The government’s bailout (buyout?) of some of the country’s largest financial institutions has, of course, generated a great deal of public interest and criticism. People want to know whom to blame, but the real culprit — the Federal Reserve System — is never assigned that role. They want to know how it could happen, but the fact that the nature of our monetary system makes it inevitable is not offered as an answer.
Sadly, the most interesting questions are never asked. Isn’t anyone interested in the intriguing fact that the government, which is hundreds of billions of dollars in debt, is going to put up 700 billion in this bailout? It’s all very well to say that the government will get it from the taxpayers, but where are the taxpayers going to get it?
The Federal Reserve has been shoring up the banking system with many billions of dollars in recent months, and has just announced its intention to buy commercial paper as necessary. Where did the Fed get those billions? Isn’t it, supposedly, a non-profit organization? Does it keep billions in some vault just for emergencies?
The ultimate question, then, might be: where does money come from? Of course, no TV pundit will ask such a question, and it certainly won’t be presented to Mr. Bernanke at any Congressional hearing. It’s the sort of question a child might ask — a child like the one who marveled that the emperor wasn’t wearing any clothes.
Modern "money" is intangible. It’s represented by numbers on currency, or written in bank accounts. And the source of these funds? The banks themselves. If you borrow 10,000 from the bank, it simply adds that number to your account. Presto! Another ten thousand added to the money supply. (The banks are the ONLY source of money: a fact worth remembering.) Banks can create an infinite amount of this "money"; they only need some believable justification for doing it.
Of course, the bank is not going to do this for you unless you pledge something in return. You will have to sign some document promising re-payment. That document — your promissory note — is an asset to the bank. The new deposit of ten thousand is a liability of the bank. Oddly, what most of us would consider assets and debts are just the opposite to the bank. Your deposit at the bank is its liability; your note is its asset. And if you default on your note, it loses its value as an asset.
That is what is happening today: large numbers of people are unable to maintain their payments on over-priced homes, and thus the bank’s assets are diminished by these non-performing loans. It’s all a matter of bookkeeping; nothing is lost. It’s just arithmetic.
Well, as school children, we all did arithmetic problems on the blackboard. When we were finished, the board was erased, and we started over. The banks, I suppose, could forget about balancing assets and liabilities, wipe the slate clean, and just get on with it. They could swallow their "losses," or reduce the borrowers’ interest rates to something that the borrower could afford.
The banks don’t want to do that. They want their capital assets replaced, and the government is the only organization that will do that. Since bank "assets" are somebody else’s IOUs, I guess that the government’s contribution will be in the form of government bonds. Wonderful assets! When it comes time to redeem them, the banks will lend the government the money to do it! Whee! Didn’t somebody once remark about the web we weave when we practice to deceive? Henry Ford is said to have remarked that it’s just as well that people do not know how banking and the monetary system work, or there’d be a revolution before tomorrow morning. He might have been wrong about the revolution (the people, it seems, will tolerate anything) but it’s true that the people’s monetary ignorance is the banker’s bliss.
Maybe what we’re really looking at, without really seeing it, is a sort of coup. In return for its assistance, the government wants to take over banking. Many commentators have remarked on the illegality of private banks creating our "money." Nothing in the laws of this country permits such a thing. This latest crisis justifies the government seizure of banking, so that it can, ultimately, create its own money, without having to borrow it from the banks. Many will applaud such a move, although there is no more legal justification for money creation by Congress than there is by private banks. In fact, there is no justification for money creation, period. The Constitution authorizes Congress to COIN money, not print, or create, it. What do you think will happen to the money supply when Congress can create it with no concern about paying interest, much less returning principal?
But, of course, if the Constitution were taken seriously, we wouldn’t be in this mess in the first place.