QE Infinity: What Is It Really About?

QE3, the Federal Reserve’s third round of quantitative easing, is so open-ended that it is being called QE Infinity.  Doubts about its effectiveness are surfacing even on Wall Street.  The Financial Times reports:

Among the trading rooms and floors of Connecticut and Mayfair [in London], supposedly sophisticated money managers are raising big questions about QE3 — and whether, this time around, the Fed is not risking more than it can deliver.

Which raises the question, what is it intended to deliver?  As suggested in an earlier article here, QE3 is not likely to reduce unemployment, put money in the pockets of consumers, reflate the money supply, or significantly lower interest rates for homeowners, as alleged.  It will not achieve those things because it consists of no more than an asset swap on bank balance sheets.  It will not get dollars to businesses or consumers on Main Street.

So what is the real purpose of this exercise?  Catherine Austin Fitts recently posted a revealing article on that enigma.  She says the true goal of QE Infinity is to unwind the toxic mortgage debacle, in a way that won’t bankrupt pensioners or start another war:

The challenge for Ben Bernanke and the Fed governors since the 2008 bailouts has been how to deal with the backlog of fraud – not just fraudulent mortgages and fraudulent mortgage securities but the derivatives piled on top and the politics of who owns them, such as sovereign nations with nuclear arsenals, and how they feel about taking massive losses on AAA paper purchased in good faith.

On one hand, you could let them all default. The problem is the criminal liabilities would drive the global and national leadership into factionalism that could turn violent, not to mention what such defaults would do to liquidity in the financial system. Then there is the fact that a great deal of the fraudulent paper has been purchased by pension funds. So the mark down would hit the retirement savings of the people who have now also lost their homes or equity in their homes. The politics of this in an election year are terrifying for the Administration to contemplate.

How can the Fed make the investors whole without wreaking havoc on the economy?  Using its QE tool, it can quietly buy up toxic mortgage-backed securities (MBS) with money created on a computer screen.

Good for the Investors and Wall Street, But What about the Homeowners and Main Street?

 The investors will get their money back, the banks will reap their unearned profits, and Fannie and Freddie will get bailed out and wound down.  But what about the homeowners?  They too bought in good faith, and now they are either underwater or are losing or have lost their homes.  Will they too get a break?  Fitts says we’ll have to watch and see.  Perhaps there was a secret agreement to share in the spoils.  If so, we should see a wave of write-downs and write-offs aimed at relieving the beleaguered homeowners.

A nice idea, but somehow it seems unlikely.  The odds are that there was no secret deal.  The banks will make out like bandits as they have before.  The never-ending backdoor bailout will keep feeding their profit margins, and the banks will keep biting the hands of the taxpayers who feed them.

How can Wall Street be made to play well with others and share in their winnings?  In a July 2012 article in The New York Times titled “Wall Street Is Too Big to Regulate,” Gar Alperovitz observed:

With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses.  If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions. . . .

Nationalization isn’t as difficult as it sounds.  We tend to forget that we did, in fact, nationalize General Motors in 2009; the government still owns a controlling share of its stock.  We also essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock.

Bailout or Receivership?

Nationalization also isn’t as radical as it sounds.  If nationalization is too loaded a word, try “bankruptcy and receivership.”  Bankruptcy, receivership and nationalization are what are SUPPOSED to happen when very large banks become insolvent; and if the toxic MBS had been allowed to default, some very large banks would have wound up insolvent.

Nationalization is one of three options the FDIC has when a bank fails.  The other two are closure and liquidation, or merger with a healthy bank.  Most failures are resolved using the merger option, but for very large banks, nationalization is sometimes considered the best choice for taxpayers.  The leading U.S. example was Continental Illinois, the seventh-largest bank in the country when it failed in 1984.  The FDIC wiped out existing shareholders, infused capital, took over bad assets, replaced senior management, and owned the bank for about a decade, running it as a commercial enterprise.  In 1994, it was sold to a bank that is now part of Bank of America.

Insolvent banks should be put through receivership and bankruptcy before the government takes them over.  That would mean making the creditors bear the losses, standing in line and taking whatever money was available, according to seniority.  But that would put the losses on the pension funds, the Chinese, and other investors who bought supposedly-triple-A securities in good faith—the result the Fed is evidently trying to avoid.

How to resolve this dilemma?  How about combining these two solutions?  The money supply is still SHORT by $3.9 trillion from where it was in 2008 before the banking crisis hit, so the Fed has plenty of room to expand the money supply.  (The shortfall is in the shadow banking system, which used to be reflected in M3, the part of the money supply the Fed no longer reports.  The shadow banking system is composed of non-bank financial institutions that do not accept deposits, including money market funds, repo markets, hedge funds, and structured investment vehicles.)

Rather than a never-ending windfall for the banks, however, these maneuvers need to be made contingent on some serious quid pro quo for the taxpayers.  If either the Fed or the banks won’t comply, Congress could nationalize either or both.  The Fed is composed of twelve branches, all of which are 100% owned by the banks in their districts; and its programs have consistently been designed to benefit the banks—particularly the large Wall Street banks—rather than Main Street.  The Federal Reserve Act that gives the Fed its powers is an act of Congress; and what Congress hath wrought, it can undo.

Only if the banking system is under the control of the people can it be expected to serve the people.  As Seumas Milne observed in a July 2012 article in the UK Guardian:

Only if the largest banks are broken up, the part-nationalised outfits turned into genuine public investment banks, and new socially owned and regional banks encouraged can finance be made to work for society, rather than the other way round.  Private sector banking has spectacularly failed – and we need a democratic public solution.

_______________________

Ellen Brown is an attorney and president of the Public Banking Institute.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.

21 Responses

  1. Iceland has given the World the answer to the current Bankster crisis. Let them fail, and go after the the perpetrators of the largest fraud in history, with a view to long jail terms. Icelands economy is now recovering and growing again.
    The Banking crisis of 2008 has exposed the total corruption of the Banking system in it’s current form, and it’s time for Governments around the world to actually do what they are elected to do, ie, fix the problems (let the Banks go under and restart the system). The Fed must be taken out of the equation and Banking oversite handed to the US Treasury. Those implicated in the massive fraud need some long jail time. There’s a large prison on an island in San Fransisco, or, even Guantanamo Bay, where America’s real enemies should be held.

  2. This sounds like a repeat of the QE that was used in the 1920’s Weimar Republic. “John Maynard Keynes described the situation in The Economic Consequences of the Peace: ‘The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.’ ” ~http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

    • Why are there 5, ‘thumbs down’ here? Curing financial problems by printing money, can lead to serious consequences.

      • “The Treaty of Versailles imposed a huge debt on Germany that could be paid only in gold or foreign currency.”

        This caused the hyper-inflation in Germany as opposed to why we do not have hyper-inflation from quantitative easing. The Fed is printing money to repay debt in our own currency. It is an equal swap.

        And this is why we need MMT with our Govt issuing money debt free.

  3. Yes, we do want to stop bailing out the banks. I believe that we the people are so very tired of subsidizing the wealthy. Seumas Milne has a great idea re breaking the behemoths up, and creating banks like the BND for state, city, county and municipalities. That would be great for the 99%.
    Nationalizing the TBTF banks would be an awesome idea too.
    But most of Congress seems to be “bought” by the 1%, and nobody in the media talks about public banking the way Ellen Brown, or Michael Hudson, or Bill Black, or Gar Alperovitz do. Could it be that someone is telling them NOT to talk about it? Could they be “bought” also? So, how do WE THE PEOPLE get Congress and the media to start talking about what is discussed in this article, and Ellen Brown has been writing about?
    As Brian Harry says above: “it’s time for Governments around the world to actually do what they are elected to do, ie, fix the problems (let the Banks go under and restart the system).”
    Aren’t governments and banks supposed to work for the people who created them? That’s a ridiculous question but I have to ask anyway.

  4. […] Ellen Brown Featured Writer Dandelion Salad webofdebt.com Sept. 21, […]

  5. […] sector banking has spectacularly failed – and we need a democratic public solution.Ellen Brown The Web of DebtPosted: Wednesday, 3 October 1012 About Ellen BrownEllen Brown is an attorney, president of the […]

  6. When all the smoke clears up, we will have countries divided into multiple global small states under the UN. That breakup will include present day superpowers so you can imagine what will happen. The eventual global small states will believe they are independent but in reality they will be totally subservient to the UN. There will be a gold backed world currency issued by the UN. The states will be free to have their regional private currencies as long as they convert to the world currency. Strict financial regulations will be enforced by the UN. Any state who tries to aspire for true fiscal independence will begin to meet its fate by the announcement of a no fly zone. The UN will be under total control of the money masters. This is the NWO. Hopefully people will wake up. Meanwhile learn to live free in an unfree world. Thank you for this excellent website and great articles.

    • What you say sounds good R, but, the UN is, and has always been a joke. The UN is totally UN-democratic because of the power of Veto held by the members of the Security Council. Nothing happens at the UN if it doesn’t meet with the approval of the Security Council.
      This is why Israel is able to ‘thumb it’s nose’ at the 100 or so resolutions passed by the General Assembly calling for Israel to treat Palestine in a reasonable manner. The USA routinely veto’s any move to bring Israel to heel, so Israel continues on it’s merry way, building settlements on Palestinian land, and the exclusion wall as well.
      When it comes to things ‘Political’ the UN is a total waste of time and money.

      • It is only a conspiracy theory. Relax, enjoy and watch TV

        • R. I like conspiracy theories. It shows that people are thinking, and not just believing what they see on their TV’s………. Cheers.

    • Its true what you say about the UN, but is there any real solution? The people have been so spoiled that cant see beyond their next happy meal, I phone, vidio game … They sit with their head in the sand (or most likely facebook) waiting for their next EBT reload. Its coming down to major sacrifice on the part of working americans. I already see people on welfare living better than people who have jobs. And complaining more too… Somehow people have come to think that goverment handouts are the norm, not getting a job and becoming self supportive.

  7. This is part III of Jill Stein’s Green Party Platform. http://WWW.JillStein.org. Especially note #8. I believe she is the candidate who sees how to reform the banking system. She has my vote! Public Banks like BND!
    III – REAL FINANCIAL REFORM
    The takeover of our economy by big banks and well-connected financiers has destabilized both our democracy and our
    economy. It’s time to take Wall Street out of the driver’s seat and to free the truly productive segments of working America
    to make this economy work for all of us. Real Financial Reform will:
    1. Relieve the debt overhang holding back the economy by reducing homeowner and student debt burdens.
    2. Democratize monetary policy to bring about public control of the money supply and credit creation. This means we’ll
    nationalize the private bank-dominated Federal Reserve Banks and place them under a Monetary Authority within the
    Treasury Department.
    3. Break up the oversized banks that are “too big to fail.”
    4. End taxpayer-funded bailouts for banks, insurers, and other financial companies. We’ll use the FDIC resolution process
    for failed banks to reopen them as public banks where possible after failed loans and underlying assets are auctioned
    off.
    5. Regulate all financial derivatives and require them to be traded on open exchanges.
    6. Restore the Glass-Steagall separation of depository commercial banks from speculative investment banks.
    7. Establish a 90% tax on bonuses for bailed out bankers.
    8. Support the formation of federal, state, and municipal public-owned banks that function as non-profit utilities.
    Under the Green New Deal we will start building a financial system that is open, honest, stable, and serves the real economy rather than the phony economy of high finance.

  8. Please challenge or endorse !
    The solution is quick,easy, and simple.
    The Fed has the power to mandate all banks and financial institutions must operate with 100% margin, 100% liquid.
    This is the solution that would prevent a burst of the bubble, but it would need an attachment to prevent the ultimate collapse-hyperinflation. That attachment would be : The Fed would LEND them all that is needed to be made 100% whole. These loans would be for 2% for 36 years.
    NO NEW LEGISLATION REQUIRED. NO NEW PRINTING REQUIRED.
    A new beginning for “The Redistribution of the Wealth of a Nation”
    for its people.
    Read More, CHALLENGE IT, IMPROVE IT, use it as a guide:.
    http://bit.ly/MlQWNs

    May God continue to bless America, and assist Ellen Brown in her efforts. Let Social Media help to set us free.

  9. “Nationalization is one of three options the FDIC has when a bank fails. The other two are closure and liquidation, or merger with a healthy bank. ”

    There is a better option. Let the for-profit banks be just that, separate
    them from government. Keep their winnings but also pay their losses.
    It is called “free banking” by Keynes, Minsky, Mises, Desoto, and others of whom Frederick Soddy would be included.
    In his “Role of Money” written in 1926,1933, he foretold the 2008 “credit expansion ” crises. Banks producing excessive,leveraged “counterfeit” money
    As Michael Hudson said,”If there is any silver lining to today’s debt crisis, it is that the present situation and trends cannot continue. So this is not only an opportunity to restructure banking; we have little choice. The urgent issue is who will control the economy: governments, or the financial sector and monopolies with which it has made an alliance.

  10. A global crisis – forecast…

    My letter is about the next stage of the current crisis. Now about my forecast accuracy – as I chose a job in Scotland in 2005, I have been thinking about this crisis; I knew, that it is unexpected and that it lasts until 2020. Nouriel Roubini predicted the twelve stages of current crisis, I predicted the first eight stages – how it will start and develop in USA and UK, but I didn’t predict that it covers the whole world and in 2005 I knew that 2020 China will be the largest economy in the world.

    Global debt and derivatives market is like a gigantic house of cards, if you take a one card or a one big bank out, you are having crash, as show 2008 crisis, now this gigantic financial house of cards is very fast growing – FINANCIAL IMPLOSION: Global Derivatives Market at $1,200 Trillion Dollars … 20 Times the World Economy

    http://www.globalresearch.ca/financial-implosion-global-derivatives-market-at-1-200-trillion-dollars-20-times-the-world-economy/

    USA, UK, EU and Japan are trying to fix a this gigantic financial bubble or a house of cards by printing the money: trillions dollars, pounds, euro, yen, it is visible part of this crisis and there is invisible part – the tax havens, where is 21-32 trillions $ – main reason for this crisis and the biggest danger now.

    A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
    1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis – the financial black holes – tax havens: sixty years ago, USA companies accounted for 32.1% of the federal tax take, but by 2009 that proportion plummeted to 8.9%, over the same period, the burden on ordinary workers (paying standard payroll tax) soared from 10% to 40% of all federal tax receipts, according to official data, the same processes took place in all developed countries and the tax havens sucked from world economy 21-32 trillions $.
    2. The decreasing dollar market share.
    3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
    4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically impossible to reform it now, as show the tax havens history.
    A only way to reform the global financial system and central part of it – the tax havens, is crash, a only one question is when?

    More…

    http://remy10.blog.com/2012/09/10/a-global-crisis-forecast/

    • Re:”A global crisis – forecast”

      What is “justaluckyfool”- Anyone that attempts to predick a future event is a fool; if by chance (luck) correctly then they are just a lucky fool, albeit still a fool.
      With a sincere hope, that you will not join the club of “luckyfools”, that as Einstein said, “For the solution:”We cannot solve our problems with the same thinking we used when we created them”.Albert Einstein
      For the solution.***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism

      CRASH is not the only solution. Frederick Soddy (one just a luck fool)
      predicted “credit expansion crisis” and even its solution in “The Role of Money” (1926,1933). When written he was declared a “crank”.

      Thank you Ellen Brown for allowing these post, allowing challenge and improvement,”for the benefit of all mankind.”

      Please read (Google): Frederick Soddy
      and : “The Wealth of a Nation is in How it Redistributes its Wealth ” by justaluckyfool.

  11. Qe to liquify the pensions. bingo

  12. “Only if the banking system is under the control of the people can it be expected to serve the people.”–To me that means abolishing the Fed. That won’t happen since Congress is a banker owned institution.

  13. No, just need to amend the Fed.
    …to serve the people
    …separate from “private for profit” banks so as to maximize “profits” for the people, instead of “the banks”
    Google: “QE 4 WAR” or “QE 4 Disaster Relief” or “justaluckyfool”

  14. Reblogged this on Current Events and commented:
    Insightful. Pay attention…

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