Collapse of 300 Year Ponzi Scheme
excerpted from the book
Web of Debt
The Shocking Truth About Our Money
System And How We Can Break Free
by Ellen Hodgson Brown
Third Millennium Press, 2007,
The global debt web has been spun from a string of frauds, deceits
and sleights of hand, including:
* "Fractional reserve" banking.
Formalized in 1694 with the charter for the Bank of England, the
modern banking system involves credit issued by private bankers
that is ostensibly backed by "reserves." At one time,
these reserves consisted of gold; but today they are merely government
securities (promises to pay). The banking system lends these securities
many times over, essentially counterfeiting them.
* The "gold standard." In the
nineteenth century, the government was admonished not to issue
paper fiat money on the ground that it would produce dangerous
inflation. The bankers insisted that paper
money had to be backed by gold. What they
failed to disclose was that there was not nearly enough gold in
their own vaults to back the privately-issued paper notes laying
claim to it. The bankers themselves were dangerously inflating
the money supply based on a fictitious "gold standard"
that allowed them to issue loans many times over on the same gold
reserves, collecting interest each time.
* The "Federal" Reserve. Established
in 1913 to create a national money supply, the Federal Reserve
is not federal, and today it keeps nothing in "reserve"
except government bonds or I.O.U.s. It is a private banking corporation
authorized to print and sell its own Federal Reserve Notes to
the government in return for government bonds, putting the taxpayers
in perpetual debt for money created privately with accounting
entries. Except for coins, which make up only about one one-thousandth
of the money supply, the entire U.S. money supply is now created
by the private Federal Reserve and private banks, by extending
loans to the government and to individuals and businesses.
* The federal debt and the money supply.
The United States went off the gold standard in the 1930s, but
the "fractional reserve" system continued, backed by
"reserves" of government bonds. The federal debt these
securities represent is never paid off but is continually rolled
over, forming the basis of the national money supply. As a result
of this highly inflationary scheme, by January 2007 the federal
debt had mushroomed to $8.679 trillion and was approaching the
point at which the interest alone would be more than the public
could afford to pay.
* The federal income tax. Considered unconstitutional
for over a century, the federal income tax was ostensibly legalized
in 1913 by the Sixteenth Amendment to the Constitution. It was
instituted primarily to secure a reliable source of money to pay
the interest due to the bankers on the government's securities,
and that continues to be its principal use today.
* The Federal Deposit Insurance Corporation
and the International Monetary Fund. A principal function of the
Federal Reserve was to bail out banks that got over-extended in
the fractional-reserve shell game, using money created in "open
market" operations by the Fed. When the Federal Reserve failed
in that backup function, the FDIC and then the IMF were instituted,
ensuring that mega-banks considered "too big to fail"
would get bailed out no matter what unwarranted risks they took.
* The "free market." The theory
that businesses in America prosper or fail due to "free market
forces" is a myth. While smaller corporations and individuals
who miscalculate their risks may be left to their fate in the
market, mega-banks and corporations considered too big to fail
are protected by a form of federal welfare available only to the
rich and powerful. Other distortions in free market forces result
from the covert manipulations of a variety of powerful entities.
Virtually every market is now manipulated, whether by federal
mandate or by institutional speculators, hedge funds, and large
multinational banks colluding on trades.
* The Plunge Protection Team and the Counterparty
Policy Group (CRMPG). Federal manipulation
is done by the Working Group on Financial Markets, also known
as the Plunge Protection Team (PPT). The PPT is authorized to
use U.S. Treasury funds to rig markets in order to "maintain
investor confidence," keeping up the appearance that all
is well. Manipulation is also effected by a private fraternity
of big New York banks and investment houses known as the CRMPG,
which was set up to bail its members out of financial difficulty
by colluding to influence markets, again with the blessings of
the government and to the detriment of the small investors on
the other side of these orchestrated trades.
* The "floating" exchange rate.
Manipulation and collusion also occur in international currency
markets. Rampant currency speculation was unleashed in 1971, when
the United States defaulted on its promise to redeem its dollars
in gold internationally. National currencies were left to "float"
against each other, trading as if they were commodities rather
than receipts for fixed units of value. The result was to remove
the yardstick for measuring value, leaving currencies vulnerable
to attack by international speculators prowling in these dangerous
* The short sale. To bring down competitor
currencies, speculators use a device called the "short sale"
- the sale of currency the speculator does not own but has theoretically
"borrowed" just for purposes of sale. Like "fractional
reserve" lending, the short sale is actually a form of counterfeiting.
When speculators sell a currency short in massive quantities,
its value is artificially forced down, forcing down the value
of goods traded in it.
* "Globalization" and "free
trade." Before a currency can be brought down by speculative
assault, the country must be induced to open its economy to "free
trade" and to make its currency freely convertible
into other currencies. The currency can
then be attacked and devalued, allowing national assets to be
picked up at fire sale prices and forcing the country into bankruptcy.
The bankrupt country must then borrow from international banks
and the IMF, which impose as a condition of debt relief that the
national government may not issue its own money. If the government
tries to protect its resources or its banks by nationalizing them
for the benefit of its own citizens, it is branded "communist,"
"socialist" or "terrorist" and is replaced
by one that is friendlier to "free enterprise." Locals
who fight back are termed "terrorists" or "insurgents."
* Inflation myths. The runaway inflation
suffered by Third World countries has been blamed on irresponsible
governments running the money printing presses, when in fact these
disasters have usually been caused by speculative attacks on the
national currency. Devaluing the currency forces prices to shoot
up overnight. "Creeping inflation" like that seen in
the United States today is also blamed on governments irresponsibly
printing money, when it is actually caused by private banks inflating
the money supply with debt. Banks advance new money as loans that
must be repaid with interest, but the banks don't create the interest
necessary to service the loans. New loans must continually be
taken out to obtain the money to pay the interest, forcing prices
up in an attempt to cover this new cost, spiraling the economy
into perpetual price inflation.
* The "business cycle." As long
as banks keep making low-interest loans, the money supply expands
and business booms; but when the credit bubble gets too large,
the central bank goes into action to deflate it. Interest rates
are raised, loans are "called," and the money supply
shrinks, forcing debtors into foreclosure, delivering their homes
and farms to the banks. This is called the "business cycle,"
as if it were a natural condition like the weather. In fact, it
is a natural characteristic only of a monetary scheme in which
money comes into existence as a debt to private banks for "reserves"
of something lent many times over.
* The home mortgage boondoggle. A major
portion of the money created by banks today originates with the
"monetization" of home mortgages. The borrower thinks
he is borrowing pre-existing funds, when the bank is just turning
his promise to repay into an "asset" secured by real
property. By the time the mortgage is paid off, the borrower has
usually paid the bank more in interest than was owed on the original
loan; and if he defaults, the bank winds up with the house, although
the money advanced to purchase it was created out of thin air.
* The housing bubble. The dollar and the
economy are currently being supported by a housing boom that was
initiated when the Fed pushed interest rates to very low levels
after the stock market collapsed in 2000, significantly shrinking
the money supply. "Easy" credit pumped the money supply
back up and saved the market investments of the Fed's member banks,
but it also led to a housing bubble that must eventually collapse
as well, sending the economy to the trough of the "business
cycle" once again.
* The Adjustable Rate Mortgage or ARM.
After interest rates were dropped to very low levels, the housing
bubble was fanned into a blaze through a series of high-risk changes
in mortgage instruments, including variable rate loans that have
allowed nearly anyone to qualify to buy a home who will take the
bait. By 2005, about half of all U.S. mortgages were at "adjustable"
interest rates. Purchasers are lulled by "teaser" rates
into believing they can afford mortgages that are liable to propel
them into inextricable debt if not into bankruptcy. Payments can
increase by 50 percent after 6 years just by their terms, and
can increase by 100 percent if interest rates go up by a mere
2 percent in 6 years.
* The secret bankruptcy of the banks.
The banks themselves are taking enormous risks with these housing
loans, as well as with very risky investments known as "derivatives,"
which are basically side bets that some asset will go up or down.
Banks have been led into these dangerous waters because traditional
commercial banking has proven to be an unprofitable venture. While
banks have the power to create money as loans, they also have
the obligation to balance their books; and when borrowers default,
the losses must be made up from the banks' profits. Faced with
a wave of bad debts and lost business, banks have kept afloat
by branching out into the economically destructive derivatives
business, and by colluding with each other and the government
to arrange periodic stealth bailouts when banks considered "too
big to fail" become insolvent.
* "Vulture capitalism" and the
derivatives cancer. At one time, banks served the community by
providing loans to developing businesses; but today this essential
credit function is being replaced by a form of "vulture capitalism,"
in which bank investment departments and affiliated hedge funds
are buying out shareholders and bleeding businesses of their profits,
using loans of "phantom money" created on a computer
screen. Banks are also funding speculative derivative bets, in
which money that should be going into economic productivity is
merely gambled on money making money in the casino of the markets.
Outstanding derivatives are now counted in the hundreds of trillions
of dollars, many times the money supply of the world. * Moral
hazard. The derivatives bubble is showing clear signs of imploding;
and when it does, those banks considered too big to fail will
expect to be bailed out from the consequences of their risky loans
just as they have been in the past.
The bubble burst and the meltdown began in earnest when investment
bank Bear Stearns had to close two of its hedge funds in June
of 2007. The hedge funds were trading in collateralized debt obligations
(CDOs) -- loans that had been sliced up, bundled with less risky
loans, and sold as securities to investors. To induce rating agencies
to give them triple-A ratings, these "financial products"
had then been insured against loss with derivative bets. The alarm
bells went off when the creditors tried to get their money back.
The CDOs were put up for sale, and there were no takers at anywhere
near the stated valuations.
The secret of the Wall Street wizards was out: the derivatives
game was a confidence trick, and when confidence was lost, the
trick no longer worked. The $681 trillion derivatives bubble was
an illusion. Panic spread around the world, as increasing numbers
of investment banks had to prevent "runs" on their hedge
funds by refusing withdrawals from nervous customers who had bet
the farm on this illusory scheme.
When the "liquidity crisis" became too big for the '
investment banks to handle, the central banks stepped in; but
in this case the "crisis" wasn't actually the result
of a lack of money in the system. The newly-created money lent
to subprime borrowers was still circulating in the economy; the
borrowers just weren't paying it back to the banks. Investors
still had money to invest; they just weren't using it to buy "triple-A"
asset-backed securities that had toxic subprime mortgages embedded
in them. The "faith-based" money system of the banks
was frozen into illiquidity because no one was buying it anymore.
The solution of the U.S. Federal Reserve, along with the central
banks of Europe, Canada, Australia and Japan, was to conjure up
$315 billion in "credit" and extend it to troubled banks
and investment firms.
In England, the central bank is at least technically owned by
the government, warranting more transparency. The cost of that
transparency, however, was that the Bank of England came under
heavy public criticism for s bailout of Northern Rock.
At one time, U.S. bailouts were also done openly, through the
FDIC under the auspices of Congress; but that approach cost votes.
The failure of President George Bush Sr. to win a second term
in office was blamed in part on the bailout of Long Term Capital
Management engineered during his first term. The public cost was
all too obvious to taxpayers and the more solvent banks, which
wound up paying higher FDIC insurance premiums to provide a safety
net for their high-rolling competitors.
Under the Fed's new stealth bailout plan, it could avoid this
sort unpleasant scrutiny by taxing the public indirectly through
inflation. No longer was it necessary to go begging to Congress
for money. The Fed could just create "credit" with accounting
entries. As Chris Powell commented on the GATA website in August
2007, "in central banking, if you need money for anything,
you just sit down and type some up and click it over to someone
who is ready to do as you ask with it.
Jim Cramer, investment guru, in a TV episode on January 17, 2008
[We used to say] "The commissions
on structured products are so huge, let's jail! it." [Note
"jam it" means foist it on the customer.] It's all about
the 'commish'. The commission on structured product is gigantic.
I could make a fortune 'jamming that crummy paper' but I had a
degree of conscience - what a shocker! We used to regulate people
but they decided during the Reagan revolution that that was bad.
So we don't regulate anyone anymore. But listen, the commission
in structured product is so gigantic .... First of all the customer
has no idea what the product really is because it is invented.
Second, you assume the customer is really stupid; like we used
to say about the German bankers, 'The German banks are just Bozos.
Throw them anything.' Or the Australians, 'Morons.' Or the Florida
Fund [ha ha], "They're so stupid, let's give them Triple
B" [junk grade]. Then we'd just laugh and laugh at the customers
and jam them with the commission .... Remember, this is about
commissions, about how much money you can make by jamming stupid
customers. I've seen it all my life; you jam stupid customers.
journalist Robert Kuttner testified before the House Committee
on Financial Services in October 2007
Since the repeal of Glass-Steagall in
1999, after more than a decade of de facto inroads, super-banks
have been able to re-enact the same kinds of structural conflicts
of interest that were endemic in the 1920s - lending to speculators,
packaging and securitizing credits and then selling them off,
wholesale or retail, and extracting fees at every step along the
way. And, much of this paper is even more opaque to bank examiners
than its counterparts were in the 1920s. Much of it isn't paper
at all, and the whole process is supercharged by computers and
Sean Olender, San Francisco Chronicle, December 2007
What would be prudent and logical is for
the banks that sold this toxic waste to buy it back and for a
lost of people to go to prison.
Web of Debt