{"id":133366,"date":"2014-07-25T14:17:51","date_gmt":"2014-07-25T14:17:51","guid":{"rendered":"http:\/\/ellenbrown.com\/2014\/07\/25\/you-cant-taper-a-ponzi-scheme-time-to-reboot\/"},"modified":"2014-07-25T15:09:02","modified_gmt":"2014-07-25T15:09:02","slug":"you-cant-taper-a-ponzi-scheme-time-to-reboot","status":"publish","type":"post","link":"https:\/\/rinf.com\/alt-news\/editorials\/you-cant-taper-a-ponzi-scheme-time-to-reboot\/","title":{"rendered":"You Can\u2019t Taper a Ponzi Scheme: Time to Reboot"},"content":{"rendered":"

One thing to be said for the women now heading the Federal Reserve and the IMF: compared to some of their predecessors, they are refreshingly honest. The Wall Street Journal reported<\/a> on July 2nd:<\/p>\n

Two of the world\u2019s most powerful women of finance sat down for a lengthy discussion Wednesday on the future of monetary policy in a post-crisis world:\u00a0U.S. Federal Reserve\u00a0Chairwoman\u00a0Janet Yellen\u00a0and\u00a0International Monetary Fund\u00a0Managing Director\u00a0Christine Lagarde. Before a veritable who\u2019s-who in international economics packing the IMF\u2019s largest conference hall, the two covered all the hottest topics in debate among the world\u2019s central bankers, financiers and economists.<\/p><\/blockquote>\n

Among those hot topics was the runaway shadow banking system, defined by Investopedia<\/em> as \u201cThe financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.\u201d Examples given include hedge funds, derivatives and credit default swaps.<\/span><\/p>\n

Conventional banks also engage in \u201cshadow banking.\u201d One way is by using their cash cushion as collateral in the repo market, where they can borrow to invest in the stock market and other speculative ventures. As explained by Bill Frezza in a January 2013\u00a0Huffington Post<\/em>\u00a0article titled \u201cToo-Big-To-Fail Banks Gamble With Bernanke Bucks<\/a>\u201d:<\/p>\n

If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these \u201cbanks\u201d to use that cash as collateral to take out loans to gamble with. In a process called hyper-hypothecation this pledged collateral gets pyramided, creating a ticking time bomb ready to go kablooey when the next panic comes around.<\/p><\/blockquote>\n

Addressing the ticking time bomb of the shadow banking system, here is what two of the world\u2019s most powerful women had to say:<\/p>\n

MS. LAGARDE: . . . You\u2019ve beautifully demonstrated the efforts that have been undertaken . . . in terms of the universe that you have under your jurisdiction. But this universe . . . has generated the creation of parallel universes. And . . . with the toolbox with all the attributes that you have \u2013 what can you do about the shadow banking at large? . . .<\/p>\n

MS. YELLEN: So I think you\u2019re pointing to something that is an enormous challenge. And we simply have to expect that when we draw regulatory boundaries and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we won\u2019t be able to detect them. And if we can, we won\u2019t be \u2013 we won\u2019t have adequate regulatory tools. And that is going to be a huge challenge to which I don\u2019t have a great answer.<\/p><\/blockquote>\n

Limited to her tools, there probably is no great answer. All the king\u2019s horses and all the king\u2019s men could not rein in the growth of the shadow banking system, despite the 828-page Dodd-Frank Act. Instead, the derivatives pyramid has continued to explode under its watch, to a notional value now estimated to be as high as $2 quadrillion<\/a>.<\/p>\n

At one time, manipulating interest rates was the Fed\u2019s stock in trade for managing the money supply; but that tool too has lost its cutting edge. Rates are now at zero, as low as they can go \u2014 unless they go negative, meaning the bank charges the depositor interest rather than the reverse. That desperate idea is actually being discussed. Meanwhile, rates are unlikely to be raised any time soon. On July 23rd<\/sup>, Bloomberg reported that the Fed could keep rates at zero through 2015.<\/p>\n

One reason rates are unlikely to be raised is that they would make the interest tab on the burgeoning federal debt something taxpayers could not support. Higher rates could also implode the monster derivatives scheme. Michael Snyder observes<\/a> that the biggest banks have written over $400 trillion in interest rate derivatives contracts, betting that interest rates will not shoot up. If they do, it will be the equivalent of an insurance company writing trillions of dollars in life insurance contracts and having all the insureds die at once. The banks would quickly become insolvent. Worse, our deposits would get confiscated to recapitalize them, under the new \u201cbail in\u201d scheme approved by Janet Yellen as one of the Fed\u2019s more promising tools (called \u201cresolution planning\u201d in Fed-speak).<\/p>\n

As Max Keiser observes, \u201cYou can\u2019t taper a Ponzi scheme.\u201d You can only turn off the tap and let it collapse, or watch the parasite consume its food source and perish of its own accord.<\/p>\n

Collapse or Metamorphosis?<\/strong><\/p>\n

The question being hotly debated in the blogosphere is, \u201cWhat then?\u201d Will economies collapse globally? Will life as we know it be a thing of the past?<\/p>\n

Not likely, argues John Michael Greer in a March 2014 article called \u201cAmerican Delusionalism, or Why History Matters<\/a>.\u201d If history is any indication, governments will simply, once again, change the rules.<\/p>\n

In fact, the rules of money and banking have changed every 20 or 30 years for the past three centuries, in an ongoing trial-and-error experiment in evolving a financial system, and an ongoing battle over whose interests it will serve. To present that timeline in full will take another article, but in a nutshell we have gone from precious metal coins, to government-issued paper scrip, to privately-issued banknotes, to checkbook money, to gold-backed Federal Reserve Notes, to unbacked Federal Reserve Notes, to the \u201cnear money\u201d created by the shadow banking system. Money has evolved from being \u201cstored\u201d in the form of a physical commodity, to paper representations of value, to computer bits storing information about credits and debits.<\/p>\n

The rules have been changed before and can be changed again. Depressions, credit crises and financial collapse are not acts of God but are induced by mechanical flaws or corruption in the financial system. Credit may stop flowing, but the workers, materials and markets are still there. The system just needs a reboot.<\/p>\n

Hopefully the next program that gets run will last more than 20 or 30 years. Ideally, we might mimic the ancient Mesopotamians, the oldest and most long-lasting civilization in history, and devise an economic system that lasts for millennia. How they did it, along with some other promising models, will be the subject of another article. For more on this, see The Public Bank Solution<\/a>.<\/p>\n

About Those Derivatives<\/strong><\/p>\n

How to kill the derivatives cancer without killing the patient? Without presuming to have more insight into that question than the head of the Fed or the IMF, I will just list some promising suggestions from a variety of experts in the field (explored in more depth in my earlier article here<\/a>):<\/p>\n