Reserve has bluntly refused a request by a major US financial news service to
disclose the recipients of more than $2 trillion of emergency loans from US
taxpayers and to reveal the assets the central bank is accepting as collateral.
Their lawyers resorted to the bizarre argument that they did so to protect
�trade secrets.� Is the secret that the US financial system is de facto
Fed move is further indication of the degree of panic and lack of clear
strategy within the highest ranks of the US financial institutions.
Unprecedented Federal Reserve expansion of the Monetary Base in recent weeks
sets the stage for a future Weimar-style hyperinflation, perhaps before 2010.
7, Bloomberg filed suit under the US Freedom of Information Act (FOIA)
requesting details about the terms of 11 new Federal Reserve lending programs
created during the deepening financial crisis.
responded on December 8 claiming it�s allowed to withhold internal memos as
well as information about �trade secrets� and �commercial information.� The
central bank did confirm that a records search found 231 pages of documents
pertaining to the requests.
Bernanke Fed in recent weeks has stepped in to take a role that was the
original purpose of the Treasury�s $700 billion Troubled Asset Relief Program
(TARP). The difference between a Fed bailout of troubled financial institutions
and a Treasury bailout is that central bank loans do not have the oversight
safeguards that Congress imposed upon the TARP. Perhaps those are the �trade
secrets� the hapless Fed Chairman, Ben Bernanke, is so jealously guarding from
of such emergency Fed lending exceeded $2 trillion on Nov. 6. It had risen by
an astonishing 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14,
when central bank governors relaxed collateral standards to accept securities
that weren�t rated AAA. They did so knowing that on the following day a
dramatic shock to the financial system would occur because they, in concert
with the Bush administration, had decided to let it occur.
September 15, Bernanke, New York Federal Reserve President Tim Geithner, the
new Obama Treasury Secretary-designate, along with the Bush administration,
agreed to let the fourth largest investment bank, Lehman Brothers, go bankrupt,
defaulting on untold billions worth of derivatives and other obligations held
by investors around the world. That event, as is now widely accepted, triggered
a global systemic financial panic as it was no longer clear to anyone what
standards the US government was using to decide which institutions were �too big
to fail� and which not. Since then the US Treasury secretary has reversed his
policies on bank bailouts repeatedly leading many to believe Henry Paulson and
the Washington administration, along with the Fed, have lost control.
to the deepening crisis, the Bernanke Fed has decided to expand what is
technically called the Monetary Base, defined as total bank reserves plus cash
in circulation, the basis for potential further high-powered bank lending into
the economy. Since the Lehman Bros. default, this money expansion rose
dramatically by the end of October at a year-year rate of growth of 38 percent,
which has been without precedent in the 95-year history of the Federal Reserve created
in 1913. The previous high growth rate, according to US Federal Reserve data,
was 28 percent in September 1939, as the US was building up industry for the
evolving war in Europe.
first week of December, that expansion of the monetary base had jumped to a
staggering 76 percent rate in just three months. It has gone from $836 billion
in December 2007, when the crisis appeared contained, to $1,479 billion in
December 2008, an explosion of 76 percent year-on-year. Moreover, until
September 2008, the month of the Lehman Brothers collapse, the Federal Reserve
had held the expansion of the Monetary Base virtually flat. The 76 percent
expansion has almost entirely taken place within the past three months, which
implies an annualized expansion rate of more than 300 percent.
this, banks do not lend further, meaning the US economy is in a depression
free-fall of a scale not seen since the 1930s. Banks do not lend in large part
because under Basle BIS lending rules, they must set aside 8 percent of their
capital against the value of any new commercial loans. Yet the banks have no
idea how much of the mortgage and other troubled securities they own are likely
to default in the coming months, forcing them to raise huge new sums of capital
to remain solvent. It�s far �safer� they reason to pass on their toxic waste
assets to the Fed in return for earning interest on the acquired Treasury paper
they now hold. Bank lending is risky in a depression.
banks exchange $2 trillion of presumed toxic waste securities consisting of
Asset-Backed Securities in subprime mortgages, stocks and other high-risk
credits in exchange for Federal Reserve cash and US Treasury bonds or other government
securities rated (still) AAA, i.e., risk-free. The result is that the Federal
Reserve is holding some $2 trillion in largely junk paper from the financial
system. Borrowers include Lehman Brothers, Citigroup and JPMorgan Chase, the US�s largest
bank by assets. Banks oppose any release of information because that might
signal �weakness� and spur short-selling or a run by depositors.
situation even more drastic is the banking model used first by US banks
beginning in the late 1970s for raising deposits, namely the acquiring of
�wholesale deposits� by borrowing from other banks on the overnight interbank
market. The collapse in confidence since the Lehman Bros. default is so extreme
that no bank anywhere dares trust any other bank enough to borrow. That leaves
only traditional retail deposits from private and corporate savings or checking
wholesale deposits with retail deposits is a process that in the best of times
will take years, not weeks. Understandably, the Federal Reserve does not want
to discuss this. That is clearly also behind their blunt refusal to reveal the
nature of their $2 trillion assets acquired from member banks and other
financial institutions. Simply put, were the Fed to reveal to the public
precisely what �collateral� they held from the banks, the public would know the
potential losses that the government may take.
demanding more transparency from the Federal Reserve and US Treasury on its
bailout lending. On December 10, in Congressional hearings by the House
Financial Services Committee, Representative David Scott, a Georgia Democrat,
said Americans had �been bamboozled,� slang for defrauded.
Hiccups and hurricanes
Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September
they would meet congressional demands for transparency in a $700 billion
bailout of the banking system. The Freedom of Information Act obliges federal
agencies to make government documents available to the press and public.
December, the Government Accountability Office (GAO) issued its first mandated
review of the lending of the US Treasury�s $700 billion TARP program (Troubled
Asset Relief Program). The review noted that in 30 days since the program
began, Henry Paulson�s office had handed out $150 billion of taxpayer money to
financial institutions with no effective accountability of how the money is
being used. It seems Henry Paulson�s Treasury has indeed thrown a giant �tarp�
over the entire taxpayer bailout.
adding to the troubles in the world�s former financial Mecca, the US Congress,
acting on largely ideological grounds, shocked the financial system when it
refused to give even a meager $14 billion emergency loan to the Big Three
automakers -- General Motors, Chrysler and Ford.
While it is
likely that the Treasury will extend emergency credit to the companies until
January 20 or until the newly elected Congress can consider a new plan, the
prospect of a chain-reaction bankruptcy collapse of the three giant companies
is very near. What is being left out of the debate is that those three
companies account for a combined 25 percent of all US corporate bonds outstanding.
They are held by private pension funds, mutual funds, banks and others. If the
auto parts suppliers of the Big Three are included, an estimated $1 trillion of
corporate bonds are now at risk of chain-reaction default. Such a bankruptcy
failure could trigger a financial catastrophe which would make what has
happened since Lehman Bros. appear as a mere hiccup in a hurricane.
the Federal Reserve�s panic actions since September, by their explosive
expansion of the monetary base, has set the stage for a Zimbabwe-style
hyperinflation. The new money is not being �sterilized� by offsetting actions
by the Fed, a highly unusual move indicating their desperation. Prior to
September the Fed�s infusions of money were sterilized, making the potential
inflation effect �neutral.�
Defining a Very Great Depression
once banks begin finally to lend again, perhaps in a year or so, that will
flood the US
economy with liquidity in the midst of a deflationary depression. At that point
or perhaps well before, the dollar will collapse as foreign holders of US
Treasury bonds and other assets run. That will not be pleasant as the result
would be a sharp appreciation in the Euro and a crippling effect on exports in
Germany and elsewhere should the nations of the EU and other non-dollar
countries, such as Russia, OPEC members and, above all, China not have arranged
a new zone of stabilization apart from the dollar.
faces the greatest financial and economic challenges in history in coming
months. The incoming Obama administration faces a choice of literally
nationalizing the credit system to insure a flow of credit to the real economy
over the next five to 10 years, or face an economic Armageddon that will make
the 1930s appear a mild recession by comparison.
aside what appears to have been blatant political manipulation by the present Bush
administration of key economic data prior to the November election in a vain
attempt to downplay the scale of the economic crisis in progress, the figures
are unprecedented. For the week ended December 6, initial jobless claims rose
to the highest level since November 1982. More than 4 million workers remained
on unemployment, also the most since 1982, and, in November, US companies cut
jobs at the fastest rate in 34 years. Some 1,900,000 US jobs have vanished so far in
As a matter
of relevance, 1982, for those with long memories, was the depth of what was
then called the Volcker Recession. Paul Volcker, a Chase Manhattan appendage of
the Rockefeller family, had been brought down from New York to apply his interest rate �shock
therapy� to the US
economy in order as he put it, �to squeeze inflation out of the economy.� He
squeezed far more as the economy went into severe recession, and his high
interest rate policy detonated what came to be called the Third World Debt
Crisis. The same Paul Volcker has just been named by Barack Obama as
chairman-designate of the newly formed President�s Economic Recovery Advisory
Board, hardly grounds for cheer.
economic collapse across the United States is driven by the collapse of the $3
trillion market for high-risk subprime and Alt-A home mortgages. Fed Chairman
Bernanke is on record stating that the worst should be over by end of December.
Nothing could be further from the truth, as he well knows. The same Bernanke
stated in October 2005 that there was �no housing bubble to go bust.� So much
for the predictive quality of that Princeton economist. The widely-used S&P
Schiller-Case US National Home Price Index showed a 17 percent year-year drop
in the third quarter, trend rising. By some estimates it will take another five
to seven years to see US home prices reach bottom. In 2009, as interest rate
resets on some $1 trillion worth of Alt-A US home mortgages begin to kick in,
the rate of home abandonments and foreclosures will explode. Little in any of
the so-called mortgage amelioration programs offered to date reach the vast
majority affected. That process, in turn, will accelerate as millions of
Americans lose their jobs in the coming months.
Williams of the widely-respected Shadow Government Statistics report recently
published a definition of depression,
a term that was deliberately dropped after World War II from the economic
lexicon as an event not repeatable. Since then all downturns have been termed
�recessions.� Williams explained to me that some years ago he went to great
lengths interviewing the respective US economic authorities at the Commerce
Department�s Bureau of Economic Analysis and at the National Bureau of Economic
Research (NBER), as well as numerous private sector economists, to come up with
a more precise definition of �recession,� �depression� and �great depression.�
His is pretty much the only attempt to give a more precise definition to these
came up with was first the official NBER definition of recession: Two or more
consecutive quarters of contracting real GDP, or measures of payroll employment
and industrial production. A depression is a recession in which the
peak-to-bottom growth contraction is greater than 10 percent of the GDP. A
Great Depression is one in which the peak-to-bottom contraction, according to
Williams, exceeds 25 percent of GDP.
period from August 1929 until he left office, President Herbert Hoover oversaw
a 43-month long contraction of the US economy of 33 percent. Barack Obama looks
set to break that record, to preside over what historians could likely call the
Very Great Depression of 2008-2014, unless he finds a new cast of financial
advisers before Inauguration Day, January 20. Required are not recycled New
York Fed presidents, Paul Volckers or Larry Summers types. Needed is a radically
new strategy to put virtually the entire United States economy into some form
of an emergency �Chapter 11� bankruptcy reorganization where banks take
write-offs of up to 90 percent on their toxic assets, in order to save the real
economy for the American population and the rest of the world. Paper money can
be shredded easily. Not human lives. In the process it might be time for
Congress to consider retaking the Federal Reserve into the Federal government
as the Constitution originally specified, and make the entire process easier
for all. If this sounds extreme, revisit this article in six months.
F. William Engdahl is
author of A Century of War: Anglo-American Oil Politics and the New World Order
(Pluto Press), and Seeds of Destruction: The Hidden Agenda of Genetic
Manipulation (www.globalresearch.ca). This essay is adapted from a book he has just
completed, titled Full Spectrum Dominance: The Geopolitical Agenda Behind
Washington�s Global Military Buildup (release date estimated Autumn 2008). He
may be contacted through his website, www.engdahl.oilgeopolitics.net.