Ellen weighs in again and this time she really
gets to the heart of the problem. It is
this:
Credit creation is local and must support local
needs and must never divert resources elsewhere however attractive returns
look.
That is clearly the heart of our present
problems. Devolving the role of central
banking down to the state or even mega city level effects this end and
regulatory oversight prevents adventures.
In Canada ,
the main banks caught the fever from New
York and came wanting to merge and play to the
government who had a long memory of such adventures and shut it down. A realistic alternative would have been to
order the banks to fund with equity an investment bank to go play. That at least would insulate the core
business from capital impairment. That
is largely what the Canadian banks have done into their forays into the USA .
As the Bank of North Dakota prospers, it will also
be wise to create similar cut outs for non core businesses.
The obvious point to everyone is that a prosperous
state banking system that held state government deposits and largely dominated
the local mortgage industry would hardly notice what is going on in New York . Certainly the citizens of north Dakota are thanking their lucky stars.
One other thing must be stated. Many of the States today have no viable
choice but to establish this facility, not least been California .
It is not the total answer but diversion of the financing profits to
paying down the state obligations will go a long way to stabilizing the
situation.
There are global financing needs, but these are
better handled by outright underwriting into a deep distributed banking system
were quality really matters. Centralized
banking eliminated the need for quality at the expense of short term profits.
The Global Debt Crisis: How We
Got In It, and How to Get Out
By Ellen Brown
URL of this article: www.globalresearch.ca/index.php?context=va&aid=25154
Global Research, June 6,
2011
Countries everywhere are facing debt crises today,
precipitated by the credit collapse of 2008. Public services are
being slashed and public assets are being sold off, in a futile attempt to
balance budgets that can’t be balanced because the money supply itself has
shrunk. Governments usually get the blame for excessive spending,
but governments did not initiate the crisis. The collapse was in the
banking system, and in the credit that it is responsible for creating and
sustaining.
Contrary to popular belief, most of our money today is not created by governments. It is created by private banks as loans. The private system of money creation has grown so powerful over the centuries that it has come to dominate governments globally. The system, however, contains the seeds of its own destruction. The source of its power is also a fatal design flaw.
Contrary to popular belief, most of our money today is not created by governments. It is created by private banks as loans. The private system of money creation has grown so powerful over the centuries that it has come to dominate governments globally. The system, however, contains the seeds of its own destruction. The source of its power is also a fatal design flaw.
The flaw is that banks advance “bank credit”
that must be paid back with interest, while having no obligation to spend the
interest they collect so that borrowers can earn it again and again, as they
must in order to retire the debt. Instead, this money is invested in
various casinos beyond the borrowers’ reach. This leads to a continual systemic
need for more new bank credit money, more debt with more interest attached, to
prevent widespread defaults and deflationary collapse.
Today this problem is particularly evident in the
EU. The Euro is a fixed currency system that does not allow for
expansion to meet the demands of the private lending casino. The
result is that EU member nations collectively are being crippled by debt.
There are more sustainable ways to run a banking and credit system, as will be shown.
There are more sustainable ways to run a banking and credit system, as will be shown.
How
Banks Create Money
The process by which banks create money was
explained by the Chicago Federal Reserve in a booklet called “Modern Money Mechanics.” It states:
“The actual process of money creation takes place primarily in banks.” [p3]
“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount].” [p6]
“With a uniform 10 percent
reserve requirement, a $1 increase in reserves would support $10 of additional
transaction accounts.” [p49]
A $100 deposit supports a $90 loan, which becomes a $90 deposit in another bank, which supports an $81 loan, etc.
That’s the conventional model, but banks actually create the loans FIRST. (Picture how a credit card works.) Banks need deposits to clear their outgoing checks, but they find the deposits later. Banks create money as loans, which become checks, which go into other banks. Then, if needed to clear the checks, they borrow the money back from the other banks. In effect, they borrow back the money they just created, pocketing the spread between the interest rates as their profit. The rate at which banks can borrow from each other in the
How the System Evolved
The current system of privately-issued money is traced in “Modern Money Mechanics” to the 17th century goldsmiths. People who left gold with the goldsmiths for safekeeping would be issued paper receipts for it called “banknotes.” Other people who wanted to borrow money were also happy to accept paper banknotes in place of gold, since the notes were safer and more convenient to carry around. The sleight of hand came in when the goldsmiths discovered that people would come for their gold only about 10% of the time. That meant that up to ten times as many notes could be printed and lent as the goldsmiths had gold. Ninety percent of the notes were basically counterfeited.
This system was called “fractional reserve” banking and was institutionalized when the Bank of England was founded in 1694. The bank was allowed to lend its own banknotes to the government, forming the national money supply. Only the interest on the loans had to be paid. The debt was rolled over indefinitely.
That is still true today. The U.S. federal debt is never paid off but just
continues to grow, forming the basis of the U.S. money
supply.
The Public Banking Alternative
There are other ways to create a banking system, ways that would eliminate its ponzi-scheme elements and make the system sustainable. One solution is to make the loans interest-free; but for Western economies today, that transition could be difficult.
Another alternative is for banks to be publicly-owned. If the people collectively own the bank, the interest and profits go back to the government and the people, who benefit from decreased taxes, increased public services, and cheaper public infrastructure. Cutting out interest has been shown to reduce the cost of public projects by 30-50%.
In the
During the period that the Pennsylvania system was in place, the colonists paid no taxes except excise taxes, prices did not inflate, and there was no government debt.
How Private Banknotes Became the National
The
In an international first, the colonists funded a war against a major power with mere paper receipts, and won. But the British counterattacked by waging a currency war. They massively counterfeited the colonists’ paper money, at a time when this was easy to do. By the end of the war, the paper scrip was virtually worthless. After it lost its value, the colonists were so disillusioned with paper money that they left the power to issue it out of the U.S. Constitution.
Meanwhile, Alexander Hamilton, the first U.S. Treasury Secretary, was faced with huge war debts, and he had no money to pay them. He therefore resorted to the ruse used in
The ruse worked: the paper banknotes expanded the
money supply, the debts were paid, and the economy thrived. But it
was the beginning of a system of government funded by debt to private bankers,
who lent banknotes only nominally backed by gold.
During the American Civil War, President Lincoln avoided
a crippling war debt by returning to the system of government-issued money of
the American colonists. He issued U.S. Notes from the Treasury
called “Greenbacks” rather than borrowing at usurious interest
rates. But Lincoln
was assassinated, and Greenback issuance was halted.
In 1913, the privately-owned Federal Reserve was authorized to issue its own Federal Reserve Notes as the national currency. These notes were then lent to the government, eliminating the government’s own power to issue money (except for coins). The Federal Reserve was set up to prevent bank runs, but twenty years later we had the Great Depression, the greatest bank run in history. Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of
“We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve.”
For the bankers, however, it was a good system. It put them in control.
Setting the Global Debt Trap
Prof. Carroll Quigley was an insider groomed by the international bankers. He wrote in Tragedy and Hope in 1966:
“The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.
“The apex of the system was to be the Bank for International Settlements [BIS] in
The debt trap was set in stages. In 1971, the dollar went off the gold standard internationally. Currencies were unpegged from gold and allowed to “float” in currency markets, competing with other currencies, making them vulnerable to speculation and manipulation.
In 1973, a secret agreement was entered into in which the OPEC countries would sell oil only in dollars, and the price of oil would be dramatically increased. By 1974, oil prices had increased by 400% from 1971 levels. Countries lacking oil had to borrow dollars from
In 1981, the Fed funds rate was raised to 20%. At 20% compound interest, debt doubles in under four years. As a result, most of the world became crippled by debt. By 2001, developing nations had repaid the principal originally owed on their debts six times over; but their total debt had quadrupled because of interest payments.
When debtor nations could not pay the banks, the International Monetary Fund stepped in with loans -- with strings attached. The debtors had to agree to “austerity measures,” including:
· cutting social services
· privatizing banks and public
utilities
· opening markets to foreign
investors
· letting currencies “float.”
Today, austerity measures are being imposed not just in developing countries but in the European Union and on U.S. States.
The BIS: Apex of the Private Central Banking Pyramid
What Professor Quigley foretold about the Bank for International Settlements (BIS) has also come to pass. The BIS now has 55 member nations and heads the global financial pyramid.
The power of the BIS was seen in 1988, when it raised the capital requirement of its member banks from 6% to 8% in an accord called
To persuade the investors to buy them, these mortgage-backed securities were protected against default with “derivatives,” which were basically just bets. The “protection seller” collected a premium for agreeing to pay in the event of default. The “protection buyer” bought the premium. Owning the asset was not required. Like gamblers at a horse race, derivative players could bet without owning a horse.
Derivatives became a very popular form of gambling. The result was the mother of all bubbles, exceeding $500 trillion by the end of 2007.
Because of securitization and derivatives, credit mushroomed. Virtually anyone who walked in the door could get a loan.
The tipping point came in August 2007, with the collapse of two hedge funds. When the derivatives scheme was exposed, the market for derivative-protected securities suddenly dried up. But the
The BIS has now become global regulator, just as Quigley foresaw. In April 2009, the G20 nations agreed to be regulated by a Financial Stability Board based in the BIS, and to comply with “standards and codes” set by the Board. The codes are only guidelines, but countries that fail to comply risk downgrades in their credit ratings, something so costly that the guidelines have effectively become laws.
An article on the BIS website states that central banks in the Central Bank Governance Network should have as their single or primary objective “to preserve price stability.” That means governments should not devalue the national currency by inflating the money supply; and that means not “printing money” or borrowing credit created by their own central banks. Like the American colonies after King George took away their power to issue their own money, governments must fund their deficits by borrowing from private banks. The bankers’ global control over currency issuance has become virtuallycomplete.
The effects of this policy are particularly evident in the European Union, where EU rules allow deficits of only 3% of government budgets and prevent member countries from either issuing their own money or borrowing credit advanced by their own central banks. Member nations must borrow instead from the European Central Bank, private international banks, or the IMF. The result has been forced austerity measures, as seen in
The Way Out: Return the Money Power to Public Control
To escape the debt trap of the global bankers, the power to create the national money supply needs to be restored to national governments. Alternatives include:
· Legal tender issued directly by national treasuries and spent on national budgets.
· Publicly-owned central banks
empowered to advance the nation’s credit and lend it to the government
interest-free.
· Nationalization of bankrupt
banks considered “too big to fail” (after expunging or writing down bad debts
on inflated bubble assets). These banks could then issue credit to
the public and serve the public’s banking needs, with the profits recycling
back to the government, defraying the tax burden on the people.
· Publicly-owned local banks
(state, provincial, or municipal).
Publicly-owned banks have been successfully established and operated in many countries, including Australia , New Zealand , Canada , Germany , Switzerland , India , China , Japan , Korea , and Malaysia .
In
the United States
there is currently only one state-owned bank, the Bank of North
Dakota. The model, however, has proven to be highly
successful. North Dakota is the only
U.S.
state to have escaped the credit crisis unscathed. In 2009, while
other states floundered, North Dakota
had its largest budget surplus ever. In 2008, the Bank of North
Dakota (BND) had a return on equity of 25%. North Dakota has the lowest unemployment
rate in the country and the lowest default rate on loans. It also
has the most local banks per capita.
A growing movement is afoot in the
The model could also be replicated in other countries. In
Japan’s solution is also a variant of what Alexander Hamilton proposed two centuries earlier.
Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org. In Web of Debt, her latest of eleven books, she shows how the power to create money has been usurped from the people, and how we can get it back. Her websites are http://webofdebt.com and http://ellenbrown.com
1 comment:
A frontal attack will not replace the fed with local banks. But it may be possible to subvert the fed. If you go here, and
www.dnusbaum.com/fix.html you will see a 6000 word article on a private solution to the housing mess. A side affect of this would be that the housing co-ops using normalized housing units could act as banks.
I am not sure, but it seems possible. Comments would be welcome
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