The Central Bank as Lender of Last Resort
Where did the Fed get this remarkable power? Central banks are "lenders of last resort," which means they are authorized to advance as much credit as the system requires. It's all keystrokes on a computer, and the supply of this credit is limitless. According to Wikipedia:
"A lender of last resort is an institution willing to extend credit when no one else will. Originally the term referred to a reserve financial institution, most often the central bank of a country, that secured well-connected banks and other institutions that are too-big-to-fail against bankruptcy."
Why is this backup necessary? Because, says Wikipedia matter-of-factly, "Due to fractional reserve banking, in aggregate, all lenders and borrowers are insolvent." The entry called "fractional reserve banking" explains:
"The bank lends out some or most of the deposited funds, while still allowing all deposits to be withdrawn upon demand. Fractional reserve banking necessarily occurs when banks lend out funds received from deposit accounts, and is practiced by all modern commercial banks."
All commercial banks are insolvent . They are unable to pay their debts when they come due, because they have double-counted their deposits. A less charitable word, if this hadn't all been validated with legislation, might be "embezzlement." The bankers took your money for safekeeping, promising you could have it back "on demand," then borrowed it from the till to clear the checks of their borrowers. Modern banking is a massive shell game, and the banks are in a mad scramble to keep peas under the shells. If they don't have the peas, they borrow them from other banks or the money market short-term, until they can come up with some longer-term source.
Ann Pettifor writes, " the banking system has been turned on its head, and become a borrowing machine." Rather than lending us their money, they are borrowing from us and lending it back. Banks can borrow from each other at the fed funds rate of 0.2%. They get the very cheap credit and lend it to us as much more expensive credit.
They got away with this shell game until September 2008, when the Lehman Brothers bankruptcy triggered a run on the money markets. Panicked investors pulled their short-term money out, and the credit market suddenly froze. The credit lines on which businesses routinely operated froze too, causing bankruptcies, layoffs and general economic collapse.
The shell game would have been exposed for all to see, if the Federal Reserve had not stepped in and played its "lender of last resort" card. Quoting Wikipedia again:
"A lender of last resort serves as a stopgap to protect depositors, prevent widespread panic withdrawal, and otherwise avoid disruption in productive credit to the entire economy caused by the collapse of one or a handful of institutions. . . .
"In the United States the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses' which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.
". . . [T]his role is undertaken by the Bank of England in the United Kingdom (the central bank of the UK), in the Eurozone by the European Central Bank, in Switzerland by the Swiss National Bank, in Japan by the Bank of Japan and in Russia by the Central Bank of Russia."
If all central banks do it, it must be okay, right? Or is it just evidence that the entire international banking scheme is sleight of hand? All lenders are insolvent and are kept in the game only by a lender-of-last-resort power given to central banks by central governments -- given, in other words, by we-the-people. Yet we-the-people are denied access to this cornucopia, and are forced to pick up the tab for the banks. Most states are struggling with budget deficits, and some are close to insolvency. Why is the Fed's magic wand not being waved over them?
QE3: Some Creative Proposals
According to financial blogger Edward Harrison, that might soon happen. He quotes a Bloomberg article by David Blanchflower, whom Harrison describes as "a former MPC [Monetary Policy Committee] member at the Bank of England but also an American-British dual citizen professor who is very plugged in at the Fed." Blanchflower wrote on October 18:
"I was at the Fed last week in Washington for one of its occasional meetings with academics . . . .