It was conceived in 1910 and constructed for the benefit of the private bankers who control it. Congress blessed the scheme in 1913 with passage of the Federal Reserve Act.
These days the Fed doesn’t just backstop America’s too-big-to-fail banks. It has expanded its doctrine of socializing banking losses globally.
The Fed helped bail out private businesses, foreign big banks and central banks in Europe and Japan in the credit crisis of 2008 and is the model for the European Central Bank, as well as the ECB’s primary backstop.
To understand how the Fed gets taxpayers around the world to pay the losses its member banks routinely incur, let’s pull back the curtain on the Fed and explain how it operates.
Here’s What the Fed Really Does
Banks lend money and sometimes they don’t get paid back. That’s not a problem if it doesn’t happen too often and if profits from other loans and investments cover the loan losses.
But since banks have gotten really big and have to make big loans (due to economies of scale and return on capital expectations) they need big borrowers. There are no bigger borrowers on the planet than governments, and that’s where a lot of banks are lending.
Of course, governments aren’t immune to over-borrowing and insolvency.
All the big banks that lent to banks in countries now in financial straits continue to lend to them because if they don’t they won’t get paid back what they are owed. Banks would fail from a cascade of losses and would either have to be bailed out or shut down.
That’s where the Federal Reserve comes in.
They don’t let their constituent members go under. If they have to, they will print money and give it to them, no matter how much they need.
That includes foreign banks and foreign governments. The Fed’s member banks lend all the time to both foreign banks and foreign governments. It only follows that our banks are not immune to what goes on anywhere they have lent money. They are directly in the line of fire.
If there was no Fed or no ECB, there wouldn’t be a backstop for banks that have lent to borrowers in Europe who can’t pay them back. Countries would fail.
But they don’t fail because central banks print money to give to banks so they can extend the loans they made, reschedule them, or in some way keep them going so they don’t have to write them off as losses.
What’s Wrong With Bankers Helping Bankers?…Plenty
The Federal Reserve System was designed to ensure that bankers always get paid. Congress blessed this scheme because Congress can be bought, was bought in 1913, again in 1977 when the Fed was given its “dual mandate,” and is still being bought and paid for by bankers today.
Essentially, the Fed operates on a socialist model. It’s not capitalism because banks would be “allowed” to fail under the rules of capitalism.
But they are protected from failing by virtue of taxpayers being called upon, in one way or another (mostly by future inflation and currency debasement, in other words, less purchasing power) to “socialize” banks’ losses.
There is no going backwards. Globally we couldn’t endure the hardships that would befall us if a cascade of big banks failed. So don’t worry, that won’t happen. But you should be worried about the creeping socialism.
The elitist class of bankers and money brokers, whose incredible wealth is protected by taxpayers, is going to have to increase the size of loans they make since they have more capital to disperse and earn income on, and will end up needing more taxpayers under their thumbs to keep their game a win-win for themselves.
Not that there isn’t a way out for us taxpayers, those of us who would like to earn more than half a percent on our fixed income investments. There is a way out…
We have to end the Fed. It’s just that simple.
End the Fed and all the big banks would have to be either shrunk or broken up, because there would be no more backstopping them with taxpayer money. The truth is they should all be made small enough to be allowed to fail without encumbering the national economy, or unfortunately today, the global economy.
Think about it. Banks that should have failed in 2008 are bigger than ever.
They’ve paid off what they borrowed to stay alive. They are paying dividends again. They are buying back billions and billions of dollars of their stocks again. They are paying big fat bonuses again. But they still complain that tougher capital standards and reserve ratios will ruin their profitability and they won’t be able to lend to the people who need them.
Seriously, this is what the Federal Reserve does, has done, and will continue to allow to happen — unless we end the Fed and their game for good.
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Shah Gilani is the editor of the highly successful trading research service, The Capital Wave Forecast, and a contributing editor to both Money Morning and The Money Map Report. He is considered one of the world’s foremost experts on the credit crisis. His published open letters to the White House, Congress and U.S. Treasury secretaries have outlined detailed alternative policy options that have been lauded by academics and legislators.
His experience and knowledge uniquely qualify him as an expert. Gilani ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When the OEX (options on the Standard & Poor’s 100) began trading on March 11, 1983, Gilani was working in the pit as a market maker, and along with other traders popularized what later became known as the VIX (volatility index). He left Chicago to run the futures and options division of the British banking giant Lloyds TSB. Gilani went on to originate and run a packaged fixed-income trading desk for Roosevelt & Cross Inc., an old line New York boutique bond firm, and established that company’s listed and OTC trading desks. Gilani started another hedge fund in 1999, which he ran until 2003, when he retired to develop land holdings with partners.