Ellen Brown on monetary matters

There are two absolutes when discussing the state of the banksters and finance. 1) The world needs $Trillions to build a sustainable infrastructure. 2) The current bunch of sociopathic charlatans who pull the main economic levers of the global economy these days are utterly incapable of funding such a project.

Ellen Brown is a unique commentator on economics because she not only covers the Predators and their vile banking practices, she campaigns relentlessly for the only possible workable alternative—democratically-controlled public banking.

While it is true that such public banking has been tried in one form or another since before the USA became a nation, this time it is a matter of life and death for the planet.  We are talking about a need for a $100 trillion Industrial-Environmental development bank here.  Obviously, this would be, by far, the largest public bank in history.  Good thing the vast majority of public banking attempts have been successful.

Both of my grandfathers were involved in political movements that had public banking as a primary goal, but even they would have never dreamt of anything so massive.  Of course, Brown is not talking about anything on this scale either.  I can see why—she probably would feel wildly successful if she got a handful of states to copy North Dakota's bank.

So good luck to Ms. Brown.  Good thing she is more informed and relevant than anyone who has ever worked for the IMF.

The Looming Mass Destruction from Derivatives

The Armageddon Looting Machine

by ELLEN BROWN  SEPTEMBER 19, 2013

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows:

[B]anks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

Increased regulation and low interest rates have made lending to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system. Shadow banking comes in many forms, but the big money today is in repos and derivatives. The notional (or hypothetical) value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined.

According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding. But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?
Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims. Perotti writes:

Security pledging grants access to cheap funding thanks to the steady expansion in the EU and US of “safe harbor status”. Also called bankruptcy privileges, this ensures lenders secured on financial collateral immediate access to their pledged securities. . . .

Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral.

This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. Critically, it ensures immediacy (liquidity) for their holders. Unfortunately, it does so by undermining orderly liquidation.

When orderly liquidation is undermined, there is a rush to get the collateral, which can actually propel the debtor into bankruptcy.

The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked. In a December 2011 article titled “Plan B – How to Loot Nations and Their Banks Legally,” documentary film-maker David Malone wrote:

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies . . . allowed a whole range of far riskier assets to be used . . . . The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get [their] money back before anyone else and no one could stop them.

Burning Down the Barn to Get the Insurance

Safe harbor status creates the sort of perverse incentives that make derivatives “financial weapons of mass destruction,” as Warren Buffett famously branded them. It is the equivalent of burning down the barn to collect the insurance. Says Malone:

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of . . . Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.

The global credit collapse was triggered, it seems, not by wild subprime lending but by the rush to grab collateral by players with congressionally-approved safe harbor status for their repos and derivatives.

Bear Stearns and Lehman Brothers were strictly investment banks, but now we have giant depository banks gambling in derivatives as well; and with the repeal of the Glass-Steagall Act that separated depository and investment banking, they are allowed to commingle their deposits and investments. The risk to the depositors was made glaringly obvious when MF Global went bankrupt in October 2011. Malone wrote:

When MF Global went down it did so because its repo, derivative and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well. . . JPMorgan allegedly has MF Global money while other people’s lawyers can only argue about it.

MF Global was followed by the Cyprus “bail-in” – the confiscation of depositor funds to recapitalize the country’s failed banks. This was followed by the coordinated appearance of bail-in templates worldwide, mandated by the Financial Stability Board, the global banking regulator in Switzerland.

The Auto-Destruct Trip Wire on the Banking System

Bail-in policies are being necessitated by the fact that governments are balking at further bank bailouts. In the US, the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivative activities. That means the next time we have a Lehman-style event, the banking system could simply collapse into a black hole of derivative looting. Malone writes:

. . . The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can.

. . . I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system.

The weaker banks may be the victims, but it is we the people who will wind up holding the bag. Malone observes:

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Fed, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with. . . .

. . . [T]he banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months, not even days. It could happen in hours if not minutes.

Crisis and Opportunity: Building a Better Mousetrap

There is no way to regulate away this sort of risk. If both the conventional banking system and the shadow banking system are being maintained by government guarantees, then we the people are bearing the risk. We should be directing where the credit goes and collecting the interest. Banking and the creation of money-as-credit need to be made public utilities, owned by the public and having a mandate to serve the public. Public banks do not engage in derivatives.

Today, virtually the entire circulating money supply (M1, M2 and M3) consists of privately-created “bank credit” – money created on the books of banks in the form of loans. If this private credit system implodes, we will be without a money supply. One option would be to return to the system of government-issued money that was devised by the American colonists, revived by Abraham Lincoln during the Civil War, and used by other countries at various times and places around the world. Another option would be a system of publicly-owned state banks on the model of the Bank of North Dakota, leveraging the capital of the state backed by the revenues of the into public bank credit for the use of the local economy.

Change happens historically in times of crisis, and we may be there again today. more

FDL Book Salon Welcomes Ellen Brown, The Public Bank Solution: From Austerity to Prosperity

Author: Les Leopold
Saturday, September 14, 2013

Ellen Brown is our national treasure. While Wall Street increases its grip on America, she is letting us know that it doesn’t have to be that way. No one makes a stronger and clearer case about why it’s time to put an end to Wall Street as we know it. While many progressive analysts (including me) rant and rave about how we’re being robbed blind by large banks and hedge funds, Ellen Brown understands how banking works and what we can actually do about it.

The secrets that Ellen reveals in The Public Banking Solution will completely turn your head around. It did mine and I’ve been writing about banking since the financial crash in 2008. What I never understood until Ellen made it so clear in this book is that about 90% of all money in circulation is created by private banks — not the U.S. mint, not the Federal Reserve, not the Treasury. The secret is this: When banks make loans, they “create money out of thin air.” They’re not just loaning out depositor money. They actually are creating new money that goes into circulation.

By this point you might be thinking, “Who wants to read a technical book about banking?” Trust me. This is not a technical book, nor is it rhetorical. Let me be blunt: You will want to read it because it offers a vision for taking our country back from the banksters and their political flunkies.

Here’s the core of her argument. Because banks create most of our money, they control the very essence of the economy. To regain control of our economic well-being we need public banks that make investments in the public goods, services and jobs that we all need. Public banks can do all that without running up the national debt or raising taxes. Public banks, like private banks, fund investments. But, as Ellen writes:

The difference is that a publicly-owned bank returns the interest to the government and the community, while a privately-owned bank siphons it into private accounts, progressively drawing money out of the productive economy. (pg 204)

Viewed from a macro-level, in too-big-to-fail private banks the returns mainly go to enrich the top 1/100th of the top 1%. In public banks the returns go to enrich the nation.

Pie in the sky? I mean how can she be writing about public banks when Washington is cutting food stamps for the hungry? And even if Washington weren’t entirely gridlocked, isn’t this just another misguided effort towards big government, the kind that so miserably failed in Communist countries?

No. You’ll find out in a hurry that Ellen is trying to save capitalism, not destroy it. And she’s incredibly practical. In fact, she is making the best case I’ve ever come across that in order to have a vibrant free-enterprise system, we need public banks.

Think about what we have now. The largest banks crashed the economy in 2008. We bailed them out because they were too big to fail and now they are even larger. The economy has barely recovered but the big banks have, making tens of millions for their executives and investors…like nothing much had happened. They now deploy more money on financial gambling (called proprietary trading) than they use for investments in business and consumer loans. When they crash again (a near certainty, don’t you think? ) there will be more bailouts (or bail-ins as Ellen calls them where depositors will have to cough up money to bailout out their own bankers). The bankers get to keep all the winnings while we pick up the losses. Is that capitalism? Adam Smith wouldn’t recognize it.

But more importantly, the current Wall Street banking system is both dangerous and corrupt. The incessant financial gambling threatens the entire global economy. Banks are so large and so powerful that they can’t be adequately regulated or disciplined. Financial wealth distorts democracy as it pours into politics further minimizing any and all regulations.

While so many of us have given up any hope of significantly changing Wall Street, Ellen shows us exactly how it can be done through public banking.

But where is the money going to come from to start public banks? The country is in no mood to run up more debt. First of all, if we had the option, millions of us would probably rush to move our money from Wall Street banks and into public banks. After all, few Americans trust Wall Street. As Ellen points out, our post offices could actually house branches of a national public retail bank similar to the excellent postal bank in Japan.

Don’t trust the Post Office? Then how about a state bank like the one in North Dakota. In fact, starting a state bank requires much less effort and almost no additional funding. Here’s another Brown revelation: Right now every time we pay our state and local taxes, or buy a drivers license, the money doesn’t just sit in a vault in city hall. It usually goes into a Wall Street bank which then provides state and local governments with cash management services. (Local banks are far too small to provide those services.) All in all, about $1 trillion of our tax money each year runs through Wall Street banks in every state….except North Dakota, which has a public bank.

Using those public funds as a base, the Bank of North Dakota supports state investments that have produced the lowest unemployment rate in the country PLUS a robust profit for the state’s treasury. No exorbitant banker salaries, no gambling in Wall Street derivatives. Just honest banking for the public good. That so-called socialist bank (created by the Populists in 1919) is so good that it thrives in one of the most conservative states in the union.

There’s so much more in the book that we don’t have time to explore. It gives us a history of banking and a review of public banking in countries all over the world. (Did you know that the largest bank in the world is publicly owned?) And her chapter on the Reconstruction Finance Corporation, (“The Little-Known Public Financial Institution that Reversed the Depression and Funded World War II.”) is a must read for progressive activists and policy wonks.

Thank you, Ellen, for opening our eyes and lighting the way to ending Wall Street’s rule. Let’s hope a million readers see the light as well. more