Series: Governments submit to “Too Big to Fail” banks (part 4)

United-States : the Fed Bails Out Wall Street

29 September 2014 by Eric Toussaint


Since 2008, the Fed FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
has granted unlimited credit to banks at an official rate of 0.25%. In fact, as the General Accounting Office (GAO) has revealed, the Fed has lent close to $16 trillion at an interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate below 0.25%. [1] The report shows it has not followed its own prudential rules and has not notified Congress.

According to an enquiry by a US Congress Committee, there is clear and evident collusion between the Fed and the big banks:
The CEO of JPMorgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JPMorgan Chase served as one of the clearing banks for the Fed’s emergency lending programs. [2]

According to an independent study by the Levy Institute, which has the collaboration of economists such as Joseph Stiglitz, Paul Krugman and James K. Galbraith, Fed assistance to banks was much more than the $16 trillion revealed by the GAO; it was $29 trillion dollars. [3]

The big European banks had access to Fed funds until the beginning of 2011. Dexia got a loan of $159 billion dollars, [4] Barclays $868 billion, Royal Bank of Scotland $541 billion, Deutsche Bank $354 billion, UBS $287 billion, Crédit Suisse $260 billion, BNP-Paribas $175 billion, Dresdner Bank $135 billion and Société Générale $124 billion. The end of this funding, under pressure from Congress, was one of the reasons that from May-June 2011, the US Money Market Funds MMF
Money Market Funds
Mutual investment funds that invest in securities, including money funds.
started to block their loans to European banks, considering that without support from the Fed the European banks incurred too high a risk.

The Federal Reserve System of the United States



The Federal Reserve System, or Fed, is the United States’ Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
. It is an independent structure with a private activity within the US government and has the responsibility for US monetary policy and thus a strong influence on the world’s financial markets. In the terms of US law, the mission of the Fed is to guarantee price stability and full employment and to ensure the stability of the financial system by taking the necessary measures to predict and attenuate financial crises and panics. To achieve this, the Fed has three important means: it controls interest-rates that influence consumption, investment and inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. ; it controls the money supply which permits the stability of prices in times of crisis; and it supervises and regulates financial institutions.

The Fed was created by the Federal Reserve Act of 1913 as a reaction to the growing instability of the North American financial system at the end of the nineteenth and beginning of the twentieth century. Until then the US did not have centralized control and regulation of its financial system. Each state had the charge of regulating and controlling the banks that were within its jurisdiction. The Fed was established to ensure the stability of the US financial system by becoming the lender of last resort and so to be able to supply resources to banks facing difficulties.

The institutional structure of the Fed is made up of twelve regional banks overseen globally by a Board of Governors. These regional banks function as Joint Stock Companies possessing non negotiable and non transferable shares in the Federal Reserve System; the stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, six per cent per year. These shares permit the banks their participation in the elections of the regional counsellors of the Fed. The councils are made up of nine members: three are chosen by the banks and represent their interests; three more, representing industrial and commercial interests, are also chosen by the banks; the last three are chosen by the national Board of Governors.

The Board of Governors is charged with overseeing the twelve regional Federal Reserve Banks and with helping implement the United States’ monetary policy. It has a maximum of seven members (currently five) who are nominated by the President of the United States and confirmed by the Senate for a fourteen-year term of office. One of the principal functions of the Board is to pilot the Federal Open Market Committee (FOMC), which fixes interest-rates and determines the country’s general monetary policy.

There are two basic differences between the Fed and its European counter-part, the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html
. While the Fed’s mission is to simultaneously guarantee price stability and full employment, the ECB has for principal mission to maintain low and stable inflation levels within the Eurozone. The other difference is in the capacities to regulate and control their financial institutions. The Fed has the means to regulate and supervise all the financial institutions operating under the Federal Reserve System, while the ECB is dependent on the central banks of each of the Eurozone countries for the application of its regulations and control over its institutions. Finally, the European Commission has approved an extension of the ECB’s powers, as from autumn 2014, to responsibility for the direct control of the big banks that are subject to the European system. We shall see what we shall see.

Translation : CADTM



Éric Toussaint, is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège. He is the President of CADTM Belgium (www.cadtm.org), and sits on the Scientific Council of ATTAC France. He is the co-author, with Damien Millet of Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He is the author of many essays including one on Jacques de Groote entitled Procès d’un homme exemplaire (The Trial of an Exemplary Man), Al Dante, Marseille, 2013, and wrote with Damien Millet, AAA. Audit Annulation Autre politique (Audit, Abolition, Alternative Politics), Le Seuil, Paris, 2012.

Footnotes

[1GAO, “Federal Reserve System, Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance”, July 2011, http://www.gao.gov/assets/330/321506.pdf. This report, was made possible by an amendment to the Dodd-Frank act that had been introduced by Ron Paul, Alan Grayson and Bernie Sanders in 2010. Bernie Sanders, an independent Senator made it public http://www.sanders.senate.gov/imo/media/doc/GAO%20Fed%20Investigation.pdf

[3See James Felkerson, “$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient”, www.levyinstitute.org/pubs/wp_698.pdf

[4See, in particular, page 196 of above mentioned GAO report that refers to loans to Dexia amounting to $53 billion, which are only a part of the total loans to Dexia by the Fed. http://www.gao.gov/assets/330/321506.pdf

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.

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