[OPE] The Fed

From: <glevy@pratt.edu>
Date: Sun Mar 29 2009 - 10:39:13 EDT

via Mitch Cohen. / In solidarity, Jerry

You can find her
articles at
and blogged at


March 28, 2009


By Ellen Brown

Nervous pundits are
predicting the end of
American life as we know it, after Fed
Ben Bernanke announced on March 18 that he would
dropping yet another trillion dollars in
helicopter money &ndash; up
to $300 billion to buy
long-term government bonds and an additional
billion to buy private debt, with the Term
Securities Loan Facility (TALF) to
be opened up for the sake of
consumers and small
businesses. The dollar immediately experienced

its worst drop in 25 years, amid worries that the
intervention would spur hyperinflation.
Typical of the concerned
commentators expressing
these sentiments was Mark Larson, who wrote
in "Money and Markets" on March 20:

"This is
Banana Republic-type stuff! And I&rsquo;m not
talking about the
clothing store. Printing money
out of thin air at the central bank,
only to turn
around and buy debt securities issued by your
Treasury, is the kind of practice you typically
see in emerging
market regimes. We&rsquo;re essentially
monetizing our
country&rsquo;s debt and deliberately
devaluing our country&rsquo;s

Tim Wood wrote in "Financial Sense"
on March 21:

"I&rsquo;m now beginning to wonder if the
powers that
be are really in their minds trying to &lsquo;fix&rsquo;

things or if they are actually trying to destroy
the dollar,
the free markets and perhaps even the
nation. To be honest, the
latter is starting to
make more sense to me because surely there is

enough intelligence in Washington to understand
the potential
consequences of these actions."

Commentators on the
Financial Sense Newshour
suggested that the Fed&rsquo;s move toward

"quantitative easing" would be looked back upon
the watershed event in the beginning of the
end of the United States
dollar. As explained in Wikipedia:

"The term quantitative
easing refers to the
creation of a pre-determined quantity of new

money . . . In very simple layman&rsquo;s terms, the
bank creates new money out of thin air.
It then uses this money to
buy what is
essentially an IOU [that is, to make a loan]. . .
. Today the new money is generally created
electronically rather
than physically printed."

The Federal Reserve has the
capacity to create
money on its books and lend it to whomever it
will. This credit may be extended to the public
to replace the
loans that banks have been
unwilling or unable to make; but there is
also a
danger that we may just see more money being
to those same Wall Street banks that got
us into this crisis in the
first place. The Fed
remains a privately-owned "bankers&rsquo;
bank," and it
has not asked Congress&rsquo;s permission before

engaging in its new policy of massive "quantitative

Those fears may be well founded, but it is also

possible that this is a watershed moment of
another sort. We
may look back upon it as the
moment when the Federal Reserve finally
its focus and started to act more like a
central bank, one that advanced "the
full faith and credit of
the United States" for
the benefit of the United States and its

citizenry, rather than just for the bankers who
have held the
government and its central bank
hostage for so long. President Obama
suggested a
move in that direction when he said on the
Show with Jay Leno on March 19:

"[W]e&rsquo;re taking a
lot of steps to . . . open up
separate credit lines outside of banks
for small
businesses so that they can get credit -- because
there are a lot of small businesses out here who
are just barely
hanging on. Their credit lines
are starting to be cut. We&rsquo;re
trying to set up a
securitized market for student loans and auto
loans outside of the banking system. So there are
other ways of
getting credit flowing again." [Emphasis added.]

The Fed
now appears to be taking on the role of
lender of last resort not
just for its member
banks but for consumers and businesses
Provisos and cautions aside, its new
"quantitative easing" policy at least has the
to be harnessed to serve the government
and the people it
represents; and that is a promising development.

the Federal Reserve for Federal Purposes

The key to this
potential is something that is
little known or appreciated: the Fed
now rebates
all of its profits to the government after
deducting its costs.1 That means that it is
actually the
government that gets the benefit of
the interest on the Fed&rsquo;s
loans; and that is how
it should be, since the U.S. dollar today is

backed by nothing but "the full faith and credit
of the
United States." The dollar is the
government&rsquo;s credit
&ndash; its promise to repay value
for value, nothing more. If the
government is
taking the risk that credit will not be repaid,
the government should get the interest on the loans.

Federal Reserve was originally set up in 1913
by a powerful Wall
Street group to serve the
private banking system, and it agreed to
its profits to the government only under duress.
happened after Congressman Wright Patman,
head of the House Banking
and Currency Committee
in the 1960s, peered closely at its
and pressed for its nationalization. The
developments were chronicled by Congressman Jerry Voorhis, who wrote in

"As a direct result of logical and relentless
agitation by members of Congress, led by
Congressman Wright Patman
as well as by other
competent monetary experts, the Federal Reserve

began to pay to the U.S. Treasury a considerable
part of its
earnings from interest on government
securities. This was done
without public notice
and few people, even today, know that it is
done. It was done, quite obviously, as
that the Federal Reserve Banks
were acting on the one hand as a
national bank of
issue, creating the nation&rsquo;s money, but on
other hand charging the nation interest on its
own credit
&ndash; which no true national bank of issue
could conceivably, or
with any show of justice, dare to do."(2)

The potential
for the Fed to acts as a truly
"federal" central bank that
issues loans to the
public and returns the profits to the government

has been there since the 1960s; but until now,
the Fed and the
Administration have not made much
use of it. The Fed has used its
power only to the extent necessary to provide the
reserves to backstop bank runs. The vast majority
of the money
supply has continued to be created
privately by banks in the form of
loans; and as
Congressman Voorhis observed, "where the
commercial banks are concerned, there is no such
repayment of the
people&rsquo;s money" as there is with
the Federal Reserve.
Commercial banks do not
rebate the interest they receive, although
also "&lsquo;buy&rsquo; the bonds with newly created
deposit entries on their books &ndash; nothing more."

This, Voorhis maintained, was a violation of the
Constitutional provision that "Congress shall
have the power
to coin money [and] regulate the value thereof."

Bernanke&rsquo;s Greenback Solution

The Federal Reserve
under Alan Greenspan
continued to operate in its traditional role of

serving the interests of its banker owners, but
Ben Bernanke
seemed to have other things in mind
as far back as 2002, when he
made his notorious
"helicopter money" speech. The speech
was made
before the National Economists Club in
D.C. on November 21, 2002 and was
titled "Deflation: Making
Sure &lsquo;It&rsquo; Doesn&rsquo;t
Happen Here." Dr. Bernanke
stated that the Fed
would not be "out of ammunition" to
deflation just because the federal funds rate had
fallen to 0 percent and could not be brought down
lower. Lowering
interest rates was not the only
way to get new money into the
economy. He said,
"the U.S. government has a technology, called
printing press (or, today, its electronic
equivalent), that
allows it to produce as many
U.S. dollars as it wishes at
essentially no
cost." Note that he said the government (not the

central bank) has a printing press, and that the
could print money at essentially no
cost. The implication was that
the government
could create money without paying interest and
without having to pay it back to the Fed or the banks.

fairly well characterizes the money created
by "quantitative
easing" today. The Fed rebates
the interest only after
deducting its costs,
which are no doubt quite generous; but in 2008,

it reported that it rebated 85% of the interest
it received to
the Treasury.(3) Since interest on
long-term bonds is now under 3%,
that means the
interest paid by the government is less than
&ndash; clearly the best deal in town, particularly
the Chinese and other foreigners are now
balking at buying more U.S.
debt. This is
comparable to what Australia did in the 1930s,
when it avoided the serious depression conditions
suffered in
other countries by funding public
projects with credit advanced by
government-owned central bank at a fraction of one percent

Not only are the Fed&rsquo;s loans nearly
interest-free, but they are never paid back. The
federal debt has
not been paid off since 1838,
when Andrew Jackson shut down the
Second U.S.
Bank. "Balancing the budget" just involves
"servicing" the debt with interest. Money that
from an interest-free loan that is rolled
over indefinitely is
essentially debt-free legal tender.

The infamous helicopter
line in Bernanke&rsquo;s 2002
speech came in when he was discussing
how the
government&rsquo;s money-creating power could be used
to cut taxes. He said, "A money-financed tax cut
essentially equivalent to Milton Friedman&rsquo;s
&lsquo;helicopter drop&rsquo; of money." Dropping
money from
helicopters was Professor Friedman&rsquo;s
hypothetical cure for
deflation. The
"money-financed tax cut" discussed by Dr.

Bernanke was one in which taxes would be replaced
with money
that was simply printed up by the
government and spent into the
economy. He added,
"[I]n lieu of tax cuts, the government could

increase spending on current goods and services
or even
acquire existing real or financial
assets." The government
could reverse deflation
by printing money and buying hard assets
with it
&ndash; assets such as real estate or corporate stock.

And that, for a Federal Reserve official next in
line to
become its Chairman, was a pretty radical
suggestion. It was
basically a Greenback
proposal, the sort of government self-funding

used by Abraham Lincoln to finance the Civil War.
It was also
the sort of money system endorsed by
Benjamin Franklin, Thomas
Jefferson, and William
Jennings Bryan, the system used by the
colonists and demonstrated to be particularly
successful in colonial Pennsylvania.

Reviving the Banking
Model of Benjamin Franklin&rsquo;s Day

In Pennsylvania in the
first half of the 18th
century, the provincial government not only

printed its own money but owned its own bank.
Colonial scrip
was printed and lent to farmers at
5% interest, and this money
recycled back to the
government as it was repaid. The money went out

and came back in a circular flow, preventing
inflation. This
was quite different from what
happened in those Banana Republics
that used the
power to print money simply to pay off foreign
debts owed in dollars. The invariable result was
to invite
speculators to jack up the price of the
dollars relative to the
local currency, causing
the currency&rsquo;s rapid devaluation. The
Bank of
Pennsylvania, by contrast, issued its fiat
currency as
loans for domestic use, loans on
which not only the principal but
the interest
came back to the government. Since the provincial
government had the power to issue the local
scrip, it could issue
some extra to meet its
expenses; and this money filtered through the

economy to provide the additional sums needed to
cover the
interest on the loans. During the time
this provincial system was in
place, the
Pennsylvania colonists paid no taxes, there was
government debt, and price inflation did not result.

What the
Fed is doing today could be considered
comparable: it is generating
the equivalent of
debt-free government-issued colonial scrip with

its "quantitative easing" tool, and it is
credit for private use, with the
interest on the loans returning to
the government.

The Case for Nationalizing the Fed

One major difference between the Federal Reserve
and the bank of
colonial Pennsylvania is that the
Fed remains a private bank owned
by other banks.
There is the fear that the powerful tool of
"quantitative easing" could turn into a dangerous
in the wrong hands. A private central bank
can be driven by a small
financial elite in
secret boardroom meetings beyond congressional

control. The power to create money is a
double-edged sword
even for a government, but at
least a government must answer to the
people in
the public forum of a democracy.

That is true
in theory, but we the people don&rsquo;t
have much more control over
Treasury Secretary
Tim Geithner, a government official, than we have

over Ben Bernanke. The Treasury&rsquo;s Troubled Asset
Program (or TARP) has been heavily
criticized for moving
"toxic" assets off the
books of the culpable Wall Street
banks and onto the backs of the taxpayers. The
problem is that government officials and Federal
Reserve officials
alike believe that the only way
the nation can have a functioning
credit system
is to maintain business as usual on Wall Street.
This is not true. A public banking system headed
by a truly
federal central bank could provide all the credit we need.

prevent corruption and abuse, this system of
money and credit would
need to be made subject to
the sort of public monitoring and control

provided by the checks and balances built into
Constitution. Stephen Zarlenga, president of
the American Monetary
Institute, suggests that
the money system should be organized as a
branch of government, alongside the executive,
and congressional branches.
Representative Dennis Kucinich told
earlier this month that he would soon be bringing
bill to nationalize the Federal Reserve. He said:

"Banking is not a proper function of the
government, but
oversight is. The Treasury
Department should not be outsourcing to
the Fed
its oversight responsibilities. The Fed, which
miserably to oversee the banks, should be
put under Treasury
instead. It&rsquo;s time for the
government to operate in the public
interest, not
in the interest of private banks. It&rsquo;s time to

stop bailing out banks and begin building up America."

Note, however, that if the Fed is nationalized
and it
continues to issue credit for the benefit
of consumers, small
businesses, and the
government itself, it will actually be in the

banking business; and that, arguably, is how it
should be. Our
money system today is nothing more
than a series of legal agreements
parties. "Credit" is merely an agreement to repay

over time. While private parties and private
banks should be
free to lend their own money or
their investors&rsquo; money, we
also need the sort of
"credit" that is created on a
computer screen;
and that sort of credit, as money reformer
Richard Cook observes, is properly administered
as a public
utility. The dollar is backed by
nothing but "the full faith
and credit of the
United States" and should be dispensed and

monitored by the United States. As William
Jennings Bryan
declared in his winning
presidential nomination speech at the
Democratic Convention in 1896:

"[W]e believe that the
right to coin money and
issue money is a function of government. . .
Those who are opposed to this proposition tell us
that the
issue of paper money is a function of
the bank and that the
government ought to go out
of the banking business. I stand with
Jefferson .
. . and tell them, as he did, that the issue of
money is a function of the government and that
the banks should go
out of the governing
business. . . . [W]hen we have restored the
of the Constitution, all other necessary reforms
will be
possible, and . . . until that is done
there is no reform that can
be accomplished."

The loans the Fed creates by
easing" are no more inflationary than the
created daily on a computer screen by private
At least, loans used to be created
daily by private banks, until
their ability to
lend was frozen for accounting reasons. The
credit facility has the advantages over private
banks&rsquo; that (a) it is not subject to the lending
freeze, and
(b) its profits are rebated to the
government, serving the public
interest. While we
are waiting for the Federal Reserve to be
nationalized, its Chairman should be applauded
for opening its
credit facility to all comers, public and private.

"FAQs: Federal Reserve System," federalreserve.gov.

2. J. Voorhis, The Strange Case of Richard Milhous Nixon (1973).

3. See Benjamin Gisin, Michael Krajovic,
"Rescuing the
Physical Economy," Conscious
Economics (January 2009); Ellen
Brown, "Monetize
this!", webofdebt.com/articles (February
22, 2009).

4. David Kidd, "How Money is Created in
Australia," www.http://dkd.net/davekidd/politics/money.html (2001).

5. See Ellen Brown, "The Wall Street Ponzi Scheme
Called Fractional Reserve Banking,"
(December 29, 2008).


Author's Website: http://www.webofdebt.com

Author's Bio: Ellen Brown developed her research
skills as an
attorney practicing civil litigation
in Los Angeles. In Web of Debt,
her latest book,
she turns those skills to an analysis of the
Federal Reserve and "the money trust." She shows
this private cartel has usurped the power to
create money from the
people themselves, and how
we the people can get it back. Her
earlier books
focused on the pharmaceutical cartel that gets
its power from "the money trust." Her eleven
include Forbidden Medicine, Nature's
Pharmacy (co-authored with Dr.
Lynne Walker), and
The Key to Ultimate Health (co-authored with Dr.

Richard Hansen). Her websites are www.webofdebt.com and

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