Tuesday, November 22, 2011

M-O-N-E-Y (Part 5)

Over the last few posts, I've reviewed the history of money and central banking in the U.S.,  the systematic devaluation of the dollar as a fiat currency since the 1970s, and the artificial growth in the currency supply created by fractional reserve banking.

So we now understand that the Federal Reserve is not actually owned by the government.  It is owned by 'member banks' in the Federal Reserve System--private banks.  The private banks are then in turn owned by shareholders--mostly rich people--some of whom are American, but many of whom aren't.

We saw in part two how the creation of the fiat money system led to the devaluation of the dollar, the magical inflation of prices for stuff that people buy, and to the huge inflation of home prices we came to call the housing bubble.

Next, we learned how the banks got themselves in a crack--through the legalized Ponzi Scheme called fractional reserve banking, in which, by design, there is never actually enough money in the banks to pay their obligations to depositors.  This shortfall, as we've seen, gets bigger whenever a loan defaults, which happens all the time, so it just keeps making the system rack up larger and larger shortfalls.   But it does result in a whole lot of money getting lent out, at a profit.

And last time, we learned about derivatives, a creature of legal maneuverings, where banks manage to get money they've loaned back quicker so they can loan it again for another profit while transfering the risk of default to investors who buy the derivatives.  And we saw how this practice led to worse and worse lending practices until the whole scheme crashed in 2007 and 2008.

So now, we'll have a look at how the banking system has, so far, managed to avoid responsibility for all of its thus far greedy and irresponsible behavior. In common parlance, we can refer to this as the bank bailouts.  

Fall, 2008.  Due to the popping of the housing bubble and the other bad practices we've already talked about, the big banks and financial service companies found themselves with a whole lot of worthless assets in the form of pools of loans that weren't paying and way too little capital to meet their obligations.  One went bust--Lehman Brothers.  Then politicians ran around for a few days with their hair on fire, screaming that we couldn't let the banks go broke; they were "too big to fail."

Then Treasury Secretary  and bank fairy godfather Henry "Hank" Paulson (a very rich guy who was once Assistant Secretary of Defense and who once succeeded the now-clearly-criminal Jon Corzine as CEO of one of the largest financial services companies in the world, Goldman Sachs) came up with a "plan."  It was called TARP, or the Toxic Asset Relief Program.  In brief, this program worked like this:

1)  The Federal Reserve would push a button on its super-money-making computer and miraculously create a whole lot of previously non-existent money (more than 3/4 of a Trillion Dollars' worth);

2) This would devalue all of the dollars that were already outstanding in the economy, because the Federal Reserve doesn't have a super-product-and-service-making computer to miraculously create any additional value in the form of products or services to go along with the imaginary money;

3a) In theory, the new imaginary money would be lent to the U.S. Treasury to be used to buy back "toxic assets,"  that is--assets that weren't worth anything because they consisted largely of huge pools of loans that either were, or were about to be, in default.  This did not happen.  No one has been willing to say exactly why (in fact, very few have even asked), but I find it likely that the reason was that if the government owned these "toxic assets," people within the government might actually be foolish enough to go and try to collect them.  Then, I think they'd find out that they were, in a legal sense, just as imaginary as the money--that is, that the supposed rights associated with the assets to collect on debts were unenforceable because they hadn't been structured properly, and that the quality of the assets was so poor that it would have opened up all the banks to lawsuits for fraud or possibly even criminal theft; so...

3b) In practice, the imaginary money wasn't actually used to buy those worthless assets, but instead was just lent to the banks that were "too big to fail," so that it would not become immediately apparent that they were completely underwater and unable to pay their obligations.  This is called insolvency, and usually is when you file bankruptcy, unless you are "too big to fail." All the big banks had to take the money, because if only the ones that were completely broke took the money, then we'd all know who was completely broke and it would show us where all the bodies were buried.   We needed to loan this money to the banks, it was said, so that they would have enough money to continue lending money to businesses and consumers and get the economy going again.  Unfortunately, the banks just kept the money and didn't loan much to anyone; so... 

3(c) In practice, the Federal government borrowed imaginary money from the Federal Reserve (which is, in fact the banks) to lend back to the banks, who didn't loan money to businesses or consumers much, but did manage to make sufficient profits so they could pay nice dividends to the rich guys who own most of the stock in big banks and and pay extremely nice bonuses to the rich guys who run the big banks.

4) We would then proceed to ignore the fact that when you are insolvent, borrowing more money does not actually improve your financial condition, since each dollar of loan money (asset) comes with an equal or greater (with interest) obligation to repay the money (liability).

5) We would also proceed to not ask ANY questions about where the money went, because the Federal Reserve and the Treasury don't actually want to tell us, and the rest of the government doesn't really want to know, because then they wouldn't be able to take campaign donations from the crooked ones any more.

6) American taxpayers will then dutifully pay taxes to pay back the big banks' loan back to themselves, plus interest, which will mean less money for all that frivolous stuff like roads and schools and police and fire protection, and pensions for people who paid in their whole lives in return for a promise they'd get a check when they are old, and so on.  This is called 'austerity.'

And now that this has worked so well here in the U.S., we want to do it on a global scale, in the form of the IMF and World Bank making similar loans to Greece, Italy, Ireland, Portugal, etc.

American ingenuity, exported once again.

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