Cyprus-style confiscation of depositor funds has been called the “new normal.” Bail-in policies are appearing in multiple countries directing failing TBTF banks to convert the funds of “unsecured creditors” into capital; and those creditors, it turns out, include ordinary depositors. Even “secured” creditors, including state and local governments, may be at risk. Derivatives have “super-priority” status in bankruptcy, and Dodd Frank precludes further taxpayer bailouts. In a big derivatives bust, there may be no collateral left for the creditors who are next in line.
Shock waves went around the world when the IMF, the EU, and the ECB not only approved but mandated the confiscation of depositor funds to “bail in” two bankrupt banks in Cyprus. A “bail in” is a quantum leap beyond a “bail out.” When governments are no longer willing to use taxpayer money to bail out banks that have gambled away their capital, the banks are now being instructed to “recapitalize” themselves by confiscating the funds of their creditors, turning debt into equity, or stock; and the “creditors” include the depositors who put their money in the bank thinking it was a secure place to store their savings.
The Cyprus bail-in was not a one-off emergency measure but was consistent with similar policies already in the works for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here. “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage the deposits of their customers, the customers will be put into bankruptcy to save the banks.
Why Derivatives Threaten Your Bank Account
The big risk behind all this is the massive $230 trillion derivatives boondoggle managed by US banks. Derivatives are sold as a kind of insurance for managing profits and risk; but as Satyajit Das points out in Extreme Money, they actually increase risk to the system as a whole.
In the US after the Glass-Steagall Act was implemented in 1933, a bank could not gamble with depositor funds for its own account; but in 1999, that barrier was removed. Recent congressional investigations have revealed that in the biggest derivative banks, JPMorgan and Bank of America, massive commingling has occurred between their depository arms and their unregulated and highly vulnerable derivatives arms. Under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. In a major derivatives fiasco, derivative claimants could well grab all the collateral, leaving other claimants, public and private, holding the bag.
The tab for the 2008 bailout was $700 billion in taxpayer funds, and that was just to start. Another $700 billion disaster could easily wipe out all the money in the FDIC insurance fund, which has only about $25 billion in it. Both JPMorgan and Bank of America have over $1 trillion in deposits, and total deposits covered by FDIC insurance are about $9 trillion. According to an article on Bloomberg in November 2011, Bank of America’s holding company then had almost $75 trillion in derivatives, and 71% were held in its depository arm; while J.P. Morgan had $79 trillion in derivatives, and 99% were in its depository arm. Those whole mega-sums are not actually at risk, but the cash calculated to be at risk from derivatives from all sources is at least $12 trillion; and JPM is the biggest player, with 30% of the market.
It used to be that the government would backstop the FDIC if it ran out of money. But section 716 of the Dodd Frank Act now precludes the payment of further taxpayer funds to bail out a bank from a bad derivatives gamble. As summarized in a letter from Americans for Financial Reform quoted by Yves Smith:
Section 716 bans taxpayer bailouts of a broad range of derivatives dealing and speculative derivatives activities. Section 716 does not in any way limit the swaps activities which banks or other financial institutions may engage in. It simply prohibits public support for such activities.
There will be no more $700 billion taxpayer bailouts. So where will the banks get the money in the next crisis? It seems the plan has just been revealed in the new bail-in policies.
All Depositors, Secured and Unsecured, May Be at Risk
The bail-in policy for the US and UK is set forth in a document put out jointly by the Federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) in December 2012, titled Resolving Globally Active, Systemically Important, Financial Institutions.
In an April 4th article in Financial Sense, John Butler points out that the directive does not explicitly refer to “depositors.” It refers only to “unsecured creditors.” But the effective meaning of the term, says Butler, is belied by the fact that the FDIC has been put on the job. The FDIC has direct responsibility only for depositors, not for the bondholders who are wholesale non-depositor sources of bank credit. Butler comments:
Do you see the sleight-of-hand at work here? Under the guise of protecting taxpayers, depositors of failing institutions are to be arbitrarily, de-facto subordinated to interbank claims, when in fact they are legally senior to those claims!
. . . [C]onsider the brutal, unjust irony of the entire proposal. Remember, its stated purpose is to solve the problem revealed in 2008, namely the existence of insolvent TBTF institutions that were “highly leveraged and complex, with numerous and dispersed financial operations, extensive off-balance-sheet activities, and opaque financial statements.” Yet what is being proposed is a framework sacrificing depositors in order to maintain precisely this complex, opaque, leverage-laden financial edifice!
If you believe that what has happened recently in Cyprus is unlikely to happen elsewhere, think again. Economic policy officials in the US, UK and other countries are preparing for it. Remember, someone has to pay. Will it be you? If you are a depositor, the answer is yes.
The FDIC was set up to ensure the safety of deposits. Now it, it seems, its function will be the confiscation of deposits to save Wall Street. In the only mention of “depositors” in the FDIC-BOE directive as it pertains to US policy, paragraph 47 says that “the authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.” But protected with what? As with MF Global, the pot will already have been gambled away. From whom will the bank get it back? Not the derivatives claimants, who are first in line to be paid; not the taxpayers, since Congress has sealed the vault; not the FDIC insurance fund, which has a paltry $25 billion in it. As long as the derivatives counterparties have super-priority status, the claims of all other parties are in jeopardy.
That could mean not just the “unsecured creditors” but the “secured creditors,” including state and local governments. Local governments keep a significant portion of their revenues in Wall Street banks because smaller local banks lack the capacity to handle their complex business. In the US, banks taking deposits of public funds are required to pledge collateral against any funds exceeding the deposit insurance limit of $250,000. But derivative claims are also secured with collateral, and they have super-priority over all other claimants, including other secured creditors. The vault may be empty by the time local government officials get to the teller’s window. Main Street will again have been plundered by Wall Street.
Super-priority Status for Derivatives Increases Rather than Decreases Risk
Harvard Law Professor Mark Row maintains that the super-priority status of derivatives needs to be repealed. He writes:
. . . [D]erivatives counterparties, . . . unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.
. . . [W]hen we subsidize derivatives and similar financial activity via bankruptcy benefits unavailable to other creditors, we get more of the activity than we otherwise would. Repeal would induce these burgeoning financial markets to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style financial meltdown, thereby helping to maintain systemic financial stability.
In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel agrees. He calls the Dodd-Frank policy approach “corporatism” – a partnership between government and corporations. Congress has made no attempt in the legislation to reduce the size of the big banks or to undermine the implicit subsidy provided by the knowledge that they will be bailed out in the event of trouble.
Undergirding this approach is what Skeel calls “the Lehman myth,” which blames the 2008 banking collapse on the decision to allow Lehman Brothers to fail. Skeel counters that the Lehman bankruptcy was actually orderly, and the derivatives were unwound relatively quickly. Rather than preventing the Lehman collapse, the bankruptcy exemption for derivatives may have helped precipitate it. When the bank appeared to be on shaky ground, the derivatives players all rushed to put in their claims, in a run on the collateral before it ran out. Skeel says the problem could be resolved by eliminating the derivatives exemption from the stay of proceedings that a bankruptcy court applies to other contracts to prevent this sort of run.
Putting the Brakes on the Wall Street End Game
Besides eliminating the super-priority of derivatives, here are some other ways to block the Wall Street asset grab:
(1) Restore the Glass-Steagall Act separating depository banking from investment banking. Support Marcy Kaptur’s H.R. 129.
(2) Break up the giant derivatives banks. Support Bernie Sanders’ “too big to jail” legislation.
(3) Alternatively, nationalize the TBTFs, as advised in the New York Times by Gar Alperovitz. If taxpayer bailouts to save the TBTFs are unacceptable, depositor bailouts are even more unacceptable.
(4) Make derivatives illegal, as they were between 1936 and 1982 under the Commodities Exchange Act. They can be unwound by simply netting them out, declaring them null and void. As noted by Paul Craig Roberts, “the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system.”
(5) Support the Harkin-Whitehouse bill to impose a financial transactions tax on Wall Street trading. Among other uses, a tax on all trades might supplement the FDIC insurance fund to cover another derivatives disaster.
(5) Establish postal savings banks as government-guaranteed depositories for individual savings. Many countries have public savings banks, which became particularly popular after savings in private banks were wiped out in the banking crisis of the late 1990s.
(6) Establish publicly-owned banks to be depositories of public monies, following the lead of North Dakota, the only state to completely escape the 2008 banking crisis. North Dakota does not keep its revenues in Wall Street banks but deposits them in the state-owned Bank of North Dakota by law. The bank has a mandate to serve the public, and it does not gamble in derivatives.
A motivated state legislature could set up a publicly-owned bank very quickly. Having its own bank would allow the state to protect both its own revenues and those of its citizens while generating the credit needed to support local business and restore prosperity to Main Street.
For more information on the public bank option, see here. Learn more at the Public Banking Institute conference June 2-4 in San Rafael, California, featuring Matt Taibbi, Birgitta Jonsdottir, Gar Alperovitz and others.
________________
Ellen Brown is an attorney, chairman of the Public Banking Institute, and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com.
Filed under: Ellen Brown Articles/Commentary |
WEB OF DEBT BLOG 
“You and 939 others like Web of Debt.” Why is this not MILLIONS ?
Where is the force of social media ? When will it awaken?
I bet a lot more people like this site than that, but just don’t want to feed the Facebook data mining operation (read: I don’t have a Facebook account but like this site).
Changes needed: All of the above renumerated suggestions starting yesterday….
The solution is a CBWFTP instead of PFPB”.Have the CBWFTP take away from the PFPB the taxation (interest) they collect for themselves as “profit” and give it back to the rightful owners: the people..
As Einstein said, “Keep it simple”
**** Stop the CB from working for the Private For Profit Banks(PFPB) and have them become a Central Bank Working For The People (CBWFTP).
The doorway to prosperity :Allow only a CBWFTP to do for US, what PFPB are doing to US.
***WHY NOT do what your economist (those you believe to be correct in many matters) have said.”SEPARATE” banks from government not nationalization ! Keynes, Minsky,Desoto, Soddy, hundreds of others: SEPARATION. “A Simple Three Step Program”
(1) Separate the government bank from the PFPB (private for profit banks)
(2).Mandate 100% capitalization.
(3) To prevent “collapse of the currency” the Fed can lend them the $200 trillion at 2% for 36 years.
There would be no need for FDIC if 100% capitalized. Mandate two types of accounts-1.Deposits owned by the people are “safe storage”, escrow that would be criminal to violate that safety. 2. Deposit that pay interest because they will be legally allowed to be used by the banks for ‘investments’ with the owners willing giving up that safety for the interest reward. As an unintended consequence of this action the Fed would become a CBWFTP.. It would turn over to the US Treasury revenue for Congress to spend, just a little over $11.1 trillion a year with a mandate to spend: (SS, Medicare, Jobs,etc.,) so as to prevent deflation! This would put an end to F.I.C.A. taxes and federal income taxes as it would be more income than both of those taxes could ever be. As an unintended consequence, it would also be a FAIR tax.
Reform Money,Take MONEY POWER Back For The People. Have a Goal Of Equality: 50% of the people have 50% of the Wealth.
How’s this for a win-win. Working toward equality while at the same time preventing deflation?
Ben Bernanke could deserve the Noble in Economic Sciences.He has proven that QE can purchase massive amounts of assets without any increase in deficit spending. He has proven QE can produce a stream of revenue income. He needs only to do it FOR THE BENEFIT of the PEOPLE, rather than for the benefit of the private for profit banks(PFPB).Then Ben Bernanke would deserve the Noble in Economic Sciences.
MAY GOD CONTINUE TO BLESS UNINTENDED CONSEQUENCES,SURELY THEY MUST REALLY BE MANKINDS INNOVATIONS.
*WHAT IF THE …The Fed Reserve were to become the CENTRAL BANK WORKING FOR THE PEOPLE (CBWFTP) instead of working for the Private For Profit Banks (PFPB) ?
The government can not win against ‘compound interest’ on debt ,simply because the accumulation of interest over time is an infinite amount, one that never ends unless paid in full. Compound interest is the most powerful force in the universe and it is being used by the PFPB. We must take back that most powerful force in the universe and use it FOR THE BETTERMENT OF MANKIND.
I am from India, a third world country. I go through the history of economic problems faced by the western world hoping to learn any lessons that might be useful for us in India. But all your problems start from excessive greed. Bank’s top executives getting fat bonuses
(what can one possibly do with all that filthy money) and moneyed people always on the job of getting richer and richer without being useful to the have-nots As far as I remember, all the religions teach that more is not better, if less is enough. Why people are crazy to earn more and more , I can never understand. If only each contented family takes care of or adopts a poor family all the poverty will vanish in a trice.
S.Athmanathan, Chennai South India.
What a wonderful comment!
This is an excellent article. The measures it proposes are urgently required. The collapse of the entire monetary and financial system is at risk and could happen within a matter of weeks rather than months unless the imperatives of the present situation are recognised and appropriate action is taken.
Derivatives are new type of money created by banksters only usable among themselves just like casino chips.
As casino chips, these privately made money should have no effect on the main street economy.
In addition to your proposals, I’d like to add one:
Universal Financial income tax to be source deducted by every chartered institute on every account.
Make it mandatory for every banks, credit unions, insurance companies, security brokers,… to track each account the actual income realized and take source deduction on that income before payout.
What is the actual income realized?
No matter what kind of account it is, each inflow and out flow of money or wealth on that account should be evaluated according to current market value and booked in dollar amount.
Then for each transaction, the system should calculate and compare balance of inflow and outflow.
Any outflow of wealth from that account within the accumulated inflow of wealth is not income yet.
However, the net outflow of wealth from that account is pure financial income realized subject to national income tax law.
This is based on simple principle.
“No matter what kind of account it is,”
If Private for profit banks were charged 2% interest for 36 years to be at 100% capitalization MEANS they are paying 200% in taxes, monet that would go directly into the US Treasury. Read: Justaluckyfool.
More pie-in-the-sky! Wall street money will never allow the slaughter of its largest cash cow. Barons of finance will merely buy off/out ( or worse) anyone who even remotely hints at following the eminently sensible ideas put forth in this article. Until these financial Al Capones are divorced from their mountains of money and influence over our ( supposedly ours, anyhow) lawmakers, they will continue to walk/stomp/crush their way over society.
[…] To read this article at Ellen’s blog “Web of Debt”, with click here. […]
………all of which assumes the People have anything to do with banking or any other segment of governmental policy. In Corpocracies like ours, the governing corporations will get what the governing corpocracies want. If you don’t like it, get yourself a Constitution.
Most monetary “systems” are RICO operations, and have been for generations. They are massive thefts by fraud by very intelligent capos, who hide in enormous smokescreens. That theft results in worldwide impoverishment, slavery, and death. The solutions will not be economic, but law enforcement. That enforcement will depend on our morality and courage, not our slick BS.
The solution will be law enforcement as you say, but the slick BS of corporate lobbies and their attorneys make enforcement prohibitively expensive for the government. There’s not enough morality and courage in the world to defeat a battalion of corporate lawyers who have the Constitution on their side in every battle. Make corporations accountable to The People, and corporate executives accountable to their charter, and the corporate veil disappears; thus “mismanagement” becomes a crime. We all know what they’re doing. We need to make it illegal. THEN it’s just a matter of law enforcement.
In other words: we need to fundamentally reconsider our government’s policy regarding the granting of corporate charters. The tail is wagging the dog and few even know that. We need to re-educate three generations of American society to understand the dangers involved in hosting multinational corporations and letting them lobby our legislatures and administer the disemination of news and information from which we form political judgements and vote.
Corruption is so rampant now that we accept it as a given. It all starts with the false (and un-written) premise that individuals have a God-given *right* to incorporate a non-governmental corporation without the cautionary restrictions our Founders imposed on the Mother Of All Corporate Charters = the US Constitution.
It’s a core societal issue that will enslave us all if we don’t learn it soon.
[…] https://webofdebt.wordpress.com/2013/04/09/winner-takes-all-the-super-priority-status-of-derivatives/ […]
Well we can not now say we haven’t been warned. The “biggies” will have their sights on gobbling up the small fry, including credit unions and the small banks come the next meltdown. Either a safe and a shotgun or perhaps government bonds. If the government defaults we’re all screwed anyway. The sharp pencils in the financial sector will have had this all figured out as to cost and sequence for some time now as apparently this has been in their planning for some time now. I’d say go get your deposits in cash if you think a depression is around the corner, or else put most of your savings in US bonds or something sound and tied to the government in the State of North Dakota….
[…] The Super-priority Status of Derivatives by Ellen Brown […]
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[…] Ellen Brown Writer, Dandelion Salad webofdebt.com April 9, […]
Seems to me that your article accurately describes how ‘corporatism’ (merging of State and Corporate power) is gathering steam. They still work somewhat within the framework of society, including its institutions, that has been in place for some time, namely they get laws passed through legislatures which can then be enforced or which tell various players what they can and cannot do (i.e. lift funds from deposit accounts in the event of failure etc.).
Given that such legislatures are still relevant, and given they are seemingly corrupt or functionally stupid (more likely both), the only thing I suspect that will work in the US is the creation of a bona fide third party whose stated aim can be boiled down to 3 things, one of which would be abolishing private central banking cartels. What the other two are I don’t know and it doesn’t matter, but the idea is to keep it simple. Such a party can’t be about vague philosophy or for ‘patriots’ or other cartoon-like causes which are easily infiltrated and misdirected (gender, religious, sexual and other cultural issues etc.). It must be practical, targeted, real. If done right such an approach would get far more votes than the established parties.
One other might be, for example, abolition of the IRS and the Federal tax system in favour of States-only tax collection (and the States send a tithe to the Feds which limits the Federal govt by law and in practice and in line with the underlying economy).
Anyway, barring such a strong political push, the only other thing is boycott of banks, but this is virtually impossible today, especially for small businesses who are the only heroes left in the economy, so it’s not a viable option.
Please share comment #2
As Einstein said, “Keep it simple”
**** Stop the CB from working for the Private For Profit Banks(PFPB) and have them become a Central Bank Working For The People (CBWFTP).The solution is a CBWFTP instead of PFPB”.Have the CBWFTP take away from the PFPB the taxation (interest) they collect for themselves as “profit” and give it back to the rightful owners: the people..
A CBWFTP doing FOR us. what PFPB are doing TO us.
***WHY NOT do what your economist (those you believe to be correct in many matters) have said.”SEPARATE” banks from government; not nationalization, separation.
Keynes, Minsky,Desoto, Soddy, hundreds of others: SEPARATION.
“A Simple Two Step Program”
(1) Separate the government bank from the PFPB (private for profit banks)
Mandate 100% capitalization for all financial transactions..
(2) To prevent “collapse of the currency” the Fed can lend them the $200 trillion at 2% for 36 years.
There would be no need for FDIC if TBTF were 100% capitalized. Mandate two types of accounts-1.Deposits owned by the people are “safe storage”, escrow that would be criminal to violate that safety. 2. Deposits that pay interest because they will be legally allowed to be used by the banks for ‘investments’ with the owners willing giving up that safety for the interest reward. As an unintended consequence of this action the Fed would become a CBWFTP.. It would turn over to the US Treasury revenue for Congress to spend, just a little over $11.1 trillion a year with a mandate to spend: (SS, Medicare, Jobs,etc.,) so as to prevent deflation! This would put an end to F.I.C.A. taxes and federal income taxes as it would be more income than both of those taxes could ever be. As an unintended consequence, interest earned on our own money would surely be a fair taxation.
How’s this for a win-win. Working toward equality while at the same time preventing deflation?
Ben Bernanke could deserve the Noble in Economic Sciences.He has proven that QE can purchase massive amounts of assets without any increase in deficit spending. He has proven QE can produce a stream of revenue income. He needs only to do it FOR THE BENEFIT OF THE PEOPLE, rather than for the benefit of the private for profit banks(PFPB). Then Ben Bernanke would deserve the Noble in Economic Sciences.
MAY GOD CONTINUE TO BLESS UNINTENDED CONSEQUENCES,SURELY THEY MUST REALLY BE MANKINDS INNOVATIONS.
The government can not win against ‘compound interest’ on debt ,simply because the accumulation of interest over time is an infinite amount, one that never ends unless paid in full. Compound interest is the most powerful force in the universe and it is being used by the PFPB. We must take back that most powerful force in the universe and use it FOR THE BETTERMENT OF MANKIND.
Please challenge, improve and share.
[…] This article first appeared at Web of Debt. […]
Imposing a wealth tax on major depositors is “confiscation”! No pretence of leftwing sentiments there! Iceland, the poster boy of the anti-euro faction, imposed a broader wealth tax to refinance its failing banks (and applied for EU membership, so as to adopt the euro, one supposes). People like Ms Brown are always telling us to do like Iceland. So we did! As the only saying goes, beware of what you wish for!
In stead of wealth tax, we should impose income tax.
My idea of “Universal Financial Income Tax ” is:
to be source deducted and paid by financial institutes before pay out any net income from that account.
Just track balance of that account by comparing inflow and outflow of wealth through that account.
Make sure not to be confused. Balance of inflow outflow is different from balance of that account itself.
Interest paid on savings account or account fee deducted every month is neither inflow nor outflow of wealth.
[…] Posted on April 9, 2013 by Ellen Brown Source: Web of Debt Blog […]
Reblogged this on pzykrsis.
thanks for this great (if frightening) post!
reblogged…
now, i need to spend some time in the silence… for healing purposes
There was a 7.9 earthquake in China on May 12, 2008 and which caused huge destruction of infrastructure.
I believe that immediately following the earthquake, China attempted to raise some cash by selling off some of the derivatives which the U.S. banks had sold them.
There were 600 trillion dollars of derivatives which had polluted every bank in the universe and which were guaranteed by AIG via the U.S. government.
Overnight, Bear Stearns and Lehman Brothers were bankrupt because they could not honour or buy back the derivatives they had sold China and which resulted in the U.S. economic collapse on September 18, 2008.
I also believe that the U.S. Capitalists believe that the “Too Big To Fail Banks” are going to be necessary in order to compete with Chinese banking in the future. Only very large banks will be able to compete globally once China gets its act together.
Calm
What good is FDIC insurance?
They got 15 years to pay out the policy or to reimburse lost monies.
If the banking system ever collapses, and you get your cheque from FDIC 10 or 15 years later, devaluation and inflation alone will leave you with pennies on the dollar.
Calm
Nice to see everyone fumbling their way towards full reserve banking. FR solves the whole problem as to “who to shaft when a bank faces disaster”.
Under FR depositors have to choose between first, having their money kept in a 100% safe fashion (e.g. having it lodged at the central bank), where it will earn little or no interest, and second, having their money loaned on or invested by their bank, in which case they get interest, but they also foot the bill if it all goes wrong.
In that scenario, Cyrpus would have been a storm in a tea cup. Depositors who had opted for safety would have been safe. And depositors who elected to have their money put at risk would have had a hair cut: but that would have been no more than they signed up for when first lodging their money.
Problem solved.
Are you saying, ““A Simple Two Step Program”
(1) Separate the government bank from the PFPB (private for profit banks)
Mandate 100% capitalization for all financial transactions..
(2) To prevent “collapse of the currency” the Fed can lend them the $200 trillion at 2% for 36 years.
There would be no need for FDIC if TBTF were 100% capitalized. Mandate two types of accounts-1.Deposits owned by the people are “safe storage”, escrow that would be criminal to violate that safety. 2. Deposits that pay interest because they will be legally allowed to be used by the banks for ‘investments’ with the owners willing giving up that safety for the interest reward. ?
Under full reserve, the central bank does not take any sort of risk or shareholding in commercial banks (if that’s what you mean by “capitalisation”). The CB acts in much the same way as it currently does for commercial banks: it just transfers money in its books from the account of one commercial bank to another when told to do so by a commercial bank.
Re “2”, the central bank does not need to lend money to a commercial bank or anyone else.
Re FDIC, there is no need for it, but not because of anything to do with capitalisation. The reason is that depositors and bond holders who have decided to let their money be loaned on or invested carry all the risk of those loans or investments going wrong. I.e. banks cannot go bust.
If you don’t fully understand, I don’t blame you. Explaining full reserve takes a bit more than a comment on a blog. Though it’s vastly simpler than the millions of words spewed out by Basel III and Dodd-Frank (and to little avail).
First and foremost: Thank You for your reply.
And thank you Ellen for allowing this dialog.
“Under full reserve, the central bank does not take any sort of risk or shareholding in commercial banks (if that’s what you mean by “capitalisation”).”
**This is not a CB requirement albeit since they ‘print’ the money they are always at 100%
Perhaps you may not be aware that the Federal Reserve requires PFPB be capitalized at 10%, meaning that they must have that amount available as ‘backing’ for their ‘temporary printing of money’.
Also as Greenspan said in 2001 after the dot com bust, ‘It (increase margin) was a consideration..’…but decided to use lower rates instead. One should wonder ,would we have had the 2008 crises if he had chosen otherwise?
“Re “2”, the central bank does not need to lend money to a commercial bank or anyone else.”
Absolutely, does NOT NEED TO LEND.
**The point is: Why allow PFPB to issue ‘print’ our own money and LEND it to us so as to gain double even triple the amount they ‘print’ and use it for their own gain ?
Re FDIC, there is no need for it, but not because of anything to do with capitalisation. The reason is that depositors and bond holders who have decided to let their money be loaned on or invested…
******WOW, ” ” IF you don’t fully understand, I don’t blame you. ” ”
Please show me any document that let’s a depositor acknowledge
that they …give the private for profit bank the right to use their money, let alone lose it…Why would you give them your money for safe deposit if you had to sign that they it may not be there for you to get it back upon demand unless you get in line with the first 10% that wish to withdraw. Why FDIC ? Perhaps, “Fraud Deposit Insurance…let you get some of YOUR money back .
But then again “” IF you don’t fully understand, I don’t blame you. ”
If you wish to understand READ:
http://archive.org/stream/roleofmoney032861mbp/roleofmoney032861mbp_djvu.txt
“THE ROLE OF MONEY”
WHAT IT SHOULD BE,CONTRASTED WITH WHAT IT HAS BECOME.
By FREDERICK SODDY ‘ ; Nobel Laureate
*** Anyone,
as for”Justaluckyfool” http://bit.ly/MlQWNs … “You are always welcome to share, copy, plagiarize, improve, etc..”
an interesting link, professor soddy, to be sure, and thanks! though i note his nobel, from 1921, was in chemistry, not economics… reading…
did you notice, perchance, his connection to the rosicrucian order?
F.R.C.
http://en.wikipedia.org/wiki/Frater_Rosae_Crucis
if one understands how precarious is the structure of partial-reserve banking, full reserve banking seems to make sense. use your favorite search engine! or start here:
regretz–“fractional-reserve banking”
Great chart, thank you.
One foolish question. The Fed has shown us that the private for profit banks are in better shape because that are at a wonderful 11.1% backing–that’s more than the 10% required. Does that mean that 88.9% of their money (2013 it is 95% of what is out there) is “temporary money” that is A LIABILITY TO THE GOOD FAITH AND CREDIT of this monetary sovereignty. If there is a ‘run’ to withdraw in ‘real money’ only 11.1% would be available?
Great article as usual.
I agree with all of Ellen’s proposals. I support Bernie Sanders’ ideas.
I think we need someone like Bernie to deliver petitions to Congress demanding that the TBTF banks not be allowed to touch depositors’ savings. This is outrageous, criminally fraudulent, and unacceptable. If you confiscate the depositors’ money, you are unequivocally wiping out the already inept and insolvent banking system.
The current financialized system should be wiped out, and changed radically, as Ellen has proposed, but not at depositors’ expense. The TBTF and TBTJ banks should pay the penalties for what they have done to our economy. They owe us that.
If the Banksters and oligarchs, monopolists, and “Caligulas of Wall Street” are treating us like monkeys in a zoo, we have to start hurtling bananas back at them. At least, the monkeys have the dignity to fight back. Where is ours?
Would it be fair to conclude that you would agree ?
“A Simple Two Step Program”
(1) Separate the government bank from the PFPB (private for profit banks)
Mandate 100% capitalization for all financial transactions..
(2) To prevent “collapse of the currency” the Fed can lend them the $200 trillion at 2% for 36 years.
There would be no need for FDIC if TBTF were 100% capitalized. Mandate two types of accounts-1.Deposits owned by the people are “safe storage”, escrow that would be criminal to violate that safety. 2. Deposits that pay interest because they will be legally allowed to be used by the banks for ‘investments’ with the owners willing giving up that safety for the interest reward.,
JALF – Sorry, I didn’t see your comment till now. Would that we had a simple two-step solution!
I agree with (1). But I have grave reservations about (2). Based on what I have read about the Fed, the FDIC-BOE plan, the Squidsters, the writings of Ellen Brown, Max Keiser, and other economists, many of whom you quote and I agree with, I simply cannot put any faith in the Fed to do anything in our interest. That is MHO.
Your recommendations about the two types of accounts are very good, I think.
Calliope, What “faith” is needed would be Rule of Law for if the ” CBWFTP” (Central Bank Working For The People) would be the Law and the operation of the FED would be subject to the full enforcement of the law, why would you not want the people to control the path to prosperity for yourself and your children while at the same time take back this power from the “PFPB” (Private For Profit Banks)
Ellen Brown, what do you say? For surely local state banks could cure the symptoms but they will still be depended as non sovereign entities upon their sovereign central bank for funds-Just as Greece, Italy , Spain.etc.whereas a CBWFTP would be a cure.
JALF, I said that I agree with your proposal #1, but have reservations about proposal # 2 regarding your recommendations about the FED. Because I do not agree with your second proposal, you conclude: “why would you not want the people to control the path to prosperity for yourself and your children while at the same time take back this power from the “PFPB” (Private For Profit Banks)”?? Whaaaat??? This is highly illogical. Because I don’t agree with you on your second proposal does not ipso facto mean that I do not want the people to control what you call the path to prosperity for myself and future generations. Utterly ridiculous and false. Perhaps I need to paraphrase what I have already clearly written. and I will add, so there should be no doubt, that I agree with one of Wm Falberg’s suggestions – closing the FRB and the establishment of state-owned banks. I have posted this in some of my earlier comments, but in case you missed them, I am clearly saying this now.
But by all means, ask Ellen, or whomever you would like to agree with you. She has already answered you in previous articles.
Well, I know nobody responded to my little ‘3rd Party’ suggestion – no doubt for obvious reasons – but without a fundamental and deep political sea-change, there is no way that the private banking cartel (FRB etc.) will be replaced. It doesn’t matter how many intelligent and workable solutions are proposed, they won’t happen in reality.
I have felt for years that America will probably go the way of England in the 1600’s (though that was warm-up and relatively light), France in late 1700’s, then Russia and Germany in 1900’s, i.e. it will get chewed up in huge internal and external wars after which a much more totalitarian/entrenched system will be in place, i.e. these will not be real peoples’ revolutions even though that might be what the newspapers say. Many bankers and people of unpopular ethnicities might well be thrown to the dogs in FEMA camps etc. etc., but these will all be camouflage.
The saving grace of the US is threefold:
a) it is basically a large island so almost impossible to invade militarily. (Therefore civil war/systemic collapse is far more likely a way to bring it to knees, albeit right now eliminating a viable working and middle class is doing about half the job which the rest will finish off when the country is so weak that it has lost the ability to come together about anything.)
b) the citizens are armed (not the case in Europe, for example) so they will be a little harder to steam roll over.
c) there is a history/belief/delusion about being free in America, so the system that succeeds in tyrannizing them is going to have to fool them into it somehow, but if there is direct confrontation, there is a good chance because of that myth and b) that things could get dicey.
All this can be avoided by eliminating private central banking which would also for peaceful economic and cultural health. It is the lynch pin. Again, though, without concerted political movement to abolish the FED, whcih could be the ONLY plank in the political platform of a new Party who, after election, has the votes to overthrow the Fed by legislation just as Congress was needed to empower them, and to withdraw US military from all around the world, and to roll back GM foods, corporation etc. etc. etc. ALL of which would happen naturally if private cartel central banking was eliminated.
Without political change, either new party or organised resistance to violent or non-violent tyranny/subterfuge, the current system will continue until collapse at which point the new order, far more totalitarian, will emerge. The pretense of democracy will finally be over. But what will replace it will be far, far worse.
I agree with everything you said up to the point of incorporating another (third) political party. Our Founders didn’t envision political parties incorporating to challenge the sovereignty of The People and we see what a mess they’ve made of it (a house divided). My amendment would make The People the ONLY party ! So, yes, we need a third party in that sense but it means revoking the charters of the Big Two (after which a third “party” would be redundant (Yes?). Most folks are already hip to the Globalcorp game and it wouldn’t take near as much effort to pass an amendment than it would take to organize a civil or revolutionary war. Besides re-writing a few charters for the most egregious banking offenders, all it would take is printing some signs for the front doors of the FRB’s – “Under New Management”.
At least let’s think about it before rushing off to destroy 2000 years of political philosophy . There’s already 27 amendments; what’s one more.
I really liked your comments. I voted for Jill Stein’s Green Party in 2012. It appears that few people seem to know about this “Third Party” or care. But, I posted information about it here on WebofDebt sometime last year, around election time. Jill Stein’s party supports some excellent proposals, IMO, and below, you can see her ideas on financial reform. For her complete platform, which looks even better than I had previously read last year, see her website Jill Stein.org., or bing her name and it’s easy to find.
FINANCIAL REFORM
Break up the oversized banks that are “too big to fail,” starting with …
(the obvious big ones)
Create a Corporation for Economic Democracy, a new federal corporation (like the Corporation for Public Broadcasting) to provide publicity, training, education, and direct financing for cooperative development and for democratic reforms to make government agencies, private associations, and business enterprises more participatory.
End bailouts for the financial elite and 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.
Bring monetary policy under democratic control by prohibiting private banks from creating money, thus restoring government’s Constitutional authority.
Let pension funds be managed by boards controlled by workers, not corporate managers.
Regulate all financial derivatives and require them to be traded on open exchanges.
Require banks to use honest bookkeeping so that toxic assets cannot be hidden or sold to unsuspecting persons.
Restore the Glass-Steagall separation of depository commercial banks from speculative investment banks.
Democratize monetary policy to bring about public control of the money supply and credit creation. This means nationalizing the private bank-dominated Federal Reserve Banks and placing them under a Federal Monetary Authority within the Treasury Department.
Establish federal, state, and municipal publicly-owned banks that function as non-profit utilities and focus on helping people, not enriching themselves.
I especially like her support for public banks.
………and furthermore: when you refer to “lynch pins” you’re about right when you state that private central banking is the lynch pin of financial power; BUT it is the innate power of incorporation that prevents the People from holding bankers accountable for fraud, theft, and abuse. It’s not just the banking cartel that hides behind the corporate veil; all the other international monopolies that have a hand in lobbying use that same legal immunity to evade tax, pressure Congress, influence elections, and control the mass media. The first lychpin that needs pulling is the freedom of corporations to participate in the political process at any level. If we don’t separate government from business (as we do religions) they’ll corrupt and depend on each other exclusively (independent of the People they’re supposed to serve). We need the supreme law of the land to
pull that personhood lynchpin. After that, all these petty financial emperors will find themselves standing naked in a court of law; both liable and culpable, without a corporate veil to hide behind.
.
to monopolize and control the
I find that a stimulating reply and when have more time will respond. Ash.
By the way, CaperAsh, my comment of 5:08PM, 4/17 was in response to your post of 10:03AM, 4/17. Unfortunately, there was a bit of timelag between the writing and intervening posts. I thought your reflections were excellent.
Thanks, Calliope. Actually, I just realised that I have been getting confused between the email alerts which arrive and the overall thread adn have missed several posts and their contexts. I would like to contribute something more in response but am working today so will have to wait until have more time.
The first banana would have to be the one that breaks the plexiglass veil they’re hiding behind:
28th Amendment (The Constitutional Emergency Amendment)
Corporations are not persons and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to:
1, prohibitions against any corporation;
a, owning another corporation,
b, becoming economically indispensable or monopolistic, or
c, otherwise distorting the general economy;
2, prohibitions against any form of intervention in the affairs of government by means of;
a, congressional lobbying
b, electoral sponsorship or advocacy
c, educational sponsorship or publication
d, media news reporting
3, provisions for;
a, the auditing of standardized, current, and transparent account books
b, closing the FRB and the establishment of state-owned banks
c, civil and criminal penalties to be suffered by corporate executives et al for violation of the terms of a corporate charter.
The 16th Amendment to the United States Constitution is hereby repealed and Congress shall re-write the U.S. Code to reflect the changes embodied herein.
This is a great banana!
b, closing the FRB and the establishment of state-owned banks
Create 50 new monsters instead of fixing the one now.
How would you fix the Fed?
Why would state-owned banks inevitably be “monsters”?
Thank you for the challenge for what better way to discover truth.
William Falberg,
How would you fix the Fed?
Why would state-owned banks inevitably be “monsters”?
Any power is corruptible ! At least with one Central Bank we would stand a better chance against “moral hazard” There is enough wealth on this planet for all mankind for all to have a good standard of living.
THE FIX:
************
“Oh what fools we mortals be.”
There is only one real solution not only Greece, Italy, Spain, or USA, yes USA.
All Sovereigns MUST be Monetary Sovereigns or become servitude to the PFPB (Private For Profit Banks).
************************************
*Mandate ALL monetary transactions for any bank, size does not matter, must be 100% capitalized.”
Make it a perfect zero sum game. All wins are paid while at the same time all losses are paid.
Never a rescue needed.
************************************
As Einstein said, “Keep it simple”
**** Stop the CB from working for the Private For Profit Banks(PFPB) and have them become a Central Bank Working For The People (CBWFTP).The solution is a CBWFTP instead of PFPB”.Have the CBWFTP take away from the PFPB the taxation (interest) they collect for themselves as “profit” and give it back to the rightful owners: the people..
A CBWFTP doing FOR us. what PFPB are doing TO us.
***WHY NOT do what your economist (those you believe to be correct in many matters) have said.”SEPARATE” banks from government; not nationalization, separation.
Keynes, Minsky,Desoto, Soddy, hundreds of others: SEPARATION.
“A Simple Two Step Program”
(1) Separate the government bank from the PFPB (private for profit banks)
Mandate 100% capitalization for all financial transactions..
(2) To prevent “collapse of the currency” the Fed can lend them the $200 trillion at 2% for 36 years.
There would be no need for FDIC if TBTF were 100% capitalized. Mandate two types of accounts-1.Deposits owned by the people are “safe storage”, escrow that would be criminal to violate that safety. 2. Deposits that pay interest because they will be legally allowed to be used by the banks for ‘investments’ with the owners willing giving up that safety for the interest reward.
Read more:http://bit.ly/MlQWNs
@ JALF: “Any power is corruptible !”
Who holds power over public institutions? It *should* be The People, right? If that’s not so, then we need to fix that first.
“At least with one Central Bank we would stand a better chance against “moral hazard”
Instead of all the initials you could just say US Treasury or “Treasury”, the entity that our Constitution originally intended to serve as a publicly-owned central bank. “TBTF” wasn’t mentioned.
There’s a couple hundred years of weasely doubletalk attached to these economic arguments that needs to be “called” on the grounds of “bullshit”. I try to keep my statements short and to-the-point. Don’t mistake that for rudeness, to me it’s all technical.
[…] by Ellen Brown […]
Re your recent posts on FDIC insurance, safe deposit boxes, etc.: You say “Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of ‘national security,’” but Kitco, the linked source, makes that claim without any substantiation that I can see. Sorry if I missed the obvious somewhere, but how do we — or how does Kitco — know that DHS has told banks all that?
I know this is not addressed to me, but I haven’t found verification of it. this http://americanlivewire.com/debunking-the-dhs-memo-about-safety-deposit-boxes/ , however, seems pretty good to me. It says that if you look at the “Patriot” Act it’s clear that no memo is needed, the act gives DHS freedom to do whatever it wants. Financial writer Jim Willie at goldenjackass.com says in his latest that the Patriot Act expressly forbids keeping precious metals in safety deposit boxes. Who ya gonna trust? You can trust DHS and the banks if you want, but I’ll pass.
“the Patriot Act expressly forbids keeping precious metals in safety deposit boxes. ”
Think about it. Why would you? If monetary collapse…BANKS CLOSE.
Bye,bye gold.
[…] https://webofdebt.wordpress.com/2013/04/09/winner-takes-all-the-super-priority-status-of-derivatives/ […]
[…] https://webofdebt.wordpress.com/2013/04/09/winner-takes-all-the-super-priority-status-of-derivatives/ […]
i’m not an economist — my academic training is in humanities and psychology; my professional career was spent in human services and as a psychotherapist. so i’m trying to understand all this from a human perspective. query me this: if 230 trillion usd has been invested in these risky derivative vehicles — where is that 230 trillion usd now? i mean the ~profits~ from the sale of those investment vehicles. if the total money supply of the us is 1.1 trillion usd (see the link i posted to my own blog in an earlier comment for documentation of these numbers…) and the total amount of bank deposits in us commercial banks is about 9.3 trillion usd, where is the money?? a few trillion here, a few trillion here — pretty soon we’re talking about some significant sums! i don’t know — more money in the hands of the elite international bankers than exists in all the countries of the world combined perhaps? like i say: i do not know! please enlighten me…
“Show me the money.”
The $230 trillion is the amount that US banks are stated (OCC.gov) as being part of the amount of derivatives in play.
This is “bookie money” ‘temporary money not yet in existence (worldwide said to be over $800 trillion).Only the amount of what is won (lost) must be made real.
When an insurance company collects a premium of $100 million to insure against a loss of $10 trillion, they may wish to bet against a great loss as anything over $1 trillion by paying someone else $1 million to ‘cover any loss after $1 trillion. Bank “BJK” accepts that up to $9 trillion risk because it “knows it ain’t gonna happen’. Bank “BJK” doesn’t need to have the $9 trillion security to cover the bet, as a matter of fact it doesn’t even need $1 because it does not have to show how it can pay, it needs only to be willing to accept the wager.
Surely there is no better credit than that of the Bank itself.
The problem arises when the time comes if there is a loser then you discover ‘there ain’t no real money there. (Unless it is so much a bailout is required – AIG?
Now there is a new twist in the game. Bank of America has put on its accounts the $65 trillion in derivatives (bets) it has , WHY? ,now the will be covered by FDIC. FYI, FDIC only has $25 billion? Hello CYPRUS .
thanks for breaking it down for me. so it’s analogous to fractional reserve banking only moreso — in order actually to make good those obligations should the debts default, money would essentially have to be printed at such a rate as to render all money in circulation virtually worthless: even all the money in all the deposits in all the commercial banks could not possibly cover these super-prioritized debt obligations. that much money simply does not exist.
madness! (my considered professional opinion.)
Why do you believe the public was told “in order to prevent systemic failure” to Fed had to intervene. ($16 trillion at that time).
Did you read anywhere, How, why or what this “systemic failure ” would be?
No, because ; being truly informed all the banks were insolvent would have made the “systemic failure ” self-fulfilling .