Al-Jazeerah: Cross-Cultural Understanding
Opinion Editorials, March 2013
How the Fed Could Fix the Economy and Why It Hasn't
By Ellen Brown
Al-Jazeerah, CCUN, March 4, 2013
Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, increasing demand. But so far, it hasn’t been working. Why not? Because as practiced for the last two decades, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks. A real “helicopter drop” that puts money into the pockets of consumers and businesses has not yet been tried. Why not? Another good question . . . .
When Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was not yet chairman of the Federal Reserve. He said then that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.
It seemed logical enough. If the money supply were insufficient for the needs of trade, the solution was to add money to it. Most of the circulating money supply consists of “bank credit” created by banks when they make loans. When old loans are paid off faster than new loans are taken out (as is happening today), the money supply shrinks. The purpose of QE is to reverse this contraction.
But if debt deflation is so easy to fix, then why have the Fed’s massive attempts to pull this maneuver off failed to revive the economy? And why is Japan still suffering from deflation after 20 years of quantitative easing?
On a technical level, the answer has to do with where the money goes. The widespread belief that QE is flooding the economy with money is a myth. Virtually all of the money it creates simply sits in the reserve accounts of banks.
That is the technical
answer, but the motive behind it may be something deeper . . . .
Asset Swap Is Not a Helicopter Drop
As QE is practiced today, the money
created on a computer screen never makes it into the real, producing
economy. It goes directly into bank reserve accounts, and it stays
there. Except for the small
amount of “vault cash” available for withdrawal from commercial banks,
bank reserves do not leave the doors of the central bank.
According to Peter Stella,
former head of the Central Banking and
Monetary and Foreign Exchange Operations Divisions at the International
[B]anks do not lend “reserves”. . . . Whether commercial banks let the reserves they have acquired through QE sit “idle” or lend them out in the internet bank market 10,000 times in one day among themselves, the aggregate reserves at the central bank at the end of that day will be the same.
This point is also stressed in Modern Monetary Theory. As explained by Prof. Scott Fullwiler:
Banks can’t “do”
anything with all the extra reserve balances. Loans create
deposits—reserve balances don’t finance lending or add any “fuel” to the
economy. Banks don’t lend reserve balances except in the federal funds
market, and in that case the Fed always provides sufficient quantities
to keep the federal funds rate at its . . . interest rate target.
Reserves are used simply to clear checks
between banks. They move from one reserve account to another, but the
total money in bank reserve accounts remains unchanged.
Banks can lend their reserves to each other, but they cannot lend
them to us.
QE as currently practiced is simply an
asset swap. The central bank swaps newly-created dollars for toxic
assets clogging the balance sheets of commercial banks. This ploy keeps
the banks from going bankrupt, but it does nothing for the balance
sheets of federal or local governments, consumers, or businesses.
Central Bank Ignorance or Intentional Sabotage?
Another Look at the Japanese Experience
That brings us to the motive.
Twenty years is a long time to repeat a policy that isn’t
UK Professor Richard Werner invented the
term quantitative easing
when he was advising the Japanese in the 1990s.
He says he had something quite different in mind from the current
practice. He intended for
QE to increase the credit available to the real economy.
Today, he says:
[A]ll QE is doing is to help banks increase the
liquidity of their portfolios by getting rid of longer-dated slightly
less liquid assets and raising cash. . . . Reserve expansion is a
standard monetarist policy and required no new label.
that the Bank of Japan (BOJ) intentionally sabotaged his proposal,
adopting his language but not his policy; and other central banks have
taken the same approach since.
In his book Princes of the Yen
(2003), Werner maintains that
in the 1990s, the BOJ
government attempts at creating a recovery. As summarized in
a review of
The post-war disappearance of the military triggered a power struggle between the Ministry of Finance and the Bank of Japan for control over the economy. While the Ministry strove to maintain the controlled economic system that created Japan's post-war economic miracle, the central bank plotted to break free from the Ministry by reverting to the free markets of the 1920s.
. . . They reckoned that the wartime economic system and the vast legal powers of the Ministry of Finance could only be overthrown if there was a large crisis - one that would be blamed on the ministry. While observers assumed that all policy-makers have been trying their best to kick-start Japan's economy over the past decade, the surprising truth is that one key institution did not try hard at all.
Werner contends that the Bank of Japan not only blocked the recovery but actually created the bubble that precipitated the downturn:
[T]hose central bankers who were in charge of the policies that
prolonged the recession were the very same people who were responsible
for the creation of the bubble. . . . [They] ordered the banks to expand
their lending aggressively during the 1980s.
In 1989, [they] suddenly tightened their credit controls, thus
bringing down the house of cards that they had built up before. .
In the US, too, the central bank holds the key to recovery. Only it can create more credit for the broad economy. But reversing recession has taken a backseat to resuscitating zombie banks, maintaining the feudal dominion of a private financial oligarchy.
In Japan, interestingly, all that may be changing with the election of a
new administration. As reported in a January 2013
article in Business Week:
Shinzo Abe and the Liberal Democratic Party
swept back into power in mid-December by promising a high-octane mix of
monetary and fiscal policies to pull Japan out of its two-decade run of
economic misery. To get there,
Prime Minister Abe is threatening a hostile takeover of the Bank of
Japan, the nation’s central bank. The terms of surrender may go
something like this: Unless the BOJ agrees to a 2 percent inflation
target and expands its current government bond-buying operation, the
ruling LDP might push a new central bank charter through the Japanese
Diet. That charter would greatly diminish the BOJ’s independence to set
monetary policy and allow the prime minister to sack its governor.
From Bankers’ Bank to
Making the central bank serve the interests of the government and the
people is not a new idea.
Prof. Tim Canova points out that central banks have only recently
been declared independent of government:
[I]ndependence has really come to mean a central bank that has been
captured by Wall Street interests, very large banking interests.
It might be independent of the politicians, but it doesn’t mean
it is a neutral arbiter.
During the Great Depression and coming out of it, the Fed took its cues
from Congress. Throughout
the entire 1940s, the Federal Reserve as a practical matter was not
independent. It took its marching orders from the White House and the
Treasury—and it was the most successful decade in American economic
To free the central bank from Wall Street
capture, Congress or the president could follow the lead of Shinzo Abe
and threaten a hostile takeover of the Fed unless it directs its credit
firehose into the real economy. The unlimited, near-zero-interest credit
line made available to banks needs to be made available to federal and
a similar suggestion was made to Ben Bernanke in January 2011,
however, he said he lacked the authority to comply. If that was what
Congress wanted, he said, it would have to change the Federal Reserve
And that is what may need to be done—rewrite the Federal Reserve Act to serve the interests of the economy and the people.
Webster Tarpley observes that the Fed advanced $27 trillion to
financial institutions through the TAF (Term Asset Facility), the TALF (Term
Asset-backed Securities Loan Facility),
and similar facilities. He proposes an Infrastructure Facility extending
credit on the same terms to state and local governments. It might offer
to buy $3 trillion in 100-year, zero-coupon bonds, the minimum currently
needed to rebuild the nation’s infrastructure. The collateral backing
these bonds would be sounder than the commercial paper of zombie banks,
since it would consist of the roads, bridges, and other tangible
infrastructure built with the loans. If the bond issuers defaulted, the
Fed would get the infrastructure.
Quantitative easing as practiced today is not designed to serve the real economy. It is designed to serve bankers who create money as debt and rent it out for a fee. The money power needs to be restored to the people and the government, but we need an executive and legislature willing to stand up to the banks. A popular movement could give them the backbone. In the meantime, states could set up their own banks, which could leverage the state’s massive capital and revenue base into credit for the local economy.
Ellen Brown is an attorney and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how a private, privileged banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org. The Public Banking Institute is hosting a conference June 2-4, 2013, in San Rafael, CA; details here.
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