One thing to be said for the women now heading the Federal Reserve and the IMF: compared to some of their predecessors, they are refreshingly honest. The Wall Street Journal reported on July 2nd:
Two of the world’s most powerful women of finance sat down for a lengthy discussion Wednesday on the future of monetary policy in a post-crisis world: U.S. Federal Reserve Chairwoman Janet Yellen and International Monetary Fund Managing Director Christine Lagarde. Before a veritable who’s-who in international economics packing the IMF’s largest conference hall, the two covered all the hottest topics in debate among the world’s central bankers, financiers and economists.
Among those hot topics was the runaway shadow banking system, defined by Investopedia as “The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.” Examples given include hedge funds, derivatives and credit default swaps.
Conventional banks also engage in “shadow banking.” One way is by using their cash cushion as collateral in the repo market, where they can borrow to invest in the stock market and other speculative ventures. As explained by Bill Frezza in a January 2013 Huffington Post article titled “Too-Big-To-Fail Banks Gamble With Bernanke Bucks”:
If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper-hypothecation this pledged collateral gets pyramided, creating a ticking time bomb ready to go kablooey when the next panic comes around.
Addressing the ticking time bomb of the shadow banking system, here is what two of the world’s most powerful women had to say:
MS. LAGARDE: . . . You’ve beautifully demonstrated the efforts that have been undertaken . . . in terms of the universe that you have under your jurisdiction. But this universe . . . has generated the creation of parallel universes. And . . . with the toolbox with all the attributes that you have — what can you do about the shadow banking at large? . . .
MS. YELLEN: So I think you’re pointing to something that is an enormous challenge. And we simply have to expect that when we draw regulatory boundaries and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we won’t be able to detect them. And if we can, we won’t be — we won’t have adequate regulatory tools. And that is going to be a huge challenge to which I don’t have a great answer.
Limited to her tools, there probably is no great answer. All the king’s horses and all the king’s men could not rein in the growth of the shadow banking system, despite the 828-page Dodd-Frank Act. Instead, the derivatives pyramid has continued to explode under its watch, to a notional value now estimated to be as high as $2 quadrillion.
At one time, manipulating interest rates was the Fed’s stock in trade for managing the money supply; but that tool too has lost its cutting edge. Rates are now at zero, as low as they can go – unless they go negative, meaning the bank charges the depositor interest rather than the reverse. That desperate idea is actually being discussed. Meanwhile, rates are unlikely to be raised any time soon. On July 23rd, Bloomberg reported that the Fed could keep rates at zero through 2015.
One reason rates are unlikely to be raised is that they would make the interest tab on the burgeoning federal debt something taxpayers could not support. According to the Treasury’s website, taxpayers pay about $400 billion a year in interest on the federal debt, just as they did in 2006 — although the debt has nearly doubled, from $9 trillion to over $16 trillion. The total interest is kept low by extremely low interest rates.
Worse, raising interest rates could implode the monster derivatives scheme. Michael Snyder observes that the biggest banks have written over $400 trillion in interest rate derivatives contracts, betting that interest rates will not shoot up. If they do, it will be the equivalent of an insurance company writing trillions of dollars in life insurance contracts and having all the insureds die at once. The banks would quickly become insolvent. And it will be our deposits that get confiscated to recapitalize them, under the new “bail in” scheme approved by Janet Yellen as one of the Fed’s more promising tools (called “resolution planning” in Fed-speak).
As Max Keiser observes, “You can’t taper a Ponzi scheme.” You can only turn off the tap and let it collapse, or watch the parasite consume its food source and perish of its own accord.
Collapse or Metamorphosis?
The question being hotly debated in the blogosphere is, “What then?” Will economies collapse globally? Will life as we know it be a thing of the past?
Not likely, argues John Michael Greer in a March 2014 article called “American Delusionalism, or Why History Matters.” If history is any indication, governments will simply, once again, change the rules.
In fact, the rules of money and banking have changed every 20 or 30 years for the past three centuries, in an ongoing trial-and-error experiment in evolving a financial system, and an ongoing battle over whose interests it will serve. To present that timeline in full will take another article, but in a nutshell we have gone from precious metal coins, to government-issued paper scrip, to privately-issued banknotes, to checkbook money, to gold-backed Federal Reserve Notes, to unbacked Federal Reserve Notes, to the “near money” created by the shadow banking system. Money has evolved from being “stored” in the form of a physical commodity, to paper representations of value, to computer bits storing information about credits and debits.
The rules have been changed before and can be changed again. Depressions, credit crises and financial collapse are not acts of God but are induced by mechanical flaws or corruption in the financial system. Credit may stop flowing, but the workers, materials and markets are still there. The system just needs a reboot.
Hopefully the next program that gets run will last more than 20 or 30 years. Ideally, we might mimic the ancient Mesopotamians, the oldest and most long-lasting civilization in history, and devise an economic system that lasts for millennia. How they did it, along with some other promising models, will be the subject of another article. For more on this, see The Public Bank Solution.
About Those Derivatives
How to kill the derivatives cancer without killing the patient? Without presuming to have more insight into that question than the head of the Fed or the IMF, I will just list some promising suggestions from a variety of experts in the field (explored in more depth in my earlier article here):
- Eliminate the superpriority granted to derivatives in the 2005 Bankruptcy Reform Act, the highly favorable protective legislation that has allowed the derivatives bubble to mushroom.
- Restore the Glass-Steagall Act separating depository banking from investment banking.
- Break up the giant derivatives banks.
- Alternatively, nationalize the too-big-to-fail banks.
- Make derivatives illegal and unwind them by netting them out, declaring them null and void.
- Impose a financial transactions tax on Wall Street trading.
- To protect the deposits of citizens and local governments, establish postal savings banks and state-owned banks on the model of the Bank of North Dakota, the only state to completely escape the 2008 banking crisis.
These alternatives are all viable possibilities. Our financial leaders, in conjunction with our political leaders, have continually re-created the web of money and credit that knits our economy together. But they have often taken only their own interests and those of the wealthiest citizens into account, not those of the general public. It is up to us to educate ourselves about money and banking, and to demand a system that is accountable to the people and serves our long-term interests.
___________________________
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.
Filed under: Ellen Brown Articles/Commentary | Tagged: LaGarde, public banking, taper, Yellen |
WEB OF DEBT BLOG 
You just forgot to mention that we must end the FDIC guarantee to fully insure derivatives, which came after Clinton’s ending Glass-Steagall and before bush’s signing “bail-in”
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Why no mention of Sheila Bair (“The Bull By The Horns”),
“I believe speculative use of CDSs should be banned, given the damage they caused to our economy.” “…I like skin-in-the game requirements-because they force market participants to put their own money at risk and suffer the consequences if their actions result in financial loss.”
How’s this for a very easy solution.
Private For Profit Banks as corporations are “people”-make them subject to the same rules as people are; all investments must be backed by 50% cash: money that is owned by the investor. All margin accounts must be insured.
And sue them as felons!
[…] Ellen Brown Global Research, July 25, 2014 Web of Debt 25 July […]
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Ellen Brown refers to Shadow Banking financial instruments as ‘near money’. They are not ‘near’ money they ARE money; privately issued ‘Democratised’ money. EB would not say that privately operated jails are ‘near’ jails, nor would she say that privately operated armies operating in Iraq/Afghanistan etc are ‘near’ armies.
The issuance of money function is being privatised, just as the penal system function and the millitary function are being privatised. This is key to understanding the dynamics that have led to the present post crunch economic situation and the possibility of it being halted or reversed.
I have written about Democratised Money in detail in ‘Crackernomics’ which is free to download on Smashwords (you can Google it) and on ‘The United States of Everywhere’ blog site.
Contract doc review attorneys have observed thoroughly researched reports authored by top banks (within the last twelve months) indicating that banks are predicting transcontinental mass starvation and pandemics. Are the banks already looking to the future with the view that the derivatives train has already left the station with inadequate brakes to stop it? Perhaps they are looking forward with an eye of how to profit from the ensuing chaos.
Exactly! We don’t have an economy, we have a credit based system which requires ever more debt in order to grow.
This guy is one of the few advisors trying to wake people up.
http://www.vancouverfinancial.net
[…] Web of Debt, by Ellen […]
You need to explain that Hypothecation is the financializing of an asset already financialized which is no owned by the loan’s recipient only held in trust, re-hypothecation is the lending of money against an asset securitized by a hypothecated loan by a third party and hyper-hypothecation would therefore be loaning against a pool of assets not owned but held in trust that have or are being loaned against and used as collateral multiple times on the same asset and loan.
In short, according to London finance articles, when they loan against your home to your mortgage company your home, regardless of your mortgage on it and payments towards said mortgage is not owned by the finance company as priority first lien-holder and in the event of default on their loans your mortgage company must assign your home to them and your agreement is null and void and they claim they can foreclose immediately and throw you out.
They must do this because your equity is their collateral against the note and they are entitled to remove that equity as quickly as possible to cover any losses on said note. They are doing this on pools like car loans and credit cards meaning you can lose your car or have you credit line cancelled and still be responsible for all the balances at interest.
[…] Ellen Brown writes for Web of Debt: […]
This certainly is a major issue facing us. It is not the major issue but rather a symptom of private interests controlling our government and our economic system. The major issue is economic slavery and lack of self-determinism that this system cultivates. There is no fundamental answer to this dynamic that does not involve some degree of taking down the global economy or collapse. If U.S. corporate empire collapses, these issues will seem trivial by comparison.
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[…] READ MORE HERE […]
the system needs more than a reboot.
we live on a finite planet with finite and depleting resources… while population increases at over 250K/day… a “reboot” will not recreate lost resources nor will it stop people from breeding.
[…] http://www.theguardian.com/music/2014/jul/27/sinead-o-connor-interview-i-deserve-to-be-a-priest https://ellenbrown.com/2014/07/25/you-cant-taper-a-ponzi-scheme-time-to-reboot/ […]
[…] https://ellenbrown.com/2014/07/25/you-cant-taper-a-ponzi-scheme-time-to-reboot/#more-8134 Populist financial and banking wizard Ellen Brown’s most recent manifesto, which explains in understandable detail what is happening with the face value of $2 quadrillion in derivative instruments which underlie Earth’s people’s labor just now: "One reason rates are unlikely to be raised is that they would make the interest tab on the burgeoning federal debt something taxpayers could not support. According to the Treasury’s website, taxpayers pay about $400 billion a year in interest on the federal debt, just as they did in 2006 — although the debt has nearly doubled, from $9 trillion to over $16 trillion. The total interest is kept low by extremely low interest rates. Worse, raising interest rates could implode the monster derivatives scheme. Michael Snyder observes that the biggest banks have written over $400 trillion in interest rate derivatives contracts, betting that interest rates will not shoot up. If they do, it will be the equivalent of an insurance company writing trillions of dollars in life insurance contracts and having all the insureds die at once. The banks would quickly become insolvent. And it will be our deposits that get confiscated to recapitalize them, under the new ‘bail in’ scheme." […]
[…] des Artikels You Can’t Taper a Ponzi Scheme: Time to Reboot von Ellen […]
“… we simply have to expect …” Ouch … for an almost Nobel-prize-winning economist, Ms. Yellen’s statement is a bit on the faith healer side. It is surprising she says these things (even if she thinks them privately). And equally surprising that no one is rattled and no markets get excited (and crash) when such a statement from a helmswoman is publicized. After all, imagine these same listeners, hedge fund managers and banking strategist who surely were her audience were hearing, on their way home “we simply have to expect” from a loudspeaker, from whence the words immediately preceding the phrase would be “good evening, this is captain Yellen speaking; we are trying to lift off and then reach … airport … we simply have to expect …”.
[…] You Can’t Taper a Ponzi Scheme: Time to Reboot […]
Ms. Ellen Brown should run for a Congressional Seat in the U.S. Congress. She would be a write-in. With debates on National TV with other candidates she would have a chance to win.
“Our financial leaders, in conjunction with our political leaders…”
You discredit yourself every time you call these criminals “Leaders”.
The very problem is “Leaders”. The monetary system needs to be “Leaderless” in order to endure.
Humanity has not evolved to the point of individual person-hood and the smarter and violent psychopath parasite class feeds off the monkey-like tribal collectivism of the masses…hence the existence of the current criminal centralized counterfeit racket they call money system.
I disagree that more individualism is the main thing needed. Instead, more cooperation/collectivism is needed, partly through a strong government representing the interests of the people against the criminal parasites (“bankers”). Individualism has it’s place, but is the ultimate divide-and conquer propaganda. Demonizing any collective action (collectivism) and government in general is a propaganda triumph on the part of the criminal overlords who occupy our society.
Nor do I agree that these sociopathic parasites are smarter–only more conscienceless, ruthless, greedy, and criminally organized. Read Russian Populist, The Political Thought of Vladimir Putin by Matthew Johnson. He put, for the most part, put the oligarchs in their place, realizing that a healthy (non-criminal) economy requires a strong state, and established national sovereignty in the process.
What makes something money? Does money have to have inherent value? Everything that has value is money. A bushel of wheat is money. A house is money. A chair is money. Why did we let bankers control money. The value of a nation belongs to its people individually. It was a mistake to let any one group or entity control it’s creation. Cash can be manipulated and counterfitted and stolen. The United states has shown that allowing bankers to control money is setting up a once great nation to fail simply because they allowed a group to control their money. It is human nature for people to want more than they have coming. This is why no one group should be allowed to control the money of a nation. A good place to start would be converting to direct democracy. Direct democracy that does not forcibly take its citizens money. The individual citizen being at the top of government. Don’t think that would work…..Neither did allowing the elites running the show. User fees instead of taxes.
I used to look at “the Bank of North Dakota, the only state to completely escape the 2008 banking crisis” as a model, too, but was disappointed to discover that the state has opened it’s arms to all sorts of environmentally destructive extractive mining operations, especially fracking, which is propping up it’s economy, if even for the short-term.
[…] In her latest essay, Ellen Brown* highlights the discussion points between the 2 women heading the Federal Reserve & the IMF on the many challenges the international monetary system faces, from the shadow banking system to derivatives to the massive levels of government debt globally .. points out whatever happens, there will likely be a priority on keeping interest rates low as rising interest rates would not only make it difficult to service the massive global debt, but also will implode the monster derivatives scheme .. “Michael Snyder observes that the biggest banks have written over $400 trillion in interest rate derivatives contracts, betting that interest rates will not shoot up. If they do, it will be the equivalent of an insurance company writing trillions of dollars in life insurance contracts and having all the insureds die at once. The banks would quickly become insolvent. Worse, our deposits would get confiscated to recapitalize them, under the new ‘bail in’ scheme approved by Janet Yellen as one of the Fed’s more promising tools (called “resolution planning” in Fed-speak).LINK HERE to the essay […]