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, paperback


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 Risk Management

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 commercial waters.

* 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 automated formulas.

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

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