Two major forces are now grinding
through the financial system and the economy.
I have posted on this before and the failure to act in a timely manner
is on its way to making the dénouement into a major crisis.
First, a massive global credit
contraction is continuing. This is
reflected in little ways and some major ways.
The Greek bailout is a major event. While the persistent decline in
housing values in the USA
As I posted immediately two years
ago, it was necessary to recapitalize the American people in order to bail out
the disaster in the housing industry brought on be reckless lending. That was not done and the inevitable result
is now upon us.
The corollary to that failure and
the inability to cleanse the inventory of housing is a sharp contraction of
municipal revenues and state revenues worsened by the loss of eleven million
wage earners. Of course Federal revenues are also contracting at the same time. All governments are about to become very desperate
as all this sinks in during the coming year.
The good news is that the rest of
the world was not so stupid. They are well
ahead of all this and will be in full swing and providing plenty of orders for
American business. Thus weak domestic
demand is not the end of the world for Main Street
So far the Fed has failed to
recap the American people and is now failing to recap the State and Municipal
governments. They also failed to nationalize
the investment banking structure in exchange for bailing out their treason. It is my contention that those were the
appropriate actions at the time and continue to be the appropriate actions
today.
We should be in a full blown
recovery today and not worrying about the pending State and City defaults that
will soon be crashing through the bond markets.
America's Economic and Social Crisis: The Fed has Spoken: No Bailout
for Main Street
By Ellen Brown January 13, 2011
URL of this article: www.globalresearch.ca/index.php?context=va&aid=22768
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 buymunicipal 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 100 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 lang=EN-US>is limited by statute to buying municipal
government debtwith 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
· [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
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
The BND has helped North
Dakota North Dakota North
Dakota
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
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.
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
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
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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