Quotes from the Book Banking on the People

Executive Summary

• The excellent book Banking on the People was so good, it was necessary to record some quotes.

Introduction

This is the third book by Ellen Brown called Banking on the People.

The Evils of the Wealth Gap

But the evils to which we are accustomed may no longer be sufferable the wealth gap has gotten so wide that six men now owned as much wealth as half the global population. The US government has 22 trillion in debt and governments globally are nearly 20 trillion in debt. We went off the gold standard nearly a century ago, yet we still perceive money to be a physical thing that must be dug from the earth or acquired from somebody else.

Benjamin Franklin on Money in the US Colonies

In fact, money today is simply credit. As Benjamin Franklin declared, the credit is incredibly abundant arising with trade, limited only by the availability of workers and materials to supply the demand.

We need a new economic model one designed to elicit the abundance of which the economy is capable of implementing that sort of systematic change is not as radical as it sounds. Money is just a contractual agreement among participating community members and in the United States. That contract has been changed every 20 or 30 years going back to colonial times.

The Intermediary Theory of Banking

The conventional economic model overlooks not only the shadow banks but the banking alchemy that makes them necessary. It assumes that banks are merely intermediaries, taking in the money of depositors and lending it out again. But banks create deposits when they make loans. Through the accepted practice of double-entry bookkeeping, banks turn our promises to pay into new money in the form of deposits that did not exist before; and the biggest banks create most of this debt-turned-money. The shadow banks then provide the liquidity needed to balance the banks’ books. Money created as credit by banks is not actually a bad system. What the banks are really doing is guaranteeing the borrowers’ own credit, turning it into a form of “money” acceptable in the marketplace. But the banks are privately owned and controlled, mandated to serve shareholder profits rather than the broader economy. They are not transparent or accountable to the public. They can speculate and take disruptive risks that can threaten economic stability, while bypassing local businesses and socially beneficial investments.The bankers’ private privilege of creating the national money supply is also a major factor in the widening gap between rich and poor. According to a January 2017 report by the New Economics Foundation titled “Making Money from Money,” 73 percent of the burgeoning profits of banks arise from the unique right to create money on their books. The result is a government-supported monopoly that drains resources from the productive economy and gives a megalithic international banking empire enormous power over people and governments.

How the Fed Become More and More Independent from the US Government

According to Timothy Canova, Professor of Law and Public Finance at Nova Southeastern University, during the Great Depression and coming out of it the Fed as a practical matter was not independent but took its marching orders from the White House and the Treasury; and that decade, he says, was the most successful in American economic history. Today, however, Wall Street largely calls the shots. Commercial banks actually own the stock of the twelve Federal Reserve Banks, which are organized as private corporations. This stock does not carry the control given to holders of common stock in for-profit organizations and may not be sold or pledged as collateral, but it does pay a yearly dividend and carries voting rights. Member banks appoint six of the nine members of each Bank’s board of directors and have a vote in the election of the Reserve Bank presidents. These privately elected presidents, in turn, serve on the Federal Open Market Committee (FOMC), which sets national monetary policy. The FOMC includes the seven-member Federal Reserve Board of Governors, the president of the New York Fed, and four other Reserve Bank presidents on a rotating basis. As of October 2018, three positions on the Federal Reserve Board were vacant, leaving the Reserve Bank presidents in majority control of the FOMC’s policy decisions. (One position was filled on a temporary basis in late November.) The FOMC’s decisions have major implications for the public, yet the public is completely shut out of the process of choosing the decision-makers.10The Federal Reserve Board in Washington, D.C. is appointed by the president and is considered “federal,” including being subject to Freedom of Information Act requests as are other federal agencies. But the regional Federal Reserve Banks claim exemption from the Act as private institutions. Their daily operations and transactions are thus largely shielded from good faith disclosure and public oversight. Unlike for other agencies, the Fed’s Inspector General is not independent but is an appointee of the Federal Reserve Chair, and the Government Accountability Office is prohibited from reviewing many important aspects of the Fed’s work. In 2008, under the leadership of the New York Federal Reserve Bank, the central bank pursued interventions that blatantly benefited the very institutions it was charged with regulating, at the expense of the public it should have been serving. The financial crisis highlighted the failure of US regulatory bodies, and in particular of the regional New York Federal Reserve Bank, to identify systemic risk and to properly supervise the banks; and the unprecedented use of emergency lending to bail out failing Wall Street banks raised serious concerns about transparency and pervasive conflicts of interest. Many regional Fed board members were affiliated with banks and companies that received a combined $4 trillion in emergency low-interest loans from the Federal Reserve during the financial crisis. The banks recovered, but many Americans are still struggling 10 years later. Faith-based Monetary PolicyCorruption shielded from public oversight is one problem; faulty economic models are another. The FOMC sets monetary policy based on the controversial “Phillips curve,” an obsolete economic model purporting to demonstrate that as the economy nears full employment, prices rise.

The Fed Continues to Use the Phillips Curve

The Phillips Curve has been shown to be virtually useless in predicting inflation, as Janet Yellen has admitted in the feds own data show shows. Minneapolis fed president Neil Khashayar key cash carry calls and continued reliance on the Phillips Curve, faith based monetary policy. But monetary policy is controlled by the secretive. Wall Street dominated FOMC which is Evidently ignored these concerns. The FOMC is the Federal Open Market Committee, which sets national monetary policy defaults of the lenders followed.

In September 2008, the Federal National Mortgage Association, Fannie Mae and the Federal Home Loan Mortgage Corporation or Freddie Mac, to private corporations that are part of the shadow banking system were put into conservatory ship effectively nationalizing them the surprise move was actually a bailout of the financial derivatives industry, avoiding a $1.4 trillion event of default that could have bankrupted Wall Street and much of the rest of the financial world.

The same month the government rescued the financial derivatives industry again, when it bailed out American International Group, AIG an insurance company (that created CDOs without reserves). When Lehman Brothers went bankrupt in September 2008, the government finally closed a bailout window and the collapse of the economy followed.

Derivatives or financial instruments that have no intrinsic value but derive their value from something else. They’re sold as insurance but they’re basically just bet you can hedge your bet that something you own will go up by placing a side bet it’ll go down. Hedge funds, hedge bets in the derivative market. Bets can be placed on anything from the price of tea in China to the movements of specific markets. Derivative instruments can be traded either on an exchange or over the counter OTC with a ladder accounting for around 90% of derivative trading.

The Bank of International Settlements reported the total derivative trades in 2008 exceeding one quadrillion dollars. That’s 1000 trillion dollars.

How is that figure even possible?

The answer is a gamblers can bet as much as they want, they can bet money they don’t have and that is where the huge increase in risk comes in. If losing counterparties can’t pay up pay players who have hedged their bets by betting both ways cannot collect on their winning beds. And that means they cannot afford to pay they’re losing beds causing other players to also default on their beds. The dominoes can go down in a cascade of cross defaults it infects the whole banking industry in jeopardizes the global pyramid scheme. Huge liabilities have been transferred from big banks to governments plunging them into a debt trap from which escape no longer appears possible. As a matter of simple math. This was recognized by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York in a 1945. presentation before the American Bar Association titled taxes for revenue or obsolete the necessity for government attacks in order to maintain both its independence and insolvency is true for state and local governments. He said, but it is not true for national governments.

“The government was now at liberty to spend as needed to meet its budget, drawing on credit issued by its own central bank, it could do this until price inflation indicated a weakening purchasing power of the currency. Then and only then would the government need to levy taxes not to fund the budget but to counteract inflation by contracting the money supply. The principal versus purpose of taxes said Romo was the maintenance of $1 which had has stable purchasing power over the years.”

Bond Traders Create a Monopoly For Themselves in Buying Government Treasury Bonds

According to Marriner Eccles as Chairman of the Federal Reserve from 1934 to 1948.

The prohibition against allowing the government to borrow from its own central bank was written into the Banking Act of 1935 at the behest of the Securities Dealers Historical Review on the website of the New York Federal Reserve quotes, Eccles is saying:

“I think the real reason for writing a prohibition into the Banking Act can be traced to certain government bond dealers, who quite naturally had their eyes on business that might be lost if direct purchasing were permitted.”

The government was required to sell bonds for Wall Street middlemen which the Fed could buy only through open market operations conducted by the Open Market Committee. Wight Patman, Chairman of the House Committee on Banking and currency from 1963 to 1975, called the official sanctioning of the Federal Open Market Committee in the banking laws of 1933 and 1935. The power revolution the transfer of the money power to the banks, the FOMC Federal Open Market Committee established a mechanism by which money was created to bond sales and what was essentially a rigged market. Patmen said.

“The open market is in reality a tightly closed market only a select few bond dealer are entitled to bid on the bonds or Treasury made available for auction each one weak.”

The practical effect he said was to make take money from the taxpayer and give it to these dealers. That massive Wall Street subsidy was subject of testimony by Eccles to the House Committee on Banking and currency in March three to five of 1947 Patman asked Eccles now since 1935, in order for the Federal Reserve banks to buy government bonds they had to go through a middleman. Is that correct? Eccles replied in the affirmative. Patman then launched into a prophetic warning, stating,

“I’m opposed to the United States government which possesses the sovereign and an exclusive privilege of creating money paying private bankers for the use of its own money. These private bankers do not hire their own money to the government. They hire only the government’s money to the government and collect an interest charge annually, I insisted is absolutely wrong for this committee to permit this condition to continue and saddled the taxpayers of this nation with a burden of debt they will not be able to liquidate in 100 years or 200 years. Do you know that we are still carrying a million dollars worth of bonds that were issued during the war between the states and that we’ve paid $4 and interest for every $1 that was borrowed. We are still paying on them and still owe them Do you know that on the Panama Canal is convertible three’s, we have already paid more than $50 million in interest and that we will soon have paid $75 million in first and still owe the $50 million principle those bonds if you judge the future by the past. The people will be compelled to pay $2 dollars and $5 interest for every $1 they borrow.”

In the writing section department attempted to have the Fed Analyze the efforts But it’s committed to enforcing the central banks to rebate its profit. To the Treasury after deducting its costs the prohibition against direct lending by the central banks to the government, however, remains in force. The money power is still with the FOMC and the banks today the debt growth model has reached its limits.

Milton Friedman Blames the US Government for What the Fed Did During the Great Depression When the Fed Took the Power to Create Money from the Government and Put it in the Hands of Private Bankers

In a Public Broadcasting Service interview in October 2000, economist Milton Friedman blamed the Fed for college in the Great Depression. He said,

“The Federal Reserve System has been established to prevent what actually happened. It was set up to avoid a situation in which you would have to close banks down, in which you would have a banking crisis. And yet under the Federal Reserve System, you had the worst banking crisis in the history of the United States. There’s no other example I can think of, of a government measure which produced so clearly the opposite of the result.”

Modern Banks Reject “Old Fashioned Banking”

They were intent that were intended results that were intended new round of reforms and bank workarounds follow creating a system on which old fashioned banking was increasingly unprofitable.

The result was a drive the biggest banks largely out of that business. They are no longer doing much of what most people think of is banking, taking deposits issuing cheques, and making consumers and small business loans, as observed in February 2014 article titled banks don’t do much banking anymore, and that’s a serious problem.

Quote, the Big Six Wall Street Mega banks Bank of America, JP Morgan Chase, Wells Fargo and Citi along with investment banks, Goldman Sachs and Morgan Stanley, take deposits these days almost as an afterthought it gets into communities. And more important it unlocks federal safety net programs like Federal Depository Insurance Corporation insurance and the discount window the Federal Reserve’s program of low interest loans, mega banks assert that they actually lose money on small deposits. And while we shouldn’t take this claim too seriously, it’s clear that deposits are not their primary concern. One large bank estimated that the proposed change would cost at an additional $9.6 million every year. Banks have also been hit with increased capital requirements under Basel III, a regulatory framework imposed by the financial stability house board. In the Bank of International Settlements in Switzerland. The result has been to largely eliminate the small banks profit margins. The upshot of all these regulations is that small banks have little recourse but to sell out to the larger banks, which have large compliance departments and can skirt the capital requirements by parking assets and off balance sheet vehicles.

Megabanks Introduce Consolidation Regulation

Critics have suggested that this bank consolidation was actually the intent of the new rules. In September 2014 article titled, The FDIC’s New Capital Rules and their Expected Impact on Community Banks, Richard Morris at all noted that a full discussion of the bank rules would resemble an advanced course in calculus and that the regulators had ignored protests that the rules would have a devastating impact on community banks. The author suggested the rules reflect a new vision of bank regulation, that there should be bigger and fewer banks in the industry. The congressional bill passed in May of 2018 rollback parts of the Dodd Frank easing reporting requirements on all but the largest banks but the damage had already been done.

Bank consolidation was created has created banking monopolies with massive political power and the ability to suppress competition. In fact, the May 2018 rollback is expected to increase that trend since it raised the threshold for a systematically systemically important banks with stringent reporting requirements from $50 billion to $250 billion in assets. This means medium sized banks can now absorb smaller banks and grow without worrying about hitting the threshold.

By 2017, the sixth largest us banks should increase their assets by around 40%. Since the crisis and controlled almost 70% of the assets in the US financial system, JP Morgan Chase, the largest US bank had more than $2.4 billion in assets larger than most countries between 2007 and 2017, the three largest banks JP Morgan, Bank of America, Wells Fargo added more than 2.4 trillion in domestic deposits 180% increase by the end of 2007 those three banks held 20% of the world of the country’s deposits. sucking up local deposits has given them a cheap source of liquidity but they are not returning that liquidity to local communities.

They are required by their business model to maximize profits for their shareholders which means they will always go for the big hedge fund loan over the small, local business loan. If the local loan is not inherently risky or unprofitable, but is just last month profitable than other options.

Issuing credit cards has become a highly concentrated business with the top four card issuers, Citigroup, Bank of America, JP Morgan Chase and Capital One, accounting for more than 70% of all cards in circulation. Note that this merchant fee is not just 2.7% annually, it’s 2.7% on every transaction on a loan that is for only around 30 days. loans to credit card borrowers who pay on time range from one to 60 days depending upon when in the billing cycle, the bill is issued and paid. But assuming 30 days on average, that is a 33% annual rate of return just for merchant fees. In addition to interest and other fees. Little wonder banks are favoring credit card loans over the riskier and less lucrative commercial and business loans that were once their bread and butter business. A merchants fees equivalent to a private sales tax and the merchants must pay it whether or not their customers pay the bill to recoup the cost they wind up raising them.

Prices go up for all customers whether or not they use credit cards. The effect on trade is actually worse than from a public sales tax, which would be spent by the local government on services and structure, returning the money to the people in the local economy. A private tax imposed by banks. typically winds up in the financialized economy of money making money removing purchasing power from the local economy. The whole business is so lucrative that not just banks but companies like General Electric, which was put their resources into product innovation and development or not are becoming credit card companies because that is where the money is.

By 2016, US credit card debt had reached $1 trillion and add an average annual rate of 18.76%.

Consumers have carried a balance on their credit cards we’re paying around $1292 annually in interest on it. Worse yet are these payday loans resorted to by the unbanked and underbanked, which average 400% interest annually or more.

The Shadow Banking Sector

Today, the commercial lending business has largely migrated to unregulated intermediaries belonging to the shadow banking system, a sector that includes mutual funds, private equity funds, hedge funds and the Asset Management Division of insurance companies and banks. By 2013 in the shadow banking sector controlled about $53 trillion in assets, up 60% since 2008, and nine financial crisis, time firms each individually control over 1 trillion, with BlackRock the largest managing $4.1 trillion in assets. By 2018, BlackRock was up to $6 trillion under management making it larger than the world’s largest conventional bank, which is in China. Yet BlackRock escaped the regulations imposed on traditional banks under the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010.

Dodd Frank

Not just the shadow banks, but the conventional banking giants remain quite risky. Despite the attempts of the Dodd Frank act to harness them. Their act requires that these systematic systemic systemically important financial institutions come up with living well showing they can fail without having to be bailed out by the government.  In a 19 page letter that month to the CEO of JPMorgan Chase. The Federal Reserve said that a deficiency had been identified and chases wind down plans that was so grave, it could pose serious adverse effects to the financial stability of the United States. In June 2017, for the first time in seven years, the Federal Reserve passed all 34 of the country’s biggest banks on their stress tests, paving the way for the largest dividend payments in almost a decade. But the New York Times editorial board was skeptical, saying it’s entirely possible that the system is more fragile than the Fed stress tests indicate.

Today, the fragility of the system is still there, but it is hidden behind so many layers of financial complexity that the planet themselves cannot determine the degree of risk to which they are exposed. multiple parties think they own the same collateral. Until then music stops and they find themselves without chairs.

Why Credit Bubbles Must Burst: The Debt Virus Theory

Credit bubbles must eventually burst because the circulating money supply is never sufficient to repay the collective debt. One obvious problem is that banks create the principal but not the interest necessary to pay off their loans. As Bernard, a former Belgian central banker explained it in 1997.

“Money is created when banks lend it into existence. When a bank provides you with $100,000 mortgage, it creates only the principal which you spend, and which then circulates in the economy. The bank expects you to pay back $200,000 but over the next 20 years, but it doesn’t create the second $100,000 interest. Instead, the bank sends you out into the tough world to battle against everyone else. To bring back the second $100,000. I have come to the conclusion that greed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using. We can produce more than enough food to feed everyone and there was definitely enough work for everybody in the world. But there was clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity, the direct consequences that we have to fight each other in order to survive.”

Debunkers of the debt virus theory argue that the interest paid to banks goes into their profits which do circulate back into the economy via bank salaries and expenditures, increasing economic activity and helping to pay off the interest. That is the argument but most bank profits do not end up in the productive economy as wages or commercial purchases. They go into the financialization of the economy. money making more money in the form of speculative assets, additional loans at interest or interest, investments reaping dividends, the productive economy ends up supporting two economies one where goods and services are produced in return for the wages that buy them, and the other a speculative parasite that feeds off of the productive economy, forcing it further and further into debt.

The unsustainable result is that incomes collectively are insufficient to buy all the gross domestic product that the nation produces. Even without the interest factor, there would be insufficient money in the economy to repay the collective debt. This is because not just banks but savers in general, withhold money from the circulating money supply. They hold it in cash or in savings accounts. Or brokerage accounts or the bond market or abroad. All this money was created as debt to a bank which must be repaid to the bank. In the 2018 book called The Road to Debt Bondage: How Banks Create Unpayable Debt, political economists Darrell Delamaide estimates at only 20% of the money supply is actually available for loan payment. This is the money held and deposit accounts the money we expect to spend on our everyday purchases and expenses, including paying down loans, the money that we don’t need for expenditures, we save or invest in some way.

How to Close the Credit Gap

For the system to be maintainable, the gap between the debt and money available to repay needs to be closed in some way. Ancient rulers did it with periodic debt jubilees debt forgiveness. Some other possibilities for closing the gap are explored in part two of this book. The two-tiered banking system reserves versus money supply, there was a little known feature to today’s monetary system that needs to be understood in order to follow the proposals and part to this is that banks and public trade and the public trade in different forms of money, individuals and other non bank.

Wildcat and Shadow Banks

In the 19th century, unregulated banks were called Wildcat banks in the 21st century they are called shadow banks, Shadow banks or financial companies are borrow short term and lend long term outside the safety nets of the FDIC insurance and the Federal Reserve discount window. They include money market funds, securities broker deals, investment, and commercial banks, and their holding companies, finance companies, and mortgage brokers issue wares of asset-backed securities and asset-backed commercial paper derivative product companies. Hedge Funds are off the books business is variously known as trusts, special purpose entities, variable interest entities, conduits, and structured investment vehicles. Commercial Banks also conduct much of their business in the shadow banking system, although most are not classed as shadow banks themselves.

Rehypothecation or Repo

The shadow banking system is a black hole of invisible landmines largely due to a practice called rehypothecation. The real lending of collateral for multiple loans. The problem is that the shadow banking system actually needs to counterfeit collateral, just as the conventional banking system needs to counterfeit banknotes in the fractional reserve system collateral is the gold of the shadow banks and there was not enough of it to go around. When the rehypothecation of collateral is curtailed by regulation market liquidity dries up. Shadow banking comes in many forms where repos and derivatives are where the big money is today. Although the repo market is little known to most people, that is considered the main financing tool of the shadow banking system and a key player in the modern financial scheme. repo in this case is short for repurchase in repo borrowing the bar or sells collateral to the lenders and promises to repurchase it the next day. repo operates on the pawnshop model, the borrower will get some money and the investor gets the collateral.

How is the Repo Market Secured?

The repo market is secured so the overnight purchase rate is often lower than the federal funds rate charged by other banks.

A repo loan is typically rolled over when it comes due so a one day loan can last for months, and the lender can reuse securities as collateral for its own repo loan, getting its cash back in the meantime, through this lending of rehypothecation allocation of collateral for multiple loans, the shadow banking system can manufacture credit out of thin air, just as the traditional banking system does.

How Protecting Against Derivative Losses is Controlling Central Bank Policies

Governments cannot be allowed to default for the same reason AIG could not be allowed to default. The financial institutions ostensibly insuring their bonds with derivatives do not have the funds to cover the bets. This was dramatically illustrated in the case of Greece in 2010, when the hedge funds colluded to short foreign Greek debt at its height, the interest rate on the debt reached 30%.

Coerced by the European Central Bank the Greek government wound up forcing brutal austerity measures on the Greek people to try to pay the bill despite a decisive vote in a national referendum against repayment. Yet Greece represents less than 2% of EU GDP. Why was it not allowed to default or renegotiate its debt? According to Graham Summers, chief marketing strategist for Phoenix Capital Research, every move the central bank, has made post-2009 has been aimed at avoiding debt structures or defaults on the bond markets. This is what the ECB and other central banks fear. The threat posed By $500 trillion in derivative bets on $100 trillion in government bonds. If the banks are allowed to collapse the entire intermesh financial system could go down with them. The giant derivative banks thus have a gun to the heads of the government and the taxpayers. Public assets must be privatized public services cut workers laid off and taxes raised all to prevent the collapse of a derivative House of Cards, ostensibly created to protect investors against risk, the risk is obviously still there It has just been offloaded by wealthy private players on the go.

The Effect of QE

Governments and their citizens The Fed’s first round of QE began in late 2008 when it bought 600 million in mortgage-backed securities off the books of Wall Street banks. QE one mirror tarp the government’s Troubled Asset Relief Program, which removed toxic or troubled assets from the bank’s books. TARP is funded by the Treasury was $700 billion in taxpayer money. But that was as far as Congress was prepared to go. The Fed’s QE 1 carried on with these purchases simply by creating crediting the bank’s reserve accounts the Fed, the central bank could do this indefinitely since the money was just being entered with computer keystrokes on its books. Bernanke said the Fed was not printing money. QE was just an asset swap. The Fed took away something On the asset side of the bank’s balance sheet, the government security mortgage backed security replaced it. with electronic printing Ready to dollars.

Hiding Bank Fraud

The challenge for Ben Bernanke and the Fed governors since the 2008 bailout has been how to deal with the backlog of fraud, not just fraudulent mortgages and fraudulent mortgage securities, but the derivatives piled on top and the politics of who owns them, such as sovereign nations with nuclear arsenals and how they feel about taking massive losses on triple-A paper purchased in good faith. On one hand, they could let them all default. The problem is that the criminal liabilities would drive the global and national leadership into factionalism and controlled violence, not to mention that such defaults would due to liquidity in the financial system, then there is the fact that a great deal of the fraudulent paper has been purchased by pension funds. So the markdown would hit the retirement savings of people who have now also lost their homes or equity in their homes. QE was politically expedient and it prevented the sort of Great Depression seen in the 1930s when the banks completely collapsed.

The Impact of QE

But rather than getting money where it was needed in the real productive economy QE just flooded the banks with excess reserves that created other problems and one was that the Fed could no longer manipulate his target federal funds. Fed funds rate by market reserves, more scarce pushing up making market reserves more scarce pushing up their price. To set a floor on the rate at which banks borrow the Fed has, therefore had to resort to another controversial maneuver it began selling a portion of the massive purchases acquired through QE in the reverse repo market, where repos are lent rather than borrowed. The central bank establishes a floor by making its securities available at an overnight rate, that is point two 5% below interest on excess reserves or IOER.

The Zero Interest Rate Policy

But the policy has been criticized as destabilizing the repo market and the result of paying IOER another massive windfall for the banks. In December 2000 As an eighth, the Fed file QE with IOER was zero.

It’s a zero interest rate policy.

The nominal interest rate was set. For the Fed funds rate at zero lowered the cost of borrowing helped to recapitalize the insolvent banking system and allowed the government to refinance his burgeoning debt at very low interest. But the policy also had unwanted side effects. One was people of retirement age normally would have kept their retirement savings in fixed income high grade bonds protect your savings move their money into higher risk high return stocks are kept in cash. Lacking bond income, they spent more of their capital to live, leaving a smaller amount available in credit markets for productive investment. Seeing no increase in demand, companies use their earnings to pay down debt rather than reinvesting in their business and they use a low interest rates to buy back their stock. The result was to inflate a stock market bubble while productivity employment and wages stagnated. Stagnant wages meant less spending further reducing demand and economic activity while low-interest rates encourage borrowing to buy real estate reinflating, a real estate bubble.

Hiding Bank Fraud

Federal bailouts and QE save the banks from criminal liability for misdeeds that cost over 22 trillion to the United States alone. Some call it the greatest bank heist in history, and the perpetrators had gotten away with it Scott free Citigroup is playing a dangerous game and needs the FDIC to back its bets because if that means triggering, even if that means triggering another bank bailout, its success and watering down. The push out roll was one of the many examples of the ability of high powered bank lobbyists to harness the regulator’s charged with harnessing the banks. Andreas Theophanous, Professor of Political Economy said in the January 2018 interview, the EU use Cyprus as an experiment as a guinea pig. They wanted to see how to do the bail and in a small country like Cyprus and whether they could repeat it in bigger countries. The end result is that the bail in scheme has turned bankruptcy on its head, rather than protecting the creditors or protects the banks, as explained by economist Nathan Lewis in the 2013 article.

How the Creditor’s Seniority Has Been Changed

At first glance, bail in resembles a normal capitalist process of liabilities restructuring, they should occur when a bank becomes insolvent. The difference with the bail in is that the order of the creditor’s seniority is changed. In the end, it amounts to the cronies, other banks and governments and non cronies. The cronies get 100% or more and the non cronies including non interest bearing depositors who should be super senior get a kick in the guts instead. In principle, depositors are the most senior creditors in a bank. However, that was changed in 2005 with the 2005 bankruptcy law, which made derivative liabilities more senior considering the extreme levels of derivative liabilities that many large banks have and the opportunity to stuff any bank with derivative liabilities of the last moment, other creditors could easily find there was nothing left for them at all.

How Many Resources Does the FDIC Have to Stop Large Bank Failures?

In theory, deposits up to $250,000 are protected by FDIC insurance, but the FDIC fund had only 93 billion in it at the end of 2017. total US bank deposits are close to 17 trillion, of which about half are covered by the FDIC insurance in the 2013 article in USA Today titled can FDIC handle the failure of a mega bank? Financial Analyst Darrell Delamaide warned the biggest failure the FDIC has handled was Washington Mutual in 2008. And while that was plenty big with 307 billion in assets, it was a small fraction Heard with the 2.5 trillion trillion in assets today at JP Morgan Chase and 2.2 trillion at Bank of America or 1.9 trillion at Citicorp.

There is there was no possibility that the FDIC could take on the rescue of a city group. Or Bank of America when the full fledged financial crisis broke in the fall that year, and threatened the solvency of even the biggest spikes. The FDIC has a credit line with the Treasury up to 500 billion but who would pay that massive loan back in theory it would be the member banks. But a major crisis could render the whole banking industry insolvent as effectively happened in 2008.

To Be Added

Privatizing the Post Office

The push for privatization of the US Postal Service has continued to the present. The nation’s second largest civilian employer after Walmart, the USPS has been successfully self-funded without taxpayer support throughout its long history; but it is currently struggling to stay afloat. What has driven it toward insolvency is an oppressive congressional mandate—included almost as a footnote in the Postal Accountability and Enhancement Act of 2006 (PAEA)— that requires the USPS to prefund healthcare and pensions for its workers 75 years into the future. No other entity, public or private, has the burden of funding multiple generations of employees yet unborn. The pre-funding mandate is so blatantly unreasonable as to raise suspicions that the nation’s largest publicly owned industry has been intentionally targeted for takedown.

Central Bank Control Over The Money Tap

Contrary to popular belief, the central bank thus has very little control over the money tap. It plays a reactive rather than a proactive role. Huber explains: Within the present frame of split-circuit reserve banking, credit extension and money creation is bank-led. The initiative of money creation is with the banks, not with the central banks, as is most often assumed. … Central banks do not pre-finance the system by setting reserve positions first. The causation runs in the opposite direction. Central banks accommodate the banks’ defining demand for central bank money (reserves and cash). …Through their pro-active lead in primary credit creation (bankmoney creation), banks determine the entire money supply, including the accommodating creation of reserves and cash by the central banks. Bankmoney is not the result of some sort of multiplication of central bank money. Quite to the contrary, the stock of central bank money is a follow-up quantity, a kind of sub-set of the stock of bankmoney. [Emphasis added.]The model of the “money multiplier,” in which central banks control the money supply by controlling bank reserves, is another central bank tool that is now obsolete. Central banks focus instead on manipulating interest rates; but in today’s highly indebted economy, raising interest rates will wreak other havoc, as detailed in Chapter 1, and it is a weak tool for controlling the money supply at best. When Fed Chairman Paul Volcker raised the fed funds rate to 20 percent in 1980, the effects were dramatic, since the fed funds market was where banks then turned for liquidity. But today banks have cheaper, unregulated sources of liquidity in the shadow banking system, a system they largely devised themselves to get around the rules.

Dodd Frank

Dodd-Frank Federal bailouts and QE saved the banks from criminal liability for misdeeds that cost over $22 trillion to the United States alone. Some called it the greatest bank heist in history, and the perpetrators had gotten away with it scot-free. Wall Street clearly needed to be reined in, but how? The response of Congress was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which was promoted as eliminating “too big to fail.” Like the Fed’s quantitative easing programs, however, what it ensured was that the biggest banks could not fail, while leaving the repo market largely untouched. Rules focused on mortgages and capital adequacy will not stop the next run on repo. Title VII of the Dodd-Frank Act did regulate derivatives, but the results were controversial. Uncleared over-the-counter derivatives (also called “swaps”) were required to substitute a central clearinghouse for the former bilateral relationship between the parties, and trading and reporting requirements were imposed. But critics complained that the new rules were destabilizing the markets.164It was the conundrum highlighted by Steve Randy Waldman: derivatives encourage investors to invest by passing risk on to someone else; and without them, the investors won’t play. But someone else is left holding the bag, and in the end it is likely to be the taxpayers and the global financial system as a whole. The Volcker Rule, proposed by former Fed Chair Paul Volcker, was added to the congressional proposal for financial overhaul in January 2010 and approved in December 2013. Volcker hoped to reestablish the divide between commercial and investment banking that had been dissolved by a partial repeal of the Glass-Steagall Act in 1999. Rather than shrinking the too-big-to-fail banks, the increased capital requirements imposed by Dodd-Frank and Basel III have served to make them bigger by forcing the smaller banks that could not handle the higher capital requirements to sell out to the giant banks that could handle them. And if the proposed regulations did succeed in breaking up the big banks, a collection of smaller commercial banks would no doubt act much like the big banks of which they were offshoots, while lacking the big banks’ ability to deal with massive international capital flows.

Too Big to Regulate

In a July 2012 article in The New York Times titled “Wall Street Is Too Big to Regulate,” Gar Alperovitz, professor emeritus of political economy at the University of Maryland, concurred. He noted that the five biggest banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs—had amassed assets amounting to more than half the nation’s GDP. He wrote:With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses. If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions. …Nationalization isn’t as difficult as it sounds. We tend to forget that we did, in fact, nationalize General Motors in 2009; the government still owns a controlling share of its stock. We also essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock.217Thomas Hanna adds Fannie Mae, Freddie Mac, and Citigroup to the list. The government took a 78 percent share of AIG, 74 percent ownership interest in GMAC (the former financing affiliate of General Motors), a 36 percent stake in Citigroup, and a warrant to purchase 80 percent of the common stock of Fannie and Freddie. But it did not exercise the warrant or put the companies in receivership. In each of these cases, the government effectively bought a controlling interest without taking control, providing large amounts of capital without requiring much in return. They were “bailouts” rather than nationalizations. Why? Hanna quotes Berkeley law professor Steven Davidoff Solomon, who explains that the reasons were political. The government did not want to look as if it owned these entities, and nationalizing them would have added trillions of dollars in debt to the government’s balance sheet. Hanna comments: By going to such extreme lengths to avoid any straightforward nationalization, the U.S. government response to the Great Financial Crisis became unnecessarily complicated, totally devoid of transparency, and replete with backroom deals and perverse incentives. It is hard to believe that a pure capital for stock transaction with the government exercising full voting rights would not have been preferable to the messy, hybrid approach the government took.. . . [P]ublic ownership would convert rent-seeking concentrations of private financial power into public utilities that work for the common good. It holds out the prospect of a way to fundamentally restructure and reimagine the financial sector as something that no longer fuels financialization, speculation, and consolidation, but instead works to allocate funds to real productive investment and decentralizes financial power to support prosperous and healthy local economies everywhere.

Pennsylvania’s Colonial Script and the Bank of North Dakota

In 1776, Adam Smith wrote of this public banking and currency system in The Wealth of Nations:The government of Pennsylvania, without amassing any treasure [gold or silver], invented a method of lending, not money indeed, but what is equivalent to money to its subjects. By advancing to private people at interest, and upon land security [as collateral], paper bills of credit … made transferable from hand-to-hand like banknotes, and declared by active assembly to be legal tender in all payments from one inhabitant to another, it raised a moderate revenue which went a considerable way toward defraying … the whole ordinary expense of that frugal and orderly government. … [Pennsylvania’s] paper currency … is said never to have sunk below the value of gold and silver which was current in the colony before … the issue of paper money.The American colonies gave up their right to issue bills of credit (paper money) when they joined the Union, delegating that power to Congress. But Congress declined to take it, and private banks stepped in to fill the void. In the National Bank Act of the 1860s, Congress imposed a heavy tax to block private state-chartered banks from issuing their own banknotes. However, some banks bypassed the tax by advancing credit simply as “deposits” written into deposit accounts.States and cities today could do the same: they could bypass the prohibition on issuing paper money by advancing credit through their own state-chartered, publicly owned banks. They would not be issuing legal tender, but they would be issuing loans; and loans create deposits, which are counted in the money supply. (See Chapter 3.) This newly created bank-money would then circulate in the community, stimulating economic activity. A growing public banking movement is advocating that approach in the United States and elsewhere today. The Bank of North DakotaIn the 19th century, only a few states owned their own depository banks; and by the 20th century, there was only one—the Bank of North Dakota (BND). That bank, however, has survived for nearly a century and has done remarkably well. In November 2014, The Wall Street Journal reported that the Bank of North Dakota was more profitable than even the largest Wall Street banks, with a return on equity that was 70 percent greater than that of either JPMorgan Chase or Goldman Sachs.230This stellar performance was attributed by the author to the state’s oil boom; but in succeeding years the boom became an oil bust, yet the BND’s profits continued to soar. Oil plunged from over $100 a barrel in mid-2014 to $30 a barrel in January 2016. Yet in its annual report published in April 2016, the BND showed 2015 to be its most profitable year to date, with total assets of $7.4 billion and a return on equity of an impressive 18.1 percent. Its lending portfolio grew by 12.7 percent, with growth in all four of its areas of concentration: agriculture, business, residential, and student loans. In April 2018 the BND reported record profits for its 14th straight year. In 2016, North Dakota Governor Jack Dalrymple proposed returning $200 million from the BND’s profits to the state’s general fund, to help make up for a budget shortfall caused by collapsing oil and soybean proceeds. He commented, “Our economic advisers have told us there is no similar state in the nation that could have weathered such a collapse in commodity prices without serious impacts on their financial condition.” One of many advantages of having a cheap and ready credit line with its own bank has been to reduce the state’s need for wasteful rainy-day funds invested at minimal interest in out-of-state banks. When North Dakota went over-budget in 2001 and again in 2016, the BND acted as a rainy-day fund for the state. When a local city suffered a massive flood in 1997, the bank provided emergency credit lines. Ironically, the goal of the BND is not actually to make a profit. It was formed in 1919 to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. As noted in The Wall Street Journal article just cited: It traditionally extends credit, or invests directly, in areas other lenders shun, such as rural housing loans.. . . [R]etail banking accounts for just 2%-3% of its business. The bank’s focus is providing loans to students and extending credit to companies in North Dakota, often in partnership with smaller community banks. Bank of North Dakota also acts as a clearinghouse for interbank transactions in the state by settling checks and distributing coins and currency. …The bank’s mission is promoting economic development, not competing with private banks. “We’re a state agency and profit maximization isn’t what drives us,” President Eric Hardmeyer said.How then to account for the BND’s remarkable profitability? Its secret seems to be its very efficient business model. Its costs are very low: no exorbitantly paid executives; no bonuses, fees, or commissions; no private shareholders; very low borrowing costs; no need for multiple branch offices; and no FDIC insurance premiums (the state rather than the FDIC guarantees its deposits). BND profits are not siphoned off to Wall Street to be invested overseas or stored in offshore tax havens. They are recycled back into the bank, the state and the community.The BND has a massive, captive deposit base, since all of the state’s revenues are deposited in the bank by law. Most state agencies must also deposit with the BND. Although the bank takes some token individual deposits, the vast majority come from the state itself. The BND also has a massive capital base. Originally capitalized with a bond issue, it has built up a sizable capital fund through years of prudent and efficient banking practices, which it can leverage many times over into loans. The BND does not compete with local North Dakota banks for deposits. Rather, it helps local community banks by providing letters of credit guaranteeing the deposits of municipal governments, which are generally reserved for local banks. In other states, community banks must post collateral equal to or greater than the deposits they take from municipal governments, tying up the deposits and limiting their use as liquidity for new loans. In North Dakota, community banks are able to avoid this requirement by substituting the BND’s letters of credit for collateral. The BND also partners rather than competes with local North Dakota banks for loans. The local bank acts as the front office dealing directly with customers. The BND acts more like a “bankers’ bank,” participating in the loans and helping with liquidity and capital requirements. Local banks are thus able to take on projects that would otherwise either go to Wall Street banks or go unfunded, including loans for local infrastructure.

Borrowing Cheaply From the State Bank

That is one of the major benefits to the state of having its own bank: it can borrow cheaply from other banks, the money market, the Federal Reserve or the Federal Home Loan Banks. In effect, the state can borrow at bankers’ rates rather than at state bond rates, getting the sort of Wall Street perks not otherwise available to governments, businesses, or individuals; and it can be backstopped by the Federal Reserve system if it runs short of funds. It can also avoid the fees related to bond issuance, maximizing the use of its resources. Rather than borrowing the whole principal of a 30-year bond and paying interest on it for 30 years before the money is actually paid out, the state or local government can stagger disbursement as the money is needed.

Converting California’s I-Bank into a State Bank

The bank could also use its efficiency savings to make loans at lower interest than otherwise, while making 10 times as many of them. Consider the possibilities for California. It already has a bank—the California Infrastructure and Development Bank (or “IBank”). But the IBank is a “bank” in name only. It cannot take deposits or leverage capital into loans. It makes infrastructure loans at 3 percent, a good below-market rate; but the bank has a limited pot of money to lend. If it used those funds to capitalize a depository bank, it could make 10 times as many loans at 3 percent, greatly expanding its usefulness. The easiest, most risk-free option would be for the state to refinance its own debt at below-market rates. As an example, consider California Proposition 68, a statewide ballot measure that voters approved in the June 2018 primary election authorizing $4.1 billion in bonds for parks, environmental, and flood protection programs. That was the stated cost, but the measure included $200 million per year in interest over 40 years, bringing the total expenditure to $8 billion.246 (Financing typically accounts for half the cost of long-term projects funded through the municipal bond market.247) The IBank could finance the same bill at 3 percent over 30 years for $2.1 billion—a nearly 50 percent reduction in financing costs.

Germany’s Public Banks

Many states and municipalities are now exploring the public bank option, including Washington state, Michigan, Pennsylvania, New Mexico, New Jersey, California, Arizona, Alaska, New York and others.249 Feasibility studies done at both state and local levels show that affordable small business lending, increased employment, low-cost student loans, affordable housing and greater economic stability can all result from keeping local public dollars in the local community. The BND is an inspiring model, but it is only one bank. For others we will have to look abroad, but there they are plentiful, composing a fifth of the banking sector globally. Government-owned banks in some developing countries have had a reputation for being inefficient or corrupt, but that reputation is changing. In a 2014 research paper titled “Alternative Banking and Recovery from Crisis,” Professors Kurt Mettenheim and Olivier Butzbach concluded that “alternative banks [public savings banks, cooperative banks, and public development banks] have equaled or outperformed joint-stock banks in terms of efficiency, profitability and risk management. This counters core ideas in contemporary banking theory and bank regulation about the superiority of private, market based banking.” Public sector banks have been particularly successful in Germany, where they dominate the local banking scene. Like the BND, these local savings banks or Sparkassen actually outperform the private banking sector while serving the public interest. This was confirmed in a January 2015 report by the Savings Banks Foundation for International Cooperation (SBFIC, the Sparkassenstiftung für internationale Kooperation), drawing from Bundesbank data. The report showed that the Sparkassen have a return on capital that is several times greater than for the German private banking sector and that they pay substantially more to local and federal governments in taxes.The Sparkassen were instituted in the late 18th century as nonprofit organizations to aid the poor. The intent was to help people with low incomes save small sums of money and to support business start-ups. Today these savings banks operate a network of over 15,600 branches and offices, employ over 250,000 people, and have a strong record of investing wisely in local businesses. Resting on top of this pyramid of thousands of municipal savings banks are the publicly owned Landesbanken, which function as “universal” banks operating in all sectors of the financial services market. The Sparkassen network capitalizes on economies of scale to provide services to its members, including a compliance department that deals with the onerous regulations imposed on banks by the EU.Thanks in large part to its vast network of public banks, Germany is now the largest and most robust economy in the Eurozone, an impressive feat considering that it emerged from World War II with a collapsed economy that had degenerated into barter. Manufacturing composes 25 percent of Germany’s GDP, more than twice that in the UK. Underlying the economy’s strength is its Mittelstand—small-to-medium-sized enterprises—which are supported by a strong regional banking system that is willing to lend to fund research and development. According to Peter Dorman, Professor of Economics at Evergreen State College, writing in 2011: If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy…. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive.

The Advantage of Pubic Banking Demonstrated Through Postal Banking

A Discussion Paper of the United Nations Department of Economic and Social Affairs states: The essential characteristic distinguishing postal financial services from the private banking sector is the obligation and capacity of the postal system to serve the entire spectrum of the national population, unlike conventional private banks which allocate their institutional resources to service the sectors of the population they deem most profitable. Maintaining post offices in some rural or low-income areas can be a losing proposition, and expanding their postal business to include financial services has been crucial in many countries to maintaining the profitability of their postal networks. Public postal banks are profitable because their market is large and their costs are low. The infrastructure is already built and available, advertising costs are minimal, and government-owned banks do not reward their management with extravagant bonuses or commissions that drain profits away. Profits return to the government and the public. Postal banking systems are ubiquitous in other countries, where their long record of safe and profitable banking has proved the viability of the model. A century ago, postal banking was also popular in the United States.

But postal banking was under continual assault from the private banking establishment. Soon after the Postal Savings Bank Act was passed, the American Bankers Association formed a Special Committee on Postal Savings Legislation to block any extension of the new service.

The US Postal Savings System came into its own during the banking crisis of the early 1930s, when it became the national alternative to a private banking system that people clearly could not trust. When demands increased to expand its services to include affordable loans, alarmed bankers called it the “postal savings menace” and warned that it could result in the destruction of the entire private banking system.The response of President Franklin Roosevelt to the crisis, however, was not to expand the Postal Savings System but to buttress the private banking system with public guarantees, including FDIC deposit insurance. That put private banks in the enviable position of being able to keep their profits while their losses were covered by the government.

What has driven it toward insolvency is an oppressive congressional mandate—included almost as a footnote in the Postal Accountability and Enhancement Act of 2006 (PAEA)—that requires the USPS to prefund healthcare and pensions for its workers 75 years into the future. No other entity, public or private, has the burden of funding multiple generations of employees yet unborn. The pre-funding mandate is so blatantly unreasonable as to raise suspicions that the nation’s largest publicly owned industry has been intentionally targeted for takedown.

Today, bank deposits not only earn virtually no interest but may not be safe from theft—in this case by the Wall Street megabanks that are authorized by statute to confiscate the money of their creditors in the event of insolvency. Postal banking could provide a safe, casino-free public banking alternative, as it did from 1911 until 1967. It could also provide a way to vote with our feet, moving our money out of a risky and rapacious Wall Street banking system into a network of publicly owned banks with a mandate to serve the people and the economy.

How the Fed is Rigged

As a result, most central banks globally are now owned by their governments.264 But that is not true of the US central banking system. Although the Fed’s Board of Governors, Chair and Vice Chair are appointed by the president with the approval of the Senate, the twelve Federal Reserve Banks are owned by and accountable to the same commercial banks they are supposed to regulate. Instead of a national public banking system run through local post offices, as the early populists sought, what the American people got was a mostly private banking scheme backstopped by a central bank effectively controlled by the banks themselves.265To gain the trust of the citizenry, the Federal Reserve needs to become a truly democratic, public institution, operated by and for the people; and discussions along those lines are happening, not just among activist groups but among economists and central bank staffers themselves.

Bitcoin

Bitcoin was a lofty idea aimed at freeing the people from the corruptions and manipulations of centralized gatekeepers. But a decade after it came online, it still has failed to achieve that democratic result. Critics contend, in fact, that bitcoin is inherently undemocratic. Ownership and control are concentrated in the hands of a few very wealthy “whales” who can collude to manipulate the price, since there is no regulatory body prohibiting it. Bitcoin is not a currency generated by the people who use it but is created by an elite class of miners with very expensive hardware and technical expertise beyond the reach of most people. Critics say it is a Ponzi scheme, in which cash paid to earlier investors by new investors maintains the illusion that the scheme is earning real profits; and that like all Ponzi schemes, it will collapse when sufficient sums can no longer be raised from new investors to pay off earlier ones.

The currency needed to exist on a peer-to-peer network using an open source protocol, with no central controlling authority and no single physical location. The virtual currency also needed to be hyperinflation-proof, originating in a way that avoided devaluation from the too-easy creation of monetary digits on a computer; and the currency units needed to be nonduplicable, preventing the fraud of double-spending. This feature would also prevent fractional reserve lending and the rehypothecation of collateral. The solution Nakamoto came up with was a type of distributed ledger or decentralized database that keeps continuously updated digital records of who owns what, without relying on a central administrator in the form of a bank, government or accountant. To prevent over-issuance of the currency, Nakamoto capped the number of bitcoins that could be produced at 21 million. How bitcoin’s distributed ledger works was explained by tech blogger Collin Thompson like this:When a digital transaction is carried out, it is grouped together in a cryptographically protected block with other transactions … . Miners (members in the network with high levels of computing power) then compete to validate the transactions by solving complex coded problems. The first miner to solve the problems and validate the block receives a reward [in the form of bitcoins] … .The validated block of transactions is then time-stamped and added to a chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks, making a chain of blocks that show every transaction made in the history of that blockchain. The entire chain is continually updated so that every ledger in the network is the same, giving each member the ability to prove who owns what at any given time.

The networks that Visa and Mastercard use process more than 5,000 transactions per second, with the capacity to process many times more. Facebook can process half a million “likes” per second. Bitcoin takes 10 minutes to clear and settle a single transaction, and it can handle only 7 transactions per second, a limitation inherent in the way the system was set up. Contrary to earlier claims, blockchain transactions are not free, and the price has been going up.

You cannot directly transfer a bitcoin token to someone else without first having the miners validate the transactions, so there is still the need for a middleman. At best it is a hybrid between a bearer instrument and a ledger money system. For most purposes, physical cash—the legal tender issued by governments—is still the best way to conduct business independently of middlemen.

The downside of acting like cash is that bitcoin is also subject to its risks. The digital coins can be lost or stolen. The coded keys are generally too long to commit to memory, and there are numerous reports of computers on which the keys were stored disappearing along with the keys. Unlike with a lost checkbook or credit card, there is no bank to phone up for replacement digits. No one is keeping a central record of who owns what, and there is no FDIC insurance protecting consumers against theft or fraud.The blockchain is said to be almost impossible to hack into, since millions of computers would need to be hacked simultaneously. But while the blockchain itself cannot be hacked, the exchanges on which it operates can be and have been. The computers of individuals who hold cryptocurrencies can also be hacked in order to steal their private keys.

Can Bitcoin Replace Money?

There is no recourse in the event of defective products or other failures to perform. There is no credit card company or Amazon that will return your money if you are not satisfied with what you got in the mail. A bitcoin deal is a deal without recourse either for the counterparties or for a government looking to unwind illegal transactions. Governments are talking about imposing reporting requirements on cryptocurrency transactions similar to those required of banks, so pseudonymity is a feature that may not be available for long. Can Bitcoin Replace the Dollar? Despite those concerns, bitcoin has so captured the popular imagination that many enthusiasts think it will one day replace the US dollar. They see the dollar as weak and vulnerable due to a $21 trillion national debt and the Fed’s $3.7 trillion in quantitative easing, which was expected to trigger hyperinflation (although that has not actually happened). Bitcoin, the runaway leader in the cryptocurrency craze, is seen as “digital gold” that will hold its value when national currencies fail. It is said to be particularly popular in foreign countries with unstable national currencies and capital controls that prevent taking the national currency out of the country. Critics say, however, that bitcoin could not actually replace the dollar. In a “withering” 24-page article released in June 2018 as part of its annual economic report, the Bank for International Settlements said that bitcoin and its offspring suffer from a range of shortcomings that would prevent them from fulfilling the lofty expectations prompting an explosion of interest and investment in them. “Cryptocurrencies are too unstable, consume too much energy, and are subject to too much manipulation and fraud to serve as bona fide mediums of exchange in the global economy,” the researchers wrote.

Bitcoin Environmental Issues

Environmental issues aside, bitcoin trades are too slow for ordinary store purchases. They are faster than clearing checks through a bank; but by April 2018 the average time to confirm a bitcoin transaction was 78 minutes, and sometimes it could take several days.292 The lag time gets progressively longer as more miners join the network. According to the Bank for International Settlements, the daily volume of transactions in US dollars globally is $4.5 trillion.293 Average bitcoin transactions, by contrast, were about $2 million in the first quarter of 2018.

Bitcoin Energy Consumption Levels

According to data from BitInfoCharts, in April 2018 the average fee to make a bitcoin transaction was $28. The total value of all transaction fees paid to miners hit a high that month of $11 million on a single day. For large transactions, a $28 fee is reasonable, but it won’t work for purchasing a cup of coffee or for the many other micropayments involved in everyday consumer purchases.There are now bitcoin debit cards that can be used anywhere Visa and MasterCard are accepted, making transactions fast and convenient. But you are not really paying in bitcoin. You are paying in US dollars, and you’re back in the conventional banking system. The Shift Visa debit card, for example, is an arrangement between Coinbase (a popular bitcoin exchange) and Visa. You buy bitcoin on the Coinbase exchange with dollars (4 percent fee), then Coinbase pays Visa, which pays the merchant in dollars. The merchant still pays the standard 2 or 3 percent Visa fee, a cost passed on to the customer in increased prices. You still pay $2.50 to withdraw cash at an ATM, and 3 percent for conversion to other currencies when using the card abroad. And when you apply for the card, you need to identify yourself to comply with Know Your Customer requirements, eliminating bitcoin’s much-prized privacy.297 You might as well just use your Visa card and save time, money and energy. A 2015 Motherboard article comparing bitcoin’s energy cost to Visa’s concluded that bitcoin was about 5,000 times more energy intensive per transaction than Visa’s at then-current usage levels.

Merchant Acceptance of Bitcoin

In a July 2017 report, Morgan Stanley analysts noted that the number of online merchants accepting bitcoin had dropped to just three, down from five a year earlier. This was after the currency had been available for nearly nine years and its value had soared to astronomical heights. But bitcoin owners evidently weren’t worried, since they were not spending their digital coins anyway. The rapid appreciation of the coins has led to hoarding rather than spending them. The analysts also cited high transaction costs, long transaction times, and the lack of government oversight as factors making bitcoin unserviceable as a trade currency. In The Guardian in January 2016, a disillusioned senior bitcoin developer pointed to another problem with the crypto leader. Although billed as a decentralized form of money, bitcoin is actually controlled by just a handful of people—the big developers and big miners—who are resistant to the adaptations needed to increase its capacity to deal with an increasingly congested network. Bitcoin replaces one currency controlled by a few rich people at the top with another currency controlled by a few rich people at the top. Conspiracy theories have also circulated around the origins of bitcoin, whose inventor remains stubbornly elusive. The blockchain program is considered too complex and sophisticated to be the brainchild of a university student or group, and no one has stepped forward to claim the one million bitcoins the inventor is thought to have generated for his own account. A case has been made that Satoshi Nakamoto is actually the National Security Agency, the largest US foreign intelligence service. The NSA has teams of cryptographers and the fastest supercomputers in the world. bitcoin’s encryption algorithm, SHA-256, was developed by the NSA; and it was one of the first organizations to describe a bitcoin-like system. A 1996 white paper authored by the NSA titled “How to Make a Mint: The Cryptography of Anonymous Electronic Cash” is said to outline a system very much like bitcoin, in which secure financial transactions are possible through the use of a decentralized network the researchers refer to informally as a Bank.

Blockchain as a Ruse

In a November 2017 article in The Financial Times titled “Taking the Block Out of Blockchain,” Izabella Kaminska noted wryly that the blockchain was supposed to change everything. But after two years of dabbling and experimentation, “it’s mostly just been changing itself (so as to become even barely usable in capital markets).” The technology has evolved into a chain without blocks, operating in a permissioned environment without “proof of work.” She quotes from a blockchain update acknowledging that “it has become apparent that in capital markets, the further away you are from the original Blockchain DNA, the more likely you are to succeed.”

Hijacking Blockchain

Bitcoin’s blockchain introduced a system that allows individuals to transfer funds around the world without a central, trusted authority. The established players are defusing that threat by adopting the new paradigm while taking out the parts that are disruptive for incumbents. To purists, Nakamoto’s original concept has been hijacked, appropriated by corporate interests. Rather than eliminating the middlemen, it is being used by them to streamline their own procedures. The term “blockchain” is often being used just because it increases sales, though no “chain of blocks” is involved.  Companies are also calling their securities “cryptocurrencies” to avoid securities regulation, with the term “ICO” (Initial Coin Offering) substituted for “IPO” (Initial Public Offering).A Gold Rush Without Gold?Everyone is cashing in on the crypto gold rush, but speculative bubbles aside, no one seems yet to have struck gold. As tech blogger Daniel Jeffries complained on Hacker Noon in October 2017: Eight years into the crypto experiment, everyone is working on the railroad tracks of the future but we don’t have much to show for it other than speculative trading and some smart contracts. The apps are hideous and practically unusable. It’s nerve-wracking when you push “send” and blast $5000 across the web to someone. Better hope you copied and pasted that address right so your money doesn’t disappear into the void! In another article on Hacker Noon titled “Ten Years in, Nobody Has Come Up with a Use for Blockchain”, tech blogger Kai Stinchcombe echoed that complaint, writing:Everyone says the blockchain, the technology underpinning cryptocurrencies such as bitcoin, is going to change EVERYTHING. And yet, after years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain—besides currency speculation and illegal transactions.Each purported use case — from payments to legal documents, from escrow to voting systems—amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isn’t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it? Bitcoin was an inspiring idea, and its developers pointed us to the goal; but for a democratic system in which money is actually created by users themselves, it seems we will need to look elsewhere.

Bitcoin as and Opposition to Public Credit Systems

Bitcoin and its blockchain software are solely payment systems, not credit systems; and businesses, households and governments run on credit.The need for an expandable credit system was highlighted by Barnard College professor Perry Mehrling in an October 2017 article called “Can Bitcoin Replace the Dollar?” Discussing his conversations with a group of digital technologists convinced that it could, he wrote:[T]he technologists see themselves as creating a form of money more trustworthy than that issued by sovereign states, more trustworthy because the rules of money creation (whether proof-of-work or proof-of-stake or whatever) limit issue to a fixed and finite quantity. Scarcity of the tokens today, and confidence that scarcity will be maintained in years to come, are supposed to support the value of the tokens today. Importantly, no such confidence can be attached to state-issued money; quite the contrary, states are seen as reliable abusers of money issue for their own purposes. Cryptocurrency is digital gold while fiat currency is just paper, subject to overissue and hence depreciation.From this point of view, current holders/users of cryptocurrency are just early adopters. Once everyone else realizes the superiority of cryptocurrency, they will all want to switch over, and the value of fiat currency will collapse.. . . One of the most fascinating things about the technologist view of the world is their deep suspicion (even fear) of credit of any kind. They appreciate all too well the extent to which modern society is constructed as a web of interconnected and overlapping promises to pay, and they don’t like it one bit.

In the real world, banking is fundamentally a swap of IOUs, and money is nothing more than the highest form of credit:In that world, the payment system is essentially a credit system, in which offsetting promises to pay clear with only very minimal use of money. … One can imagine automating a lot of that activity—and blockchain technology may well be useful for that task—but one cannot imagine eliminating the credit element. … [F]rom a money view standpoint, it is the institution of credit that is the real disruptor, which is fundamentally why it is feared ….What the concept of money-as-credit has disrupted is the prevailing monetarist dogma holding that money is a “thing” like gold that exists in perpetuity. In Mehrling’s real world, money is elastic, expanding and contracting in response to the demand for credit. As he wrote in an article quoted earlier, “each of us, in our interface with the essentially financial system that is modern capitalism, operates essentially as a bank, meaning a cash inflow, cash outflow entity. … [T]he elasticity of credit … allows us to spend today and put off payment to the future.” Money As a Commodity Versus Money As CreditBitcoin has been compared to the gold-based monetary system prized by the “Austrian” school of economics. The Austrian ideal is a system in which money is an existing token in fixed supply that has to be mined or acquired from somewhere else. The 21-million cap that Nakamoto put on the bitcoins that could be issued is thought to have been a direct analogy to the physical limit on the gold in the world, considered to be equivalent to a cube 21 meters on a side. But this hard limit also represents a limitation on bitcoin’s usefulness as a national currency, which must have some way to expand to meet the needs of trade. The reason the medieval system of gold-backed currency was able to work as long as it did was that the money supply could expand through various forms of paper money. So argued Antal Fekete, a professor of mathematics and statistics in Newfoundland, Canada, in a 2005 article called “Detractors of Adam Smith’s Real Bills Doctrine.” He showed mathematically that the attempt to finance all of the stages of production in an economy by borrowing the nation’s savings in gold would put a demand on gold supplies that simply could not be met. Manufacturers all along the chain of production need to pay for workers and materials before the customer pays for the finished product, which can be 30 or 60 or 90 days after being invoiced.

When Did Gold Work as Money?

Fekete used the example of a hypothetical drug that takes 91 days to produce and involves 90 firms, each one taking a day to do its work. Each adds $1 of value to the product, which ultimately sells for $100 a bottle. The first producer borrows $11 in gold for the raw materials. The second producer borrows $12 in gold to obtain the semi-finished product with the first producer’s work added. The third producer borrows $13 to get the product from the second producer, and so forth. The total comes to $4,995, almost 50 times the retail value of the product. That means almost $5,000 worth of gold would be tied up for 91 days just to move one $100 bottle of drug through the production process. Fekete argued that the gold system worked historically only because the various stages of production were financed with bills of credit—paper credits representing advances against future repayment. And even with that ability to expand the money supply, restrictive gold reserve requirements triggered repeated bank runs and crises when the banks ran out of gold. The inability of the money supply to expand led to recessions, depressions, unemployment, economic stagnation, and the ultimate abandonment of the gold standard.But gold did have the advantage that it could be traded without the validation of a middleman. It had value in itself. In order to turn our credit into a form of money that will be accepted in trade, we need the guarantee of a third party, which in the current commercial system takes the form of a bank.The blockchain system operates outside banks, and bitcoins are not precious metals that can be worn as jewelry or have industrial uses. They are actually fiat currencies, conjured out of thin air. Satoshi Nakamoto therefore had to find another way to validate them and to avoid the “double-spending” problem—users spending the same money twice. This was achieved by incentivizing “miners” to check the transactions and continually update the ledger in return for payment in bitcoin. The miners were thus substituted for bankers as middleman guarantors. Capping the number of coins and making the mining process slow and expensive prevented hyperinflation from the too-easy private creation of digital currency with computer keystrokes, a necessary feature of a private system; but it also made the system too slow and expensive for commercial use on a national or global scale. There is a third way the money supply can be kept in balance. It can be created at the local level through the demand for loans and extinguished when they are paid off, just as happens now. What needs to be fixed in the current banking system are not its elastic credit features but the corruptions, opacity and inefficiencies that have diverted and distorted its free flow, largely due to control by those same private middleman gatekeepers needed to validate its exchanges.

How Money Should be Designed

Community currencies operate on the same sort of credit clearing system that banks use to create the “bank money” composing the majority of our money supply today, but they do it without manipulation by profiteering middlemen. Money is created as a debit in an account and is extinguished when the debt is repaid. Like bitcoin, digital community currency systems create this money without banks or governments; but unlike bitcoin, community currencies are user-generated and cannot be “scarce.” As South African community currency advocate Margaret Legum puts it:In a community currency system, money is not used as a commodity in itself, to be lent and borrowed and kept out of use. The currency comes into existence only when a trade happens and, as a result, there is no risk of inflation or deflation since there is no such thing as too much or too little money.

Interest Paid by Banks

Commercial banks in the United States currently handle over $12 trillion in deposits, paying an average rate on checking accounts of a mere 0.05 percent and on savings accounts of 0.08 percent. If the central bank were to pay 2.2 percent on $12 trillion in deposits, the interest cost would be over $264 billion annually. But the Fed’s unlimited deep pocket can handle any sized expenditure.

Benjamin Franklin on Money as Credit

“Remember,” said Benjamin Franklin, “that credit is money.” Credit and debt are just accounting entries—functions of the double-entry bookkeeping on which banking has been based since the Middle Ages. Blockchains and distributed ledgers are said to allow “triple-entry” bookkeeping, with the trustless, automatic, immutable distributed ledger replacing fallible, corruptible human middlemen. But blockchains and distributed ledgers are not scalable to the national level. This is also true of digital community currencies.

Wright Patman on the Fed

I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money. … I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue.— US Rep. Wright Patman

QE and Limitless Money

QE revealed to the world that the central bank has a limitless ability to issue new money, and that it can exercise that tool without collapsing the currency or the economy. It also demonstrated that there was no need for the federal government to borrow from the bond market. But the federal debt had increased by more than 50 percent from 2006 to 2010, due to a collapsed economy and the highly controversial decision to bail out the banks. By the end of 2009, the debt was up to $12.3 trillion. The interest paid on it ($383 billion) was actually less than in 2006 ($406 billion), because interest rates had been pushed to extremely low levels; but even at those rock-bottom levels, interest was still eating up nearly half of federal personal income tax receipts. If interest rates were to rise, it was thought that the impact on taxes would be crushing. With an increase of just a few percentage points, debt service could consume over 100 percent of income tax receipts; and taxes might have to be doubled.

So monetize the debt the Fed did. When the QE program was officially halted in October 2014, the US central bank had accumulated $4.5 trillion in assets, $2.7 trillion of which were federal securities. It wound up owning more Treasuries than China and Japan combined, making it the largest holder of government securities outside the government itself and its agencies. The result of this exercise was that the government was able to double its debt after 2008 without increasing the interest owed by the taxpayers. QE had opened the door to funding the government’s budget with dollars created on a computer screen.

The Benefits of Not Paying Interest on Bonds

If the US government could avoid paying interest on its bonds, the taxpayers could have saved $460 billion in 2017 and could save an estimated $1 trillion annually by 2027. To avoid that interest tab, the Fed could buy the government’s debt from the bondholders as it did in its quantitative easing programs, returning the interest to the Treasury as it does now. Arguably the Fed could buy up the entire $21 trillion federal debt, gradually as the bonds came due, and the chief effect on the economy would just be to relieve the taxpayers of the interest on it. For future congressional budgets, the Treasury could run up a tab on its Fed account interest-free.

The Bank of Canada

Among other noteworthy examples is the Bank of Canada’s monetary policy from 1935 to 1973, when the central bank was not “independent” but actually served the government and the public. As Joyce Nelson explains in Bypassing Dystopia (2018), the Bank of Canada Act gave Canada’s publicly owned central bank the power to make near-zero interest loans to federal and provincial governments for infrastructure and health care spending. It did that successfully for nearly 40 years, funding the St. Lawrence Seaway, the Trans-Canada Highway, the construction of coastal ports and airports, and many other public building ventures, without incurring debt to commercial lenders and without creating inflation problems. But in 1974, the Bank for International Settlements, the World Bank, the International Monetary Fund, and a variety of corporate think-tanks persuaded countries including Canada to stop their central banks from making interest-free loans. Instead, governments were to do most of their borrowing from commercial banks. Since then, Canada’s federal debt has skyrocketed, and its taxpayers have paid about $1.5 trillion in interest on it, most of which could have been saved if the federal government had continued to borrow from its own central bank.

China Versus How the US Funds Itself

The White House said its initiative was not a take-it-or-leave-it proposal but was the start of a negotiation, and that the president was open to new sources of funding. Perhaps it is time to look more closely at how China is doing it. While American politicians are busy arguing about where to find the money, the Chinese are busy building.A case in point is the 12,000 miles of high-speed rail they constructed in a mere decade, while American politicians were still trying to finance much more modest rail projects. According to The Wall Street Journal, the money largely came from loans from China’s state-owned banks.What About China’s Bad-Debt Problem?Critics say China has a dangerously high debt-to-GDP ratio and a “bad-debt” problem, meaning its banks have too many “nonperforming” loans. But according to financial research strategist Chen Zhao in a Harvard review called “China: A Bullish Case,” these factors are being misinterpreted and need not be cause for alarm. China has a high debt-to-GDP ratio because most Chinese businesses are funded through loans rather than through the stock market, as in the United States. China’s banks are able to engage in massive lending because the Chinese chiefly save their money in banks rather than investing it in the stock market, providing a huge source of liquidity for loans. Most of China’s “public debt,” says Zhao, is money created on bank balance sheets for economic stimulus. If the Chinese loans do get repaid, great; but if they don’t, it is not a major problem. The nonperforming loans merely leave extra money circulating in the economy, helping to create the extra demand needed to fill the gap between wages (demand) and GDP (supply). And China’s economy particularly needs that boost today, when shrinking global markets have caused demand to shrink following the 2008-09 crisis.

Investing in Infrastructure Instead of Banks

In an October 2012 editorial in The New York Times titled “Getting More Bang for the Fed’s Buck,” Joseph Grundfest and co-authors proposed a form of QE for the United States that was similar to China’s. They noted that Republicans and Democrats alike had been decrying the failure to stimulate the economy through needed infrastructure improvements, but shrinking tax revenues and limited debt service capacity had tied the hands of state and local governments. The authors proposed that rather than buying mortgage-backed or federal securities from banks, as the Fed was then doing through its QE program, it should do some “QE-Muni”—interest-free or low-interest loans made directly to municipal governments.