Another Bank Bailout Under Cover of a Virus

Insolvent Wall Street banks have been quietly bailed out again. Banks made risk-free by the government should be public utilities.  

When the Dodd Frank Act was passed in 2010, President Obama triumphantly declared, “No more bailouts!” But what the Act actually said was that the next time the banks failed, they would be subject to “bail ins” – the funds of their creditors, including their large depositors, would be tapped to cover their bad loans.

Then bail-ins were tried in Europe. The results were disastrous.

Many economists in the US and Europe argued that the next time the banks failed, they should be nationalized – taken over by the government as public utilities. But that opportunity was lost when, in September 2019 and again in March 2020, Wall Street banks were quietly bailed out from a liquidity crisis in the repo market that could otherwise have bankrupted them. There was no bail-in of private funds, no heated congressional debate, and no public vote. It was all done unilaterally by unelected bureaucrats at the Federal Reserve.

“The justification of private profit,” said President Franklin Roosevelt in a 1938 address, “is private risk.” Banking has now been made virtually risk-free, backed by the full faith and credit of the United States and its people. The American people are therefore entitled to share in the benefits and the profits. Banking needs to be made a public utility. Continue reading

Crushing the States, Saving the Banks: The Fed’s Generous New Rules

Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt.

No such threat looms over the banks, which have made out extremely well in this crisis. The Federal Reserve has dropped interest rates to 0.25%, eliminated reserve requirements, and relaxed capital requirements. Banks can now borrow effectively for free, without restrictions on the money’s use. Following the playbook of the 2008-09 bailout, they can make the funds available to their Wall Street cronies to buy up distressed Main Street assets at fire sale prices, while continuing to lend to credit cardholders at 21%.

If there is a silver lining to all this, it is that the Fed’s relaxed liquidity rules have made it easier for state and local governments to set up their own publicly-owned banks, something they should do post haste to take advantage of the Fed’s very generous new accommodations for banks. These public banks can then lend to local businesses, municipal agencies, and local citizens at substantially reduced rates while replenishing the local government’s coffers, recharging the Main Street economy and the government’s revenue base. Continue reading

A Universal Basic Income Is Essential and Will Work

A central bank-financed UBI can fill the debt gap, providing a vital safety net while preventing cyclical recessions.

According to an April 6 article on CNBC.com, Spain is slated to become the first country in Europe to introduce a universal basic income (UBI) on a long-term basis. Spain’s Minister for Economic Affairs has announced plans to roll out a UBI “as soon as possible,” with the goal of providing a nationwide basic wage that supports citizens “forever.” Guy Standing, a research professor at the University of London, told CNBC that there was no prospect of a global economic revival without a universal basic income. “It’s almost a no-brainer,” he said. “We are going to have some sort of basic income system sooner or later ….”

“Where will the government find the money?” is no longer a valid objection to providing an economic safety net for the people. The government can find the money in the same place it just found more than $5 trillion for Wall Street and Corporate America: the central bank can print it. In an April 9 post commenting on the $1.77 trillion handed to Wall Street under the CARES Act, Wolf Richter observed, “If the Fed had sent that $1.77 Trillion to the 130 million households in the US, each household would have received $13,600. But no, this was helicopter money exclusively for Wall Street and for asset holders.” Continue reading

Treasury Takeover? Interview with Sarah Westall and Harley Schlanger

Was the Fed Just Nationalized?

Did Congress just nationalize the Fed? No. But the door to that result has been cracked open.

Mainstream politicians have long insisted that Medicare for all, a universal basic income, student debt relief and a slew of other much-needed public programs are off the table because the federal government cannot afford them. But that was before Wall Street and the stock market were driven onto life-support by a virus. Congress has now suddenly discovered the magic money tree. It took only a few days for Congress to unanimously pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will be doling out $2.2 trillion in crisis relief, most of it going to Corporate America with few strings attached. Beyond that, the Federal Reserve is making over $4 trillion available to banks, hedge funds and other financial entities of all stripes; it has dropped the fed funds rate (the rate at which banks borrow from each other) effectively to zero; and it has made $1.5 trillion available to the repo market.

It is also the Federal Reserve that will be picking up the tab for this bonanza, at least to start. The US central bank has opened the sluice gates to unlimited quantitative easing, buying Treasury securities and mortgage-backed securities “in the amounts needed to support smooth market functions.” Last month, the Fed bought $650 billion worth of federal securities. At that rate, notes Wall Street on Parade, it will own the entire Treasury market in about 22 months. As Minneapolis Fed President Neel Kashkari acknowledged on 60 Minutes, “There is an infinite amount of cash at the Federal Reserve.” Continue reading

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.  Continue reading

The Fed’s Baffling Response to the Coronavirus Explained

When the World Health Organization announced on February 24th that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points or over 10%. In an attempt to contain the damage, on March 3rd the Federal Reserve slashed the fed funds rate from 1.5% to 1.0%, in their first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.

Exasperated commentators on CNBC wondered what the Fed was thinking. They said a half point rate cut would not stop the spread of the coronavirus or fix the broken Chinese supply chains that are driving US companies to the brink. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan, the epicenter of the virus. At least 5 million companies globally have one or more tier-two suppliers in the region, meaning their suppliers get their supplies there; and 938 of the Fortune 1000 companies have tier-one or tier-two suppliers there. Moreover, fully 80% of US pharmaceuticals are made in China. A break in the supply chain can grind businesses to a halt. Continue reading

The Fed Protects Gamblers at the Expense of the Economy

Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.

This does not serve the real economy, in which products, services and jobs are created. However, the Fed is trapped into this speculative monetary expansion to avoid a cascade of defaults of the sort it was facing with the long-term capital management crisis in 1998 and the Lehman crisis in 2008. The repo market is a fragile house of cards waiting for a strong wind to blow it down, propped up by misguided monetary policies that have forced central banks to underwrite its highly risky ventures. Continue reading

Interview with Max Keiser Nov. 2019

The Key to the Environmental Crisis Is Beneath Our Feet

The Green New Deal resolution that was introduced into the U.S. House of Representatives in February hit a wall in the Senate, where it was called unrealistic and unaffordable. In a Washington Post article titled “The Green New Deal Sets Us Up for Failure. We Need a Better Approach,” former Colorado governor and Democratic presidential candidate John Hickenlooper framed the problem like this:

The resolution sets unachievable goals. We do not yet have the technology needed to reach “net-zero greenhouse gas emissions” in 10 years. That’s why many wind and solar companies don’t support it. There is no clean substitute for jet fuel. Electric vehicles are growing quickly, yet are still in their infancy. Manufacturing industries such as steel and chemicals, which account for almost as much carbon emissions as transportation, are even harder to decarbonize.

Amid this technological innovation, we need to ensure that energy is not only clean but also affordable. Millions of Americans struggle with “energy poverty.” Too often, low-income Americans must choose between paying for medicine and having their heat shut off. …

If climate change policy becomes synonymous in the U.S. psyche with higher utility bills, rising taxes and lost jobs, we will have missed our shot.

The problem may be that a transition to 100% renewables is the wrong target. Reversing climate change need not mean emptying our pockets and tightening our belts. It is possible to sequester carbon and restore our collapsing ecosystem using the financial resources we already have, and it can be done while at the same time improving the quality of our food, water, air and general health. Continue reading

Paul Volcker’s Long Shadow

Former Federal Reserve Chairman Alan Greenspan called Paul Volcker “the most effective chairman in the history of the Federal Reserve.” But while Volcker, who passed away Dec. 8 at age 92, probably did have the greatest historical impact of any Fed chairman, his legacy is, at best, controversial.

“He restored credibility to the Federal Reserve at a time it had been greatly diminished,” wrote his biographer, William Silber. Volcker’s policies led to what was called “the New Keynesian revolution,” putting the Fed in charge of controlling the amount of money available to consumers and businesses by manipulating the federal funds rate (the interest rate at which banks borrow from each other). All this was because Volcker’s “shock therapy” of the early 1980s – raising the federal funds rate to an unheard of 20% – was credited with reversing the stagflation of the 1970s. But did it? Or was something else going on?

Less discussed was Volcker’s role at the behest of President Richard Nixon in taking the dollar off the gold standard, which he called “the single most important event of his career.” He evidently intended for another form of stable exchange system to replace the Bretton Woods system it destroyed, but that did not happen. Instead, freeing the dollar from gold unleashed an unaccountable central banking system that went wild printing money for the benefit of private Wall Street and London financial interests. Continue reading

A run of presentations on public banking

Interest in public banking is high! I just finished a run of 11 presentations and in-person interviews in 7 cities in 10 weeks. Here’s a video from one, a debate with a county official sponsored by the League of Women Voters in San Diego, and two power points from another, the Soil and Nutrition Conference in Southbridge, MA.

 

 

Power point, A Deep Dive into Money and Banking, Soil & Nutrition Conf 11-19

Power point, Funding the Green Transition, Soil & Nutrition Conf 11-19

Is the Run on the Dollar Due to Panic or Greed?

What’s going on in the repo market? Rates on repurchase agreements (“repo”) should be around 2%, in line with the fed funds rate. But they shot up to over 5% on September 16 and got as high as 10% on September 17. Yet banks were refusing to lend to each other, evidently passing up big profits to hold onto their cash – just as they did in the housing market crash and Great Recession of 2008-09.

Since banks weren’t lending, the Federal Reserve Bank of New York jumped in, increasing its overnight repo operations to $75 billion; and on October 23 it upped the ante to $120 billion in overnight operations and $45 billion in longer-term operations.

Why are banks no longer lending to each other? Are they afraid that collapse is imminent somewhere in the system, as with the Lehman collapse in 2008?

Perhaps, and if so the likely suspect is Deutsche Bank. But it looks to be just another case of Wall Street fattening itself at the public trough, using the funds of mom and pop depositors to maximize bank profits and line the pockets of bank executives while depriving small businesses of affordable loans. Continue reading

The Disaster of Negative of Interest Rates

President Trump wants negative interest rates, but they would be disastrous for the U.S. economy, and his objectives can be better achieved by other means.

The dollar strengthened against the euro in August, merely in anticipation of the European Central Bank slashing its key interest rate further into negative territory. Investors were fleeing into the dollar, prompting President Trump to tweet on Aug. 30:

The Euro is dropping against the Dollar “like crazy,” giving them a big export and manufacturing advantage… And the Fed does NOTHING!

When the ECB cut its key rate as anticipated, from a negative 0.4% to a negative 0.5%, the president tweeted on Sept. 11:

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.

And on Sept. 12 he tweeted:

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!

However, negative interest rates have not been shown to stimulate the economies that have tried them, and they would wreak havoc on the U.S. economy, for reasons unique to the U.S. dollar. The ECB has not gone to negative interest rates to gain an export advantage. It is to keep the European Union from falling apart, something that could happen if the United Kingdom does indeed pull out and Italy follows suit, as it has threatened to do. If what Trump wants is cheap borrowing rates for the U.S. federal government, there is a safer and easier way to get them. Continue reading

Desperate Central Bankers Grab for More Power

Conceding that their grip on the economy is slipping, central bankers are proposing a radical economic reset that would shift yet more power from government to themselves.

Central bankers are acknowledging that they are out of ammunition. Mark Carney, the soon-to-be-retiring head of the Bank of England, said in a speech at the annual meeting of central bankers in August in Jackson Hole, Wyoming, “In the longer-term, we need to change the game.” The same point was made by Philipp Hildebrand, former head of the Swiss National Bank, in an August 2019 interview with Bloomberg. “Really there is little if any ammunition left,” he said. “More of the same in terms of monetary policy is unlikely to be an appropriate response if we get into a recession or sharp downturn.” Continue reading

The Bankers’ “Power Revolution”: How the Government Got Shackled by Debt

This article is excerpted from my new book Banking on the People: Democratizing Money in the Digital Age, available in paperback June 1.

The U.S. federal debt has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $22 trillion in April 2019. The debt is never paid off. The government just keeps paying the interest on it, and interest rates are rising.

In 2018, the Fed announced plans to raise rates by 2020 to “normal” levels — a fed funds target of 3.375 percent — and to sell about $1.5 trillion in federal securities at the rate of $50 billion monthly, further growing the mountain of federal debt on the market. When the Fed holds government securities, it returns the interest to the government after deducting its costs; but the private buyers of these securities will be pocketing the interest, adding to the taxpayers’ bill.

In fact it is the interest, not the debt itself, that is the problem with a burgeoning federal debt. The principal just gets rolled over from year to year. But the interest must be paid to private bondholders annually by the taxpayers and constitutes one of the biggest items in the federal budget. Currently the Fed’s plans for “quantitative tightening” are on hold; but assuming it follows through with them, projections are that by 2027 U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Donald Trump’s trillion-dollar infrastructure plan every year, and it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds.

Where will this money come from? Crippling taxes, wholesale privatization of public assets, and elimination of social services will not be sufficient to cover the bill. Continue reading

Why Is the Fed Paying So Much Interest to Banks?

“If you invest your tuppence wisely in the bank, safe and sound,
Soon that tuppence safely invested in the bank will compound,

“And you’ll achieve that sense of conquest as your affluence expands
In the hands of the directors who invest as propriety demands.”

Mary Poppins, 1964

When Mary Poppins was made into a movie in 1964, Mr. Banks’ advice to his son was sound. Banks were then paying more than 5% interest on deposits, enough to double young Michael’s investment every 14 years.

Now, however, the average savings account pays only 0.10% annually – that’s 1/10th of 1% – and many of the country’s biggest banks pay less than that. If you were to put $5,000 in a regular Bank of America savings account (paying 0.01%) today, in a year you would have collected only 50 cents in interest.

That’s true for most of us, but banks themselves are earning 2.4% on their deposits at the Federal Reserve. Continue reading

QE Forever: The Fed’s Dramatic About-face

“Quantitative easing” was supposed to be an emergency measure. The Federal Reserve “eased” shrinkage in the money supply due to the 2008-09 credit crisis by pumping out trillions of dollars in new bank reserves. After the crisis, the presumption was that the Fed would “normalize” conditions by sopping up the excess reserves through “quantitative tightening” (QT) – raising interest rates and selling the securities it had bought with new reserves back into the market.

The Fed relentlessly pushed on with quantitative tightening through 2018, despite a severe market correction in the fall. In December, Fed Chairman Jerome Powell said that QT would be on “autopilot,” meaning the Fed would continue to raise interest rates and to sell $50 billion monthly in securities until it hit its target. But the market protested loudly to this move, with the Nasdaq Composite Index dropping 22% from its late-summer high.

Worse, defaults on consumer loans were rising. December 2018 was the first time in two years that all loan types and all major metropolitan statistical areas showed a higher default rate month-over-month. Consumer debt – including auto, student and credit card debt – is typically bundled and sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008 after the Fed had progressively raised interest rates.

Chairman Powell evidently got the memo. Continue reading

This Radical Plan to Fund the ‘Green New Deal’ Just Might Work

With what Naomi Klein calls “galloping momentum,” the “Green New Deal” promoted by newly-elected Rep. Alexandria Ocasio-Cortez (D-NY) appears to be forging a political pathway for solving all of the ills of society and the planet in one fell swoop. It would give a House Select Committee “a mandate that connects the dots between energy, transportation, housing, as well as healthcare, living wages, a jobs guarantee” and more. But to critics even on the left it is just political theater, since “everyone knows” a program of that scope cannot be funded without a massive redistribution of wealth and slashing of other programs (notably the military), which is not politically feasible.

Perhaps, but Ocasio-Cortez and the 22 representatives joining her in calling for a Select Committee are also proposing a novel way to fund the program, one which could actually work. The resolution says funding will primarily come from the federal government, “using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks, public venture funds and such other vehicles or structures that the select committee deems appropriate, in order to ensure that interest and other investment returns generated from public investments made in connection with the Plan will be returned to the treasury, reduce taxpayer burden and allow for more investment.”   Continue reading

Interview with Sarah Westall