GROUND ZERO ON WALL STREET: FED FUNDS AND T-BILLS HIT 0% INTEREST

What the Fed is doing with all this money-conjured-out-of-nothing, however, remains a state secret.  When Bloomberg News sued recently under the Freedom of Information Act to find out who had received $2 trillion in loans and what the collateral was, the Fed refused to disclose the documents, claiming it was protecting “trade secrets.”8  Whose trade and what sort of secrets?  We’re not supposed to know which banks are lined up at the trough and how dodgy their collateral is, because that would erode investor confidence.  But why should we have confidence in banks engaging in “confidence tricks”? 

The biggest “trade secret” of the banking business is that banks create the money they lend out of thin air.  “The process by which banks create money is so simple,” wrote economist John Kenneth Galbraith, “that the mind is repelled.”  Banks simply write “credit” into an account in exchange for the borrower’s promise to repay.   In the case of the federal government, the bank that “monetizes” its promise to repay is the privately-owned Federal Reserve; and today the Fed is taking that monetizing power to such dangerous lengths that the currency could be hyperinflated into oblivion. 

 Implications and Possibilities 

When you understand this sleight of hand, the way out of the government’s debt trap appears equally simple: Congress could just nationalize the Federal Reserve and print Federal Reserve Notes itself.  This government-issued money could then be either spent or lent into the economy to get the wheels of production rolling again.   

But isn’t the Federal Reserve already a federal agency?  That commonly held misconception was dispelled when the Fed refused to comply with the Bloomberg demand under the FOIA.  Most of the documents, said the Fed, are held by the New York Federal Reserve; and the New York Fed is not subject to the FOIA because it is not a federal agency. 9 

It is not a federal agency but it should be, because we the people are picking up the tab.  The Fed and the banks are creating $8 trillion out of thin air, nearly doubling the money supply; and that means the value of our dollars is being diluted by nearly 50%.  If it is our money, we should get the interest, have the right to full accountability, and have control over where the money goes.   Instead of pouring money into a massive black hole on the derivatives books of bankrupt banks, Congress could and should be using the national credit card to bolster manufacturing, housing and infrastructure development, either by making low-interest credit readily available to qualified borrowers or by a direct infusion of government-issued dollars into the economy. 

The objection to the government printing dollars and simply spending them on public projects has always been that it would be inflationary, but that alternative would actually be less inflationary than letting the privately-owned Federal Reserve print dollars and swap them for U.S. debt, as is being done now.  This is because Treasury debt, once created, is never paid off.  The U.S. federal debt hasn’t been paid off since the days of Andrew Jackson.  Instead, U.S. government securities wind up circulating in the economy along with the dollars that were printed to buy them.  These securities represent a claim against U.S. goods and services just as dollars do.  Indeed, that is why the government’s securities are so highly valued: they are just as good as dollars.  They can be cashed in at any time for their dollar equivalent or deposited and borrowed against for an equivalent sum in loans, and they can be swapped for the risker toxic collateral that is tying up the banks’ capital, preventing the banks from making new loans.  Federal securities are particularly valuable to banks, because they can become the “reserves” for generating many times their face value in new loans.  If the government were to print dollars directly, the bonds would be taken out of the picture.  There would be debt-free, permanent money in circulation, money not subject to perpetual servicing with interest by the taxpayers.

Banking with the U.S. Government

The superior safety and security that investors feel when they stash their savings with the U.S. government could be achieved by nationalizing bankrupt banks.  This is not a radical idea.  Rather than being bailed out with taxpayer money, insolvent banks are actually supposed to be put into receivership under the FDIC (a government agency).  It then has the option of taking the bank’s stock (effectively nationalizing it) in return for getting the bank back on its feet.  This was done, for example, with Continental Illinois, the nation’s fourth largest bank, when it went bankrupt in the 1990s. 

In a number of capitalist countries, including Switzerland and India, publicly-owned banks operate right alongside privately-owned banks.  Studies in India comparing public and private banks have found that Indian public banks not only are more secure but give superior customer service.10  In European countries, working for the government is considered more prestigious than working for the private sector, and government employees have better training.  Interestingly, the first banks owned publicly in democratic communities were established in the American colonies.  It may be time to return to our roots and restore the U.S. banking system to public ownership again.        

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