Why did the Federal Reserve bail out the banks by 2010 to the tune of more than $10 trillion–and keep providing them free money for the next 7 years? Listen to the first of a four part series by Dr. Rasmus, summarizing his forthcoming June 2017 new book, ‘Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression’, by Clarity Press, June 2017.
To listen to the Alternative Visions show of June 2 on the Progressive Radio Network on this first of a four part series, go to:
http://prn.fm/?s=Alternative+Visions
Or Go to:
http://alternativevisions.podbean.com
SHOW ANNOUNCEMENT:
Dr. Rasmus begins a four part series examining the role and function of central banks in the global capitalist system, and how that role evolved through the 20th century and is changing again in the 21st. In Part 1 of a proposed four part presentation, Rasmus explains how central banks have been the primary source of runaway money and liquidity generation that is the root cause of accelerating global debt. Debt is but the reflection of the more fundamental problem of excess liquidity creation by central banks since the 1970s. It is liquidity that enables debt accumulation, which then leads to financial asset bubbles, busts, deflation, defaults, which then transmits the crisis to the real side of the economy producing ‘great recessions’ and eventually depressions. Central banks then bail out the banks—injecting still more liquidity again—leading to a renewed cycle of debt, bubbles, and crisis. Rasmus asks why the Fed, which bailed out US banks by 2010 has nonetheless continued for 7 more years providing free money to the banks to the tune of more than $10 trillion? Their ole of central banks has expanded beyond its primary task of bank bailouts this century, Rasmus argues. Continued injection of trillions of free money has become their new 21st century primary function—i.e. to continue to subsidize the financial sector and financial markets (stocks, bonds, derivatives, forex, etc.) . Central banks are evolving, Rasmus argues, along with the rest of the capitalist State toward an ever growing subsidization of Capital in general. Can global capital survive without expanding State subsidization of profits—central banks subsidizing financial markets and finance capital and other sectors of the State other non-financial forms of capital. (Next week Part 2: The origins of the US central bank, its 20th century performance, and why in the 21st it is failing as it evolves toward its new subsidization role).
II want to introduce a visual metaphor that has helped me tie down the key concept of excess liquidity that creates these endless cycles that ultimately cause a negative feedback system and then collapse. Here is the key concept:
“It is liquidity that enables debt accumulation, which then leads to financial asset bubbles, busts, deflation, defaults, which then transmits the crisis to the real side of the economy producing ‘great recessions’ and eventually depressions. Central banks then bail out the banks—injecting still more liquidity again—leading to a renewed cycle of debt, bubbles, and crisis. “
The visual metaphor is The Tacoma Narrows Bridge Collapse of 1940 and you can download a short You Tube movie of the collapse.
The metaphor works as follows. The Bridge is a large man made structure akin to the world economy, which is ultimately destroyed by strong but not Hurricane force winds. The winds start up a negative feed back system since the suspension cables resonate with greater and greater force, as with a see saw that gets pushed higher and higher. And then despite the strength of the materials used the entire bridge collapses. Since that collapse, suspension bridges have had dampers built in which absorb the energy and stop the negative feedback. Those dampers are analogous to the regulatory system that was built into the economy during the 1930’s which has been systematically dismantled making the next collapse inevitable.
In any event, this You Tube video would make a great introduction to a talk on Central Bankers.
Thank you for the useful and accurate metaphor and comment. I’ll take your advice. I also hope you will find time to read my book, Central Bankers at the End of Their Rope, when it comes out in a couple of weeks and comment on it for readers on this blog. Your analyses are always quite incisive and accurate. I’m sure it will help readers understand the content of the book better. Thanks again for your suggestion.
Thank you for your explanation of how the USA is able to finance its budget deficit by recycling US$ via US Treasury bonds being bought by trading partners with whom the US runs trade deficits. Is this a cycle that will continue onwards? What happens if other countries stop buying the bonds? and would they ever threaten to do so or would that be a ‘nuclear’ option resulting in damage to both sides? appreciate any thoughts and comments you may have regarding this.
There is no indication that US trading partners’ central banks (or private sources) are stopping buying US treasuries. A further deterioration of relations in general with these countries would have to occur first. Trump of course is capable of that. Yes, an abrupt cessation of bond buying would represent a ‘nuclear’ option. So even if they stopped, it would likely be gradual. For example, if China stopped abruptly, the value of the dollar would fall significantly. The value of the Yuan rise in relation to the dollar, which would reduce China exports and their GDP. Ditto even more for Japan, which I believe now holds more Treasuries than CHina. The wild card long run is the China currency. If it becomes a widespread and true global currency, as it does it is unlikely that CHina will keep buying bonds at the rate it has.