their own credit ratings after gambling in derivatives. The Fed’s low-interest facilities could have been used to restore local government credit, just as it was used to restore the credit of the banks. But Chairman Bernanke has now vetoed that plan.
Why? It can hardly be argued that the Fed doesn’t have the money. The collective budget deficit of the states for 2011 is projected at $140 billion, a mere drop in the bucket compared to the sums the Fed managed to come up with to bail out the banks. According to data recently released, the central bank provided roughly $3.3 trillion in liquidity and $9 trillion in short-term loans and other financial arrangements to banks, multinational corporations, and foreign financial institutions following the credit crisis of 2008.
The argument may be that continuing the Fed’s controversial “quantitative easing” program (easing credit conditions by creating money with accounting entries) will drive the economy into hyperinflation. But creating $12.3 trillion for the banks — nearly one hundred times the sum needed by state governments — did not have that dire effect. Rather, the money supply is shrinking – by some estimates, at the fastest rate since the Great Depression. Creating another $140 billion would hardly affect the money supply at all.
Why didn’t the $12.3 trillion drive the economy into hyperinflation? Because, contrary to popular belief, when the Fed engages in “quantitative easing,” it is not simply printing money and giving it away. It is merely extending CREDIT, creating an overdraft on the account of the borrower to be paid back in due course. The Fed is simply replacing expensive credit from private banks (which also create the loan money on their books) with cheap credit from the central bank.
So why isn’t the Fed open to advancing this cheap credit to the states? According to Mr. Bernanke, its hands are tied. He says the Fed is limited by statute to buying municipal government debt with maturities of six months or less that is directly backed by tax or other assured revenue, a form of debt that makes up less than 2% of the overall muni market. Congress imposed that restriction, and only Congress can change it.
That may sound like he is passing the buck, but he is probably right. Bailing out state and local governments IS outside the Fed’s mandate. The Federal Reserve Act was drafted by bankers to create a banker’s bank that would serve their interests. No others need apply. The Federal Reserve is the bankers’ own private club, and its legal structure keeps all non-members out.
Earlier Central Bank Ventures into Commercial Lending
That is how the Fed is structured today, but it hasn’t always been that way. In 1934, Section 13(b) was added to the Federal Reserve Act, authorizing the Fed to “make credit available for the purpose of supplying working capital to established industrial and commercial businesses.” This long-forgotten section was implemented and remained in effect for 24 years. In a 2002 article called “Lender of More Than Last Resort” posted on the Minneapolis Fed’s website, David Fettig summarized its provisions as follows:
- [Federal] Reserve banks could make loans to any established businesses, including businesses begun that year (a change from earlier legislation that limited funds to more established enterprises).
- Reserve banks were permitted to participate [share in loans] with lending institutions, but only if the latter assumed 20 percent of the risk.
- No limitation was placed on the amount of a single loan.
- A Reserve bank could make a direct loan only to a business in its district.
Today, that venture into commercial banking sounds like a radical departure from the Fed’s given role; but at the time it evidently seemed like a reasonable alternative. Fettig notes that “the Fed was still less than 20 years old and many likely remembered the arguments put forth during the System’s founding, when some advocated that the discount window should be open to all comers, not just member banks.” In Australia and other countries, the central bank was then assuming commercial as well as central bank functions.
Section 13(b) was repealed in 1958, but one state has kept its memory alive. In North Dakota, the publicly owned Bank of North Dakota (BND) acts as a “mini-Fed” for the state. Like the Federal Reserve of the 1930s and 1940s, the BND makes loans to local businesses and participates in loans made by local banks.
The BND has helped North Dakota escape the credit crisis. In 2009, when other states were teetering on bankruptcy, North Dakota sported the largest surplus it had ever had. Other states, prompted by their own budget crises to explore alternatives, are now looking to North Dakota for inspiration.
The “Unusual and Exigent Circumstances” Exception
Although Section 13(b) was repealed, the Federal Reserve Act retained enough vestiges of it in 2008 to allow the Fed to intervene to save a variety of non-bank entities from bankruptcy. The problem was that the tool was applied selectively. The recipients were major corporate players, not local businesses or local governments. Fettig writes:
Section 13(b) may be a memory, . . . but Section 13 paragraph 3 . . . is alive and well in the Federal Reserve Act. . . . [T]his amendment allows, “in unusual and exigent circumstances,” a Reserve bank to advance credit to individuals, partnerships and corporations that are not depository institutions.
In 2008, the Fed bailed out investment company Bear Stearns and insurer AIG, neither of which was a bank. John Nichols reports in The Nation that Bear Stearns got almost $1 trillion in short-term loans, with interest rates as low as 0.5%. The Fed also made loans to other corporations, including GE, McDonald’s, and Verizon.
In 2010, Section 13(3) was modified by the Dodd-Frank bill, which replaced the phrase “individuals, partnerships and corporations” with the vaguer phrase “any program or facility with broad-based eligibility.” As explained in the notes to the bill:
Only Broad-Based Facilities Permitted. Section 13(3) is modified to remove the authority to extend credit to specific individuals, partnerships and corporations. Instead, the Board may authorize credit under section 13(3) only under a program or facility with “broad-based eligibility.”
What programs have “broad-based eligibility” isn’t clear from a reading of the Section, but long-term municipal bonds are evidently excluded. Mr. Bernanke said that if municipal defaults became a problem, it would be in Congress’ hands, not his.
Congress could change the law, just as it did in 1934, 1958, and 2010. It could change the law to allow the Fed to help Main Street just as it helped Wall Street. But as Senator Dick Durbin blurted out on a radio program in April 2009, Congress is owned by the banks. Changes in the law today are more likely to go the other way. Mike Whitney, writing in December 2010, noted:
So far, not one CEO or CFO of a major investment bank or financial institution has been charged, arrested, prosecuted, or convicted in what amounts to the largest incident of securities fraud in history. In the much-smaller Savings and Loan investigation, more than 1,000 people were charged and convicted. . . . [T]he system is broken and the old rules no longer apply.
The old rules no longer apply because they have been changed to suit the moneyed interests that hold Congress and the Fed captive. The law has been changed not only to keep the guilty out of jail but to preserve their exorbitant profits and bonuses at the expense of their victims.
To do this, the Federal Reserve had to take “extraordinary measures.” They were extraordinary but not illegal, because the Fed’s congressional mandate made them legal. Nobody’s permission even had to be sought. Section 13(3) of the Federal Reserve Act allows it to do what it needs to do in “unusual and exigent circumstances” to save its constituents.
If you’re a bank, it seems, anything goes. If you’re not a bank, you’re on your own.
So Who Will Save the States?
Highlighting the immediacy of the local government budget crisis, The Wall Street Journal quoted Meredith Whitney, a banking analyst who recently turned to analyzing state and local finances. She said on a recent broadcast of CBS’s “60 Minutes” that the U.S. could see “50 to 100 sizable defaults” in 2011 among its local governments, amounting to “hundreds of billions of dollars.”
If the Fed could so easily come up with 12.3 trillion dollars to save the banks, why can’t it find a few hundred billion under the mattress to save the states? Obviously it could, if Congress were inclined to put non-bank lending back into the Fed’s job description. Then why isn’t that being done?
The cynical view is that the states are purposely being kept on the edge of bankruptcy, because the banks that hold Congress hostage want the interest income and the control.
Whatever the reason, Congress is standing down while the nation is sinking. Congress must summon the courage to take needed action; and that action is not to impose “austerity” by cutting services, at a time when an already-squeezed populace most needs them. Rather, it is to create the jobs that will generate real productivity. To do this, Congress would not even have to go through the Federal Reserve. It could issue its own debt-free money and spend it on repairing and modernizing our decaying infrastructure, among other needed works. Congress’ task will become easier if the people stand with them in demanding action, but Congress is now so gridlocked that change may still be long in coming.
In the meantime, the states could take matters in their own hands and set up their own state-owned banks, on the model of the Bank of North Dakota. They could then have their own very-low-interest credit lines, just as the Wall Street banks do. Rather than spending or selling off valuable public assets, or hoarding them in massive rainy day funds made necessary by the lack of ready credit, states could LEVERAGE their assets into a very strong and abundant local credit system, following the accepted business practices of the Wall Street banks themselves.
The Public Banking Institute is being launched on January 13 to explore that alternative. For more information, see http://PublicBankingInstitute.org.
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Ellen Brown is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com, ellenbrown.com, and public-banking.com.
Filed under: Ellen Brown Articles/Commentary |
WEB OF DEBT BLOG 
Ellen:
With all due respect, this shows an impoverished understanding of the role of the central bank.
The central bank uses the banking system to regulate money issuance. It regulates money issuance, but does not directly control it. That’s why you can have inflation or deflation that the Fed cannot absolutely control.
If the states and municipalities want to borrow they can borrow from the banks, which are flush with liquidity from the Fed. If they are not able to do so because, say, they are not credit worthy, they wouldn’t be any more credit worthy if the Fed loaned to them directly; the problem at that point would be that they are not credit worthy, not that the central bank is not lending to them.
Even if the Fed did lend directly to them, if they defaulted it would be just as much a problem for the Fed as it would be for any other bank.
In any case, the Fed is simply not set up to do that. The system doesn’t contemplate it.
What you are doing here, if you are not completely misunderstanding the situation, is behaving like a demagogue. Complaining that the central bank lends almost exclusively to banks is blaming it for being a central bank. It can’t do anything else, and it isn’t designed to. If it lent to individuals and private companies and state and local governments those would be the very kind of political decisions, favoring some over others, that the Federal Reserve is supposed to avoid.
Don’t get me wrong – I oppose the whole thing. I oppose a central bank. But I recognize what it is designed to do. I’m not going to say it should be abolished for doing what it is designed to do, as if it could do something else more to my liking. As if it was effectively the Atticus Bank if I got enough people to agree with me.
The idea that you can just have a fountain of money to solve our economic woes is frankly ridiculous. If you just give away free, “debt free” money and enable everyone to “pay” everything they owe, it’s no different than just canceling all their debts and starting over with “money” that is utterly meaningless.
Now if you want to discuss canceling everyone’s debts and restoring monetary sanity that might be a discussion worth having.
Atticus, I wish your tone weren’t so condescending and that you had read the article a little more carefully. You are obviously an astute observer of the financial scene and have a lot to offer, but it appears to me that in this case you have missed the point.
You know, I’m trying not to be condescending, I understand how annoying that is, but on the other hand how much patience can I have – how much time is there? – to formulate a viable plan of action? People need to understand the enormous difficulty involved in addressing these problems. You don’t just snap your fingers and make the world a better place, this idea is polyanna-ish and silly.
I think, first of all, there needs to be a general agreement among anyone in the US who seriously wants to change things that we’re talking about amending the constitution. This is a tangible and potentially effective thing that can be done, and would essentially legally implement the ideas about the monetary system that the amendment’s framers decide upon. No federal or state law can do this. You’ll just have to take my word as a lawyer about that much.
But second, we have to remember that constitutional amendments can do bad things as well as good things. Prohibition was done by constitutional amendment and it was a bad thing. Just because we might be able to amend the constitution, that is no guarantee that we will do so wisely or that what we do will accomplish what we intend. The best chance of doing that, though, is that the whole thing is well thought through, and for that you need a lawyer. People without legal training do not have enough familiarity with the processes of government to know what to do or how to do it. People have been more or less indoctrinated to hate lawyers, but lawyers have a particular kind of learning that is the only learning that matters right now. People need to regain their respect for the law and for lawyers, at least some lawyers, if any of this is to have a chance of really happening.
I put up a post today about the “social credit” concepts that I believe underlie a lot of Ellen Brown’s thinking. I can’t say a lot about that because Ellen Brown hasn’t talked to me. But I’m doing the best I can with the information I have.
I recommend the post, especially because I’m kind of thinking out loud about these things and it might be good for people to see how much thought has to go into it.
Go here: http://strikelawyer.wordpress.com
If you want an amendment you need people with horsepower behind it. Equal rights didn’t have it, and it wasn’t supposed to be contentious. Successful amendments are black & white affairs. Social credit sounds like financial voodoo to me.
Right now we’ve got is 45+ governors who can’t balance their budgets & who will get no help from Washington. Dozens or hundreds of cities & counties just as bad off. In a year’s time they will be desperate to rewrite the script.
What you want is a new constitutional convention, where we can rewrite the states/Washington relationship from the ground up. Fix that, and money will take care of itself.
Will it be scary? Heck yes. It’s scary right now in Cairo.
You’re not going to get anyone with “horsepower” behind an amendment to change the monetary system. All the people with horsepower are wedded to the current one. If that is an absolute requirement the situation is hopeless. This will only happen with pressure from underneath.
I’m not sure what you mean by “black & white” affairs. The proposed 28th amendment does essentially two things: cancels debt and prescribes a gold standard for the dollar. That’s pretty black & white. Getting there is complicated, however. There’s no way around that. A lot of people would just have to agree with the two objectives and have faith in the means, something they do not understand. Again, if this is not possible then the situation is hopeless.
Social credit sounds like financial voodoo to me too. But there’s something there. No harm in discussing it at this point.
A new constitutional convention is, of course, a possibility, but in theory it’s not necessary. The amendment should be enough. Prudence dictates that you don’t go where you don’t have to.
And I don’t agree that money will take care of itself. It is the essence of the problem. It was addressed in the constitution originally, because it is fundamental. My opinion is the opposite of yours: fix the monetary system, and the rest will take care of itself.
Your comment is very thoughtful, though. This is all scary as hell, and Cairo is a foretaste. No country on earth is too far from that.
If getting there is complicated, then it’s not black & white. Banning booze, that’s black & white. Presidential succession, that’s black & white. Popular election of senators, that’s black & white. Equal rights for women was supposed to be black and white. Isn’t it? Lots more black & white than a return to the gold standard. Remember William Jennings Bryan, an advocate of silver?
Getting control of an out-of-control Washington, that’s black & white. Stopping the outflow of money, from your state, to Washington, where it’s being thrown away on the military & Wall Street, if you’re a governor whose state is bust, that’s black & white. Governors have horsepower. Lots of it. That’s how they got to be governors.
Jerry Brown can watch California tear itself to pieces, or declare independence, or grab the money that Washington is stealing from him. It’s just that brutal. 34 states can stop stop Washington in its tracks. 34 states can end rampant Federalism. The mere threat of a Convention would stop Washington in its tracks.
Will a new national government, based on the lowest common denominator that 50 states can agree upon, will that be anything great? Heck, no. Study the 12th amendment, which is when the states foolishly gave up their rights.
Equal rights for women is not “black & white”. There is a lot involved. You’re not thinking this through. Getting control of an out of control Washington is NOT “black & white”. What does that even mean, in concrete terms? What are you suggesting anyone should do about that?
Governors have no horsepower. This is not a bottom up world. Governors are simply lackeys for a federal government that has the money privilege, as in: they get to make up money as they go along. States can’t do that. Being a governor means nothing, other than that the powers that be have consented to you being in that position for the time being. They didn’t want David Paterson in that position in NY and guess what happened? He announced he wouldn’t run a week after he said they would have to carry him out of office. In the intervening week they made things clear to him.
34 states? Please. They are not “threatened” by a convention. They would just co-opt it like they do everything else. You have to focus. Not a convention, but a specific amendment.
The crucial thing is the debt forgiveness. This is their Achilles’ heel. They will never be more vulnerable than they are right now, where they hold all the cards so long as “debts” must be paid
Everything is controlled by the money power. That is why, if you get control of that, you control everything else. That is why, if you take that from them, you can have your freedom back.
Wisdom counsels that the money power should belong to no one. That’s what the gold standard is all about.
Welcome to the world of fantasy & ego. Good luck.
I am sorry, but in my opinion it is you who lack understanding. You mention that “If the states and municipalities want to borrow they can borrow from the banks, which are flush with liquidity from the Fed. If they are not able to do so because, say, they are not credit worthy, they wouldn’t be any more credit worthy if the Fed loaned to them directly; the problem at that point would be that they are not credit worthy, not that the central bank is not lending to them”.
In this comment you show a incredible double standard. If the Fed would not loan to the states because of poor credit quality, then it should not lend to the bankrupt banks, especially in 2008 because they had even worse credit quality. The banks were and are continuously being lent money at ZERO percent at the discount window. They are allowed to mark their assets at mark to fantasy. These are but a small hint of the fraud that the banks have committed and the bailouts from TARP to FED monies that they have received and will continue to receive.
In conclusion, your faulty, ignorant and biased statement should be disregarded by all viewers.
Atticus, you are woefully uninformed. The Fed lent money to dozens of private corporations, and even to foreign banking entities, during the various bailouts. Whether this was illegal or not is another question entirely, but they DID engage in this behavior already, so as an argument against loaning money to state and city governments, it’s a non-starter. The Fed’s actions have been totally political every step of the way, as it is repeatedly used its resources to cover for the fraudulent behavior of the biggest banks, to the competitive disadvantage of many of their smaller competitors.
The whole POINT of the bailouts was to essentially buy back all of the empty and fraudulent MBS (mortgage backed securities) contracts the Big 5 (and many foreign banks) had sitting on their books – the very cause of the current real estate crisis and economic Depression we’re currently mired in! The Fed has been main culprit in the entire scheme.
I should also mention, the Fed absolutely controls the issuance of new currency. That’s its primary purpose, and the main method it uses to control this country’s monetary policy.
Well, first you have to distinguish between “currency” and “money”. But even in the case of currency, the Fed supplies it to the banking system, not to the general public. And currency is a relatively small portion of what is considered “money”.
The fact that the Fed controls currency absolutely is true. But currency is about $1 trillion out of a $14 trillion per year US GDP, $7 trillion or more in residential mortgage loans alone, and you could go on and on.
Even when they loan to the banks, the money is owed back in. That is the terrible thing about it, but it is also the system’s genius. It sets up a competition between the general public among each other, those who cannot similarly create the money required to pay it back, and the interest – which is income to the lender and proportionately predominates the early part of nearly every loan, is never created, so the borrowers are in a constant competition to get over on each other to obtain more than they borrowed from each other so they can pay the lenders back with interest.
For a while it may work fine, as more people come online in the borrowing game and more money is created which can then, through commerce, accrete to the earlier borrowers enabling them to pay the lenders back. The system’s feedback tells the central managers at that point that all is well: the earlier borrowers guessed right and loans are being largely paid back. OTOH, when a lot of loans begin defaulting, it is apparent that the additional lending is not producing more profit. The central managers then slow the game down, let the liquidations occur, wealth is transferred to the lenders who can then presumably make new and healthier loans.
Like any ponzi scheme, however, a high rate of growth of loans is required to keep the game going, whether those loans are productive or not. When too many loans turn out to be unproductive, the main feedback being given is that lack of productivity. But you can mask this by continuing to make more loans, even if they are obviously going to be unproductive, because in the near term that produces more “money”.
This was the so-called subprime crisis from three years ago. But the problem that crisis was signaling – that the economy as a whole had reached the borrowing/lending limit – cannot be addressed, obviously, by more borrowing and lending. Yet this is all the system offers, because this is the very mechanism of central control, and central control is what the system is all about.
The system then collapses in a very ugly fashion. It could be less ugly, or even beneficial, but the idea of central control would have to be abandoned. In other words, the central controllers would have to give up power or it would have to be taken from them. But the populace has been so well trained to look to get over on each other that they don’t focus on the puppet masters. They think, for example, that the “deadbeat” who didn’t pay back his loan is the problem, and they don’t appreciate that it is impossible to pay back that loan and so many others because the system has reached its design limit. This is a recipe for social disaster unless people’s minds and hearts are changed.
I am not defending the Fed. I oppose it.
[…] We’ll see if she talks back. Go here. […]
I should add, that if the Fed reloads the banks, as it has done, and the money isn’t going anywhere it’s not because the banks want to keep it all for themselves. They can’t do anything with it either.
They want to lend it out. They make money if they do. In that sense the system is self regulating.
But criteria have to met in order to make loans, and apparently they’re not being met. No amount of reloading the banks will solve that problem. Indeed that’s a problem the Fed can’t solve.
What they can do, through their open market operations, is lend money to the federal government through bond purchases. And that’s what they have been doing. We have the deficits to prove it.
If the states and munis need money they’ll have to get it from the federal government. And that’s better, because they won’t owe it back.
Of course the federal deficit will explode, but that’s happening anyway, and as you say what’s another $140 billion on top of trillions?
If you don’t understand this, you really don’t understand how the system works. I oppose it, I really do. But you have to understand something before you can intelligently oppose it. And like I said, I would have to conclude based upon this post that either you don’t understand this system or you are a demagogue. You’re too nice to be the latter. Ergo…
atticus, you claim that the fed can only lend to banks, but the fed has proven you wrong by lending to all types of entities. including McDonalds,GE, insurance co. and investmant banks. I would say that you do not understand how the system works.Rather than regurgitation something you learned in a text book look at what actually transpires http://dailybail.com/home/feds-emergency-loan-borrowers-included-foreign-banks-goldman.html
This was simply political cover. The amounts were a drop in the bucket compared to what they doled out to the banks, and any lending or “purchasing” of “assets” outside the banking system has to be justified as an “extraordinary measure”. Why is it extraordinary? Because the normal functioning of the system is all through the lending and borrowing in the banking system.
You know, the Fed doesn’t just “lend”; it makes “purchases”. But the overwhelming majority of what it purchases is debt. Usually government debt. Federal government debt, not state. Not corporate.
It only deals with the big guns.
I can’t say I fully understand the system. But I think I understand the simple points, that:
(a) owning a national bank would enable a state to obtain for lending out at RELATIVELY LOW RATES with SUBSTANTIAL FRACTIONAL MULTIPLICATION and for PUBLICLY BENEFICIAL PURPOSES virtually interest-free money, just like every other national bank, which of course, through various programs, could be applied to prevent default, and sustain the state’s economy in the best interests of its citizens;
(b) the FED presently pays interest on reserves held by national banks, which, as a matter of fact, and whether or intended, has proved sufficient for banks, acting in their perceived self-interest, to generally prefer garnishing this secure income-for-doing-nothing, over making commercial loans that entail risk.
One thing I try to do with varying degrees of success is to understand my “opponent” from his own point of view. You oppose the Fed, and you are 100% right there, if you ask me. But you have to try to understand why the people at the Fed can believe they are providing an important public service. There are arguments in their favor, and you can’t understand them until you understand those arguments.
But in any case. your point (b) is unfair. The Fed pays almost nothing on those reserves, the banks would much, much rather be lending the “money”, but they are constrained by rules and this is by design. When they disregarded the rules and made subprime loans everybody yelled at them. So they go back to following the rules and wind up not making loans and … everybody yells at them. I mean, which is it?
And your point (a) is a misunderstanding. The Fed IS a “national bank”; but no bank can waive a magic wand and make things be other than they are; no bank can conjure an apple pie out of nothing, let alone effectuate widespread prosperity through “money” issuance. Money is perhaps not easy to completely understand, but it is not voodoo or magic.
Production causes prosperity. Money is the medium to exchange and (hopefully) distribute it. You’re confusing the two.
I’m unfazed by your responses.
Without the concrete example of North Dakota, I would accept your position as arguable. With that example, your position is more disputacious, than arguable.
I think I see where you’re coming from, because I agree that the FED was not designed to fund public interests (including state government) at the same rate as private banks. But how set up a rule that states can’t operate a national bank, when one state always has and does, with such obvious, incontrovertible benefits? Was this an overlooked, fatal flaw in the FED’s otherwise perversely complete, 1913 design?
Bankers seem to have suppressed the realization of North Dakota’s model successfully for a long time. Can they continue to do so in the Internet age, using all the disinformation they can spout, and all the arm-twisting and bribery they can manage, in every other state, and in Congress? Isn’t that the real question?
Can we agree that the answer is now blowing in the wind, and more so than at any previous time?
I’m not here to faze anyone, just trying to clear up misunderstandings.
Glad you brought up the North Dakota thing. Now please, respectfully, this is a completely specious comparison. The Bank of North Dakota is not like a central bank at all; it’s just like a lot of other state chartered banks, of which there are many all across the US.
None of those banks, including the Bank of North Dakota, has the powers of a central bank: to act as a “bank of issue”; to regulate the money supply; to carry out the government’s monetary policy; to act as the lender of last resort to the banking system; to influence interest rates through “open market operations” and such. A central bank is an arm of the government. It is not a bank like other banks.
More info:
http://en.wikipedia.org/wiki/Central_bank
North Dakota may well have all those good things going or it, I don’t know. What I do know is that it has nothing to do with its having the “Bank of North Dakota” which, whatever its laudable purposes and practices, cannot have 1/100th the influence on the economy of North Dakota that the Federal Reserve in Washington does, no more than any other state chartered bank.
I know this money and banking stuff is opaque. I’m sure there are gaps in my understanding of it all as well. But on this part Ellen is just, you know, way way off.
Re point (b), you are clearly missing a key point. If the interest paid on reserves were so insignificant, then:
(i) Why did the FED take the trouble to extraordinarily accelerate it’s introduction to October 2008?
(ii) Why do FED officials announce that the purpose of the interest payment reallyis to render more advantageous the retention of reserves?
I accept that I don’t understand the exact process here, but the most credible explanation to me, based carefully on my present perception, is a combination of FED failing and flailing, while banks as ever do whatever they want — in full knowledge of the desperately uncertain US-small-fry solvency circumstances, which they are so well aware of, in light of the junk still face-valued on their books, which they themselves brought about.
I’m finally getting to figure out the mechanical details. Ellen’s ‘shrinking’ link explains why banks are now simply sitting on more capital than ever before:
” the Dodd-Frank financial overhaul, and banking agreements like Basel II and III, demand ever-higher capital ratios at the banks. And they are doing this at the same time as the new law is restricting some of the financial instruments that banks use to raise capital, like trust-preferred securities, which are a hybrid of equity and debt. In essence, the government has weakened the banks’ access to capital while demanding they increase their capital ratios. Still another wrinkle is that Congress and regulators have changed the way they measure a bank’s capital. It used to be calculated simply by adding a bank’s common equity to its reserves. Today, however, the authorities use a measure called Tier 1 capital. This is an extraordinarily complex calculation that no longer uses banks’ assets to determine bank capital-to-asset ratios.
Instead, Tier 1 uses a new concept called “risk-weighted assets.” Without going into the details, what this means is that the new capital calculations penalize banks for making loans and reward them for holding cash and government-backed securities. So banks have understandably been dumping loans and adding cash and Treasury bonds. Before the banking crisis, cash and Treasuries accounted for 5.7 percent of American banks’ assets. They now account for 9.4 percent. Just look at the biggest American banks. Bank of America, while shrinking its assets and loan portfolio, has $172 billion in cash on its balance sheet. Citibank is sitting on $185 billion in cash; JPMorgan Chase has $72 billion. Yet just try to get a new loan from any of them. For smaller banks the problem is bigger. Community banks have relied on trust-preferred securities to build their capital for decades. Not only are they prohibited from using these instruments in the future, but they must replace them with common equity — that is, they have to sell stock in their company.”
In addition, QE is purchasing Treasuries not from the Treasury, but from the banks, and it is motivating those sales by offering a very slightly higher interest payment on the reserves than the bonds themselves pay.
The Fed Reloads the banks and they reinvest the Money in every country but the USA this is why I say we need to abolish the Fed and reenact the US Constitution’s Article 1 Section 10 sound money rule and put we the people back in charge of their own monetary / money Policy , then we the people can decide what to do with our money creation . HR 833 will start this .
If the borrower defaults to the Fed, which has created
the money out of thin air in the first place, what loss
is it to the Fed? It can simply cancel the debt.
That’s what the Fed is doing with QE2, creating
money out of thin air with which to buy government
securities held by the banks so they have more
cash on hand. They should feel more secure to lend
more. There are lots of enterprises that will be able
to repay the loans. Right now everyone is so uptight
with toxic assets on hand that they can’t move.
If the Fed buys the toxic assets with money created
by it out of thin air, they get money back into the
hands of lenders and may even make money for
the government out of selling the toxic assets
when the price is right.
Not only did the banks create the Fed, but the banks created MERS, which exacerbated the real estate bubble that caused the economic downturn and foreclosures that followed the bust.
The question is not whether or not the banks bear a responsibility for local governments’ dire circumstances, but to what extent the courts will make them pay for their transgressions.
Many cities and counties have filed complaints charging MERS and the banks with failure to pay mortgage transfer fees. As real estate values fall, so do property taxes, which further cuts their revenues.
With all the damages cities have experienced due to bank negligence and questionable actions, the Fed and the banks have a nerve to deny them relief. They, and we, are pretty much at the mercy of the courts, unless local governments take matters into their own hands by withdrawing their funds from the banks that are causing their problems and establishing their own banks, as Ellen and others have suggested.
Here, here! Although virtually never attacked or blamed by the media, the courts — and in particular the Supreme Court and its professional sycophants — are more responsible than the other two branches for whole sorry global economic mess.
From their unanimous 1978 Marquette decision, in fact as wrong as though a pitch that had hit the first baseman were called a strike; which in one stroke nixed or fatally undercut every predatory lending protection in the nation.
Through Stoneridge’s 5-4 majority in 2008, which expressly legalized third party sham transactions knowingly designed for securities farud, on the grounds that penalizing such fraud (which was not really fraud at all) would be bad for business. How quaint, that Ginsberg’s footnote, arguing that integrity was good for the market was addressed and overruled, as a matter of fact! Incidentally, Staoneridge was sub silento promptly applied to excuse the the $95 billion dollar sham transaction of a fraud recidivist, even where the third party and first party shared directors, via a GVR (grant/vacate/remand order); and it was followed a week later by the general dismissal of Enron fraud complaints.
By Stoneridge’s logic, a bank gettaway car driver would be immune — wherefore Stoneridge violates equal protection for main street bank robber assistants.
Why won’t the Supreme Court televise it’s hearings? Because it could no longer get away with such garbage decisions as when 5 justices declare that congress’ language “clearly/unambiguously” means one thing, while four justices declare that it “clearly/unambiguously” means the very opposite.
The common man can see through such willful stupidity. Yet the court’s most important decisions — those that override/preempt individual contract/tort rights, which all nine arrogate as mere judge-made fictions, their natural law basis being disparaged as some simpleton-founding-father-notion — all these decisions require such clarity in the language of congress. If the court were televised, the nincompoop nine would no longer be able to arrogate such powers by such narrow-majority nonsense and unanimous hubris.
Marquette my words. Everybody must get Stoneridge.
[…] Brown writes here about the indebted US states but her prescription also works for indebted eurozone member states. […]
I think Atticus’ point is correct that the Federal Reserve was never intended to serve the public interest. And although Ellen’s most recent articles show a desperate wish to the contrary, the Fed is still beholden to it shareholders, the banking industry, rather than to the public.
Then, how about H.R. 6550? The “NEED act” in order to fix this?
The sooner it becomes law (as currently written and posted on Dennis Kucinich’s website) the better!
I just read an introduction to Gertrude Coogan’s “The Money Creators” written by Robert L. Owen. Owen says he drafted the first Federal Reserve Bill, with the requirement that the “Reserve System be employed in the service of commerce and to promote a stable price level.”
He says: “Under the administrations of Wilson, Harding, Coolidge and Hoover, this Act was diverted from its proper purpose on the advice of some who controlled the policies of a number of the largest banks.”
Probably this was the plan from the get-go, and Owen was allowed to draft the bill so it would look like reform and get passed.
nice……………………………………………………………………………..^_^b
HEY ELLEN
WOULD YOUR FRANCHISE BE ENDANGERED IF INSTEAD OF:
“The old rules no longer apply because they have been changed to suit the moneyed interests that hold Congress and the Fed captive.”
YOU WROTE:
THE OLD RULES ARE NO LONGER NEEDED BECAUSE CONGRESS & THE FED ARE OWNED & OPERATED BY THE MASTERS OF THE UNIVERSE & THERE IS NO TURNING BACK?
“CAPTIVE” CONNOTES UNWILLING PARTICIPANT, WHEN IN REALITY THEY ARE ACTIVE PREDATORY CONSPIRATORS.
GBY
DR.B
Everyone over here should read this:
Then read this:
And then this:
If the states are abandoned by Washington, they have a nuclear option:
They can pass resolutions for a Constitutional Convention. Charge their Convention Delegates to resolve the financial mess.
It’s past time the states reasserted themselves. In 1932, the states were so angry with Herbert Hoover they passed the 20th Amendment expressly to bring his term of office to the earliest possible ending. It didn’t quite work out, since the Amendment first took effect in 1937.
Well, this is interesting:
http://www.allgov.com/Top_Stories/ViewNews/US_Starts_to_Call_in_Loans_to_States_for_Unemployment_Benefits_110117
They really ought to just write it off, but maybe the feds are just trying to kill off the states fiscally. More power for them, doncha know.
People should be reading my blog, BTW. Lots of good stuff there over the last few days.
Such as this:
and this:
[…] “Web of Debt” website we get a good reason for states to have their own state banks. https://webofdebt.wordpress.com/2011/01/12/the-fed-has-spoken-no-bailout-for-main-street/ She says in the article that Fed Chairman Bernanke told Congress that the Fed won’t or […]
This is the precise blog for anyone who wants to find out about this topic. You understand so much its nearly arduous to argue with you (not that I actually would want…HaHa). You positively put a brand new spin on a topic thats been written about for years. Nice stuff, just nice!