Class action: 13 major banks and a broker conspired to fix the ISDAfix rate

Quinn Emanuel Reloads Against Banks in New Price-Fixing Case

Susan Beck, The Litigation Daily

September 5, 2014    | 0 Comments

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Fresh off a favorable ruling in a lawsuit accusing big banks of conspiring to fix credit default swaps, Quinn Emanuel Urquhart & Sullivan has launched a new multibillion- dollar antitrust suit against the banks, this time over interest rate swaps.

The firm filed a class action complaint Thursday in federal court in Manhattan, asserting that 13 major banks and broker ICAP plc conspired to fix the so-called ISDAfix rate. The firm seeks to represent everyone that entered into an interest rate derivative transaction in the eight-year period from Jan. 1, 2006, to January 2014, a group that mostly includes hedge funds, pension funds and other large investors.

The defendants include Bank of America Corp., Citigroup Inc. and Goldman Sachs & Co. Trillions of dollars of financial instruments were affected by the banks' collusion, the complaint asserts.

Quinn Emanuel partner Daniel Brockett, who is also directing the credit default swaps class action, is spearheading the case. In contrast to the CDS case, where Quinn Emanuel battled for the lead counsel role with plaintiffs firms, this time the firm has partnered from the start with two of its competitors. Named plaintiff Alaska Electrical Pension Fund is also represented by Robbins Geller Rudman & Dowd and Scott + Scott. The case is assigned to U.S. District Judge Jesse Furman.

ISDAfix is among the most important benchmarks in the U.S. financial system, according to the complaint. It's used to set rates not only for "plain vanilla" interest rate swaps, but also for commercial real estate mortgages, structured debt products and also more esoteric financial instruments such as "steepeners" and "snowballs." Many of these products—like interest rate "swaptions," which are options to do interest rate swaps—may not be widely known, but there's a huge market for them. Swaptions alone involved $29.5 trillion in interest rate swaps as of July 2013.

The Commodity Futures Trading Commission is reportedly investigating the ISDAfix market but has not yet taken action. The pension fund plaintiff commissioned its own experts to study swings in ISDAfix rates and found anomalous spikes that could only be explained by collusion, the complaint states.

The plaintiffs have asked for an equitable tolling of the statutes of limitation because the defendants concealed their activity.

Several of the defendant banks declined to comment to Bloomberg News.

In the unrelated credit default swap antitrust case, which targets a nearly identical group of banks, U.S. District Judge Denise Cote on Thursday refused to dismiss claims that the defendants violated state unjust enrichment laws and Section 1 of the Sherman Antitrust Act. Pearson, Simon & Warshaw is colead counsel with Quinn Emanuel in that case.

Read more: http://www.litigationdaily.com/id=1202669162024/Quinn-Emanuel-Reloads-Against-Banks-in-New-PriceFixing-Case#ixzz3CoZDOwpU

A European Story: Of pigs, horses and people’s lives

September 6, 2014 13:22 | Annick Baud

http://www.spectrezine.org/european-story-pigs-horses-and-people%E2%80%99s-lives

It all started in Romania, a poor country that saw benefits in joining the European Union, because of the many much-needed subsidies it could receive to build infrastructure, such as roads, bridges, schools and hospitals.

Before its entry into the EU’s single market, Romania had a well-established system to feed its people at low cost: many amongst its large farming population raised two pigs per year. After slaughter, the meat of each pig was prepared in various ways to last a whole year. The farmer kept the proceeds of one pig to feed the family, while an urban family came to get the meat from the second pig, thus ensuring their yearly food at very low cost. Everyone was fed, the system worked and everybody was a winner.

As soon as Romania entered the European Union, its government was immediately notified by Brussels that this pig situation could not go on, as it failed to comply with European health regulations. The farmers had to take their pigs to proper slaughterhouses, where the meat would be bought by weight. But whatever money the farmers made from that sale, it was far from ensuring their year’s food, since from then on they had to buy their meat in stores, which generally meant big European supermarkets that had immediately moved into Romania. And the urban people were faced with the same problem as the farmers: whatever they had paid for their yearly pig at the farm, the same amount was far from ensuring supermarket food for a whole year. Everyone, except the big supermarkets, was a loser. Even the pigs, who now had to travel some distance to a slaughterhouse, had a more harrowing end to their brief lives.

Meanwhile roads, bridges, schools and hospitals were indeed built, and at the same pace many European auto industries relocated there, simply because wages in Romanian car factories were massively lower than those in French, German, Spanish or Italian plants. The relocations of these companies produced a rise in unemployment in these countries, with the further snowball effect of thousands of sub-contractor companies having to close down.

Those auto companies now produced cars in Romania at lower cost, and they looked for a way to open their market there. They soon found the way to do it: a great number of the population used horse-drawn carts for transportation of goods and all sorts of other daily purposes. So the car companies lobbied the European Union to put pressure on the Romanian government to outlaw the use of horse-drawn carts on roads, so as to force the Romanian people to buy cars. This of course meant they had to take out loans, which was good for European banks that immediately opened branch-offices there.

Once the horse-drown carts were outlawed , the Romanians who owned horses were suddenly faced with the fact that they couldn’t afford to keep feeding a horse, if the animal was no longer useful. So they took them to the slaughterhouses. Suddenly

Romania had tonnes of horsemeat to sell, and corrupt European industrial food companies saw a great opportunity to make good money at low investment: they bought the horsemeat very cheap, transported the meat into most European countries where they changed its label to beef, after which they used it for the preparation of various frozen dinners, such as lasagne, ravioli, etc, sold at beef cost. The issue was not the species so much as the fact that the horses had never been passed for human consumption, though it is true also that in many countries there is a cultural aversion to eating an animal traditionally used as a beast of burden or for leisure purposes, rather than a source of food.

When the information leaked out, it created a huge scandal. Frozen dinners had to be withdrawn from supermarkets in many European countries. It was further revealed that some of the horsemeat disguised as beef was contaminated: some of the horses had been in bad health when slaughtered.

Meanwhile, many Romanian people found themselves in a situation in which not only could they not afford supermarket food, but they were also forced to buy a car on loan, as a result of which they sank further into poverty. Since they no longer needed a passport to cross the EU’s internal frontiers, or a visa or work permit to enter EU member states, many migrated to richer European countries to find work, where they were exploited, often receiving slave salaries in informal sectors. This infuriated many people in these countries, which were already suffering from rising unemployment and downward pressure on wages. Despite EU freedom of movement rules, governments have responded by in various ways making life difficult for these migrants. They are subject to harassment, arrest and deportation, and are then blamed for the expense, which of course falls on the taxpayer.

Often, those deported will stay put in Romania for a month or two, and then leave once again for the European “Eldorado” of their choice, where they find again some slave work until they are once more subject to the same treatment. And on and on it goes.

I here wish to open a parenthesis about an important aspect of this leakage of Romanian people all over Europe, because it touches a certain category of people who have had and continue to have no voice to be heard: in Romania itself, the Roms (gypsies) are considered to be sub-humans. Already exterminated during the Second World War, they suffer today discrimination from the rest of the Romanian people. The subsidies the government receives from the European Union to build infrastructures never reach their slums and don’t better their lives in any way. As a result, a great number of them leave Romania to try their luck elsewhere in Europe, to meet with even more fierce racial police harassment than the Romanians themselves.

This is the story about how the people of Romania and in a snow ball effect the people of other European countries find themselves in a losing position, while the big winners, of course, are the European industrial food companies and supermarkets, auto companies and banks. At the heart of this process is the EU, with its single market and passion for deregulation.

Annick Baud is an artist who “dreams of a silent, non violent revolution, when all the people of all major countries around the world will unite to stop paying their taxes, which feed this global corrupt system.” She realises that this makes her, in her own words, “an anarchist utopian.”

Colonization by Bankruptcy: Argentina

Colonization by Bankruptcy: The High-stakes Chess Match for Argentina

Posted on August 25, 2014 by Ellen Brown

http://ellenbrown.com/2014/08/25/colonization-by-bankruptcy-the-high-stakes-chess-match-for-argentina/#more-8378

If Argentina were in a high-stakes chess match, the country’s actions this week would be the equivalent of flipping over all the pieces on the board.

– David Dayen, Fiscal Times, August 22, 2014

Argentina is playing hardball with the vulture funds, which have been trying to force it into an involuntary bankruptcy. The vultures are demanding what amounts to a 600% return on bonds bought for pennies on the dollar, defeating a 2005 settlement in which 92% of creditors agreed to accept a 70% haircut on their bonds. A US court has backed the vulture funds; but last week, Argentina sidestepped its jurisdiction by transferring the trustee for payment from Bank of New York Mellon to its own central bank. That play, if approved by the Argentine Congress, will allow the country to continue making payments under its 2005 settlement, avoiding default on the majority of its bonds.

Argentina is already foreclosed from international capital markets, so it doesn’t have much to lose by thwarting the US court system. Similar bold moves by Ecuador and Iceland have left those countries in substantially better shape than Greece, which went along with the agendas of the international financiers.

The upside for Argentina was captured by President Fernandez in a nationwide speech on August 19th. Struggling to hold back tears, according to Bloomberg, she said:

When it comes to the sovereignty of our country and the conviction that we can no longer be extorted and that we can’t become burdened with debt again, we are emerging as Argentines.

. . . If I signed what they’re trying to make me sign, the bomb wouldn’t explode now but rather there would surely be applause, marvelous headlines in the papers. But we would enter into the infernal cycle of debt which we’ve been subject to for so long.

The Endgame: Patagonia in the Crosshairs

The deeper implications of that infernal debt cycle were explored by Argentine political analyst Adrian Salbuchi in an August 12^th article titled “Sovereign Debt for Territory: A New Global Elite Swap Strategy.” Where territories were once captured by military might, he maintains that today they are being annexed by debt. The still-evolving plan is to drive destitute nations into an international bankruptcy court whose decisions would have the force of law throughout the world. The court could then do with whole countries what US bankruptcy courts do with businesses: sell off their assets, including their real estate. Sovereign territories could be acquired as the spoils of bankruptcy without a shot being fired.

Global financiers and interlocking megacorporations are increasingly supplanting governments on the international stage. An international bankruptcy court would be one more institution making that takeover legally binding and enforceable. Governments can say no to the strong-arm tactics of the global bankers’ collection agency, the IMF. An international bankruptcy court would allow creditors to force a nation into bankruptcy, where territories could be involuntarily sold off in the same way that assets of bankrupt corporations are.

For Argentina, says Salbuchi, the likely prize is its very rich Patagonia region, long a favorite settlement target for ex-pats. When Argentina suffered a massive default in 2001, the global press, including Time and The New York Times, went so far as to propose that Patagonia be ceded from the country as a defaulted debt payment mechanism.

The New York Times article followed one published in the Buenos Aires financial newspaper El Cronista Comercial called “Debt for Territory,” which described a proposal by a US consultant to then-president Eduardo Duhalde for swapping public debt for government land. It said:

[T]he idea would be to transform our public debt default into direct equity investment in which creditors can become land owners where they can develop  industrial, agricultural and real estate projects. . . . There could be surprising candidates for this idea: during the Alfonsin Administration, the Japanese studied an investment master plan in Argentine land in order to promote emigration.  The proposal was also considered in Israel.

Salbuchi notes that ceding Patagonia from Argentina was first suggested in 1896 by Theodor Herzl, founder of the Zionist movement, as a second settlement for that movement.

Another article published in 2002 was one by IMF deputy manager Anne Krueger titled “Should Countries Like Argentina Be Able to Declare Themselves Bankrupt?” It was posted on the IMF website and proposed some “new and creative ideas” on what to do about Argentina. Krueger said, “the lesson is clear: we need better incentives to bring debtors and creditors together before manageable problems turn into full-blown crises,” adding that the IMF believes “this could be done by learning from corporate bankruptcy regimes like Chapter 11 in the US”.

These ideas were developed in greater detail by Ms. Krueger in an IMF essay titled “A New Approach to Debt Restructuring,” and by Harvard professor Richard N. Cooper in a 2002 article titled “Chapter 11 for Countries” published in Foreign Affairs (“mouthpiece of the powerful New York-Based Elite think-tank, Council on Foreign Relations”).Salbuchi writes:

Here, Cooper very matter-of-factly recommends that “only if the debtor nation cannot restore its financial health are its assets liquidated and the proceeds distributed to its creditors – again under the guidance of a (global) court” (!).

In Argentina’s recent tangle with the vulture funds, Ms. Krueger and the mainstream media have come out in apparent defense of Argentina, recommending restraint by the US court. But according to Salbuchi, this does not represent a change in policy. Rather, the concern is that overly heavy-handed treatment may kill the golden goose:

. . . [I] n today’s delicate post-2008 banking system, a new and less controllable sovereign debt crisis could thwart the global elite’s plans for an “orderly transition towards a new global legal architecture” that will allow orderly liquidation of financially-failed states like Argentina. Especially if such debt were to be collateralized by its national territory (what else is left!?)

Breaking Free from the Sovereign Debt Trap

Salbuchi traces Argentina’s debt crisis back to 1955, when President Juan Domingo Perón was ousted in a very bloody US/UK/mega-bank-sponsored military coup:

Perón was hated for his insistence on not indebting Argentina with the mega-bankers: in 1946 he rejected joining the International Monetary Fund (IMF); in 1953 he fully paid off all of Argentina’s sovereign debt. So, once the mega-bankers got rid of him in 1956, they shoved Argentina into the IMF and created the “Paris Club” to engineer decades-worth of sovereign debt for vanquished Argentina, something they’ve been doing until today.

Many countries have been subjected to similar treatment, as John Perkins documents in his blockbuster exposé Confessions of an Economic Hit Man. When the country cannot pay, the IMF sweeps in with refinancing agreements with strings attached, including selling off public assets and slashing public services in order to divert government revenues into foreign debt service.

Even without pressure from economic hit men, however, governments routinely indebt themselves for much more than they can ever hope to repay. Why do they do it? Salbuchi writes:

Here, Western economists, bankers, traders, Ivy League academics and professors, Nobel laureates and the mainstream media have a quick and monolithic reply: because all nations need“investment and investors” if they wish to build highways, power plants, schools, airports, hospitals, raise armies, service infrastructures and a long list of et ceteras . . . .

But more and more people are starting to ask a fundamental common-sense question: why should governments indebt themselves in hard currencies, decades into the future with global mega-bankers, when they could just as well finance these projects and needs far more safely by issuing the proper amounts of their own local sovereign currency instead?

Neoliberal experts shout back that government-created money devalues the currency, inflates the money supply, and destroys economies. But does it? Or is it the debt service on money created privately by banks, along with other forms of “rent” on capital, that create inflation and destroy economies? As Prof. Michael Hudson points out:

These financial claims on wealth – bonds, mortgages and bank loans – are lent out to become somebody else’s debts in an exponentially expanding process.  . . . [E]conomies have been obliged to pay their debts by cutting back new research, development and new physical reinvestment. This is the essence of IMF austerity plans, in which the currency is “stabilized” by further international borrowing on terms that destabilize the economy at large. Such cutbacks in long-term investment also are the product of corporate raids financed by high-interest junk bonds. The debts created by businesses, consumers and national economies cutting back their long-term direct investment leaves these entities even less able to carry their mounting debt burden.

Spiraling debt also results in price inflation, since businesses have to raise their prices to cover the interest and fees on the debt.

From Sovereign Debt to Monetary Sovereignty

For governments to escape this austerity trap, they need to spend not less but more money on the tangible capital formation that increases physical productivity. But where to get the investment money without getting sucked into the debt vortex? Where can Argentina get funding if the country is shut out of international capital markets?

The common-sense response, as Salbuchi observes, is for governments to issue the money they need directly. But “printing money” raises outcries that can be difficult to overcome politically. An alternative that can have virtually the same effect is for nations to borrow money issued by their own publicly-owned banks. Public banks generate credit just as private banks do; but unlike private lenders, they return interest and profits to the economy. Their mandate is to serve the public, and that is where their profits go. Funding through their own government-issued currencies and publicly-owned banks has been successfully pursued by many countries historically, including Australia, New Zealand, Canada, Germany, China, Russia, Korea and Japan. (For more on this, seeThe Public Bank Solution.)

Countries do need to be able to buy foreign products that they cannot acquire or produce domestically, and for that they need a form of currency or an international credit line that other nations will accept. But countries are increasingly breaking away from the oil- and weapons-backed US dollar as global reserve currency. To resolve the mutually-destructive currency wars will probably take a new Bretton Woods Accord. But that is another subject for a later article.

____________________________

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.

Russia and the Ukraine Backstory

Russia and the Ukraine Backstory with Anne Williamson

Catherine, The Solari Report on September 4, 2014 at 7:09 am · 

https://solari.com/blog/russia-and-the-ukraine-backstory-with-anne-williamson/

“The aid program delivered best it could what was in reality a flimsy contrivance, which – in turn – was really only an exotic venue through which to pass public funds to selected Russians of the Clintons and the Harvard Institute of International Development’s choosing and to Wall Street investment banks the Clintons hoped to entice permanently into their orbit of supporters and contributors. In short, the Russian bond market was the Arkansas Development Finance Authority gone international.” ~ Anne Williamson, Testimony Before the Committee on Banking and Financial Services of the U.S. House of Representatives, Sept. 21, 1999

By Catherine Austin Fitts

The most popular blog post at solari.com is Financial Coup d’ Etat. It was written about my experience at an investment conference in London. I was presenting The Myth of the Rule of Law about the extraordinary windfalls enjoyed by private investors as a result of so-called “privatization” and the early engineering of the US housing bubble. I then heard a riveting presentation from former WSJ report and author Anne Williamson about a similar process in Russia and the former Soviet Union territories and one from John Laughland about, yet again, a similar process in Eastern Europe.

We realized that day that it was the same investment interests operating globally using the same models in country after country.  Since then, as events unfold globally, I watch for the impact of investment flows on events throughout the seven continents – the financial interests and deals often involve deep connections.

This week Anne Williamson of Lok-N-Load Media joins me to discuss the devastating “privatization” of the Russian economy in the 1990′s as a critical history leading up to current events in the Ukraine. We will talk about what is happening in the Ukraine, Russia’s point of view and what that means to events ahead. This is a long, fascinating discussion on the real politik of US relations with Europe, Russia and the Ukraine today with an experienced author whose grasp of the global financial system, institutions and markets is first rate. You don’t want to miss it!

In Money & Markets this week I will discuss the latest in financial and geopolitical news.

In Let’s Go to the Movies, I will review a remarkable new documentary Dinosaur 13, directed and produced by Todd Douglas Miller. Whether Iraq, Kiev, Crimea or Rapid City, South Dakota, when powerful private interests want control, whether of fossil fuels or fossils, they can and do engineer a lot of tax-payer funded resources in the service of getting what they want.

Talk to you Thursday!

Joseph E. Stiglitz 

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank. His most recent book, co-authored with Bruce Greenwald, … read more

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SEP 1, 2014 19

Democracy in the Twenty-First Century

NEW YORK – The reception in the United States, and in other advanced economies, of Thomas Piketty’s recent book Capital in the Twenty-First Century attests to growing concern about rising inequality. His book lends further weight to the already overwhelming body of evidence concerning the soaring share of income and wealth at the very top.

Piketty’s book, moreover, provides a different perspective on the 30 or so years that followed the Great Depression and World War II, viewing this period as a historical anomaly, perhaps caused by the unusual social cohesion that cataclysmic events can stimulate. In that era of rapid economic growth, prosperity was widely shared, with all groups advancing, but with those at the bottom seeing larger percentage gains.

Piketty also sheds new light on the “reforms” sold by Ronald Reagan and Margaret Thatcher in the 1980s as growth enhancers from which all would benefit. Their reforms were followed by slower growth and heightened global instability, and what growth did occur benefited mostly those at the top.

But Piketty’s work raises fundamental issues concerning both economic theory and the future of capitalism. He documents large increases in the wealth/output ratio. In standard theory, such increases would be associated with a fall in the return to capital and an increase in wages. But today the return to capital does not seem to have diminished, though wages have. (In the US, for example, average wages have stagnated over the past four decades.)

The most obvious explanation is that the increase in measured wealth does not correspond to an increase in productive capital – and the data seem consistent with this interpretation. Much of the increase in wealth stemmed from an increase in the value of real estate. Before the 2008 financial crisis, a real-estate bubble was evident in many countries; even now, there may not have been a full “correction.” The rise in value also can represent competition among the rich for “positional” goods – a house on the beach or an apartment on New York City’s Fifth Avenue.

Sometimes an increase in measured financial wealth corresponds to little more than a shift from “unmeasured” wealth to measured wealth – shifts that can actually reflect deterioration in overall economic performance. If monopoly power increases, or firms (like banks) develop better methods of exploiting ordinary consumers, it will show up as higher profits and, when capitalized, as an increase in financial wealth.

But when this happens, of course, societal wellbeing and economic efficiency fall, even as officially measured wealth rises. We simply do not take into account the corresponding diminution of the value of human capital – the wealth of workers.

Moreover, if banks succeed in using their political influence to socialize losses and retain more and more of their ill-gotten gains, the measured wealth in the financial sector increases. We do not measure the corresponding diminution of taxpayers’ wealth. Likewise, if corporations convince the government to overpay for their products (as the major drug companies have succeeded in doing), or are given access to public resources at below-market prices (as mining companies have succeeded in doing), reported financial wealth increases, though the wealth of ordinary citizens does not.

What we have been observing – wage stagnation and rising inequality, even as wealth increases – does not reflect the workings of a normal market economy, but of what I call “ersatz capitalism.” The problem may not be with how markets should or do work, but with our political system, which has failed to ensure that markets are competitive, and has designed rules that sustain distorted markets in which corporations and the rich can (and unfortunately do) exploit everyone else.

Markets, of course, do not exist in a vacuum. There have to be rules of the game, and these are established through political processes. High levels of economic inequality in countries like the US and, increasingly, those that have followed its economic model, lead to political inequality. In such a system, opportunities for economic advancement become unequal as well, reinforcing low levels of social mobility.

Thus, Piketty’s forecast of still higher levels of inequality does not reflect the inexorable laws of economics. Simple changes – including higher capital-gains and inheritance taxes, greater spending to broaden access to education, rigorous enforcement of anti-trust laws, corporate-governance reforms that circumscribe executive pay, and financial regulations that rein in banks’ ability to exploit the rest of society – would reduce inequality and increase equality of opportunity markedly.

If we get the rules of the game right, we might even be able to restore the rapid and shared economic growth that characterized the middle-class societies of the mid-twentieth century. The main question confronting us today is not really about capital in the twenty-first century. It is about democracy in the twenty-first century.

Read more at http://www.project-syndicate.org/commentary/joseph-e--stiglitz-blames-rising-inequality-on-an-ersatz-form-of-capitalism-that-benefits-only-the-rich#wlIgCjt1K4q80bdk.99

CFR: Central Banks Should Give Money Directly to the People

Print Less but Transfer More

Why Central Banks Should Give Money Directly to the People

By Mark Blyth and Eric Lonergan

FROM OUR SEPTEMBER/OCTOBER 2014 ISSUE

(Johnny Vulkan / Flickr)

In the decades following World War II, Japan’s economy grew so quickly and for so long that experts came to describe it as nothing short of miraculous. During the country’s last big boom, between 1986 and 1991, its economy expanded by nearly $1 trillion. But then, in a story with clear parallels for today, Japan’s asset bubble burst, and its markets went into a deep dive. Government debt ballooned, and annual growth slowed to less than one percent. By 1998, the economy was shrinking.

That December, a Princeton economics professor named Ben Bernanke argued that central bankers could still turn the country around. Japan was essentially suffering from a deficiency of demand: interest rates were already low, but consumers were not buying, firms were not borrowing, and investors were not betting. It was a self-fulfilling prophesy: pessimism about the economy was preventing a recovery. Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.

As Bernanke made clear, the concept was not new: in the 1930s, the British economist John Maynard Keynes proposed burying bottles of bank notes in old coal mines; once unearthed (like gold), the cash would create new wealth and spur spending. The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.

Even the CFR Is Saying It: Time to Rain Money on Main Street

Even the Council on Foreign Relations Is Saying It: Time to Rain Money on Main Street

http://www.nationofchange.org/even-council-foreign-relations-saying-it-time-rain-money-main-street-1409641381

ELLEN BROWN

WEB OF DEBT / OP-ED

Published: Tuesday 2 September 2014

The economy is continually teetering toward the edge of deflation, which is the feds responsibility to take care of. They need to push up the money supply and encourage demand in some creative way.

You can always count on Americans to do the right thing, after they’ve tried everything else.                      —Winston Churchill

When an article appears in Foreign Affairs, the mouthpiece of the policy-setting Council on Foreign Relations, recommending that the Federal Reserve do a money drop directly on the 99%, you know the central bank must be down to its last bullet.

The September/October issue of Foreign Affairs features an article by Mark Blyth and Eric Lonergan titled “Print Less But Transfer More: Why Central Banks Should Give Money Directly To The People.” It’s the sort of thing normally heard only from money reformers and Social Credit enthusiasts far from the mainstream. What’s going on?

The Fed, it seems, has finally run out of other ammo. It has to taper its quantitative easing program, which is eating up the Treasuries and mortgage-backed securities needed as collateral for the repo market that is the engine of the bankers’ shell game. The Fed’s Zero Interest Rate Policy (ZIRP) has also done serious collateral damage. The banks that get the money just put it in interest-bearing Federal Reserve accounts or buy foreign debt or speculate with it; and the profits go back to the 1%, who park it offshore to avoid taxes. Worse, any increase in the money supply from increased borrowing increases the overall debt burden and compounding finance costs, which are already a major constraint on economic growth.

Meanwhile, the economy continues to teeter on the edge of deflation. The Fed needs to pump up the money supply and stimulate demand in some other way. All else having failed, it is reduced to trying what money reformers have been advocating for decades — get money into the pockets of the people who actually spend it on goods and services.

A Helicopter Drop on Main Street

Blyth and Lonergan write:

[L]ow inflation . . . occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. . . . At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.

Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality. [Emphasis added.]

A money drop directly on consumers is not a new idea for the Fed. Ben Bernanke recommended it in his notorious 2002 helicopter speech to the Japanese who were caught in a similar deflation trap. But the Japanese ignored the advice. According to Blyth and Lonergan:

Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.

. . . The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.

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Today most of the global economy is drowning in debt, and central banks have played all their other cards.  Blyth and Lonergan write:

It’s well past time, then, for U.S. policymakers — as well as their counterparts in other developed countries — to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.

The Hyperinflation Bugaboo

The main reason governments have not tried this approach, say the authors, is the widespread belief that it will trigger hyperinflation. But will it? In a Forbes article titled “Money Growth Does Not Cause Inflation!”, John Harvey argues that the rule as taught in economics class is based on some invalid assumptions. The formula is:

MV = Py

When the velocity of money (V) and the quantity of goods sold (y) are constant, adding money (M) must drive up prices (P). But, says Harvey, V and y are not constant. The more money people have to spend (M), the more money that will change hands (V), and the more goods and services that will get sold (y). Only when V and y reach their limits – only when demand is saturated and productivity is at full capacity – will consumer prices be driven up. And they are nowhere near their limits yet.

The US output gap – the difference between actual output (y) and potential output – is currently estimated at about $1 trillion annually. That means the money supply could be increased by at least $1 trillion without driving up prices.

As for V, the relevant figure for the lower 80% (the target population of Blyth and Lonergan) is the velocity of M1 –– coins, dollar bills, and checkbook money. Fully 76% of Americans now live paycheck to paycheck. When they get money, they spend it. They don’t trade in the forms of investment called “near money” and “near, near money”that make up the bulk of M2 and M3.

The velocity of M1 in 2012 was 7 (down from a high of 10 in 2007). That means M1 changed hands seven times during 2012 – from housewife to grocer to farmer, etc. Since each recipient owes taxes on this money, increasing GDP by one dollar increases the tax base by seven dollars.

Total tax revenue as a percentage of GDP in 2012 was 24.3%. Extrapolating from those figures, one dollar spent seven times over on goods and services could increase tax revenue to the government by 7 x 24.3% = $1.7. The government could actually get more back in taxes than it paid out! Even with some leakage in those figures, the entire dividend paid out by the Fed might be taxed back to the government, so that the money supply would not increase at all.

Assume a $1 trillion dividend issued in the form of debit cards that could be used only for goods and services. A back-of-the-envelope estimate is that if $1 trillion were shared by all US adults making under $35,000 annually, they could each get about $600 per month.  If the total dividend were $2 trillion, they could get $1,200 per month. And in either case it could, at least in theory, all come back in taxes to the government without any net increase in the money supply.

There are also other ways to get money back into the Treasury so that there is no net increase in the money supply. They include closing tax loopholes, taxing the $21 trillion or more hidden in offshore tax havens, raising tax rates on the rich to levels like those seen in the boom years after World War II, and setting up a system of public banks that would return the interest on loans to the government. If bank credit were made a public utility, nearly $1 trillion could be returned annually to the Treasury just in bank profits and savings on interest on the federal debt.  Interest collected by U.S. banks in 2011 was $507 billion (down from $725 billion in 2007), and total interest paid on the federal debt was $454 billion.

Thus there are many ways to return the money issued in a national dividend to the government. The same money could be spent and collected back year after year, without creating price inflation or hyperinflating the money supply.

Why It’s the Job of the Fed

Why not just stimulate employment through the congressional funding of infrastructure projects, as politicians usually advocate? Blyth and Lonergan write:

The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy. . . . Governments should . . . continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly.

Still, getting money into the pockets of the people sounds more like fiscal policy (the business of Congress) than monetary policy (the business of the Fed). But monetary policy means managing the money supply, and that is the point of a dividend. The antidote to deflation – a shrinking supply of money – is to add more. The Fed tried adding money to bank balance sheets through its quantitative easing program, but the result was simply to drive up the profits of the 1%. The alternative that hasn’t yet been tried is to bypass the profit-siphoning 1% and get the money directly to the consumers who create consumer demand.

There is another reason for handing the job to the Fed. Congress has been eviscerated by a political system that keeps legislators in open battle, deadlocked in inaction. The Fed, however, is “independent.” At least, it is independent of government. It marches to the drum of Wall Street, but it does not need to ask permission from voters or legislators before it acts. It is basically a dictatorship. The Fed did not ask permission before it advanced $85 billion to buy an 80% equity stake in an insurance company (AIG), or issued over $24 trillion in very-low-interest credit to bail out the banks, or issued trillions of dollars in those glorified “open market operations” called quantitative easing. As noted in an opinion piece in the Atlantic titled “How Dare the Fed Buy AIG”:

It’s probable that they don’t actually have the legal right to do anything like this.  Their authority is this:  who’s going to stop them?  No one wants to take on responsibility for this mess themselves.

There is a third reason for handing the job to the Fed. It is actually in the interest of the banks – the Fed’s real constituency – to issue a national dividend to the laboring masses. Interest and fees cannot be squeezed from people who are bankrupt. Creditor and debtor are in a symbiotic relationship. Like parasites and cancers, compound interest grows exponentially, doubling and doubling again until the host is consumed; and we are now at the end stage of that cycle. To keep the host alive, the creditors must restock their food source. Dropping money on Main Street is thus not only the Fed’s last bullet but is a critical play for keeping the game going.