“It is well enough that people of the nation do not understand our
banking and monetary system, for if they did, I believe there would be a
revolution before tomorrow morning.”
-Henry Ford
With the J. P. Morgan Chase settlement finally decided, now seems as good a time as any to discuss those most hated of all villains: Bankers.
Generally seen as undeserving of their truly obscene wealth, most people instinctively distrust their skill at jumping their horse over your front line to checkmate you on turn two when you were pretty sure you were playing checkers.
We don't understand most of what they do is what I'm trying to say there.
Also, realize that I am primarily talking about US investment bankers. Canada's banks did pretty well through the crash, primarily because Paul Martin had rejected deregulating the banks as finance minister. Instead, alone amongst the Group of 8, Canada tightened loan-loss and reserve requirements while disallowing major bank mergers. This he did while being criticized by the banks and Stephen Harper, both of whom felt it would put the Canadian financial sector at a disadvantage globally. Fortunately, they were very wrong and Canada came out in a pretty strong position bank-wise.
After the 2008 financial collapse, which was primarily brought about by greed and fraud within the banking sector, it was unclear whether the economy would recover at all. Understandably, there were a lot of people mad. In 2009, Obama spoke to the bankers and made it clear that: "My administration is the only thing between you and the pitchforks."
Fortunately for them, Obama did a damn good job of getting between them and the pitchforks to the point that none of them outside Lehman Brothers actually had to suffer at all. In fact, while 2 million Americans were losing their jobs at the end of 2008 due to the crisis, 2009 would prove to be Wall Street's best year ever. Amidst a $175 billion dollar taxpayer-funded bailout for 9 of the major banks, $32.6 billion of it was being used to provide bonuses even though 'the talent' had only managed to achieve massive losses. Despite the financial sector providing 20% of Obama's campaign funds in 2008, more than any president for the last 20 years, even he had to put his foot down and complain about the obscene culture of huge bonuses for bankers who almost destroyed capitalism.
It was this pro-Main Street, anti-Fat Cat rhetoric that would cause Wall Street to support Romney for the 2012 election, providing him $61 million and only $18.7 million to Obama. Now, I can hear you say, "Surely this lack of support and this record-breaking $13 billion dollar fine for J. P. Morgan shows that the Obama administration is finally getting tough on financial crime and taking the crooked bankers to task!"
Well, it doesn't. And don't call me Shirley.
This fine is unfortunately far less consequential than it sounds and accomplishes nothing except providing a good sound-bite that Obama is 'taking on the bankers'. Essentially, this settlement is their punishment for engaging in criminal fraud and routinely overstating the quality of mortgages it sold to investors. This includes bad loans made by Washington Mutual and Bear Stearns, two firms purchased by JP Morgan during the crash. 26-27% of the loans they packaged did not meet the guidelines investors had demanded but they knowingly lied and said they did.
This payment is likely to just be one of many as there are at least 9 other government probes into JP Morgan for various other illegal behavior. In fact, they just finished up another $4.5 billion dollar settlement with 21 institutional investors who they had ripped off. Clearly a very ethical institution. The bank currently has $23 billion set aside to deal with these other approaching litigations.
The problems with this approach to punishing banks is that it doesn't actually make them stop the behavior. First of all, the settlement doesn't actually include an admission of wrong doing. This means it can work as a shield against other lawsuits. In fact, upon announcing the $13 billion dollar settlement, their stock price would increase roughly $12 billion since smooth legal sailing was assumed from then out. Second, potentially as much as $9 billion of the settlement is tax deductible which seems to defeat the purpose. Third and most importantly, no one is going to jail.
This is a big problem because the company is raking in much more money from these illegal behaviors than it is being required to pay in fines. Thus, fines just become a cost of doing business that may possibly hurt shareholders but won't affect those who choose to commit crimes. Which means they have no reason to not commit crimes. Which is ridiculous.
In 1995, bank regulators referred 1,837 cases to the justice department. In 2006, that had fallen to 75. It has been clear for a while that when a bank breaks the law, it is generally not treated like a crime. During the late 1980's savings and loans scandal, more than 800 bank officials went to jail. This time around? None. Some fines have been paid by those who knowingly committed fraud after investigations by the Securities and Exchange Commission but there has been no jail time. It was argued this was because restoring stability was goal number one and arresting major bank executives for their crimes could destabilize the recovery.
Of course this is nonsense. The top people who agreed to break the law should not be considered "too big to jail." Working for a business should not grant immunity to the law anymore than Nazis were protected for "just following orders."
Being asked to return what you stole is not a deterrent, especially if you don't have to return all of it. Locking the bosses up and promoting somebody else would not somehow destabilize the system. It would increase trust in the system since people would know you play by the written rules or suffer actual consequences.
Even worse is that the Dodd-Frank Wall Street Reform and Consumer Protection Act was gutted. This was supposed to be the big piece of consumer-protecting legislation designed specifically to prevent this whole sloppy mess from happening again. Matt Taibbi over at the Rolling Stone provides a grim narrative of how it was done and how friggin' impossible it is in the US to successfully pass and keep legislation desired by voters but that is opposed by a wealthy industry. This means that their is basically a zero chance of getting in legal trouble for breaking banking laws and basically no law to break anyway.
It isn't surprising that Obama sides with Wall Street when you consider he stacked his administration with Wall Street insiders. He was even been trying to put Larry Summers in charge of the Federal Reserve when Ben Bernanke steps down in 2014. This is despite Summers being an idiot who was partially responsible for the deregulating of the derivatives market that lead to this collapse in the first place. Fortunately, the Senate raised too much of a ruckus and this clown has to go away.
The Obama administration, the banks, and almost all the state attorney generals were desperately trying to prevent prosecution and prevent those defrauded from being properly reimbursed. They had agreed to a $20 billion dollar settlement for the crimes that left millions homeless and almost caused another great depression. The $20 billion would go towards "loan modifications and possibly counseling for homeowners." This is an obscenely small amount considering how much money was lost to investors due to illegal practices. In 2008, the state pension of Florida alone lost $62 billion due to investing in these fraudulently packed securities.
Fortunately, New York's Attorney General Eric Scheiderman was a principled man and refused the settlement and stalled the process. When he did so, Kathryn Wylde, a board member of the Federal Reserve who is supposed to represent the public, would state:
"It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street - love 'em or hate 'em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible."
That's a pretty messed up quote for someone who is being paid by the public to work for the public good. What they were doing was clearly illegal. I'm not sure what else it needs to be in order to be indefensible.
Since then, things have generally gotten worse. Andrew Huszar, a former Federal Reserve official, has admitted that the Quantitative Easing program the US has engaged in, to 'stabilize the economy,' is really only benefiting the banks at the expense of the public. The program has basically consisted of the US central bank, the Federal Reserve, creating money to purchase treasury bonds and mortgage-backed securities from the banks in order to lower interest rates and free up funds to lend to Main Street. Currently, it is creating about $85 billion a month in order to buy up bonds and has bought over $4 trillion worth in the last 5 years.
As Huszar notes, this hasn't worked and the banks aren't creating more loans. It brought down the cost for Wall Street to make loans but they have simply been pocketing the difference and using it to speculate, therefore raising prices and causing a new bubble. The Fed has admitted that the return on this massive $4 trillion dollar investment has been, at most, a few points of GDP growth and possibly even as little as $40 billion.
Because of this nonsense, the big US banks have seen their stock prices triple since March of 2009 and made them even more concentrated and risk-prone than before. 0.2% of the banks have been able to buy up smaller ones and now own 70% of US bank assets. In addition, it killed the urgency of dealing with the problematic US economy which is only producing low-wage jobs at home.
Simply handing out the cash in the form of infrastructure job programs would have been a much more logical solution. Inflation would have been a bit of a problem but it would certainly have beat this alternative. It's what FDR did during the Great Depression and it spread the wealth around enough to reboot the economy. Quantitative Easing has done the opposite and concentrated wealth so that income inequality hasn't been this bad since the end of the Roaring Twenties, right before the world fell into said Great Depression. One percent of the population owns 40% of the wealth while the bottom 80% get by with 7%. That means the richest 400 Americans have the same wealth as the bottom 150 million. That doesn't bode well for the future of the country.
It's also worth noting that that both Canada and the US have messed up central banking systems. The publicly-owned Bank of Canada was established in 1935 and allows the federal government to borrow money at almost no interest. This borrowing helped us escape the Great Depression and fund WWII. It also allowed for many amazing Canadian achievements without bankrupting the country. These include the Trans-Canada Highway, McDonald-Cartier freeway, St. Lawrence Seaway, various subway lines and airports as well as funding our universal healthcare system and Canadian Pension Plan.
In the 70's, high inflation was the result of the OPEC oil shocks and a tendency in governments to pursue full employment through monetary policy. Together, these would drastically raise the price of all goods and services. This situation would cause our various governments to follow the advice of the International Basel Committee, a think-tank composed of the central bank governors of the G10, and start borrowing almost exclusively from private sources. It was argued that this wouldn't cause further inflation since it is old money being recycled instead of new money being added.
However, this is debatable since now it is just the private banks creating money through fractional reserve lending. They don't lend out the principle which means they are just creating cash, and inflation, the same way the central bank would. Except we have to pay interest on it.
Canada now only uses its central bank for between 1% and 5% of its financing needs. This is a big problem as it puts the Canadian government in debt to private banks when there is no need to. This means we are all in debt to private banks since the Fed's debt is our debt. Between 1935 and 1974, there was almost no inflation except for during WWII. However, wars are always inflationary so this can be considered a blip.
The fact is that money lent by the Bank of Canada to the Canadian government would only be temporarily inflationary. The inflation would go away once the debt was repaid and the cash was removed from the money supply, same as when private bank loans are repaid. This means we could borrow to pay our bills without interest.
This would of course be difficult since it would mean challenging the private-banking structure. However, the advantages would be enormous. In fact, between Confederation and when we switched to borrowing from private banks instead of our central bank (1867-1974), our public debt level only reached $21 billion.
After 1974, our debt level increased 20% annually, reaching $563 billion in 1997. There was a Auditor General report which noted that of the accumulated net debt of $423 billion in 1993, only $37 billion was principal. The rest was compound interest payments, payments there was no reason to make. It is estimated that between 1974 and today, we have needlessly paid over one trillion dollars in interest.
Of course, people are right that there are pretty terrible examples of governments going insane with the printing press. Germany during the 20's, Zimbabwe recently, Chile during the early 70's, etc. Each experienced brutal inflation due to having too much cash around. However, each of those countries had reasons for their hyperinflation that Canada would not face. Germany was making massive reparation payments to Britain and France for its role in WWI, Zimbabwe is a basket-case with insane leadership, and Chile was going through a socialist revolution under Salvador Allende where he fixed prices of goods too low and raised wages by decree. This resulted in too much money chasing too little goods. Canada is safe from all those problems.
This makes the idea of having to pay massive interest payments when we don't have to because we don't think we can handle the responsibility of printing our own money kind of a lame cop-out. If we passed legislation saying that we could only have the Bank of Canada buy a limited amount of Canadian government bonds yearly and that they had to be repaid the next year from tax revenue, we could avoid the massive interest payments to private banks with no risk of hyperinflation.
The United States has an even weirder system. They needed a central bank to prevent various banking crises and got one in 1913 when the Federal Reserve Act was passed. It was pushed through under President Woodrow Wilson two days before Christmas when most of Congress was not there. The main problem with it is that the Federal Reserve Bank is actually a privately owned corporation with stocks owned by member banks that cannot be traded or sold.
However, knowing which banks own it is difficult since it won't tell and has stated that it doesn't need to respond to Freedom of Information Act requests since it is "not an agency" of the federal government. However, it is known that some of its member banks are at least partially foreign owned. This means that the US Federal Reserve is partially owned by foreign citizens and governments.
Either way, the Federal Reserve buys US government bonds and T-bills and provides the US treasury with money. The profits made by the Federal Reserve doing this are given back to the US treasury except for an annual 6% dividend on their paid-in capital stock. I honestly have no idea what this 6% dividend works out to and am having trouble finding out. Please mention in the comments if you can.
Now, the Fed's policy of Quantitative Easing has consisted of the Federal Reserve printing money to buy treasury bonds/bills and toxic bank assets in the hopes of pushing down interest rates and making banks solvent enough to lend. As explained by Andrew Huszar, we already know that the QE policy has only benefited the biggest banks who are not lending any more but are instead buying up smaller banks and speculating. Also worth noting is that it is these biggest banks who are also the member banks that make up the Federal Reserve. Which means the Federal Reserve which is made up of the biggest banks has chosen to implement policies that only benefit the biggest banks. That's not suspicious.
What is clear is that the Federal Reserve is not controlled by the people whose money is made in its name. Between December 2007 and July 2010, the Fed gave out secret loans at almost no interest to various corporations to a sum of $16.1 trillion dollars. The link to the Government Accounting Office's audit showing who got it is here.
Now, just a few useful quotes on private banking and paying interest when creating your countries own money:
Thomas Edison on the Federal Reserve system:
"That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.
Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we
simply add 120 to 150 per cent, to the stated cost.
But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good."
Benjamin Franklin on producing own money:
"That is simple. In the Colonies we issue our own money. It is called Colonial Scrip. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers. In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay no one."
Benjamin Franklin declaring that the cause of the Revolutionary War was the poverty in the colonies resulting from the British Parliament demanding they stop using Colonial Scrip and instead use gold and silver borrowed from the English bankers with interest:
“The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”
Thomas Jefferson on private central banks:
"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs."
William Mackenzie King on private central banks:
"Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Usury, once in control, will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of sovereignty of parliament and of democracy is idle and futile."
Overall, I think I've made my point that the big private banks are taking us to the cleaners. Productivity keeps increasing but the benefits keep getting more and more concentrated. My advice for everyone is two-fold.
First, join a credit union that supports your local economy, has less fees, and is more democratic in nature than corporate banks.
Second, push for a change for governments to begin borrowing, at least partially, interest-free money from their central banks to pay their debts. The money saved in interest payments should prevent countries from going deep enough into debt that printing to cover it would cause much inflation. After the government debt to the central bank is repaid, the money is destroyed and the inflation is gone. Make sure debt-minimizing legislation is passed simultaneously to avoid government spending sprees and hyperinflation.
Man, banks and money are complicated. But I think everyone knows we're being robbed. There is a reason the major religions and most older empires have all opposed usury, or the charging of interest on debt, beyond a very limited amount.
I doubt that this is the correct answer and I know I'm missing a bunch of unintended consequences but it seems the current system is unsustainable, prone to crisis, and needs to change.
AS
-Henry Ford
With the J. P. Morgan Chase settlement finally decided, now seems as good a time as any to discuss those most hated of all villains: Bankers.
Generally seen as undeserving of their truly obscene wealth, most people instinctively distrust their skill at jumping their horse over your front line to checkmate you on turn two when you were pretty sure you were playing checkers.
We don't understand most of what they do is what I'm trying to say there.
Also, realize that I am primarily talking about US investment bankers. Canada's banks did pretty well through the crash, primarily because Paul Martin had rejected deregulating the banks as finance minister. Instead, alone amongst the Group of 8, Canada tightened loan-loss and reserve requirements while disallowing major bank mergers. This he did while being criticized by the banks and Stephen Harper, both of whom felt it would put the Canadian financial sector at a disadvantage globally. Fortunately, they were very wrong and Canada came out in a pretty strong position bank-wise.
After the 2008 financial collapse, which was primarily brought about by greed and fraud within the banking sector, it was unclear whether the economy would recover at all. Understandably, there were a lot of people mad. In 2009, Obama spoke to the bankers and made it clear that: "My administration is the only thing between you and the pitchforks."
Fortunately for them, Obama did a damn good job of getting between them and the pitchforks to the point that none of them outside Lehman Brothers actually had to suffer at all. In fact, while 2 million Americans were losing their jobs at the end of 2008 due to the crisis, 2009 would prove to be Wall Street's best year ever. Amidst a $175 billion dollar taxpayer-funded bailout for 9 of the major banks, $32.6 billion of it was being used to provide bonuses even though 'the talent' had only managed to achieve massive losses. Despite the financial sector providing 20% of Obama's campaign funds in 2008, more than any president for the last 20 years, even he had to put his foot down and complain about the obscene culture of huge bonuses for bankers who almost destroyed capitalism.
It was this pro-Main Street, anti-Fat Cat rhetoric that would cause Wall Street to support Romney for the 2012 election, providing him $61 million and only $18.7 million to Obama. Now, I can hear you say, "Surely this lack of support and this record-breaking $13 billion dollar fine for J. P. Morgan shows that the Obama administration is finally getting tough on financial crime and taking the crooked bankers to task!"
Well, it doesn't. And don't call me Shirley.
This fine is unfortunately far less consequential than it sounds and accomplishes nothing except providing a good sound-bite that Obama is 'taking on the bankers'. Essentially, this settlement is their punishment for engaging in criminal fraud and routinely overstating the quality of mortgages it sold to investors. This includes bad loans made by Washington Mutual and Bear Stearns, two firms purchased by JP Morgan during the crash. 26-27% of the loans they packaged did not meet the guidelines investors had demanded but they knowingly lied and said they did.
This payment is likely to just be one of many as there are at least 9 other government probes into JP Morgan for various other illegal behavior. In fact, they just finished up another $4.5 billion dollar settlement with 21 institutional investors who they had ripped off. Clearly a very ethical institution. The bank currently has $23 billion set aside to deal with these other approaching litigations.
The problems with this approach to punishing banks is that it doesn't actually make them stop the behavior. First of all, the settlement doesn't actually include an admission of wrong doing. This means it can work as a shield against other lawsuits. In fact, upon announcing the $13 billion dollar settlement, their stock price would increase roughly $12 billion since smooth legal sailing was assumed from then out. Second, potentially as much as $9 billion of the settlement is tax deductible which seems to defeat the purpose. Third and most importantly, no one is going to jail.
This is a big problem because the company is raking in much more money from these illegal behaviors than it is being required to pay in fines. Thus, fines just become a cost of doing business that may possibly hurt shareholders but won't affect those who choose to commit crimes. Which means they have no reason to not commit crimes. Which is ridiculous.
In 1995, bank regulators referred 1,837 cases to the justice department. In 2006, that had fallen to 75. It has been clear for a while that when a bank breaks the law, it is generally not treated like a crime. During the late 1980's savings and loans scandal, more than 800 bank officials went to jail. This time around? None. Some fines have been paid by those who knowingly committed fraud after investigations by the Securities and Exchange Commission but there has been no jail time. It was argued this was because restoring stability was goal number one and arresting major bank executives for their crimes could destabilize the recovery.
Of course this is nonsense. The top people who agreed to break the law should not be considered "too big to jail." Working for a business should not grant immunity to the law anymore than Nazis were protected for "just following orders."
Being asked to return what you stole is not a deterrent, especially if you don't have to return all of it. Locking the bosses up and promoting somebody else would not somehow destabilize the system. It would increase trust in the system since people would know you play by the written rules or suffer actual consequences.
Even worse is that the Dodd-Frank Wall Street Reform and Consumer Protection Act was gutted. This was supposed to be the big piece of consumer-protecting legislation designed specifically to prevent this whole sloppy mess from happening again. Matt Taibbi over at the Rolling Stone provides a grim narrative of how it was done and how friggin' impossible it is in the US to successfully pass and keep legislation desired by voters but that is opposed by a wealthy industry. This means that their is basically a zero chance of getting in legal trouble for breaking banking laws and basically no law to break anyway.
It isn't surprising that Obama sides with Wall Street when you consider he stacked his administration with Wall Street insiders. He was even been trying to put Larry Summers in charge of the Federal Reserve when Ben Bernanke steps down in 2014. This is despite Summers being an idiot who was partially responsible for the deregulating of the derivatives market that lead to this collapse in the first place. Fortunately, the Senate raised too much of a ruckus and this clown has to go away.
The Obama administration, the banks, and almost all the state attorney generals were desperately trying to prevent prosecution and prevent those defrauded from being properly reimbursed. They had agreed to a $20 billion dollar settlement for the crimes that left millions homeless and almost caused another great depression. The $20 billion would go towards "loan modifications and possibly counseling for homeowners." This is an obscenely small amount considering how much money was lost to investors due to illegal practices. In 2008, the state pension of Florida alone lost $62 billion due to investing in these fraudulently packed securities.
Fortunately, New York's Attorney General Eric Scheiderman was a principled man and refused the settlement and stalled the process. When he did so, Kathryn Wylde, a board member of the Federal Reserve who is supposed to represent the public, would state:
"It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street - love 'em or hate 'em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible."
That's a pretty messed up quote for someone who is being paid by the public to work for the public good. What they were doing was clearly illegal. I'm not sure what else it needs to be in order to be indefensible.
Since then, things have generally gotten worse. Andrew Huszar, a former Federal Reserve official, has admitted that the Quantitative Easing program the US has engaged in, to 'stabilize the economy,' is really only benefiting the banks at the expense of the public. The program has basically consisted of the US central bank, the Federal Reserve, creating money to purchase treasury bonds and mortgage-backed securities from the banks in order to lower interest rates and free up funds to lend to Main Street. Currently, it is creating about $85 billion a month in order to buy up bonds and has bought over $4 trillion worth in the last 5 years.
As Huszar notes, this hasn't worked and the banks aren't creating more loans. It brought down the cost for Wall Street to make loans but they have simply been pocketing the difference and using it to speculate, therefore raising prices and causing a new bubble. The Fed has admitted that the return on this massive $4 trillion dollar investment has been, at most, a few points of GDP growth and possibly even as little as $40 billion.
Because of this nonsense, the big US banks have seen their stock prices triple since March of 2009 and made them even more concentrated and risk-prone than before. 0.2% of the banks have been able to buy up smaller ones and now own 70% of US bank assets. In addition, it killed the urgency of dealing with the problematic US economy which is only producing low-wage jobs at home.
Simply handing out the cash in the form of infrastructure job programs would have been a much more logical solution. Inflation would have been a bit of a problem but it would certainly have beat this alternative. It's what FDR did during the Great Depression and it spread the wealth around enough to reboot the economy. Quantitative Easing has done the opposite and concentrated wealth so that income inequality hasn't been this bad since the end of the Roaring Twenties, right before the world fell into said Great Depression. One percent of the population owns 40% of the wealth while the bottom 80% get by with 7%. That means the richest 400 Americans have the same wealth as the bottom 150 million. That doesn't bode well for the future of the country.
It's also worth noting that that both Canada and the US have messed up central banking systems. The publicly-owned Bank of Canada was established in 1935 and allows the federal government to borrow money at almost no interest. This borrowing helped us escape the Great Depression and fund WWII. It also allowed for many amazing Canadian achievements without bankrupting the country. These include the Trans-Canada Highway, McDonald-Cartier freeway, St. Lawrence Seaway, various subway lines and airports as well as funding our universal healthcare system and Canadian Pension Plan.
In the 70's, high inflation was the result of the OPEC oil shocks and a tendency in governments to pursue full employment through monetary policy. Together, these would drastically raise the price of all goods and services. This situation would cause our various governments to follow the advice of the International Basel Committee, a think-tank composed of the central bank governors of the G10, and start borrowing almost exclusively from private sources. It was argued that this wouldn't cause further inflation since it is old money being recycled instead of new money being added.
However, this is debatable since now it is just the private banks creating money through fractional reserve lending. They don't lend out the principle which means they are just creating cash, and inflation, the same way the central bank would. Except we have to pay interest on it.
Canada now only uses its central bank for between 1% and 5% of its financing needs. This is a big problem as it puts the Canadian government in debt to private banks when there is no need to. This means we are all in debt to private banks since the Fed's debt is our debt. Between 1935 and 1974, there was almost no inflation except for during WWII. However, wars are always inflationary so this can be considered a blip.
The fact is that money lent by the Bank of Canada to the Canadian government would only be temporarily inflationary. The inflation would go away once the debt was repaid and the cash was removed from the money supply, same as when private bank loans are repaid. This means we could borrow to pay our bills without interest.
This would of course be difficult since it would mean challenging the private-banking structure. However, the advantages would be enormous. In fact, between Confederation and when we switched to borrowing from private banks instead of our central bank (1867-1974), our public debt level only reached $21 billion.
After 1974, our debt level increased 20% annually, reaching $563 billion in 1997. There was a Auditor General report which noted that of the accumulated net debt of $423 billion in 1993, only $37 billion was principal. The rest was compound interest payments, payments there was no reason to make. It is estimated that between 1974 and today, we have needlessly paid over one trillion dollars in interest.
Of course, people are right that there are pretty terrible examples of governments going insane with the printing press. Germany during the 20's, Zimbabwe recently, Chile during the early 70's, etc. Each experienced brutal inflation due to having too much cash around. However, each of those countries had reasons for their hyperinflation that Canada would not face. Germany was making massive reparation payments to Britain and France for its role in WWI, Zimbabwe is a basket-case with insane leadership, and Chile was going through a socialist revolution under Salvador Allende where he fixed prices of goods too low and raised wages by decree. This resulted in too much money chasing too little goods. Canada is safe from all those problems.
This makes the idea of having to pay massive interest payments when we don't have to because we don't think we can handle the responsibility of printing our own money kind of a lame cop-out. If we passed legislation saying that we could only have the Bank of Canada buy a limited amount of Canadian government bonds yearly and that they had to be repaid the next year from tax revenue, we could avoid the massive interest payments to private banks with no risk of hyperinflation.
The United States has an even weirder system. They needed a central bank to prevent various banking crises and got one in 1913 when the Federal Reserve Act was passed. It was pushed through under President Woodrow Wilson two days before Christmas when most of Congress was not there. The main problem with it is that the Federal Reserve Bank is actually a privately owned corporation with stocks owned by member banks that cannot be traded or sold.
However, knowing which banks own it is difficult since it won't tell and has stated that it doesn't need to respond to Freedom of Information Act requests since it is "not an agency" of the federal government. However, it is known that some of its member banks are at least partially foreign owned. This means that the US Federal Reserve is partially owned by foreign citizens and governments.
Either way, the Federal Reserve buys US government bonds and T-bills and provides the US treasury with money. The profits made by the Federal Reserve doing this are given back to the US treasury except for an annual 6% dividend on their paid-in capital stock. I honestly have no idea what this 6% dividend works out to and am having trouble finding out. Please mention in the comments if you can.
Now, the Fed's policy of Quantitative Easing has consisted of the Federal Reserve printing money to buy treasury bonds/bills and toxic bank assets in the hopes of pushing down interest rates and making banks solvent enough to lend. As explained by Andrew Huszar, we already know that the QE policy has only benefited the biggest banks who are not lending any more but are instead buying up smaller banks and speculating. Also worth noting is that it is these biggest banks who are also the member banks that make up the Federal Reserve. Which means the Federal Reserve which is made up of the biggest banks has chosen to implement policies that only benefit the biggest banks. That's not suspicious.
What is clear is that the Federal Reserve is not controlled by the people whose money is made in its name. Between December 2007 and July 2010, the Fed gave out secret loans at almost no interest to various corporations to a sum of $16.1 trillion dollars. The link to the Government Accounting Office's audit showing who got it is here.
Now, just a few useful quotes on private banking and paying interest when creating your countries own money:
Thomas Edison on the Federal Reserve system:
"That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.
Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we
simply add 120 to 150 per cent, to the stated cost.
But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good."
Benjamin Franklin on producing own money:
"That is simple. In the Colonies we issue our own money. It is called Colonial Scrip. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers. In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay no one."
Benjamin Franklin declaring that the cause of the Revolutionary War was the poverty in the colonies resulting from the British Parliament demanding they stop using Colonial Scrip and instead use gold and silver borrowed from the English bankers with interest:
“The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”
Thomas Jefferson on private central banks:
"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs."
William Mackenzie King on private central banks:
"Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Usury, once in control, will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of sovereignty of parliament and of democracy is idle and futile."
Overall, I think I've made my point that the big private banks are taking us to the cleaners. Productivity keeps increasing but the benefits keep getting more and more concentrated. My advice for everyone is two-fold.
First, join a credit union that supports your local economy, has less fees, and is more democratic in nature than corporate banks.
Second, push for a change for governments to begin borrowing, at least partially, interest-free money from their central banks to pay their debts. The money saved in interest payments should prevent countries from going deep enough into debt that printing to cover it would cause much inflation. After the government debt to the central bank is repaid, the money is destroyed and the inflation is gone. Make sure debt-minimizing legislation is passed simultaneously to avoid government spending sprees and hyperinflation.
Man, banks and money are complicated. But I think everyone knows we're being robbed. There is a reason the major religions and most older empires have all opposed usury, or the charging of interest on debt, beyond a very limited amount.
I doubt that this is the correct answer and I know I'm missing a bunch of unintended consequences but it seems the current system is unsustainable, prone to crisis, and needs to change.
AS
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