Understanding the Monetary System in America

Matt Taibbi has a good description of the monetary system under the Federal Reserve tucked away in a chapter from his book Griftopia on the gigantic folly of Alan Greenspan. He writes:

“A person can go crazy trying to understand everything the Fed does, so in the interest of sanity it’s probably best to skip the long version and focus on its magical money-creating powers, the key to the whole bubble scam. The bank has a great many functions – among other things, it enforces banking regulations and maintains and standardizes the currency – but its most important job has to do with regulating the money supply.
The basic idea behind the Fed’s regulation of the money supply is to keep the economy as healthy as possible by limiting inflation on the one hand and preventing recession on the other. It achieves this by continually expanding and contracting the amount of money in the economy, theoretically tightening when there is too much buying and inflation and loosening when credit goes slack and the lack of lending and business stimulation threatens recession.
The Fed gets its pseudo-religious aura from its magical ability to create money out of nothing, or to contract the money supply as it sees fit. As a former Boston Fed chief named Richard Syron has pointed out, the banks has even fashioned its personnel structure to resemble that of the Catholic Church, with a pope (the chairman), cardinals (the regional governors), and a curia (the senior staff).
One way that money is created is through new issuance of private credit; when private banks issue new loans, they essentially create money out of thin air. The Fed supervises this process and theoretically monitors the amount of new loans issued by the banks. It can raise or lower the amount of new loans by raising or lowering margin requirements, i.e., the number of hard dollars each bank has to keep on hand every time it makes a loan. If the margin requirement is 10 percent, banks have to keep one dollar parked at the Fed for every ten they lend out. If the Fed feels like increasing the amount of money in circulation, it can lower the margin rate to, say, 9 percent, allowing banks to lend out about eleven dollars for every one kept in reserve at the Fed.”

Having a small reserve requirement from which banks can lend out many times more money that it actually is also called fractional-reserve lending. This supposedly allows money to flow more freely where it is needed, although it is done specifically by private bank loans.

“The bank can also inject money into the system directly, mainly through two avenues. One is by lending money directly to banks at a thing called the discount window, which allows commercial banks to borrow from the Fed at relatively low rates to cover short term-financial problems.
The other avenue is for the Fed to buy Treasury bills or bonds from banks or brokers. It works like this: The government, i.e., the Treasury, decides to borrow money. One of a small group of private banks called primary dealers is contracted to raise that money for the Treasury by selling T-bills or bonds or notes on the open market. Those primary dealers (as of writing there are eighteen of them, all major institutions, including Goldman Sachs, Morgan Stanley, and Deutche Bank) on occasion selling those T-bills to the Fed, which simply credits that dealer’s account when it buys the securities. Through this circular process the government prints money to lend to itself, adding to the overall money supply in the process.”

The Fed’s primary and most often used tools for regulating the money supply is through manipulating interest rates:

“When a bank falls short of the cash it needs to meet its reserve requirement, it can borrow cash either from the Fed or from the reserve accounts of other banks. The interest rate that the bank has to pay to borrow that money is called the federal funds rate, and the Fed can manipulate it. When rates go up, borrowers are discouraged from taking out loans, and banks end up rolling back their lending. But when the Fed cuts the funds rate, banks are suddenly easily able to borrow the cash they need to meet their reserve requirements, which in turn dramatically impacts the amount of new loans they can issue, vastly increasing the money in the system.
The upshot of all of this is that the Fed has enormous power to create money by injecting it directly into the system and by allowing private banks to create their own new loans.. If you have a productive economy and an efficient financial services industry that rapidly marries money to solid, job-creating business opportunities, that stimulative power of a central bank can be a great thing. But if the national economy is a casino and the financial services industry is turning one market after another into a Ponzi scheme, then frantically pumping money new money into such a destructive system is madness, no different from lending money to wild-eyed gambling addicts on the Vegas strip-and that’s exactly what Alan Greenspan did, over and over again.”

The power that the Fed has to manipulate the amount of money coursing through the economy at any given time is enormous. The function of such an institution is stability and easing financial hardship, but when factions and class interests are factored in, the misused of the power to control how much money gets pumped into the people’s pockets (all by loans with attached interest from banks and, therefore, an increasing debt burden) is epic. Remember: private banks create new money when they issue loans. This means that when the Fed lowers interest rates: the federal funds rate (meaning the banks can now borrow from each other or the Fed to meet its reserve requirements), the freedom of banks to lend is increased dramatically. More money is extended to people (often referred to as households – it is the economy remember) but as loans or as credit. This loan will theoretically be paid off eventually, but until then, people remain holding a debt that will gradually increase due to interest rates the bank sets on its own (besides the rates the Fed sets).

The U.S. government itself (in the form of the Treasury) also must borrow money from the Fed to finance its expenditures and pay out its dollars. Recall from above that the Treasury must contract out to banks the selling of its Treasury bonds and bills, then receives its (the Treasury’s) own money that it printed after the sale. Since these are bond and bill purchases that must take place before the money is allowed to enter existence as currency, the government must go into debt and pay back the investors who bought those bonds and bills eventually and with interest. Hence the skyrocketing U.S. national debt.

From both the perspective of the people and the government, debt is built into money from the start. But it doesn’t have to be.

Some will point to the Federal Reserve and say: “there is the problem. End the Fed or nationalize it, we can create money debt-free and end the national debt.” A number of people have wised up to this parasite on the money supply and have a similar idea: a national currency of “Greenbacks” the likes of which were seen in Lincoln’s Civil War era and Benjamin Franklin’s colonial Pennsylvannia. The currency would then be be created by publicly and not by private banks siphoning off interest right from the start. Here is a list of people who have more-or-less come to the same conclusion:

Ellen Brown
Stephen Zarlenga:
Bill Still:

The UK’s Positive Money:

A good blog post was put out on Washington’s Blog about the prospects of a nationalized, public central bank and public banking in general as a panacea: http://www.washingtonsblog.com/2010/03/7-questions-about-public-banking.html

Be sure to read this whole post. They bring on Steve Keen at the end to say that Public Banks are not enough because of the speculative gambling that takes place on Wall Street and the financial trickery that allows money to be multiplied many times over will not be stopped by the public issuance of money. Getting at the source is important, but not sufficient in creating lasting solutions to fictional bubble economies. Regulation of finance is crucial: as long as bankers and financiers are allowed to bid-up asset prices like land, housing, and commodities, the bubbles and an unstable currency will continue despite a tighter control of the money supply. Keen’s key is to stop the debt-leveraging of asset prices.

Very heavy financial reform and regulation is required to stop gigantic crises that spread misery throughout the Earth. These financial technologies like derivatives, mortgage-backed securities, and naked short selling were cooked up by the smartest people the academies produced (many of the brightest minds in physics left the field to work on Wall Street in the past few decades) and are difficult for regulators to stay on top of. Class interests prevent legislation from being passed on Capitol Hill due to banker capture and unlimited campaign financing. The way out of this mess is hard to see.

The decision makers in politics and finance will move when their power is threatened however. A few quick outlets:

People have been pointing to a far-left/far-right alliance of end-the-Fed Libertarians and progressive Socialists. If they stay away from falling in with the large Corporate backers and Banker class of ultra-wealthy and become popular, they could make radical legislative changes. See Ralph Nader here

The specter of a very unpopular war with Russia and perhaps China (which would mainly be caused by currency and oil control around the globe) could propel a mass movement to change what is in essence an imperial financial system. See here

A debt strike or jubilee would immediately make banks insolvent and provide the open space for alternative solutions formerly considered “too radical.” See Andrew Ross here

Revolution (early reports are unclear about how this would happen).


The BRICS Bank and Dollar Hegemony: the Importance of Geopolitics

Michael Hudson and Leo Panitch had a spirited debate at the Real News Network recently that brought to light two different views on the strategies for resisting Capitalism. Watch it hear and follow along with the transcript:

Is the BRICS Bank a Challenge to US Financial Power?

The BRICS Development Bank (Brazil, Russia, India, China and South America) was just announced and is an attempt to subvert America’s dollar hegemony or, what Hudson calls, Super Imperialism. They will make loans outside of the dollar system, which coerces/persuades countries that receive loans from the IMF to keep their currencies pegged to the dollar, and issue loans to countries in their own currencies. This, Hudson believes, will be a major geopolitical move by countries extremely frustrated by the Washington Consensus in America and will provide an alternative to the broken philosophy of neoliberalism and its Trojan Horse policy of forcing countries to accept austerity, privatization, and cheap asset sell-offs to private companies when sovereign countries cannot pay back their debts. Rather than write down debts that cannot be repaid, the IMF and World Bank (who accept and champion the dollar standard) demand “developing countries” who cannot keep up with entrenched global corporations on the world market sell away their natural resources, privatize public services and industry (including pensions and health benefits), and generally accept nation-wide austerity when the interest on the loan bloats the bill too high.

A recent case of this comes from Argentina. Argentina was going to write down its debts so that it could repay without crippling its economy until the “Vulture Firms” who bought up some of its debts at very low, distressed prices and demanded they be relayed in full. A New York judge decided that Argentina must make the Vulture Firms whole, with many big Wall Street Banks owning stakes in these vultures. Such is the logic of debt intoxicating countries under financial imperialism, demanding all debts be repaid. Whole peoples wealth and well-being can be sacrificed, but heaven forbid an investor should not get the full amount of capital returned on his investment!

Leo Panitch, however, believes that the significance of the BRICS Development Bank in combating US led neoliberalism is overblown. These five countries all themselves operate as Capitalist economies, forcing their population into low-waged labor and engaging in land purchases around the globe. Oligarchs dominate Russia, ghettos abound in Brazil, Indian farmers have been committing suicide by the thousands, and everyone must submit to the toil of the work day for their livelihood. These aren’t Socialist countries we’re talking about.

Why is the issuing of loans in the currency of a sovereign nation instead of dollars so important for opposing neoliberalism and, eventually, Capitalism itself?

It depends on how much you think American foreign policy and its war machine is bound up with the character and functioning of global economies – whether they could go Socialist or whether they would still choose by themselves to remain fully Capitalist. Does the “room for maneuver” that Panitch says the BRICS alliance is seeking create a whole new place where countries can more democratically reorganize or are they merely jockeying for more of the Capitalist pie?

Hudson emphasizes the Geopolitical where Panitch emphasizes the social forms; I would like to explain why geopolitics (the position of nations on the Earth, the resources they contain, their strategic location for war and trade routes, etc.) is crucial in determining the course of action that a country can take. Countries’ decisions on how their goods and services will be distributed are not merely internal decisions based on voting or their succumbing to the overarching logic of Capitalism. Monetary flows that are unleashed on markets and colonial histories play a major role in shaping the options a country has in taking on the social form it has at any given time. One might call them “external pressures”, but monetary flows and debt levels operate with fluidity and course through countries boundaries according to policies and decisions made at the IMF, World Bank, and Washington DC. If a new development bank would appear that would be more willing to cancel debts and make low interest rate loans, a fundamental shift could occur that would free up a countries’ ability to change its socials forms. The big question, yet to be answered, is whether the BRICS Development Bank will be willing to cancel/write down debt, i.e. whether the credit that is pumped into global markets will be for the purpose of productive works and projects that people need or for making a return at all any “external” cost. Will they be neoliberal financial parasites by another name?

The blight of austerity ravaging the world, of which there seems no end in sight, is largely driven by American Politics: which has been captured by the financial interests of Too-Big-To-Fail Banks and extractive parasites. Their main weapon is debt and interest. The dollar standard ensures that, internationally, sovereign nations must keep their currencies at a fixed rate to the dollar or else leave those currencies open to crippling currency raids and Short Sells. Here is Ellen Brown:

“[After the dollar was taken off of the gold standard] Currencies were now valued merely by their relative exchange rates in the “free” market. Foreign exchange markets became giant casinos, in which the investors were just betting on the relative positions of different currencies. Smaller countries were left at the mercy of the major players – whether other countries, multinational corporations or multinational banks – which could radically devalue national currencies just by selling them short on the international market in large quantities. These currency manipulations could be so devastating that they could be used to strong-arm concessions from target economies. (Web of Debt, p.207)”

Hudson in The Bubble and Beyond writes about the constraining system set up by the dollar standard:

“A double standard has been implicit in the world’s economic rules since the dollar was decoupled from gold in 1971, when the U.S. trade deficit of $10 billion was the equivalent of more than half the U.S. gold stock. But today there is no gold convertibility and hence no major constraint on U.S. spending abroad or at home. The United States has not subjected itself to any of the distressing fiscal conditions that all other countries feel obliged to follow. What makes this asymmetry so ironic is that it was made possible by what seemed to be a financial defeat for the United States. Once America stopped paying gold, there was not much that other central banks could ask for as they found themselves flooded with dollars obtained by private-sector exporters and asset sellers in excess of their need…

…Now that gold had been demonetized, all that foreign central banks can do with their excess dollars is to send them back to the U.S. Government by buying Treasury bonds. If they do not do this, their currencies will surge against the dollar, threatening to price their manufacturers and food exporters out of foreign markets.” (p.368)

The United States of America is an a unique, privileged position in the geopolitical dynamic of forces: it alone gets to run up its debt without limit and maintain a “balance-of-payment” deficit without ever having to pay its debt back. The interest that it must pay for the Treasury bonds it issues are simply added to the debt pile it already has built up. The U.S. Federal Reserve can keep printing dollars and issuing Treasury bonds to match them (the government must borrow in order to create new money), while other countries must use their dollars to buy more Treasury bonds. The Treasury bond nets its buyers money on interest, but that interest paid out by the U.S. comes from printing more money – issuing more T-Bonds.

This “recycling process” fuels U.S. National debt and at the same time ensures that other countries keep using dollars that they obtain from selling their exports to America, foreign company buy-outs, and IMF loans. In international finance, America has become a black hole of debt: other nations receive a glut of dollars must “send them back to the U.S. Government by buying Treasury bonds. If they do not do this, their currencies will surge against the dollar, threatening to price their manufacturers and food exporters out of foreign markets” (Hudson, TBaB p.368). These are currency wars performed almost entirely on computer screens and with the frightening threat of falling to the bottom of a hostile world market when your currency becomes over-valued (relative to the dollar and the value of goods). Suddenly all of the work your country has performed to create products and grow food will be un-tradable because it will cost to much for other countries to convert their own currency into yours for the exchange. This is constraining force burdening the “developing countries” (“developing” because they must export to “developed” countries or else face default or the impending hostile military takeover) to use dollars and continue to finance the U.S. and its war machine.

Michael Hudson is one of the few people to understand this mechanism and has been yelling about it since the early seventies. Few others understand it, but when you do, the importance of not using the dollar – freeing up the room to use one’s own currency for receiving loans and trade with other countries not denominated in dollars – becomes a huge move to open up possibilities for economic activity.

David Graeber writes about this mechanism at the end of his book Debt: The First 5,000 Years:

“Because of the United States trade deficits, huge numbers of dollars circulate outside the country; and one effect of Nixon’s floating of the dollar was that foreign central banks have little they can do with these dollars except use them to buy U.S. Treasury bonds. This is what is meant by the dollar becoming the world’s “reserve currency.”…

…The effect, though, is that American imperial power is based on a debt that will never – can never – be repaid…
…At the same time, U.S. policy was to insist that those countries relying on U.S. Treasury bonds as their reserve currency behave in exactly the opposite way as they did: observing tight money policies and scrupulously repaying their debts.” (p.366-7)

Both realize that this is a special position for the U.S. to be in and reinforces imperial authority in a very efficient, monetary way. Capitalism might have spread throughout the globe, with countries and their ruling classes forcing their people into a reserve of cheap labor and the strict adherence to property rights among other coercions, but the method used for getting new countries to accept this state of affairs is an age old tactic: interest and debt. More from Graeber:

“The new global currency is rooted in military power even more firmly than the old was. Debt peonage continues to be the main principle in of recruiting labor globally: either in the literal sense, in much of East Asia or Latin America, or in the subjective sense, whereby most of those working for wages or even salaries feel that they are doing so primarily to pay off interest-bearing loans.” (p.368)

Getting out of the Capitalist trap will involve financial maneuvering in the national-geopolitical landscape as much as labor struggles because the power of the logic of debt is so great, taking its most global and destructive manifestation to date with American Super Imperialism or Dollar Hegemony. The linking of the influence of debt and military might means that whenever a country attempts to get out of the debt/dollar system, the military steps in to enforce U.S. interests. Saddam Hussein’s Iraq stopped trading in dollars and went for euros in 2000 as well as Iran in 2001. As long as dollars are used in the deal America will win, but if anyone steps out of line and rejects the dollar the hammer comes down. This is why only a large block of high producing nations can legitimately challenge dollar hegemony, unless America’s corporate media is so thoroughly corrupt that it can convince its people a war on China, Russia, Brazil, South Africa and India. It is already demonizing Russia and China the best it can, the two largest players…

Both Hudson and Panitch are anti-Capitalist political-economic thinkers. They both wish to see a Socialist government that can restructure economies to stop apocalyptic climate change and promote prosperity absent the dominance of Capital. Hudson, though, is peering deeper into geopolitics and the forces moving and controlling nations to act in certain predictable ways to find a way out of Imperial U.S. led global Capitalism. A new development bank, though not as uplifting and energizing as a revolutionary uprising, is a glimmer of hope that will change the dominant forces operating all around the Earth if the BRICS countries do it right. All that is left is to see if the BRICS Development Bank will use money and credit solely as a means to serve their Capitalist classes vs the U.S.’s or whether the credit they lend will allow countries the means to invest in national infrastructure that will stop climate change and provide for the public health and food security.

Did the Other Shoe Just Drop? Big Banks Hit with Monster $250 Billion Lawsuit in Housing Crisis

The next credit crisis will be much larger than 2008, how we will distribute goods and services without a free-flowing credit/debt creation machine (in the banks) will likely determine the type of society we will have in the near future.


Wicked Witch of the East

For years, homeowners have been battling Wall Street in an attempt to recover some portion of their massive losses from the housing Ponzi scheme. But progress has been slow, as they have been outgunned and out-spent by the banking titans.

In June, however, the banks may have met their match, as some equally powerful titans strode onto the stage.  Investors led by BlackRock, the world’s largest asset manager, and PIMCO, the world’s largest bond-fund manager, have sued some of the world’s largest banks for breach of fiduciary duty as trustees of their investment funds. The investors are seeking damages for losses surpassing $250 billion. That is the equivalent of one million homeowners with $250,000 in damages suing at one time.

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Guattari’s Schizoanalytic Cartographies

Brian Holmes navigates global cybernetic capitalism with the help of Guattari’s Schizoanalytic Cartographies.

Continental Drift

or, the Pathic Core at the Heart of Cybernetics


[This text was developed through a large number of improvised presentations. Thanks to all who listened and responded. The very first, in Chicago at the invitation of Jon Cates,  is archived here. – BH]


A desiring mind seeks infinity, and finds it today in a proliferation of signals: electromagnetic waves beaming down from the skies, fiber-optic cables emerging from the seas, copper wires woven across the continents. The earthly envelope of land, air and ocean – the realm of organic life, or biosphere – is doubled by a second skin of electronically mediated thought: the noosphere. It’s a vast, pulsating machine: a coded universe grown complex beyond our grasp, yet connected at every pulse to the microscopic mesh of nerve cells in our flesh.

Such is the contemporary circuit of communication. Its existence raises two basic questions. What…

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