Friday, March 19, 2010
German Central Bank Admits that Credit is Created Out of Thin Air
Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times more than they actually have in reserves. But very few people - with the exception of those in the banking industry and financial experts - know where credit really comes from.
Germany's central bank - the Deutsche Bundesbank (German for German Federal Bank) - has admitted in writing that banks create credit out of thin air.
As the Bundesbank states in a publication entitled "Money and Monetary Policy" (pages 88-93; translation provided by Google translate, but German speaker and economic writer Festan von Geldern confirmed the basic translation):
4.4 Creation of the banks money
Money is created by "money creation". Both [central banks] and private commercial banks can create money. In the euro monetary system [money creation] arises mainly through the granting of loans, as well as the fact that central banks or commercial banks to buy assets such as gold, foreign currencies, real estate or securities. If the central bank granted a loan from a commercial bank and crediting the amount in the account of the bank at the central bank, created “central bank money.”
***
Money creation by commercial banksIn other words, money is created as book-entry by purchasing assets or entering credits on the left side of the balance-sheet and corresponding deposits on the right side. In other words, credit is created out of thin air.The commercial banks can create money itself, the so-called bank money. The money creation process through which commercial banks can be explained by the related postings: If a commercial bank to a customer a loan, they booked in its balance sheet as an asset against a loan receivable the client - for example, 100,000. At the same time, the bank writes down the customer's checking account, which is run on the liabilities of the bank's balance sheet, 100,000 euros good. This credit increases the deposits of customers on its current account - it creates deposit money, which increases the money supply.
Frontiers of money creationAs I've previously pointed out, the Federal Reserve is taking the same tack, creating conditions that guarantee that American banks will have huge excess reserves so as to prevent inflation. Back to the publication:The above description might leave the impression that the commercial banks are able to draw an infinite amount of money in bank accounts. If this were really so, this could be inflationary. The central bank therefore takes effect on the extent of lending and money creation. It requires commercial banks to hold the reserve.
Central banks, commercial banks can typically obtain only by the fact that the central bank granted them credit. For these loans, commercial banks have to pay the central bank interest rate. Increase this rate, the central bank, the "prime rate", the commercial banks usually raise their part, the rates at which they lend themselves. There will be a general rise in interest rates. This, however, dampens the tendency of businesses and households, the demand for loans. By raising or lowering the key interest rate the central bank can thus influence the business sector demand for credit - and thus on Lending and bank money creation.The commercial banks need central bank money to cover not only for the reserve, but also to the cash needs of its customers. Each bank customer may be credit in the bank account into cash to pay off. If the stocks of the banks in cash to be in short supply, the central bank can create only remedy. Because only they are permitted to bring additional notes in circulation. To meet the cash needs of its clients, the commercial bank must therefore include, where appropriate, with the central bank for a loan. This leads to the creation of central bank money. The so-purchased assets for central bank money can pay off the commercial bank in cash let. Thus, the cash is in circulation: from the central bank to commercial banks and from these to the bank customers.
Central Bank money is also to cover the non-cash payments are required: a customer transfers money from its credit to a customer at another bank, this results in many cases led to the sending bank central bank needs to transfer money to the receiving bank. The central banks then moves from one bank to another.
***
The commercial banks can use the surplus of central bank money and to award additional credits to businesses and households. As previously described, arises from the award of additional credits additional demand for central bank money - which can be covered in this special situation of great uncertainty among banks by the existing excess liquidity. The abundant supply of liquidity relief, a bank that wants to provide a loan, from the traditional consideration of how much money they need after the award of credit is, how it is constituted, and at what cost. Using the so-called money creation multiplier can be estimated how large the potential for additional Credit limit is.
Do you get it now?
Private banks don't make loans because they have extra deposits lying around. The process is the exact opposite:
(1) Each private bank "creates" loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding liabilities are created on their books at the same time. But see below); then
(2) If the bank doesn't have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);
(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.
It's not just Bernanke ... the central banks and their owners - the private commercial banks - have been running the printing presses for hundreds of years.
Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won't even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II's capital requirements - but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless).
The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there.It is - in fact - a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).
At the very least, the system must be changed so that it is not - by definition - perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people.
Thursday, March 18, 2010
Congressman Grayson Demands Release of AIG Emails
Congressman Grayson sent the following letter to AIG's trustee:
March 18, 2010
AIG Credit Facility Trust
Trustee Peter A. Langerman
Trustee Chester B. Feldberg
Trustee Jill M. Considine
Arnold & Porter LLP
399 Park Avenue
New York, NY 10022
Dear Mr. Langerman, Mr. Feldberg and Ms. Considine,
I write to request that you turn over to this office, and the public, e-mails backed up on AIG’s servers, including internal accounting documents and financial models developed by the company in the last decade. The public owns AIG. We bought it, for an initial down payment of $182 billion. You are the representatives of the public, through your positions as the three trustees of the AIG Credit Facility Trust.
The public is unhappy with the purchase. In March, 2009, a poll found that 82% of the public wanted bonuses to AIG employees returned. This didn’t happen. We do not know who is responsible for the company’s collapse, or whether they are working now at other banks or for the Federal government. We do not know if they got bonuses, if they were committing fraud, whether there were kickbacks from counterparties, or if there was any significant restraining role played by the regulatory community. We cannot separate the bad decision-makers from innocent employees, because we simply do not know what went on. You can address this problem, by releasing to us and on the internet, with reasonable discretion, all or sustainably all of the emails and documents that describe the web of relationships and practices behind AIG’s failed business.
Last year, I asked former AIG CEO Ed Liddy to give me the names of the people who destroyed AIG and cost taxpayers tens of billions of dollars. He refused. I asked the Government Accountability Office (GAO) to look into the matter. The GAO wrote that it didn’t have the authority to do an audit. I requested that the Special Inspector General of TARP look into the problem. I was told that the problem is too complicated.
The ball is in your court. As experienced fraud investigators Bill Black, Eliot Spitzer, and Frank Portnoy wrote in December, 2009:
Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story. In past cases of financial fraud — from the complex swaps that Bankers Trust sold to Procter & Gamble in the early 1990s to the I.P.O. kickback schemes of the late 1990s to the fall of Enron — e-mail messages and internal documents became the central exhibits in our collective understanding of what happened, and why.
[Here is Black, Spitzer and Portnoy's letter.]
On Wall Street, winners can win, but losers must lose. This did not happen with AIG. AIG itself, AIG employees, and AIG counterparties were bailed out. It is beyond outrageous that this company, which taxpayers capitalized after Wall Street used it as a slush fund, hides nearly all relevant facts from its owners, the public. Should this information be released, it is likely that the value of AIG’s remaining businesses will be unchanged. In any event, the public and public markets will benefit dramatically from transparency, because reliable information is the cornerstone of effective markets.
I ask that you exercise prudent judgment as stewards of the public interest, and direct the release of all or substantially all emails and financial records into the public domain.
Sincerely,
Alan Grayson
Member of Congress
Chairs of Both the 9/11 Commission and the Joint Intelligence Inquiry into 9/11 Said That Government Minders Obstructed the 9/11 Investigation
As I detailed previously, both the Joint Intelligence Committee and 9/11 Commission investigations into 9/11 had government "minders" intimidating witnesses into not saying anything the government didn't like.
You may assume that the issue of "minders" is overblown, and is not really that important.
But, as the New York Times noted in 2003:
The panel [i.e. the 9/11 Commission] also said the failure of the Bush administration to allow officials to be interviewed without the presence of government colleagues could impede its investigation, with the commission's chairman suggesting today that the situation amounted to "intimidation" of the witnesses.
***[9/11 Commission co-chairs] Mr. Kean and Mr. Hamilton suggested that the Justice Department was behind a directive barring intelligence officials from being interviewed by the panel without the presence of agency colleagues.
At a news conference, Mr. Kean described the presence of "minders" at the interviews as a form of intimidation. "I think the commission feels unanimously that it's some intimidation to have somebody sitting behind you all the time who you either work for or works for your agency," he said. "You might get less testimony than you would."
"We would rather interview these people without minders or without agency people there," he said.
And as I previously noted, a recently released 9/11 Commission memo complains that:
- Minders “answer[ed] questions directed at witnesses;”
- Minders acted as “monitors, reporting to their respective agencies on Commission staffs lines of inquiry and witnesses’ verbatim responses.” The staff thought this “conveys to witnesses that their superiors will review their statements and may engage in retribution;” and
- Minders “positioned themselves physically and have conducted themselves in a manner that we believe intimidates witnesses from giving full and candid responses to our questions.”
Still think this isn't an important issue?
Senator Bob Graham, former chairman of the Senate Intelligence Committee, and chair of the Joint Inquiry of the House and Senate Intelligence Committees into 9/11, said in 2005:
The [9/11] commission's findings were based on an interview with al-Bayoumi in Saudi Arabia with Saudi Arabian officials present. "He had no motivation to speak truthfully as to his role," he said.
When government officials are present, it creates conditions where the witness "has no motivation to speak truthfully."
Bottom Line: The co-chairs of the 9/11 Commission, Tom Keane and Lee Hamilton, and chair of the the Joint Inquiry of the House and Senate Intelligence Committees into 9/11, Bob Graham, said that minders obstructed the investigation into 9/11.
Shouldn't we believe them?
"The Reason For This Cover-Up Goes Right To The White House"
The 9/11 Commission Report was largely based on a third-hand account of what tortured detainees said, with two of the three parties in the communication being government employees.
The official 9/11 Commission Report states:
Chapters 5 and 7 rely heavily on information obtained from captured al Qaeda members. A number of these "detainees" have firsthand knowledge of the 9/11 plot. Assessing the truth of statements by these witnesses-sworn enemies of the United States-is challenging. Our access to them has been limited to the review of intelligence reports based on communications received from the locations where the actual interrogations take place. We submitted questions for use in the interrogations, but had no control over whether, when, or how questions of particular interest would be asked. Nor were we allowed to talk to the interrogators so that we could better judge the credibility of the detainees and clarify ambiguities in the reporting.
In other words, the 9/11 Commissioners were not allowed to speak with the detainees, or even their interrogators. Instead, they got their information third-hand.
The Commission didn't really trust the interrogation testimony. For example, one of the primary architects of the 9/11 Commission Report, Ernest May, said in May 2005:
We never had full confidence in the interrogation reports as historical sources.
As I noted last May:
Abu Zubaida was well-known to the FBI as being literally crazy. The Washington Post quotes "FBI officials, including agents who questioned [alleged Al-Qaeda member Abu Zubaida] after his capture or reviewed documents seized from his home" as concluding that he was:Newsweek is running an essay by [New York Times investigative reporter] Philip Shenon saying [that the 9/11 Commission Report was unreliable because most of the information was based on the statements of tortured detainees]:
The commission appears to have ignored obvious clues throughout 2003 and 2004 that its account of the 9/11 plot and Al Qaeda's history relied heavily on information obtained from detainees who had been subjected to torture, or something not far from it.
The panel raised no public protest over the CIA's interrogation methods, even though news reports at the time suggested how brutal those methods were. In fact, the commission demanded that the CIA carry out new rounds of interrogations in 2004 to get answers to its questions.
That has troubling implications for the credibility of the commission's final report. In intelligence circles, testimony obtained through torture is typically discredited; research shows that people will say anything under threat of intense physical pain.
And yet it is a distinct possibility that Al Qaeda suspects who were the exclusive source of information for long passages of the commission's report may have been subjected to "enhanced" interrogation techniques, or at least threatened with them, because of the 9/11 Commission....
Information from CIA interrogations of two of the three—KSM and Abu Zubaydah—is cited throughout two key chapters of the panel's report focusing on the planning and execution of the attacks and on the history of Al Qaeda.
Footnotes in the panel's report indicate when information was obtained from detainees interrogated by the CIA. An analysis by NBC News found that more than a quarter of the report's footnotes—441 of some 1,700—referred to detainees who were subjected to the CIA's "enhanced" interrogation program, including the trio who were waterboarded.
Commission members note that they repeatedly pressed the Bush White House and CIA for direct access to the detainees, but the administration refused. So the commission forwarded questions to the CIA, whose interrogators posed them on the panel's behalf.
The commission's report gave no hint that harsh interrogation methods were used in gathering information, stating that the panel had "no control" over how the CIA did its job; the authors also said they had attempted to corroborate the information "with documents and statements of others."
But how could the commission corroborate information known only to a handful of people in a shadowy terrorist network, most of whom were either dead or still at large?
Former senator Bob Kerrey of Nebraska, a Democrat on the commission, told me last year he had long feared that the investigation depended too heavily on the accounts of Al Qaeda detainees who were physically coerced into talking. ...
Kerrey said it might take "a permanent 9/11 commission" to end the remaining mysteries of September 11.
[L]argely a loudmouthed and mentally troubled hotelier whose credibility dropped as the CIA subjected him to a simulated drowning technique known as waterboarding and to other "enhanced interrogation" measures.For example:
Retired FBI agent Daniel Coleman, who led an examination of documents after Abu Zubaida's capture in early 2002 and worked on the case, said the CIA's harsh tactics cast doubt on the credibility of Abu Zubaida's information.
"I don't have confidence in anything he says, because once you go down that road, everything you say is tainted," Coleman said, referring to the harsh measures. "He was talking before they did that to him, but they didn't believe him. The problem is they didn't realize he didn't know all that much."
***
"They said, 'You've got to be kidding me,' " said Coleman, recalling accounts from FBI employees who were there. " 'This guy's a Muslim. That's not going to win his confidence. Are you trying to get information out of him or just belittle him?'" Coleman helped lead the bureau's efforts against Osama bin Laden for a decade, ending in 2004.
Coleman goes on to say:
Abu Zubaida ... was a "safehouse keeper" with mental problems who claimed to know more about al-Qaeda and its inner workings than he really did.
***
Looking at other evidence, including a serious head injury that Abu Zubaida had suffered years earlier, Coleman and others at the FBI believed that he had severe mental problems that called his credibility into question. "They all knew he was crazy, and they knew he was always on the damn phone," Coleman said, referring to al-Qaeda operatives. "You think they're going to tell him anything?"
ACLU, FireDogLake's Marcy Wheeler and RawStory broke the story yesterday that (quoting RawStory):
Senior Bush administration officials sternly cautioned the 9/11 Commission against probing too deeply into the terrorist attacks of September 11, 2001, according to a document recently obtained by the ACLU.
The notification came in a letter dated January 6, 2004, addressed by Attorney General John Ashcroft, Defense Secretary Donald H. Rumsfeld and CIA Director George J. Tenet. The ACLU described it as a fax sent by David Addington, then-counsel to former vice president Dick Cheney.
In the message, the officials denied the bipartisan commission's request to question terrorist detainees, informing its two senior-most members that doing so would "cross" a "line" and obstruct the administration's ability to protect the nation.
"In response to the Commission's expansive requests for access to secrets, the executive branch has provided such access in full cooperation," the letter read. "There is, however, a line that the Commission should not cross -- the line separating the Commission's proper inquiry into the September 11, 2001 attacks from interference with the Government's ability to safeguard the national security, including protection of Americans from future terrorist attacks."
***
"The Commission staff's proposed participation in questioning of detainees would cross that line," the letter continued. "As the officers of the United States responsible for the law enforcement, defense and intelligence functions of the Government, we urge your Commission not to further pursue the proposed request to participate in the questioning of detainees."
Destruction of Evidence
The interrogators made videotapes of the interrogations. The 9/11 Commission asked for all tapes, but the CIA lied and said there weren't any.
The CIA then destroyed the tapes.
Specifically, the New York Times confirms that the government swore that it had turned over all of the relevant material regarding the statements of the people being interrogated:
But is the destruction of the tapes -- and hiding from the 9/11 Commission the fact that the tapes existed -- a big deal? Yes, actually. As the Times goes on to state:“The commission did formally request material of this kind from all relevant agencies, and the commission was assured that we had received all the material responsive to our request,” said Philip D. Zelikow, who served as executive director of the Sept. 11 commission ....
“No tapes were acknowledged or turned over, nor was the commission provided with any transcript prepared from recordings,” he said.
Daniel Marcus, a law professor at American University who served as general counsel for the Sept. 11 commission and was involved in the discussions about interviews with Al Qaeda leaders, said he had heard nothing about any tapes being destroyed.Indeed, 9/11 Commission co-chairs Thomas Keane and Lee Hamilton wrote:If tapes were destroyed, he said, “it’s a big deal, it’s a very big deal,” because it could amount to obstruction of justice to withhold evidence being sought in criminal or fact-finding investigations.
Those who knew about those videotapes — and did not tell us about them — obstructed our investigation.The CIA also is refusing to release any transcripts from the interrogation sessions. As I wrote a year ago:
Trying to Create a False Linkage?What does the fact that the CIA destroyed numerous videotapes of Guantanamo interrogations, but has 3,000 pages of transcripts from those tapes really mean?
Initially, it means that CIA's claim that it destroyed the video tapes to protect the interrogators' identity is false. Why? Well, the transcripts contain the identity of the interrogator. And the CIA is refusing to produce the transcripts.
Obviously, the CIA could have "blurred" the face of the interrogator and shifted his voice (like you've seen on investigative tv shows like 60 Minutes) to protect the interrogator's identity. And since the CIA is not releasing the transcripts, it similarly could have refused to release the videos.
The fact that the CIA instead destroyed the videos shows that it has something to hide.
I have repeatedly pointed out that the top interrogation experts say that torture doesn't work.
As I wrote last May:
Other Obstructions of JusticeThe fact that people were tortured in order to justify the Iraq war by making a false linkage between Iraq and 9/11 is gaining attention.
Many people are starting to understand that top Bush administration officials not only knowingly lied about a non-existent connection between Al Qaida and Iraq, but they pushed and insisted that interrogators use special torture methods aimed at extracting false confessions to attempt to create such a false linkage.
Indeed, the Senate Armed Services Committee found that the U.S. used torture techniques specifically aimed at extracting false confessions (and see this).
And as Paul Krugman wrote in the New York Times:
[A]ccording to NBC news:Let’s say this slowly: the Bush administration wanted to use 9/11 as a pretext to invade Iraq, even though Iraq had nothing to do with 9/11. So it tortured people to make them confess to the nonexistent link.
- Much of the 9/11 Commission Report was based upon the testimony of people who were tortured
- At least four of the people whose interrogation figured in the 9/11 Commission Report have claimed that they told interrogators information as a way to stop being "tortured."
- One of the Commission's main sources of information was tortured until he agreed to sign a confession that he was NOT EVEN ALLOWED TO READ
In fact, the self-confessed "mastermind" of 9/11 also confessed to crimes which he could not have committed. He later said that he gave the interrogators a lot of false information - telling them what he thought they wanted to hear - in an attempt to stop the torture. We also know that he was heavily tortured specifically for the purpose of trying to obtain false information about 9/11 - specifically, that Iraq had something to do with it.
- The 9/11 Commission itself doubted the accuracy of the torture confessions, and yet kept their doubts to themselves
***Remember, as discussed above, the torture techniques used by the Bush administration to try to link Iraq and 9/11 were specifically geared towards creating false confessions (they were techniques created by the communists to be used in show trials).
***
The above-linked NBC news report quotes a couple of legal experts to this effect:
Michael Ratner, president of the Center for Constitutional Rights, says he is "shocked" that the Commission never asked about extreme interrogation measures.
"If you’re sitting at the 9/11 Commission, with all the high-powered lawyers on the Commission and on the staff, first you ask what happened rather than guess," said Ratner, whose center represents detainees at Guantanamo. "Most people look at the 9/11 Commission Report as a trusted historical document. If their conclusions were supported by information gained from torture, therefore their conclusions are suspect."...Karen Greenberg, director of the Center for Law and Security at New York University’s School of Law, put it this way: "[I]t should have relied on sources not tainted. It calls into question how we were willing to use these interrogations to construct the narrative."The interrogations were "used" to "construct the narrative" which the 9/11 Commission decided to use.
Remember (as explored in the book The Commission by respected journalist Philip Shenon), that the Executive Director of the 9/11 Commission was an administration insider whose area of expertise is the creation and maintenance of "public myths" thought to be true, even if not actually true. He wrote an outline of what he wanted the report to say very early in the process, controlled what the Commission did and did not analyze, then limited the scope of the Commission's inquiry so that the overwhelming majority of questions about 9/11 remained unasked (see this article and this article).
***As constitutional law expert Jonathan Turley stated:
[The 9/11 Commission] was a commission that was really made for Washington - a commission composed of political appointees of both parties that ran interference for those parties - a commission that insisted at the beginning it would not impose blame on individuals.
The failure of the government to allow the 9/11 Commission to speak with the detainees directly and the CIA's subsequent destruction of the interrogation videotapes isn't the first obstruction of justice by the government regarding the 9/11 investigations.
For example:
- The chairs of both the 9/11 Commission and the Joint Inquiry of the House and Senate Intelligence Committees into 9/11 said that government "minders" obstructed the investigation into 9/11 by intimidating witnesses
- The 9/11 Commissioners concluded that officials from the Pentagon lied to the Commission, and considered recommending criminal charges for such false statements
- The tape of interviews of air traffic controllers on-duty on 9/11 was intentionally destroyed by crushing the cassette by hand, cutting the tape into little pieces, and then dropping the pieces in different trash cans around the building as shown by this NY Times article (summary version is free; full version is pay-per-view) and by this article from the Chicago Sun-Times
- Investigators for the Congressional Joint Inquiry discovered that an FBI informant had hosted and even rented a room to two hijackers in 2000 and that, when the Inquiry sought to interview the informant, the FBI refused outright, and then hid him in an unknown location, and that a high-level FBI official stated these blocking maneuvers were undertaken under orders from the White House. As the New York Times notes:
Senator Bob Graham, the Florida Democrat who is a former chairman of the Senate Intelligence Committee, accused the White House on Tuesday of covering up evidence . . .
* * *
The accusation stems from the Federal Bureau of Investigation's refusal to allow investigators for a Congressional inquiry and the independent Sept. 11 commission to interview an informant, Abdussattar Shaikh, who had been the landlord in San Diego of two Sept. 11 hijackers.
In his book "Intelligence Matters," Mr. Graham, the co-chairman of the Congressional inquiry with Representative Porter J. Goss, Republican of Florida, said an F.B.I. official wrote them in November 2002 and said "the administration would not sanction a staff interview with the source.'' On Tuesday, Mr. Graham called the letter "a smoking gun" and said, "The reason for this cover-up goes right to the White House."
Wednesday, March 17, 2010
The American Dream Has Moved Abroad
The American dream has always been that even those with humble roots can end up wealthy.
The American dream is what has motivated generations of Americans - natives and immigrants alike - to work hard and play by the rules.
And as Michael Moore wrote in 2003, the American dream is what has kept Americans from rebelling against corporate corruption:
After fleecing the American public and destroying the American dream for most working people, how is it that, instead of being drawn and quartered and hung at dawn at the city gates, the rich got a big wet kiss from Congress ... and no one says a word? How can that be?
I think it's because we're still addicted to the Horatio Alger fantasy drug. Despite all the damage and all the evidence to the contrary, the average American still wants to hang on to this belief that maybe, just maybe, he or she (mostly he) just might make it big after all.
So don't attack the rich man, because one day that rich man may be me!
But as I have previously noted, things have gotten much worse recently:
- Income inequality is worse than it has been since at least 1917
- "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007"
- "In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."
[T]he average wage of Americans, adjusting for inflation, is lower than it was in the 1970s. The minimum wage, adjusting for inflation, is lower than it was in the 1950s.
***
On the other hand, billionaires have never had it better ...
***
As economics professor and former Secretary of Labor Robert Reich writes...:
Are we finally in a recovery? ... Big global companies, Wall Street, and high-income Americans who hold their savings in financial instruments are clearly doing better. As to the rest of us -- small businesses along Main Streets, and middle and lower-income Americans -- forget it.
Warren Buffet said a couple of years ago:
There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.
Now, the OECD has found that upward mobility is lower in the U.S. than most other developed countries. Dan Froomkin provides a must-read summary of the report:
A new report from the Organization for Economic Co-Operation and Development (OECD) finds that social mobility between generations is dramatically lower in the U.S. than in many other developed countries.
***
The report finds the U.S. ranking well below Denmark, Australia, Norway, Finland, Canada, Sweden, Germany and Spain in terms of how freely citizens move up or down the social ladder. Only in Italy and Great Britain is the intensity of the relationship between individual and parental earnings even greater.
For instance, according to the OECD, 47 percent of the economic advantage that high-earning fathers in the United States have over low-earning fathers is transmitted to their sons, compare to, say, 17 percent in Australia and 19 percent in Canada.
***
All in all, the OECD report is an ugly reality check for a country that has historically seen itself as uniquely rewarding of talent; as a place free of the sorts of rigid social structures that led so many generations of immigrants to leave Old Europe.
In other words, the American dream has moved abroad.
Tuesday, March 16, 2010
Colleen Rowley: Minders Ensured She Didn't Say Anything About 9/11 the FBI Didn't WANT Told, Even to Government Officials With Top Security Clearance
FBI whistleblower Colleen Rowley says in a new interview that she was "minded" during her testimony to the Joint Intelligence Committee investigation of 9/11.
Specifically, she said that "FBI minders" listened to her every word, to trail her and make sure that she didn't tell government personnel with top secret clearance even higher than her own anything which the FBI did not want to be told.
While this might sound fantastic, it is nothing new.
Rowley said the same had happened to Daniel Ellsberg went to members of Congress with the Pentagon papers.
As I wrote a year ago:
9/11 Commission chair Thomas Kean points out that if "minders" had been present during the Commission's investigation, that would have been intimidation, which would have stemmed the flow of testimony from the witnesses:
I think the commission feels unanimously that it’s some intimidation to have somebody sitting behind you all the time who you either work for or works for your agency. You might get less testimony than you would.However, that's exactly what happened to Kean's own 9/11 Commission.
A recently released 9/11 Commission memo [released in January 2009 from the Commission to the National Archives; referenced in the The National Commission on Terrorist Attacks Upon the United States, Finding Aid: Series Descriptions and Folder Title Lists, page 52, "Memo Concerning Minders Conduct" *] highlights the role of government “minders” who accompanied witnesses interviewed by the commission. It was added to the National Archives’ files at the start of the year and discovered there by History Commons contributor paxvector.
The memo, entitled “Executive Branch Minders’ Intimidation of Witnesses,” complains that:
- Minders “answer[ed] questions directed at witnesses;”
- Minders acted as “monitors, reporting to their respective agencies on Commission staffs lines of inquiry and witnesses’ verbatim responses.” The staff thought this “conveys to witnesses that their superiors will review their statements and may engage in retribution;” and
- Minders “positioned themselves physically and have conducted themselves in a manner that we believe intimidates witnesses from giving full and candid responses to our questions.”
The memo was drafted by three staffers on the commission’s Team 2, which reviewed the overall structure of the US intelligence community. One of the drafters was Kevin Scheid, a senior staffer who led the team. His co-writers were Lorry Fenner, an air force intelligence officer, and lawyer Gordon Lederman. The complaint was sent to the commission’s counsels, Daniel Marcus and Steve Dunne, in October 2003, about halfway through the commission’s 19-month life.
The memo makes clear that the problems were not occurring only with witnesses talking to Team 2, but also in “other teams’ interviews.” A hand-written note on a draft of the memo says, “not one agency or minder – also where we’ve sat in on other Teams’ interviews.”
According to the memo, some minders merely policed prior agreements between the commission and their parent agency about what the commission could ask witnesses, and others were simply there to make a list of documents the commission might want based on a witness’ testimony. However, some minders saw their role differently.
Intimidation through Physical Positioning
The three staffers argued minders should not answer questions for witnesses because they needed to understand not how the intelligence community was supposed to function, but “how the Intelligence Community functions in actuality.” However: “When we have asked witnesses about certain roles and responsibilities within the Intelligence Community, minders have preempted witnesses’ responses by referencing formal polices and procedures. As a result, witnesses have not responded to our questions and have deprived us from understanding the Intelligence Community’s actual functioning and witnesses’ view of their roles and responsibilities.”
The memo also describes the minders’ conduct in detail: “… [M]inders have positioned themselves physically and have conducted themselves in a manner that we believe intimidates witnesses from giving full and candid responses to our questions. Minders generally have sat next to witnesses at the table and across from Commission staff, conveying to witnesses that minders are participants in interviews and are of equal status to witnesses.”
The staffers also worried about minders taking “verbatim notes of witnesses’ statements,” as they thought this “conveys to witnesses that their superiors will review their statements and may engage in retribution.” They believed that “the net effect of minders’ conduct, whether intentionally or not, is to intimidate witnesses and to interfere with witnesses providing full and candid responses.”
Another problem with the verbatim notetaking was that it “facilitates agencies in alerting future witnesses to the Commission’s lines of inquiry and permits agencies to prepare future witnesses either explicitly or implicitly.”
Proposals
In response to this, the three staffers proposed not that minders be banned from interviews, but a set of rules governing minders’ conduct. For example, minders were to keep a “low profile,” sit out of witnesses’ sight, not take verbatim notes and not answer any questions directed at the witnesses.
Perhaps the most remarkable proposal is that the number of minders be limited to one per witness. The memo indicates that where an interviewee had served in multiple agencies, more than one minder would accompany the witness. The memo therefore requests, “Only one minder may attend an interview even if the witness served in multiple agencies,” meaning a witness would at least not be outnumbered by his minders.
As the Family Steering Committee (made up of 9/11 victims' family members) wrote in 2003:
The FSC [Family Steering Committee] is shocked with the use of “minders” in the interrogatory process. And, despite the Commissioner's similar objection to “minders”, as stated at the last press conference, “minders” continue to be present during witness examination and questioning. The FSC does not want “minders” present during any witness examination and questioning; it is a form of intimidation and it does not yield the unfettered truth.Indeed, even 9/11 Commission co-chair Lee Hamilton admitted that "it is very difficult to tell when a witness is being intimidated by a minder."Not only did the Bush administration adopt Communist torture techniques geared towards extracting false confessions, it also appears to have adopted Communist intimidation tactics.
More Evidence that Banks Create Credit Out of Thin Air
I recently provided evidence that banks create credit out of thin air.
I've just found two more pieces of evidence:
(1) William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said in a speech last July:Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference.(2) On February 10th, Ben Bernanke proposed the elimination of all reserve requirements:
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
Of course, Bernanke's proposal is the exact opposite of the 100% reserve system proposed by Nobel prize winning economist Milton Friedman and Laurence Kotlikoff, former Senior Economist for the President’s Council of Economic Advisers.
More importantly, if banks don't make loans based on available reserves, but can enter into loan agreements first and then borrow any reserves needed, that means:
(1) This was never a liquidity crisis, but rather a solvency crisis, as I and many others have repeatedly tried to explain. In other words, it was not a lack of available liquid funds which got the banks in trouble, it was the fact that they speculated and committed fraud, so that their liabilities far exceeded their assets. If you don't understand what I'm saying, please read this.
(2) The giant banks are not needed, as the federal, state or local governments or small local banks and credit unions can create the credit instead, if the near-monopoly power the too big to fails are enjoying is taken away, and others are allowed to fill the vacuum.
The Fed Is Responsible for the Crash in the Money Multiplier ... And the Failure of the Economy to Recover
Greg Mankiw noted in January 2009:
Econ prof Bill Seyfried of Rollins College emails me:Since January 2009, the M1 Money Multiplier has crashed further, to .786 in the U.S. as of February 24, 2010:Here's an interesting fact that you may not have seen yet. The M1 money multiplier just slipped below 1. So each $1 increase in reserves (monetary base) results in the money supply increasing by $0.95 (OK, so banks have substantially increased their holding of excess reserves while the M1 money supply hasn't changed by much).
(Click for full image; underlying data is here)
That means that - for every $1 increase in the monetary base - the money supply only increases by 79 cents.
Why is M1 crashing?
Because the banks continue to build up their excess reserves, instead of lending out money:
(Click for full image)
These excess reserves, of course, are deposited at the Fed:
(Click for full image)
Why are banks building up their excess reserves?
As the Fed notes:
The Federal Reserve Banks pay interest on required reserve balances--balances held at Reserve Banks to satisfy reserve requirements--and on excess balances--balances held in excess of required reserve balances and contractual clearing balances.
The New York Fed itself said in a July 2009 staff report that the excess reserves are almost entirely due to Fed policy:
Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically, as shown in Figure 1.1 Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. As the figure shows, almost all of the increase was in excess reserves. While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves.
[Figure 1 is here]
Why are banks holding so many excess reserves? What do the data in Figure 1 tell us about current economic conditions and about bank lending behavior? Some observers claim that the large increase in excess reserves implies that many of the policies introduced by the Federal Reserve in response to the financial crisis have been ineffective. Rather than promoting the flow of credit to firms and households, it is argued, the data shown in Figure 1 indicate that the money lent to banks and other intermediaries by the Federal Reserve since September 2008 is simply sitting idle in banks’ reserve accounts. Edlin and Jaffee (2009), for example, identify the high level of excess reserves as either the “problem” behind the continuing credit crunch or “if not the problem, one heckuva symptom” (p.2). Commentators have asked why banks are choosing to hold so many reserves instead of lending them out, and some claim that inducing banks to lend their excess reserves is crucial for resolving the credit crisis.Why Is The Fed Locking Up Excess Reserves?
This view has lead to proposals aimed at discouraging banks from holding excess reserves, such as placing a tax on excess reserves (Sumner, 2009) or setting a cap on the amount of excess reserves each bank is allowed to hold (Dasgupta, 2009). Mankiw (2009) discusses historical concerns about people hoarding money during times of financial stress and mentions proposals that were made to tax money holdings in order to encourage lending. He relates these historical episodes to the current situation by noting that “[w]ith banks now holding substantial excess reserves, [this historical] concern about cash hoarding suddenly seems very modern.”
[In fact, however,] the total level of reserves in the banking system is determined almost entirely by the actions of the central bank and is not affected by private banks’ lending decisions.
The liquidity facilities introduced by the Federal Reserve in response to the crisis have created a large quantity of reserves. While changes in bank lending behavior may lead to small changes in the level of required reserves, the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter how banks react. In other words, the quantity of excess reserves depicted in Figure 1 reflects the size of the Federal Reserve’s policy initiatives, but says little or nothing about their effects on bank lending or on the economy more broadly.
This conclusion may seem strange, at first glance, to readers familiar with textbook presentations of the money multiplier.
Why is the Fed locking up excess reserves?
As Fed Vice Chairman Donald Kohn said in a speech on April 18, 2009:
We are paying interest on excess reserves, which we can use to help provide a floor for the federal funds rate, as it does for other central banks, even if declines in lending or open market operations are not sufficient to bring reserves down to the desired level.Kohn said in a speech on January 3, 2010:
Because we can now pay interest on excess reserves, we can raise short-term interest rates even with an extraordinarily large volume of reserves in the banking system. Increasing the rate we offer to banks on deposits at the Federal Reserve will put upward pressure on all short-term interest rates.As the Minneapolis Fed's research consultant, V. V. Chari, wrote this month:
Currently, U.S. banks hold more than $1.1 trillion of reserves with the Federal Reserve System. To restrict excessive flow of reserves back into the economy, the Fed could increase the interest rate it pays on these reserves. Doing so would not only discourage banks from draining their reserve holdings, but would also exert upward pressure on broader market interest rates, since only rates higher than the overnight reserve rate would attract bank funds. In addition, paying interest on reserves is supported by economic theory as a means of reducing monetary inefficiencies, a concept referred to as “the Friedman rule.”And the conclusion to the above-linked New York Fed article states:
We also discussed the importance of paying interest on reserves when the level of excess reserves is unusually high, as the Federal Reserve began to do in October 2008. Paying interest on reserves allows a central bank to maintain its influence over market interest rates independent of the quantity of reserves created by its liquidity facilities. The central bank can then let the size of these facilities be determined by conditions in the financial sector, while setting its target for the short-term interest rate based on macroeconomic conditions. This ability to separate monetary policy from the quantity of bank reserves is particularly important during the recovery from a financial crisis. If inflationary pressures begin to appear while the liquidity facilities are still in use, the central bank can use its interest-on-reserves policy to raise interest rates without necessarily removing all of the reserves created by the facilities.As the NY Fed explains in more detail:
The central bank paid interest on reserves to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions. In such a situation, the absence of a money-multiplier effect should be neither surprising nor troubling.Because financial conditions are not "normal", it appears that preventing inflation seems to be the Fed's overriding purpose in creating conditions ensuring high levels of excess reserves.
Is the large quantity of reserves inflationary?
Some observers have expressed concern that the large quantity of reserves will lead to an increase in the inflation rate unless the Federal Reserve acts to remove them quickly once the economy begins to recover. Meltzer (2009), for example, worries that “the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain.” Feldstein (2009) expresses similar concern that “when the economy begins to recover, these reserves can be converted into new loans and faster money growth” that will eventually prove inflationary. Under a traditional operational framework, where the central bank influences interest rates and the level of economic activity by changing the quantity of reserves, this concern would be well justified. Now that the Federal Reserve is paying interest on reserves, however, matters are different.
When the economy begins to recover, firms will have more profitable opportunities to invest, increasing their demands for bank loans. Consequently, banks will be presented with more lending opportunities that are profitable at the current level of interest rates. As banks lend more, new deposits will be created and the general level of economic activity will increase. Left unchecked, this growth in lending and economic activity may generate inflationary pressures. Under a traditional operating framework, where no interest is paid on reserves, the central bank must remove nearly all of the excess reserves from the banking system in order to arrest this process. Only by removing these excess reserves can the central bank limit banks’ willingness to lend to firms and households and cause short-term interest rates to rise.
Paying interest on reserves breaks this link between the quantity of reserves and banks’ willingness to lend. By raising the interest rate paid on reserves, the central bank can increase market interest rates and slow the growth of bank lending and economic activity without changing the quantity of reserves. In other words, paying interest on reserves allows the central bank to follow a path for short-term interest rates that is independent of the level of reserves. By choosing this path appropriately, the central bank can guard against inflationary pressures even if financial conditions lead it to maintain a high level of excess reserves.
This logic applies equally well when financial conditions are normal. A central bank may choose to maintain a high level of reserve balances in normal times because doing so offers some important advantages, particularly regarding the operation of the payments system. For example, when banks hold more reserves they tend to rely less on daylight credit from the central bank for payments purposes. They also tend to send payments earlier in the day, on average, which reduces the likelihood of a significant operational disruption or of gridlock in the payments system. To capture these benefits, a central bank may choose to create a high level of reserves as a part of its normal operations, again using the interest rate it pays on reserves to influence market interest rates.
The Fed Has Failed Once Again
I believe that the Fed's efforts to ensure excess reserves are completely wrong, as deflation is the greater short-term threat. See this, this, this, this, this, this, this, this and this.
However, regardless of whether or not the Fed has been right to worry about inflation since it started paying interest on excess reserves in October 2008, the real cost of this program to the American people and the American economy has been staggering.
In October 2009:
As Barron's notes:Otmar Issing, the ECB's former chief economist, told an Open Europe forum in London that policymakers are entering treacherous waters. "Nobody can be sure that we have a self-sustaining recovery. The challenges facing the ECB are tremendous," he said.
"Money multipliers have collapsed everywhere. What M3 is telling us is that confidence is missing. I don't see any way to stabilise M3 in such circumstances," he said.
The multiplier's decline "corresponds so exactly to the expansion of the Fed's balance sheet," says Constance Hunter, economist at hedge-fund firm Galtere. "It hits at the core of the problem in a credit crisis. Until [the multiplier] expands, we can't get sustainable growth of credit, jobs, consumption, housing. When the multiplier starts to go back up toward 1.8, then we know the psychological logjam has begun to break."As I wrote last October:
Professor Tim Congdon from International Monetary Research says:Note 1: The NY Fed actually says that the M1 money multiplier is now moot as a metric. Specifically, the above-discussed paper states that the central bank's policy of paying interest on excess reserves renders the M1 money multiplier - that all economists rely on - useless.A key reason for credit contraction is pressure on banks to raise their capital ratios... "The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."But isn't it good that governments are requiring banks to raise their capital ratios?
Sure, but unless they force the banks to write off their bad debts, they will remain giant black holes, and will never be adequately capitalized. If they are never adequately capitalized, they will never release money out into the economy through loans and other economic activity ...
As just one example, remember that the nominative amount of outstanding derivatives dwarfs the size of the global economy. As another example, remember that several of the too big to fails have close to a trillion dollars each in toxic assets in off-book SIVs.
IMF chief Dominique Strauss-Kahn says that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.
As many people have repeatedly written (including me), the world's governments must restore sound economic fundamentals - which includes forcing banks to write down their bad assets - instead of cranking up the printing presses and trying to paper over all of the problems.
Moreover, as [we] have pointed out, governments can create all the credit they want, but if people do not have jobs, they will not borrow that money.
In addition, the amount of credit and wealth destroyed exceeds the amount of money pumped into the system.
When will the politicians listen? Will they wait until after the next huge market crash? When there are tent cities everywhere? After their governments default and they essentially lose sovereignty under "austerity measures" imposed by the IMF, World Bank or other agency?
Note 2: It's not just the Fed. The NY Fed report notes:
Most central banks now pay interest on reserves.Note 3: I understand that consumers' balance sheets are so impaired that many are not looking for loans. However, many consumers and small businesses are looking for credit, and are being turned down.
Posts
