[p2p-research] Fwd: Article - Central Banking 101: What the Fed Can Do as "Lender of Last Resort"

[Michel Bauwens]

I hope yu can read this through to the end, where it becomes really
interesting,

in my opinion, ellen brown is the top monetary expert for the p2p movement,
because she is not just focused on as yet mythical open money, but on using
existing mechanisms in new ways,

Michel

---------- Forwarded message ----------
From: Dante-Gabryell Monson <dante.monson at gmail.com>
Date: Sun, Dec 19, 2010 at 4:55 AM
Subject: Article - Central Banking 101: What the Fed Can Do as "Lender of
Last Resort"
To: sustainable_solidarity at yahoogroups.com, hc_ecology at yahoogroups.com,
econowmix at googlegroups.com



http://www.truth-out.org/central-banking-101-what-fed-can-do-lender-last-resort66069

Central Banking 101: What the Fed Can Do as "Lender of Last Resort"

Wednesday 15 December 2010

by: Ellen Brown   |  *WebofDebt.com | News
Analysis*<http://www.webofdebt.com/articles/>

[image: Central Banking 101: What the Fed Can Do as "Lender of Last Resort"]
(Photo: Giovanni Orlando /
Flickr<http://www.flickr.com/photos/jjjohn/2723422506/>
)

*We’ve seen behind the curtain, as the Fed waved its magic liquidity wand
over Wall Street. Now it’s time to enlist this tool in the service of the
people.*

The Fed’s invisible hand first really became visible with the bailout of
AIG. House Speaker Nancy Pelosisaid
<http://www.huffingtonpost.com/2009/06/18/pelosi-on-fed-people-want_n_217580.html>in
June 2009:

"Many of us were, shall we say, if not surprised, taken aback when the Fed
had $80 billion to invest -- to put into AIG just out of the blue. All of a
sudden we wake up one morning and AIG has received $80 billion from the Fed.
. . . So of course we're saying, Where's this money come from? ‘Oh, we have
it. And not only that, we have more.’”

How much more -- $800 billion? $8 trillion?

*The stage magician smiles coyly and rolls up his sleeves to show that there
is nothing in them. “Try $12.3 trillion,” he says.*

That was the figure recently
revealed<http://ampedstatus.com/the-wall-street-pentagon-papers-biggest-scam-in-world-history-exposed-are-the-federal-reserves-crimes-too-big-to-comprehend>
for
the Fed’s “emergency lending programs” to bail out the banks.

*“$12.3 trillion of our taxpayer money!” shout the bemused spectators as
pigeons emerge from the showman’s gloved hands. “We could have used that
money to build roads and bridges, pay down the state’s debts, keep
homeowners in their homes!”*

*“Not exactly tax money,” says the magician with his mysterious Mona Lisa
smile. “When did you have $12.3 trillion in tax money sitting idle?”*

Not only did he not use “tax money;” it seems he hardly used “money” at all.
He just advanced numbers on a computer screen, amounting to credit against
collateral, replacing the credit that would have been advanced by the money
market before the Fatal Day the Money Market Died. According to
CNNMoney –<http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/index.htm>

“[T]he Federal Reserve made $9 trillion in overnight loans to major banks
and Wall Street firms during the Wall Street crisis . . . . All the loans
were backed by collateral and all were paid back with a very low interest
rate to the Fed -- an annual rate of between 0.5% to 3.5%. . . .

“In addition to the loan program for bond dealers, the data covered the
Fed's purchases of more than $1 trillion in mortgages, and spending to back
consumer and small business loans, as well as commercial paper used to keep
large corporations running. . . .

“Most of the special programs set up by the Fed in response to the crisis of
2008 have since expired, although it still holds close to $2 trillion in
assets it purchased during that time. The Fed said it did not lose money on
any of the transactions that have been closed, and that it does not expect
to lose money on the assets it still holds.”

Or so it is reported in the media. . . .

*The pigeons slip back up the sleeve from whence they came, a sleeve that
was empty to start with.*

*The Central Bank as Lender of Last Resort*

Where did the Fed get this remarkable power? Central banks are “lenders of
last resort,” which means they are authorized to advance as much credit as
the system requires. It’s all keystrokes on a computer, and the supply of
this credit is limitless. According to
Wikipedia:<http://en.wikipedia.org/wiki/Lender_of_last_resort>

“A *lender of last resort* is an institution willing to extend credit when
no one else will. Originally the term referred to a reserve financial
institution, most often the central bank of a country, that secured
well-connected banks and other institutions that are too-big-to-fail against
bankruptcy.”

 Why is this backup necessary?  Because, says Wikipedia matter-of-factly,
“Due to fractional reserve
banking<http://en.wikipedia.org/wiki/Fractional_reserve_banking>,
in aggregate, all lenders and borrowers are insolvent.”  The entry called
“fractional reserve banking” explains:

“The bank lends out some or most of the deposited funds, while still
allowing all deposits to be withdrawn upon demand. Fractional reserve
banking necessarily occurs when banks lend out funds received from deposit
accounts, and is practiced by all modern commercial banks.”



*All commercial banks are insolvent*.  They are unable to pay their debts
when they come due, because they have double-counted their deposits.  A less
charitable word, if this hadn’t all been validated with legislation, might
be “embezzlement.”  The bankers took your money for safekeeping, promising
you could have it back “on demand,” then borrowed it from the till to clear
the checks of their borrowers.  Modern banking is a massive shell game, and
the banks are in a mad scramble to keep peas under the shells.  If they
don’t have the peas, they borrow them from other banks or the money market
short-term, until they can come up with some longer-term source.

Ann Pettifor<http://www.huffingtonpost.com/ann-pettifor/the-broken-global-banking_b_748628.html>
writes,
“the banking system has been turned on its head, and become a borrowing
machine.”  Rather than lending us their money, they are borrowing from us
and lending it back.  Banks can borrow from each other at the fed funds rate
of 0.2%.  They get the very cheap credit and lend it to us as much more
expensive credit.

They got away with this shell game until September 2008, when the Lehman
Brothers bankruptcy triggered a run on the money markets. Panicked investors
pulled their short-term money out, and the credit market suddenly froze. The
credit lines on which businesses routinely operated froze too, causing
bankruptcies, layoffs and general economic collapse.

The shell game would have been exposed for all to see, if the Federal
Reserve had not stepped in and played its “lender of last resort” card.
Quoting Wikipedia again:


“A lender of last resort serves as a stopgap to protect depositors, prevent
widespread panic withdrawal, and otherwise avoid disruption in productive
credit to the entire economy caused by the collapse of one or a handful of
institutions. . . .

“In the United States the Federal Reserve serves as the lender of last
resort to those institutions that cannot obtain credit elsewhere and the
collapse of which would have serious implications for the economy. It took
over this role from the private sector ‘clearing houses’ which operated
during the Free Banking Era; whether public or private, the availability of
liquidity was intended to prevent bank runs.

“. . . [T]his role is undertaken by the Bank of England in the United
Kingdom (the central bank of the UK), in the Eurozone by the European
Central Bank, in Switzerland by the Swiss National Bank, in Japan by the
Bank of Japan and in Russia by the Central Bank of Russia.”


If all central banks do it, it must be okay, right? Or is it just evidence
that the entire international banking scheme is sleight of hand? All lenders
are insolvent and are kept in the game only by a lender-of-last-resort power
given to central banks by central governments -- given, in other words, by
we-the-people. Yet we-the-people are denied access to this cornucopia, and
are forced to pick up the tab for the banks. Most states are struggling with
budget deficits, and some are close to insolvency. Why is the Fed’s magic
wand not being waved over them?

*QE3: Some Creative Proposals*


According to financial blogger Edward Harrison, that might soon happen. He
quotes a Bloomberg article by David Blanchflower, whom Harrison describes as
“a former MPC [Monetary Policy Committee] member at the Bank of England but
also an American-British dual citizen professor who is very plugged in at
the Fed.” Blanchflower wrote on October 18:


“I was at the Fed last week in Washington for one of its occasional meetings
with academics . . . .

“The Fed is especially concerned about unemployment and the weak housing
market. . . .

“Quantitative easing remains the only economic show in town given that
Congress and President Barack Obama have been cowed into inaction.


“Quantitative easing” (QE) involves central bank purchases with money
created on a computer screen. Blanchflower asked:



“What will they buy? They are limited to only federally insured paper, which
includes Treasuries and mortgage-backed securities insured by Fannie Mae and
Freddie Mac. But t*hey are also allowed to buy short-term municipal bonds,
and given the difficulties faced by state and local governments, this may
well be the route they choose, *at least for some of the quantitative
easing. Even if the Fed wanted to, it couldn’t buy other securities, such as
corporate bonds, as it would require Congress’s approval, which won’t happen
anytime soon.” [Emphasis added.]


You don’t need to understand all this financial jargon to pick up that a
central banking insider who has sat in on the Fed’s meetings says that for
the Fed’s next trick, it could and “may well” fund the bonds of local
governments. Harrison
comments:<http://seekingalpha.com/article/231031-blanchflower-the-fed-should-buy-munis-and-monetize-state-debt>



“The Fed can legally buy as many municipal bonds as it wants without
congressional approval. . . . This is a big story. Blanchflower is
essentially saying that the U.S. government can bail out both the housing
market via Fannie and Freddie paper purchases and the state governments via
Muni purchases. And, of course, the banks get to dump these assets onto the
Fed who will hold them to maturity. I guarantee you this will have a very
nice kick since it is the states where the biggest employment cuts are.”




A big story indeed, opening very interesting possibilities. The Fed could
use its QE tool not just to buy existing assets but to fund future
productivity and employment, stimulating the depressed economy the way
Franklin Roosevelt did but without putting the nation in debt at high
interest to a private banking cartel.

The Fed could, for example, buy special revenue bonds issued by the states
to finance large-scale infrastructure projects. They might build a
high-speed train system of the sort seen in Europe and Asia. The states
could issue special revenue bonds at 0% or 0.5% interest to finance the
project, which could be repaid with user fees generated by the finished
railroad. The same could be done to build modern hospitals, develop water
projects and alternative energy sources, and so forth. All this could be
done at the same extremely low interest rates now afforded to the banks,
saving the states enormous sums in taxes.

Wouldn’t that sort of program be inflationary though? Not under current
conditions, says author Bill Baker in a recent
post.<http://dailyreckoning.com/the-real-reason-for-qe2/> He
notes that over 95% of the money supply is created by bank lending, and that
when credit is destroyed, the money supply shrinks. The first round of QE
did not actually increase the money supply, because the money printed by the
Fed was matched by the destruction of money caused by debt default and
repayment. To replace the debt-money lost in a shrinking economy, the Fed
has already elected to embark on a program of quantitative easing. The
question addressed here is just where to aim the hose.


*                                    Closing the Social Security Gap*


Another interesting idea for QE3 was proposed by Ted Schmidt, associate
professor of economics at Buffalo State College.
Writing<http://artvoice.com/issues/v9n44/paging_bernanke> in
early November, Schmidt anticipated the cut in social security taxes now
being debated in Congress. Worried observers see these cuts as the first
step to dismantling social security, which will in the future be called
“underfunded” and too expensive for the taxpayers to support. Schmidt notes,
however, that social security is a major holder of federal government bonds.
The Fed could finance a $400 billion tax cut in social security by buying
bonds directly from the social security trust fund, allowing the fund to
maintain its current level of benefits. Among other advantages of this sort
of purchase:



“[I]t does not raise the gross national debt, because it simply transfers
bonds from one government entity (the Social Security trust fund) to a
semi-government entity (the Fed); and . . . it gives the Fed the extra ammo
(treasury bonds) it will need when the time comes to restrain inflationary
pressures and pull reserves out of the banking system. (It does this by
selling bonds to banks.)”



Schmidt concludes: “Enough is enough, Dr. Bernanke! It’s time to inject the
patient with money that gets into the hands of working people and small
businesses.”

The Fed’s lender-of-last-resort power has so far been used only to keep rich
bankers rich and the rest of the population in debt peonage, a parasitic and
unsustainable endeavor. If this power were directed into projects that
increased productivity and employment, it could become a sustainable and
very useful tool. We the People do not need to remain subject to a
semi-private central bank that was ostensibly empowered by our mandate. We
can take our Money Power back.
________________________________

Ellen Brown is an attorney and the author of eleven books, including WEB OF
DEBT: The Shocking Truth About Our Money System and How We Can Break
Free.<http://www.webofdebt.com/order.php> Her
websites are webofdebt.com <http://www.webofdebt.com/>, ellenbrown.com, and
public-banking.com. <http://publicbanking.wordpress.com/>



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