Socialism at Its Finest after Fed’s Bazooka Fails

In what is being called the worst financial crisis since 1929, the US stock market has lost a third of its value in the space of a month, wiping out all of its gains of the last three years. When the Federal Reserve tried to ride to the rescue, it only succeeded in making matters worse. The government then pulled out all the stops. To our staunchly capitalist leaders, socialism is suddenly looking good.  

The financial crisis began in late February, when the World Health Organization announced that it was time to prepare for a global pandemic. The Russia-Saudi oil price war added fuel to the flames, causing all three Wall Street indices to fall more than 7 percent on March 9. It was called Black Monday, the worst drop since the Great Recession in 2008; but it would get worse. 

On March 12, the Fed announced new capital injections totaling an unprecedented $1.5 trillion in the repo market, where banks now borrow to stay afloat. The market responded by driving stocks 8% lower.

On Sunday, March 15, the Fed emptied its bazooka by lowering the fed funds rate nearly to zero and announcing that it would be purchasing $700 billion in assets, including federal securities of all maturities, restarting its quantitative easing program. It also eliminated bank reserve requirements and slashed Interest on Excess Reserves (the interest it pays to banks for parking their cash at the Fed) to 0.10%. The result was to cause the stock market to open on Monday nearly 10% lower. Rather than projecting confidence, the Fed’s measures were generating panic.

As financial analyst George Gammon observes, the Fed’s massive $1.5 trillion in expanded repo operations had few takers. Why? He says the shortage in the repo market was not in “liquidity” (money available to lend) but in “pristine collateral” (the securities that must be put up for the loans). Pristine collateral consists mainly of short-term Treasury bills. The Fed can inject as much liquidity as it likes, but it cannot create T-bills, something only the Treasury can do. That means the government (which is already $23 trillion in debt) must add yet more debt to its balance sheet in order to rescue the repo market that now funds the banks.

The Fed’s tools alone are obviously incapable of stemming the bloodletting from the forced shutdown of businesses across the country. Fed chair Jerome Powell admitted as much at his March 15 press conference, stating, “[W]e don’t have the tools to reach individuals and particularly small businesses and other businesses and people who may be out of work …. We do think fiscal response is critical.” “Fiscal policy” means the administration and Congress must step up to the plate.

What about using the Fed’s “nuclear option” – a “helicopter drop” of money to support people directly? A March 16 article in Axios quoted former Fed senior economist Claudia Sahm:

The political ramifications of the Fed essentially printing money and giving it to people – there are ways to do it, but the problem is if the Fed does this and Congress still has not passed anything … that would mean the Fed has stepped in and done something that Congress didn’t want to do. If they did helicopter money without congressional approval, Congress could, and rightly so, end the Fed.

The government must act first, before the Fed can use its money-printing machine to benefit the people and the economy directly.

The Fed, Congress and the Administration Need to Work as a Team 

On March 13, President Trump did act, declaring a national emergency that opened access to as much as $50 billion “for states and territories and localities in our shared fight against this disease.” The Dow Jones Industrial Average responded by ending the day up nearly 2,000 points, or 9.4 percent.

The same day, Democratic presidential candidate Rep. Tulsi Gabbard proposed a universal basic income of $1,000 per month for every American for the duration of the crisis. She said, “Too much attention has been focused here in Washington on bailing out Wall Street banks and corporate industries as people are making the same old tired argument of how trickle-down economics will eventually help the American people.” Meanwhile the American taxpayer “gets left holding the bag, struggling and getting no help during a time of crisis.” H.R. 897, her bill for an emergency UBI, she said was the most simple, direct form of assistance to help weather the storm.

Democratic presidential candidate Andrew Yang, who made a universal basic income the basis of his platform, would go further and continue the monthly payments after the coronavirus threat was over.

CNBC financial analyst Jim Cramer also had expansive ideas. He said on March 12:

How about a $500 billion Treasury issue … [at] almost no interest cost, to make sure that when people are sick they don’t have to go to work, and companies that are in trouble because of that can still make their payroll. How about a credit line backstopped by … the Federal Reserve. I know the Federal Reserve is going to say they can’t do that, Congress is going to say they can’t do that, everyone is going to say what they said in 2007, they can’t do that, they can’t do that — until they did it. … [W]e heard all that in 2007 and they ended up doing everything.

And that looks like what will happen this time around. On March 18, as the stock market continued to plummet, the administration released an outline for a $1 trillion stimulus bill, including $500 billion in direct payments to Americans, along with bailouts and loans for the airline industry, small businesses, and other “critical” sectors of the U.S. economy.

But the details needed to be hammered out, and even that whopping package buoyed the markets only briefly. In the bond market, yields shot up and values went down, on fears that the flood of government bonds needed to finance this giant stimulus would cause bond values to plummet and the government’s funding costs to shoot up.

Extraordinary Measures for Extraordinary Times

There is a way around that problem. To avoid driving the federal debt into the stratosphere, the Treasury could borrow directly from the central bank interest-free, with an agreement that the debt would remain on the Fed’s books indefinitely. That approach has been tested in Japan, where it has not generated price inflation as austerity hawks have insisted it would. The Bank of Japan has purchased nearly 50 percent of the government’s debt, yet consumer price inflation remains below the BOJ’s 2 percent target.

Virtually all money today is simply “monetized” debt – debt turned by banks into something that can be spent in the marketplace – and the ultimate backstop for this sleight of hand is the central bank and the government, which means the taxpayers. To equalize our very unequal system, the central bank and the government need to work together. The Fed needs to be “de-privatized” – turned into a public utility that serves the taxpayers and the economy. As Eric Striker observed in The Unz Review on March 13:

The US government’s lack of direct control over the nation’s central bank and the plutocratic nature of our weak state means that common sense solutions are off the table. Why doesn’t the state buy up majority shares in large corporations (or outright nationalize them, as happened with the short successful experiment with General Motors in 2009) and use the $1.5 trillion at low interest to develop American industrial independence?

Interestingly, that too could be on the table in these extraordinary times. Bloomberg reported on March 19 that Larry Kudlow, the White House’s top economic adviser, says the administration may ask for an equity stake (an ownership interest) in corporations that want coronavirus aid from taxpayers. Kudlow noted that when this was done with General Motors in 2008, it turned out to be a good deal for the federal government.

While traditionally considered “anti-capitalist,” the government taking an ownership interest in bailed out companies may be the only way the proposed bailouts will get approval. There is little sentiment today for the sort of no-strings-attached “socialism for the rich” that the taxpayers shouldered in 2008 without reaping the benefits. Bloomberg quotes Jeffrey Gundlach, chief executive officer at DoubleLine Capital:

I don’t think government bailouts of over-leveraged companies that got over-leveraged by share buybacks at all-time highs, enriching executives and hedge fund investors, will sit well with the American people.

The Bloomberg article concludes with a quote from another chief investment officer, Chris Zaccarelli of Independent Advisor Alliance:

I like how [the administration is] thinking a little bit outside of the box. Something big and bold like that could potentially be what turns the market around ….

Long-term Solutions

Rather than just a stake in the profits, the government could think a bit further outside the box and turn insolvent airlines, oil companies, and banks into public utilities. It could require them to serve the people and the economy rather than just maximizing the short-term profits of their shareholders.

Concerning the banks, the Fed could do as the People’s Bank of China is doing in this crisis. The state-run PBoC is giving regional banks $79 billion in stimulus money, but it is on condition that they lend it to small and medium enterprises and forgive late payments, so that economic damage is reversed and production can recover quickly.

Another model worth studying is that of Germany, which also has a strong public banking system. As part of a package for coronavirus aid that the German finance minister calls its “big bazooka,” the government is offering immediate access to loans up to €500,000 for small businesses through its public bank, the KfW (Kreditanstalt fuer Wiederaufbau), administered through the publicly-owned Sparkassen and other local banks. The loans are being made available at an interest rate as low as 1%, with interest only for the first two years.

Contrast that to the aid package President Trump announced last week, which will authorize the Small Business Administration to offer business loans. After a lengthy process of approval by state authorities, the loans can be obtained at an interest rate of 3.75% – nearly 4 times the KfW rate. German and Chinese public banks are able to offer rock-bottom interest rates because they have cut out private middlemen and are not driven by the insatiable demand for shareholder profits. They can lend countercyclically to avoid booms and busts while supporting the economy as a whole.

The U.S., too, could create a network of publicly-owned banks backed by the central bank, which could lend into their communities at below-market rates. And this is the time to do it. Times of crisis are when change happens. When the Covid-19 scare has passed, we will have a different government, a different economy and a different financial system. We need to make sure that what we get is an upgrade that works for everyone.

_______________________

Ellen Brown chairs the Public Banking Institute and has written thirteen books, including her latest, Banking on the People: Democratizing Money in the Digital Age She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

43 Responses

  1. Regarding the power struggle between Fed and Congress (who traditionally rule over the fiscal side), Gammon (taking cues from Richard Werner, who has much academic history showing duplicity at central banks, than his other main competing author N. Prins) has said, if the Fed implements negative rates, then that takes out the any remaining vestiges of the main street financial system, like Community Banks who do real work/credit unions and the like, leaving the Fed as sole Hegemon over the nations’ money and credit. They won the war.

  2. “… the Treasury could borrow directly from the central bank interest-free, with an agreement that the debt would remain on the Fed’s books indefinitely.”

    YES! This is REAL money backed by the sovereignty of the state. In order for a supply of real money to exist, it must be on the books somewhere as having been issued, and the Fed is the obvious place for it. Why is this so non-obvious to so many people, experts even? Thank you for being one of the few talking about this.

    • The Fed funding the Treasury directly is not allowed. The Treasury does by borrowing through a 3rd party but no to fund spending, just to take part in the ineffective shenanigans to control interest rates.

      People need to understand this fact: the Government does NOT create the money that appears in the real economy. Commercial banks create all of our money when they lend. The gov only has access to this money via taxing or borrowing.

      The NEED Act allows the Treasury to create money directly without the silly pretense of borrowing.

      https://www.congress.gov/bill/112th-congress/house-bill/2990

      • Yes I agree that it’s not currently part of the Fed’s mandate to fund the Treasury, and that it’s silly given that the Treasury could create real money directly. However, it’s a step toward the latter which seems to be off the table. NEED looks great! I miss Kucinich. It looks like NEED was proposed in 2011. How much support did it get?

      • As a result of following up on your org, Alliance for Just Money, I’ve become aware of the International Movement for Money Reform and in particular the Ons Geld idea of a debt-free money instrument called a safe account. I love this idea and it is the best thing I’ve seen in years for a way to transition to debt-free money.

        “Debt-free money

        When the safe account is generally accepted, the money on safe accounts can become debt-free. This means that it is no longer considered a claim on the public depository.[21] It has then become the digital embodiment of the general unit of value; digital cash.[22] Unlike physical cash, digital cash can be used as a monetary policy instrument.[23] This makes it possible to expand and control the money supply without increasing debt, and without pursuing inflation. This is the key instrument that is needed to manage the euro efficiently. Debt growth, market distortion and inflation are then no longer inherent to monetary policy. Central banks, however, cannot obtain this instrument on their own. Only the legislator can call digital cash into existence. As a debt-free intangible liquid asset digital cash requires a legal basis.[24] It is therefore a political responsibility to introduce this form of money and to determine the way it is organized. It is thus not the ESCB but the legislator who holds the key to making monetary policy effective and non-distortionary.”

        https://internationalmoneyreform.org/news/2020/03/new-instruments-for-monetary-policy/

  3. https://www.linkedin.com/pulse/qe-4-banks-now-people-2008-16to-20-trillion-w-harm-we-c-basilovecchio/ BULLSEYE ! Please add to your list “QE4the people” Switch $20-$40 Trillion Bank loans to ZERO INTEREST LOANS an asset. Literally take money from one pocket and put it in another.

    • Where is the Challenge ? What do you believe is not realistic?

      ***** “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)

  4. We already have the solution – its call the NEED Act introduced in 2011 HR2990.. All these complex schemes are completely unnecessary since this act, if passed, would give the government the authority to create the people’s money as needed.

    Forcing banks to make certain kinds of loans to “small and medium enterprises” is completely useless and perpetuates the same failed system where money doesn’t go for public purpose, such as developing vaccines, unless there is a profit motive. The only entity that can provide a profit motive for public purpose is the government through spending.

    This bank money printing has to end. Its absurd as allowing private industry to sell us our water. Money is too precious a public utility to leave into the hands of profit-seeking banks.

    • AMI (NEED ACT) with Prof Werner with Ellen Brown could create “THE PERFECT STORM”. A seamless transition ” … to form a more perfect union” Go from T.I.N.A. to T.A.R.A. (There Are No Alteratives to There Are Realistic Alternative.)

  5. North Americans need to catch up to Germans and Chinese on matters of gaining sovereign wealth self determination by ensuring that corporate rules require serving a public good rather than short term shareholder profit maximization. We need to affirm the Context Institute’s position on the legitimate historical role of the corporation, https://www.context.org/iclib/ic41/rowe/.

    We should also become familiar with the Chinese history in the worker co-op movement and how equity position for workers on corporate boards prevents companies from treating people as nothing but expenses. https://geo.coop/node/603

    • Yes but remember, a corporation must make a profit. The only way that can be done for public good is if the government spends the money to purchase public purpose goods and services from these corporations. Just “requiring” them to produce for public good without the demand from gov spending won’t work.

    • Co-op movements are nothing new. The basis of socialism, from the start, has always workers owning the means of production, not the state or finance capital. Co-ops have been huge in Scandinavia for many, many decades. Even the US has many co-ops and some are quite large. https://www.thenews.coop/122959/sector/usas-top-100-co-operatives-year-named-national-cooperative-bank/

      In the US, socialism is incorrectly equated with communism. Most socialists rejected the Marx/Engelsl ideology seeing communism as the weak oppressing the strong, while seeing finance capitalism as the strong oppressing the weak. The concept of “property” has been twisted. In the 19th century there was a common understanding that “property” meant objects in one’s possession, and “real property” was land. There are residuals of that today, as theft is a “property crime”
      and land is now real estate or property for sale or lease. When 19th century socialists spoke of finance capital stealing property, they were referring to the theft of the object from the person whose labour created it.
      The promotion of Marxism has completely obscured the intent of the 19th century originators of socialism. It’s not about state ownership, it’s about finance capital being eliminated from ownership.

  6. The Power to print money is in the wrong hands. ONLY the government should hold the power over money, NOT private Banksters, who have used their powers to Bail themselves out(in 2008/2009).
    The “mighty”USA is controlled by the Banksters, Not the American Government, who are there only to make the USA look like a “Democracy”.

  7. […] Source: Socialism at Its Finest after Fed’s Bazooka Fails | WEB OF DEBT BLOG […]

  8. […] Socialism at Its Finest after Fed’s Bazooka Fails […]

  9. […] Ellen Brown Writer, Dandelion Salad The Web of Debt Blog, Mar. 21, 2020 March 22, […]

  10. Dear Ellen, Thanks for your continued commentary on what effective government of, by, and for people, and progressive markets would look like with the a national public banking network. You’re right. After the #TrumpPandemic runs its course, everything WILL be different. I fear that our #GovOfBy4People is disappearing before our eyes. Caring citizen leadership like yours is the solution, Chuck – http://bit.ly/ESPread

  11. I offer this Suggestion: read: FIAT MONEY INFLATION IN FRANCE How it Came, What it Brought, and How It Ended……….written by Andrew Dickson White, LLD, PhD., D.O.L….late President & Professor of History@ Cornell Univ.; Sometime U.S. Minister to Russia & Ambassador to Germany; Author of ” A History of Warfare of Science and Theology ,” , etc.

  12. In roughly the 15th paragraph, quoting the liar : Kudlow noted that when this was done with General Motors in 2008, it turned out to be a good deal for the federal government.

    Um… No. This nonsense conflates a relentless refusal to expose domestic and foreign criminals (English, French, German) in falsehood the “federal government” is the federal reserve.

    The Only “good” was done for the criminals (domestic and foreign) still athwart the financial well-being of the US. The “federal government”, specifically, the IRS, allows and allowed, circa 2008, English, French, German bankruptcy, insurance and security frauds to play out in bogus Collateralized Debt Obligation shadow bank pools of American “mortgages”… given the amounts counterfeit: 1200 trillion in the repo market among naked short sales in credit default swap bucketeering, among OTC derivatives… fraud, fraud and fraud upon fraud, ad infinitum … nauseum etc.

  13. Milt Friedman was paid by rich right wingnuts to write supply side or anti-Keynes economics. The problem is that it is anti-reality because it destroys the dollar in an honest currency market but, this being Chicago, we corrupted the currency and all other markets by firing the humans and installing computers that buy and sell stocks and commodities at high speed to look as if there are traders. The things sold are not delivered but settled for dollars at the end of the day. I know how a computer could track the real things being traded but the hedge funds would rather make up prices and naked short sell to get enough money to fake it every day. Those thousands of grain elevators in the fly over states are all empty because the traders stay short until they buy grain cheap from who knows where or settle for worthless dollars.

  14. AMI (NEED ACT) with Prof Werner with Ellen Brown could create “THE PERFECT STORM”. A seamless transition ” … to form a more perfect union” Go from T.I.N.A. to T.A.R.A. (There Are No Alteratives to There Are Realistic Alternative.) A TOTAL SOLUTION NEW FED w 7 Directors; 2 economist (WERNER & BROWN) , 2 APPOINTEES (BAIR & BORN) 5 CEO’s OF the five largest STATES ‘newly formed “PUBLIC STATE BANKS” Get back to IN GOD WE TRUST. https://www.linkedin.com/pulse/qe-4-banks-now-people-2008-16to-20-trillion-w-harm-we-c-basilovecchio/?trackingId=Zyqbh04HwrXK%2Bfx70OhH6Q%3D%3D

  15. It appears as though humanities grand(???) experiment with ‘money as debt’ is about to end at the behest of a string of RNA inside a tiny virus and all the super computers in the world are powerless to change our financial destiny. Compound interest and logarithmic viruses produce the same extinction events!

    • WOW1 Translated that is one helluva remark. THE INHUMANITIES DONE BY MAN UPON ITSELF; MANKIND AND ALL ITS KNOWLEDGE ARE POWERLESS AGAINST THIS INVISIBLE ENEMY! ****Really good but incorrect. WHY? Mankind can Go from T.I.N.A. to T.A.R.A. (There Are No Alternatives to There Are Realistic Alternative.) and create one of mankinds greatest achievements.

  16. The Federal Reserve system is part of Mystery Babylon that has made all nations drunk…The sooner it all collapses the better!

  17. I hope those who follow these Ideas are aware that SOUTH Korea & China are curing their carona patients with relatively small intravenous vitamin (non-patentable) infusions… Cheaply with no negative side-effects, & actually “positive side-effects”. Head of fox news told Robert Kennedy Jr. 70% of News sponsor $$$ come from Pharmaceutical industry” so; if it’s not good for them, we won’t hear it via the mainstream News… No conspiracy needed, just self interest (=fiduciary responsibility) trumps WHOLE truth…

  18. […] This article was originally published on the author’s blog site, Web of Debt Blog. […]

  19. […] This article was originally published on the author’s blog site, Web of Debt Blog. […]

  20. Another great explanation of how our system doesnt work and solutions done elsewhere that do. Love you Ellen and all the hard work and sacrifice you do . Come to Australia and I will give you another Acupuncture/ BodyWork treatment like in San Francisco at the public banking conference .

  21. For Ray: et. al.
    Another relatively cheap remedy for corona virus is sea salt. I use the brand Celtic Sea salt. I believe it to be Mother Nature’s anti-biotic. I’ll be having Corona Controlling Cooking Classes….e-mail me at davidsnieckus2@gmail.com for dates times

  22. Be glad we made those gains. Imagine how much it would suck if this happened on obama’s seventh year.

  23. Republicans are socialists, who knew? It’s true they only care about deficit when they are not in power.

  24. One very big mistake here, Brown calls this “socialism at its finest” This is not socialsim, this is fascism, the marriage of government and corporations.

  25. […] Brown Écrivain, Salade de pissenlit Le blog du Web de la dette , 21 mars 2020 22 mars […]

  26. The nation’s money center banks made sure that money creation would not fall to the U.S. Treasury in the design of the Federal Reserve System. Very few of the people elected to the U.S. Congress know the history or grasp the economics. Too few economists have a firm grasp of how banks operate or the connections between monetary theory and reality.

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