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Sunday, February 24, 2013

The Financial Instrument That Could Save the Economy - and Why It Hasn't

From, by Dr. Ellen Brown, 2-24-13. Read link here.

As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy.

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 US government has a technology, called a printing press (or, today, its electronic equivalent)," he said, "that allows it to produce as many US 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 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.

An 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 Monetary Fund:
Banks 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 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 working.

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:

All 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.

Werner contends 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 2003 book Princes of the Yen, Werner maintains that in the 1990s, the BOJ consistently foiled government attempts at creating a recovery. As summarized in a review of the book:

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 maintains that the Bank of Japan not only blocked the recovery, but actually created the bubble that precipitated the downturn:

Those 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....

With banks paralyzed by bad debts, the central bank held the key to a recovery: Only it could step in and create more credit. It failed to do so, and hence the recession continued for years. Thanks to the long recession, the Ministry of Finance was broken up and lost its powers. The Bank of Japan became independent and its power has now become legal.

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 Government Bank

Making the central bank serve the interests of the government and the people is not a new idea. Prof. Tim Canova points out central banks have only recently been declared independent of government:

Independence 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 history.

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 unless it directs its credit fire hose into the real economy. The unlimited, near-zero-interest credit line made available to banks needs to be made available to federal and local governments.

When 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 Act.

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.

Wednesday, February 13, 2013

The coming drone attack on America

By Naomi Wolf, from The Guardian, 12-21-12

Drones on domestic surveillance duties are already deployed by police and corporations. In time, they will likely be weaponised.

People often ask me, in terms of my argument about "ten steps" that mark the descent to a police state or closed society, at what stage we are. I am sorry to say that with the importation of what will be tens of thousands of drones, by both US military and by commercial interests, into US airspace, with a specific mandate to engage in surveillance and with the capacity for weaponization – which is due to begin in earnest at the start of the new year – it means that the police state is now officially here.
In February of this year, Congress passed the FAA Reauthorization Act, with its provision to deploy fleets of drones domestically. Jennifer Lynch, an attorney at the Electronic Frontier Foundation, notes that this followed a major lobbying effort, "a huge push by […] the defense sector" to promote the use of drones in American skies: 30,000 of them are expected to be in use by 2020, some as small as hummingbirds – meaning that you won't necessarily see them, tracking your meeting with your fellow-activists, with your accountant or your congressman, or filming your cruising the bars or your assignation with your lover, as its video-gathering whirs.
Others will be as big as passenger planes. Business-friendly media stress their planned abundant use by corporations: police in Seattle have already deployed them.
An unclassified US air force document reported by CBS (pdf) news expands on this unprecedented and unconstitutional step – one that formally brings the military into the role of controlling domestic populations on US soil, which is the bright line that separates a democracy from a military oligarchy. (The US constitution allows for the deployment of National Guard units by governors, who are answerable to the people; but this system is intended, as is posse comitatus, to prevent the military from taking action aimed at US citizens domestically.)
The air force document explains that the air force will be overseeing the deployment of its own military surveillance drones within the borders of the US; that it may keep video and other data it collects with these drones for 90 days without a warrant – and will then, retroactively, determine if the material can be retained – which does away for good with the fourth amendment in these cases. While the drones are not supposed to specifically "conduct non-consensual surveillance on on specifically identified US persons", according to the document, the wording allows for domestic military surveillance of non-"specifically identified" people (that is, a group of activists or protesters) and it comes with the important caveat, also seemingly wholly unconstitutional, that it may not target individuals "unless expressly approved by the secretary of Defense".
In other words, the Pentagon can now send a domestic drone to hover outside your apartment window, collecting footage of you and your family, if the secretary of Defense approves it. Or it may track you and your friends and pick up audio of your conversations, on your way, say, to protest or vote or talk to your representative, if you are not "specifically identified", a determination that is so vague as to be meaningless.
What happens to those images, that audio? "Distribution of domestic imagery" can go to various other government agencies without your consent, and that imagery can, in that case, be distributed to various government agencies; it may also include your most private moments and most personal activities. The authorized "collected information may incidentally include US persons or private property without consent". Jennifer Lynch of the Electronic Frontier Foundation told CBS:
"In some records that were released by the air force recently … under their rules, they are allowed to fly drones in public areas and record information on domestic situations."
This document accompanies a major federal push for drone deployment this year in the United States, accompanied by federal policies to encourage law enforcement agencies to obtain and use them locally, as well as by federal support for their commercial deployment. That is to say: now HSBC, Chase, Halliburton etc can have their very own fleets of domestic surveillance drones. The FAA recently established a more efficient process for local police departments to get permits for their own squadrons of drones.
Given the Department of Homeland Security militarization of police departments, once the circle is completed with San Francisco or New York or Chicago local cops having their own drone fleet – and with Chase, HSBC and other banks having hired local police, as I reported here last week – the meshing of military, domestic law enforcement, and commercial interests is absolute. You don't need a messy, distressing declaration of martial law.
And drone fleets owned by private corporations means that a first amendment right of assembly is now over: if Occupy is massing outside of a bank, send the drone fleet to surveil, track and harass them. If citizens rally outside the local Capitol? Same thing. As one of my readers put it, the scary thing about this new arrangement is deniability: bad things done to citizens by drones can be denied by private interests – "Oh, that must have been an LAPD drone" – and LAPD can insist that it must have been a private industry drone. For where, of course, will be the accountability from citizens buzzed or worse by these things?
Domestic drone use is here, and the meshing has begun: local cops in Grand Forks, North Dakota called in a DHS Predator drone – the same make that has caused hundreds of civilian casualties in Pakistan – over a dispute involving a herd of cattle. The military rollout in process and planned, within the US, is massive: the Christian Science Monitor reportsthat a total of 110 military sites for drone activity are either built or will be built, in 39 states. That covers America.
We don't need a military takeover: with these capabilities on US soil and this air force white paper authorization for data collection, the military will be effectively in control of the private lives of American citizens. And these drones are not yet weaponized.
"I don't think it's crazy to worry about weaponized drones. There is a real consensus that has emerged against allowing weaponized drones domestically. The International Association of Chiefs of Police has recommended against it," warns Jay Stanley, senior policy analyst at the ACLU, noting that there is already political pressure in favor of weaponization:
"At the same time, it is inevitable that we will see [increased] pressure to allow weaponized drones. The way that it will unfold is probably this: somebody will want to put a relatively 'soft' nonlethal weapon on a drone for crowd control. And then things will ratchet up from there."
And the risk of that? The New America Foundation's report on drone use in Pakistan noted that the Guardian had confirmed 193 children's deaths from drone attacks in seven years. It noted that for the deaths of ten militants, 1,400 civilians with no involvement in terrorism also died. Not surprisingly, everyone in that region is traumatized: children scream when they hear drones. An NYU and Stanford Law School report notes that drones "terrorize citizens 24 hours a day".
If US drones may first be weaponized with crowd-control features, not lethal force features, but with no risk to military or to police departments or DHS, the playing field for freedom of assembly is changed forever. So is our private life, as the ACLU's Stanley explains:
"Our biggest concerns about the deployment of drones domestically is that they will be used to create pervasive surveillance networks. The danger would be that an ordinary individual once they step out of their house will be monitored by a drone everywhere they walk or drive. They may not be aware of it. They might monitored or tracked by some silent invisible drone everywhere they walk or drive."
"So what? Why should they worry?" I asked.
"Your comings and goings can be very revealing of who you are and what you are doing and reveal very intrusive things about you – what houses of worship you are going to, political meetings, particular doctors, your friends' and lovers' houses."
I mentioned the air force white paper. "Isn't the military not supposed to be spying on Americans?" I asked.
"Yes, the posse comitatus act passed in the 19th century forbids a military role in law enforcement among Americans."
What can we do if we want to oppose this? I wondered. According to Stanley, many states are passing legislation banning domestic drone use. Once again, in the fight to keep America a republic, grassroots activism is pitched in an unequal contest against a militarized federal government.

military drone spy
By 2020, it is estimated that as many as 30,000 drones will be in use in US domestic airspace. Photograph: US navy/Reuters