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Pulling Back the Curtain on the Wall Street Money Machine

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Money Curtain by Scott Picunko

On November 27, Bloomberg News reported the results of its successful case to force the Federal Reserve to reveal the lending details of its 2008-09 bank bailout.   Bloomberg reported that by March 2009, the Fed had committed $7.77 trillion in below-market loans and guarantees to rescuing the financial system; and that these nearly interest-free loans came without strings attached.  

The Fed insisted that the loans were repaid and there have been no losses, but the Bloomberg report said the banks reaped a $13 billion windfall in profits; and "details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger."

The revelations provoked shock and outrage among commentators.   But in a letter to the leaders of the House and Senate Committees focused on the financial services industry, Fed Chairman Ben Bernanke responded on December 6th th at the figures were greatly exaggerated.   He said the loans were being double-counted: short-term loans rolled over from day to day were counted as separate cumulative loans rather than as a single extended loan.  

Bloomberg was quick to rebut, denying any exaggerated claims.   But either way, the banks were clearly getting perks not available to the rest of us.   As Alan Grayson observed in a December 5th editorial:

The main, if not the sole, qualification for getting help from the Fed was to have lost huge amounts of money. The Fed bailouts rewarded failure, and penalized success. . . .

During all the time that the Fed was stuffing money into the pockets of failed banks, many Americans couldn't borrow a dime for a home, a car, or anything else. If the Fed had extended $26 trillion in credit to the American people instead of Wall Street, would there be 24 million Americans today who can't find a full-time job?

All in the Name of Liquidity

It was all explained, said Grayson, with "the Fed's all-time favorite rationale for everything it does, "increasing liquidity.'" In 2008, bank liquidity dried up after Lehman Brothers collapsed, and the banks could not get the cheap, ready credit on which their lending scheme depends.   The Fed then stepped in as "lender of last resort," doing what it had to do to keep the banking scheme going.  

Left unexplained is why the banks' need for "liquidity" justifies such extraordinary measures.   Why do banks need cheap and ready access to funds?   Aren't they the lenders rather than the borrowers of funds?   Don't they simply take in deposits and lend them out?

The answer is no.   Today when banks make loans, they extend credit FIRST, then fund the loans by borrowing from the cheapest available source.   If deposits are not available, they borrow from another bank, the money market, or the Federal Reserve.  

Rather than loans being created from deposits, loans actually CREATE deposits.   They create deposits when checks are drawn on the borrower's account and deposited in another bank.   The originating bank can then borrow these funds (or others created by the same process at another bank) at the Fed funds rate--currently a very low 0.25%.   In effect, a bank can create money in the form of "bank credit," lend it to a customer at high interest, and borrow it back at very low interest, pocketing the difference as its profit.  

If all this looks like sleight of hand, it is.   The process has been compared to "check kiting," defined in Barron's Business Dictionary as:

[An] illegal scheme that establishes a false line of  credit  by the exchange of worthless checks between two banks. For instance, a check kiter might have empty checking accounts at two different banks,   A   and   B . The kiter writes a check for $50,000 on the bank   A   account and deposits it in the bank   B   account. If the kiter has good credit at bank   B , he will be able to draw  funds  against the deposited check before it clears, that is, is forwarded to bank   A   for payment   and paid by bank   A . Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days and then deposit   it in the bank   A   account before the $50,000 check drawn on that  account  clears.

Setting Things Right

As suspicious as all this appears, the economy actually needs an expandable credit system, and an expandable credit system needs a lender of last resort.   What is wrong with the current scheme is that it discriminates against Main Street in favor of Wall Street.   Banks can borrow very cheaply, while individuals, corporations and governments pay "whatever the market will bear."   The banker middlemen take their cut in a scheme in which money is actually manufactured in the process of lending it.   The profits are siphoned off to the 1% at the expense of the 99%.  

To fix the system, the profits need to be returned to the 99%.   How that could be done was suggested by Thom Hartmann in a recent editorial:

Have the central bank owned by the US government and run by the Treasury Department, so all the profits . . . go directly into the Treasury and you and I pay less in taxes . . . .

For a model on the local level, he pointed to the Bank of North Dakota: 

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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)

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Would you buy John Dillinger's getaway car?  ... by Samuel Bryan on Friday, Dec 9, 2011 at 3:45:56 PM
Well, if we actually OWNED the Fed . . . you can d... by Ellen Brown on Friday, Dec 9, 2011 at 7:00:22 PM
You can direct lending to job creation and educati... by Samuel Bryan on Saturday, Dec 10, 2011 at 11:41:55 AM
To Samuel Bryan,We want a central bank is to facil... by John Durham on Friday, Dec 9, 2011 at 7:53:25 PM
 Kennedy, in 1963, went around the Fed and pr... by John Durham on Friday, Dec 9, 2011 at 7:55:12 PM
Thanks for waking us up, Ellen Brown, to the need&... by Ernie Messerschmidt on Friday, Dec 9, 2011 at 4:16:38 PM
Screw that!  Tax the rich!   Sorry, fo... by Robert Tracey on Friday, Dec 9, 2011 at 5:00:13 PM
ha ha, that too!... by Ellen Brown on Friday, Dec 9, 2011 at 7:01:26 PM
A website with famous quotes: click here"If the Am... by Mike Preston on Friday, Dec 9, 2011 at 7:11:44 PM
Lendman has the quintessential article on The Fede... by Mike Preston on Friday, Dec 9, 2011 at 7:58:48 PM
How Wall Street Fleeces America: Privatized Bankin... by Mike Preston on Friday, Dec 9, 2011 at 8:06:06 PM
remainder of their investments, But the entire pop... by Paul Repstock on Friday, Dec 9, 2011 at 7:30:46 PM
of funding the COUNTERFEIT DEBTS of the banksters.... by bogi666 on Saturday, Dec 10, 2011 at 7:07:06 AM
Allowing the rape of pension funds also makes thos... by Paul Repstock on Saturday, Dec 10, 2011 at 10:28:24 AM
Best path is so driven from thinking you cannot ev... by Mike Preston on Friday, Dec 9, 2011 at 10:39:57 PM
is funded by the FORCED CONTRIBUTIONS,withholding ... by bogi666 on Saturday, Dec 10, 2011 at 7:01:31 AM
But if you take away these money gimmicks of the b... by Ray O. Sunshine on Saturday, Dec 10, 2011 at 7:53:14 AM
Don't forget too the way banks and stock market in... by Gustav Wynn on Saturday, Dec 10, 2011 at 1:46:40 PM