Paul Craig Roberts on the Dollar Demise and the Future of the Negative Interest Rate
Published by Boom Bust
About: Where have all the banks gone? Well, according to statistics from the FDIC, banks are going the way of the dinosaur.
We’ll tell you all about it.
Also economist and former Assistant Treasury Secretary, Paul Craig Roberts, joins Erin today to discuss all things Fed policy.
Finally, Rachel Kurzius and Erin discuss the high net-worth practice of “jurisdiction shopping” in today’s Big Deal.
The Money Changers Serenade: A New Plot Hatches
Former Treasury Secretary Timothy Geithner, a protege of Treasury Secretaries Rubin and Summers, has received his reward for continuing the Rubin-Summers-Paulson policy of supporting the “banks too big to fail” at the expense of the economy and American people. For his service to the handful of gigantic banks, whose existence attests to the fact that the Anti-Trust Act is a dead-letter law, Geithner has been appointed president and managing director of the private equity firm, Warburg Pincus and is on his way to his fortune.
A Warburg in-law financed Woodrow Wilson’s presidential campaign. Part of the reward was Wilson’s appointment of Paul Warburg to the first Federal Reserve Board. The symbiotic relationship between presidents and bankers has continued ever since. The same small clique continues to wield financial power.
Geithner’s career is illustrative. In the 1980s, Geithner worked for Kissinger Associates. In the mid to late 1990s, Geithner served as a deputy assistant Treasury secretary. Under Rubin and Summers he moved up to undersecretary of the Treasury.
From the Treasury he went to the Council on Foreign Relations and from there to the International Monetary Fund (IMF). From there he was appointed president of the Federal Reserve Bank of New York, where he worked to make banks more profitable by allowing higher ratios of debt to capital, thus contributing to the financial crisis.
Geithner arranged the sale of the failed Wall Street firm of Bear Stearns, helped with the taxpayer bailout of AIG, and rejected saving Lehman Brothers from bankruptcy in order to create the crisis atmosphere needed to more fully subordinate US economic policy to the needs of the few large banks.
Rubin, a 26-year veteran of Goldman Sachs, was rewarded by Citibank for his service to the banks while Treasury Secretary with a $50 million compensation package in 2008 and $126,000,000 between 1999 and 2009.
When a person becomes a Treasury official it is made clear that the choice is between serving the banks and becoming rich or trying to serve the public and becoming poor. Few make the latter choice.
As MIchael Hudson has informed us, the goal of the financial sector has always been to convert all income, from corporate profits to government tax revenues, to the service of debt. From the bankers standpoint, the more debt the richer the bankers. Rubin, Summers, Paulson, Geithner, and now banker Treasury Secretary Jack Lew faithfully serve this goal.
The Federal Reserve describes its policy of Quantitative Easing — the creation of new money with which the Fed purchases Treasury debt and mortgage backed securities — as a low interest rate policy in order to stimulate employment and economic growth. Economists and the financial media have parroted this cover story.
In contrast, I have exposed QE as a scheme for pumping profits into the banks and boosting their balance sheets. The real purpose of QE is to drive up the prices of the debt-related derivatives on the banks’ books, thus keeping the banks with solvent balance sheets.
Writing in the Wall Street Journal (“Confessions of a Quantitative Easer,” November 11, 2013), Andrew Huszar confirms my explanation to be the correct one. Huszar is the Federal Reserve official who implemented the policy of QE. He resigned when he realized that the real purposes of QE was to drive up the prices of the banks’ holdings of debt instruments, to provide the banks with trillions of dollars at zero cost with which to lend and speculate, and to provide the banks with “fat commissions from brokering most of the Fed’s QE transactions.” (See: www.paulcraigroberts.org )
This vast con game remains unrecognized by Congress and the public. At the IMF Research Conference on November 8, 2013, former Treasury Secretary Larry Summers presented a plan to expand the con game.
Summers says that it is not enough merely to give the banks interest free money. More should be done for the banks. Instead of being paid interest on their bank deposits, people should be penalized for keeping their money in banks instead of spending it.
To sell this new rip-off scheme, Summers has conjured up an explanation based on the crude and discredited Keynesianism of the 1940s that explained the Great Depression as a problem caused by too much savings. Instead of spending their money, people hoarded it, thus causing aggregate demand and employment to fall.
Summers says that today the problem of too much saving has reappeared. The centerpiece of his argument is “the natural interest rate,” defined as the interest rate at which full employment is established by the equality of saving with investment. If people save more than investors invest, the saved money will not find its way back into the economy, and output and employment will fall.
Summers notes that despite a zero real rate of interest, there is still substantial unemployment. In other words, not even a zero rate of interest can reduce saving to the level of investment, thus frustrating a full employment recovery. Summers concludes that the natural rate of interest has become negative and is stuck below zero.
How to fix this? The way to fix it, Summers says, is to charge people for saving money. To avoid the charges, people would spend the money, thus reducing savings to the level of investment and restoring full employment.
Summers acknowledges that the problem with his solution is that people would take their money out of banks and hoard it in cash holdings. In other words, the cash form of money provides consumers with a freedom to save that holds down consumption and prevents full employment.
Summers has a fix for this: eliminate the freedom by imposing a cashless society where the only money is electronic. As electronic money cannot be hoarded except in bank deposits, penalties can be imposed that force unproductive savings into consumption.
Summers’ scheme, of course, is a harebrained one. With governments running huge deficits, who would purchase bonds at negative interest rates? How would pension and retirement funds operate? Would they also be subject to an annual percentage confiscation?
We know that the response of consumers to the long term decline in real median family income, to the loss of jobs from labor arbitrage across national borders (jobs offshoring), to rising homelessness, to cuts in the social safety net, to the transformation of their full time jobs to part time jobs (employers’ response to Obamacare), has been to reduce their savings rate. Indeed, few have any savings at all. The US personal saving rate is currently 2 percentage points, about 30%, below the long term average. Retired people, unable to earn any interest on their savings from the Fed’s zero interest rate policy, are being forced to draw down their savings in order to pay their bills.
Moreover, it is unclear whether the savings rate is an accurate measure or merely a residual of other calculations. With so many people having to draw down their savings, I wouldn’t be surprised if an accurate measure showed the personal savings rate to be negative.
But for Summers the plight of the consumer is not the problem. The problem is the profits of the banks. Summers has the solution, and the establishment, including Paul Krugman, is applauding it. Once the economy officially turns down again, watch out.
This column first appeared as a Trend Alert, Trends Research Institute
Reprinted with permission from www.paulcraigroberts.org
About Dr. Paul Craig Roberts
Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.
Banks Prepare to Charge Deposit Fees to Customers
During the late October meeting of the Federal Reserve (Fed) Board and the Federal Open Market Committee (FOMC), it was revealed that the 0.25% annual interest rate on money that the banks keep in the Fed would be reduced.
Kris Dawsey, economist for Goldman Sachs said: “The probability of a reduction in the interest rate has increased somewhat . . . The Fed will ultimately decide not to pursue it. One risk is that the move could prompt charges … on bank deposits.”
Industry experts are now decrying that this scenario could affect certain businesses through deposit fees.
Kristin Lemkau, spokesperson for JP Morgan & Chase Co said: “We have no intention of charging for retail customer deposits.”
David George, analyst for Robert W. Baird & Co, explains that the financial institutions “would need to find alternative revenue sources to compensate” because of this decline in the Fed’s interest rate and fees on deposits “would be the most likely” option.
George said: “Having a bank account is a service, like the water and electric bill. And it has become less and less profitable.”
Wayne Abernathy, executive vice president of the American Bankers Association confirmed: “Banks could respond to a drop in the Fed’s interest rate by charging a fee to large business customers that hold millions of dollars in savings accounts. Banks must bear the expense of managing that money.”
Gary Schnitkey, economist at the University of Illinois commented : “Market-watchers do expect the slide in interest rates to end in the near future, but that doesn’t mean they will turn higher immediately. In fact, federal officials will likely take action to keep them at currently low levels in an effort to spur badly needed macroeconomic growth.”
Wall Street is being described as taking this move by the Fed as a threat.
The announcement would cause depositors who earn close to or zero percent interest on checking and savings accounts as a side-effect of the third round of quantitative easing performed by the Fed.
Joshua Siegel, managing partner and chief executive officer with StoneCastle Partners (SCP) said: “From the Fed’s point of view, by discouraging banks from leaving their excess cash at the fed, they are encouraging banks to buy securities in the market (the same as the what they are doing with quantitative-easing purchases) or to go out into the market and make loans. And banks, given their current capital requirements, can be a little riskier, and funds being deployed back into the market would be good for the economy.”
Analysts say that the Durbin Amendment within the Dodd Frank Act which limited fees imposed by merchant retailers onto banks who issue debit cards “has effectively hit consumer-banking revenues pretty hard.”
When accessing debits, banks view checking accounts as high-risk and costing “a lot of money” to the banks.
Insurance is taken when banks impose a minimum balance to the account to ensure the customer retains specified funds by which the bank can manipulate; however this does not equal high revenue for the banks in the long-term.
In 2012, the 7th Circuit Court of Appeals ruled that when a bank is insolvent, under duress or in bankruptcy the funds in private checking accounts could be used to pay off debts or loans owed by the bank.
Since the ruling gives banks the right to co-mingle customer funds with their own, no crime can be committed for the use of customer deposited monies.
According to Walker Todd, former lawyer for the Federal Reserve Bank of New York and Cleveland: “Basically, there is a new 7th Circuit opinion saying that there is no reason to impose a constructive trust on a lender’s takings of customers’ funds from client commodity firms that were used (inappropriately) to secure the firms’ borrowings, as long as the lender can say that it did not know WITH CERTAINTY that customers’ funds were being repledged. Negligence and misappropriation (vs. knowing criminal intent) are now a sufficient excuse for letting the lender keep the money and go to the head of the line for distributions in bankruptcies of the client commodity firms.”
When a customer deposits money into a bank, the bank essentially issues a promise to have those funds available when the customer returns to withdraw the deposited amount.
When the same customer withdraws funds from their account (whether checking or savings) the customer assumes that the bank has enough funds to cover their withdrawal; including the presumption that their monies are separate from the bank’s assets.
Now, those funds are up for grabs by the bank at their discretion without explanation to the customer – nor is the bank obligated to recoup the customer should they “lose” those funds due to bad loans, bankruptcy or stock market loss.
Canada has proposed in their government budget entitled, “Economic Action Plan 2013” that those too big to fail banks will benefit from a bail-in. Just like the European Parliament, Canada is setting the stage for depositors to have their funds removed from their accounts on behalf of the government for the benefit of the technocrats.
The document reads: “The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital; the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.”
Analyst Jim Sinclair explained : “Bail-ins are coming to North America without any doubt, and will be remembered as the ‘Great Leveling,’ of the ‘great Flushing’ (of Lehman Brothers). Not only can it happen here, but it will happen here. It stands on legal grounds by legal precedent both in the U.S., Canada and the U.K.”
According to Sinclair “bail-ins do not require a crisis to occur and can surface one bank at a time, spread out over years. The major situation is deposits above insurance levels in banks too big to fail. Those deposits are directly in harm’s way.”
Image credit: http://www.occupycorporatism.com
About the author:
Michael Snyder: Next Great Wave of Economic Crisis – Gold, Silver, Grow Food, Alternative Energy (Video)
Published by Greg Hunter
Published on Nov 20, 2013
http://usawatchdog.com/michael-snyder… – Michael Snyder, Publisher of TheEconomicCollapseBlog.com says the next crisis, “will be like 2008 on steroids. . . . We’re living in the greatest debt bubble in the history of the planet.” Snyder suggests people need to take steps to protect themselves against this debt bubble bursting. Snyder says, “Learn how to grow good food, get alternative sources of energy, and hold gold and silver for the long term.” Join Greg Hunter as he goes One-on-One with investigative reporter Michael Snyder.
Federal Reserve Hides Trillions?
Still Report #131 — Fed Hides Trillions?
Video published by Bill Still
Lawsuit in U.S. District Court accuses the Fed of “embezzling” $7 Trillion from the United States.
A False Claim (whistleblower) suit has been filed naming the Federal Reserve as defendants. The Federal Reserve (FRBNY and BOG) are accused of hiding a trillion dollars annually using their exclusive handling of records and disbursement of the Treasury security auction accounts.
Those accounts are claimed to have never been subject to independent audit nor have they ever been reported to Congress as required by law.
The Amended Complaint filed in Federal District Court in Kansas City alleges the BOG is operating as a government contractor as defined by the Supreme Court and is not an agency immune from suit. Further, their systemic violation of the law that all profit of the Fed belongs to the government is alleged to negate any claim to government immunity.
Improperly handled funds subject to recovery are statutorily limited to a six year limit. Penalties allow for triple damages.
The link to the legal cite on Scribd:
By: Peter Schiff
Ben’s Rocket to Nowhere
Herd mentality can be as frustrating as it is inexplicable. Once a crowd starts moving, momentum can be all that matters and clear signs and warnings are often totally ignored. Financial markets are currently following this pattern with respect to the unshakable belief that the Federal Reserve is ready, willing, and most importantly, able, to immediately execute a wind down of its quantitative easing program. Although the release last week of the minutes of the Fed’s last policy meeting did not contain a shred of hard information about the certainty or timing of a “tapering” campaign, most observers read into it definitive proof that the Fed would jump into action by December or March at the latest. The herd is blissfully unaware that the Fed may not be able to reverse, or even slow, the course of QE without immediately sending the economy back into recession.
In an interview this week, outgoing Fed Chairman Ben Bernanke likened the QE program to the first stage in a multiple stage rocket that gets the spacecraft off the ground and accelerates it to the point where it is close to achieving permanent orbit. Like a first stage that has spent its fuel and has become dead weight, Bernanke seems to concede that QE is no longer capable of providing positive thrust, and as a result can now be jettisoned (like a first stage) so that the remainder of the spacecraft/economy can now move higher and faster. The Chairman’s nifty metaphor provides some inspiring visuals, but is completely flawed in just about every way imaginable.
In real rocketry, when the first stage separates, it falls back to earth and is no longer a burden to the remainder of the ship. Subsequent booster rockets (which in economic terms Bernanke imagines would be continuation of zero interest rate policies) build on the gains made by the first stage. But the almost $4 trillion in assets that the Fed has accumulated as a result of the QE program will not simply vaporize into the stratosphere like a discarded rocket engine. In fact it will remain tethered to the rest of the economy with chains of solid lead.
In the process of accumulating the world’s largest cache of Treasuries, the Fed has become the most important player in that market. I believe the Fed can’t stop accumulating and dispose of its inventory without creating major market disruptions that will drag the economy down.
This would be true even if the economic rocket were actually approaching escape velocity. In reality, we are still sitting on the launch pad. By keeping interest rates far below market levels and by channeling newly created dollars directly into the financial markets, the QE program has resulted in major gains in the stock, real estate, and bond markets. Many have argued that all three are currently in bubble territory. Yet to the casual observer, these gains are proof of America’s surging economic vitality.
But things look very different on Main Street, where the employment picture has not kept pace with the rising prices of financial assets. The work force participation rate continues to shrink (recently falling back to levels last seen in 1978),real wages have declined, and since the end of 2009 the temporary workforce has grown at a pace that is 14 times faster than those with permanent jobs. Americans are driving less, vacationing less, and switching to lower quality products and services in order to deal with falling purchasing power. But the herd is closely watching the Fed’s rocket show and does not understand that stocks and housing will likely fall, and bond yields rise steeply, once the QE is removed. The crowd is similarly ignoring the significance of the Chinese announcement.
But while the Fed was gaining much attention by saying nothing, the Chinese made a blockbuster statement that was summarily ignored. Last week, a deputy governor of the People’s Bank of China said that buying foreign exchange reserves was now no longer in China’s national interest. The implication that China may no longer be accumulating U.S. government debt would amount to the “mother of all tapers” and could create a clear and present danger to the American economy. But the story barely rated a mention in the American media. Over the past decade or so, the People’s Bank of China has been one of the largest buyers of U.S. Treasuries (after various U.S. government entities that are essentially nationalizing U.S. debt). China currently sits on $1 trillion or more in U.S. bond obligations.
So, just as many expect that the #1 buyer of Treasuries (the Fed) will soon begin paring back its purchases, the top foreign holder may cease buying, thereby opening a second front in the taper campaign. This should cause any level-headed observer to conclude that the market for such bonds will fall dramatically, causing severe upward pressure on interest rates. But the possibility is not widely discussed.
Also left out of the discussion is the degree to which remaining private demand for Treasuries is a function of the Fed’s backstop (the Greenspan put, renewed by Bernanke, and expected to be maintained by Yellen). The ultra-low yields currently offered by long-term Treasuries are only acceptable to investors so long as the Fed removes the risk of significant price declines. If the private buyers, the Fed, China (and other central banks that may likely follow China’s lead) refuse to buy Treasuries, who will take on the slack? Absent the Fed’s backstop, prices will likely have to fall considerably to offer an acceptable risk/reward dynamic to investors. The problem is that any yield high enough to satisfy investors may be too high for the government or the economy to afford.
Little thought seems to be given to how the economy would react to 5% yields on 10 year Treasuries (a modest number in historical standards). The herd assumes that our stronger economy could handle such levels. In reality, 5% rates would likely deeply impact the financial sector, prick the bubbles in housing and stocks, blow a hole in the federal budget, and cause sizable losses in the value of the Fed’s bond holdings. These developments would require the Fed to devise a rocket with even more power than the one it is now thinking of discarding.
That is why when it comes to tapering, the Fed is all bark and no bite. In fact, toward the end of last week, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, said that the Fed “won’t taper its bond-buying until the economy is ready.” He must know that the economy will never be ready. It’s like a drug addict claiming that he’ll stop using when he no longer needs them to stay high.
But the market understands none of this. Instead it is operating under dangerous delusions that are creating sky-high valuations for the latest social media craze, undermining the investment case for gold and other inflation hedges, and encouraging people to ignore growing risks that are hiding in plain sight.
This is not unusual in market history. When the spell is finally broken and markets wake up to reality, we will scratch our heads and wonder how we could ever have been so misguided.
Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.
Banks and Reid working together? “Nuclear Option,” a move to make sure Yellen is confirmed and QE continues? (Video)0
Banks and Reid working together? “Nuclear Option,” a move to make sure Yellen is confirmed and QE continues? (Video)
This in an interesting take on why Reid moved when he did. From one of the best connected people in politics, Ron Paul. (He does have a son in the Senate.)
End the Fed.
Image credit: http://www.againstcronycapitalism.org
Jim Rogers Says “Abolish the Fed and Resign”
It was an historic day on Wall Street with the Dow topping 16,000 on Monday. We’ll tell you why-and-what caused the run.
And the revolving door of Washington-to-Wall-Street takes another spin! This time it’s Timothy Geithner in the turnstile. We’ll tell you where he’s going.
Also, “What Would Jim Rogers Do”? We follow up with the legendary investor, and bow-tie aficionado, to get his take on what he would do if put charge of the Fed.
Finally, foreclosures are up from September. In some cities one in every 300 homes received a foreclosure filing last month. Is yours on the list? Rachel Kurzius and Erin discuss in today’s Big Deal.
Published by Boom Bust
The Mises View: “Our Enemy The Fed” | Glenn Jacobs
Published by misesmedia
Glenn Jacobs explains why understanding the Federal Reserve System is one of the most important tasks facing Americans. Jacobs is an American professional wrestler and actor, known by the ring name “Kane”. For more information, visit the Mises Institute online at mises.org.
By Ron Paul
Federal Reserve Steals From the Poor and Gives to the Rich
Last Thursday the Senate Banking Committee held hearings on Janet Yellen’s nomination as Federal Reserve Board Chairman. As expected, Ms. Yellen indicated that she would continue the Fed’s “quantitative easing” (QE) polices, despite QE’s failure to improve the economy. Coincidentally, two days before the Yellen hearings, Andrew Huszar, an ex-Fed official, publicly apologized to the American people for his role in QE. Mr. Huszar called QE “the greatest backdoor Wall Street bailout of all time.”
As recently as five years ago, it would have been unheard of for a Wall Street insider and former Fed official to speak so bluntly about how the Fed acts as a reverse Robin Hood. But a quick glance at the latest unemployment numbers shows that QE is not benefiting the average American. It is increasingly obvious that the Fed’s post-2008 policies of bailouts, money printing, and bond buying benefited the big banks and the politically-connected investment firms. QE is such a blatant example of crony capitalism that it makes Solyndra look like a shining example of a pure free market!
It would be a mistake to think that QE is the first time the Fed’s policies have benefited the well-to-do at the expense of the average American. The Fed’s polices have always benefited crony capitalists and big spending politicians at the expense of the average American.
By manipulating the money supply and the interest rate, Federal Reserve polices create inflation and thereby erode the value of the currency. Since the Federal Reserve opened its doors one hundred years ago, the dollar has lost over 95 percent of its purchasing power —that’s right, today you need $23.70 to buy what one dollar bought in 1913!
As pointed out by the economists of the Austrian School, the creation of new money does not impact everyone equally. The well-connected benefit from inflation, as they receive the newly-created money first, before general price increases have spread through the economy. It is obvious, then, that middle- and working-class Americans are hardest hit by the rising level of prices.
Congress also benefits from the devaluation of the currency, as it allows them to increase welfare- and warfare-spending without directly taxing the people. Instead, the increase is only felt via the hidden “inflation tax.” I have often said that the inflation tax is one of the worst taxes because it is hidden and because it is regressive. Of course, there is a limit to how long the Fed can facilitate big government spending without causing an economic crisis.
Far from promoting a sound economy for all, the Federal Reserve is the main cause of the boom-and-bust economy, as well as the leading facilitator of big government and crony capitalism. Fortunately, in recent years more Americans have become aware of how the Fed is impacting their lives. These Americans have joined efforts to educate their fellow citizens on the dangers of the Federal Reserve and have joined efforts to bring transparency to the Federal Reserve by passing the Audit the Fed bill.
Auditing the Fed is an excellent first step toward restoring a monetary policy that works for the benefit of the American people, not the special interests. Another important step is to repeal legal tender laws that restrict the ability of the people to use the currency of their choice. This would allow Americans to protect themselves from the effects of the Fed’s polices. Auditing and ending the Fed, and allowing Americans to use the currency of their choice, must be a priority for anyone serious about restoring peace, prosperity, and liberty.