Ground Zero on Wall Street
Fed Funds and T-Bills Hit 0% Interest
by Ellen Brown
In the last two weeks, two federal interest rates hit all-time
record lows. On December 16, the market was taken by surprise
when Fed Chairman Ben Bernanke lowered the federal funds rate
(the interest banks pay to borrow the reserves they need to meet
their reserve requirement) to zero. The explanation given was
that the Federal Reserve was just setting the rate closer to where
banks had already been trading with each other for weeks.1
In an even more stunning development, the week before that the
federal government itself began borrowing money for free. "We
were all watching it agog," said a Treasury spokesman of
the December 9 auction of three-month Treasury bills. Investors
were so hungry for Treasury debt that they were snatching up the
T-bills at zero percent interest. In the secondary market (investors
buying from each other), Treasuries were actually trading at a
negative interest rate. That meant buyers were paying more than
they would get back when the Treasuries came due. Even at these
unprecedented rates of non-return, the Treasury was having trouble
keeping up with the demand. Four times as much money wanted in
as was sought by the government, indicating much more demand than
What is going on? The credit market remains so tight that state
and local governments are being forced to pay interest rates as
high as 20 percent. Why is the debt of our insolvent federal government
so much more desirable that investors are clamoring to buy it
when the return is zero or even negative? The U.S. government
is the most indebted nation in the world, with an official federal
debt topping $10 trillion. Everyone knows that this debt never
can or will be paid off with taxpayer dollars, now or in the future.
Commentators have been warning for years
that the federal debt would soon be so crippling that foreign
investors would flee and the interest alone would be more than
the taxpayers could pay. Why are investors now rushing in to buy
the U.S. government's exploding debt, even at a 0% return? Wouldn't
their money be safer and more liquid tucked under the mattress
or left in cash in the bank?
Why Lend Money for Free?
The explanation proffered by commentators
is that mattresses are vulnerable to thieves; and the U.S. government,
though insolvent, is less likely to file for bankruptcy than either
your local bank or your local government. If your bank goes bankrupt,
your money will become part of an FDIC receivership. You may get
it back eventually, but you could be doing without it for longer
than you would like. Another problem with cash, for investors
who have a lot of it, is that it can't be moved from place to
place without reporting it; and huge amounts of money are difficult
to convert to currency, making it more convenient to just park
the funds in Treasuries.
What makes the debt of the insolvent U.S. government less risky
than that of state and local governments is that the federal government
has the power to print its way out of any dollar deficiency. Not
that the Treasury actually prints Federal Reserve Notes (dollar
bills) - the Federal Reserve does that - but the Treasury can
always print more bonds, which the Federal Reserve can then be
counted on to buy with new dollar bills (or, more often, with
new computer entries in bank accounts).
Something More Interesting than Interest?
While that may all be true, it still doesn't
seem to explain a sudden surge of interest in a potentially risky
investment that generates zero profit. Or could it be that the
profit is coming in other ways than interest? For banks, U.S.
Treasuries are highly sought after regardless of interest rate,
because the securities are considered "risk-free" for
purposes of meeting the "risk-weighted" capital requirement
of the Bank for International Settlements. Under the Troubled
Asset Relief Program (TARP), banks can bolster their balance sheets
by swapping T-bills for riskier "toxic" collateral,
including those pesky derivatives that are messing up their books.
Banks are allowed to buy Treasuries with their "excess reserves"
(the amount by which the bank's deposits have not been leveraged
by a factor of ten or so into new loans).3 By putting these lendable
funds into T-bills, the TARP recipients can remove them from the
reach of riskier borrowers. The fact that the Fed is now paying
interest on the reserves that banks hold at the central bank could
also factor into the equation.4
Adding to the heavy demand for federal securities may be competition
from the Federal Reserve itself. On December 1, 2008, Chairman
Bernanke announced that the Fed could soon be providing "liquidity"
to the frozen credit market by buying "longer-term Treasury
and agency securities on the open market in substantial quantities."5
For the Fed to buy U.S. Treasuries with money created on a printing
press is actually nothing new. The process is called "open
market operations" and is how the Fed has always expanded
the money supply. But the Fed is now talking about "substantial
quantities," and today that could mean trillions. The Los
Angeles Times reported on November 30 that the loans, commitments
and guarantees of the Treasury and the Fed together now come to
$8.5 trillion.6 That's roughly half the gross domestic product
of the whole country; yet Congress approved only $700 billion
in its latest bailout excursion in October. Where is the other
$7-plus trillion coming from? The Fed is obviously just creating
it with accounting entries on computer screens.7 A trillion here,
a trillion there, as the saying goes, and pretty soon you're talking
What the Fed is doing with all this money-conjured-out-of-nothing,
however, remains a state secret. When Bloomberg News sued recently
under the Freedom of Information Act to find out who had received
$2 trillion in loans and what the collateral was, the Fed refused
to disclose the documents, claiming it was protecting "trade
secrets."8 Whose trade and what sort of secrets? We're not
supposed to know which banks are lined up at the trough and how
dodgy their collateral is, because that would erode investor confidence.
But why should we have confidence in banks engaging in "confidence
The biggest "trade secret" of the banking business is
that banks create the money they lend out of thin air. "The
process by which banks create money is so simple," wrote
economist John Kenneth Galbraith, "that the mind is repelled."
Banks simply write "credit" into an account in exchange
for the borrower's promise to repay. In the case of the federal
government, the bank that "monetizes" its promise to
repay is the privately-owned Federal Reserve; and today the Fed
is taking that monetizing power to such dangerous lengths that
the currency could be hyperinflated into oblivion.
Implications and Possibilities
When you understand this sleight of hand,
the way out of the government's debt trap appears equally simple:
Congress could just nationalize the Federal Reserve and print
Federal Reserve Notes itself. This government-issued money could
then be either spent or lent into the economy to get the wheels
of production rolling again.
But isn't the Federal Reserve already a federal agency? That commonly
held misconception was dispelled when the Fed refused to comply
with the Bloomberg demand under the FOIA. Most of the documents,
said the Fed, are held by the New York Federal Reserve; and the
New York Fed is not subject to the FOIA because it is not a federal
It is not a federal agency but it should be, because we the people
are picking up the tab. The Fed and the banks are creating $8
trillion out of thin air, nearly doubling the money supply; and
that means the value of our dollars is being diluted by nearly
50%. If it is our money, we should get the interest, have the
right to full accountability, and have control over where the
money goes. Instead of pouring money into a massive black hole
on the derivatives books of bankrupt banks, Congress could and
should be using the national credit card to bolster manufacturing,
housing and infrastructure development, either by making low-interest
credit readily available to qualified borrowers or by a direct
infusion of government-issued dollars into the economy.
The objection to the government printing dollars and simply spending
them on public projects has always been that it would be inflationary,
but that alternative would actually be less inflationary than
letting the privately-owned Federal Reserve print dollars and
swap them for U.S. debt, as is being done now. This is because
Treasury debt, once created, is never paid off. The U.S. federal
debt hasn't been paid off since the days of Andrew Jackson. Instead,
U.S. government securities wind up circulating in the economy
along with the dollars that were printed to buy them. These securities
represent a claim against U.S. goods and services just as dollars
do. Indeed, that is why the government's securities are so highly
valued: they are just as good as dollars. They can be cashed in
at any time for their dollar equivalent or deposited and borrowed
against for an equivalent sum in loans, and they can be swapped
for the risker toxic collateral that is tying up the banks' capital,
preventing the banks from making new loans. Federal securities
are particularly valuable to banks, because they can become the
"reserves" for generating many times their face value
in new loans. If the government were to print dollars directly,
the bonds would be taken out of the picture.
There would be debt-free, permanent money
in circulation, money not subject to perpetual servicing with
interest by the taxpayers.
Banking with the U.S. Government
The superior safety and security that
investors feel when they stash their savings with the U.S. government
could be achieved by nationalizing bankrupt banks. This is not
a radical idea. Rather than being bailed out with taxpayer money,
insolvent banks are actually supposed to be put into receivership
under the FDIC (a government agency). It then has the option of
taking the bank's stock (effectively nationalizing it) in return
for getting the bank back on its feet. This was done, for example,
with Continental Illinois, the nation's fourth largest bank, when
it went bankrupt in the 1990s.
In a number of capitalist countries, including Switzerland and
India, publicly-owned banks operate right alongside privately-owned
banks. Studies in India comparing public and private banks have
found that Indian public banks not only are more secure but give
superior customer service.10 In European countries, working for
the government is considered more prestigious than working for
the private sector, and government employees have better training.
Interestingly, the first banks owned publicly in democratic communities
were established in the American colonies. It may be time to return
to our roots and restore the U.S. banking system to public ownership
Ellen Brown developed her research skills
as an attorney practicing civil litigation in Los Angeles. In
Web of Debt, her latest book, she turns those skills to an analysis
of the Federal Reserve and "the money trust." She shows
how this private cartel has usurped the power to create money
from the people themselves, and how we the people can get it back.
"US Rate Futures Spike as Fed Sets Low Funds Target Range,"
Reuters (December 16, 2008).
Tom Petruno, "Safety Outweighs Negative Yield for Some T-bill
Investors," Los Angeles Times (December 10, 2008); "Treasurys
Higher as Bad News Creeps in," MarketWatch (December 9, 2008).
See Chicago Federal Reserve, Modern Money Mechanics (1961, last
revised 1992), originally produced and distributed free by the
Public Information Center of the Federal Reserve Bank of Chicago,
Chicago, Illinois, now available on the Internet at http://landru.i-link-2.net/monques/MMM.pdf.
Mark Felsenthal, "Bailout Bill Gives Fed New Tool to Boost
Liquidity," Reuters (October 3, 2008).
Scott Lanman, Vivien Lou Chen, "Bernanke Says Fed May Buy
Treasuries to Aid Economy," Bloomberg News (December 1, 2008).
Jim Puzzanghera, "Bailout: Pay Now, Worry Later," Los
Angeles Times (November 30, 2008).
See Ellen Brown, "Oops, We Meant $7 Trillion!", www.webofdebt.com/articles
(November 30, 2008).
Mark Pittam, "Fed Refused to Disclose Recipients of $2 Trillion,"
Bloomberg News (December 12, 2008).
"Bloomberg Picks a Fight With the Federal Reserve,"
The Prudent Investor (November 9, 2008).
"State Bank of India Ranks Highest in Consumer Satisfaction,"
J.D. Power Asia Pacific Reports (2001); Nirmal Chandra, "Is
Inclusive Growth Feasible in Neoliberal India?", networkideas.org