The Fed helped bail out private businesses, foreign big banks and central banks in Europe and Japan in the credit crisis of 2008 and is the model for the European Central Bank, as well as the ECB’s primary backstop.
To understand how the Fed gets taxpayers around the world to pay the losses its member banks routinely incur, let’s pull back the curtain on the Fed and explain how it operates.
Here’s What the Fed Really Does
Banks lend money and sometimes they don’t get paid back. That’s not a problem if it doesn’t happen too often and if profits from other loans and investments cover the loan losses.
But since banks have gotten really big and have to make big loans (due to economies of scale and return on capital expectations) they need big borrowers. There are no bigger borrowers on the planet than governments, and that’s where a lot of banks are lending.
Of course, governments aren’t immune to over-borrowing and insolvency.
All the big banks that lent to banks in countries now in financial straits continue to lend to them because if they don’t they won’t get paid back what they are owed. Banks would fail from a cascade of losses and would either have to be bailed out or shut down.
That’s where the Federal Reserve comes in.
What’s Wrong With Bankers Helping Bankers?…Plenty
The Federal Reserve System was designed to ensure that bankers always get paid. Congress blessed this scheme because Congress can be bought, was bought in 1913, again in 1977 when the Fed was given its “dual mandate,” and is still being bought and paid for by bankers today.
Essentially, the Fed operates on a socialist model. It’s not capitalism because banks would be “allowed” to fail under the rules of capitalism.
But they are protected from failing by virtue of taxpayers being called upon, in one way or another (mostly by future inflation and currency debasement, in other words, less purchasing power) to “socialize” banks’ losses.
There is no going backwards. Globally we couldn’t endure the hardships that would befall us if a cascade of big banks failed. So don’t worry, that won’t happen. But you should be worried about the creeping socialism.
The elitist class of bankers and money brokers, whose incredible wealth is protected by taxpayers, is going to have to increase the size of loans they make since they have more capital to disperse and earn income on, and will end up needing more taxpayers under their thumbs to keep their game a win-win for themselves.
Not that there isn’t a way out for us taxpayers, those of us who would like to earn more than half a percent on our fixed income investments. There is a way out…
We have to end the Fed. It’s just that simple.
End the Fed and all the big banks would have to be either shrunk or broken up, because there would be no more backstopping them with taxpayer money. The truth is they should all be made small enough to be allowed to fail without encumbering the national economy, or unfortunately today, the global economy.
Think about it. Banks that should have failed in 2008 are bigger than ever.
They’ve paid off what they borrowed to stay alive. They are paying dividends again. They are buying back billions and billions of dollars of their stocks again. They are paying big fat bonuses again. But they still complain that tougher capital standards and reserve ratios will ruin their profitability and they won’t be able to lend to the people who need them.
Seriously, this is what the Federal Reserve does, has done, and will continue to allow to happen — unless we end the Fed and their game for good.
- QE 4: Folks, This Ain’t Normal – What You Need To Know About The Fed’s Latest Move (zerohedge.com)
- Fed Falls Behind on Basel III (hispanicbusiness.com)
- Here’s What the Fed Does With Those ‘Gold IOUs’ (wealthwire.com)
- Big Banks Are Rotten to the Core (ritholtz.com)
- Why do we need to end the Federal Reserve? (beyond2012zeitgeist.com)
- No ‘Fiscal Cliff’ Solution without Auditing the Fed (ConservativeActionAlerts.com)