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Federal Reserve sets stage for Weimar-style hyperinflation
By F. William Engdahl
Online Journal Contributing Writer
Dec 16, 2008
The Federal 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
bankrupt?
The latest 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.
On November 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.
The Fed responded on December 8 claiming it's allowed to withhold
internal memos as well as information about `trade secrets'
and `commercial information.
records search found 231 pages of documents pertaining to the
requests.
The 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 the
public.
Coming hyperinflation?
The total 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.
On September 15, Bernanke, New York Federal Reserve President Tim
Geithner, the new Obama Treasury Secretary-designate
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.
In response 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.
By the 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.
Despite 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.
Hence the 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.
Making the 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 accounts.
To replace 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.
Congress is 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
Fed 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.
In early 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.
Further 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.
As well, 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
That means 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.
The world 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.
Leaving 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 2008.
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.
The present 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.
John 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.
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 terms.
What he 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.
In the 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
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.
Saturday, 20 December 2008
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