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December 23rd marks the 100th anniversary of the Federal Reserve. Dissatisfaction with its track record has prompted calls to audit the Fed and end the Fed. At the least, Congress needs to amend the Fed, modifying the Federal Reserve Act to give the central bank the tools necessary to carry out its mandates.
The Federal Reserve is the only central bank with a dual mandate. It is charged not only with maintaining low, stable inflation but with promoting maximum sustainable employment. Yet unemployment remains stubbornly high, despite four years of radical tinkering with interest rates and quantitative easing (creating money on the Fed’s books). After pushing interest rates as low as they can go, the Fed has admitted that it has run out of tools.
At an IMF conference on November 8, 2013, former Treasury Secretary Larry Summers suggested that since near-zero interest rates were not adequately promoting people to borrow and spend, it might now be necessary to set interest at below zero. This idea was lauded and expanded upon by other ivory-tower inside-the-box thinkers, including Paul Krugman.
Negative interest would mean that banks would charge the depositor for holding his deposits rather than paying interest on them. Runs on the banks would no doubt follow, but the pundits have a solution for that: move to a cashless society, in which all money would be electronic. “This would make it impossible to hoard cash outside the bank,” wrote Danny Vinik in Business Insider, “allowing the Fed to cut interest rates to below zero, spurring people to spend more.” He concluded:
. . . Summers’ speech is a reminder to all liberals that he is a brilliant economist who grasps the long-term issues of monetary policy and would likely have made an exemplary Fed chair.
Maybe; but to ordinary mortals living in the less rarefied atmosphere of the real world, the proposal to impose negative interest rates looks either inane or like the next giant step toward the totalitarian New World Order. Business Week quotes Douglas Holtz-Eakin, a former director of the Congressional Budget Office: “We’ve had four years of extraordinarily loose monetary policy without satisfactory results, and the only thing they come up with is we need more?”
Paul Craig Roberts, former Assistant Secretary of the Treasury, calls the idea “harebrained.” He is equally skeptical of quantitative easing, the Fed’s other tool for stimulating the economy. Roberts points to Andrew Huszar’s explosive November 11th Wall Street Journal article titled “Confessions of a Quantitative Easer,” in which Huszar says that QE was always intended to serve Wall Street, not Main Street. Huszar’s assignment at the Fed was to manage the purchase of $1.25 trillion in mortgages with dollars created on a computer screen. He says he resigned when he realized that the real purpose of the policy was to drive up the prices of the banks’ holdings of debt instruments, to provide the banks with trillions of dollars at zero cost with which to lend and speculate, and to provide the banks with “fat commissions from brokering most of the Fed’s QE transactions.”
A Helicopter Drop That Missed Its Target
All this is far from the helicopter drop proposed by Ben Bernanke in 2002 as a quick fix for deflation. He told the Japanese, “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.
But there has been no cloudburst of money raining down on the people. The money has gotten only into the reserve accounts of banks. John Lounsbury, writing in Econintersect, observes that Friedman’s idea of a helicopter drop involved debt-free money printed by the government and landing in people’s bank accounts. “He foresaw the money entering the economy through bank deposits, not through bank reserves which was the pathway available to Bernanke. . . . [W]hen Ben Bernanke fired up his helicopter engines he took the only path available to him.”
Bernanke created debt-free money and bought government debt with it, returning the interest to the Treasury. The result was interest-free credit, a good deal for the government. But the problem, says Lounsbury, is that:
The helicopters dropped all the money into a hole in the ground (excess reserve accounts) and very little made its way into the economy. It was essentially a rearrangement of the balance sheets of the creditor nation with little impact on the debtor nation.
. . . The fatal flaw of QE is that it delivers money to the accounts of the creditors and does nothing for the accounts of the debtors. Bad debts remain unserviced and the debt crisis continues.
Thinking Outside the Box
Bernanke delivered the money to the creditors because that was all the Federal Reserve Act allowed. If the Fed is to fulfill its mandate, it clearly needs more tools; and that means amending the Act. Harvard professor Ken Rogoff, who spoke at the November 2013 IMF conference before Larry Summers, suggested several possibilities; and one was to broaden access to the central bank, allowing anyone to have an ATM at the Fed.
Rajiv Sethi, Barnard/Columbia Professor of Economics, expanded on this idea in a blog titled “The Payments System and Monetary Transmission.” He suggested making the Federal Reserve the repository for all deposit banking. This would make deposit insurance unnecessary; it would eliminate the need to impose higher capital requirements; and it would allow the Fed to implement monetary policy by targeting debtor rather than creditor balance sheets. Instead of returning its profits to the Treasury, the Fed could do a helicopter drop directly into consumer bank accounts, stimulating demand in the consumer economy.
John Lounsbury expanded further on these ideas. He wrote in Econintersect that they would open a pathway for investment banking and depository banking to be separated from each other, analogous to that under Glass-Steagall. Banks would no longer be too big to fail, since they could fail without destroying the general payment system of the economy. Lounsbury said the central bank could operate as a true public bank and repository for all federal banking transactions, and it could operate in the mode of a postal savings system for the general populace.
Earlier Central Bank Ventures into Commercial Lending
That sounds like a radical departure today, but the Fed has ventured into commercial banking before. In 1934, Section 13(b) was added to the Federal Reserve Act, authorizing the Fed to “make credit available for the purpose of supplying working capital to established industrial and commercial businesses.” This long-forgotten section was implemented and remained in effect for 24 years. In a 2002 article on the Minneapolis Fed’s website called “Lender of More Than Last Resort,” David Fettig noted that 13(b) allowed Federal Reserve banks to make loans directly to any established businesses in their districts, and to share in loans with private lending institutions if the latter assumed 20 percent of the risk. No limitation was placed on the amount of a single loan.
Fettig wrote that “the Fed was still less than 20 years old and many likely remembered the arguments put forth during the System’s founding, when some advocated that the discount window should be open to all comers, not just member banks.” In Australia and other countries, the central bank was then assuming commercial as well as central bank functions.
Section 13(b) was eventually repealed, but the Federal Reserve Act retained enough vestiges of it in 2008 to allow the Fed to intervene to save a variety of non-bank entities from bankruptcy. The problem was that the tool was applied selectively. The recipients were major corporate players, not local businesses or local governments. Fettig wrote:
Section 13(b) may be a memory, . . . but Section 13 paragraph 3 . . . is alive and well in the Federal Reserve Act. . . . [T]his amendment allows, “in unusual and exigent circumstances,” a Reserve bank to advance credit to individuals, partnerships and corporations that are not depository institutions.
In 2008, the Fed bailed out investment company Bear Stearns and insurer AIG, neither of which was a bank. Bear Stearns got almost $1 trillion in short-term loans, with interest rates as low as 0.5%. The Fed also made loans to other corporations, including GE, McDonald’s, and Verizon.
In 2010, Section 13(3) was modified by the Dodd-Frank bill, which replaced the phrase “individuals, partnerships and corporations” with the vaguer phrase “any program or facility with broad-based eligibility.” As explained in the notes to the bill:
Only Broad-Based Facilities Permitted. Section 13(3) is modified to remove the authority to extend credit to specific individuals, partnerships and corporations. Instead, the Board may authorize credit under section 13(3) only under a program or facility with “broad-based eligibility.”
What programs have “broad-based eligibility” is not clear from a reading of the Section, but it isn’t individuals or local businesses. It also isn’t state and local governments.
No Others Need Apply
In 2009, President Obama proposed that the Fed extend its largess to the cash-strapped cities and states battered by the banking crisis. “Small businesses and state and local governments are having serious difficulty obtaining necessary financing from debt markets,” Obama said. He proposed that the Fed buy municipal bonds to cut their rising borrowing costs.
The proposed municipal bond facility would have been based on the Fed program to buy commercial paper, which had almost single-handedly propped up the market for short-term corporate borrowing. Investors welcomed the muni bond proposal as a first step toward supporting the market.
But Bernanke rejected the proposal. Why? It could hardly be argued that the Fed didn’t have the money. The collective budget deficit of the states for 2011 was projected at $140 billion, a drop in the bucket compared to the sums the Fed had managed to come up with to bail out the banks. According to data released in 2011, the central bank had provided roughly $3.3 trillion in liquidity and $9 trillion in short-term loans and other financial arrangements to banks, multinational corporations, and foreign financial institutions following the credit crisis of 2008. Later revelations pushed the sum up to $16 trillion or more.
Bernanke’s reasoning in saying no to the muni bond facility was that he lacked the statutory tools.. The Fed is limited by statute to buying municipal government debt with maturities of six months or less that is directly backed by tax or other assured revenue, a form of debt that makes up less than 2% of the overall muni market.
The Federal Reserve Act was drafted by bankers to create a banker’s bank that would serve their interests. It is their own private club, and its legal structure keeps all non-members out. A century after the Fed’s creation, a sober look at its history leads to the conclusion that it is a privately controlled institution whose corporate owners use it to direct our entire economy for their own ends, without democratic influence or accountability. Substantial changes are needed to transform the Fed, and these will only come with massive public pressure.
Congress has the power to amend the Fed – just as it did in 1934, 1958 and 2010. For the central bank to satisfy its mandate to promote full employment and to become an institution that serves all the people, not just the 1%, the Fed needs fundamental reform.
Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her blog articles are at EllenBrown.com.
Filed under: Ellen Brown Articles/Commentary
Unternehmensgewinne Steigen auf RekordhÃ¶he — Die Superreichen Erfinden eine Neue Spielart des Amerikanischen Kapitalismus
- Republican Civil War Erupts: Business Groups v. Tea Party (BBG)
- Budget fight leaves Boehner 'damaged' but still standing (Reuters)
- Madoff Was Like a God, Wizard of Oz, Lawyers Tell Jury (BBG) - just like Bernanke
- Republicans press U.S. officials over Obamacare snags (Reuters)
- Brilliant: Fed Unlikely to Trim Bond Buying in October (Hilsenrath)
- More brilliant: Fed could taper as early as December (FT)
- Russia Roofing Billionaires Seen Among Country’s Youngest (BBG)
- Ford's Mulally won't dismiss Boeing, Microsoft speculation (Reuters)
- China reverses first-half slowdown (FT)
- NY Fed’s Fired Goldman Examiner Makes Weird Case (BBG)
- Italian protests against Letta government disrupt transport (Reuters)
- Transit workers strike again, will hamper Bay Area commute (Reuters)
Overnight Media Digest
* SAC Capital and federal prosecutors have agreed in principle on a penalty exceeding $1 billion in a potential criminal settlement that would be the largest ever for an insider-trading case.
* Insurers say the federal healthcare marketplace is generating flawed data that is straining their ability to handle even the trickle of enrollees who have gotten through so far.
* Chinese PC maker Lenovo is actively considering a bid for all of BlackBerry and has signed a non-disclosure agreement with the smartphone maker. ()
* A late surge of cases against low-level offenders will push the SEC's case total close to last year's levels, masking a steep drop in enforcement actions related to the financial crisis. While the total hasn't been announced, it likely will be down at least 5 percent from a near-record high of 734 enforcement cases in fiscal 2012.
* Google posted a 12 percent increase in third-quarter revenue, as it tries to keep pace with its users' shift to mobile devices.
* Video-streaming service Hulu on Thursday named Mike Hopkins as its new chief executive, effective immediately. Hopkins has been president of Fox Networks Group, a division of 21st Century Fox Inc, since 2008 and a member of Hulu's board since 2011.
* A U.S. district judge ordered subprime lender Household International Inc - now part of HSBC Holdings PLC - to pay investors $2.46 billion in a class-action lawsuit, a move that comes several years after a jury found the company liable for securities fraud.
* IBM is shaking up leadership of its growth-markets unit, following disappointing third-quarter results that prompted a critical internal email from CEO Virginia Rometty. She wrote that IBM's strategy is correct, but criticized the company for failing to execute in sales of computer hardware as well as in the growth markets unit, whose sales territory includes markets in Southeast Asia, Eastern Europe, the Middle East and Latin America.
Paul Tucker, the Bank of England's outgoing deputy governor, said regulators need to keep a stronger eye on hedge funds and shadow banks and added it would be disastrous if the economic fragility of banks was recreated outside the mainstream banking sector.
The U.S. Federal Reserve could begin reducing its asset purchases as early as December after the government shutdown sabotaged a crucial month of data and dealt a blow to the world's largest economy.
The next U.S. monthly employment report became a casualty of the U.S. government shutdown with the Department of Labor saying the data would be released after a delay of more than two weeks on Tuesday.
Scottish National Party leader and Scotland's first minister, Alex Salmond was involved in the talks between the management and workers Grangemouth refinery and petrochemicals complex. The management has closed off the refinery demanding that workers accept changes to pay, pensions and union representation in what has turned out to be Scotland's biggest industrial dispute in years.
Google shares rose 8 percent to a record high after the company managed a smooth transition of its advertising business to smartphones and tablets from PCs.
Goldman Sachs managed to protect its profits by slashing the amount of money set aside for year-end bonuses after its fixed-income trading was worse than any other large Wall Street bank's.
Barclays has approached the Court of Appeal to overturn an earlier ruling that allowed Guardian Care Homes, which is suing Barclays over interest-rate swaps, to amend its claim to include Libor-related allegations.
UK Ministers will look at the green measures that have contributed to rising fuel bills after British Gas became the second energy company to increase energy prices.
* Britain said on Thursday that it would allow Chinese firms to buy stakes in British nuclear power plants and eventually acquire majority holdings. The agreement, which comes with caveats, opens the way for China's fast-growing nuclear industry to play a significant role in Britain's plans to proceed with construction of its first new reactor in nearly two decades.
* The hedge fund SAC Capital Advisors is moving closer to a plea deal with prosecutors that would force it to wind down its business of managing money for outside investors, punctuating its decline from the envy of Wall Street to a firm caught in the government's cross hairs. An agreement to stop operating as an investment adviser is one feature of a larger agreement SAC is negotiating as it seeks to resolve insider trading charges, according to people briefed on the case.
* On Thursday Goldman Sachs Group Inc announced that revenue in its fixed-income, currency and commodities division, a powerful unit inside the bank that in better years has produced more than 35 percent of its entire revenue, dropped 44 percent from year-ago levels. The weakness renewed worries about the headwinds that Goldman and other banks are facing in big money-producing areas like fixed-income trading.
* Google Inc impressed investors, but people's changing behavior on mobile phones and even on desktops threatens the company's main business. The results revealed the company's deep challenges: as its desktop search and advertising businesses mature, along with overall business in the United States, its growth rate is slowing and the amount of money it makes from each ad it sells is falling.
* The United States government sputtered back to life Thursday after President Obama and Congress ended a 16-day shutdown, reopening tourist spots and clearing the way for federal agencies to deliver services and welcome back hundreds of thousands of furloughed workers.
* There is a confusion over the text of the deal that Congress just approved and President Obama signed, but it does not kill the debt ceiling. At first glance, the "default prevention" section of the bill seemed to imply that the president would have the authority in the future to increase the country's debt unilaterally, and that Congress could stop him only by passing a bill forbidding it.
* Roughly 1,500 fires burn above western North Dakota because of the deliberate burning of natural gas by companies rushing to drill for oil without having sufficient pipelines to transport their production. With cheap gas bubbling to the top with expensive oil, the companies do not have an economic incentive to build the necessary gas pipelines, so they flare the excess gas instead.
* As European interest in American craft beers begins to mirror the mania for them stateside, the Duvel Moortgat Brewery of Belgium on Thursday announced a deal to buy the Boulevard Brewing Co, a craft brewery in Kansas City, Missouri.
THE GLOBE AND MAIL
* Canadian provinces have approved the free-trade agreement with the European Union, but key players Ontario and Quebec are insisting the federal government open its wallet to mitigate some of the impact, notably by compensating dairy producers. Prime Minister Stephen Harper arrived in Brussels on Thursday night and plans to meet with Jose Manuel Barroso, president of the European Commission, on Friday afternoon to sign the agreement.
* The shortage of skilled employees in Canada is deepening, and government policies that tightened the rules governing foreign workers have made the situation worse. That is the message of a new study from global recruiting firm Hays Plc, which surveyed the skills gap in 30 developed countries around the world.
Reports in the business section:
* Lenovo Group Ltd is joining the list of suitors considering a bid for BlackBerry Ltd , raising concerns that the Canadian company's ultra-secure communications network for the global elite might end up owned by a firm based in China.
* Imperial Oil Ltd is looking at a major revamp of its Mackenzie gas project that would see the stalled northern venture reborn as part of an expansive liquefied natural gas development, the company's chief executive says. A shift to LNG is under "serious" consideration as the Mackenzie pipeline's economics remain weak due to the flood of cheap shale gas across the continent, CEO Rich Kruger said in an interview at the company's Calgary headquarters.
* The Quebec government has announced that it will contest the latest nomination to the Supreme Court of Canada, adding a new layer of controversy to the process. The provincial government says it is weighing different options to block the Harper government's appointment of Marc Nadon, which is already under attack.
* Canada's campaign to win approval in the United States for the Keystone XL pipeline may seem pricey, aggressive, and perhaps out of character - but it is a drop in the bucket compared with the resources and tactics of those rallying against it.
* Air Canada's chief executive, Calin Rovinescu, says he is pleased investors are starting to get on board with the dramatic transformation underway at his airline, including the near-elimination of its multi-billion-dollar pension funding deficit that has twice threatened to upend the company in recent years. But he said there are still plenty of challenges ahead for the country's largest carrier.
CHINA SECURITIES JOURNAL
- The China Securities Regulatory Commission approved China Everbright Bank Co Ltd's request to list H shares on Wednesday, according to sources. The bank plans to list in Hong Kong as early as November, but listing is subject to Hong Kong Stock Exchange approval.
- China has started laying the foundations for its fifth-generation mobile telephony network, said Dai Xiaohui, the deputy director of the Ministry of Science and Technology on Thursday at a communications forum.
- China has investigated 129 officials at prefectural level or higher for suspected corruption and bribery from January through August this year, the Supreme People's Procuratorate said on Thursday.
- Chinese officials should not blindly follow customary practices if such practices lead to waste or are not legal, said a commentary in the paper that acts as the government's mouthpiece. The article highlighted extravagance during opening and closing ceremonies as an example of a traditional practice best curbed.
- Beijing will take half the cars off the city's roads and suspend school classes when there are three straight days of heavy pollution, an official said on Thursday. The plan includes measures to increase buses and extend subway operating hours.
Fly On The Wall 7:00 AM Market Snapshot
AMAG Pharmaceuticals (AMAG) upgraded to Outperform from Neutral at RW Baird
Align Technology (ALGN) upgraded to Buy from Hold at Cantor
Amazon.com (AMZN) upgraded to Buy from Neutral at UBS
CBOE Holdings (CBOE) upgraded to Buy from Neutral at UBS
Essex Property Trust (ESS) upgraded to Buy from Neutral at UBS
Intuit (INTU) upgraded to Buy from Neutral at BofA/Merrill
Peabody Energy (BTU) upgraded to Outperform from Market Perform at BMO Capital
Union Pacific (UNP) upgraded to Buy from Neutral at Goldman
VMware (VMW) upgraded to Overweight from Neutral at JPMorgan
Verizon (VZ) upgraded to Buy from Hold at Deutsche Bank
AMD (AMD) downgraded to Neutral from Buy at BofA/Merrill
Alpha Natural (ANR) downgraded to Underperform from Market Perform at BMO Capital
Amarin (AMRN) downgraded to Neutral from Buy at Citigroup
Aspen Technology (AZPN) downgraded to Neutral from Overweight at JPMorgan
Baxter (BAX) downgraded to Market Perform from Outperform at Raymond James
Fairchild Semiconductor (FCS) downgraded to Hold from Buy at Canaccord
Home Bancshares (HOMB) downgraded to Market Perform from Outperform at Raymond James
International Rectifier (IRF) downgraded to Market Perform at Wells Fargo
LG Display (LPL) downgraded to Neutral from Outperform at Credit Suisse
Monolithic Power (MPWR) downgraded to Market Perform from Outperform at Wells Fargo
Navistar (NAV) downgraded to Underweight from Equal Weight at Barclays
Qualys (QLYS) downgraded to Neutral from Overweight at JPMorgan
SL Green Realty (SLG) downgraded to Hold from Buy at Cantor
Total (TOT) downgraded to Neutral from Buy at UBS
Ultratech (UTEK) downgraded to Hold from Buy at Canaccord
UnitedHealth (UNH) downgraded to Hold from Buy at Cantor
Clean Harbors (CLH) initiated with an In-Line at Imperial Capital
Covanta (CVA) initiated with a Hold at Stifel
Fidelity National (FNF) initiated with a Neutral at Janney Capital
Finish Line (FINL) initiated with a Neutral at UBS
First American (FAF) initiated with a Buy at Janney Capital
Gaming & Leisure (GLPIV) initiated with an In-Line at Imperial Capital
Masonite International (DOOR) initiated with an Outperform at RBC Capital
New Residential (NRZ) initiated with a Buy at Sterne Agee
Spectrum Brands (SPB) initiated with an Outperform at BMO Capital
Stewart (STC) initiated with a Neutral at Janney Capital
U.S. Cellular (USM) initiated with an Underperform at FBR Capital
Google CEO said 40% of YouTube traffic comes from mobile
Schlumberger (SLB) said global economic outlook remains unchanged
Fitch cut Darden (DRI) IDR to 'BBB-' from 'BBB', outlook stable
LabCorp (LH) board authorized additional $1B share repurchase program
AMD (AMD) sees PC shipments down 10% in 2013 and 2014
Waste Management (WM) to build renewable natural gas facility
Companies that beat consensus earnings expectations last night and today include:
Sensient (SXT), F.N.B. Corp. (FNB), AMD (AMD), Las Vegas Sands (LVS), Capital One (COF), Covenant Transportation (CVTI), WD-40 (WDFC), Google (GOOG), Align Technology (ALGN)
Companies that missed consensus earnings expectations include:
Valmont (VMI), Kaiser Aluminum (KALU), B&G Foods (BGS), athenahealth (ATHN), Greenhill & Co. (GHL), Acacia Research (ACTG), Stryker (SYK), Chipotle (CMG)
Companies that matched consensus earnings expectations include:
OceanFirst Financial (OCFC), Western Alliance (WAL), Werner (WERN)
- The long-running drama about when the Fed will start scaling back its $85B a-month bond-buying program might now last longer. It isn't clear when the first move will occur. The Fed is unlikely to start curtailing its bond buying at its next policy meeting Oct. 29-30, the Wall Street Journal reports
- Bank of America (BAC) is considering a checking account that wouldn't permit customers to overdraw their balances at an ATM or when making an automatic bill payment, sources say, the Wall Street Journal reports
- Ford (F) CEO Alan Mulally would not confirm or deny media reports that he is being sought to join Boeing (BA) and Microsoft (MSFT), Reuters reports
- Air France -KLM (AFLYY) is open to giving Alitalia its rightful role in a merged entity but only if certain conditions are met, CEO Alexandre de Juniac told French television. He said Alitalia needs deeper restructuring if Air France is to eventually hike its 25% stake and take control, Reuters reports
- DBS Group (DBSDY) is among banks that have advanced in bidding for Societe Generale’s (SCGLY) SA’s private banking assets in Asia, sources say. The division oversees about $13B, Bloomberg reports
- JPMorgan Chase (JPM) agreed to sell 1 Chase Manhattan Plaza to Fosun International, the investment arm of China’s biggest closely held industrial group, for $725M, Bloomberg reports
Cinedigm Digital (CIDM) files to sell 7.91M shares of Class A common stock
Crestwood Midstream (CMLP) files to sell 14M common units for limited partners
EV Energy (EVEP) files to sell 5M common units for limited partners
Evercore Partners (EVR) files to sell 3M shares of common stock
Stemline (STML) files to sell $90M of common stock
Voxeljet (VJET) 6.5M share IPO priced at $13.00
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Jan Brewer is the governor of Arizona and one of her three sons, Ronald, was charged in 1989 with sexual assault and kidnapping of a Phoenix woman. He was diagnosed suffering schizophrenia and, in 1990, was found not guilty by reason of insanity and sent to the Arizona State Hospital in Phoenix where he has been housed for the last two decades. Brewer is one of the lucky mentally ill or criminally insane people in the U.S. not forced to live out their sentence in a state jail or federal prison.
A 2006 report for the Department of Justice’s Bureau of Justice Statistics (BJS), “Mental Health Problems of Prison and Jail Inmates,” estimated that 1.25 million people suffering from mental health problems were inmates in U.S. prisons and jails. This is a four-fold increase from the BJS’s 1998 estimate of 283,000 incarcerated inmates with a mental illness.
Two recent BJS studies spotlight the horrendous conditions faced by the criminally insane in the American prison gulag. They reveal that U.S. prisons have become the dumping ground for an increasing number of mentally ill people and, more troubling, these people are subject to widespread and repeated sexual victimization. Prisons are coming to increasingly resemble hell on earth, a postmodern version Dante’s 8th level of Hell, Malebolge, an amphitheatre-shaped pit in which panderers, pimps, seducers and others are whipped, ducked in boiling pitch and their feet licked by flames.
* * *
In March 2013, CBS’s primetime Sunday news program, “60 Minutes,” featured an exposé on prison conditions in Chicago. It profiled Cook County Sheriff Tom Dart and argued, “with a shortage of mental facilities, jails have become the new asylums.” Sadly, the conditions found in Chicago are relatively humane compared to that found in prisons around the country. This is the sad lesson suggested by two recent BJS reports: “Sexual Victimization in Prisons and Jails Reported by Inmates, 2011–12: National Inmate Survey (NIS), 2011–12,” prepared by Allen Beck and others; and “Report on Sexual Victimization in Prisons and Jails (RSV),” edited by G. J. Mazza.
The NIS findings are pretty alarming: “In 2011-12, an estimated 4.0% of state and federal prison inmates and 3.2% of jail inmates reported experiencing one or more incidents of sexual victimization by another inmate or facility staff in the past 12 months or since admission to the facility, if less than 12 months.” It adds, “an estimated 3.6% of those identified with serious psychological distress reported inmate-on-inmate sexual victimization, compared to 0.7% of inmates with no indication of mental illness.”
In real numbers, incidents of sexual victimization are significant. The total U.S. incarcerated population is estimated at 2.3 million. Using a 3.5 percent victimization rate, about 80,000 men and women, boys and girls as well as those identified as LGBT or suffering a mental health disorder are subject to some form of sexual violence.
More enlightened prison systems offer inmates some form of mental health support. The NIS found “more than a third of prison inmates (35.8%) and jail inmates (39.2%) said they had received some counseling or therapy from a trained professional for these problems.”
Not surprising, those who saw a mental health professional were more likely to report being sexually victimized. Inmate-on-inmate sexual victimization is 3 to 4 times higher among inmates who had received mental health counseling and 2 to 3 times higher among inmates who take prescription drugs. The need for professional counseling is probably greater for those inmates subject to solitary confinement.
In 2005, the Supreme Court found in Wilkinson v. Austin that “no study of the effects of solitary or supermax-like confinement that lasted longer than 60 days failed to find evidence of negative psychological effects.” The mental-health consequences from such confinement take many forms. Inmates report an increase in problems sleeping, irrational anger, rage, lack of impulse control, confusing thought processes, hallucinations and depression, severe and chronic. Suicide and incidents of self-harm or self-mutilation (e.g., swallowing razors and repeatedly smashing his/her head against the wall) increase.
“Report on Sexual Victimization in Prisons and Jails (RSV)” is an even more revealing indictment of U.S. prison system. It provides detailed information about three so-called “High-Incidence Prisons.” Among the characteristics of those who are most victimized by inmate-on-inmate sexual violence those with the following characteristics: (i) being white or multi-racial, (ii) having a college education, (iii) having a sexual orientation other than heterosexual, and (iv) having experienced sexual victimization prior to coming to the facility. Among the characteristics of those who are most victimized due to staff sexual misconduct included: (i) having a college and (ii) experienced sexual victimization before coming to the facility.
Three prisons deemed high-incident facilities were singled out.
Fluvanna is a maximum-security prison for women in Troy, VA. It suffered a major scandal in 2007 when the former chief of security was charged with having sex with female inmates. He was convicted the following year. Current administration concedes it suffers from short staffing during critical early-morning and late-evening hours, when most sexual victimization takes place.
Allred is a maximum-security prison for men in Wichita Falls, TX. During the 2008-2009 period, its capacity was 3,682. In 2009, 4,693 inmates spent time at Allred; the average length of stay was 1,682 days, the longest stay was 5,306 days. Did someone say overcrowding?
Elmira, located in Upstate New York, is a maximum-security prison for men. During the 2008-2009 period, its capacity was 3,682 and, in 2009, the total number of inmates who spent any time there was 9,396. That year, two inmates committed suicide and 11 people attempted suicide.
The authors of the RSV study take up an advocacy voice, calling for system wide changes. Knowingly, they insist: “We know that sexual assaults can be reduced by changing attitudes toward potentially vulnerable populations, including female, LGBTQ, and physically frail inmates; paying close attention to institutional design and surveillance; providing offender education and staff training; improving operational policies and post orders; and monitoring adherence to established policies.”
* * *
American prisons have become the new mental institutions, asylums for lost souls. In Madness and Civilization, Michel Foucault notes that in 1656 the Hopital General was founded in Paris. It was not a medical establishment, but a juridical institution seeking to instill moral and religious order in those so imprisoned. While ostensibly aimed at the confinement of the insane, it also housed the unemployed or idle, prisoners and the poor. The confined included those identified as “the debauched, spendthrift fathers, prodigal sons, blasphemers” and “libertines.”
We’ve come nearly full circle in the last three-and-a-half centuries. As Rockefeller inspired lock-‘em-up drug-related policies wane in the face of the mounting fiscal crises faced by local and state governments, nonviolent drug offenders are being replaced by the mentally ill. The sad situation is that there are dwindling facilities for the civil confinement of those designated criminally insane or mentally ill.
Writing in the New York Review of Book, David Kaiser and Lovisa Stannow point out, “the asylums where people with serious disorders could once receive care were mostly closed down by the end of the Reagan era.” They point out that a half-century ago, in 1955, there were 558,239 beds for severely mentally ill patients in public psychiatric hospitals. Going further, they argue that, based on population growth, the number of beds should have been 885,000 by 1994. Sadly, the number of beds in public institutions were only 71,619 and “perhaps another 70,000” in private psychiatric hospitals.
The authors conclude, pessimistically, “Indeed, a visit to almost any prison or jail makes it distressingly clear that these institutions now house many of the people who need mental health treatment.” These prisons have become a modern-day hell-on-earth.