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Bonnie Faulkner interviews Ellen Brown, on October 24th, 2012. |
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This is Guns & Butter.
ELLEN BROWN: According to a researcher in Germany, Margrit Kennedy, who's a professor there, she's collated data from businesses at all different stages of production of a product, and she has found that 35% of everything we buy goes to interest. So if we owned the banks, we would get that interest.
BONNIE FAULKNER: I'm Bonnie Faulkner. Today on Guns & Butter, Ellen Brown. Today's show: "Restoring prosperity with Public Banking." Ellen Brown is an attorney, researcher and author. She's the author of The Web of Debt: the Shocking Truth About Our Money System And How We Can Break Free. She's the author of many books on Natural Healing as well as numerous articles on the financial system. In Web of Debt, her latest book, she analyzes the Federal Reserve and the money trust. I caught up with Ellen Brown at a fund raiser for public banking in San Rafael, California. She is on a speaking tour of the US and abroad.
Today we discuss
the Public Banking Institute, which she heads
public vs. private banking
two banking models: sustainable and extractive
the Federal Reserve
the "shadow banking system"
the Repo market
the benefits of a public banking system
debt
the money supply
compound interest
and "all things money".
Ellen Brown, welcome!
ELLEN BROWN: Oh, thanks Bonnie.
BONNIE FAULKNER: It was nice to finally meet you in person yesterday at your fund raiser in San Rafael.
ELLEN BROWN: Oh, likewise.
BONNIE FAULKNER: You are the chairman and president of the Public Banking Institute. Its website says, "Banking in the Public Interest". What is the Public Banking Institute that you head, and what are its goals?
ELLEN
BROWN: It's a 501(c)(3).
It's a non-profit think-tank sort of institute. We're all volunteers, we're just
promoting the idea that we'd all be better off if the states, counties, cities,
even the federal government owned its own bank, and borrowed from its own bank,
and used it the way banks are used: in other words, put the public's revenues
in the bank and created credit with that money. So, what banks do now, the
perks that Wall Street has that we aren't sharing in, is that Wall Street is
able to take our deposits, our government state, local, and county and city
revenues are deposited generally in Wall Street banks, which then make loans
with that money, even though the money is still there on deposit in the bank
that's the way banking works so they're able to extend credit, charge
interest on those loans, but they're not using them right now for the benefit
of the local community. They tend to be using their ability to create credit
for derivatives and speculation, for buying up corporations that perhaps are
competing with our corporations, like, y'know, foreign corporations. Anyway,
they're not investing in our interest. So, a publicly owned bank would be
something on the model of the Bank of North Dakota, which is the only public bank that
we have right now, the only state-owned bank. It's been in existence since
1919. All the state's revenues, by law, go into the Bank of North Dakota, and
then the bank does what any bank does, it creates credit out of those deposits,
but the deposits are still there. So, they haven't spent the government's
money: they've lent it without spending it. It's still there when the
government needs to withdraw it.
What happens: if the depositor and the borrower come for their money at the
same time, what banks do is they borrow from other banks, at the Fed Funds
Rate, which is 0.25%, or they borrow from the money markets, or there're many
different sources they can get funds, but that's this whole you hear the
term "liquidity": that's what they're talking about. It's "where
do they get their money if the deposits have already been withdrawn?" So
the bank is able to borrow very cheaply, and then turn around and lend that
money at 5% or 8% or 16% depending on what type of loan it is and then they get
that spread; they get that interest. So, if we own the bank, we can recapture
the interest and use it for public purposes. In North Dakota, they have a very
nice dividend that's returned to the state every year, and that that allows
them to do all sorts of services we keep being told that we can't do, that we
have to tighten our belts, that we're in deficit, that we can't find the
money. But North Dakota has had a very nice surplus ever since 2008. In fact
they're in the enviable position of trying to decide what to do with the
money. Should they add more services? Should they cut taxes? I mean, they're
the only state in that position. Because, or one good reason is, because they
have their own credit machine that is creating credit for stimulating that
local economy.
BONNIE FAULKNER: Well, when you say that the Bank of North Dakota accepts deposits from the government, and the government's money remains in the bank and then the bank makes loans, these loans are just ledger entries, right?
ELLEN BROWN: Right. That's the way banks work, is that, it's double entry bookkeeping. So if you go to the bank to take out a mortgage, which is a loan, let's say, say you want to buy a house, then you will sign a mortgage, which is a negotiable instrument, which is your promise to pay a sum of money over time, let's say it's $500,000. So the bank will write that $500,000 on one side of its books and call it an asset to itself because you have promised to pay that money over time with interest. And then on the other side of their books, they'll write the same $500,000 as a liability to themselves 'cause you're probably gonna turn around and write a check to the seller of the house, and that check's gonna leave the bank, and the bank's gonna have to come up with the money some how. So that all nets out to zero from their point of view. What they've actually done is create $500,000 that's gonna go out into the system. So then, where do they get the money when you write your check and it has to clear? They would normally draw from their own deposits, which would be, in the case of the Bank of North Dakota would be the revenues of the state that have been deposited there. But if they don't happen to have the deposits, their reserve account will just go into deficit, and the Federal Reserve which is what clears all these checks automatically just says that the reserve account is basically overdrawn which means they have to get the money from somewhere else. So they can borrow it from the deposits of other banks for example, and they have two weeks to come up with this money, so some other bank will have the money, because they just transferred the money over there. They just sent a $500,000 check into some other bank. They can borrow that back. The money they just created, they can borrow it back at 0.25%, the Fed Funds Rate, and meanwhile they've lent it to you at 5% or something, so they get that nice spread. So if We the People owned the bank, we would get that money. And it's not even just 5%. According to a researcher in Germany, Margrit Kennedy, who's a professor there, she's collated data from businesses at all different stages of production of a product, and she has found that 35% of everything we buy goes to interest. So if we owned the banks, we would get that interest, and we could recapture that money. So banking, instead of being this parasitic thing that is just continually sucking profits out of the economy, that money could be returned to the economy, and we would have a sustainable system.
BONNIE FAULKNER: Now the way you are describing banking it sounds like the loans are actually in some sense or another based on deposits. Now I thought that the money was just being created out of nothing, rather than being based on deposits. Is that incorrect?
ELLEN BROWN: Well, it is created out of nothing in the first instance. I mean they when they do the double entry bookkeeping, they just write the money into their account. They don't look to see what they've got in deposits, they don't look to see what they've got in reserves. The loan officer is in a totally different department from whoever's keeping track of the reserves. They just write er, they write it into your account, as they write a number into your account. So they've created a deposit account. So in that sense they've created money, because what they call money. It depends on how you define money. But if you look at the M1, M2, M3 M2 is the circulating money supply. That includes coins, dollar bills, and checkbook money. So anything that is a deposit account is gonna be counted as money. So if they open a new deposit account, they've just created money. But in order for that I mean you might just leave that money sitting there, and then nothing happens, and they they don't have to worry about deposits. But whenever you write a check on that account, then the check has to clear through the Federal Reserve or some other clearing house, and that means they have to draw from their pool of deposits in order to clear the check. But if they don't have the deposits, not to worry: they will get it somewhere else. There are many different places they can get it. And if there are no other options, the Federal Reserve itself well, they can draw from the Federal Reserve's discount window at 0.75%, so it's still very cheap compared to what they've just charged you.
BONNIE FAULKNER: Now is a public bank intended to be used only by governments, state, county and local, and if so, how would the government be using the public bank?
ELLEN BROWN: Well, no, the public bank is a bank that actually, it partners with the local banks. It's run by bankers, not politicians, and in fact, in North Dakota, we have one retired North Dakota banker on our advisory board, and he y'know, makes it very clear, that, he says, "we are bankers; we're not development people", and they avoid the politicians, y'know, they make loans because they're credit-worthy loans and not because some politician has leaned on them to do something.
BONNIE FAULKNER: Well, no, but I mean, how does the government use the bank? What is the government requirement what is a public bank? It's not a retail bank. It's not for individuals, right?
[12:10]
ELLEN BROWN: Well, globally, 40% of banks globally are publically owned. And some of them are retail banks. You can set it up any way you like. But the Bank of North Dakota is more of a banker's bank. So it primarily partners with the local banks, helps them with their reserve requirements, so, they guarantee the loans, so that that helps with their capital requirements, and they help with liquidity. But they do make some individual loans. Like they'll lend at 1% to startup farmers. They have certain policies that they pursue that are helpful to their local community, which is largely farming and energy, so they make low-interest loans for alternative energy, for example, and they make 1% loans for startup farmers directly. They used to make student loans directly, but now student loans have been taken over by the federal government.
BONNIE FAULKNER: Well, what is the difference between private and public banking?
ELLEN BROWN: A private bank has private shareholders, and the profits go back to the shareholders, or to the CEOs, you know. A private bank is out to make [laughs] out to make money, or, out to make profits, so they get bonuses, fees, commissions, for churning loans. I mean, that is one problem, that their mandate is to serve their shareholders, and of course their management is going to make as much money as they can get away with as well. Whereas a public bank, its mandate is to serve the public. It's staffed by basically, civil servants I mean, they don't make bonuses, fees, commissions for making extra loans. So they're a lot more conservative in who they'll lend to. And their mandate is to take the long view and to do what's good for the local community, rather than what private banks they're always taking the short view. I mean, the shareholders want their money now. They're looking at their 3 month quarterly profits.
BONNIE FAULKNER: Well, you write that the Federal Reserve is composed of 12 branches, all of which are 100% owned by the banks in their districts. Who owns the banks in their districts?
ELLEN BROWN: Well, for example, the largest Federal Reserve bank is the New York Fed. It's owned by about 500 banks in their district, and they're obviously private. So all their shareholders are private investors. And those are the people that are they're looking at the short term, quarterly profits and the bottom line. They're not interested necessarily in whether even the bank survives, y'know, and they're certainly don't care particularly about whether the farmer that just got the loan, how his business does. They just want to make their profits and get out of there. Y'know, they'll foreclose if whatever. It's all about money.
BONNIE FAULKNER: [laughs] That's the understatement of the century.
ELLEN BROWN: [laughs] Yeah. I guess that's what banking banking's all about money anyway. But yeah. But it's whether the money serves the people or serves serves private interests.
BONNIE FAULKNER: I'm speaking with attorney and author, Ellen Brown. Today's show: "Restoring prosperity with Public Banking." I'm Bonnie Faulkner. This is Guns & Butter.
ELLEN BROWN: There're two models of banking globally. I writing a book now on public banking, so I'm looking at banking globally and historically. And there are two competing models that go back actually for thousands of years. One is a cooperative model, where the idea is to create credit for the community support the community, and the community shares in the profits. And the other is an extractive model, where the bank is sort of in opposition to its customers and to the rest of the you know, the economy. And so, the idea is to keep pulling pulling money out. So whenever they reinvest the money it's their private profits reinvested, so it's always they're always taking more out than they put in. That's the nature of compound interest.
And compound interest grows exponentially, if you look at a graph of it, which is unsustainable. So you have a sustainable model versus an extractive, unsustainable model, which results in these periodic booms and busts, y'know. In the Nineteenth Century we had banking crises on the average once every six years, because of this model of puff up a lot of credit, get everybody locked into debt and then you withdraw the credit and then you [laughs] foreclose, and take all the properties.
BONNIE FAULKNER: Well, you have said the banks lend only the principal and not the interest, which is the nature of the debt system. What do you mean by this? And how does that explain why debt grows exponentially?
ELLEN BROWN: Again, there are two models. When a bank creates money by double-entry bookkeeping, they'll write you a loan for $500,000, but they want you to pay back $500,000 plus 5% or whatever over 30 years. So if you look over the whole 30 years you will owe back probably twice as much as you borrowed in the first place. California for example has $155 billion in outstanding loans for the type that you do for bonds and infrastructure, and of that $70 billion is interest. So that interest is not created in the original loan, so that where are you going to find that extra interest? Somebody somewhere has to take out another loan. Which is basically a pyramid scheme. So there are only two alternatives. Either you keep expanding the money supply, or, somebody has to go into default. It's a game of musical chairs, and the odd man out is always not gonna have enough money to pay off his loan, and he'll lose his property. So the bank will issue a loan for ten, and take back eleven, issue a loan for eleven, take back eleven and a half, &c. So if you look at a chart of that, that that does shoot up exponentially.
BONNIE FAULKNER: And is the bank charging interest on interest? Is that what the phrase "compound interest" means?
ELLEN BROWN: Right. And you might think, "well, I'm not paying compound interest as long as I pay my bill", but that's not actually true, because, the way they calculate mortgages, compound interest is baked into the formula. And 80% of all loans are mortgages. And so we actually have a huge compound interest thing going on, even though we're not aware of it. It's pretty complicated to explain, but the thing is, you're not actually, let's say you're paying $2000 a month on your mortgage. That's not actually enough to cover principal and interest for that particular period. That's the way they calculate it. So it's your interest is actually growing as you go through this 30 year cycle.
BONNIE FAULKNER: Yes, it's interesting. I was talking to one of my credit card companies, and if the amount due was not paid off in full, and the balance begins to accrue interest, they're charging what they say the daily average balance, and that daily average balance includes the accrued interest, so they're charging interest on interest.
ELLEN BROWN: Yeah. That is compound interest. Yeah.
BONNIE FAULKNER: Yeah. So that's why, eventually eventually the debt can't be paid, right?
ELLEN BROWN: Right. Well, if you look at a graph of an exponential curve, it eventually shoots skyward, and that's the point in nature the only things that show exponential growth are things like parasites and cancer. And they ultimately run out of their food source, and when that happens they hit the ceiling, and they drop straight back down. That's the way the graph looks. So that's what happens with these booms and busts.
BONNIE FAULKNER: Well, how does a public bank get around the exponential growth of compound interest?
ELLEN BROWN: The original model for a public bank, and it's still probably the best model, was the bank of Pennsylvania in Benjamin Franklin's time. At that time the colonists had figured out how to avoid having to borrow from the British bankers. They didn't have their own money. They didn't have gold in the colonies, so the choices were either to borrow from the British bankers at interest, and the British bankers were just printing their own banknotes anyway, so it was still just printed money, or the colonists devised this idea of printing their own money. But some of the colonies just printed and printed and printed, and they tended to hyperinflate the money supply. But in Pennsylvania, they got the idea, among in several other of the colonies, to form a bank.
So, they would print enough money say you printed $105. You're the issuer of the money, so you're not just lending but you also issue the money. So you issue $105, you lend $100, you spend $5 on your budget, and then there's $105 out there in the economy, and it all comes back as principal and interest, $105. Then you lend the $100 all over again, at 5% interest, spend the five it all comes back as principal and interest, and you can do that over and over, and it's quite sustainable. So during the period that they did that, they pai d no taxes, 'cause the interest was sufficient, plus, of course, they had the power to create the money they needed, they had no government debt, and prices did not inflate. So it was a totally sustainable, ideal system.
Then today, of course, states do not have the power to actually print money, but they can own a bank. So the bank then would lend, say, they lend they lend $100, and it gets paid back with $105, with interest, but the bank will then return those profits to the government. The 5% either goes to the government, or it goes into more loans for the economy, but anyway, eventually the profits get returned to the government, which then spends them on the government budget, so they go out into the economy. The difference is that a public bank will spend its money on public services, so we get the benefit of that money. And that will put people to work and stimulate the economy, &c., whereas, in the extractive model, the profits are taken out, and they are reinvested, so it's money always money making money. They're always taking more out than they put in. They're lending it in, and taking that plus a percentage. I mean, even if the money gets paid to the CEOs and so forth, they've got so much money that they they put it into money-making-money things that are they're always expecting their money to get bigger and bigger at the expense of the economy.
BONNIE FAULKNER: So what you're saying then is in a public bank, the interest that the bank receives is then reinvested for the public good rather than going to private use, essentially.
ELLEN BROWN: Right. Right it goes to the government, which then pays it in its budget, so it's all those services that they tell us we can't afford we can afford 'cause we now have the interest. Banks collectively in 2011 collected $725 billion in interest. And, we paid $454 billion in interest on the federal debt. So, if the federal debt had been financed through the central bank, which then rebates the profits to the government the Federal Reserve actually does rebate its profits, even though it's the twelve Federal Reserve branches are privately owned. They don't want to do it, but they were forced into it in the 1960s long story. So if we owned the central bank and funded the federal debt through it, and if we owned the banks collectively I know that's not gonna happen any time soon but just hypothetically, we could do exactly the same thing Pennsylvania did. We could have $725 plus $454 is more than $1.1 trillion and our income taxes were $1.1 trillion that year we actually paid more in interest in those two things yeah, we paid that in interest. If we'd gotten that back we wouldn't have had to pay income taxes.
BONNIE FAULKNER: Well, now, should Congress nationalize the Federal Reserve and the banks? You have pointed out that the federal government nationalized General Motors and American International Group, or AIG. You've also written that nationalization is the same thing as bankruptcy and receivership. How would the Fed operate differently if it were nationalized or part of the Treasury than how it operates now?
ELLEN BROWN: Well, right now the Federal Reserve is completely independent from Congress. In fact, Alan Greenspan said that once, in an interview. He said I think the interviewer asked something about what his relationship was with the president I think it was Clinton at the time, and he said, "Well, it doesn't really matter" [laughs] he said, "because y'know, the president really has no control over what the Federal Reserve does" that they're an independent entity. And according to the Federal Reserve Act, they're set up to serve the banks. So, for example, with all this quantitative easing, the money is going directly into banks' reserve accounts, and it never makes it into the real economy. Now, if it were government owned and controlled, so that the government were using it for the purposes of the public, they could do what some central banks have done, historically, like the Commonwealth Bank of Australia in the early part of the 19th Century, they could just directly make loans or even Roosevelt in the 1930s through the Reconstruction Finance Corporation just made loans to everything in sight that was productive and that would put people back to work during a time when we were in a, y'know, difficult economic times, when we were in a recession, and stimulated the economy and got everything going again. And it paid off in the end. It actually turned a profit for the government.
So this is not handouts. It did not put us deeper in debt. We actually broke even and made a little profit from the 1930s investments. And in Australia, they just issued the money as credit, and did remarkable things. They built roadways and seaways and funded the participation of the country in World War One, all without borrowing internationally, without borrowing from the Bank of England. The mistake of the governor of the Bank of Australia was that he then went to England and bragged about it, and then passed away shortly thereafter, and they changed the system after that.
BONNIE FAULKNER: Well what do you say to the frequent criticism that during the Great Depression the United States government did not have the debt overhang that it now has, so that the same solutions will not work. I've heard this claim made many times.
ELLEN BROWN: You could if we owned the central bank, we could refinance the entire debt overhang. The debt itself does not hurt anything. It's the interest that hurts. The debt is actually our money supply. All of our money is debt based, except for dollar bills, and you know, a very small percentage of the money supply is actually issued by the Federal Reserve as dollars or issued by the Treasury as coins. And all of the rest is debt bank debt. And the government's debt, the federal debt, is basically the same size as the circulating money supply.
So if we had no debt that's what Galbraith said in the 30s, that we had to preserve the debt, in order to have a money supply. But what grows exponentially, and what is a problem, is the interest. If you look at a chart, the projected interest, like up to 2080, it starts to turn up exponential, and that looks quite dangerous. So if we refinanced that through our own central bank in other words the central bank could just they're doing it anyway. They're like Quantitative Easing II was $600 billion, where they just bought up federal securities. But let's say, hypothetically, they issued $15 trillion in quantitative easing, and bought up the whole debt, and just paid off all the creditors. Now and rebated the interest to the government, so it would basically be an interest-free interest-free debt, would be an interest-free money supply. It would just be money. In fact that's what the Japanese do. They borrow from themselves, and that's why they have a debt to GDP ratio of 235%, and they're still way up there. I mean, they're a global leader in many things in all these electronics, and sophisticated parts. I mean they're actually doing very well. They're sort of they keep a low profile and pretend that they're heavily in debt, but they're in debt to their own people. So we could do that as well.
BONNIE FAULKNER: I'm speaking with attorney and author, Ellen Brown. Today's show: "Restoring prosperity with Public Banking." I'm Bonnie Faulkner. This is Guns & Butter.
Well, that's very interesting, then. You say the real problem is interest accrued. How would the government get rid of this interest?
ELLEN BROWN: Well, that's it. If they refinanced through their own central bank they get to keep the interest. The interest is rebated. The Fed see, even now, the Federal Reserve rebates the interest to the government, even though you can argue about whether it's actually publicly owned. But if it were nationalized in the sense that Congress could actually control what the Federal Reserve did, then we could eliminate the interest, and we could use that vehicle for creating credit to direct it to what the economy needs. And there are many countries that do this: China, India, Russia the BRIC countries Brazil, Russia, India and China. Their banking sector is all dominated by publicly owned banks, and the government uses those banks to direct the economy, and to support industry, and they all escaped the banking crisis of 2008, they're growing like gangbusters they've grown by 92% in the last decade. We could do the same thing.
We tend to say that [laughs] the Chinese are cheating as they support their industries with the national credit, but instead of pointing fingers and saying that they're competing unfairly with our banks, what we should do is have a look at what they're doing and maybe consider copying some of that.
[31:41]
BONNIE FAULKNER: Well, right. You have said that 40% of banks worldwide are public, and like you've just got done saying, they've grown by 92% in the last decade, specifically in the BRIC countries, Brazil, Russia, India and China, and Latin America, Argentina being a primary example. What's going on in Argentina?
ELLEN BROWN: Well, Argentina's a very interesting case, because their currency totally collapsed in 2001, and then that's when the president was Kirchner, and he just told the creditors to go away, said, "we don't have the money. Come back later when we've got it", told the IMF to go away, and they just started issuing their own money. They issued pesos at the federal level, and at the city/local levels they issued warrants, which were bonds. They were basically government IOUs, but they accepted them in the payment of taxes, unlike what, when California recently issued IOUs, they refused to accept them in the payment of taxes, so that doesn't work as a currency. But as long as the government will take it back. Like, they were giving us their IOUs but they wouldn't take them back in payment. But in Argentina they did, and at the local level they had a very large and successful community currency. So they created their own money supply, and within four years they had remarkable growth. I think it was something like 7% a year, contrary to all the critics said, y'know, that this'll be a disaster, cutting off their source of borrowing, internationally. In fact, they didn't need the international loans at all. They created their own credit and got their economy going, and did very well.
So right now, then, Kirchner has passed away, and his wife is now president, and the head of the central bank is also a woman, and they're just very quietly doing their own thing, and they're not shaking a fist like Gaddhafi did, and just took on the world, and, y'know, tried to mobilize the whole African continent the way Gaddhafi did. They're just very quietly saying, y'know, "we've seen your model, and we don't think it works very well, and we've decided to try this other thing." So they're just issuing credit, and it's working really well for the Argentineans. They do have price inflation, but the people aren't worried about it, because they're also getting wage increases to match, and the whole economy is just doing so well, they're just delighted to see their economy thriving.
BONNIE FAULKNER: And you've said that China owns its banks, and that they can't sell off more than 25%, that in China the banks are publicly controlled, and the credit mechanisms pays for workers and materials to make a product, that they're not dependent on private banks and speculation. Is this true? And is this why, you just got through saying, the US says they're cheating?
ELLEN BROWN: Well, y'know, World Trade Organization rules say that you can't do certain things, and one of them is to y'know, they make loans to these businesses, then if the business defaults, if the business can't pay, then it's just treated like a grant, in other words they just write it off. So, technically, their banks have these non-performing loans. But really what they're doing is just supporting their industries, particularly their export industries, by supporting them with credit. And yes, they do own their big banks are publicly owned and publicly controlled, and the government directs them what to do. But you know, I just read recently that, even though they still have these 5-year plans, it's really at the local level where all this productivity is happening. The local governments control where the credit goes in their local economies, and they really have a go-local model, much more than we did. They're starting at the grass roots and going up, instead of starting at the top and going down like we used to do.
BONNIE FAULKNER: Well, let's talk about QE3, or "quantitative easing to infinity" as they call it $40 billion per month, they're buying mortgage-backed securities, toxic assets, right? You have said that QE3, or "quantitative easing to infinity" is no more than an asset swap on balance sheets. Is that what you mean, because they're buying up these toxic assets?
[36:25]
ELLEN BROWN: Well, what happens when they the Fed issues credit ba y'know, it issues accounting entry money which it then buys the assets from the reserve account of the bank. So, before, the bank had dollars, and then it used the dollars to buy these assets, and now the Fed has swapped them out, so now the bank has dollars again. So the bank doesn't really have any more than it had before. The mortgage-backed securities have just been turned back into dollars. So this whole exercise of QE3 is not helping the homeowners. It supposedly it was to lower interest rates. Interest rates are already at 3 %, which is already ridiculously low, so that's not the really the hold-up in the housing market. So then various commentators were wondering about what the real point of QE3 was, and that the argument that looked most logical to me was Catherine Austin Fitts said that she used to work for HUD, and so she's kind of an insider, and she said the Chinese and the pension funds, and y'know, some big important investors had bought most of these mortgage-backed securities, I think it's Fannie and Freddie, these securities are backed by the government until the year 2012. But when that guarantee runs out, there's not gonna be any market for these things. And so the Fed is basically creating a market for them. 'Cause otherwise the Chinese could be very upset. Y'know, the Chinese are actually in a position to I mean, they could be a military opponent if we aggravated them too much. We made representation that these were AAA investments. And our own pension funds and pensioners are not gonna be too happy if all their money collapses. So that was the idea, to save the investors, who are big important investors, not just little little people. But it is not helping the real economy. I think quantitative easing is a good idea, and they need to get more money out there. The money supply has shrunk by $4 trillion since 2008, if you count the shadow banking system, the M3, which is pretty complicated, but there's not as much money competing for goods and services as there used to be, and therefore there's not the demand, and therefore businesses don't have money coming in, so they can't hire, and that causes unemployment, &c. So we need to get more money into the economy, and quantitative easing isn't doing it, although apparently it is serving some purpose that is useful in its way.
BONNIE FAULKNER: Well, now, when the government buys up these mortgage-backed securities, many of these assets that are not worth much, is it the taxpayers, then that are buying this stuff up?
ELLEN BROWN: No, it's the the Federal Reserve creates this money on its books. It's creating money, and getting back the mortgage-backed securities, so it's monetizing the mortgage-backed securities, basically. It's turning these assets that were interest bearing into dollars, which are not interest bearing. In other words, it's an asset swap. That's what the Fed does. It's not creating anything. It's just swapping non-interest-bearing notes, which are called dollars, for interest-bearing notes, which are called securities.
BONNIE FAULKNER: Right, but does QE3 then devalue the dollar, eventually? Will it have that effect?
ELLEN BROWN: No. That's what everybody thinks that it's hyperinflating the money supply, that it's going out into the economy, competing for goods and services, and therefore raising prices. But it's not. It's not making it into the real economy. I think it would be good if it did. We need more money out in the real economy. People point to oil, food, gold and silver, and say that prices are going up those are the obvious ones. But they're going up for a different reason. It's not because there's too much money in the money supply. And you can tell that by looking at housing. If there were too much money in the money supply, housing would be going up as well, and it's still way low, even though it's creeping up. The reason that commodities are going up is that the speculators, or the investors y'know, you and me, all the people that have money invested somewhere the hot money, the money that moves from one investment to another, it used to be in real estate, and then suddenly real estate was a bad investment, and everybody got out of it. The mortgage-backed securities that were supposedly AAA weren't AAA, and housing itself is declining, and now there's really no other safe place to park your money. You can't even put it in government bonds anymore, because they're paying so little, which is all done to save the banks. So the only thing that seems to be going up these days is commodities, and so everybody's money is moving into commodities, the funds are in commodities, pension funds, the big institutional investors, they now have big investments in commodities including food, and oil.
BONNIE FAULKNER: So that's interesting. So then I guess you're saying the speculative money has gone into commodities, and that's what's driving the price up, not a falling dollar, is what you're saying.
ELLEN BROWN: Right, and not the fact that there's too much money competing for too few goods. If there were, they'd be putting people back to work making more goods. That's what happens when there's an increase in demand. The first thing that happens is they put people back to work, and it doesn't drive up prices until you have full employment, and we're nowhere near full employment. That happened in Argentina, when they finally hit full employment prices did start to rise, and at that point Kirchner put price controls on the goods, but another thing you can do is just, y'know, pull the money back in in some other ways, like y'know, taxes, or fees on things. I think that actually think the government should be allowed to make some money in all those things that we invest in. We should be able to get a return on that, and that would be a way to get money back to the government and keep it circulating, and make make the whole system sustainable.
[42:59]
BONNIE FAULKNER: Well, now, Bernanke has said, he's gonna do monetary easing to the tune of $40 billion per month until employment improves. But if none of this money is going toward infrastructure or employing people, it's not going to have that effect, is it?
ELLEN BROWN: Right. He'll just keep doing it until he buys up all the mortgage-backed securities, probably, which, again, probably appears to be to save the Chinese and the pensioners. The big investors.
BONNIE FAULKNER: I'm speaking with attorney and author, Ellen Brown. Today's show: "Restoring prosperity with Public Banking." I'm Bonnie Faulkner. This is Guns & Butter.
Now you've written that the money supply is still short by $3.9 trillion from where it was in 2008, before the banking crisis hit, so that the Fed has plenty of room to expand the money supply. And you've stated that. And I'm kind of surprised to read that, because with the QE3 of course so many people are saying that there's too much money out there.
ELLEN BROWN: Yeah, well that's the point. The QE3 did not make it into the real circulating money supply. And what is short is in the shadow banking system, which is so obscure that most people haven't even heard of it. They didn't bother to regulate it in Dodd-Frank. It's only regulating the conventional banking system. But the shadow banking system is actually larger than the conventional banking system, and the conventional system is dependent on the shadow banking system. It's not something you can get rid of. So what it is it's pretty complicated, but it's an added source of liquidity for the regular banking system, so it's the repo market, where large institutional investors have more than $250,000 to invest. It could be like pension funds, or maybe it could be ordinary mutual funds, hedge funds, sovereign wealth funds, all those things. They have huge amounts of money. Say, a mutual fund: it sells a stock, and then, for the time between when they sell the stock, then they buy another stock, they want to park their money somewhere, and they want to make a little interest on it, so they put it in the repo market, which is like this huge pawn shop, where they deliver their money, and the pawn shop delivers some security in return. The security is these mortage-backed securities, which is our real estate which has been chopped up into little pieces and sold off to investors. So that's the shadow banking system, which is actually creating money in the same way that the regular banking system creates money. I mean they're creating money as credit, and virtually all money today is credit, created by banks or these other financial institutions, non-banks. And that shadow banking system is the thing that's collapsed in 2008. There was a run on the shadow banks, on the money markets, and the money markets are a source of liquidity for the conventional banks. So credit froze across the board, and that was the whole problem. So that money is no longer out there competing in the market, playing in the market, being a part of the whole credit system. The credit system is huge, the amount of money that is lent well, I saw, I saw an analysis by a man who is actually a gold bug, but he was saying, you couldn't have a 100% gold system, because you wouldn't have near enough gold to borrow to meet all the demands at all the stages of production of a product, a product that they borrow at each stage of production. You have to pay your workers and materials before you have a product to sell, and before you get paid by the end purchaser, like 90 days max. So for that whole period, all these producers have to fund their business on credit. So you could add up the all those producers of a single product, comes out to many times what the actual price of the product is. And that's all credit that flies back and forth every day. Has to be millions of checks that are just flying back and forth, and you need to get that liquidity. You need to get that credit, and that largely comes from the shadow banking system.
BONNIE FAULKNER: Now when you use the term "shadow banking system" you're talking about this credit that you're talking about, what? Money market funds, or talking about derivatives?
ELLEN BROWN: Uh, the derivatives, the derivatives trade, actually, allegedly come to $1 quadrillion, I mean it's this huge, huge, impossible sum, and the shadow banking system is only it was $20 trillion at its height; it's now dropped to $16 trillion I think. So it's it obviously doesn't include derivatives in that sense. But I've seen this, somehow the derivative maybe it's the pra . The derivatives are connected to the shadow banking system somehow. I'm just not sure how. Oh, well, the derivatives, for one thing, are the insurance that protects all these mortgage-backed securities supposedly. But we know that they really don't. You know, like the credit default swaps, which are basically bets on whether or not these things will default. So you have investors on both sides. If you buy the insurance, you're betting that the thing will default. If you're selling the insurance, you're betting that the thing won't default. Somebody has to come in and pay the other party depending on how the bet comes out.
BONNIE FAULKNER: Right. The credit default swaps. So just to be clear about the shadow banking system, you're talking about what? All of this overnight credit that's flying around?
ELLEN BROWN: Right. The shadow banking system is not part of the . The conventional banking system is depository. Y'know, it's based on deposits, and it's where banks create money in the form of deposits. So the shadow banking system also creates credit, but it's not bank credit, it's non-bank credit. But it's the same thing. It's still credit that's out there, competing in the money supply. It used to be counted in M3, but now they don't report M3. But it's still out there. The whole system's still there, but they can't figure how to count it. And so I mean, that was their reason for not reporting it, although other suspicious commentators say that it's because they didn't want us to see all this shadow business that was going on, how big it was, and how fragile, because there's nothing protecting it. There's no FDIC insurance, there's no deposit requirement, no capital requirement. But it evolved for a good reason. I mean, you need to have a flexible credit system like that. Here's, here's what I if I can suggest, my vision for an ultimate credit system: what I think the problem is, it's all private, and therefore nobody would trust the bank, unless the bank has the money. At some point the bank has to come up with the money. But if you had a public system, you don't need to be backing it up with mortgage-backed securities, you know, by real estate, or gold, or whatever. You could just have a credit system. In other words, what you're really turning into money, is the borrower's promise to pay. You're monetizing the future ability of the borrower to pay to pay back this loan. So the borrower goes to the bank, the public bank, and says, "this is me, this is what I plan to do with the money, I'm gonna build whatever, this is how I'll pay it back. You know how to find me. You've got the court system. You can attach me. This is what I've got in the way of real estate, &c." So you've got this whole public system, including the courts and the sheriff. And so, everybody trusts it, because you know how to collect. And then you're turning that promise to pay into money. And that's what money is. That's what it was among the colonists originally. It was just little receipts showing that the goods and services had been delivered to the community, and that the community owed that sum. So it seems to me that the whole system is totally messed up. And the reason is that we feel we have to back y'know, we feel that money is a commodity. That's what I want to say. We think that money is a thing, and that you have to "get the thing" somewhere. You have to dig it out of the ground, or you have to get it from somebody else. But that's not really what money is. All money is merely legal agreements. It's merely credit, turning your promise to pay into credits that can be spent for other credits in the system.
BONNIE FAULKNER: Right. In other words, money is created by law.
ELLEN BROWN: Yeah. Exactly.
BONNIE FAULKNER: Now, is it true that twenty states have introduce bills for public banks?
ELLEN BROWN: Right. Twenty states have put forth bills either to form a bank, or to do feasibility studies. Colorado has an initiative to form a state-owned bank.
BONNIE FAULKNER: And what about postal banks? In France, you can bank at the Post Office. How does that work?
ELLEN BROWN: Uh, very well. In Japan actually the largest depository bank in the world is the Japan Post Bank. And that's where the Japanese tend to save. And so they get a little interest on it, on their savings. I mean you can go and get your stamps, and make your deposits, and get your checks in the same place. So you already have all these post offices around the country, and if you turn them into a bank as well, where people can save money and write checks, it works out very conveniently. And then the Japan Post Bank buys the Japanese Federal Debt, so the people themselves are getting interest on their own federal debt. That's been going for over well over a hundred years. But in New Zealand, they've just recently set up a postal bank, which they did it because their big banks were Australian, they were foreign, and they were they were just going after the bottom line, and there were many places in that country where it just wasn't financially profitable to have a branch, and so they were closing all these branches. So the New Zealanders were quite upset with this whole system. So they used their post offices to set up a public banking system, where everybody could have access to a bank and it was wildly successful, in spite of the critics who said it wouldn't work, because the people just moved their money in droves into this public bank, because they were much happier with it than the foreign banks.
BONNIE FAULKNER: What about student debt? How dangerous is this debt? I've heard it said that student debt is the new debt bubble.
[54:08]
ELLEN BROWN: It is. It's over a trillion dollars now, and there's no way it can be paid off. I mean, not all of it. So it's very like the sub-prime loans. It's y'know, shaky debt. The students themselves have had all the protections that debtors are supposed to have have been taken away from the students. They can't file bankruptcy. Their Social Security can be tapped up, in order to pay the student debt. I mean, your Social Security is there, for your security in your old age. And if you can cut into that for your for your student debt, it's quite a desperate situation for some people. Like UCLA, where I went to Law School, is now $35,000 a year for tuition for an in-state student. You can get out of school with like $200,000 in debt. And if you can't get a job, there's no way you can pay that off. Then they're allowed to do things like, increase the interest rate. They just make it a lot more difficult for you to pay it off.
BONNIE FAULKNER: How does public banking benefit the public?
ELLEN BROWN: Well, first, we get the profits from the interest on our own government money, which currently is deposited in Wall Street banks, and they get the interest. And the interest is a lot more than we think it is: it's 35% of everything we buy goes to interest. Second of all, the public can direct or, the government can direct where the credit goes. Right now, Wall Street particularly, which has, like, five banks have over half the banking assets of the whole country, they can direct credit to their own purposes. They've sort of lost interest in investing locally. They're more in now they're into interest rate swaps and other forms of derivatives and speculating for their own account, &c. And so that's two oh, and the state bank partners with the local banks, so it strengthens the local banks' ability to lend to the local community, which they're having a lot of trouble with right now. The local banks are being bought up by the big banks, they can't meet the capital requirements, these heightened capital requirements, and they've got regulators, apparently, all over them, so they're afraid to lend. It helps with all that.
BONNIE FAULKNER: Ellen Brown thank you very much.
ELLEN BROWN: Thank you.
BONNIE FAULKNER: I've been speaking with Ellen Brown. Today's show has been: "Restoring prosperity with Public Banking." Ellen Brown is an attorney, researcher and author. She is the author of The Web of Debt: the Shocking Truth About Our Money System And How We Can Break Free. She's the author of many books on Natural Healing as well as numerous articles on the financial system. She developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala, and Nicaragua. She is currently working on a new book: The Buck Starts Here: Creating Prosperity With Publicly Owned Banks, due out in January 2013. Visit the Public Banking Institute's website at www.publicbankinginstitute.org, and Ellen Brown's website at www.webofdebt.com.
Guns & Butter is produced by Bonnie Faulkner and Yara Mako. To leave comments or to order copies of shows, email us at mailto:blfaulkner@yahoo.com. Visit our website at gunsandbutter.org.