July 28, 2013
Federal Reserve Policy Mainly Benefits Big Foreign Banks
We’ve extensively documented that the Federal Reserve is intentionally locking up bank money so that it is not loaned out to Main Street. Specifically – due to Fed policy – 81.5% of all money created by quantitative easing is sitting there gathering dust in the form of “excess reserves” … instead of being loaned out to help Main Street or the American economy.
And we’ve extensively documented that a large percentage of the bailouts went to foreign banks (and see this and this). (A 2010 Fed audit also revealed that of the $1.25 trillion of mortgage-backed securities the central bank purchased after the housing bubble popped, some $442.7 billion - more than 35% – were bought from foreign banks.)
It turns out that these themes are all connected.
Specifically, most of the Fed-created money which is gathering dust is actually being held by foreign banks.
The Levy Economics Institute noted in May:
Excess reserves are the surplus of reserves against deposits and certain other liabilities that depository institutions (loosely called “banks”) hold above the amounts that the Board requires within ranges set by federal law. The general requirement is that covered institutions maintain reserves at least equal to ten percent of liabilities payable on demand. For the first time in history, there is statistical evidence that as much as one-half or more of excess reserves are held for United States banking offices offoreign banks.
Zero Hedge reports today:
As per last night’s [Federal Reserve] H.8 update, commercial bank deposits rose by $94 billion in the week ended July 17: the fourth largest weekly increase in history …. This took total commercial bank deposits to an all-time high of $9.54 trillion.
The entire difference can be attributed to the $2+ trillion in excess reserves created by the Fed since the start of the [global financial crisis] .
Speaking of Fed reserves with banks, the most recent number was $2.1 trillion, and its allocation breakdown by Domestic (small and large) and Foreign banks operating in the US is as follows:
Foreign banks continue to be the biggest beneficiary of the Fed’s monthly $85 billion liquidity largesse, just as they were the biggest winners during QE2.
In fact, the total reserve cash distribution continues to favor foreign banks, which now have a record $1.13 trillion in cash, or $9 billion more than all Domestically-chartered banks, at $1.122 trillion. The notable shift of cash reallocation from domestic to foreign banks since QE2 can be seen on the chart below.
To nobody’s surprise, global liquidity (as created by the Fed) continues to be infinitely fungible, and increasingly benefits offshore-based (mainly European) banks.
(And see this earlier report from Zero Hedge).
We’ve repeatedly noted that loose Federal Reserve policy benefits of the super-elite at the expense of Main Street, the U.S. economy or the average American.
It now appears that the policy benefits foreign super-elite even more than the elites in the U.S.
The Federal Reserve – like many parts of the U.S. government – are Steeling the prosperity(Quantative Easing or Premeditated Theft) out of American hands and mouths and giving it to Big Foreign banks
Money Is Being Sucked Out of the U.S. Economy … But Big Bucks Are Being Made Abroad
Stop Sending American Jobs and Wealth Abroad
Corporate profits are up. Stock prices are up. So why isn’t anyone hiring?
Actually, many American companies are — just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.
The trend helps explain why unemployment remains high in the United States, edging up to 9.8% last month, even though companies are performing well: All but 4% of the top 500 U.S. corporations reported profits this year, and the stock market is close to its highest point since the 2008 financial meltdown.
But the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9%, says Robert Scott, the institute’s senior international economist.
“There’s a huge difference between what is good for American companies versus what is good for the American economy,” says Scott.
Many of the products being made overseas aren’t coming back to the United States. Demand has grown dramatically this year in emerging markets like India, China and Brazil.
Bad government policy has encouraged this trend.
It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate … that is, not only do they pay no taxes, but they actually get tax refunds.
Why QE2 Failed: The Money All Went Offshore
By Ellen Brown
Global Research, July 09, 2011
9 July 2011
On June 30, QE2 ended with a whimper. The Fed’s second round of “quantitative easing” involved $600 billion created with a computer keystroke for the purchase of long-term government bonds. But the government never actually got the money, which went straight into the reserve accounts of banks, where it still sits today. Worse, it went into the reserve accounts of FOREIGN banks, on which the Federal Reserve is now paying 0.25% interest.
Before QE2 there was QE1, in which the Fed bought $1.25 trillion in mortgage-backed securities from the banks. This money too remains in bank reserve accounts collecting interest and dust. The Fed reports that the accumulated excess reserves of depository institutions now total nearly $1.6 trillion.
Interestingly, $1.6 trillion is also the size of the federal deficit – a deficit so large that some members of Congress are threatening to force a default on the national debt if it isn’t corrected soon.
So here we have the anomalous situation of a $1.6 trillion hole in the federal budget, and $1.6 trillion created by the Fed that is now sitting idle in bank reserve accounts. If the intent of “quantitative easing” was to stimulate the economy, it might have worked better if the money earmarked for the purchase of Treasuries had been delivered directly to the Treasury. That was actually how it was done before 1935, when the law was changed to require private bond dealers to be cut into the deal.
The one thing QE2 did for the taxpayers was to reduce the interest tab on the federal debt. The long-term bonds the Fed bought on the open market are now effectively interest-free to the government, since the Fed rebates its profits to the Treasury after deducting its costs.
But QE2 has not helped the anemic local credit market, on which smaller businesses rely; and it is these businesses that are largely responsible for creating new jobs. In a June 30 article in the Wall Street Journal titled “Smaller Businesses Seeking Loans Still Come Up Empty,” Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17% of smaller businesses said they were able to land needed bank financing.
How QE2 Wound Up in Foreign Banks
Before the Banking Act of 1935, the government was able to borrow directly from its own central bank. Other countries followed that policy as well, including Canada, Australia, and New Zealand; and they prospered as a result. After 1935, however, if the U.S. central bank wanted to buy government securities, it had to purchase them from private banks on the “open market.” Former Fed Chairman Marinner Eccles wrote in support of an act to remove that requirement that it was intended to keep politicians from spending too much. But all the law succeeded in doing was to give the bond-dealer banks a cut as middlemen.
Worse, it caused the Fed to lose control of where the money went. Rather than buying more bonds from the Treasury, the banks that got the cash could just sit on it or use it for their own purposes; and that is apparently what is happening today.
In carrying out its QE2 purchases, the Fed had to follow standard operating procedure for “open market operations”: it took secret bids from the 20 “primary dealers” authorized to sell securities to the Fed and accepted the best offers. The problem was that 12 of these dealers – or over half — are U.S.-based branches of foreign banks (including BNP Paribas, Barclays, Credit Suisse, Deutsche Bank, HSBC, UBS and others); and they evidently won the bids.
The fact that foreign banks got the money was established in a June 12 post on Zero Hedge by Tyler Durden (a pseudonym), who compared two charts: the total cash holdings of foreign-related banks in the U.S., using weekly Federal Reserve data; and the total reserve balances held at Federal Reserve banks, from the Fed’s statement ending the week of June 1. The charts showed that after November 3, 2010, when QE2 operations began, total bank reserves increased by $610 billion. Foreign bank cash reserves increased in lock step, by $630 billion — or more than the entire QE2.
In a June 27 blog, John Mason, Professor of Finance at Penn State University and a former senior economist at the Federal Reserve, wrote:
In essence, it appears as if much of the monetary stimulus generated by the Federal Reserve System went into the Eurodollar market. This is all part of the “Carry Trade” as foreign branches of an American bank could borrow dollars from the “home” bank creating a Eurodollar deposit. . . .
Cash assets at the smaller [U.S.] banks remained relatively flat . . . . Thus, the reserves the Fed was pumping into the banking system were not going into the smaller banks. . . .
[B]usiness loans continue to “tank” at the smaller banking institutions. . . .
The real lending by commercial banks is not taking place in the United States. The lending is taking place off-shore, underwritten by the Federal Reserve System and this is doing little or nothing to help the American economy grow.
Tyler Durden concluded:
. . . [T]he only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains . . . why US banks have been unwilling and, far more importantly, unable to lend out these reserves . . . .
. . . [T]he data above proves beyond a reasonable doubt why there has been no excess lending by US banks to US borrowers: none of the cash ever even made it to US banks! . . . This also resolves the mystery of the broken money multiplier and why the velocity of money has imploded.
Well, not exactly. The fact that the QE2 money all wound up in foreign banks is a shocking finding, but it doesn’t seem to be the reason banks aren’t lending. There were already $1 trillion in excess reserves sitting idle in U.S. reserve accounts, not counting the $600 billion from QE2.
According to Scott Fullwiler, Associate Professor of Economics at Wartburg College, the money multiplier model is not just broken but is obsolete. Banks do not lend based on what they have in reserve. They can borrow reserves as needed after making loans. Whether banks will lenddepends rather on (a) whether they have creditworthy borrowers, (b) whether they have sufficient capital to satisfy the capital requirement, and (c) the cost of funds – meaning the cost to the bank of borrowing to meet the reserve requirement, either from depositors or from other banks or from the Federal Reserve.
Setting Things Right
Whatever is responsible for causing the local credit crunch, trillions of dollars thrown at Wall Street by Congress and the Fed haven’t fixed the problem. It may be time for local governments to take matters into their own hands. While we wait for federal lawmakers to get it right, local credit markets can be revitalized by establishing state-owned banks, on the model of the Bank of North Dakota (BND). The BND services the liquidity needs of local banks and keeps credit flowing in the state. For more information, see here and here.
Concerning the gaping federal deficit, Congressman Ron Paul has an excellent idea: have the Fed simply write off the federal securities purchased with funds created in its quantitative easing programs. No creditors would be harmed, since the money was generated out of thin air with a computer keystroke in the first place. The government would just be canceling a debt to itself and saving the interest.
As for “quantitative easing,” if the intent is to stimulate the economy, the money needs to go directly into the purchase of goods and services, stimulating “demand.” If it goes onto the balance sheets of banks, it may stop there or go into speculation rather than local lending — as is happening now. Money that goes directly to the government, on the other hand, will be spent on goods and services in the real economy, creating much-needed jobs, generating demand, and rebuilding the tax base. To make sure the money gets there, the 1935 law forbidding the Fed to buy Treasuries directly from the Treasury needs to be repealed.
Fed Releases Details On Secret $855 Billion Single-Tranche OMO Bailout Program: Just Another Foreign Bank Rescue Operation
Submitted by Tyler Durden on 07/06/2011
A month ago we reported about Bob Ivry’s discovery that the Fed had been conducting a secretive bailout operation between March and December 2008, under which banks borrowed as much as $855 billion over the time frame for a rate as low as 0.01%. As the Fed itself explains following a just disclosed launch of a page dedicated to this Saint OMO, "The Federal Reserve System conducted a series of single-tranche term repurchase agreements from March 2008 to December 2008 with the intention of mitigating heightened stress in funding markets. These operations were conducted by the Federal Reserve Bank of New York with primary dealers as counterparties through an auction process under the standard legal authority for conducting temporary open market operations. In these transactions, primary dealers could deliver any of the types of securities–Treasuries, agency debt, or agency MBS–that are accepted in regular open market operations.
By providing term funding to primary dealers, this program helped to address liquidity pressures evident across a number of financing markets and supported the flow of credit to U.S. households and business." Well, not really. As the chart below shows the banks, pardon primary dealers, that benefited the most from this secret iteration of Fed generosity were once again foreign banks, with the Top 5 borrowers being Credit Suisse, Deutsche Bank, BNP Paribas, RBS and Barclays. Together these five accounted for $593 billion of total borrowings, or 70% of the total. So perhaps the Fed should rephrase the last sentence to "supported the flow of credit to U.S. European households and business" which is to be expected. After all, as we have demonstrated before, the European banking system’s liabilities are orders of magnitude greater than the US. So in order to preserve the global Ponzi (a main reason why Greece must never be allowed to fail), the biggest weakness that has to be addressed constantly is and will be in Europe.
Below is a summary of who borrowed how much in total from the Fed’s ST-OMO program.
And lest someone thinks that Goldman did not somehow benefit, the firm was i) the single biggest US-based borrower under the program; ii) it was the single biggest one time borrower for $15 billion on December 10, 2008, and iii), it received the smallest borrowing rate afforded to anyone at the laughable 0.01% on December 30, 2008.
The full excel breakdown can be found here.
Quantitative Easing; The New Old Solution to Economic Woes
As predicted here, and almost everywhere else the economy is for all intents and purposes exactly where it was in 2008. In case you’ve been living under a rock we are talking collapse. Collapse like the world hasn’t seen since Rome. What do our all knowing leaders plan to do about it? They’re going to do more of the same. Our favorite crooks over at the fed just announced another round of “Quantitative Easing” or monetizing the debt.
The way the bailout worked (quantitative easing one(QE1)) was that the Federal Reserve issued a whole bunch of credit to banks for basically nothing. Those same banks (which also coincidently own the private federal reserve stock) then purchased Government debt. The problem is that these banks can only be persuaded to buy so many treasury bonds. They claim that the money will be lent to us. This is a hoax since the banks mostly sit on it because there arent any good credit risks right now who are actually looking for debt.
What will the fed do next? They will buy the government debt directly. Wow! Now the very same private organization that is creating money out of nothing will be lending money to the government directly and we are paying interest on it. The Fed already owns more than 5Trillion dollars in treasury bonds.
China is becoming unnerved because the Trillions they lent us used to be worth a lot more 20 years ago. If they bring us to war with China it will be a set-up. Killing commies is appealing, at first thought. However, we watched Clinton and the rest of them sell us out to China and move our manufacturing base into the 3rd world. The American worker is competing with labor that is just a hair away from slavery.
War with china? No way. They wont go that route. All this hype about China is ”predictive programing”. The idea will be to fully bankrupt and manage America into a steady decline. They wont hide the fact that China is becoming the new dominate super power. Economically, Militarily, Politically. The media will report it all with a smile. When China is done divesting itself from the Dollar they will complete the collapse. All the wealth is moving into the 3rd world because they can literally buy everything. The Elite global corporations will cozy up to China.
One day our leaders will turn to us and claim our system failed. They will point to their predecessors as they already do and we will become the new 3rd world. This new era will be a dark and smoldering age as the entire globe falls into the clutches of a corporate fascist state.
We will be hated the world over for allowing our government to bribe and intimidate the heads of central banks in an attempt to maintain the Dollars status as the global reserve currency. Laughed at for having squandered our status, wasted our treasure, betrayed our values.
How did the Federal Reserve bank get the power to create our currency? In 1913 congress passed the federal reserve act giving them the power to issue credit and control interest rates. Why would we pay a private bank to do what our government previously did itself?
In 1914 we got the federal income tax. Our labor pledged as collateral on the government debt. Each day the government adds to that debt and every month it pays interest on it. Last month it was a record high 20Billion in interest on federal deficits. Twenty Billion Dollars in interest in only ONE MONTH! That’s $20,000,000,000/month and they demand we borrow more.
“I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” – Thomas Jefferson.
“The money power preys upon the nation in times of peace & conspires against it in times of war. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who even question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me & the financial institutions at the rear, the latter is my greatest foe.
– President Abraham Lincoln
“This is the Aldrich bill in disguise…The worst legislative crime of the ages is perpetrated by this banking bill…The banks have been granted the special privilege of distributing the money, and they charge as much as they wish…This is the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed. The system is private…There should be no legal tender other than that issued by the government…The People are the Government. Therefore the Government should, as the Constitution provides, regulate the value of money.”
-Rep. Charles Lindbergh Sr.(Congressional Record, 1913-12-22)
“The banks manufacture, without borrowing it, the monetary credit which they loan to the Government. For every dollar they themselves contribute to the loaning process, they manufacture 10 credit dollars, and call them their own, although they base the credit dollars on human sweat and labor and productive genus that is not their own.”
-Allen B. Brown, chairman of the New Economic Group. (1936)
WE MUST REVERSE COURSE NOW!
THIS IS HISTORY!!
WAKE UP AND SAVE THE REPUBLIC!!!
We don’t need to pay interest. We can rescind the federal reserve act and issue credit and currency ourselves. Obviously that doesn’t fix the problem of inflation, but at least we would no longer be slaves to a corporate cartel.
The system is collapsing! END THE FED!
RON PAUL 2012!
TAKE BACK YOUR STATES!