As Ellen makes clear, a bank that is too big to fail is also too big. Support has to be directed downward to the many other tiers of the economy. And yes, starting with States and cities with cheap money is a good start. A better place is to completely underwrite a completely reworked mortgage market that also employs my bank/fed participation scheme. (earlier posts)
She also points out that we have a lot of bad ideas running around, most of which are some variant of walking away and let the market sort it out. This always fails to recall that the depression was caused by just that decision.
After all if I walk up to your door and inform you that you must pay out your mortgage now or leave immediately, you could not reasonably solve it all. Present foreclosure laws have actually become unreasonable because the banks chose to lower their underwriting standards and thus filled the market with a glut of housing making it impossible to dispose of a property in a timely manner.
The point here is that while we have prevented an outright collapse of the larger banking system, this has only allowed that system to properly contract to proper post bubble size. The process is not over and will not be over until the mortgage inventory is fully capitalized in about two years.
It is necessary to now create liquidity in the smaller financial system and this will be best done by establishing a State banking system that is similar to
The reward is that such a step will speed up the recovery.
A Solution to the Federal Debt Crisis? Time for Helicopter Ben to Drop Some Money on Mainstream
By Ellen Brown
URL of this article: www.globalresearch.ca/index.php?context=va&aid=20962
Global Research, September 9, 2010
The Fed is proposing another round of “quantitative easing,” although the first round failed to reverse deflation. It failed because the money went into the coffers of banks, which failed to lend it on. To reverse deflation, the money needs to be funneled directly to state and local economies. The Fed may not be authorized to “monetize” state bonds, but it COULD buy bonds issued by state-owned banks.
In 2002, in a speech that earned him the nickname “Helicopter Ben,” then-Fed Governor Bernanke famously said that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. “The
It seems logical enough. If there is insufficient money in the money supply (deflation), the solution is to put more money into it. But if deflation is so easy to fix, then why has the Fed’s massive attempts to date failed to do the job? At the Federal Reserve’s Jackson Hole summit on August 27, Chairman Bernanke said he would fight deflation with his whole arsenal, including “quantitative easing” (QE) – purchasing longterm securities with money created on a computer. Yet since 2008, the Fed has added more than $1.2 trillion to “base money” doing just that, and the economy is still in a serious deflationary spiral. In the first quarter of this year, the money supply actuallyshrank at a record annual rate of 9.6%.
Cullen Roche at The Pragmatic Capitalist has an answer to that puzzle. He says that as currently practiced, quantitative easing (QE) isnot really a money drop. It is just an asset swap:
“[T]he Fed doesn’t actually ‘print’ anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset.”
The Fed just swaps Federal Reserve Notes (dollar bills) for other assets (promissory notes or debt) that can quickly be turned into money. The Fed is merely trading one form of liquidity for another, without raising the overall water level in the pool.
The mechanics of how QE works were revealed in a remarkable segment on National Public Radio on August 26, describing how a team of Fed employees bought $1.25 trillion in mortgage bonds beginning in late 2008. According to NPR:
“The Fed was able to spend so much money so quickly because it has a unique power: It can create money out of thin air, whenever it decides to do so. So . . . the mortgage team would decide to buy a bond, they’d push a button on the computer – ‘and voila, money is created.’
“The thing about bonds, of course, is that people pay them back. So that $1.25 trillion in mortgage bonds will shrink over time, as they get repaid. Earlier this month, the Fed announced that it will use the proceeds from the mortgage bonds to buy Treasury bonds – essentially keeping all that newly created money in circulation. The decision was a sign that the Fed thinks the economy still needs to be propped up with extraordinary measures.”
“Extraordinary measures” was a reference to Section 13(3) of the Federal Reserve Act, which allows the Fed in “unusual and exigent circumstances” to buy “notes, drafts and bills of exchange” (debt instruments) from “any individual, partnership or corporation” satisfying its requirements. The Fed was supposedly engaging in these extraordinary measures to “reflate” the money supply and get credit flowing again. Yet the money supply continued to shrink. The problem, as Roche explains, is that the dollars were merely being swapped for other highly liquid assets on bank balance sheets. That this sort of asset swap will not pump up a collapsed money supply has been shown not only by the Fed’s failed experiments over the last two years but by two decades of failed QE policy in Japan, an economy which remains in the deflationary doldrums. To reverse deflation, it seems, QE needs to be directed somewhere else besides the balance sheets of private banks. What we need is the sort of helicopter drop described by Bernanke in 2002 – one over the towns and cities of the real economy.
There is another interesting lesson suggested by two decades of failed QE: it might actually be possible for the government to “print” its way out of debt, without triggering the dreaded hyperinflation long warned of by pundits. Swapping dollars for debt hasn’t inflated the circulating money supply to date because federal debt securities already serve as forms of “money” in the economy.
The Textbook Money Multiplier Model . . . And Why It Is Obsolete
Beginning with some definitions, “quantitative easing” is explained in Wikipedia like this:
“A central bank . . . first credit[s] its own account with money it has created ex nihilo (‘out of nothing’). It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus a hopeful stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.”
“Deposit multiplication” is the textbook explanation for how credit expands as it circulates through the economy. In the textbook model, banks must retain “reserves” equal to 10% of outstanding deposits (including deposits created as loans). With a 10% reserve requirement, a $100 deposit can support a $90 loan, which gets deposited in another bank, where it becomes an $81 loan, and so forth, until a $100 deposit becomes $1,000 in credit-money.
The theory is that increasing the banks’ reserves will stimulate this process, but both the Federal Reserve and the Bank for International Settlements (BIS) now concede that the process has not been working in the textbook way. (The BIS is “the central bankers’ central bank” in
The failure of QE either to increase bank lending or to inflate the money supply was confirmed in a March 24 paper by Federal Reserve Vice Chairman Donald L. Kohn, who wrote:
“The huge quantity of bank reserves that were created [by quantitative easing] has been seen largely as a byproduct of the purchases [of debt instruments] that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation.”
The textbook model is obsolete because banks don’t make lending decisions based on how many reserves they have. They can alwaysget the reserves they need. If customers don’t walk in the door with new deposits, the bank can borrow deposits from other banks, something they can now do at the very low Fed funds rate of .2% (1/5th of 1%). And if those deposits are not available, the Federal Reserve itself will supply the reserves. This was confirmed in a BIS working paper called “Unconventional Monetary Policies: An Appraisal”, which observed:
“[T]he level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. . . .
“The aggregate availability of bank reserves does not constrain the expansion [of credit] directly. The reason is simple: . . . in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system. From this perspective, a reserve requirement, depending on its remuneration, affects the cost . . . of loans, but does not constrain credit expansion quantitatively. . . . [A]n expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best.”
Again, one form of liquidity is just substituted for another, without changing the overall level in the pool.
If bank reserves do not constrain bank lending, what does? According to the BIS paper, “the main . . . constraint on the expansion of credit is minimum capital requirements.” These capital requirements, known as “
A Solution to the Federal Debt Crisis?
Another interesting aside arising from all this is the suggestion that the government could actually print its way out of debt – it could print dollars and buy back its bonds -- without creating inflation. As Roche observes:
“[Quantitative easing] in time of a balance sheet recession is not actually inflationary at all. With the government merely swapping assets they are not actually ‘printing’ any new money. In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits. . . . [T]his policy response would in fact be deflationary – notinflationary.”
Roche concludes, “the inflationistas have been wrong and the
“In my opinion, the
The failed QE experiments in
The Fed’s earlier attempts at QE involved swapping $1.25 trillion in mortgaged-backed securities (MBS) for dollars created on a computer screen. As noted in the NPR segment, many of those securities have come due and have gotten paid off, putting cash in the Fed’s till. The Fed now proposes to use this money to buy long-term Treasury debt rather than MBS. That means the Fed will, in effect, be buying the government’s debt with dollars created on a computer screen. The privately-owned Federal Reserve is not actually an arm of the federal government, but if it were, the government would thus be printing its way out of debt – just as Helicopter Ben proposed in 2002. Recall that he said, “the
Running the government’s printing presses to pay its bills has not seriously been tried since the Civil War, when President Lincoln saved the North from a crippling war debt at usurious interest rates by printing Greenbacks (
How to Reverse a Deflation:
Do a Helicopter Drop on the States
The government could pay its bills by issuing Greenbacks as
A “state” might not qualify as an “individual, partnership or corporation” under Section 13(3) of the Federal Reserve Act, but a state-owned bank would. Bruce Cahan, an attorney and social entrepreneur in Silicon Valley, California, proposes that the Fed could diversify its role by buying long-term bonds in existing or newly-chartered state-owned banks. These banks, which would have a mandate to serve state and local communities, would more quickly and accountably lend for in-state purposes than private banks do now. They could be required to use accepted transparency accounting standards to trace how the proceeds of their loans flowed into the economy. Local needs would thus determine how best to jumpstart and keep alive businesses and households that the “too big to fail” megabanks no longer want to fund on fair credit terms. Adding a state-owned bank would also bring competition to regional banking markets such as that of the
Ellen Brown is an attorney and the author of eleven books. In Web of Debt, her latest book, she shows how the Federal Reserve and "the money trust" have usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are webofdebt.com, ellenbrown.com, and public-banking.com.