Join Jason Hartman and returning guest, Ellen Brown, author of Web of Debt, for a discussion of the United States’ debt ceiling, QE2, inflation, as well as a brief explanation of how money came to equal debt. Ellen explains why the debt ceiling is unconstitutional, how the government is legally committed to paying its debts. She points out the contradiction that has been for more than 100 years, since WWI. The easing put into place at that time was only to be a temporary measure. For more information, listen at: www.JasonHartman.com. Ellen also talks about shadow banking causing the crisis by money being lent into existence, slight of hand. The only real money are coins, which are one-tenth of the total money in circulation. Ellen also discusses QE2 , where the government agreed to pay the interest on borrowed money in order to maintain control of the Federal Funds rate. She said there are a lot of reserve funds on the books in certain foreign banks, including bond dealers, that is just being held. Ellen also touches on the national debt, Glass-Steagall, and proposes state-owned banks as part of the solution, with the basic idea that we take care of our own, much the same way that Japan is reliant on their own Central Bank.
Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua. She returned to practicing law when she was asked to join the legal team of a popular Tijuana healer with an innovative cancer therapy, who was targeted by the chemotherapy industry in the 1990s. That experience produced her book Forbidden Medicine, which traces the suppression of natural health treatments to the same corrupting influences that have captured the money system. Brown’s eleven books include the bestselling Nature’s Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.
Introduction: Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing. Fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self-made multimillionaire who not only talks the talk, but walks the walk. He has been a successful investor for 20 years and currently owns properties in 11 States and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it and now here is your host Jason Hartman with the complete solutions for real-estate investors.
Jason: Welcome to the Creating Wealth Show, this is your host Jason Hartman, and this is Episode #7364, just kidding Episode #242, but I can’t want until we have that many episodes behind us. We’ve got a long future here. Anyway how’s everybody doing? Thank you so much for all your interest in the last couple of shows. I know a lot of you were just jumping out of your chairs at the financing that really frankly very unbelievable financing that we talked about on Episode #241 for foreign nationals and IRA buyers and people with more than 10 properties that it’s just a phenomenal opportunity.
So there are some really good stuff and you know what is so nice about this folks? Never in all my years – there are more years I have been in this business than frankly I cared to admit, but you’ve heard me slip a couple of times in the show so you probably know the number. But anyway, in all my years I’ve really never seen a scenario where private money or hard money financing really works for both the lender and the borrower like I am seeing today and why is that? Well, it’s because capitalism – it’s not perfect, it’s just better than everything else and capitalism has rushed into fill the void left by the dysfunctional complete scams known as Fannie Mae and Freddie Mac in the secondary market and Wall Street, their collateralized debt obligations and all that garbage out there and it’s rushing to fill the gap, but it’s also rushed in another way to capitalism has worked so well and it would work a lot better frankly if the government would get out of the way. But the market has adjusted so much that the combination of people buy properties based on a payment, right? They don’t really care much about the price of the house or the apartment complex. They care about the effective cost and the effective cost consists of what can you obtain financing for and what is the price? It’s the blend of those two items and of course there are other items in there expenses, property taxes et cetera, but really it’s the major thing is the fact that the difference of the price and the combination with the financing, right? And so prices have corrected so much in some markets where you are buying far below the cost of construction and then you get financing that’s reasonably good. And why is that financing are reasonably good? Well, the reason private financing actually can make sense for a borrower now, okay. And what we talked about by the way, I’m kind of blending two subjects here.
But what we talked about on Episode #241 was not private financing in the strictest sense that is through a bank and a community bank and lot of times you can get these pretty good deals through community banks and that is I don’t want to say totally exclusive to us, but it’s almost exclusive because it came through a special relationship, a banking relationship with our vendor who we have a long relationship with and you are not going to hear about that much of anywhere else. There will be, I don’t want to say totally not anywhere else, because there will be what a certain competitor of ours is back from vacation, that competitor will probably be offering it, but you know that again folks, we don’t really have any competition, that’s what I always learned from [unintelligible 04:20] old days. If you constantly think of how your business will be done five years from now, 10 years from now, you really don’t have any competition and when you look at a company like Apple, the most valuable company on the planet by far especially with their stock lately [Laughter] that’s just incredible, but an amazing company, no question about it, when you look at that, you know, a company that thinks in the future and thinks in an innovative way, I mean, really do they really have much competition at all? Well, not really, but anyway, back to this banking thing.
So, you see a special deal like that that we talked about on the last episode, unbelievable financing, IRA buyers, foreign nationals, people with more than 10 properties, even people that are credit challenge and you see the private financing that so many of you have expressed an interest in lately. And by the way if you are interested just e-mail me email@example.com, again I’ll make the introductions is because when it reaches a good effective cost and it makes sense for the borrower and the lender alike, everything really meets and that’s when you have what’s known as price discovery. So you have price discovery in terms of this private financing now making it a great deal for both parties. And oddly enough someone might be a borrower on some of this private financing offered through our network and a lender at the same time and you think, how can that be? Isn’t it like going to the casino and betting on red and black in roulette? Well not exactly, because different deals happen in different time frames and in different marketplaces and so forth. So, it’s really kind of interesting how I am seeing that unfold with our clientele how sometimes they will be a lender and then other times that very same person will lend money to another party will be a borrower and boy, it just works both ways because of the particular circumstances in which they find themselves. So, some great stuff there.
We are going to talk a lot more about private lending at our next Meet the Masters event in March and by the way, we just bought a totally new speaker on land trust and I am really quite excited about that. I got his package, reviewed it, it’s pretty darn interesting, not hype, not scammy like so many speakers on that subject out there. I interviewed him for the show and he will be a speaker at our Meet the Masters event. So we are getting some variety, we are getting some new speaker so for those of you groupies out there, we appreciate you coming back every time some of you have been to every single Meet the Masters event and we love to see you coming back. But we are a little worried that you might get bored and you need some new speaker so we are going to have someone and this would be the first time we present the St. Louis market at any of the Meet the Masters events.
So we’ve got that lined up and I think that’s going to be a real show stopper. And we are going to do another – another thing that we are going to do, it’s really interesting, you know, we have done client panels for at that event, but this time we are actually going to do a local market specialist panel and we might even pick on the clients just a little bit [Laughter] because what we are going to do is we are going to have you hear from people who are very very experienced vendors or local market specialist and investors in their own right and we are going to have you here about some of the problems and some of the things and some of the areas in which investors shoot themselves in the foot some of their own mistakes that they have made over the years, over many years and just kind of really open it up to you about that. So we are not doing a quiet panel this time, but this would be the first time that we are actually doing a vendor panel and I think that’s going to be very interesting. So that will be Saturday night and it’s just was going to be an awesome event.
We are trying to keep it new and stimulating for those of you who keep coming back and also of course for those of you new attendees as well. Before we get into today’s interview, we’ve got our guest today is Ellen Brown. She is the author of Web of Debt. She talks a lot about monetary policy, fiscal policy, federal reserve that kind of stuff and she has been on the show before a long long time ago and I want to say that’s back in like #90 or a 100 right away on there, but we are going to have her on today on show #242 to talk about some fairly new developments and that interview was recorded just about I don’t know two months ago maybe so we got to get it aired. Again, these interviews don’t always have to be super timely because this stuff changes start of slowly. It’s not like breaking news, but it’s still very interesting and one of our clients Steve sent me a really telling article and it fits in with today’s guest interview a little bit because she really is an expert on Federal Reserve stuff. And I guess what happens is the federal, and I say federal in quotes because the federal reserve is just about as federal as federal express of course you all know that.
It’s a pseudo governmental entity created back in 1913 and it’s really largely been a scam, but we know how we can exploit that scam to our benefit as investors and by the way, I did an interview today with the author of an interesting book I read a couple of months ago entitled the age curve and he is a demographer who talks about how demographics affect the economy and so forth similar to way Harry Dent does and of course we had Harry Dent on the show in the past, but this was interesting because he predicted on the show that you will hear in several episodes we’ll play that one for you, but he predicted that Obama was going to win the election in November and most of you regular listeners probably know how I feel about that and that’s not positive, I am not a fan of any big government socialist type of policy which, you know, I think Obama represents that all too well because, you know, he is the first president in history that has increased our debt by $5 trillion, that’s trillion with a T, and inside of you know basically three years. So what if we give him five more years in office and he doesn’t have to worry about re-election, you know, I think he is really going to go all out, but hey, you know what? Who cares as much as I may hate it philosophically we know how because we are starting this stuff, we know how to exploit the heck out of that as investors and that’s going to benefit us big time, but what a way to hear this article. And frankly, I kind of hate to read it to you because I am not a voice-over person so I always think my reading does not sound very good. But this is a New York Times article and what’s interesting about it is I guess what happens and I didn’t know this before reading this is that the federal reserve transcripts of their meetings are kept private or secret. The federal reserve is very secretive first of all, but I guess the transcripts of their meetings are released after five years.
So, this is interesting because this article details a meeting that the Federal Reserve had in back in 2006. Okay, now you all know what was going on in 2006, we were on the verge of catastrophe back then and you know, well life looked pretty grim there for a while, but you know obviously life goes on and the market adjusts and things are really kind of coming back and you know, I have to say from my side of the spectrum I see investors coming out of the woodwork, I see business being very strong right now, it was pretty decent last year, but I think this year it will be even better and this article just it blew my mind reading this, okay, New York Times article and forgive me, our client Steve sent it to me on January 13th but I do not see a date on this article.
So I am just going to read you some of it and I hope, I don’t know, I kind of think you can tell where my snarky commentary comes in and what is in the article that’s sort of too hard to chop it up and say while I am commenting, but I think you can kind of tell and I will try and make that obvious in the inflection in my voice. But the article is entitled and you know, if you want to Google this article, read it yourselves because I am not going to read the whole thing, but the article is entitled, Inside the Fed in 2006: A Coming Crisis, and Banter, and it’s just really, really telling. And it’s amazing to me how the people who are charged with leading our economy that the brightest guys in the room so to speak, The Smartest Guys in the Room, there was a documentary about Enron with that name that by the way is really interesting and if you haven’t seen it I recommend you. I don’t know if it’s on Netflix but look it up and check it out. That’s The Smartest Guys in the Room about Enron, but it’s really amazing how stupid these people are [Laughter] just how stupid, how careless, how just wrong they have been in so many ways and I want to make my full disclosure here because one of the parts in this article talks about how they did not realize how intertwined the housing market had become and how it had become so intertwined with Wall Street and the financial markets.
Years ago those are really kind of two separate things, you know, housing was housing, real-estate was real-estate and Wall Street and banking. And when I say banking I don’t mean mortgage lending and foreclosures, I mean, the broader concept of banking before Glass-Steagall or back in the days of Glass-Steagall I should say and all of that stuff. They really weren’t intertwined they are now and you know what? I didn’t realize that either. And that’s one of the reasons I underestimated how bad this crisis would become because look, I knew in 2003, 2004, 2005, I mean, I was in the business, I saw it and I knew lending was far too careless, I knew that a lot of these borrowers would default. I knew that there was a mass of amount of fraud going on in the mortgage business. Heck, I had a mortgage rep to work for me, remember I owned a couple of different mortgage businesses within my traditional real-estate company or Platinum Properties International. I sold that company to Coldwell Banker affiliate back in 2005 and you know, I had a couple of different mortgage arrangements over the years some that I owned outright and some that were affiliated business arrangements or net branches, you know, they had all these different hybrids of businesses and I knew there was a lot of fraud, I mean, I had this one guy that worked for me and if you ask me the guy was a crook, you know, it just almost didn’t matter what the truth was. [Laughter] I don’t think, you know, in the mortgage business in the hay day there and it was really disgusting frankly, but I weeded him out of my business as quick as I could but I knew that that was going on. I knew there would be a foreclosure issue. Well Gosh, did I know about these complicated, crazy derivatives and the collateralize debt obligations and the forms of fake instruments that were being traded on Wall Street and they bankrupted the country of Iceland, heck no, I didn’t know any of that. Well Gosh, I am just a commoner, I am just an everyday guy that pays attention and studies the economy in the markets. I am not an insider in the Federal Reserve or the Treasury department, I mean, they should know. Ben Bernanke and Alan Greenspan, they should know when you are going to see how hopefully ignorant Bernanke was in this article.
So without further due let me just read some of the stuff to you. Okay, it’s mind-boggling, Washington. As the housing bubble entered its waning hours in 2006, top Federal Reserve officials marveled at the desperate antiques of home builders seeking to lure buyers. The officials laughed about cars that builders were offering as signing bonuses. In other words, what that means folks is that builders were offering – they would give you a car if you buy a house or a condo, it’s amazing and about efforts to make empty houses look occupied. They joked remember this is a transcript of the meeting. It was a private meeting among Federal Reserve officials, okay. That’s my commentary and here you are hearing about what happened behind closed doors. They joked about one builder who said that inventory was rising through the roof, but officials meeting every six weeks to discuss the health of the nation’s economy gave little credence to the possibility that the faltering housing market would weigh on the broader economy according to transcripts the fed released on Thursday. Instead, they continued to tell one another throughout 2006 that the greatest danger was inflation. The possibility that the economy would grow too fast. [Laughter] Are you kidding me? That’s just amazing that someone would think that in 2006, right? Okay, back to the article. “We think the fundamentals of expansion going forward still look good” – Timothy Geithner, that’s TurboTax Timmy, right? Timothy Geithner, the then president of the Federal Reserve Bank of New York told his colleagues when they gathered in Washington in December of 2006. Some officials including Susan Bies, I guess this is how you pronounce up, a fed governor suggested that the housing downturn would actually bolster the economy by redirecting money into other kinds of investments and there was general acclaim for Alan Greenspan who stepped down as Chairman at the beginning of the year for presiding over one of the longest economic expansions in the nation’s history.
Now, what’s funny there in my commentary, the Greenspan in his early days was a friend and a fan of the famous author – the late famous author Ayn Rand who wrote a great book entitled Atlas Shrugged, which if you have not read Atlas Shrugged you need to read that book. It is the most incredible 1200 pages you are likely to read anytime soon and The Fountainhead and many other books. If you want a short Ayn Rand book to read by the way, a one that I like is just a collection of essays and the title really has nothing to do with the contents, but it’s called The Virtue of Selfishness and I would highly recommend you read it, really interesting little collection of essays there.
Anyway, what’s interesting about Greenspan in my commentary is that Greenspan being a devotee of Ayn Rand who actually gave a eulogy at her funeral and I think she passed away in her early 80s if not mistaken and Greenspan became the total sell out, the total Keynesian, prime the pump, print fake money, create inflation, create money out of thin air, totally contradictory to anything Ayn Rand would have ever believed, okay. And so that’s just amazing to me, right, my little commentary on Greenspan there. Anyway, it says, Mr. Geithner suggested the Greenspan’s greatness [Laughter] still was not fully appreciated in opinion now held by a much smaller number of people. Meanwhile, by the end of 2006, the economy already was shrinking by at least one important measure: total income and by the end of the next year, the Fed had started its desperate struggle to prevent the collapse of the financial system and to avert the onset of what could have been the nation’s first full-fledged depression in about 70 years.
The transcripts of the 2006 meetings were leased out through a standard five year delay, now my comment, why the heck aren’t they released right away? Why is any of this stuff secret or why do we even have a Federal Reserve in the first place, my thinking, but back to the article, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken. “It’s embarrassing for the Fed,” said Justin Wolfers, an economics professor at the University of Pennsylvania. “You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets.” “It’s also embarrassing for economics,” he continued. “My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.” Many of the officials who appear in the transcripts have since spoken publicly about the Fed’s failings in the years before the crisis. But the transcripts provide a raw and detailed account of those errors as they were made. Evidence of the problems in the housing market accumulated at each meeting of the Federal Open Market Committee, which sets policy for the central bank. “We are getting reports that builders are now making concessions and providing upgrades, such as marble countertops.” And by the way they got that wrong. I am sure they weren’t marble, they were probably granite. People don’t usually do marble countertops because marbles are too porous and absorbs liquids so granite would be a better choice anyway and other extras, and in one case even throwing in a free Mini Cooper to sweeten the deal,” George Guynn, I guess this is how you said that, then president of the Federal Reserve Bank of Atlanta, said at the June meeting.
The committee consists of the governors of the Federal Reserve and the presidents of the 12 regional banks. “The speed of the falloff in housing activity and the deceleration in housing prices continue to surprise us,” said Janet Yellen, then president of the Federal Reserve Bank of San Francisco, said in September. One builder she spoke with, she said, “toured some new subdivisions on the outskirts of Boise and discovered that the houses, most of which are unoccupied, are now being dressed up to look occupied — with curtains, things in the driveway, and so forth — so as not to discourage potential buyers.” Wow! Can you believe it folks what a scam? You know, I mean, this is just like window dressing everywhere you look. Anyway back to the article. For a famously private institution known for its cryptic, formulaic statements, the meeting transcripts offer a rare glimpse of senior officials in relatively unguarded conversation, somewhat akin to the tapes that some presidents made in the Oval Office. My comment, are you thinking Richard Nixon there folks? Wasn’t it like eight – I’m just talking now, wasn’t it eight minutes had disappeared, those missing tapes from the Oval Office? Anyway back to the article. The Fed officials exchange jokes, gossip about people who are not present, and speak much more frankly about the economy and policy than they did in the public remarks that they made contemporaneously. The results are unlikely to burnish any of their reputations, in as much as they could not see the widening cracks beneath their feet. But the Fed’s chairman, Ben Bernanke, appears as the most consistent voice of warning that problems in the housing market could have broader consequences. Well Ben, I’m impressed by that. You know, I think Ben is largely full of it when I hear him on 60 minutes. Was he been on 60 minutes twice now? A sitting Federal Reserve Chair has never ever been on 60 minutes before. That’s how crazy the times we live in, alright. Anyway, the general consensus on the board, summarized by Mr. Geithner, was that the problems in the housing market had few broader ramifications. “We don’t see troubling signs yet of collateral damage, and we are not expecting much,” Geithner said at the September meeting. Mr. Bernanke initially agreed, telling colleagues at his first meeting as chairman, in March, “I think we are unlikely to see growth being derailed by the housing market.” Can you imagine folks? My comment here, these are the smartest guys in the room and they have access to information we don’t have, they know things we don’t know. They have insider information and can you believe how optimistic they are, but Bernanke starts to get a little cautious and I am impressed. The article goes on. As the year rolled along, however, Mr. Bernanke increasingly took the view that his colleagues were too sanguine. “I don’t have quite as much confidence as some people around the table that there will be no spillover effect,” he said. As for Mr. Geithner, who became Treasury secretary in 2009, of course remember Obama point at the guy who can’t even file his own tax returns and now he is Treasury secretary, craziness.
Okay, back to the article. In 2009, his spokesman, Anthony Coley, said, “Secretary Geithner was an early source of initiative at the Fed to reduce risk and make the financial system more resilient even before 2006.” Some Fed officials argued that a housing slowdown would be good for the broader economy. Now we’ll think about that one. Now this is interesting. “I really believe that the drop in housing is actually on net going to make liquidity available for other sectors rather than being a drain going forward, and that will also get the growth rate more positive,” Ms. Bies told colleagues at the committee’s June meeting, but she could not be reached for comment Thursday. I’m almost done here folks. And even Ms. Yellen did not believe that the problems in the housing market would have broader consequences. “Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting,” she said. Well, folks, you know what? That’s kind of true. It would be more self-correcting without so much government intervention, my comment. One fundamental reason for this blindness was that Fed officials did not understand how deeply intertwined the housing sector and financial markets had become. They were also convinced that financial innovations, by distributing the risk of losses more broadly, had increased the strength and resilience of the system as a whole. Folks, you can just Google and find this article and read it for yourselves, but that to me is mind boggling. It is scary how little the smartest people in the room, the people who we have charged to lead our country, to lead our economy Geithner appointment by Obama, I mean, just I’m not going to say what I want to say in the show because that’s just my boggling here really is. Anyway, let’s get to Ellen Brown, author of Web of Debt, this Meet the Masters event coming up in March, be sure to join us. We are labeling the theme for this and Doug thought of it so thank you for this one. The theme for this Meet the Masters event will be revenge of the cash flow investor, that’s right. Revenge of the cash flow investor. So we are going to talk a lot about cash flow at this next event in March so be sure to register at jasonhartman.com and we look forward to seeing you there and we will be back with Ellen Brown in just a moment.
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Jason: It’s my pleasure to welcome Ellen Brown to the show. She is the author of Web of Debt and she is talking to us today from Basel, Switzerland. So we are going to try and make the sound quality as good as possible and if you’ve heard her on the show before, you’ve heard that she talks a lot about monetary and fiscal issues and it’s going to be really interesting because we are going to get her perspective a little bit from Europe and on the latest crazies and things that are going on, talk about the debt ceiling et cetera. Ellen, welcome, how are you?
Ellen: Hi, thanks Jason, I’m fine.
Jason: Well, good. It’s good to have you up on the show. So, first of all, the most recent big fiasco and the news as far as monetary issues and fiscal issues is of course the debt ceiling. You say that the debt ceiling is unconstitutional. Tell us what you mean by that?
Ellen: Well, it’s in the constitution that the government should – will pay all its debt or its agreements, everything it’s already agreed to and the debt ceiling involves a budget that has already been passed so we have already agreed, we are already committed to those things, I mean, it could be things like social security, I mean, it’s either legal agreement and so that would be a violation of that constitutional amendment to impose the debt ceiling after the fact and we had this debt ceiling contradiction ever since – well after about 100 years and had to do with World War I when we are attempting to persuade our creditors that we want to just continue to finance things through debt like it was sort of like it shouldn’t be a temporary measure of just issue these bonds and of course we did. We kept raising the debt ceiling periodically and it’s always been assumed that we are raising debt ceiling. So that’s it that it would be a breach of the social insecurity to actually pay on time. It’s the duty in the constitution.
Jason: So, what do you think was another increase in the debt ceiling and we’ve had so many so far and just the amount of easing and money printing out there, what are your thoughts about inflation and deflation? I mean, the deflation is to say there are still more deleveraging coming but maybe we’ve gone through the major share of it. The inflation is say the money printing is ramped and the future is very inflationary and frankly I think the present is already pretty inflationary in so many things. What are your thoughts on inflation versus deflation?
Ellen: Well, there are two definitions of inflation. One involves prices and the other involves the size of the money supply and the money supply has actually shrunk. And the reason is that M3, what they used to report up until 2007…
Jason: Right that they stopped reporting now, that’s a little been suspicious as a way to maybe hide inflation, but go ahead with what you say.
Ellen: Well, it included what’s called the shadow banking system so it included the money market and the savings or the money of large institutional investors and they tended to put it in the money market. So the whole shadow banking system is this thing that collapsed in the fall of 2008, there was a freeze in the money market and that sort of precipitated this whole crisis. So that shrunk by $5 trillion and you can see it particularly in housing crisis. I mean, if you consider that loans are an asset or therefore, you know, that is counted as an asset and books of the banks and the value of all these properties have shrunk and in that sense the money supply has shrunk. So, the Fed has only put back two or three of that to you anyway and so there is still a large gap between the amount of money in circulation available for trade compared to what was there in 2007 before we started to have all these problems.
Jason: That’s because what you are saying is that the credit supply has shrunk and money in circulation plus credit available I guess is maybe have made all the gap.
Jason: Yeah. Right, sure.
Ellen: Virtually within the coins.
Jason: Yeah, that goes into a bit of a more esoteric thing which I would love for you to explain and the listeners have heard that before how money is debt, but do you want to maybe just explain that real quickly because a lot of that’s – it’s pretty hard for people to get their head around that concept initially when they are looking at this stuff?
Ellen: Well most, you know, let’s say, I mean, you see the – you learn this in school and you see pictures of the Bureau of Engraving and Printing it are these printing presses running and they are government’s printing presses so you figure that the government prints the money, but that’s not really where the money comes from. It’s the Federal Reserve that authorizes the Bureau of Engraving and Printing to print and it gets these bills for I think now 6 cents a bill even if it’s a $100 bill or whatever it is. So, these are – this is Federal Reserve money – bank notes. It goes back to the 19th century when bank notes were literally issued by individual banks and they had the name of the individual bank on it.
In 1913 this Federal Reserve took over that process and so instead of many banks issuing their own bank notes you had one Central Bank issuing supposedly the currency of the country, but when the Fed issues the money they don’t just hand it over to Congress to do with as they will. They lend it. So all that money comes into – it gets into the money supply in the form of loan and then they basically lend it to banks as they need it and that’s still only a small portion of the money supply. Most of the money supply is created by banks themselves, private banks when they issue loans.
So that’s another misconception most people think that banks are lending their deposited money, but in fact they make this loan first. They make a loan whenever a creditworthy buyer walks in the door and they raise the loan into the account of the borrower as the deposit and then when they need the deposits is when that borrower writes checks on his account that go into another bank or for somebody to leave the bank and then the checks have to clear and they clear usually through the Federal Reserve which is just watching the money coming in and the money going out. And at the end of the day you have to have as much coming in as going out because the banks are always, you know, right at the margin. Now it’s operated [unintelligible 37:01] because they don’t want X checks, money siting around doing nothing. So, to get that money to clear their checks, they have to borrow form other. They typically borrow from other banks or they borrow from their own depositors, but they are still actually lending the money they got from the depositors. All they are doing is clearing the checks with that, I mean, they are just making the books balance because the money still belongs to the depositor so you are double counting that how is it that – well you never go to the bank and they say, sorry, we just rent your money out to Mr. Smith, come back in 30 years. It’s always available for you and yet supposedly the deposits are backing the loans to their borrowers. So what you are doing is you are drawing from this pool so there is just a limited pool here and they are using it well under Fractional Reserve Lending you can use it – you could make it grow by a factor of 10. So, if you had a 10% reserve requirement, you would have to hold back 10% of your deposits and you could lend out 90%, but meanwhile the deposits always stay in the bank and yet you are allowed to issue a loan equal to 90% of your deposits. And then that loan would become a check which go into another bank which would now have say was the $9000 loan. Now they can lend $8100 of that excluding that 10% so that’s how it multiplies until a $100 become the $1000 there.
Jason: It’s unbelievable, the way to look at this is that money is lent into existence, right? Is that a fair way to say that.
Jason: Money is lent into existence. I want the listeners to remember that money is lent into existence, very very important concept and really it’s hard to get one’s head around that. It really is. You really have to think about the way that happens out there, but that’s a good explanation so thank you.
Ellen: Well, and they don’t want us to get our heads around this, you know, when just recently Bernie Sanders, you know, there was this $16 trillion audit, I mean, audit as I said that showed that there was $16 trillion that had been advanced through the banks in short-term loans in order to save them from the credit crisis, I mean, I guess that’s been advanced ever since 2007, but Ben Bernanke resisted and resisted and he said no, you know, people would lose confidence in their banks if they understood, if they knew all these details.
Jason: If they knew this scam that [Laughter] is being portrayed, right? Yeah.
Ellen: If they saw how this sausage is made. The point is that the banks don’t have the money, they never have the money until after they make the loan and then they scramble around and find it, they borrow it from some other bank, but it’s still a deposit in the other bank, you know, they are borrowing against these deposits basically or lending against these deposits.
Ellen: So, it’s all like a [unintelligible 40:03].
Jason: Yeah, it really is.
Ellen: Except for coins.
Jason: Except for what? Sorry, we didn’t hear you there.
Ellen: Coins are created by the government and they are issued outright so they are real money. I mean, they are debt free money, but that’s only a billion dollars out of the whole, it’s like one ten-thousandth of the money supply and then arguably the money that the Fed has added by quantitative easing is interest free money. I mean, they do lend it into the system, but they didn’t – the Fed didn’t borrow it to get that money.
Jason: Well, let’s talk about QE2 for a moment here. So, QE2, Quantitative Easing 2, not to be confused with the Queen Elizabeth 2, the ship, [Laughter] because it’s funny they report to that as the QE2 also. So, what is it in – did it fail or did it work? I think it failed.
Ellen: It did, but I think they do need a QE3, I mean that it was not a bad idea but the problem with QE2 was, it was $600 billion that was supposedly for the purchase of long-term government debts, but in the 1930s there was a law passed that said that the Federal Reserve could not buy bonds directly from the government. Now this is just a banker rule as far as I can see it just to make sure that the banker middlemen get in there.
So, well, I mean, the justification was there would be QE for Congress to just walk right over the Fed and get the money, you know, just right out and just borrow it. So instead the Fed has to borrow on the open market which means they have to borrow from these particular bond dealers. I think there is 22 of them or there were 23 of them that are allowed to sell bonds to the Fed. Well, more than – oh, it’s 20 I guess. So 12 of these are now foreign banks and they do it as secret auction. So these foreign banks won the auction, I mean, most of these money was sold to foreign banks because they had more incentive to get the money than the other banks. They have this problem in Europe for one bank they have their own credit crisis and they could give the carry trade where they can get a nice – they can just turn out and use this very cheap money for collateral for their own investment purposes.
Anyway, so have it wound up largely in foreign banks and they – it’s just sitting on their books. I mean, I think the major mistake that the Fed made on that was that they agreed to pay interest on these excess reserves so they are now $1.6 trillion in excess reserves sitting on the books of the banks and not doing anything. So that was the mistake. The reason the Fed take the interest is to maintain control over the Fed funds, right, which is so arcane and obscure it’s really hard to even, I mean, to understand, but they don’t explain, but their theory is that they don’t have any other means of control so therefore, you know, as long as they can control the interest rates of banks borrowing from each other that’s the Feds funds, right, then they still have control over the money supply, but they don’t and they absolutely have no control over the money supply.
But anyway, the Fed’s funds, right, they don’t wanted to go any lower than 0.25% and so they figure if they pay interest like that themselves then there is no incentive for the banks to borrow from each other. But, I mean, surely the Fed itself understands how the whole banking system works. They have to borrow from each other. That’s how – that’s where you get credit. I mean, that’s where you get your credit line. So, you could argue well at one point it’s trillion sitting on – and actually two-thirds sitting on the books of the bank, why do they need to borrow from for? But the thing is they are only sitting on the books of particular banks largely the foreign banks. So the local banks, these are the ones that make the loans and achieve local business. They cannot get, they cannot borrow cheaply from the other banks like they used to be able to. So, therefore they can’t, that’s why all these businesses are having their credit lines cut. They are turned into credit cards. The bank cannot give credit lines to a bunch of different businesses because they don’t know when these businesses are going to put in for a loan. They might all put in for a loan at the same time, right, maybe around the fall when they are preparing for Christmas or something or farmers, you know, may need – all at one time need a lot of liquidity. So they can’t get – if they can’t get the deposits to cover these loans that they are going to make, they won’t make the loans. So, it cause the credit freeze at the local level even though you’ve got plenty of excess reserves on the books of the banks, they are not on the books of the right banks.
Jason: Well, it’s interesting you say that, so which banks first of all and this is what you call Ellen when you talk about the silent liquidity squeeze, why banks are lending, is that what that is? Is that what you are referring to?
Ellen: Yeah. So, in a sense, I mean, somebody else who is a money reform person and he is a professor and I am sure he said, well they don’t need liquidity, they have got $1.6 trillion in excess reserve, but they are kidding on that, those are the reserves that were – that are sitting on the books of these bond dealers, well 600 billion are remaining, they are sitting on the books of bond dealers that are at least foreign banks, they are not even US banks. They have branches in the US and that’s why they are part of that whole auction system. So they are not lending it out of their FICO.
Jason: So you are saying that regular maybe small to medium size US banks, they don’t have liquidity, they do have a credit crisis if you will, well they don’t have money to lend because people have been vilifying the banks for the last couple of years, last year and a half at least saying that why are they lending? Why are they lending? The Fed is pumping money into the system and the banks aren’t lending it. They are just holding on to it. And that is really causing the problem especially for small businesses and the real-estate market. Do they not have the money? Is that what you are saying?
Ellen: Well that’s the problem there. There are banks in there, but banks – but the big Wall Street banks are flushed and they are doing fine, but they are not using their money to make loans to local businesses. They have much more lucrative things they can do with it. Now they are thinking to get this money in 0.2%…
Jason: And they buy treasuries, right? [Laughter]
Ellen: Well, yeah, that’s one thing they can do and they can just keep the, you know, it’s like 2% or 3% they just keep this credit and it’s absolutely risk free money or they can use it to speculate, you know, commodities et cetera or you spread in all kinds of derivative things that they can use it for collateral. Even though it’s still sitting on their books, they use this money for collateral for their speculative investment. So, the local banks are the ones that are suffering and they are the ones that have the arrangements with the local businesses so that’s if you want to get into more, my particular solution is everything we are working on is state owned banks. There is one state in the whole country that does not have this problem…
Jason: Yeah, the North Dakota, is that North Dakota Bank?
Jason: Yeah. Tell us about that.
Ellen: Yeah, it’s the only state that don’t owns its own bank. The government owned it since 1919 and that the bank, the state owned bank provides the liquidity for the local banks. They share – the local bank deals with the customers so the bank’s line of credit does not compete with the local bank. They just helps them out, but they are like big brother to the local banks and so they provide liquidity, they provide guarantees so they help them out with their capital requirements, they have a credit line directly to the government so it is the North Dakota itself imposed over budget, they can just cap up their credit line with their own bank, their credit lines with the individual cities, they do things like disaster relief like when they had a big flood they just stepped in and they didn’t need FEMA, they didn’t need to wait for FEMA, they just stepped right in with their own money and we’ve talked to the – well now President of the Public Banking Institute, so we have been just spreading information on this alternative which just seems to me like a no brainer, I mean, it just worked out so well for making those products.
Jason: Yeah, but the question is who does that? There are entrenched power instructors of course and entrenched people who are benefiting into these that are benefiting from the system as it is, I mean, who loses in that plan?
Jason: Not to what had happened, right?
Ellen: Yeah. [Laughter] It’s a no brainer for us, but yeah, you are right. There are big forces there that we have to deal with, so that’s why I think it’s important for people to understand the basic concepts here. Otherwise, I mean, if we don’t–we need the people power, in fact—I am from California and we’ve heard a rumor, I don’t know that’s the fact that the Jerry Brown would be in favor if he had a Groundswell popular support. Well, you are not going to get the Groundswell and tell people understand what we are talking about here. So their first reaction is, why do we need another bank or I don’t trust banks or you know, it’s not the type of thing where you could go into supermarket and set up the cable and get signatures on that, you know, on the ballot or something. So that’s how we are working, on but anyway so we have a fortune state that have built various sorts of funding, right, either builds for an actual bank or for a feasibility study to look into the possibilities et cetera, but so we actually made quite a bit of progress considering the totally voluntary organization.
Jason: Yeah, that’s great. Just I want to circle back to that subject of inflation and deflation and you talked about how when we look at the credit supply contracting, but the money supply increasing, but yes, of course the credit supply is the money supply so I understand that. I am just trying to segment the two. What, you know, you said that what $5 trillion was missing from the size of the money supply then?
Ellen: It’s shrunk by that much, yeah.
Jason: Right, okay. So, one of the things that the deflation say, and I think it’s a ridiculous statement, but they say it. They say things like, well, there is so much deleveraging that the government can’t print enough money to offset that and cause inflation and I think that statement is just completely stupid on its face because the amount of money they can create and print is an old-fashioned term. Of course, they don’t print all the money anymore, but you know that’s kind of just a metaphor I guess. They can create as much money as they want, there is absolutely no limit to that whatsoever. I mean, look at Hungary, look at Weimar Republic, look at Zimbabwe, money creation is completely infinite and unlimited in every way. Your thoughts on that?
Ellen: Yeah, well in terms of the physical process you don’t need to print, you just write it into an account which is what the Fed does with most of the money they create.
Jason: It’s a couple of clicks of a mouse. [Laughter]
Ellen: Yeah, well that’s when they brought up, you know, actually one was they brought up toxic assets and they – and NPR their [unintelligible 51:44] said employees were interviewed on how they did it? And they said, yeah, it’s great, remarkable, they just – that’s what they did, a click of a mouse and they created money to buy all these properties. They just found the properties, they went in and click, click, click, and they had them. But what I like for an idea is the trillion dollar coin idea. I mean, just you know, you may [unintelligible 52:08] the government itself is authorized to issue coins, I mean, it’s in the constitution the government still have authority to coin money and regulate the value there. So, it doesn’t say how big these coins are and you could have like 15 one trillion dollar coins and you would have solved the Federal debt problem. Now you may say or most people will think that would be inflationary, but here is the thing, you are not actually necessarily spending the coins. But let’s just say you put them in the Treasury’s bank account, so now the Treasury has the money and nobody…
Jason: And you are saying these are the physical coins, I am trying to envision the trillion dollar coin. [Laughter]
Ellen: Well, you do have a problem making change right now, but you don’t necessarily have to make change. The thing here is sort of like your – yeah.
Jason: It’s like your gold supply, the theoretical gold supply in foreign [unintelligible 52:58] is what it is.
Ellen: Yeah, well…
Jason: You know, it’s a way to limit money creation.
Ellen: Yeah, well…
Jason: You know, create monetary discipline, right? Is that what you are talking about?
Ellen: Well, if you use these coins to buy up all the bonds that are out there, you know, they were to pay after debt, you would not have increased the money supply because the bonds are actually part of the money supply. People consider – well if you’ve got your money in bonds, how much money do you think you have like let’s say you have $5000 in bonds and some other money in stocks and some other money in cash and you look into your account, how much money do you have? You count those bonds as your money, that’s money that you have. I mean, it’s no different from the deposits that are counted, double counted when they become loans.
So the fact that the government has borrowed that money, it’s still your money, it’s still you could cash that out at any time and you would have the money. So, you know, it’s part of the liquidity of the money supply. So, you just turned it into cash that we acknowledge that what we are talking about here is it’s not a debt. When the government does it, it’s not a debt. When the government issues it, it’s the credit of the people. So, these coins are just the same thing as the bond. In other words, the bond is an IOU, a Federal Reserve note is an IOU. A bank note was a promissory note. It was the note of the bank saying, we owe you, we acknowledge that you have $1000 in the bank, we owe you a $1000. So it’s no different when you call it a bond, which is an IOU or you call it a Federal Reserve note, which is an IOU. It just makes everybody feel better instead of all this running around in panic because how come we ever pay off a $15 trillion debt. Well, of course we can’t pay it off. We don’t need to pay it off. We haven’t paid it off since 1835 and it’s we have been doing well, you know, that as the debt grows the money supply grows. The debt is the money supply. It’s a misconception we should never call it a debt in the first place. That was something that Andrew Jackson did because they didn’t have gold and nobody would at that time nobody believed in anything but gold and so they faked it, they made it look like they had gold they didn’t have by taking limited amount of gold that they had. They put it in the first US bank, you know, they set up this bank, put their limited amount of gold in it and then the bank started issuing bank notes supposedly backed by gold so the same they multiplied their money by a factor of 10 by making the gold be a backing for this paper instead of the gold itself being the money. But what it meant was that now the government was in debt for its own money [Laughter] basically. They had to borrow from the bank and they owe the money back to the bank so their debt just grows and grows and grows, but what you could have done was you call it money in the first place, which is what the American colonists did. They just issued the money, they issued it as colonial script and that worked fine. I mean, it worked better in some places than others, but properly that was fine.
Jason: Yeah, I hear what you are saying there, but in the more simplistic form and I am calling the Reserve Banking system and fractional reserve lending and so forth, I am giong to call that the more esoteric concept, but just in the more simplistic concept, I mean, we have at minimum a 60 to 75 trillion dollars, some say more, obligation the size of our economy is what, 12 trillion a year, we are in a pickle, I mean, we are in debt. When you look at it the simplistic debt, now do you think so?
Ellen: Well, I know, that’s the thing you – I think we are misperceiving what money is, I mean, what are the steps? First of all, you are talking about social security that years away when it comes, you know, that they have 50%, well it’s 42% or something like that of the Federal debt is owed to the Federal government. I mean, you could waive about half of that by just voiding out the half that we owe to ourselves that includes social security. Everybody says, well, the government already spent the money, well of course they did. And so you do with bonds and then you lend it to somebody else, you use the money, but the government can always pay that money back because the government is or it should be the issuer of money. It is sovereign government and money is just a representation of an obligation owed, you know, it’s just you need a value. Basically we are saying everybody who retire is guaranteed X amount of money when they retire and so when they do retire just give them the money. I mean, you can borrow it then, you don’t need to be that right now those bonds are drawing what? That’s they are drawing 2% interest. They are drawing very little. So just spend that money, you know, void out the bonds, void out the 50% of the debt that we owe to ourselves. And then when it comes due then create the money or borrow it if you are still more comfortable borrowing, but you are still just borrowing against yourselves and that the idea of model is in, I would say, is in Japan. Everybody thinks Japan is doing superbly, but Japan is actually doing very low because they owe that debt to themselves. They owe it largely to their own Central Bank, which is totally interest free and they owe it to the Japan Post Bank, which is also a government owned back, it’s the largest depository bank in the world now. And the Japanese people are the savers who have their money in the Japan Post Bank. So again they owe interest to their own bank, so their own bank is not going to worry about credit ratings and you know, do all these things that will drive the interest rate up and make it very vulnerable though. They know that they have this very low interest that they have to pay on this debt even though their debt is 240% of their GDP, they are still getting along fine and it is…
Jason: So, you really really – Ellen, this is kind of shocking for me to hear this. I just want to make sure I am clear in this. So, people can talk about Japan’s last decade, which is really almost two decades now. Do you think that, I mean, you disagree with that when you look at Japan’s real-estate market, you look at its situation, I think it’s largely caused by demographics, I mean, the fact that you know Japanese people just start having kids, but that sort of another issue I just wanted to talk about from the monetary and fiscal standpoint and you know, in terms of their markets and economy and property, do you think they are okay really?
Ellen: Well, in 1988 they were the world’s largest creditors. Their banks were taking over and they were our largest creditors and that’s when the Bank for International Settlements imposed Clause 01, which is the First Capital Requirement and that was done specifically, I mean, I wrote an article in this coded sources that was fairly done to get the Japanese banks to bring them down to size so that their capital requirement which raised to 8% and the Japanese banks within they capitalized and this broke the banks and that the banks went bankrupt, they were nationalized even though they didn’t call it that, then the stock market broke and collapse. We were also responsible for that. We talked – went to setting it up the way they did it, but anyway so that all happened and it was the external banking system that was responsible for that.
So the Japanese just laid low after that. First of all, they are not aiming for growth, I mean, they are a small country, they are aiming for a life style. So they have a very good social security system; they have very good educational system. They have all these things that make for a secure life and as Hazel Henderson argues we don’t value GDP, right? We only count GDP in GDP thinks of yourselves and we don’t count the things that the government makes. Well, the things that the government makes are life [unintelligible 61:17], so maybe government pays for social security and healthcare and lot of healthcare and I think they pay for the healthcare there, I am not very sure with the healthcare situation. But anyway, all these benefits if the government pays for are cut in the GDP, but they should be because they are indefinitely something that improves our quality of life. We count in GDP weapons that we sell abroad, I mean, really affordable things that don’t improve our quality of life at all. It’s I happened to say like count.
Jason: Ellen, I got to tell you that is a fascinating perspective [Laughter] that really is that I see what you are saying. The problem maybe I take issue with you and I just kind of want to understand where you are coming from. Is it personally I am just not a fan of government. I don’t think the government really makes much of anything. I know we need it, but I would like to keep it real small and real lean and I just look at the government as something that sucks money out of the private economy, takes a giant handling fee and gives a little bit of it back. [Laughter] Do you disagree with that? You probably do – it sounds like.
Ellen: Yeah, I probably do. Well, I mean, there is government next door, you know, there is government. The government we have is corrupted, I mean, it’s been taken over by big banks and big corporations…
Jason: Sure. It’s a corporatocracy, it’s fascist in a way. People on the road keep talking about socialism and I definitely see their point, but it’s more like corporate fascism in a way, you know, and it’s big corporate fascism because the people on the Left, they are okay with the government, the people on the radar okay with big business, but I think they are both wrong, [Laughing] right?
Ellen: Yeah, I see.
Jason: I am not okay with either one.
Ellen: But that’s not properly set up government could be very good and useful, I mean, here in Switzerland, for example, they have public banks, publicly owned banks. They have or let’s say France, I mean, I actually think France has a very nice lifestyle that they have a lot more days off than we do. They have very good healthcare provided by the government. I mean, there are ways to work it so that it’s quite good and I think the Japanese do it well, I know there is a lot of, I mean, it’s sort of a patriarchal, it’s like…
Jason: Well, it’s patriarchal, it’s totally insular, I mean, try and come and be an outsider in Japan and do business there, it’s impossible. I mean, it’s a very – it’s just a very different society over there and I love, you know, I had been to Japan only one time, but I love my visit there, I mean, the people are so polite and it’s really nice place, but it’s very insular, I mean, that’s the word I would really give it or just it’s cut off from the outside world and in lot of ways.
Ellen: Yeah, well going back to North Dakota, which I think is a little like Japan, it takes care of their own, you know, we had contact with that we asked some people on our – they are consultants for the Public Banking Institute who works for the Bank of North Dakota and we just – we had a conference call last week and [unintelligible 64:18] we are just talking about where can we – where do we get the money to fund this infrastructure and I said, well you can find there. You know there are lot of funds that have money sitting around so we just borrow from those funds, you know, like Rainy-Day funds or whatever, I mean, you are not even thinking about it, it will be so difficult to do that in California you have to pass laws and everybody saying no, no, that was for the forestry whatever, you know, it’s not…
Jason: Right, and how all the special interest would come in and yeah, right, I agree.
Ellen: But they are just one big family and like well if we get the money that’s sitting over here, it’s not doing anything, so let’s use that. And so they have this separate entity in the government that its business is to fund infrastructure I think. And if they are – of course you know, it’s really only two guys in there in the Bank of North Dakota. I mean, they are in the building in the Bank of North Dakota. So they are all sitting there walking across the hall and supporting each other, you know, like we need a guarantee so that we don’t have to deal with Chapter requirement, you know, what would be that for you? So, I don’t think they even realize how varied commonsense their approach is, I mean, they don’t realize what they – how good this thing is that they have because they don’t realize how bad it is everywhere else.
Jason: Yeah, very interesting. Now I had the North Dakota model. This is of great interest to me. I don’t know that much about it, but I think it’s fascinated what they do. One more thing I would like to just ask you Ellen before we go and I appreciate you talking to us from such a long distance, you probably have some opinions about Glass-Steagall. And I just wanted to get your take on that before we go, if I could, if you have any thoughts about Glass-Steagall?
Ellen: Well, they should reinstate it if they could.
Jason: What would that do for us?
Ellen: [unintelligible 66:00] authorities and they set up the roles they generate to prevent all the disasters that now we are going to again because we got rid of the, I mean, we’ve already done this one, so repeating history, 1937, you know, they went into all this deposit reduction and then that cost another depression and we are doing the very same thing like given the authority. Hopefully we won’t have to have World War III in order to get out of it.
Jason: Ellen, give the list of your websites, you have got two different websites, I think Web of Debt which is the title of your book that I originally know you for and then about the public banking, give out those two websites if you would?
Ellen: Okay, webofdebt.com and that’s my book Web of Debt. And actually I have another but that’s the one which is most relevant right now and publicbankinginstitute.org.
Jason: Publicbankinginstitute.org, so you can find out what Ellen is up to there and thanks so much for being on the show today, Ellen, we’ll talk to you soon.
Ellen: Okay, bye.
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