China Leads Global Credit Reform

The one thing that needs to be now remembered in our evolving dealings with China is that the country is now operated by political elites trained in the west and imbued with our ideas and responsive to what has worked in the past for us. They are naturally allergic to ideology considering the joys of Communism.

We on the other hand still tolerate and even sometimes elect political ideologues who are eager to denigrate the successes of their opponents in order to advance oft times incredible folly.

Recently these fools have attempted to downgrade the Reagan revolution in tax management in order to replace it with a terrible leftist agenda. It is as if they think we can support social programs by strangling the countries income. That our own leadership will turn over success is appalling.

What the credit crisis of 2008 proved is that the USA cannot be trusted to properly manage a global reserve currency. This was already obvious, but the crash ripped it apart. It is now necessary to unwind the role of the US dollar as the primary reserve. The cost will be borne to some degree by all, but the US in particular will be experiencing a new set of rules.

Expect the Chinese to attempt to create a better system. Let us wish them good fortune. The globe cannot tolerate another round of fast credit expansion as the last one in which available credit out stripped the supply of creditworthy customers.

Credit granting must be a conservative modestly profitable business. Add a point of profit and you accept ten additional points of risk. This is risk that cannot be escaped with mathematical modeling or even luck. It also takes an extraordinary mindset to preserve capital in the face of success.

You can appreciate my dismay when the investment banking crowd got loose in the banking industry a decade ago. History shows it cannot work and my own personal experience in the securities industry showed the same result. You can rest assured that the young Turks made sure the old hands were kept out of the credit kitchen. Yet that is always the way.

The challenge now is to see if it can be made to work a lot better.




September 3, 2009, 11:29 PM ET

China Starts Journey to New Reserve Currency

http://blogs.wsj.com/chinajournal/2009/09/03/china-starts-journey-to-new-reserve-currency/


China began the long journey to a new international reserve currency with a single step - agreeing to buy $50 billion in notes from the International Monetary Fund.

Another proverb, less distinguished than a quote from Daoist philosopher Laozi, also applies here: China put its money where its mouth is.

After calling for a super-sovereign reserve currency to replace dependence on any national currency, China’s leaders have made a concrete commitment toward achieving that far-in-the-future goal.

The IMF announced Wednesday that China had signed an agreement to buy $50 billion in notes denominated in Special Drawing Rights, the IMF synthetic asset which China favors as an alternative to the dollar as the world’s reserve currency. It’s the first such agreement in the history of the IMF.

The news didn’t come as a surprise, as China’s intention had been announced in June. It didn’t have a noticeable impact on markets because immediate foreign-exchange-rate effects are negligible.

Nevertheless, the formal signing of China’s agreement with the IMF is a significant development, albeit at the long-term policy level.

“The IMF’s relevance has returned in light of the financial crisis and this transaction represents a new way forward for the IMF to obtain funding,” wrote Gareth Berry, a currency strategist at UBS in London, in an email note.

Moreover, the purchase of IMF notes gives China the opportunity to increase its influence within the IMF, where it still holds disproportionately small voting power, Berry noted.

With Russia and Brazil on tap to buy similar IMF notes to the tune of $10 billion each, that gives the IMF about a quarter of the $283 billion it needs for SDR reserves. Early this week, the IMF said it had allocated $250 billion and another $33 billion would be added on Sept. 9.

This will increase the outstanding stock of SDRs to the equivalent of $317 billion. If the IMF were a country, it would have the fifth largest foreign-exchange reserves in the world, lagging slightly behind Taiwan but ahead of India.

In a statement on its Web site, the IMF said the agreement will “boost the Fund’s capacity to help its membership - particularly the developing and emerging market countries - weather the global financial crisis, and facilitate an early recovery of the global economy.”

So in one fell swoop, China has accomplished several things. It has shown that it’s serious with its push for reform of the international financial system. It has given SDRs more prominence than ever before. At the same time, it has found a safe parking place for a tiny part of its more than $2 trillion in reserves, one that doesn’t depend directly on the dollar or U.S. government debt.

Perhaps most importantly, China has demonstrated yet again it has considerable clout at the loftiest levels and isn’t afraid to use it in a constructive fashion. It’s backing its rhetoric with $50 billion in action.

–Robert Flint

Shiller's Bad Recession

We are almost a year past the 2008 market break. Everyone has had a chance to review their personal outcomes and make whatever plans are possible to respond to the changed conditions.

Because the real estate market is still eroding, albeit slowly now as described in this article, household wealth continues to be under attack. Also because of the near ten percent unemployment rate, it is also true that most incomes are terribly vulnerable. In this environment, most folks who get new jobs will be accepting lower incomes.

So far, government action has produced little that is concrete. They certainly have prevented a total banking implosion by printing money to fill the shortfall produced by massive asset write downs in the banking sector. At this point that sector knows were it stands and if they begin supporting lending in the housing sector which I expect them to do we will see that sector quickly sort itself out.

With luck, we can have a land rush through 2010 and see the bulk of the inventory cleaned up over the next two years, driven by buyers prepared to rent the houses.

The big present concern is to get the economic core back into economic expansion and hiring mode. As I have already posted, our best chance there is to backstop a massive expansion of the power business in preparation for electrification of the personal transportation business. A lot of metal must be cast and shaped to build all those windmills and it is all best done in the Midwest.

This is where the government can get the biggest response for effort and outlay.

In answer to the question of can the economy deteriorate much more? The answer is not that likely. It would require a further attack on household incomes more than anything else. We are still losing jobs and that should have largely run its course.

The restoration of consumer spending will be slow for another year but then should start recovery. Credit cards will have been paid down and the credit system should then be fully functional.

This should all add up to a sharp rally this fall, instead of further declines.

Economist Shiller Sees 'Bad Recession,' Stocks Could Drop Again
Sunday, July 19, 2009 5:34 PM

http://moneynews.newsmax.com/headlines/shiller_recession_housing/2009/07/19/237119.html?s=al&promo_code=83A5-1

Esteemed economist Dr. Robert Shiller was among the very few to warn of a housing bust before it happened.

Now he tells Newsmax and Moneynews.com that, although the housing market could be approaching a bottom, prices might remain in the “doldrums” for years to come as the United States remains in a “liquidity trap” comparable to the one it faced during the Great Depression.

Though stock market prices are valued fairly now, Shiller said, equities remain a “risky” investment because the United States has not turned the corner on its fiscal crisis. He warned that stock prices “could fall dramatically.”

Editor's Note: To see Dr. Shiller’s full video interview, Go Here Now.

Shiller is the co-creator of the closely watched S&P/Case-Shiller Home Price Indices. His books include "The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It."

During an interview in 2006 with Newsmax’s Financial Intelligence Report, Shiller accurately warned of a looming price bust in housing. During a recent interview, Newsmax.TV’s Dan Mangru asked Shiller where he sees the housing market going from here.

"In the United States, home prices have been dropping at a rapid clip," Shiller responded.

"However, in the latest S&P/Case-Shiller data, the rate of decline seems to be reduced, and in fact, in seven of our 20 cities, home prices were rising in April. So it does seem to me that we are getting closer to a bottom at the very least."

Last week, demand for home-purchase loans decreased and the unemployment rate now stands at 9.5 percent, Mangru pointed out, and asked: Are home buyers just scared?

"I think having really high unemployment is naturally scaring people," Shiller said.

"And we don't know that it's over yet. We had a really bad unemployment report, and unemployment could easily exceed 10 percent. People know that. That's one reason the personal savings rate has risen to 6.9 percent, levels we haven't seen in decades.

"Even though the confidence surveys seem to be relatively upbeat, I don't know if it really translates into willingness to purchase yet."

Unlike other analysts, Shiller doesn’t believe the key to a U.S. economic recovery lies in the housing sector. He argues that the United States should first get its credit markets in order and get banks lending money again.

He told Newsmax.TV he doesn’t think some proposals calling for increased tax credits for all home buyers is a good idea.

He sees the $8,000 tax credit for new home buyers as stimulative because it forces new home buyers into the market rather than existing homeowners who would put their existing properties up for sale.

In discussing the overall economy, Shiller said the United States had avoided an economic “catastrophe” because of intervention by the Federal Reserve and Treasury, but the nation remains in a “bad recession.”

Instead, Shiller foresees a “risk of a weak economy for years to come.”

He advises conservative investors, especially those who are retired and on fixed incomes, to be wary of stocks.

Shiller compared the country’s economic crisis to the same “liquidity trap” the United States faced in the Great Depression. The federal government needs to pump more economic stimulus, via increased spending or tax cuts, into the economy, he said.

He thinks the first stimulus wasn’t enough and has unwound too slowly.

Asked whether he sees the Fed's increase of the nation’s monetary base as inflationary, Shiller said no, at least for the near future.

However, he suggested that the economy could face “the possibility of substantial inflation” a “few years down the road.”

He believes that investing in commodities is a “smart thing to do,” regardless of whether inflation hits.

Obama Dreams of New Regulation

As summer follows winter, we get the drive for better regulation. In the meantime, the foreclosure machine is slowly grinding its way through the households of the nation destroying personal capital. I suppose these fools think that they are going to accomplish something.

I have lived with regulatory regimes and their banal twists and turns for over thirty seven years and there is little I have less faith in than a regulatory regime. Let me explain why.

A so called regulatory regime is usually planned around a network of specific rules and even laws and assigned discretionary authority. It needs a control person of exceptional knowledge and foresight to work properly, and that is exactly who will never get hired. In the meantime the rules and regulations attract a well funded class of legal council whose sole object is to work those same rules and regulation to the benefit of their clients.

A new system almost works for a time because they are always implemented immediately after a major crash and no one is too brave yet. After that the usual dynamics of bamboozlement and occasional bribery allows anything to happen. It is really all quite offensive and what is most offensive is the idea that a long book of rules will stop a thief. After all, a thief has the lowest overhead of all and can well afford all those lawyers.

So yes, there is a regulatory problem, but not the one that the present army of rookies thinks that they are solving. There always were good rules, but they were also made expensive to apply and this created a market for circumvention. WE need to make the rule base system both work as cleanly as possible, but way more importantly, it needs to be cheap.

Public companies today are saddled with an audit charge that is massive and serves no economic purpose whatsoever. This has been goosed up with the advent of Sarbanes-Oxley which has been a disaster. And observe how effective it all was in discovering Bernie Madoff.

I believe that institutions handling other people’s money need to be subjected to both a proper independent audit and a higher regime of full disclosure far beyond what is possible today. I also think most of this disclosure needs to be in the audit cycle rather than the day to day business cycle. What I am really saying is that no one has the right to hide his actions but he has the right to withhold trade related disclosure that is of his commercial benefit until it is properly closed out.

I do not believe any other organization needs anything like that at all. In fact management financials are my first preference, simply because they will be normally simple and direct and represent the best intentions and understanding of time and place. Also if they are in fact deliberately falsified, there is no shield for management on been called to account. They have to show up and convince a judge that their actions are reasonable. If that does not discourage junk financials, nothing will.

If the public has learned anything it is that an audit will always be completed for the paying customer, somehow or the other. So what is the point of it all, anyway? I would sooner have a badly prepared set of financials prepared by a rookie that still clearly tells me how much is in the bank and what they owe.

The other part of all this is management disclosure. Proper disclosure should be sufficient to permit funds to be raised. That means even today, a simple checklist and a clear title opinion of assets owned by the company. Any more and we are inviting a smoke machine.

After that we need to devise a rule based system for public offerings that is not allowed to be flexible at all, but includes clear provision for all participants, otherwise the army of lawyers shows up to blow it apart and turn it into another free for all. This is not an easy task, but it is critical that the legal profession in particular not be allowed in as the guys who fill out the forms. England has done well using accountants for this task.

This is supposed to be a business, not a make work program for legal clerks.



Obama to Announce Sweeping New Market Regulations

By Binyamin Appelbaum and David Cho

Washington Post Staff Writers

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/17/AR2009061701834_3.html

Wednesday, June 17, 2009; 12:13 PM

President Obama this afternoon will announce a series of proposals that would involve the government much more deeply in the private markets, from helping to steer consumers into affordable mortgage loans to imposing new limits on the largest financial companies, in a sweeping effort to prevent the kinds of risk-taking that sparked the economic crisis.

The plan is an attempt to overhaul an outdated system of financial regulations, the president plans to say in a speech later today.

"Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and the failure of their government to provide adequate oversight," Obama said, according to prepared remarks. "Our entire economy has been undermined by that failure."

The administration's plan would vastly increase the powers of the Federal Reserve in an effort to create stronger and more consistent oversight of the largest companies and most important markets.

It also would create a new agency to protect consumers of mortgages, credit cards and other financial products.

President Obama is expected to formally unveil the proposal in a speech at 1 p.m. This morning, the administration released the final version of an 85-page white paper detailing the plans and justifying each element as a direct response to the causes of the financial crisis.

"We did not choose how this crisis began. But we do have a choice in the legacy this crisis leaves behind," Obama says, according to prepared remarks. "So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."

Many of the specific proposals will require legislation, and today's announcement will drop the plan into an already heated debate on Capitol Hill about the eventual shape of reform. The financial crisis has forced broad consensus that changes are necessary, but there are wide disagreements about the details.

The proposed Consumer Financial Protection Agency would have broad authority to regulate the relationship between financial companies and consumers of mortgage loans, credit cards, checking accounts and other financial products. It would define standards, police compliance and penalize delinquent firms. Other agencies, particularly the Federal Reserve, would surrender some powers.

One idea highlighted by the administration is to require that lenders offer all customers standard "plain vanilla" loans with simple features and streamlined pricing, such as 30-year, fixed-rate mortgages. The sale of more loans with more complicated terms would be subjected to greater scrutiny by the agency. It could even require that customers make a written choice to select anything other than a vanilla loan.

The agency would have authority to overhaul a tangled mess of federal regulations that many financial experts regard as outdated, insufficient and inadequately enforced. An oft-cited example is the massive stack of paperwork handed to mortgage borrowers at closing, including several calculations of the true cost of the loan itself.

"Consumers should have clear disclosure regarding the consequences of their financial decisions," the plan states.

The agency also would have the power to limit or prohibit fees and other practices judged generally harmful to consumers. One example cited are prepayment penalties, or fees designed to discourage people from refinancing before their interest rate increases.

And the agency would have a mandate to increase the availability of financial products in lower-income and underserved communities, in part by enforcing the Community Reinvestment Act, which requires banks to make loans everywhere that they collect deposits.

To carry out these responsibilities, the agency could conduct inspections of firms, putting it on equal footing with regulators charged with ensuring the health of these companies.

The administration also wants to increase the powers of the Federal Reserve. The agency would gain new authority over the largest financial firms, including commercial banks such as J.P. Morgan Chase, investment banks such as Goldman Sachs and insurance companies such as MetLife. It would require those firms to hold greater capital reserves against potential losses, and constrain their ability to make high-risk investments.

The proposal is strongly favored by many of the largest banks, which already are subject to heavy regulation and want the government to impose similar constraints on the operations of their rivals. The administration also will propose a new authority to dismantle these massive firms if they fall into trouble, through a process akin to bankruptcy.

And it will try to impose new oversight on financial markets for the sale of derivatives and asset-backed securities, investments made from mortgages and other loans.

Several ideas have been dropped as the administration picks its battles. The proposal will not include a new federal regulatory structure for insurance companies, which are regulated at the state level, according to people familiar with the matter. The industry is deeply divided, and the White House anticipated a distracting fight. The administration instead plans to create an office inside the Treasury Department to monitor the insurance industry, the sources said.

Some of the largest insurance companies could still fall under the scrutiny of the Federal Reserve in its new role as a systemic risk regulator.

The administration earlier had backed away from a proposal to merge the two agencies that oversee the markets, and to merge the four agencies that regulate banks. It still will seek to merge the Office of Thrift Supervision and the Office of the Comptroller of the Currency to create a single agency to oversee banks with national charters. And it will propose to eliminate a special charter for firms that specialize in mortgage lending, sources said.

The creation of a new consumer protection agency is perhaps the most radical proposal remaining.

It is likely to spark a massive fight on Capitol Hill. The regulatory agencies and industry groups acknowledge failures in recent years, but they say the existing model remains the best way to protect consumers. They argue that the agencies can identify problems more easily because of their close engagement with firms. They also are concerned that a consumer agency could be overly restrictive, limiting access to loans and constraining financial innovation.

"This consumer protection agency would be deciding how people get to live as opposed to people getting to decide for themselves," said Kelly King, chief executive of BB&T, a large commercial bank based in North Carolina. Consumer advocates say the financial crisis is ample evidence of the need for a new approach.

We've tried it the other way for years, and obviously it didn't work. That's how we got here," said John Taylor of the National Community Reinvestment Coalition. "They've really demonstrated that they had very little interest."

Taylor also played down the recent rush of public comments from regulators who said they had a renewed commitment to consumer protection.

"They're so late that it's absurd," Taylor said. "The horse has left the barn, the hay has rotted, the roof is falling in."

Steve Adamske, spokesman for the House Financial Services Committee, said committee chairman Rep. Barney Frank, (D-Mass.), plans to launch hearings on the proposals next week, and to hold votes on pieces of the legislation as soon as July.

"We've been waiting for this for a long time," Adamske said.

both houses say they hope to send legislation to the president by year's end.

Staff writers Brady Dennis and Zachary A. Goldfarb contributed to this report.

Monetize This

This article by Ellen brown is an excellent review of the operations of our monetary system. The bad news is that you the American voter now needs to understand our present options. Again the attention is focused on the naïve approach of simply printing money. However, as congress loves to prove over and over again this type of funding cannot be either managed or policed effectively. It is little better than what took place in Iraq after the occupation began. Money finds its way into the hands of cronies until the world is flooded with hot cash looking for a home. Tammany Hall rides again.

As I have been posting, the only possible solution is to restructure foreclosure laws allowing a restoration of individual credit. This is a good place to place all that printed money because it fully recaps the banking system and puts them back into the lending business as opposed to the race to the bottom foreclosure business.

We may in fact want to consider doing a modified form of this for the overall lending portfolio, although it surely is not necessary in the USA. It may be necessary in the euro dollar market. State bankruptcy is not pretty and is a serious waste of human resources.

Obama has had one bite at the stimulus apple. He is going to find out that nothing was really accomplished as foreclosures continue to grind down the wealth and savings of the middle class who pay taxes. This means that a significant drop in tax revenues is developing and all government finance will be seriously strained.

In the meantime housing prices continue to deteriorate as the tide of foreclosures continues to rise to a peak sometime in 2010. This is the most massive reduction in US and global wealth ever achieved. It is as if a massive wealth tax is been levied. No one yet understands that the foreclosure law itself has to be reset and financed at the bank level.


Monetize This!: Resolving a Spiraling Public Debt Crisis
How Obama could take a Page from the Fed's Playbook

By Ellen Brown

URL of this article: www.globalresearch.ca/index.php?context=va&aid=12394

Global Research, February 21, 2009

webofdebt.com

"Diseases desperate grown are by desperate appliances relieved, or not at all." – Shakespeare, "Hamlet"

Moody's credit rating agency is warning that the U.S. government's AAA credit rating is at risk, because it has taken on so much debt that there are few creditors left to underwrite it. Foreigners have bought as much as two-thirds of U.S. debt in recent years, but they could be doing much less purchasing of U.S. Treasury securities in the future, not so much out of a desire to chastise America as simply because they won't have the funds to do it. Oil prices have fallen off a cliff and the U.S. purchase of foreign exports has dried up, slashing the surpluses that those countries previously recycled back into U.S. Treasuries. And domestic buyers of securities, to the extent that they can be found, will no doubt demand substantially higher returns than the rock-bottom interest rates at which Treasuries are available now.1


Who, then, is left to buy the government's debt and fund President Obama's $900 billion stimulus package? The taxpayers are obviously tapped out, so the money will have to be borrowed; but borrowed from whom? The pool of available lenders is shrinking fast. Morever, servicing the federal debt through private lenders imposes a crippling interest burden on the U.S. Treasury. The interest tab was $412 billion in fiscal year 2008, or about one-third of the federal government's total income from personal income taxes ($1,220 billion in 2008). The taxpayers not only cannot afford the $900 billion; they cannot afford to increase their interest payments. But what is the alternative?


How about turning to the lender of last resort, the Federal Reserve itself? The advantage for the government of borrowing from its own central bank is that this money is virtually free. This is because the Federal Reserve rebates any interest it receives to the Treasury after deducting its costs, and the federal debt is never actually paid off but is just rolled over from year to year. Interest-free loans that are never paid off are basically free money. In 2008, 85% of the interest collected by the Federal Reserve (or "Fed") was returned to the Treasury. The average interest rate on Treasury securities today is only about 3%; 15% of 3% is less than ½% – such a negligible interest as to make the money nearly free.

The key is that the Fed does not actually have to acquire the money before lending it. The Fed originates the money it lends, either on a printing press or with accounting entries. It can purchase Treasury debt simply by writing credits into the "reserve account" of the seller's bank, which then credits the seller's account. The Fed's ability to write numbers into an account is obviously unlimited; but it has normally restricted its purchase of government securities to only so much as is necessary to provide the liquidity needed for banks to cash and clear checks.


Funding the government's budget shortfall has usually been left to private lenders; but those loans are drying up, and servicing them is proving expensive. Both this interest burden and the need to continually attract new lenders could be avoided by tapping into the government's credit line at its own central bank.


But wouldn't that be dangerously inflationary? Not in today's economic climate, as will be shown. And if the notion of funding the government through its own central bank seems too radical and unprecedented to be entertained, consider the radical moves the Fed has already been taking in the last year. Without so much as a by-your-leave from Congress, the Fed just "monetized" $1.2 trillion in private debt, turning commercial loans into money. If private banks and private corporations now have multi-billion dollar credit lines with the Federal Reserve, then Congress should have one too. In fact Congress, which gave the Fed its charter to create the national money supply, should have been the first in line.


If the Fed Can "Monetize" Private Debt, It Can Monetize Public Debt.


The Fed has been a hotbed of radical, experimental activity in the past year. Ben Gisin is a former banker who has long been tracking the Fed's statistical releases. He says he has never seen anything like it. Assets have been magically appearing on the Fed's balance sheet, and they are not coming from any traditional source.2


In May 2007, the Fed reported assets of about $850 billion, and 92% of them were the usual federal securities (government I.O.U.s). A year later, the Fed's stash of federal securities had dropped to $500 billion, but its total assets remained substantially unchanged. The federal securities had just been swapped for other forms of debt. In January of 2009, however, the Fed reported assets of $2.1 trillion, an increase of $1.2 trillion from a year earlier.3 Where did this new money come from? The Fed's liabilities also went up by $1.2 trillion, indicating that it was creating "credit" simply by double-entry bookkeeping. Loans were being created by entering them as assets on one side of the Fed's books and as corresponding liabilities on the other.


Creating money by double-entry bookkeeping is not actually unique to the central bank. It is how all commercial banks come up with the money they lend, as many authorities have attested. In a revealing booklet called Modern Money Mechanics, the Chicago Federal Reserve explained how banks expand the money supply (or create money) using double-entry bookkeeping. The booklet stated:

"Of course, [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]."4


Congressman Jerry Voorhis, writing in 1973, explained how monetary expansion is built on the 10% reserve requirement imposed by the Fed:


"[F]or every $1 or $1.50 which people – or the government – deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up."5


That means that if the Federal Reserve were operating like a commercial bank, it could take its $500 billion in U.S. securities and fan them into $5 trillion in loans; and that appears to be exactly what it has been doing. What is extraordinary is that the money is being used to make commercial loans. If the Fed can come up with $1.2 trillion to "monetize" private promissory notes, argues Ben Gisin, there is no reason it could not come up with $900 billion to monetize Obama's stimulus package. In fact, Congress could mandate the central bank that it chartered to buy the bonds needed to fund the stimulus package.


The Advantage of Borrowing from the Federal Reserve


For the government, the difference between borrowing credit created with accounting entries by a private bank and the same sort of credit created by the Federal Reserve is that borrowing from the Fed is nearly interest-free. That is true today, but it has not always been true. Congressman Wright Patman, Chairman of the House Banking and Currency Committee, wrote in a 1964 treatise called A Primer on Money:


"The Federal Reserve Banks create money out of thin air to buy Government Bonds from the U.S. Treasury . . . [creating] out of nothing a . . . debt which the American people are obliged to pay with interest."


Patman was outraged at the inequity of this practice and boldly agitated for Congress to nationalize the privately-owned Federal Reserve, a move that would have allowed the
government to issue the national money supply directly. Needless to say, however, this proposal met with strong opposition. Nationalization did not happen, but the Fed did have to compromise. According to Jerry Voorhis:


"As a direct result of logical and relentless agitation by members of Congress, led by Congressman Wright Patman as well as by other competent monetary experts, the Federal Reserve began to pay to the U.S. Treasury a considerable part of its earnings from interest on government securities. This was done without public notice and few people, even today, know that it is being done. It was done, quite obviously, as acknowledgment that the Federal Reserve Banks were acting on the one hand as a national bank of issue, creating the nation's money, but on the other hand charging the nation interest on its own credit – which no true national bank of issue could conceivably, or with any show of justice, dare to do."


Voorhis went on, "But this is only part of the story. And the less discouraging part, at that. For where the commercial banks are concerned, there is no such repayment of the people's money." Commercial banks, he explained, do not rebate the interest, although they also "‘buy' the bonds with newly created demand deposit entries on their books – nothing more."6


Voorhis noted that the Constitution provides, "Congress shall have the power to coin money [and] regulate the value thereof." Whether "to coin money" means "to issue money" has been debated; but as President Andrew Jackson observed, if anyone was given the power to issue money, it was Congress, not a private banking elite. For a full century before the American Revolution, the colonists funded a period of unprecedented prosperity and productive enterprise with paper money issued directly by their own local governments or government-owned banks. According to Benjamin Franklin, it was chiefly to get that power back after King George halted the practice that the colonists fought the Revolution.7 They won the war but lost the money-creating power to a private banking cartel. We the people now have an opportunity to get that innovative funding system back, and we can do it without having to convince a faction-ridden Congress that they need to do anything so controversial as nationalizing the Federal Reserve or even passing new legislation. All that is required is a shift in emphasis, a shift the Federal Reserve has been making lately itself. The Fed routinely turns government bonds into dollars in order to expand the amount of currency in circulation; it has now begun doing that with corporate debt; and Fed officials are talking about doing it with long-term federal securities. According to a January 28, 2009 Associated Press report:


"With its key lending rate to banks already near zero, the Fed pledged anew to use ‘all available tools' to revive the economy. Specifically, the Fed said it is ‘prepared' to buy longer-term Treasury securities if the circumstances warrant such action."8


Traditionally, government debt has been "monetized" by the Fed only to provide the bank reserves necessary to cover check cashing and clearing. This tool is now being recommended "to revive the economy." Obama's stimulus package is also intended to revive the economy. Combine the two and you have a package that stimulates the economy without adding to the impossible burden of an exponentially-increasing debt.


But Wouldn't That Be Inflationary?


The usual objection to funding the government with credits drawn on its own central bank is that the result would be inflationary. However, the scenario most feared today is actually deflation – a lack of available dollars to fuel the economy. Asset values have collapsed, and savings have collapsed along with them. People with only half as much money in their brokerage accounts have less to spend; people whose houses have plummeted in value cannot take out consumer loans against equity as was done in the boom years. Funding a "stimulus" package with existing money that is merely recycled through the banking system as loans will not stimulate the economy but will only add to the problem, by adding to the collective burden to service debt. Money that should have gone into more productive endeavors will wind up going into interest payments. To bolster demand and stimulate production, recovery requires an infusion of new dollars – dollars that can be used to pay wages and salaries, which can then be used to buy goods and services.


In any case, adding new money to the money supply will not inflate prices if the money is used in the production of new goods and services. Price inflation results only when "demand" (dollars) exceeds "supply" (goods and services). If the new dollars are used to create new goods and services, demand and supply will rise together and prices will remain stable. If the goods being produced are income-generating assets – railroads, bridges, alternative energy sources, low-cost housing, medical services – so much the better. The projects can be "monetized" in the same way that banks monetize mortgages – by entering them as assets on one side of their books and as liabilities on the other. The funds received from the central bank can then be repaid to the central bank from the income the assets produce, extinguishing the debt and avoiding inflation. Ideally, the projects would actually turn a profit, generating income for the government and reducing the tax burden on the public.


The bottom line is that we cannot borrow our way out of debt. Only new money will stimulate a debt-ridden economy – money that is interest-free and does not have to be paid back. The direct road to that result would have been to nationalize the Federal Reserve and return the power to create money to Congress; but as Wright Patman found, that solution is controversial and could be a difficult piece of legislation to get passed. In the meantime, the same result can be achieved by tapping into the government's nearly-interest-free credit line at the Federal Reserve. Nearly-interest-free loans of accounting-entry money that never has to be paid back are a source of debt-free liquidity that can be used to fund projects that put people back to work, without increasing the interest burden on the government or the tax burden on the public.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from "the money trust." Her eleven books include Forbidden Medicine, Nature's Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.

Notes1. Aaron Task, "Another $3T of U.S. Debt: Don't Count on Foreigners to Pay for Our Bailouts" (citing John Ryding, chief economist of RDQ Economics), Finance.Yahoo.com (February 13, 2009).

2. Benjamin Gisin, Michael Krajovic, "Rescuing the Physical Economy," Conscious Economics (January 2009).

3. Federal Reserve Board, "Annual Report 2007," "Statistical Tables, "No. 9: Statement of Condition of Federal Reserve Banks," & "No. 10: Income and Expenses of the Federal Reserve Banks,"

www.federalreserve.gov/boarddocs/rptcongress/default.htm;

"Current Release," www.federalreserve.gov/releases/h41.

4. Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion (Federal Reserve Bank of Chicago, Public Information Service, 1992, available at http://www.rayservers.com/images/ModernMoneyMechanics.pdf ), page 6.

5. J. Voorhis, The Strange Case of Richard Milhous Nixon (1973), excerpted at http://www.sonic.net/~doretk/ArchiveARCHIVE/ECONOMICSPOLITICS/FEDERAL%20RESERVE/Jerry%20VoorhisFedReserve.html.

6. Jerry Voorhis, op. cit.

7. Quoted by Congressman Charles Binderup in a 1941 speech, "How America Created Its Own Money in 1750: How Benjamin Franklin Made New England Prosperous," reprinted in Unrobing the Ghosts of Wall Street, http://reactor-core.org/america-created-money.html.

8. Jeannine Aversa, "Fed Ready to Provide Fresh Aid to Revive Economy," Associated Press (January 28, 2009).