Great read lorne, thanks..............
Misinformation, Disinformation, Mistakes, and Material Omissions Relating to the Money Issue in the Major Media
There is so much misinformation, disinformation, mistakes, and material omissions relating to the money issue in the major media, it?s like swimming up a waterfall. Nevertheless, one has to start somewhere. The quotations below and comments that follow were culled at random from various publications. If those publications believe that their information is correct and that our criticisms are unwarranted, FAME will be delighted to print (short) rejoinders.
The Economist, ?Schools Brief: The business of banking? - October 30th, 1999 Page 89
In this article, The Economist purports to explain ?why banks evolved, how they function, what they do, and the challenges they face.?
The Economist: ?First, they [banks] are vital to economic activity, because they reallocate money, or credit, from savers, who have a temporary surplus of it, to borrowers, who can make better use of it.?
The Economist: ?Banks take in money as deposits, on which they sometimes pay interest, and then lend it to borrowers, who use it to finance investment or consumption. They also borrow money in other ways, generally from other banks in what is called the interbank market. They make profits on the difference, called the margin or the spread, between interest paid and received. As this spread has been driven down by better information and the increasing sophistication of capital markets, banks have tried to boost their profits with fee businesses, such as selling mutual funds. Such income now accounts for 40% of bank profits in America.?
FACT: The above statements include a material omission. Banks do not just ?take in money.? Banks create money. In 1950, the money supply in the U.S. was about $150 billion. Today, it is about $6.2 trillion. Of the additional $6 trillion, the Federal Reserve created roughly $500 billion. The remaining $5.5 trillion was created out of thin air by banks?and without any work. How do banks create money? In essence, they merely press some keys on a computer keyboard. To quote John Kenneth Galbraith: ?The process by which banks create money is so simple that the mind is repelled.? [Emphasis added.]
The Economist: ?Governments try to minimize the risk of such [systemic] failure in several ways. One is to impose harsher regulation on banks than on other sorts of companies; often the regulator is the central bank.?
FACT: The Economist?s claim is demonstrably false. Banks have much more lenient? even derelict?reporting requirements than other companies. For example, banks alone are exempt from the Securities and Exchange Commission regulations that require publicly held companies to mark their balance sheets to market. Banks alone have been given the privilege of valuing their ?investments? at historic cost rather than at market value. This means that banks, and banks alone, are able to hide the deterioration of their balance sheets from public scrutiny. Since the public guarantees the banking systems? aggregate balance sheet?by virtue of the so-called lender of last resort facility at the Federal Reserve and so-called Federal Deposit Insurance?, why isn?t the true market valuation of that balance sheet public information?
FACT: Representatives of some of the largest banks have been empowered by law, which created a body called the Federal Advisory Council, to meet regularly?and in secret, with no oversight?with the Board of Governors of the Federal Reserve in order to give advice to the Board and to air their concerns. No other regulated industry has the privilege of meeting with their putative regulators in this manner.
The Economist: ?Another tack is to try to prevent runs on banks in the first place. Following the collapse of a third of all American banks in 1930-1933, the government set up an insurance scheme under which it guaranteed to repay depositors, up to a certain limit, in the event of bank failure.?
FACT: So-called Federal Deposit Insurance was not set up to prevent further runs on banks. After the banking debacle of the 1930?s people were generally distrustful of banks, as they should have been. The so-called insurance plan was put into place to entice people to put their money into banks. That the ?insurance? scheme would prevent further runs was an added bonus. In effect, the so-called insurance plan is a subsidy?none other than Alan Greenspan, the current Chairman of the Federal Reserve confirms this?to the banking system. It was implemented so that people would again trust the banks with their money.
FACT: So-called Federal Deposit ?Insurance? is not insurance. It is an indemnification. As the late Professor Murray Rothbard has written, insurance as a concept arises only when there is a large population of actuarially identifiable risks. Risks taken by banks are judgment calls and do not fit this model. Further, since the banking systems? entire balance sheet is subsidized and protected by taxpayer subsidy, there is the added issue of moral hazard?that the one taking the risk gets the reward if the risk works out, but that someone else (the ordinary taxpayer) is left holding the bag if the risk fails. To use the term ?insurance? to describe this subsidy is misinformation.
The Economist, ?Killing Glass-Steagall,? - October 30th, 1999, Page 18
In this article, The Economist purports to explain: ?Not before time, America?s Congress has decided to repeal this bad law. A pity it has not updated the country?s financial supervision.?
The Economist: ?House and Senate have agreed to dismantle a law that was badly conceived and kept alive out of sheer prejudice. ? Such a draconian restriction, you might think, must have had the soundest of motives. Indeed it did. In the four years following the Wall Street Crash in 1929, some 11,000 of America?s banks, a third of the total, collapsed. Everyone concluded that they must have been speculating on the stockmarket and politicians made sure that banks would never be allowed to do so again. Actually, these fears had no basis in fact. Banks had not, as it turns out, poured depositors? money into the stockmarket. Nor was there any evidence for a second worry: that banks had foisted on a na‹ve public shares in dodgy companies which owed them money.?
FACT: The Economist has set up a straw man argument, i.e., an argument that is false, and then attacked that argument. While there were hearings in the Congress about the malfeasance of some bank officials, ?everyone? most certainly did not conclude that banks had been speculating in the stockmarket, as The Economist suggests, and such speculating was not the driving motivation for the Glass-Steagall Act.
Perhaps one of the most astute and plugged-in personalities of the time was Mr. James Warburg, the son of Paul Warburg (who was the intellectual driving force behind the Federal Reserve legislation in 1913). Mr. James Warburg, who testified before the Congress on the money issue several times, and who represented the U.S. at the aborted London Economic Conference, was also a close confidant of President Roosevelt.
Mr. Warburg, in his book The Money Muddle, identified what was then seen as the principal motivation for the Glass-Steagall Act. The idea was that banks, which created what was then called ?bank money,? should use that money only for short-term liquidating loans, i.e., to finance what was then called ?turnover,? or goods that would soon reach the ultimate consumer. This was another way of putting forth the so-called ?Real Bills? concept of bank credit creation.
It was felt at the time, and it was true, that banks had badly mismatched their assets and liabilities by financing investments?which were not just stock market speculation, but were, for the most part, real estate and foreign loans?most of which were, by their nature, long-term. It was believed that the mismatching of assets and liabilities was the principal reason for most of the bank failures. Here is what Mr. Warburg wrote in his The Money Muddle:
Page 193: ?We must see that demand deposits are loaned out to finance turnover, and not capital transactions, so that ?bank money? may always be what it is supposed to be?a medium of exchange.?
Page 194: ?We have seen how necessary it is that there should constantly be an accumulation of savings out of income, in order that the machinery of production may be supplied with the fixed assets it requires. We have seen also that financing for such capital requirements must not come from ?bank money,? but should come from the ?investment market.? It is the function of the ?investment banker? to guide savings into wise and profitable employment and to guide business enterprise in obtaining the capital to which it is properly entitled, on favorable terms.?
?When the investment bankers lose their sense of proportion, as they did in selling foreign loans after the War, or when the public is seized by a speculative mania, as it was in 1927-29, the investment market ceases to fulfill its proper function and becomes nothing more than a gambling hell. If, when this happens, the commercial banks are one and the same as the investment bankers, the whole ?bank money? structure is affected, instead of just the capital market. That is why segregation was necessary.?
The ?segregation? that Mr. Warburg speaks of was accomplished by the Glass-Steagall Act.
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