Treasury bills are the I.O.U.s of the federal government, and they obviously add to the federal debt. The federal debt hasn’t been paid off since the days of Andrew Jackson, but the interest is always paid; and today the interest comes to nearly half a trillion dollars annually. The taxpayers are now on the hook for the Fed’s “enhanced liquidity facilities” as well, meaning the billions in loans that the Fed has been and will be making to an unprecedented range of financial institutions, exercising obscure provisions in the Federal Reserve Act. We the taxpayers are paying interest to the Fed so that the Fed can use taxpayer money to bail out its banking cronies from their gambling ventures. At the very least, doesn’t it seem that the Fed and the banks should be paying interest to us for the privilege of drawing on the national credit card?
A Better Way
Not only does Paulson’s bailout plan reward the guilty at the expense of the taxpayers, but it is not an efficient way to recapitalize the banking system. As William Engdahl observes in a September 30 article, citing economist Nouriel Roubini for authority:
“[I]n almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990’s, nationalize the troubled banks, take over their management and assets, and inject public capital to recapitalize the banks to allow them to continue doing business, lending to normal clients. In the Swedish case, the Government held the assets, mostly real estate, for several years until the economy again improved at which point they could sell them onto the market and the banks could gradually buy the state ownership shares back into private hands. In the Swedish case the end cost to taxpayers was estimated to have been almost nil. The state never did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of securitization and speculation abuses.”
To “inject public capital” means to issue the currency and credit of the nation itself. A sovereign government does not need to borrow from private banks that create the money as it is lent (the “fractional reserve” lending scheme prevalent today). Bankrupt banks can and should be left to those same free market forces they have been so eager to defend until now. Let them go bankrupt, impose a receiver and nationalize them. If a series of banks was to be nationalized, these truly “national” banks could issue the “full faith and credit of the United States” directly, without having to borrow the money first. That idea is not new. It was the solution extolled by Benjamin Franklin, advocated by Thomas Jefferson, and implemented by Abraham Lincoln. Jefferson wrote in an 1802 letter:
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
1 “Frequently Asked Questions: Federal Reserve System,” FederalReserve.gov.
2 William Hummel, “Bank Capital Requirements,” http://wfhummel.cnchost.com/capitalrequirements.html (December 11, 2002).
3 Ellen Simon, “Fed, Central Banks Move to Boost Global Confidence,” Associated Press (September 18, 2008).
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