[R-G] [BillTottenWeblog] Thinking Positively

[Bill Totten]

How "Quantitative Easing" may be Harnessed for the Public Good

by Ellen Brown

www.webofdebt.com (March 30 2009)


Nervous pundits are predicting the end of American life as we know it,
after Fed Chairman Ben Bernanke announced on March 18 that he would be
dropping yet another trillion dollars in helicopter money - up to $300
billion to buy long-term government bonds and an additional $750 billion
to buy private debt, with the Term Asset-backed Securities Loan Facility
(TALF) to be opened up for the sake of consumers and small businesses.
The dollar immediately experienced its worst drop in 25 years, amid
worries that the Fed's intervention would spur hyperinflation. Typical
of the concerned commentators expressing these sentiments was Mark
Larson, who wrote in "Money and Markets" on March 20:

"This is Banana Republic-type stuff! And I'm not talking about the
clothing store. Printing money out of thin air at the central bank, only
to turn around and buy debt securities issued by your Treasury, is the
kind of practice you typically see in emerging market regimes. We're
essentially monetizing our country's debt and deliberately devaluing our
country's currency."

Tim Wood wrote in "Financial Sense" on March 21:

"I'm now beginning to wonder if the powers that be are really in their
minds trying to 'fix' things or if they are actually trying to destroy
the dollar, the free markets and perhaps even the nation. To be honest,
the latter is starting to make more sense to me because surely there is
enough intelligence in Washington to understand the potential
consequences of these actions."

Commentators on the Financial Sense Newshour suggested that the Fed's
move toward "quantitative easing" would be looked back upon as the
watershed event in the beginning of the end of the United States dollar.
As explained in Wikipedia:

"The term quantitative easing refers to the creation of a pre-determined
quantity of new money ... In very simple layman's terms, the central
bank creates new money out of thin air. It then uses this money to buy
what is essentially an IOU [that is, to make a loan] ... Today the new
money is generally created electronically rather than physically printed".

The Federal Reserve remains a privately-owned "bankers' bank," and it
has not asked Congress's permission before engaging in its new policy of
massive "quantitative easing". The Fed has the capacity to create money
on its books and lend it to whomever it will. There is thus a danger
that we may just see more money being funneled to those same Wall Street
banks that got us into this crisis in the first place. But while the
Fed's new "quantitative easing" tool is fraught with risk, it also has
some interesting potential. This funding mechanism could be extended not
only to replace the loans that banks have been unwilling or unable to
make but to fund Obama's stimulus package - at little or no cost to the
American taxpayer. What we are faced with today is not inflation but
deflation. Lending has dried up not only from banks but from the "shadow
banking system" - all those pension funds, hedge funds, and foreign
investors who used to snatch up mortgage-backed securities - and that
means the velocity of money has slowed. Money is sitting in bank
accounts rather than being lent into the economy for consumer and
homeowner use. The government's stimulus plan is meant to pick up the
slack, but who is going to fund it? The Chinese and other foreign
investors are balking at buying more of our debt, and the taxpayers are
tapped out. That just leaves the central bank itself.

Thinking positively, in fact, we may look back upon this as the
watershed moment when the Federal Reserve finally adjusted its focus and
started to act more like a government central bank, one that advances
"the full faith and credit of the United States" for the benefit of the
United States and its citizenry, rather than just for the bankers who
have held the government and its central bank hostage for so long.
President Obama suggested a move in that direction when he said on the
Tonight Show with Jay Leno on March 19:

"[W]e're taking a lot of steps to ...open up separate credit lines
outside of banks for small businesses so that they can get credit -
because there are a lot of small businesses out here who are just barely
hanging on. Their credit lines are starting to be cut. We're trying to
set up a securitized market for student loans and auto loans outside of
the banking system. So there are other ways of getting credit flowing
again." [Emphasis added.]

The Fed now appears to be taking on the role of lender of last resort
not just for its member banks but for consumers, businesses, and the
government itself. Provisos and cautions aside, its new "quantitative
easing" policy at least has the potential to be harnessed to serve the
government and the people it represents; and that is a promising
development.

Harnessing the Federal Reserve for Federal Purposes

The key to this potential is something that is little known or
appreciated: the Fed now rebates all of its profits to the government
after deducting its costs. {1} That means that it is actually the
government that gets the benefit of the interest on the Fed's loans; and
that is how it should be, since the US dollar today is backed by nothing
but "the full faith and credit of the United States". The dollar is the
government's credit - its promise to repay value for value, nothing
more. If the government is taking the risk that credit will not be
repaid, the government should get the interest on the loans.

The Federal Reserve was originally set up in 1913 by a powerful Wall
Street group to serve the private banking system, and it agreed to
return its profits to the government only under duress. This happened
after Congressman Wright Patman, head of the House Banking and Currency
Committee in the 1960s, peered closely at its operations and pressed for
its nationalization. The developments were chronicled by Congressman
Jerry Voorhis, who wrote in 1973:

"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 US 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." {2}

The potential for the Fed to act as a truly "federal" central bank that
issues loans to the public and returns the profits to the government has
been there since the 1960s; but until now, the Fed and the
Administration have not made much use of it. The Fed has used its
dollar-issuing power only to the extent necessary to provide the
reserves to backstop bank runs. The vast majority of the money supply
has continued to be created privately by banks in the form of loans; and
as Congressman Voorhis observed, "where the commercial banks are
concerned, there is no such repayment of the people's money" as there is
with the Federal Reserve. Commercial banks do not rebate the interest
they receive, although they also "'buy' the bonds with newly created
demand deposit entries on their books - nothing more". This, Voorhis
maintained, was a violation of the Constitutional provision that
"Congress shall have the power to coin money [and] regulate the value
thereof".

Bernanke's Greenback Solution

The Federal Reserve under Alan Greenspan continued to operate in its
traditional role of serving the interests of its banker owners, but Ben
Bernanke seemed to have other things in mind as far back as 2002, when
he made his notorious "helicopter money" speech. The speech was made
before the National Economists Club in Washington, DC on November 21
2002 and was titled "Deflation: Making Sure 'It' Doesn't Happen Here".
Dr Bernanke stated that the Fed would not be "out of ammunition" to
counteract deflation just because the federal funds rate had fallen to
zero percent and could not be brought down lower. Lowering interest
rates was not the only way to get new money into the economy. He said,
"the US government has a technology, called a printing press (or, today,
its electronic equivalent), that allows it to produce as many US dollars
as it wishes at essentially no cost". Note that he said the government
(not the central bank) has a printing press, and that the government
could print money at essentially no cost. The implication was that the
government could create money without paying interest and without having
to pay it back to the Fed or the banks.

That fairly well characterizes the money created by "quantitative
easing" today. The Fed rebates the interest only after deducting its
costs, which are no doubt quite generous; but in 2008, it reported that
it rebated 85% of the interest it received to the Treasury. {3} Since
interest on long-term bonds is now under three percent, that means the
interest paid by the government is less than half of one percent -
clearly the best deal in town, particularly since the Chinese and other
foreigners are now balking at buying more US debt. This is comparable to
what Australia did in the 1930s, when it avoided the serious depression
conditions suffered in other countries by funding public projects with
credit advanced by its government-owned central bank at a fraction of
one percent interest. {4}

Not only are the Fed's loans nearly interest-free, but they are never
paid back. The federal debt has not been paid off since 1838, when
Andrew Jackson shut down the Second US Bank. "Balancing the budget" just
involves "servicing" the debt with interest. Money that comes from an
interest-free loan that is rolled over indefinitely is essentially
debt-free legal tender.

The infamous helicopter line in Bernanke's 2002 speech came in when he
was discussing how the government's money-creating power could be used
to cut taxes. He said, "A money-financed tax cut is essentially
equivalent to Milton Friedman's famous 'helicopter drop' of money".
Dropping money from helicopters was Professor Friedman's hypothetical
cure for deflation. The "money-financed tax cut" discussed by Dr
Bernanke was one in which taxes would be replaced with money that was
simply printed up by the government and spent into the economy. He
added, "[I]n lieu of tax cuts, the government could increase spending on
current goods and services or even acquire existing real or financial
assets". The government could reverse deflation by printing money and
buying hard assets with it - assets such as real estate or corporate stock.

And that, for a Federal Reserve official next in line to become its
Chairman, was a pretty radical suggestion. It was basically a Greenback
proposal, the sort of government self-funding used by Abraham Lincoln to
finance the Civil War. It was also the sort of money system endorsed by
Benjamin Franklin, Thomas Jefferson, and William Jennings Bryan, the
system used by the American colonists and demonstrated to be
particularly successful in colonial Pennsylvania.

Reviving the Banking Model of Benjamin Franklin's Day

In Pennsylvania in the first half of the 18th century, the provincial
government not only printed its own money but owned its own bank.
Colonial scrip was printed and lent to farmers at five percent interest,
and this money recycled back to the government as it was repaid. The
money went out and came back in a circular flow, preventing inflation.
This was quite different from what happened in those Banana Republics
that used the power to print money simply to pay off foreign debts owed
in dollars. The invariable result was to invite speculators to jack up
the price of the dollars relative to the local currency, causing the
currency's rapid devaluation. The Bank of Pennsylvania, by contrast,
issued its fiat currency as loans for domestic use, loans on which not
only the principal but the interest came back to the government. Since
the provincial government had the power to issue the local scrip, it
could issue some extra to meet its expenses; and this money filtered
through the economy to provide the additional sums needed to cover the
interest on the loans. During the time this provincial system was in
place, the Pennsylvania colonists paid no taxes, there was no government
debt, and price inflation did not result.

What the Fed is doing today could be considered comparable: it is
generating the equivalent of debt-free government-issued colonial scrip
with its "quantitative easing" tool, and it is advancing credit for
private use, with the interest on the loans returning to the government.

The Case for Nationalizing the Fed

One major difference between the Federal Reserve and the bank of
colonial Pennsylvania is that the Fed remains a private bank owned by
other banks. There is the fear that the powerful tool of "quantitative
easing" could turn into a dangerous weapon in the wrong hands. A private
central bank can be driven by a small financial elite in secret
boardroom meetings beyond congressional control. The power to create
money is a double-edged sword even for a government, but at least a
government must answer to the people in the public forum of a democracy.

That is true in theory, but we the people don't have much more control
over Treasury Secretary Tim Geithner, a government official, than we
have over Ben Bernanke. The Treasury's Troubled Asset Relief Program (or
TARP) has been heavily criticized for moving "toxic" assets off the
books of the culpable Wall Street derivative banks and onto the backs of
the taxpayers. The problem is that government officials and Federal
Reserve officials alike believe that the only way the nation can have a
functioning credit system is to maintain business as usual on Wall
Street. This is not true. A public banking system headed by a truly
federal central bank could provide all the credit we need.

To prevent corruption and abuse, this system of money and credit would
need to be made subject to the sort of public monitoring and control
provided by the checks and balances built into the Constitution. Stephen
Zarlenga, president of the American Monetary Institute, suggests that
the money system should be organized as a fourth branch of government
alongside the executive, judicial and congressional branches. The Fed is
acting like a fourth branch now, but without the public oversight of a
true government agency. Congressman Ron Paul has brought a bill (HR1027)
to audit the Federal Reserve, and Congressman Dennis Kucinich told
Congress earlier this month that he would soon be bringing a bill to
nationalize the Fed. He said:

"Banking is not a proper function of the government, but oversight is.
The Treasury Department should not be outsourcing to the Fed its
oversight responsibilities. The Fed, which failed miserably to oversee
the banks, should be put under Treasury instead. It's time for the
government to operate in the public interest, not in the interest of
private banks. It's time to stop bailing out banks and begin building up
America."

Note, however, that if the Fed is nationalized and it continues to issue
credit for the benefit of consumers, small businesses, and the
government itself, it will actually be in the banking business; and
that, arguably, is how it should be. Our money system today is nothing
more than a series of legal agreements between parties. "Credit" is
merely an agreement to repay over time. While private parties and
private banks should be free to lend their own money or their investors'
money, we also need the sort of "credit" that is created on a computer
screen; and that sort of credit, as money reformer Richard Cook
observes, is properly administered as a public utility. The dollar is
backed by nothing but "the full faith and credit of the United States"
and should be dispensed and monitored by the United States. As William
Jennings Bryan declared in his winning presidential nomination speech at
the Democratic Convention in 1896:

"[W]e believe that the right to coin money and issue money is a function
of government ... Those who are opposed to this proposition tell us that
the issue of paper money is a function of the bank and that the
government ought to go out of the banking business. I stand with
Jefferson ... and tell them, as he did, that the issue of money is a
function of the government and that the banks should go out of the
governing business ... [W]hen we have restored the money of the
Constitution, all other necessary reforms will be possible, and ...
until that is done there is no reform that can be accomplished."

The loans the Fed creates by "quantitative easing" are no more
inflationary than the credit created daily on a computer screen by
private banks. {5} At least, loans used to be created daily by private
banks, until their ability to lend was frozen for accounting reasons.
The Fed's credit facility has the advantages over private banks' that
(a) it is not subject to the lending freeze, and (b) its profits are
rebated to the government, which ultimately serves the taxpayers'
interest. Nationalizing the Federal Reserve is the ideal solution; but
while we are waiting for that development, the government can do the
next best thing and tap into the very cheap, readily available credit
provided by its own central bank.

______

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.

Notes:

1. "FAQs: Federal Reserve System", federalreserve.gov.

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

3. See Benjamin Gisin, Michael Krajovic, "Rescuing the Physical
Economy," Conscious Economics (January 2009); Ellen Brown, "Monetize
this!", webofdebt.com/articles (February 22 2009).

4. David Kidd, "How Money is Created in Australia",
www.http://dkd.net/davekidd/politics/money.html (2001).

5. See Ellen Brown, "The Wall Street Ponzi Scheme Called Fractional
Reserve Banking", webofdebt.com/articles (December 29 2008).

(c) Copyright 2007 Ellen Brown. All Rights Reserved.

http://www.webofdebt.com/articles/bernanke.php


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