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Financial Meltdown: The Greatest Transfer of Wealth in History
- Text size
Ellen Brown
Global Research
October 17, 2008
"Admit it, mes amis, the rugged individualism and cutthroat capitalism that made America the land of unlimited opportunity has been shrink-wrapped by half a dozen short sellers in Greenwich, Conn., and FedExed to Washington, D.C., to be spoon-fed back to life by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson. We’re now no different from any of those Western European semi-socialist welfare states that we love to deride."– Bill Saporito, "How We Became the United States of France," Time (September 21, 2008)
On October 15, the Presidential candidates had their last debate before the election. They talked of the baleful state of the economy and the stock market; but omitted from the discussion was what actually caused the credit freeze, and whether the banks should be nationalized as Treasury Secretary Hank Paulson is now proceeding to do. The omission was probably excusable, since the financial landscape has been changing so fast that it is hard to keep up. A year ago, the Dow Jones Industrial Average broke through 14,000 to make a new all-time high. Anyone predicting then that a year later the Dow would drop nearly by half and the Treasury would move to nationalize the banks would have been regarded with amused disbelief. But that is where we are today.1
Congress hastily voted to approve Treasury Secretary Hank Paulson’s $700 billion bank bailout plan on October 3, 2008, after a tumultuous week in which the Dow fell dangerously near the critical 10,000 level. The market, however, was not assuaged. The Dow proceeded to break through not only 10,000 but then 9,000 and 8,000, closing at 8,451 on Friday, October 10. The week was called the worst in U.S. stock market history.
On Monday, October 13, the market staged a comeback the likes of which had not been seen since 1933, rising a full 11% in one day. This happened after the government announced a plan to buy equity interests in key banks, partially nationalizing them; and the Federal Reserve led a push to flood the global financial system with dollars.
The reversal was dramatic but short-lived. On October 15, the day of the Presidential debate, the Dow dropped 733 points, crash landing at 8,578. The reversal is looking more like a massive pump and dump scheme – artificially inflating the market so insiders can get out – than a true economic rescue. The real problem is not in the much-discussed subprime market but is in the credit market, which has dried up. The banking scheme itself has failed. As was learned by painful experience during the Great Depression, the economy cannot be rescued by simply propping up failed banks. The banking system itself needs to be overhauled.
A Litany of Failed Rescue Plans
Credit has dried up because many banks cannot meet the 8% capital requirement that limits their ability to lend. A bank’s capital – the money it gets from the sale of stock or from profits – can be fanned into more than 10 times its value in loans; but this leverage also works the other way. While $80 in capital can produce $1,000 in loans, an $80 loss from default wipes out $80 in capital, reducing the sum that can be lent by $1,000. Since the banks have been experiencing widespread loan defaults, their capital base has shrunk proportionately.
The bank bailout plan announced on October 3 involved using taxpayer money to buy up mortgage-related securities from troubled banks. This was supposed to reduce the need for new capital by reducing the amount of risky assets on the banks’ books. But the banks’ risky assets include derivatives – speculative bets on market changes – and derivative exposure for U.S. banks is now estimated at a breathtaking $180 trillion.2 The sum represents an impossible-to-fill black hole that is three times the gross domestic product of all the countries in the world combined. As one critic said of Paulson’s roundabout bailout plan, "this seems designed to help Hank’s friends offload trash, more than to clear a market blockage."3
By Thursday, October 9, Paulson himself evidently had doubts about his ability to sell the plan. He wasn’t abandoning his old cronies, but he soft-pedaled that plan in favor of another option buried in the voluminous rescue package – using a portion of the $700 billion to buy stock in the banks directly. Plan B represented a controversial move toward nationalization, but it was an improvement over Plan A, which would have reduced capital requirements only by the value of the bad debts shifted onto the government’s books. In Plan B, the money would be spent on bank stock, increasing the banks’ capital base, which could then be leveraged into ten times that sum in loans. The plan was an improvement but the market was evidently not convinced, since the Dow proceeded to drop another thousand points from Thursday’s opening to Friday’s close.
One problem with Plan B was that it did not really mean nationalization (public ownership and control of the participating banks). Rather, it came closer to what has been called "crony capitalism" or "corporate welfare." The bank stock being bought would be non-voting preferred stock, meaning the government would have no say in how the bank was run. The Treasury would just be feeding the bank money to do with as it would. Management could continue to collect enormous salaries while investing in wildly speculative ventures with the taxpayers’ money. The banks could not be forced to use the money to make much-needed loans but could just use it to clean up their derivative-infested balance sheets. In the end, the banks were still liable to go bankrupt, wiping out the taxpayers’ investment altogether. Even if $700 billion were fanned into $7 trillion, the sum would not come close to removing the $180 trillion in derivative liabilities from the banks’ books. Shifting those liabilities onto the public purse would just empty the purse without filling the derivative black hole.
Plan C, the plan du jour, does impose some limits on management compensation. But the more significant feature of this week’s plan is the Fed’s new "Commercial Paper Funding Facility," which is slated to be operational on October 27, 2008. The facility would open the Fed’s lending window for short-term commercial paper, the money corporations need to fund their day-to-day business operations. On October 14, the Federal Reserve Bank of New York justified this extraordinary expansion of its lending powers by stating:
"The CPFF is authorized under Section 13(3) of the Federal Reserve Act, which permits the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations. . . .
"The U.S. Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the New York Fed in support of this facility."4
- A d v e r t i s e m e n t
That means the government and the Fed are now committing even more public money and taking on even more public risk. The taxpayers are already tapped out, so the Treasury’s "special deposit" will no doubt come from U.S. bonds, meaning more debt on which the taxpayers have to pay interest. The federal debt could wind up running so high that the government loses its own triple-A rating. The U.S. could be reduced to Third World status, with "austerity measures" being imposed as a condition for further loans, and hyperinflation running the dollar into oblivion. Rather than solving the problem, these "rescue" plans seem destined to make it worse.
The Collapse of a 300 Year Ponzi Scheme
All the king’s men cannot put the private banking system together again, for the simple reason that it is a Ponzi scheme that has reached its mathematical limits. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on "fractional reserve" lending, which allows banks to create "credit" (or "debt") with accounting entries. Banks are now allowed to lend from 10 to 30 times their "reserves," essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.5 The problem is that banks create only the principal and not the interest necessary to pay back their loans. Since bank lending is essentially the only source of new money in the system, someone somewhere must continually be taking out new loans just to create enough "money" (or "credit") to service the old loans composing the money supply. This spiraling interest problem and the need to find new debtors has gone on for over 300 years — ever since the founding of the Bank of England in 1694 – until the whole world has now become mired in debt to the bankers’ private money monopoly. As British financial analyst Chris Cook observes:
"Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth’s resources."6
The parasite has finally run out of its food source. But the crisis is not in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money. Fortunately, we don’t need the credit of private banks. A sovereign government can create its own.
The New Deal Revisited
Today’s credit crisis is very similar to that facing Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s plan failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.
The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the private banks with which it was competing, the RFC had to have the money in hand before lending it. The RFC was funded by issuing government bonds (I.O.U.s or debt) and relending the proceeds. The result was to put the taxpayers further into debt. This problem could be avoided, however, by updating the RFC model. A system of public banks might be set up that had the power to create credit themselves, just as private banks do now. A public bank operating on the private bank model could fan $700 billion in capital reserves into $7 trillion in public credit that was derivative-free, liability-free, and readily available to fund all those things we think we don’t have the money for now, including the loans necessary to meet payrolls, fund mortgages, and underwrite public infrastructure.
Credit as a Public Utility
"Credit" can and should be a national utility, a public service provided by the government to the people it serves. Many people are opposed to getting the government involved in the banking system, but the fact is that the government is already involved. A modern-day RFC would actually mean less government involvement and a more efficient use of the already-earmarked $700 billion than policymakers are talking about now. The government would not need to interfere with the private banking system, which could carry on as before. The Treasury would not need to bail out the banks, which could be left to those same free market forces that have served them so well up to now. If banks went bankrupt, they could be put into FDIC receivership and nationalized. The government would then own a string of banks, which could be used to service the depository and credit needs of the community. There would be no need to change the personnel or procedures of these newly-nationalized banks. They could engage in "fractional reserve" lending just as they do now. The only difference would be that the interest on loans would return to the government, helping to defray the tax burden on the populace; and the banks would start out with a clean set of books, so their $700 billion in startup capital could be fanned into $7 trillion in new loans. This was the sort of banking scheme used in Benjamin Franklin’s colony of Pennsylvania, where it worked brilliantly well. The spiraling-interest problem was avoided by printing some extra money and spending it into the economy for public purposes. During the decades the provincial bank operated, the Pennsylvania colonists paid no taxes, there was no government debt, and inflation did not result.7
Like the Pennsylvania bank, a modern-day federal banking system would not actually need "reserves" at all. It is the sovereign right of a government to issue the currency of the realm. What backs our money today is simply "the full faith and credit of the United States," something the United States should be able to issue directly without having to draw on "reserves" of its own credit. But if Congress is not prepared to go that far, a more efficient use of the earmarked $700 billion than bailing out failing banks would be to designate the funds as the "reserves" for a newly-reconstituted RFC.
Rather than creating a separate public banking corporation called the RFC, the nation’s financial apparatus could be streamlined by simply nationalizing the privately-owned Federal Reserve; but again, Congress may not be prepared to go that far. Since there is already successful precedent for establishing an RFC in times like these, that model could serve as a non-controversial starting point for a new public credit facility. The G-7 nations’ financial planners, who met in Washington D.C. this past weekend, appear intent on supporting the banking system with enough government-debt-backed "liquidity" to produce what Jim Rogers calls "an inflationary holocaust." As the U.S. private banking system self-destructs, we need to ensure that a public credit system is in place and ready to serve the people’s needs in its stead.
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October 17th, 2008 at 11:15 am
Oh yeah! This is a great article!!!
October 17th, 2008 at 11:30 am
Gordon Gekko lost in the end when his evil artful manipulations of the airline and other assets were exposed and he lost millions by none other than the character played by Charlie Sheen.
October 17th, 2008 at 11:37 am
Wow… Un-be-f---ing-leivable… Take back your country America.
October 17th, 2008 at 11:41 am
1. I believe that banking institutions are more dangerous to our liberties than
standing armies.
Thomas Jefferson.
..
Need more be said, and I do hold a few thoughts, that seam out in left field! I’m call nuts for
these beliefs, I say take a stand and replace out present congress, these people are the same on both sides, Take control of the voting process, If that means 1 paper ballot, Not Diebolt
You see under the US. Constitution it gives me and you the right to replace our government, When it is not working for the people, Indeed we are in these times, We were told “At this moment in the world, Terrorist are planning new attachs on our country. There goal is to bring destruction to our shores’, That it will make Sept 11th look pale by comparison” By George W.Bush Feb 13, 2008
Search CBS News for this quote, Now go to the Dick Cheney quote April 15th 2008, It’s godamn crazy, and these two are lunatics, A hint at what Cheney said A Nuclear weapon go’s off in one of our own cities…..It’s a very threat””! See I say this and I am a nut case, and they go on and on,
This Banking deal is far from over,
And thanks for the story,
Silver has just fell today at 2001 level, $9 bucks, And was $21 at a all time high.
Looks like the hunt brothers are back
October 17th, 2008 at 11:46 am
Financial predators are nothing new to the USA. Humans have accomplished “ethnic genetic greed!”
This is a test, It is only a test, humans should go about your typical behavior, Lying, stealing and cheating each other. If and only if you feel some sense of conscious guilt you will than have passed into pure consciousness and light. The goal is DONT LOOK BACK! Blacken the Bubble with a Number 2 pencil, Blacken the bubble completely, do not go out of the lines. If you error use your erasure, be sure to erase any marks cleanly and completely. This is a test and only a test, You may now resume normal programing. LOL!
Love to all MCB
October 17th, 2008 at 11:48 am
That is if you don’t count all the interest on make believe money for the last hundred years.
October 17th, 2008 at 11:50 am
Having the government print its own money instead of going into exponentially-growing debt is of course the solution to our problem. But by a show of hands, who here thinks it will happen?
Although Gordon Gecko was presumably punished in the movie, he gets away cleanly in real life. The banking establishment has run their Ponzi scheme successfully for over a century. They have sucked our country dry, and now they’re ready to cash out. Game over. Billions of dollars in the bank accounts of the rich, exponentially growing, unpayable debt for the rest of us. They walk away, and we’re left trying to pick up the pieces.
We have no leaders. We have no organization or substantial education of our citizens. We need these things in order to put our world back together again. That’s the only course that will improve our situation now.
October 17th, 2008 at 12:47 pm
Yes this is the greatest theft yet of the new world order antichrist globalist!! But it will all be taken from them during the Great Tribulation Period that will come upon the Earth after they murder and martyr Gods True Born Again Christians who won’t be taking their zombie making beast chip!! As we will be ruling the renovated and restored and beautified earth for 1000 years as gods and goddesses!! While the wicked and those of the new world order antichrist beast system will be in the great lake of fire and brimstone being scorched and fried and crying like little goat children!!
October 17th, 2008 at 1:34 pm
Past Presidents as mentioned, Jefferson and Jackson saw it being attempted 200 years ago. The bankers ..like wolves after prey just kept after the prey until they found a weak enough President they could hamstring.. in Woodrow Wilson to be exact… From there they brought the prey(The US) down. With the distortion of education and the easy purchase of GVT the bankers had no problem once they got in..
Now.. to get thm out. We have become too passive and apathetic.. I just hope and pray that financial times will become so desparate people will want to find out what happened and get mad enough to take out revenge.
For those clammering for a ‘divine intervention”..I beleive in a God and a higher power..but there was never a promise made that anything would be easy…
If you are a Christian, read the old testament and see how God acknowledged those who forsake Him..
More basic than that..we have become a people who have been provided with more than enough and have forsaken ourselves…
A beautiful planet was provided with more than adeqaute means of enjoying the fruits of life, flora and fauna..if we just worked at it… and we did…until some wanted to “farm” others for money so that they may profit from their labor. GVTs used people through taxation…
Now we are reaping what we allowed to be sown..
People need to take a hard look at themselves and see if they have what it takes before trying to blame others… You are either going to remain apathetic and promote the system..or begin by any means you can to defeat the system..even if not in an outright physical way.
I owe $15,133.64 to the world..and pay for everything in cash now…
I have a cell phone and a home phone(w/internet dialup)– Home phone and internet is going away this month.. Why keep it.. Internet is the only thing I have it for.. Save another $56.00 a month or put $672.00 a year BACK in my pocket and out of theirs.
I have reduced my income below the taxable amount for a year because I was tired of paying high income and state taxes in Georgia.. and I can live within my means..tight for now..but that is part of the withdrawal pain for now.
Next will be my cell phone as soon as my “2 year enlistment” is up… saving me an other $45 a month or $540 a year.
I heat with wood and have one heater and recently purchaced a used one that was in good shape for $250 as a backup… it is in like new condition.. Guy wanted a pellet stove instead of wood stove because he didn’t like handling wood.(Wonder what he will do when pellets become hard to come by?)
I am not using credit cards..although I have two with low interest in an emergency,, the highest interest on on is 11.9% and the other is 8%..through credible credit unions..
Banks are reluctant to loan money.. I have never been late on a payment or written a bad check in 31 years of my adult life(I am 51 now) and have a credit score of 790(on a scale of 350-850) and was turned down for a loan to consolidate my bills.. No big deal.. I can manage..No bank will ever get my business again…
I garden enough to supplement my food ..and that will be stepped up..
I could go on..and realise some do not have the assets to do everything or are in deep financial trouble due to lack of foresight…
The bottom line.. If you particiapte in the system.. you support it’s consumption of YOU.. When the banks can no longer afford to operate their way… they will operate OUR way… or not at all..
You cannot borrow yourself out of debt..period !!!!
If this turns into an all out internal war declared on US citizens by our politiciqans.. Whoooaaaa boy… I Count me in.. but the target better be WA DC and Wall Street… wipe out those two and the war is over fast… I do hope it doesn’t come to that… but history repeats itself…
The pwoers to be know that as well and have worked very hard at making a apathetic domesicated version of a human this past century… This little experiment will tell them if they have been successful or not…
October 17th, 2008 at 1:45 pm
An article that actually offers a solution to the problem. Nice for a change.
October 17th, 2008 at 2:12 pm
Attention: illuminati/biters/falllen angels/aliens: my boss Yahweh wishes to have a word with you shortly. Pentecost 2012, we shall be waiting for what is left of you. Kind regards, one of the remnant. oh and thanks a bunch for the lyme, babesia, cancer virus and mycoplasma. However, fire the chemtrail chef because maaany sheep are waking up in a very baaaad mood. Love to all others and read ronald weinland’s boooks and Enoch. God’s plan is beautiful.
October 17th, 2008 at 6:08 pm
Ellen Brown says we must have a nationalized central bank, i.e. a government central bank in lieu of a private one. Didn’t Thomas Jefferson speak out against ALL central banks? We need a FREE banking system. We came close to having one from 1838 to 1863. We don’t need no stinkin’ central bank. What would prevent the money manipulators from abusing a government central bank? Nothing! If the Power Elite can prevent any Federal Reserve audit or central banking oversight what makes you think they won’t be able to do the same with a fedgov central bank run by an authoritarian or totalitarian U.S. regime, like the one we have now? You’ll have the same problems whenever people in power control the M-3 money supply. Alex Jones needs to sit down and have a heart-to-heart discussion with G. Edward Griffin, Lew Rockwell, Ron Paul and Thomas DiLorenzo over the advantages of a free banking system versus a government central bank. The central bank idea, whether private or government, is the hallmark of totalitarianism. Central banks -the fifth plank of the communist manifesto- of any sort will always promote inflationary monetary policies for plutocratic and oligarchical control of the economy in order to achieve plenary control over the host nation’s domestic affairs and foreign policy, leading to a garrison police state “in the homeland” and to aggressive and belligerent foreign interventionism abroad. Read Edward Griffin’s “The Creature From Jekyll Island”! Damn it!
October 18th, 2008 at 3:20 am
It’s like Boiler room, a movie that talked about an a fake brokerage firm that scammed people. They bought lamborginis and one dude “You should got it rizzi” It’s all a big hustle that’s what ganster rap is talkin about, Don’t hate the playa hate the game, let’s paint our balls red white and blue.
October 18th, 2008 at 5:54 pm
Hello just thought I’d comment on the fact that Jefferson also had little faith in the people:
Arthur Schlesinger wrote this:
The America of Jefferson had begun to disappear before Jefferson himself had retired from the presidential chair. That paradise of small farms, each man resting on his own freehold, was already darkened by the shadow of impending change. For Jefferson, utopia had cast itself in the form of a nation of husbandmen (farmers) and the American dream required that the land be kept free from the corruptions of industrialism. “Those who labor in the earth are the chosen people of God, if ever He had a chosen people. While we have the land to labor, let us never wish to see our citizens occupied at a workbench or twirling a distaff: far better to send our materials to Europe for manufacture, than to bring workingmen (and bankers) to these virgin shores, and with them, their manners and their principles! The mobs of the great cities,” Jefferson continued, “add just so much to the functioning of pure government, as sores do to the strength of the human body!”
October 18th, 2008 at 7:47 pm
Is anyone capable of enlightening me as to the purpose of these infowars articles?
As no action has taken place in seven years…to thwart the Globalist agenda…i’m wondering if the articles aren’t purely for entertainment value…kinda like a gossip site!
It’s all getting rather pathetic…in fact verging on the ridiculous!!!
.
Seven years and not one major protest…not one…you Infowarriors with children must be very proud of yourselves…i’d hate to imagine what your children must think…of your moral fibre…ashamed, embarassed, disgusted, let down…are just a few words that come to mind!!!
October 18th, 2008 at 9:06 pm
great stuff http://www.free4phoenix.com/BL-UniversalLube.htm
http://www.thepentacon.com http://www.donaldtrumphair.com