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Pundits predicted the end of American life as we know it after Fed Chairman Ben Bernanke announced on March 18 that he would be dropping yet another trillion dollars in "helicopter money" here , with up to $300 billion of it to buy long-term government bonds, and an additional $750 billion to buy private debt, using the Term Asset-backed Securities Loan Facility (TALF), which was to be opened up for the sake of consumers and small businesses. The dollar then experienced its worst drop in 25 years, amid worries that the Fed's 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'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're essentially monetizing our country's debt and deliberately devaluing our country's currency!"
Tim Wood wrote in "Financial Sense" on March 21:
"I'm now beginning to wonder if the powers that be are really in their minds trying to 'fix' 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's move toward "quantitative easing" would be looked back upon as 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's terms, the central 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 Fed has the capacity to create money on its books and lend it to whomever it will. There is thus a danger that we may just see more money being funneled to those same Wall Street banks that got us into this crisis in the first place. But while the Fed's new "quantitative easing" tool is fraught with risk, it also has some interesting potential. This funding mechanism could be extended not only to replace the loans that banks have been unwilling or unable to make, but to fund Obama's stimulus package -- at little or no cost to the American taxpayer.
What we are faced with today is not inflation but deflation
Lending has dried up not only from banks but from the "shadow banking system," i.e. all those pension funds, hedge funds, and foreign investors who used to snatch up mortgage-backed securities. And that means the velocity of money has slowed. Money is sitting in bank accounts rather than being lent into the economy for consumer and homeowner use. The government's stimulus plan is meant to pick up the slack, but who is going to fund it? The Chinese and other foreign investors are balking at buying more of our debt, and the taxpayers are tapped out. That just leaves the central bank itself. And that's why it must be nationalized.
This could be the watershed moment when the Federal Reserve
finally adjusts its focus and starts to act more like a government central bank, one that advances "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 this direction when he said on the Tonight Show with Jay Leno on March 19:
"[W]e'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'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."
The Fed now appears to be taking on the role of lender of last resort, not just for its member banks but for consumers, businesses, and the government itself. Provisos and cautions aside, its new "quantitative easing" policy at least has the potential to be harnessed to serve the government and the people it represents; and that is a promising development.
Harnessing the Federal Reserve for Federal Purposes
The Federal Reserve was originally set up in 1913 by a powerful Wall Street group to serve the private banking system, and it agreed to return its profits to the government only under duress. This actually happened after Congressman Wright Patman, head of the House Banking and Currency Committee in the 1960s, peered closely at its operations and pressed for its nationalization. The developments were chronicled by Congressman Jerry Voorhis, who wrote in 1973:
"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 being done. It was done, quite obviously, as acknowledgment that the Federal Reserve Banks were acting on the one hand as a national bank of issue, creating the nation's money, but on the other hand charging the nation interest on its own credit -- which no true national bank of issue could conceivably, or with any show of justice, dare to do."
