| Subject: | [socialcredit] Re: clever propaganda | | Date: | Sunday, January 2, 2005 17:50:37 (-0800) | | From: | william_b_ryan <william_b_ryan @.....com>
|
[HERMANN] Government securities are also purchased by
the Federal Reserve, that is, the Fed loans money to
the Treasury - notwithstanding that this is only a
small fraction of the national debt. Incidentally, to
refuse to use the word "borrow" is obfuscatory.
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-----------------------
[REPLY] The point is that the Fed does not purchase
directly from Treasury, but through the dealers, like
everyone else. It is not exactly a "small fraction."
It's about ten percent. The purchase of a security
by a bank is the functional equivalent to a loan.
When a corporate entity - government or otherwise -
sells securities it is effectively borrowing. This
is true whether the securities represent "equity" or
"debt." Much debt thereby masquerades as equity.
Incidentally, there is no rule, regulation or law
that requires the Fed to limit its purchases to
Treasury securities. Prior to the mid-1930s, it
purchased a variety of securities, a practice which
several other central banks still follow. There is
also no rule, regulation or law that prohibits the
Fed from lending directly to Treasury. It is the
Fed's self-imposed practice not to do so, the period
during WWII being a little known exception.
-
[HERMANN] The essential difference between open
market operations and direct "borrowing" from the Fed
is that the bond dealers get to keep the interest.
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[REPLY] Well, they do keep some of it for the
services they render. Technically, the sellers and
buyers in the securities markets do not transact
directly between themselves, but through the dealer
intermediaries, who do the selling and buying. The
dealers' gross profit is the differential between the
prices they pay and the prices they sell. As a
general matter - and this applies to the Fed as well
- the holders of securities for convenience do not
hold to maturity, but sell to dealers shortly before
the redemption date, who collect the interest.[see
note below] The interest the dealers get to "keep"
is the differential between the price they paid for
the securities in their own accounts, and their
redemption value.
But in reality it's a lot more than that. According
to Friedman in the article cited, up to half of all
http://www.geocities.com/socredus/friedman-81.txt
dealer transactions in Treasury securities are
conducted for the Fed, yet the Fed holds only ten
percent of marketable Treasury securities
outstanding. That means effectively that the Fed is
paying, as a statistical matter, as much as five
times more as a percentage of its portfolio in
"service charges" to the dealers - effectively
reducing interest earned commensurately - than is any
other transactor in Treasury securities. The
justification being of course that the economy is in
some sort unstable equilibrium that requires "fine
tuning" to maintain. Otherwise, it would spiral into
chaos. So they claim. They argue from historical
examples of hyperinflation, which will have to be
addressed. They can be.
The larger issue from the reform perspective is
whether it is necessary for the central bank to
engage in open market operations at all, in order to
"inject" reserves (or "high powered" money) into the
economy. In principle, there are other ways than
simply letting government "print" greenbacks and
spending them, which at a minimum must further
concentrate power in government. Such poorly thought
out proposals are guaranteed to keep the individual
special interests behind government and finance in
perpetual conflict, each protecting and trying to
extend its own turf irrationally. Each will justify
what they do in terms of public welfare. It devolves
into what specific group takes control of the
guillotine, where might will make right.
Theoretically, the central bank could keep its
independence - we do certainly want checks and
balances in the democratic system - by paying
"dividends" directly to final consumers. If reserves
at some point in the future need to be "drained,"
member bank reserve accounts could be levied or
"taxed." The process is presently in the reverse
direction: consumers are "taxed," and reserves are
"injected" through Wall Street, from the top down.
In other words, it is "social credit" for the rich,
and "trickle down" for the rest of us.
-
[HERMANN] Their activities are an unnecessary drain
on the taxpayer. No government ever needs to borrow
from the private sector. Putting it another way, the
national debt is the national sin.
---------------------
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[REPLY] Nonetheless, there are real costs to
supplying financial services. It remains to be
demonstrated that a government department could do it
more efficiently. It certainly wouldn't be if the
complete ignoramuses who typically make such
proposals are running the show. Furthermore, even if
it could be demonstrated that it is more efficient
from a purely technical perspective, disregarding the
probable incompetence of personnel in the relevant
department, it would also have to be demonstrated,
beyond a reasonable doubt, that it is significantly
enough more efficient in principle to justify the
danger to the public in totally centralizing the
power of finance with government, and the Stalin who
might be on top. Whether that can be accomplished is
very much open to doubt.
-
[HERMANN] Any money owed by government to the central
bank is never paid back - because it does not need to
be.
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[REPLY] Every government security in the Fed's
portfolio carries a redemption date. It is redeemed
on its redemption date, because it has to be.
-
> Central-bank profit obtained from interest income
always returns to Treasury.
> ------------------
> [REPLY] Perhaps.
[HERMANN] Indisputably.
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[REPLY] Technically, the Fed does not rebate ninety-
five percent of its interest income, but ninety-five
percent of its self-calculated net profit, being
something less than its gross interest income. It
has only done that "voluntarily," the Fed's term,
since 1948. The rebate really is an arbitrary credit
to Treasury's account for political cover. A bribe,
so to speak.
-
> What is less recognized is the reality that the
Federal Reserve is more than making up that "expense"
or "lost income" to Wall Street by churning its
portfolio (something it didn't do before - certainly
not during the immediately preceding war years when
the interest rate was "pegged") generating
compensatory income to the "primary" dealers for the
"service" they are providing, who are large banks and
consortiums of banks, in one form or another. That
sop to Wall Street is effectively interest. The
rationale is they have to "fine tune" for monetary
stability.
[HERMANN] You have provided yet another good reason
for bringing in "monetary reform" and financial re-
regulation. From the article supplied we learn that
"... The churning serves only to muddy the waters,
introduce uncertainty and speculation and waste the
taxpayers' money". Might even be a case for
nationalizing the Fed?
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[REPLY] The Fed is already "nationalized" and always
was. The President of the United States appoints its
chairman and board of directors, subject to
confirmation by the Senate of the United States.
The issue is accountability.
-
[note from above] I am informed the process is a bit
subtler than that. The above is a simplification.
The dealers normally never part with the physical
possession of the securities they purchase until
redemption, but hold most of them in beneficial
"street name" for their customers who purchase
securities from them, and sell to them, including the
Fed, "transferring" the securities from customer
"account" to customer "account" with trades. They
each of them hold "buffer stock" portfolios to their
own account, analogous to "reserves." Moreover, the
dealers will sell "short" and buy "long" between
themselves, in further variation on the concept of
"fractional reserve" banking. Martin Meyer's books
are invaluable for learning details of the process.
-
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