How The New York Times Continues To Spread Monetary Disinformation – a continuing AMI series featuring commentary by Richard Distelhorst

In our continuing series of articles showing how monetary disinformation is spread by the media, AMI Researcher and Chapter Leader Dick Distelhorst again dismantles each paragraph of another recent travesty by The New York Times.  The article is reproduced as presented on The New York Times’ web site, interspersed with Distelhorst’s piercing commentary in bold italics.


Published: August 10, 2010

By Sewell Chan

WASHINGTON — Federal Reserve officials, acknowledging that their confidence in the recovery had dimmed, moved again on Tuesday to keep interest rates low and encourage economic growth. They also signaled that more aggressive measures could follow if the job market and other indicators continued to weaken.

Keeping interest rates low does not encourage economic growth, it encourages economic debt.  With our nation and its people already over $52 trillion in debt, the last thing we need is more debt.  Click following link to see Total Credit Market Debt:

While low interest rates are desirable, in today’s world where most of the American people are up to their eyeballs in debt and unable to borrow, the low rates do not help the economy.  What the American people need is money to spend, what they definitely do not need is to go even deeper in debt.  The Fed has kept the Fed Funds Rate (the rate banks pay to borrow money) at zero to 1/4 of one percent which IS a great way to make the profits of the “too-big-to-fail” banks grow – they borrow money at 1/4 of one percent or less, then lend it out at 5%, 10% or more.  Sometimes, on credit cards, they charge 30% or more.  Who couldn’t make money this way?  Can you or I borrow for 1/4 of one percent and then invest it to return far more?  Wouldn’t you like to get on this deal?  The Fed is “encouraging economic growth” all right, but only for the big banks who got us into this mess in the first place.

With short-term interest rates already close to zero, the Fed’s policy makers have relatively few tools available to encourage consumer and corporate spending. So they now plan to use the proceeds from the Fed’s huge mortgage-bond portfolio to buy long-term government debt.

And where did the Fed’s “huge mortgage-bond portfolio” come from?  It came from the bailout of the “too-big-to-fail” banks when the Fed bought the big banks’ bad mortgage debts from them at full price.  Now the Fed will “use the proceeds” from selling these bad mortgages, at perhaps 50 or 60 cents on the dollar, “to buy long-term government debt.”  And who pays for the loss on the sales?  Who else, the American taxpayer.  The same ones many of whom have lost their jobs, their homes and much of their savings and pensions due to the greed and avarice of those same “too-big-to-fail” banks.

Now the Fed plans “to use the proceeds from the Fed’s huge mortgage-bond portfolio to buy long-term government debt.”  This means the Fed will buy 30 year Government securities, which now pay an interest rate of about 4%, directly from the U. S. Treasury.  What the American people must realize is the fact that, when the Fed bought their “huge mortgage-bond portfolio” from the big banks at full price, the Fed simply created the money to buy them “out of thin air” during Open Market Operations.  The question should be asked, “If the Federal Reserve, a private corporation owned by the privately-owned commercial banks, can create money “out of thin air” to buy securities, why doesn’t the United States Government create that same money “out of thin air” itself and simply spend it into circulation for the benefit of the people with no interest or debt involved.  Why should we pay 4% or more interest and go deeper in debt when we don’t have to.  There is legislation ready to be introduced to take back control of our own money, it is called The American Monetary Act.  Click the following link to read why this legislation is needed and to see the proposed legislation:

That action may put downward pressure on long-term interest rates and stimulate borrowing. For consumers, it means mortgage rates are likely to remain at record lows for some time.

We don’t need to “stimulate borrowing,” we’re already $52 trillion in debt.  We need to stimulate spending.  How?  To save the “too-big-to-fail” banks the Federal Reserve and other parts of the government directly gave over $4.5 trillion to these big banks to return them to profitability.  And these banks are now reporting record profits and their executives are paying themselves huge bonuses (with taxpayer money).  More than $4.5 trillion was immediately available to save the same people who caused this Great Recession with their greed and avarice.  Think about this.  If the Fed had created that same $4.5 trillion and gave it to the American people instead of the big banks, every citizen of the United States would have received a check for $15,000.  A family of two would have received $30,000; a family of four, $60,000, etc.  This would have put money back into the hands of those who need it most and this recession would have ended right then.  Which course of action would you choose:  Give $4.5 trillion to a few big banks to save them or give $4.5 trillion to the American people to save them.  Pretty easy choice, isn’t it.  Why isn’t this possibility discussed in the New York Times?

Though the immediate impact is likely to be modest, the decision is a turnabout from only a few months ago, when officials were discussing when and how to begin to raise interest rates and gradually shrink the $2.3 trillion balance sheet amassed through the Fed’s response to the 2008 financial crisis.

What the Fed’s response to the 2008 financial crisis was has just been explained.

In buying at least $10 billion a month in new Treasury securities — a small fraction of the roughly $700 billion in Treasury debt the Fed holds — the central bank is trying to help keep money readily available in the financial markets.

No, the central bank is still trying to help the big banks become even more profitable, not to help the American people or the American economy.  The Fed obviously believes that what is good for Wall Street is good for the American people.  The Fed believes that because the Fed is controlled by those same big Wall Street banks.

With Congress seemingly unable to agree on substantial new stimulus spending, the Fed could face a far tougher decision later this year: whether to take more drastic steps to pump money into the economy and make credit even cheaper.

The Fed never “pumps money into the economy” – it pumps ever increasing interest-bearing debt into the economy.  We, as a country and a people, are already over $52 trillion in debt.  We don’t need more debt, we need more money.

“We’re in a lousy middle between the economy picking up on its own and falling off a cliff,” said Cathy E. Minehan, a former president of the Federal Reserve Bank of Boston. “And that makes policy-setting really hard.”

Based on the Fed’s continuing actions, a good bet is that the economy is “falling off a cliff” – a “cliff” built by the privately-owned, debt-based, interest-laden monetary system.  The time to introduce and pass The American Monetary Act is NOW!

The announcement on Tuesday, after the scheduled meeting of the Fed committee that sets interest rates and monetary policy, confirmed what had been widely discussed among economists and business leaders in recent days: the Fed would move more decisively if the economic picture darkened.

Would “move more decisively” in what way?  The Federal Reserve’s fractional reserve banking system was and is designed to force us ever deeper into interest-bearing debt, and it is working exactly as designed by the big banks who wrote the Federal Reserve Act of 1913.

The Fed, led by Ben S. Bernanke, its chairman, has shifted away from its more optimistic outlook earlier this year. “The pace of recovery in output and employment has slowed in recent months,” said the Federal Open Market Committee. The statement added that the nation’s economic recovery was “likely to be more modest in the near term than had been anticipated.”

If every American citizen had received a check for $15,000 do you think the economy might now look better?  Why was $4.5 trillion immediately available to the big banks but never available to American citizens?  Have you figured it out yet? It’s the privately-owned monetary system that is the underlying reason for almost all our economic problems.  The solution is The American Monetary Act.

Yields on 10-year Treasury securities, a benchmark for home mortgages and corporate loans, tumbled to their lowest level in more than a year on Tuesday. Rates on 30-year Treasuries briefly fell below 4 percent. The yield on a 10-year Treasury note dipped to 2.765 percent from 2.83 before the announcement.

So when the big banks borrow money at 1/4 of one percent or less they can use it to buy 10 year Treasury notes which “only” pay 2.765%.  Gee, how they must suffer.

Stocks regained some of their losses from earlier in the day. At its close, the Dow Jones industrial average was down 54.5 points, or 0.51 percent, to 10,644.25.

The only people with the large amounts of money needed to influence whether the stock market goes up or down are the same big banks that we gave $4.5 trillion.  The big banks decide whether the stock market goes up or down, and they make profits when it goes up and when it goes down.  How are you doing with your stocks?

From January 2009 to March 2010, the Fed bought $1.25 trillion in mortgage-backed securities and about $175 billion in debt owed by government agencies, primarily the housing finance entities Fannie Mae and Freddie Mac. The Fed had planned to allow the size of that portfolio to shrink gradually as the securities matured or the debts were prepaid.

You now already know how the Fed bought all this debt – and paid full price for it.  And will pass all the losses on to the taxpayer.  How long will the American people put up with this?  Demand passage of The American Monetary Act NOW and take back control of our own money.  It’s the only real way out of this mess.

Instead, the Fed will now reinvest those principal payments in longer-term Treasury securities. (The central bank said it would continue to roll over its holdings of other Treasury securities as they mature.)

The disinformation in this article is getting redundant.  We already covered this.

The money involved is unclear. In March, the Federal Reserve Bank of New York estimated that at least $200 billion of the mortgage-related securities and debt would mature or be prepaid by the end of 2011.

The other option is default and foreclosure.  Now at all time high rates.  The default  option is not mentioned.  I wonder why?

But mortgage rates have dropped since then, giving borrowers an incentive to refinance and pay off existing mortgages, so the actual figure could be substantially larger.

How many people who have lost their jobs, their homes, their savings and their pensions will now be able to refinance their home mortgages and pay them off at a lower interest rate?   How likely is that to happen?

By not allowing its debt holdings to decline below the level of $2.054 trillion at which they stood on Aug. 4, the Fed is preventing what economists have called the passive tightening of monetary policy. The Fed still has the option, if conditions warrant, of increasing its debt purchases.

More redundant misinformation.  This has also been covered.

Some analysts believe that if the economy worsens, the Fed might begin a new round of quantitative easing — the strategy of buying financial assets to increase the money supply.

And we all now know that the financial assets the Fed will buy will be more bad debts from the big banks.  Which, of course, will help the big banks, not the American people.

In its statement, the committee said that while household spending was gradually increasing, high unemployment, modest income growth, a drop in household wealth and tight credit continued to hamper growth.

Now you know what is really hampering growth, it’s the privately-owned, debt-based, interest-laden monetary system.  Take back control.  Pass The American Monetary Act.

The committee said it still expected a “gradual return” to normal economic conditions, although the recovery was less robust than expected at this point.

Try sending money to the people, not the banks.  See what happens then.  The American Monetary Act will do that, the Fed will not.

Ethan S. Harris, an economist at Bank of America, said he was “mildly surprised” by the Fed’s action — “not that they did it but rather how quickly they decided.” He added, “My expectation had been that the Fed would take a little more time to switch gears and prep the market.”

With rare exceptions, almost all economists and the Federal Reserve failed to see the Great Recession coming.  And those economists who did, including James Galbraith and Dean Baker, are consistently not listened to.  Economist who are consistently wrong don’t get fired, they get promoted.  Economists in general have lost all credibility.

The decision not to let the balance sheet shrink was a relatively easy one, Mr. Harris added. “To go back to big asset purchases is a much bigger step, and it would require clear signs that the economy is heading toward a double-dip recession.”

Which is, of course, exactly where the economy is headed until help goes to the American people not to the big banks that caused the problems in the first place.

Economists who work in the markets had a mix of reactions.

Bruce McCain, the chief investment strategist at Key Private Bank, said the Fed “steered the middle ground.”

“Given the uncertainty, hopefully the middle ground calms nerves and keeps people confident enough to go ahead and spend the money that they have in productive ways,” he added.

Why anyone would believe most economists is beyond me.

But a former New York Fed economist, John Ryding of RDQ Economics, said the announcement suggested “a bit of a feeling of panic by the Fed.” And Joshua Shapiro, an economist at MFR Inc., said the Fed’s announcement “appears to mainly be designed to provide itself with political cover against a backdrop of a gut-wrenching economic correction that shows no sign of ending anytime soon.”

The Fed could “provide itself with political cover” by helping the American people instead of the big banks.  But the present system is not designed to do that.

Along with additional quantitative easing, another option available to the Fed is to lower the interest rate (now 0.25 percent) it pays on the roughly $1 trillion in reserves that banks hold at the Fed.

Another interesting situation.  Before the crash of 2008 the Fed did not pay interest on bank reserves at the Fed.  Before the crash these reserves held steady for years in the range of $10 billion.  As soon as the Fed bought bad mortgage assets from the banks to the tune of over $1.2 trillion, actions which created $1.2 trillion, not $10 billion, in reserves at the Fed, then the Fed decided to pay the big banks interest on the reserves the Fed created and gave the banks free of charge.  That’s like someone giving you a lot of money and then paying you interest on what they just gave you.  What a deal.

While that action could be helpful, it carries some risk, said Christopher L. House, an economics professor at the University of Michigan.

“If they were to simultaneously lower the rate to zero while leaving $1 trillion in reserves in the banking system, they would have a lot of reason to worry about inflation,” he said.

With official unemployment level at 9.5% and the real level of unemployed and underemployed at 22% there is no basis to worry about inflation.  The classic definition of inflation is “too much money chasing too few goods.”  Go to any big box store or big supermarket.  Are the shelves empty?  Do the people have too much money?  The answer is obvious.

In its announcement, the Fed also left unchanged its benchmark short-term interest rate — the federal funds rate, the rate at which banks borrow from one another overnight — at zero to 0.25 percent, its level since December 2008. And it maintained that the rate would remain “exceptionally low” for “an extended period,” the language it has been using since March 2009.

More redundant information.  The very low Fed Funds rate helps the big banks far more than it helps anyone else.

The Federal Open Market Committee’s vote on Tuesday was 9 to 1. The dissenter was Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City.

Mr. Hoenig, who is known for his focus on inflation, the Fed’s traditional enemy, dissented for the fifth consecutive meeting, both on the extended-period language and on the decision to reinvest the mortgage-bond proceeds.

Mr. Hoenig obviously thinks not enough people have lost their jobs, homes, savings and pensions.  He wants to “focus on inflation” when deflation is the immediate problem.  If the big banks could find borrowers and use their over one trillion dollars of “reserves” to loan out $10 trillion or more dollars at interest, THEN we would see inflation.  The big banks are not loaning these reserves, in fact, the Fed is paying them interest for not loaning them.   What an insane monetary system (except for those at the top who collect all the interest on the over $52 trillion of debt).  It is way past time for a change.  Pass the American Monetary Act now and take back control of our own money and use it to help the American people for a change.

Christine Hauser contributed reporting from New York.


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