The Citadel Is Breached by Ellen Brown

Minneapolis I-35W Bridge Collapse (Trusses)

Image by Tony Webster via Flickr

by Ellen Brown
Writer, Dandelion Salad
The Web of Debt Blog
January 16, 2016

In a landmark infrastructure bill passed in December, Congress finally penetrated the Fed’s “independence” by tapping its reserves and bank dividends for infrastructure funding.

The bill was a start. But some experts, including Congressional candidate Tim Canova, say Congress should go further and authorize funds to be issued for infrastructure directly.

For at least a decade, think tanks, commissions and other stakeholders have fought to get Congress to address the staggering backlog of maintenance, upkeep and improvements required to bring the nation’s infrastructure into the 21st century. Countries with less in the way of assets have overtaken the US in innovation and efficiency, while our dysfunctional Congress has battled endlessly over the fiscal cliff, tax reform, entitlement reform, and deficit reduction.

Both houses and both political parties agree that something must be done, but they have been unable to agree on where to find the funds. Republicans aren’t willing to raise taxes on the rich, and Democrats aren’t willing to cut social services for the poor.

In December 2015, however, a compromise was finally reached. On December 4, the last day the Department of Transportation was authorized to cut checks for highway and transit projects, President Obama signed a 1,300-page $305-billion transportation infrastructure bill that renewed existing highway and transit programs. According to America’s civil engineers, the sum was not nearly enough for all the work that needs to be done. But the bill was nevertheless considered a landmark achievement, because Congress has not been able to agree on how to fund a long-term highway and transit bill since 2005.

That was one of its landmark achievements. Less publicized was where Congress would get the money: largely from the Federal Reserve and Wall Street megabanks. The deal was summarized in a December 1st Bloomberg article titled “Highway Bill Compromise Would Take Money from US Banks”:

The highway measure would be financed in part by a one-time use of Federal Reserve surplus funds and by a reduction in the 6 percent dividend that national banks receive from the Fed… . Banks with $10 billion or less in assets would be exempt from the cut.

The Fed’s surplus capital comes from the 12 reserve banks. The highway bill would allow for a one-time draw of $19 billion from the surplus, which totaled $29.3 billion as of Nov. 25… .

Banks vigorously fought the dividend cut, which was estimated to generate about $17 billion over 10 years for the highway trust fund.

According to Zachary Warmbrodt, writing in Politico in November, the Fed registered “strong concerns about using the resources of the Federal Reserve to finance fiscal spending.” But former Federal Reserve Chairman Ben Bernanke, who is now at the Brookings Institute, acknowledged in a blog post that the Fed could operate with little or no capital. His objection was that it is “not good optics or good precedent” to raid an independent central bank. It doesn’t look good.

Rep. Peter DeFazio (D-Oregon), ranking member on the House Transportation Committee, retorted, “For the Federal Reserve to be saying this impinges upon their integrity, etc., etc. — you know, it’s absurd. This is a body that creates money out of nothing.”

DeFazio also said, “[I]f the Fed can bail out the banks and give them preferred interest rates, they can do something for the greater economy and for average Americans. So it was their time to help out a little bit.”

An Idea Whose Time Has Come

It may be their time indeed. For over a century, populists and money reformers have petitioned Congress to solve its funding problems by exercising the sovereign power of government to issue money directly, through either the Federal Reserve or the Treasury.

In the 1860s, Abraham Lincoln issued debt-free US Notes or “greenbacks” to finance much of the Civil War, as well as the transcontinental railroad and the land-grant college system. In the 1890s, populists attempted unsuccessfully to revive this form of infrastructure funding. In the Great Depression, Congress authorized the issuance of several billion dollars of US Notes in the Thomas Amendment to the 1933 Agricultural Adjustment Act. In 1999, Illinois Rep. Ray LaHood introduced the State and Local Government Economic Empowerment Act (H. R. 1452), which would have authorized the US Treasury to issue interest-free loans of US Notes to state and local governments for infrastructure investment.

Law professor Timothy Canova plans to reintroduce this funding model if elected to represent Florida’s 23rd Congressional district, where he is now running against the controversial Debbie Wasserman Schultz, current chair of the Democratic National Convention. Prof. Canova wrote in a December 2012 article:

… Wall Street bankers and mainstream economists will argue that greenbacks and other such proposals would be inflationary, depreciate the dollar, tank the bond market, and bring an end to Western civilization. Yet, we’ve seen four years of the Federal Reserve—now on its third quantitative-easing program—experimenting with its own type of greenback program, creating new money out of thin air in the form of credits in Federal Reserve Notes to purchase trillions of dollars of bonds from big banks and hedge funds. While the value of the dollar has not collapsed and the bond market remains strong, neither have those newly created trillions trickled down to Main Street and the struggling middle classes. The most significant effect of the Fed’s programs has been to prop up banks, bond prices, and the stock market, with hardly any benefit to Main Street.

In a January 2015 op-ed in the UK Guardian titled “European Central Bank’s QE Is a Missed Opportunity,” Tony Pugh concurred, stating of the US and European QE programs:

Quantitative easing, as practised by the Bank of England and the US Federal Reserve, merely flooded the financial sector with money to the benefit of bondholders. This did not create a so-called wealth affect, with a trickle-down to the real producing economy.

… If the EU were bold enough, it could fund infrastructure or renewables projects directly through the electronic creation of money, without having to borrow. Our government has that authority, but lacks the political will. The [Confederation of British Industry] has calculated that every £1 of such expenditure would increase GDP by £2.80 through the money multiplier. The Bank of England’s QE programme of £375bn was a wasted opportunity.

According to IMF director Christine Lagarde, writing in The Economist in November 2015:

IMF research shows that, in advanced economies, an increase in investment spending worth one percentage point of GDP raises the overall level of output by about 0.4% in the same year and by 1.5% four years after the spending increase.

In a December 2015 paper titled “Recovery in the Eurozone: Using Money Creation to Stimulate the Real Economy”, Frank van Lerven expanded on this research, writing:

For the Eurozone, statistical analysis of income and consumption patterns suggests that €100 billion of newly created money distributed to citizens would lead to an increase in GDP of around €232 billion. Using IMF fiscal multipliers, our empirical analysis further suggests that using the money to fund a €100 billion increase in public investment would reduce unemployment by approximately one million, and could be between 2.5 to 12 times more effective at stimulating GDP than current QE.

The Hyperinflation Myth

The invariable objection to exercising the government’s sovereign money-creating power is that it would lead to hyperinflation, but these figures belie that assumption. If adding €100 billion for infrastructure increases GDP by €232 billion, prices should actually go down rather than up, since the supply of goods and services (GDP) would have increased more than twice as fast as demand (money). Conventional theory says that prices go up when too much money is chasing too few goods, and in this case the reverse would be true.

In a November 2015 editorial, the Washington Post admonished Congress for blurring the line between fiscal and monetary policy, warning, “Many a banana republic … has come to grief using its central bank to facilitate government deficit spending.” But according to Prof. Michael Hudson, who has studied hyperinflations extensively, that is not why banana republics have gotten into trouble for “printing money.” He observes:

The reality is that nearly all hyperinflations stem from a collapse of foreign exchange as a result of having to pay debt service. That was what caused Germany’s hyperinflation in the 1920s, not domestic German spending. It is what caused the Argentinean and other Latin American hyperinflations in the 1980s, and Chile’s hyperinflation earlier.

Promising Possibilities

Any encroachment on the Fed’s turf is viewed by Wall Street and the mainstream media with alarm. But to people struggling with mounting bills and crumbling infrastructure, the development has promising potential. The portal to the central bank’s stream of riches has been forced open, if just a crack. The trickle could one day become a flow, a mighty river of liquidity powering the engines of productivity of a vibrant economy.

For that to happen, however, we need an enlightened citizenry and congressional leaders willing to take up the charge; and that is what makes Prof. Tim Canova’s run for Congress an exciting development.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at Listen to “It’s Our Money with Ellen Brown” on PRN.FM.

from the archives:

Ellen Brown: Banks Can Take Your Money in A Crisis

Your Life Savings Could Be Wiped Out In A Massive Derivatives Collapse by Ellen Brown

Trumping the Federal Debt Without Playing the Default Card by Ellen Brown

After 100 Years, It’s Time to Make the Federal Reserve a Public Utility by Ellen Brown

Government Debt and Deficits Are Not the Problem. Private Debt Is. by Michael Hudson

5 thoughts on “The Citadel Is Breached by Ellen Brown

  1. There are so many misconceptions here it is hard to know where to start. As a sovereign fiat currency the US cannot run out of money full stop. Secondly the debt is a balance sheet entry on the ledger not a profit an loss statement like your family budget. Debt is simply the debit side of the ledge and represents private savings including government bonds. Bonds are not a liability they are part of interbank trades and the investment of surplus profits in US dollars invested in low interest risk free loans. A financial institution transfers a bunch of numbers to the Fed for a fixed period which, when it matures, are transfered back with interest. The interest is created money as is all real currency. The Fed has the capacity to put as much money into the public sector as it likes. The expenditure in government spending and the savings including assets thereof map onto each other on a one-to-one basis. A balanced budget is a budget in stasis with no growth and a surplus draws down private savings and actually shrinks the money supply. Every surplus budget has been followed by a recession.

    There is much more. Taxes are not saving they are effectively destroyed so if you pay your taxes in cash the notes will be shredded and the coins melted down. You can actually buy shredded money from treasury. Were are much of the debt savings? In offshore accounts and share buy backs that inflate the share price without increased productive capacity while executives take a huge cut for inflating share prices. The Fed is the only place where currency can be created and it is in fact congress that is responsible for the Fed however with both parties full of corporates they simply control the money supply for their own banking finance and corporate interests. They want you to be fooled by conspiracy theories so you will not find out the truth. The most accurate model of how the economy actually works is Modern Monetary Theory. Many of these points have been admitted too by Greenspan and Bernaki in isolation however the never coalesce them into a coherent and accessible framework for the public.

    So they force the middle low and poor to pay excessive taxes simply to keep them in low wage servitude and diminishing work conditions where their real profits come from your shrinking wages which has nothing to do with taxes. Remember taxes are destroyed. Taxes are supposed to make the economy more equitable but what neo-liberals have done is inverted the whole process blaming the middle and low income for being selfish and un-American while they run of with all the rewards. While you believe in debt is bad and taxes are savings they have you in a trap of you own self-defeating impoverishment and their unscrupulous greed.

    Meanwhile they force the price of housing up further stressing the family budget and excluding a whole generation from home ownership while giving you cheep imported goods to satiate your indoctrinated hedonistic need for more and more sub-standard rubbish. This is without discussing the 2008 recession scam of derivatives and colateralised debt obligations that brought down the economy throwing millions throughout the world into hardship suffering and bankruptcy as the banks were bailed out through quantitative easing which you paid for in loss hardship and suffering. None banksters go to jail while they get bailed out and get even bigger and too big to fail. Matt Taibbi’s Vampire Squids. Meanwhile Dodd/Frank has been weakened and you are once more on the highway to recession. This is without the grand theft perpetrated by the military industrial complex. You dear citizens have been sold a lemon and until you rise up you will remain their victim.

    Point is you could have a minimum wage job guarantee for everyone and infrastructure spending and never run out of money. This would stimulate the economy and eventually drive down the debt. Austerity is a load of crap. Too easy however don’t expect the GOP or Democrats to let you know. Bernie Sanders is moving in the right direction for which I give him credit as he has MMT theorist Stephenie Keaton on his team. At the moment the whole understanding of economics is so dysfunctional that Bernie is your only real hope for some possible structural change.

    Another great article LOL. I hope you don’t mind me shredding some of it.

    The reason I did not post it on is because my colleagues and I are trying to challenge convention economic theory and educate the confused.

    • Not sure exactly where you disagree with what Ellen Brown has written in this article or are you writing about past articles she’s written?

      Bernie Sanders is not the best candidate. Please look into his foreign policy or lack of foreign policy.

    • It appears that you disagree with Brown effectively in her assertion that private bankers control the Fed. You maintain, wrongly, that “Congress is responsible for the Fed.” If I weren’t such a lovable person I might suspect that much of what you say is obfuscating bullshit. I might suspect that what you are doing is obfuscating that the Fed is owned by private banks. But I feel, lovingly, that you and your colleagues are much too honorable to do something like that.

  2. One of the greatest secular hallucinations that the US-American people possess is that the Federal reserve is a government agency. It is, in fact, though Unmentionable in the corporate media, owned by private banks which are owned by private bankers. Incredibly, private bankers create the US money and charge the US taxpayers interest for it. It’s a racket, but currency politics is very powerful, and the gangster banksters have defended their turf for the past century, and longer.

    Ellen Brown is a very smart lady (I only talked to her briefly) and wants the USA and the states, perhaps even the cities, to governmentalize the banks.
    She loves North Dakota because they are the only state to have a state bank, and they benefit from it, if not enough to counteract the weather (North Dakota wants to change its name to ‘Dakota’ to make it a little warmer.)

    Ms Brown keeps plugging away trying to make the fraudulent and complicated economics simple enough so that Americans can understand it, and do something about it. She deserves some credit for the current legislation.

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