Bank Run Or Stealth Bailout

Bank Run Or Stealth Bailout

By Ellen Brown

In July 2007, the global credit crisis hit Wall Street. In September 2007 it hit Main Street, in what has been called the worst bank run since the 1970s. Bank officials feared that as much as half the bank’s deposit base could be withdrawn before the run was over. By September 14, 2007, Northern Rock’s share price had dropped 30 percent, and on September 17 it dropped another 35 percent.1 The bloodletting slowed after the government issued an emergency pledge to Northern Rock’s worried savers that their money was safe, but analysts said the credit crisis was here to stay.

As BBC News explained the problem: “Northern Rock has struggled since money markets seized up over the summer. The problem reflects a fundamental flaw in the modern banking system: it is built on a confidence trick. As the late Murray Rothbard observed:

Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money isn’t there.

“ This sort of swindling or counterfeiting is dignified by the term ‘fractional-reserve banking,’ which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem.”

"Why is it that the $2 billion investment by Bank of America in Countrywide was front page news in August while the company’s new $12 billion financing is buried on the business pages? Isn’t it funny, too, that Countrywide didn’t specify who is providing all that money, saying only that it comes from 'new or existing credit lines.' "

At least that is true in the United States, where the Federal Reserve, a private banking corporation answerable to the private banks that are its real owners, primarily conducts bailouts. In England, by contrast, the Bank of England is actually owned by the British government.

Before 1913, whenever a bank’s depositors demanded more cash than the bank had on hand, the bank would have to close its doors. The Federal Reserve Act of 1913 shored up the system by allowing troubled banks to “borrow” from the Federal Reserve, which created the money essentially by counterfeiting it on its books.

At one time, the Federal Deposit Insurance Corporation (FDIC) under the auspices of Congress, did bank bailouts openly with the burden falling on more solvent banks or the taxpayers, but that solution cost votes and was politically unpopular.

This fund is used to bail out banks that experience difficulties meeting commitments to their depositors. This also compounds the moral hazard problem created whenever government socializes business losses. In the event of a severe banking crisis, Congress likely will transfer funds from general revenues into the Deposit Insurance Fund, which would make all taxpayers liable for the mistakes of a few.

The Federal Reserve’s new approach to rescuing failed banks is evidently to avoid political objections by doing it behind the scenes, using fiat money created for the purpose. Rather than taxing other banks or the taxpayers at large, the Federal Reserve imposes an indirect tax in the form of inflation. Meanwhile, being allowed to keep their winnings and continue in their risky ventures rewards errant bank managers.

It was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation. But now bank runs – at least for the overwhelming majority of banks under federal deposit insurance – are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation. At long last, banks would be treated like any firm in any other industry.

There is really no good solution under the current debt-based banking system, because it is basically a pyramid scheme. Virtually the entire money supply now originates as a debt to private banks; and since banks create the principal but not the interest necessary to pay back their loans, new loans must continually be taken out to come up with this interest.

Rather than coming into existence as an interest-bearing debt to private banks, our national currency needs to be issued as “legal tender” by the people themselves, following the innovative system of debt-free money devised by the American colonists before the private central banking scheme was imposed on the world.