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THE FED HAS SPOKEN: NO BAILOUT FOR MAIN STREET
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THE FED HAS SPOKEN: NO BAILOUT FOR MAIN STREET
Courtesy of Ellen Brown at Web of Debt
(Orginally published at Web of Debt and Huffington Post here.)
The Federal Reserve was set up by bankers for bankers, and it has served them well. Out of the blue, it came up with $12.3 trillion in nearly interest-free credit to bail the banks out of a credit crunch they created. That same credit crisis has plunged state and local governments into insolvency, but the Fed has now delivered its ultimatum: there will be no “quantitative easing” for municipal governments.
On January 7, according to the Wall Street Journal, Federal Reserve Chairman Ben Bernanke announced that the Fed had ruled out a central bank bailout of state and local governments. "We have no expectation or intention to get involved in state and local finance," he said in testimony before the Senate Budget Committee. The states "should not expect loans from the Fed."
So much for the proposal of President Barack Obama, reported in Reuters a year ago, to have the Fed buy municipal bonds to cut the heavy borrowing costs of cash-strapped cities and states.
The credit woes of state and municipal governments are a direct result of Wall Street’s malfeasance. Their borrowing costs first shot up in 2008, when the “monoline” bond insurers lost their own credit ratings after gambling in derivatives. The Fed’s low-interest facilities could have been used to restore local government credit, just as it was used to restore the credit of the banks. But Chairman Bernanke has now vetoed that plan.
Why? It can hardly be argued that the Fed doesn’t have the money. The collective budget deficit of the states for 2011 is projected at $140 billion, a mere drop in the bucket compared to the sums the Fed managed to come up with to bail out the banks. According to data recently released, the central bank provided roughly $3.3 trillion in liquidity and $9 trillion in short-term loans and other financial arrangements to banks, multinational corporations, and foreign financial institutions following the credit crisis of 2008.
The argument may be that continuing the Fed’s controversial “quantitative easing” program (easing credit conditions by creating money with accounting entries) will drive the economy into hyperinflation. But creating $12.3 trillion for the banks -- nearly one hundred times the sum needed by state governments -- did not have that dire effect. Rather, the money supply is shrinking – by some estimates, at the fastest rate since the Great Depression. Creating another $140 billion would hardly affect the money supply at all.
Why didn’t the $12.3 trillion drive the economy into hyperinflation? Because, contrary to popular belief, when the Fed engages in “quantitative easing,” it is not simply printing money and giving it away. It is merely extending CREDIT, creating an overdraft on the account of the borrower to be paid back in due course. The Fed is simply replacing expensive credit from private banks (which also create the loan money on their books) with cheap credit from the central bank.
So why isn’t the Fed open to advancing this cheap credit to the states? According to Mr. Bernanke, its hands are tied. He says the Fed is limited by statute to buying municipal government debt with maturities of six months or less that is directly backed by tax or other assured revenue, a form of debt that makes up less than 2% of the overall muni market. Congress imposed that restriction, and only Congress can change it.
That may sound like he is passing the buck, but he is probably right. Bailing out state and local governments IS outside the Fed’s mandate. The Federal Reserve Act was drafted by bankers to create a banker’s bank that would serve their interests. No others need apply. The Federal Reserve is the bankers’ own private club, and its legal structure keeps all non-members out.
Earlier Central Bank Ventures into Commercial Lending
That is how the Fed is structured today, but it hasn’t always been that way. In 1934, Section 13(b) was added to the Federal Reserve Act, authorizing the Fed to “make credit available for the purpose of supplying working capital to established industrial and commercial businesses.” This long-forgotten section was implemented and remained in effect for 24 years. In a 2002 article called “Lender of More Than Last Resort” posted on the Minneapolis Fed’s website, David Fettig summarized its provisions as follows:
- [Federal] Reserve banks could make loans to any established businesses, including businesses begun that year (a change from earlier legislation that limited funds to more established enterprises).
- Reserve banks were permitted to participate [share in loans] with lending institutions, but only if the latter assumed 20 percent of the risk.
- No limitation was placed on the amount of a single loan.
- A Reserve bank could make a direct loan only to a business in its district.
Today, that venture into commercial banking sounds like a radical departure from the Fed’s given role; but at the time it evidently seemed like a reasonable alternative. Fettig notes that “the Fed was still less than 20 years old and many likely remembered the arguments put forth during the System's founding, when some advocated that the discount window should be open to all comers, not just member banks.” In Australia and other countries, the central bank was then assuming commercial as well as central bank functions.
Section 13(b) was repealed in 1958, but one state has kept its memory alive. In North Dakota, the publicly owned Bank of North Dakota (BND) acts as a “mini-Fed” for the state. Like the Federal Reserve of the 1930s and 1940s, the BND makes loans to local businesses and participates in loans made by local banks.
The BND has helped North Dakota escape the credit crisis. In 2009, when other states were teetering on bankruptcy, North Dakota sported the largest surplus it had ever had. Other states, prompted by their own budget crises to explore alternatives, are now looking to North Dakota for inspiration.
The “Unusual and Exigent Circumstances” Exception
Although Section 13(b) was repealed, the Federal Reserve Act retained enough vestiges of it in 2008 to allow the Fed to intervene to save a variety of non-bank entities from bankruptcy. The problem was that the tool was applied selectively. The recipients were major corporate players, not local businesses or local governments. Fettig writes:
Section 13(b) may be a memory, . . . but Section 13 paragraph 3 . . . is alive and well in the Federal Reserve Act. . . . [T]his amendment allows, "in unusual and exigent circumstances," a Reserve bank to advance credit to individuals, partnerships and corporations that are not depository institutions.
In 2008, the Fed bailed out investment company Bear Stearns and insurer AIG, neither of which was a bank. John Nichols reports in The Nation that Bear Stearns got almost $1 trillion in short-term loans, with interest rates as low as 0.5%. The Fed also made loans to other corporations, including GE, McDonald’s, and Verizon.
In 2010, Section 13(3) was modified by the Dodd-Frank bill, which replaced the phrase “individuals, partnerships and corporations” with the vaguer phrase “any program or facility with broad-based eligibility.” As explained in the notes to the bill:
Only Broad-Based Facilities Permitted. Section 13(3) is modified to remove the authority to extend credit to specific individuals, partnerships and corporations. Instead, the Board may authorize credit under section 13(3) only under a program or facility with “broad-based eligibility.”
What programs have “broad-based eligibility” isn’t clear from a reading of the Section, but long-term municipal bonds are evidently excluded. Mr. Bernanke said that if municipal defaults became a problem, it would be in Congress’ hands, not his.
Congress could change the law, just as it did in 1934, 1958, and 2010. It could change the law to allow the Fed to help Main Street just as it helped Wall Street. But as Senator Dick Durbin blurted out on a radio program in April 2009, Congress is owned by the banks. Changes in the law today are more likely to go the other way. Mike Whitney, writing in December 2010, noted:
So far, not one CEO or CFO of a major investment bank or financial institution has been charged, arrested, prosecuted, or convicted in what amounts to the largest incident of securities fraud in history. In the much-smaller Savings and Loan investigation, more than 1,000 people were charged and convicted. . . . [T]he system is broken and the old rules no longer apply.
The old rules no longer apply because they have been changed to suit the moneyed interests that hold Congress and the Fed captive. The law has been changed not only to keep the guilty out of jail but to preserve their exorbitant profits and bonuses at the expense of their victims.
To do this, the Federal Reserve had to take “extraordinary measures.” They were extraordinary but not illegal, because the Fed’s congressional mandate made them legal. Nobody’s permission even had to be sought. Section 13(3) of the Federal Reserve Act allows it to do what it needs to do in “unusual and exigent circumstances” to save its constituents.
If you’re a bank, it seems, anything goes. If you’re not a bank, you’re on your own.
So Who Will Save the States?
Highlighting the immediacy of the local government budget crisis, The Wall Street Journal quoted Meredith Whitney, a banking analyst who recently turned to analyzing state and local finances. She said on a recent broadcast of CBS's "60 Minutes" that the U.S. could see "50 to 100 sizable defaults" in 2011 among its local governments, amounting to "hundreds of billions of dollars."
If the Fed could so easily come up with 12.3 trillion dollars to save the banks, why can’t it find a few hundred billion under the mattress to save the states? Obviously it could, if Congress were inclined to put non-bank lending back into the Fed’s job description. Then why isn’t that being done?
The cynical view is that the states are purposely being kept on the edge of bankruptcy, because the banks that hold Congress hostage want the interest income and the control.
Whatever the reason, Congress is standing down while the nation is sinking. Congress must summon the courage to take needed action; and that action is not to impose “austerity” by cutting services, at a time when an already-squeezed populace most needs them. Rather, it is to create the jobs that will generate real productivity. To do this, Congress would not even have to go through the Federal Reserve. It could issue its own debt-free money and spend it on repairing and modernizing our decaying infrastructure, among other needed works. Congress’ task will become easier if the people stand with them in demanding action, but Congress is now so gridlocked that change may still be long in coming.
In the meantime, the states could take matters in their own hands and set up their own state-owned banks, on the model of the Bank of North Dakota. They could then have their own very-low-interest credit lines, just as the Wall Street banks do. Rather than spending or selling off valuable public assets, or hoarding them in massive rainy day funds made necessary by the lack of ready credit, states could LEVERAGE their assets into a very strong and abundant local credit system, following the accepted business practices of the Wall Street banks themselves.
The Public Banking Institute is being launched on January 13 to explore that alternative. For more information, see http://PublicBankingInstitute.org.
Pic credit: Jr. Deputy Accountant
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Try this:
http://www.govtrack.us/congress/bill.xpd?bill=h111-6550
Our moron Mayor just raised property taxes (which are not even being paid by most because we are a huge foreclosure city - though no one wants to admit it...) and raised salaries for County employees. Idiot. He made cuts to actual services being performed for the people. His recall election was just scheduled for March 2011. Less than six months after that budget was passed. So far, I have received collection notices from the County for dog license fees for dogs that have been dead for years; parking tickets for this year on a license plate for a car I had two years ago, burglar alarm fees for an address where I no longer live. Nothing is clearly working and it is all falling apart. And Luther Campbell of 2 live crew has just announced he wants to take the Mayor's place and do a reality show of him being the Mayor. Oh, but we are building a new stadium for our baseball team (so now we will have too many sports teams and broke populace that won't be able to attend same). But the Mayor did install those nice cash making red light cameras all over town. That should bring in some cash until the lawyers get the ruling that said cameras are unconstitutional and all the money might have to be returned. Banana Republic - that is how we roll. Now the rest of the country seems to have Bananaitis.... Drinking is the only solution to dealing with it that we have seen.
Run for a position on your local city council like me. I am a white man running in a ward that is 70% hispanic. I don't, at this time , believe that these people are unaware of what is going on with their pocketbook. Try to create that small ripple. It is not impossible.
As long as you aren't another bogus Lib, good on you!
Been there, done that, and had to move anyway.
I don't know what a bogus Lib is.... enlighten?
We don't have councils where we live. And it is rotten to the core. Always has been. I am moving to the Bahamas. And hopefully never coming back. I hate dealing with Homeland Security anyway.
As i have pointed out quite a few times, the private members that own the Federal Reserve only care about their members and counterparties to them. States are not among those that could cause harm to the Federal Reserve members/owners, an why the likes of AIG does get bailouts.
Wake up people, of the Federal Reserve, by the Federal Reserve and for the Federal Reserve.
The system is made on usary. Mustn't we end both the Fed and the Major Banks themselves who run the Fed? If we wash the usary on one hand we should wash it from the other.
sharia law doesn't allow "usery" .
"Usury" was interest above the legal rate. Nobody is supposed to "allow" usury it just comes into practice because people that couldn't get money from banks had to get it from loan sharks. Now there are credit cards...and those are legal usury.
That's how it started:
http://blogs.wsj.com/washwire/2011/01/15/boehner-fires-shot-in-debt-limit-debate/
Moral Hazard is a bitch !......But i Still dont know who i trust less, the banks or the Public employees
Don't worry, as the moral hazard increases and no one trusts anyone and the public employees disappear and the infrastructure falls into disrepair; I hope you find yourself with a way to generate your own power, your own drinking water, and a way to deal with your own sewage. I sit on 40+ acres surrounded by like minded individuals who can come off the grid when we want. Many GOP folks who want power, water, sewage and a high-on-the-hog city lifestyle better go thank those public municipal workers before they open their mouths.
Soon enough, like with the collapse in Russia in 96, you will have to bribe those guys just to get back on the grid when you are "accidently" shut off.
Your comments are spot on.
We allowed Union thugs to gain control of our basic services because they threatened to shut them off.
Now we need to bankrupt these same Union thugs and take them back.
We can and will replace them.
Some suffering will occur. I think most of the overweight, out of shape, lazy, Union thugs will suffer most.
Unions are the solution, dumbass union-haters like you are the problem.
yes, please explain................thought so
Please explain.
yeah we saw in NJ what happens when the pigs who have outpriced themselves DONT WANT to remove the snow
Im actually afraid to post what I really think...........
Maybe an "affidavit" with my name on it will get printed and posted here at ZH.
Just by pressing the save button for this message was enough to infect your computer with a worm virus.
ALL YOUR DOWNLOADED PORN NOW BELONGS TO US!!!
Is there an ultra-short ETF for state and local munis?
Try a search with "Short-The-American-Mirage"
Junk me all you want retard then get back on your little wheel and run bitch. The vampire squid needs more of your blood.
It's not the message. It's the delivery. Just sayin'. No, I didn't junk you but I thought about it.
http://www.businessinsider.com/record-low-revenue-record-austerity-measures-for-us-cities-2010-10?slop=1#slideshow-start
.
http://www.businessinsider.com/biggest-state-budget-gaps-2012-2011-11#15-colorado-1
All the tea baggers and independents that swung to the GOP this last election will see that both parties work for the vampire squid and we will have another retarded swing back in 2012.
Ron or Rand Paul will be executed (like Kennedy was - the last person to suggest that the people's government take control of it's own money) if they block a vote on the debt limit being raised.
The second amendment is there, for now. Do something or shut the fuck up.
Tea bagging is a gay love act. When did you first find out you needed things put in your a**?
The moral hazard was unleashed long ago, fuck it. Time for folks to wake up and find out what their shit is really worth. Life makes no promises and anyone who really believes that their government is going to save them is a moron.
The companies can't exist without the consumers.
The banks make billions by trading and only need the people for the deposits. Now that the FED is supplying that, they don't need them anymore. Even a bank run wouldn't do shit about it.
The muni's going bankrupt will actually be a good thing. Now people will soon start to realize that their taxes are going up because a elite has stolen it. And if America can only looks to it's history and only remember the old days as the age where Americans took their freedom and won't be able to do it again, they all deserve to live as slaves of the system and lose for which their ancestors fought and died for.
I wonder how it will play out.
+1
And if America can only looks to it's history and only remember the old days as the age where Americans took their freedom and won't be able to do it again, they all deserve to live as slaves of the system and lose for which their ancestors fought and died for.
I wonder how it will play out.
The US citizens know their History. They rebelled against a system that prevented them from expanding on Indian lands.
Anytime it is about expanding, the US citizens have answered the call. See how many US citizens enlist in the US army under the cover of diminishing non threatening countries.
The trouble is to find those Indians so the US citizens can spirit themselves up. Trouble with the US system is that it turns Indians into a scarce asset.
Okay, so how about if all the states default, recall all their national guard troops, takeover the military bases, and print their own money backed by the resources in those states. Think about it, 40+ states are looking at default now anyway. Don't audit the Fed, fuck the fed.
I like it. Productive states will do well and corrupt leftist toilets like Illinois, California and NY will sink.
That's a start. I am so sick of focusing on the damn Federal Reserve of fucktard liars. Fuck them. I would never audit a liar ever. Complete waste of time. Trading state currency....sounds kind of fun. The currency is fiat anyway. Oh, and I guess states get their own resources back also? Guess that would get us out of some military occupations overseas. Very interesting idea.
my state is now looking at starting a state bank along the lines of the Bank of North Dakota. That will cut the money center banks out of the state money entirely.
a good thing.
Great! Which state do you live in?
Are you talking about the State Bank of North Dakota that now has the all student loan action?
They are more plugged into this administration than Bush was with big oil.
I find it interesting that there was no discussion about the size or the bloated nature of the local and state governments... Nope. Which tells me that this article is nothing more than a plant by an advertising agency. Most likely by union money. Its more common than you think...
Also, why should we "bailout" state and local governments? I have a better idea.... Why dont they shrink in size so that revenue and services align? Sounds like a radical idea doesnt it?? Here is a better idea... Why doesnt the federal government do the same?? Because it would be hard to keep this Ponzi game going if they did....
I find it interesting you are incapable of comprehending that the production assets and capital assets of the USA have been relocated offshore.
Obvious to thinking people -- just not you.
actually, government jobs have been shrinking. Most of those jobs were in law enforcement or regulation and oversight of the financial sector, so you are correct about the ponzi.
And if anyone says "audit the Fed" grow up. The Fed ain't honest - you ever audited a dishonest entity? I have. The books are cooked so it is a complete waste of time.
why do we keep thinking these people are going to act honorably? they aren't.
the goal was to steal as much of the US Treasury as possible before Bush left office,
and then set in place the structure to take what was left over during the incoming administration.
now? come on. they are almost ready to hang out the Mission Accomplished banners and start leaving the country.
The big boys started pulling their money out of the US and investing it in Asia in 1997. The scams that have gone down since, are aimed at cleaning out the rubes and leaving an empty shell.
I got this from Catherin Austin Fitts who got the tip from the head of CALPERS in 1996.
Personally, this system is gross and sick and financially cancer stricken and has ethical HIV/AIDS - this proposal of bailout on bailout on bailout is dumb as shit. Makes worthless more worthless. We are never going back to the 'way it was' ever. Once humanity realizes that, we can do something about it. There is a possibility that what you "own" may be worthless but you don't really own anything in life anyway now do you? No. These conversations are getting sad and ludicrous. Zero Hedge has covered the problems and effective solutions and now we are all just on a hamster wheel. And "bank" in the "banking system" as it currently sits is susceptible to infection in current times. We all know what the answer is but will it happen? Who knows? We shall see how people react and most of the solutions will come locally not from some magical federal solution. Washington is now a complete waste of time. Nothing will work at this point. Trust is that broken.
key:
"To do this, Congress would not even have to go through the Federal Reserve. It could issue its own debt-free money and spend it..."
Cut!
Roll: http://www.youtube.com/watch?v=1q91RZko5Gw&feature=related
Does anyone here not think there is intended purpose of letting states go bankrupt? Consider that if they went bankrupt, their charter as a state could be undone and they basically become incorporated at the federal level. Push out localized "independent" government and substitute it with a detachment of the federal government and you have the beginnings of organizing the country for participation in a one-world government.
I know it is a little out there, but it sure would simplify things a great deal and it would allow the government to further distance itself from those it governs.
"I know it is a little out there,..."
Puuylease Akrunner907, never use this phrase today.
With the Fed pumping out trillions to off-balance-sheet offshore financial constructs (therefore who knows where all that money is going -- excepting for the top three guys over at the Fed, of course!) along with thousands of other items, there is no such thing as being "..a little out there..". (And you are correct, of course -- +1,000 points for you today -- but it has never been about one-world government, which we have pro forma with the WTO, 'natch, but IT IS about one-world coporation -- proceeding along on schedule -- not politics, the diversion among those thousand points of confusion (racism, sexism, other 'isms, abortion, gun-control, etc, ad nauseum) -- but always the money.)
Recently the official "academic radical" Noam Chomsky (whom I call Chumpsky) gave a talk in the southern part of the United States, where he sounds like the official apologist for Wall Street.
He claimed the meltdown was due to "shortsightedness" -- but then, as usual, contradicts himself a little later proclaiming these bubbles are "designed to crash" --- Duuuhh. That's the way the super-speculators make their ill-gotten gains.
Chumpsky claims "It's not because they are bad people" -- bullcrappy! They are most definitely socipathic greedheads -- and vile, evil people.
Chumpsky claimed it was due to "institutional irrationality" --- no kidding, after all it is the same group who bought and paid for those laws which institutionalized their "irrational" behavior.
I am sick of those misinformation specialists (the "official academic radicals") who are stalwart supporters of the existing order, the status quo.
Chumpsky's mealy-mouthed, rambling, confusing and contradictory talks, leading to nonsensical conclusions are designed to confuse anyone and eveyone who isn't sufficiently knowledgeable about what is truly taking place.
The final word to my rant: JPMorgan Chase-Goldman Sachs-Morgan Stanley-Blackstone Group-Fortress-Citadel-Carlyle Group-KKR-TPG-Citigroup-BankofAmerica.
why support states that dont support health care? and dont forget since the fed prints the money, they believe they own all the money, even if its in your account or pocket.
"That same credit crisis has plunged state and local governments into insolvency.."
This is largely rubbish. The state and local govt overspending and LAVISH peks and pay for govt union workers have bankrupted the states. In addition, welfare programs including those for illegal aliens have led to the looming bankruptcy. You can only squeeze productive people so much with higher taxes and then they will leave the state.
I see the "I don't agree, but I can't articulate my view" brigade junked you too.
The idea that the banks caused states to ratchet up welfare spending, salaries, benefits, and pensions to union employees, graft, monuments to politician's egos in the name of "public works", etc. is insane.
And now Ilene seems to be saying that endless bailouts need to be offered to the states, counties, cities, townships, municipal water districts, etc.?
It's almost as if people thought that the government can create real wealth out of thin air, and only their "meanness" keeps them from helping regular people on Main Street!
The end result of endless bailouts is obvious. Can you say hyperinflation, boys and girls??!?