October 16, 2008
from WebOfDebt Website
Last night, the Presidential candidates had their last debate before the election.
They talked of the baleful state of the economy and the stock market; but omitted from the discussion was what actually caused the credit freeze, and whether the banks should be nationalized as Treasury Secretary Hank Paulson is now proceeding to do. The omission was probably excusable, since the financial landscape has been changing so fast that it is hard to keep up.
A year ago, the Dow Jones Industrial Average
broke through 14,000 to make a new all-time high. Anyone predicting then
that a year later the Dow would drop nearly by half and the Treasury would
move to nationalize the banks would have been regarded with amused
disbelief. But that is where we are today.1
The week was called the worst in U.S. stock
The real problem is not in the much-discussed subprime market but is in the credit market, which has dried up. The banking scheme itself has failed. As was learned by painful experience during the Great Depression, the economy cannot be rescued by simply propping up failed banks.
The banking system itself needs to be overhauled.
Since the banks have been experiencing
widespread loan defaults, their capital base has shrunk proportionately.
The sum represents an impossible-to-fill black hole that is three times the gross domestic product of all the countries in the world combined.
As one critic said of Paulson’s roundabout bailout plan,
By Thursday, October 9, Paulson himself evidently had doubts about his ability to sell the plan. He wasn’t abandoning his old cronies, but he soft-pedaled that plan in favor of another option buried in the voluminous rescue package – using a portion of the $700 billion to buy stock in the banks directly.
Plan B represented a controversial move toward nationalization, but it was an improvement over Plan A, which would have reduced capital requirements only by the value of the bad debts shifted onto the government’s books. In Plan B, the money would be spent on bank stock, increasing the banks’ capital base, which could then be leveraged into ten times that sum in loans.
The plan was an improvement but the market was
evidently not convinced, since the Dow proceeded to drop another thousand
points from Thursday’s opening to Friday’s close.
The Treasury would just be feeding the bank money to do with as it would. Management could continue to collect enormous salaries while investing in wildly speculative ventures with the taxpayers’ money. The banks could not be forced to use the money to make much-needed loans but could just use it to clean up their derivative-infested balance sheets.
In the end, the banks were still liable to go bankrupt, wiping out the taxpayers’ investment altogether.
Even if $700 billion were fanned into $7
trillion, the sum would not come close to removing the $180 trillion in
derivative liabilities from the banks’ books. Shifting those liabilities
onto the public purse would just empty the purse without filling the
derivative black hole.
On October 14, the Federal Reserve Bank of New York justified this extraordinary expansion of its lending powers by stating:
That means the government and the Fed are now committing even more public money and taking on even more public risk. The taxpayers are already tapped out, so the Treasury’s “special deposit” will no doubt come from U.S. bonds, meaning more debt on which the taxpayers have to pay interest.
The federal debt could wind up running so high that the government loses its own triple-A rating. The U.S. could be reduced to Third World status, with “austerity measures” being imposed as a condition for further loans, and hyperinflation running the dollar into oblivion.
Rather than solving the problem, these “rescue” plans seem destined to make it worse.
The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend.
Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.5
The problem is that banks create only the principal and not the interest necessary to pay back their loans. Since bank lending is essentially the only source of new money in the system, someone somewhere must continually be taking out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply.
This spiraling interest problem and the need to find new debtors has gone on for over 300 years - ever since the founding of the Bank of England in 1694 - until the whole world has now become mired in debt to the bankers’ private money monopoly.
As British financial analyst Chris Cook observes:
The parasite has finally run out of its food source.
But the crisis is not in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money.
Fortunately, we don’t need the credit of private banks.
A sovereign government can create its own.
In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today.
But like today, Hoover’s plan failed.
The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency).
In the 1940s, the RFC went into overdrive
funding the infrastructure necessary for the U.S. to participate in World
War II, setting the country up with the infrastructure it needed to become
the world’s industrial leader after the war.
The result was to put the taxpayers further into debt.
This problem could be avoided, however, by updating the RFC model. A system of public banks might be set up that had the power to create credit themselves, just as private banks do now.
A public bank operating on the private bank model could fan $700 billion in capital reserves into $7 trillion in public credit that was derivative-free, liability-free, and readily available to fund all those things we think we don’t have the money for now, including the loans necessary to meet payrolls, fund mortgages, and underwrite public infrastructure.
“Credit” can and should be a national utility, a public service provided by the government to the people it serves.
Many people are opposed to getting the government involved in the banking system, but the fact is that the government is already involved. A modern-day RFC would actually mean less government involvement and a more efficient use of the already-earmarked $700 billion than policymakers are talking about now.
The government would not need to interfere with the private banking system, which could carry on as before. The Treasury would not need to bail out the banks, which could be left to those same free market forces that have served them so well up to now. If banks went bankrupt, they could be put into FDIC receivership and nationalized.
The government would then own a string of banks, which could be used to service the depository and credit needs of the community.
There would be no need to change the personnel or procedures of these newly-nationalized banks. They could engage in “fractional reserve” lending just as they do now. The only difference would be that the interest on loans would return to the government, helping to defray the tax burden on the populace; and the banks would start out with a clean set of books, so their $700 billion in startup capital could be fanned into $7 trillion in new loans.
This was the sort of banking scheme used in
Benjamin Franklin’s colony of Pennsylvania, where it worked brilliantly
well. The spiraling-interest problem was avoided by printing some extra
money and spending it into the economy for public purposes. During the
decades the provincial bank operated, the Pennsylvania colonists paid no
taxes, there was no government debt, and inflation did not result.7
But if Congress is not prepared to go that far,
a more efficient use of the earmarked $700 billion than bailing out
failing banks would be to designate the funds as the “reserves” for a
The G-7 nations’ financial planners, who met in Washington D.C. this past weekend, appear intent on supporting the banking system with enough government-debt-backed “liquidity” to produce what Jim Rogers calls “an inflationary holocaust.”
As the U.S. private banking system
self-destructs, we need to ensure that a public credit system is in place
and ready to serve the people’s needs in its stead.