The real take home here is that the focus on the central bank is
grossly misguided. The correct response is through direct government
action. This should consist of mostly extending credit guarantees.
You do not ask stupid people to make smart decisions.
You create credit. This is something only the government can do.
Banks merely lend to what you have created. They often do not do
much of a job determining good intent. Our whole housing industry
lives and dies on the basis of first time lending guarantees for a
first time buyer. His education is underwritten is the same way.
The future is terribly fearful and only the fiat of government can
set that aside.
In 2008, the housing collapse was easy to fix then and there in about
six months. The alternative was clearly the four years needed to
sort out who was still alive. The end cost was several times what
might have been spent then. Done my way as I suggested then, we
would likely have all the money back with a huge profit.
Today millions are outside the credit regime and are not customers.
This is a depression in modern form. Yet no one has a clue.
The Financial
Instrument That Could Save the Economy - and Why It Hasn't
Sunday, 24 February
2013 06:08By Ellen Brown,
As QE is practiced
today, the money created on a computer screen never makes it into the
real, producing economy.
Quantitative easing
(QE) is supposed to stimulate the economy by adding money to the
money supply, increasing demand. But so far, it hasn't been working.
Why not? Because as practiced for the last two decades, QE does not
actually increase the circulating money supply. It merely cleans up
the toxic balance sheets of banks.
A real "helicopter
drop" that puts money into the pockets of consumers and
businesses has not yet been tried. Why not? Another good question.
When Ben Bernanke gave
his famous helicopter money speech to the Japanese in 2002, he was
not yet chairman of the Federal Reserve. He said then that the
government could easily reverse a deflation, just by printing money
and dropping it from helicopters.
"The US
government has a technology, called a printing press (or, today, its
electronic equivalent)," he said, "that allows it to
produce as many US dollars as it wishes at essentially no cost."
Later in the speech, he discussed "a money-financed tax cut,"
which he said was "essentially equivalent to Milton Friedman's
famous 'helicopter drop' of money." Deflation could be cured,
said Friedman, simply by dropping money from helicopters.
It seemed logical
enough. If the money supply were insufficient for the needs of trade,
the solution was to add money to it. Most of the circulating money
supply consists of "bank credit" created by banks when they
make loans. When old loans are paid off faster than new loans are
taken out (as is happening today), the money supply shrinks. The
purpose of QE is to reverse this contraction.
But if debt deflation
is so easy to fix, then why have the Fed's massive attempts to pull
this maneuver off failed to revive the economy? And why is Japan
still suffering from deflation after 20 years of quantitative easing?
On a technical level,
the answer has to do with where the money goes. The widespread belief
that QE is flooding the economy with money is a myth. Virtually all
of the money it creates simply sits in the reserve accounts of banks.
That is the technical
answer, but the motive behind it may be something deeper.
An Asset Swap Is Not a
Helicopter Drop
As QE is practiced
today, the money created on a computer screen never makes it into the
real, producing economy. It goes directly into bank reserve accounts,
and it stays there. Except for the small amount of "vault cash"
available for withdrawal from commercial banks, bank reserves do not
leave the doors of the central bank.
According to Peter
Stella, former head of the Central Banking and Monetary and Foreign
Exchange Operations Divisions at the International Monetary Fund:
Banks do not lend
'reserves....' Whether commercial banks let the reserves they have
acquired through QE sit 'idle' or lend them out in the internet bank
market 10,000 times in one day among themselves, the aggregate
reserves at the central bank at the end of that day will be the same.
This point is also
stressed in Modern Monetary Theory. As explained by Prof. Scott
Fullwiler:
Banks can't 'do'
anything with all the extra reserve balances. Loans create deposits;
reserve balances don't finance lending or add any 'fuel' to the
economy. Banks don't lend reserve balances except in the federal
funds market, and in that case the Fed always provides sufficient
quantities to keep the federal funds rate at its ... interest rate
target.
Reserves are used
simply to clear checks between banks. They move from one reserve
account to another, but the total money in bank reserve accounts
remains unchanged. Banks can lend their reserves to each other, but
they cannot lend them to us.
QE as currently
practiced is simply an asset swap. The central bank swaps newly
created dollars for toxic assets clogging the balance sheets of
commercial banks. This ploy keeps the banks from going bankrupt,
but it does nothing for the balance sheets of federal or local
governments, consumers or businesses.
Central Bank Ignorance
or Sabotage? Another Look at the Japanese Experience
That brings us to the
motive. Twenty years is a long time to repeat a policy that isn't
working.
UK Professor Richard
Werner invented the term quantitative easing when he was
advising the Japanese in the 1990s. He says he had something quite
different in mind from the current practice. He intended for QE
to increase the credit available to the real economy. Today, he says:
All QE is doing is to
help banks increase the liquidity of their portfolios by getting rid
of longer-dated slightly less liquid assets and raising cash....
Reserve expansion is a standard monetarist policy and required no new
label.
Werner contends
that the Bank of Japan (BOJ) intentionally sabotaged his proposal,
adopting his language, but not his policy; and other central banks
have taken the same approach since.
In his 2003
book Princes of the Yen, Werner maintains that in the
1990s, the BOJ consistently foiled government attempts at creating a
recovery. As summarized in a review of the book:
The post-war
disappearance of the military triggered a power struggle between the
Ministry of Finance and the Bank of Japan for control over the
economy. While the ministry strove to maintain the controlled
economic system that created Japan's post-war economic miracle, the
central bank plotted to break free from the ministry by reverting to
the free markets of the 1920s....
They reckoned that the
wartime economic system and the vast legal powers of the Ministry of
Finance could only be overthrown if there was a large crisis - one
that would be blamed on the ministry. While observers assumed that
all policy-makers have been trying their best to kick-start Japan's
economy over the past decade, the surprising truth is that one key
institution did not try hard at all.
Werner maintains that
the Bank of Japan not only blocked the recovery, but actually created
the bubble that precipitated the downturn:
Those central bankers
who were in charge of the policies that prolonged the recession were
the very same people who were responsible for the creation of the
bubble....
They ordered the banks
to expand their lending aggressively during the 1980s. In 1989,
[they] suddenly tightened their credit controls, thus bringing down
the house of cards that they had built up before....
With banks paralyzed
by bad debts, the central bank held the key to a recovery: Only it
could step in and create more credit. It failed to do so, and hence
the recession continued for years. Thanks to the long recession, the
Ministry of Finance was broken up and lost its powers. The Bank of
Japan became independent and its power has now become legal.
In the US, too, the
central bank holds the key to recovery. Only it can create more
credit for the broad economy. But reversing recession has taken a
backseat to resuscitating zombie banks, maintaining the feudal
dominion of a private financial oligarchy.
In Japan,
interestingly, all that may be changing with the election of a new
administration. As reported in a January 2013 article in
Business Week:
Shinzo Abe and the
Liberal Democratic Party swept back into power in mid-December by
promising a high-octane mix of monetary and fiscal policies to pull
Japan out of its two-decade run of economic misery. To get
there, Prime Minister Abe is threatening a hostile takeover of the
Bank of Japan, the nation's central bank. The terms of surrender
may go something like this: Unless the BOJ agrees to a 2 percent
inflation target and expands its current government bond-buying
operation, the ruling LDP might push a new central bank charter
through the Japanese Diet. That charter would greatly diminish the
BOJ's independence to set monetary policy and allow the prime
minister to sack its governor.
From Bankers' Bank to
Government Bank
Making the central
bank serve the interests of the government and the people is not a
new idea. Prof. Tim Canova points out central banks have only
recently been declared independent of government:
Independence has
really come to mean a central bank that has been captured by Wall
Street interests, very large banking interests. It might be
independent of the politicians, but it doesn't mean it is a neutral
arbiter. During the Great Depression and coming out of it, the Fed
took its cues from Congress. Throughout the entire 1940s, the Federal
Reserve as a practical matter was not independent. It took its
marching orders from the White House and the Treasury - and it was
the most successful decade in American economic history.
To free the central
bank from Wall Street capture, Congress or the president could follow
the lead of Shinzo Abe and threaten a hostile takeover of the Fed
unless it unless it directs its credit fire hose into the real
economy. The unlimited, near-zero-interest credit line made available
to banks needs to be made available to federal and local governments.
When a similar
suggestion was made to Ben Bernanke in January 2011, however, he
said he lacked the authority to comply. If that was what Congress
wanted, he said, it would have to change the Federal Reserve Act.
And that is what may
need to be done: Rewrite the Federal Reserve Act to serve the
interests of the economy and the people.
Webster
Tarpley observes that the Fed advanced $27 trillion to financial
institutions through the TAF (Term Asset Facility), the TALF (Term
Asset-backed Securities Loan Facility) and similar facilities. He
proposes an Infrastructure Facility extending credit on the same
terms to state and local governments. It might offer to buy $3
trillion in 100-year, zero-coupon bonds, the minimum currently needed
to rebuild the nation's infrastructure. The collateral backing these
bonds would be sounder than the commercial paper of zombie banks,
since it would consist of the roads, bridges and other tangible
infrastructure built with the loans. If the bond issuers defaulted,
the Fed would get the infrastructure.
Quantitative easing as
practiced today is not designed to serve the real economy. It is
designed to serve bankers who create money as debt and rent it out
for a fee. The money power needs to be restored to the people and the
government, but we need an executive and legislature willing to stand
up to the banks. A popular movement could give them the backbone. In
the meantime, states could set up their own banks, which could
leverage the state's massive capital and revenue base into credit for
the local economy.
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