Dishonest Money: CHAPTER 2 Something for Nothing by Joseph Plummer

 

Dishonest Money: CHAPTER 2 Something for Nothing by Joseph Plummer

 

CHAPTER 2
Something for Nothing

So far we’ve established that The Federal Reserve System was created in secrecy by a handful of powerful men. We know they sought (and secured) the power of government to maximize their profits and shift the inevitable losses of their fraudulent banking practices onto the backs of the American people. Now, let’s briefly walk through some of the mechanisms that enable them to do this.

 

The first step is to create money out of nothing. For now, we only need to know that the bankers can “loan out” money they do not possess. So for instance, let’s say you need to borrow $200,000. The bankers simply type “200,000” into your checking account and poof; they just created $200,000.

 

As soon as this $200,000 is loaned to you, it is entered into the bank’s books as an asset. (You signed a contract that says you owe the bank $200,000 and it is assumed you will pay it back.) However, the loan is also entered into the bank’s books as a liability. (It is assumed you will go out and spend your recently created $200,000 worth of checkbook money and your bank will be liable for those checks.) In other words, many of the checks you write will wind up in other banks and that means the issuing bank (your bank) will owe, potentially, up to $200,000 as those cashed checks start rolling in.

 

Being able to earn interest on money created out of thin air is a sweet deal for the bank. If it takes you 30 years to repay your loan (as is the case with a typical mortgage), the bank will earn hundreds of thousands of dollars in interest on the money it loaned you. But $200,000 is small change. Let’s look at the kind of money they’d much rather be dealing with. Let’s consider a loan of say $200 million.

 

The bankers still create the money out of nothing, they still enter the loan as an asset and a liability, and they still earn profit from interest charges. There is hardly any difference between typing 200,000 into a database and typing 200,000,000 (only a few extra keystrokes). However, those “few extra keystrokes” amount to one thousand times the profit. To put it another way: If you were a banker, would you rather process 1,000 loans at $200,000 each or would you rather find just ONE customer that you could loan $200,000,000 to?

 

From a “paperwork to profit” standpoint, the $200 million loan is the clear choice. However, there is at least one good reason why a bank might prefer making 1,000 smaller loans to making just one big loan. That reason is: It’s far less likely that all 1,000 loans will go bad – one giant loan of $200 million puts an awful lot of eggs in one basket. It creates a greater risk.

 

Some might jump in here and say: “But they created the money out of nothing! What difference does it make if the loan isn’t paid back?” While it is true that the money was created out of nothing, loans that go into default can still cause serious problems for the bank. In short: When somebody defaults on a loan, that “asset” is wiped from their books but the “liability” side of the equation still exists. All that checkbook money is still out in circulation and the bank is obligated to redeem those checks. (Additionally, the lost “loan asset” puts the bank at risk regarding certain regulatory requirements.)

 

If the person who defaulted has nothing of value to seize, the bank must get the money to cover its obligations from somewhere else. If the bank’s profits or stockholder equity aren’t sufficient, the bank becomes insolvent and the gravy train (collecting interest payments on money the bankers created out of thin air) can come to an abrupt end.

 

Under normal circumstances, this would encourage banks to be very cautious about the loans they approve, especially big loans. Oh, but those BIG loans are so much easier and they generate so much profit! Assuming you had the power; why not devise a system that protects the bank from insolvency in the event the really big loans go bad? Why not indeed...

 

The Federal Reserve System, The Federal Deposit Insurance Corporation (FDIC) and The Federal Deposit Loan Corporation all exist to do just that. They stand by to “guarantee” the massive loans that banks make to governments and corporations. The argument for rescuing these loans when they go bad is the same argument that is always used: “It’s in the public’s best interest.” (I guess we’re supposed to ignore the fact it is the public that ends up paying for the bank’s irresponsible lending, in effect subsidizing and encouraging more “irresponsible lending” in the future.)

 

To put that another way: If you’re a banker and all of your really enormous loans are eligible for a bailout, but your smaller loans are not, doesn’t this encourage you to go big? It’s kind of like telling a gambler: “As long as you bet really, really big, there is no need to worry; your losses will be insured.” Not only does the gambler stand to make more on larger bets (as the banker stands to make more on larger loans), but the inherent RISK is no longer an obstacle.

 

Do we encourage “responsible gambling” (or responsible lending) with this approach? And if the answer is no, is it fair to encourage irresponsible behavior knowing full well the financial consequences are going to be shifted to somebody else?

 

The end result of this policy is that the banks have little motive to be cautious and are protected against the effect of their own folly. The larger the loan, the better it is, because it will produce the greatest amount of profit with the least amount of effort. A single loan to a third-world country netting hundreds of millions of dollars in annual interest is just as easy to process – if not easier – than a loan for $50,000 to a local merchant…If the interest is paid, it’s gravy time. If the loan defaults, the federal government will “protect the public” and…will make sure the banks continue to receive their interest.

The Goal is Perpetual Debt

 

Before continuing, it’s important to note that banks don’t get to keep the money they “create out of nothing.” If a bank creates $200,000 out of nothing today, loans it to you, and then you pay the loan back next week, the bank doesn’t get to keep the $200,000 you paid them. Whatever they create for loans, they must also destroy when the loan is repaid. (Again, we’ll cover this process in greater detail in Chapter 8.)

 

What the bank DOES get to keep is the interest it earns on the money it creates. So the process goes something like this: You ask to borrow $200,000 to purchase a home. The bank “creates” the money and then loans it to you at 8% interest over 30 years. By the time you make your final payment, the bank will have earned $328,000 in interest. $328,000 is a pretty nice profit when you consider the $200,000 loan you paid interest on was created by typing some digits into a computer.

 

To understand this is to understand the dirty little secret of banking. Bankers don’t really want customers who pay off their debts; they want customers to remain heavily in debt. (The bigger the debt, the better.) Governments are especially attractive in this respect. Not only do governments never pay down what they owe (guaranteeing indefinite profit on the original loan amount), they also can’t seem to stop spending money they don’t have. That is to say, they never stop adding to the debt they’ve already accumulated. As the debt forever climbs, so too does the bank’s profit.

 

Suddenly the game of loaning insane amounts of money to governments and corporations starts to make sense. Why should the bank care if the borrower is buried in debt? What difference does it make if the BIG borrower’s revenue stream barely covers interest payments? Remember, those “really, really big loans” are protected. Once there is a system in place for shifting the loan obligations onto others, the only logical objective (from a profit standpoint) is to get the borrower “on the hook” for as much money as possible. When the inevitable happens (the borrower becomes unable or unwilling to make any more payments), it’s time for the final play: Get the citizens to pick up the tab.

 

Consider this a simplified illustration of the process.

 

A “high-risk” loan of $250 million dollars is made to the government of a third-world country. The government spends the money and is soon unable to keep up with its multi-million dollar monthly payments. The bank (after “careful consideration”) decides to help the government by providing yet another loan. Once again, the loan payments resume and all is well. However, before long the new loan is exhausted and now the country is in even worse trouble. If it couldn’t make payments on the first loan, how can it make payments on the TWO loans it now has? Simple; the bank agrees to create even more money out of nothing and loans that to the country. This process can go on for decades. With each new loan the bank increases both its “asset” (the amount of money it is owed) AND the profit it earns on the ever-increasing interest payments. Eventually, the borrower realizes that interest payments alone are eating up nearly all available revenue. There is no way the enormous debt will ever be repaid and bank offers for “helpful” new loans are rejected. What is the bank to do? If the loan goes into default, it stands to lose both the “loan asset” and the highly lucrative interest payments…

 

After intense negotiations, the bank kindly agrees to “reschedule” the loan. (That means reduce the interest rate and extend the loan period.) In reality, this is hardly a concession. Sure, by reducing the interest rate and extending the loan period the bank makes it easier for the borrower to pay, but it has only postponed the inevitable. Sooner or later, the day of reckoning will come. But for now, this move keeps their huge asset on the books and keeps the interest rolling in.

 

At long last the day of reckoning does arrive. The borrower realizes he can never repay what is owed and flatly refuses to continue paying millions of dollars a month in interest to the bank. The jig is up. Or is it? …Time for the final play.

 

G. Edward Griffin explains:

 

The president of the lending bank and the finance officer of the defaulting corporation or government will join together and approach Congress. They will explain that the borrower has exhausted his ability to service the loan and, without assistance from the federal government, there will be dire consequences for the American people. Not only will there be unemployment and hardship at home, there will be massive disruptions in the world markets. And, since we are now so dependent on those markets, our exports will drop, foreign capital will dry up, and we will suffer greatly. What is needed, they will say, is for Congress to allow him to continue to pay interest on the loan and to initiate new spending programs which will be so profitable he will soon be able to pay everyone back. The bank…will agree to write off a small part of the loan as a gesture of its willingness to share the burden. (This however represents) …a small step backward to achieve a giant stride forward. …this modest write down is dwarfed by the amount to be gained through the restoration of the income stream…(On money created out of nothing.) Text in parenthesis added.

 

This final play, the “bailout,” shifts the financial burden from its rightful owners (the borrower and the bank) onto the backs of the American people. Where there would have been consequences for recklessly loaning so much money, there are now billions of dollars to be made in interest payments on those “reckless” loans. Where the bank’s “mistakes” would have surely cost them, those same mistakes become an enormous stream of guaranteed profit. Thanks to the bailout, the “loan asset” will not be lost, the revenue stream will continue without further interruption, and it’s you and I who’ll pay for it all.

 

Through a complex system of federal agencies, international agencies, foreign aid, and direct subsidies

 

Money extracted from the American people goes first to the borrower, and then is sent to the banks to service the loans. Most of this money does not come from taxes, but rather is “created out of thin air” by the Federal Reserve System. As the newly created money flows into the banks and then out into our economy, it dilutes the purchasing power of our money. Confiscation of our purchasing power (via inflation) is the result.

 

Even with this elaborate system standing by to bail out the banks, there is still plenty of opportunity for the banks to loan themselves into insolvency. For instance, bank runs are always a real threat because the banks keep only a small fraction of their customer’s deposits on hand. The bank not only loans out the money you’ve deposited with them, they also create more money (checkbook obligations to pay) out of thin air. If even a small percentage of the people get spooked and show up at the same time to withdraw their deposits…you know the rest. Sure, the Federal Reserve was created to help the bank in situations like this; but there are limits. If the bank has dug itself too big of a hole, it’s time for the FDIC play.

FDIC to the Rescue:

 

FDIC stands for Federal Deposit Insurance Corporation.

 

The concept behind this agency seems noble enough: If a bank presses its luck too far and ends up going broke, its customer’s deposits are insured up to $100,000 each. Given a choice, most people would rather do their banking at an FDIC insured bank. Better to get your money back if the bank goes broke than not.

 

Unfortunately, just as the banks never keep anywhere near the amount of money in their vaults that they owe their customers, the FDIC has nowhere near the amount of money it claims to insure on hand in the event of a banking collapse. How thin are the “reserves” standing by to rescue the people from irresponsible banking? Just about as thin as one could imagine. Not 50%, not 30%, not 15%, or even 5%...more like 1%.

 

As if that isn’t bad enough, that paltry 1% doesn’t even exist in the form of cash. By law, the bank fees paid into the “FDIC fund” must be invested in Treasury bonds. In other words, it is “loaned” to Congress which of course promptly spends every penny. (If the FDIC truly “insures” anything, it’s a steady supply of money flowing into Treasury bonds for our politicians to spend.)

 

One major bank failure could easily wipe out the so-called FDIC fund in an instant. Not to worry though, the fund is “backed by the full faith and credit of the federal government.” Well, doesn’t that make you feel warm and fuzzy inside? The same federal government that doesn’t have any money; the same government that is currently borrowing more than a billion dollars a day to try and support its spending programs…

 

So what happens when the FDIC has exhausted its ability to cover depositor’s losses? The government (with full faith in its credit) must borrow it. So it sells more I.O.U.’s (Treasury securities) and whatever the public doesn’t buy, the Federal Reserve agrees to purchase. But the Fed has no money either…no problem. Whatever amount of money the Fed needs to buy the government securities will simply be “created out of thin air” and presto: the FDIC is now funded. The newly created money floods into the economy, the purchasing power of our currency goes down, and through the hidden tax of inflation we all pay the price. Isn’t this fun?

 Dis