by Matthias Chang
July 08, 2013
from
GlobalResearch Website
Banks’ excess reserves
at FED is one of the biggest scam by the FED and
there is a conspiracy of silence as to its actual
implications.
Economists and financial
analysts spewing nonsense to mislead and divert
attention to non-issues so that the public is kept
in the dark.
The issue of banks’
reserves at the FED and other central banks
in the world is a complex subject with much technical jargons that confuses
a lot of people.
Besides, don’t be surprised that your bank
branch manager on Main Street as well as lecturers in finance and economics
are also ignorant on this issue. In the case of the latter, this subject is
hardly taught in universities. And this is the reason why the scam has not
been exposed till today.
But, for those who have a basic idea of bank reserves and how this huge
amount of “excess reserves” have been created by the FED, have you asked
yourself,
“Why have I not spotted this scam earlier?”
Many have been taken in by the propaganda that
“excess reserves” is the means to encourage banks to extend credit (give out
loans) to desperate borrowers who needed urgent funds to survive and to
jump-start their businesses.
This propaganda is grounded on the assumption
that there is insufficient liquidity in the market.
This assumption is misleading.
What are Excess
Reserves
The latest figures obtained from the H.3 release from the Board of
Governors of the Federal Reserve System (the FED) shows excess reserves
of about $1.794 trillion (data as of April 17, 2013).
This level of excess reserves is unprecedented
and is the highest since reserves were legislated as a requirement.
Please read the below paragraph carefully, ponder deeply before proceeding
further. Don’t rush. It is important that you understand this simple fact as
otherwise you would not appreciate the audacity of this financial scam!
Excess reserves are the
surplus of reserves against deposits and certain other liabilities that
depository institutions (collectively referred to as “banks”) hold above
the statutory amounts that the FED requires in accordance with the law.
The general requirement is that banks
maintain reserves at least equal to ten percent of liabilities payable
on demand.
There is now data to show that as much as 50% of
these “excess reserves” are held for United States banking offices of
foreign banks.
Let me elaborate.
Banks receives deposits from their customers
which are inter-alia placed in current accounts (checking accounts) or time
deposits (fixed deposit accounts) and which the customer can at any time
withdraw from the bank. But, banking practice shows that at any one time,
only a small fraction of customers would withdraw their deposits in full.
So, there was no need for banks to keep all the
deposits in their vaults to meet such a demand for payment. Laws were
enacted to allow banks to keep in reserve a small amount of monies to meet
such demands.
That being the case - if only 10% reserves is all that is required according
to banking regulations to meet repayment demands - why should there be such
a huge amount of reserves, beyond the legal requirement of 10%?
Keep this question at the back of your mind to understand the huge scam by
the FED.
A Slight Digression
In
a previous article, I had exposed the fact
that when a customer deposits monies in a bank, he is in law a “creditor”
(he has loaned the monies to the bank) and the bank is a “debtor” (and he
can use the money in any way at his absolute discretion, even to speculate).
This is because the ownership of the money has been transferred to the bank.
The money is no longer the money of the
customer. It now belongs to the bank. And as long as the bank is solvent,
and there is a demand for repayment of the deposit, the law of contract
stipulates that the bank must repay together with the agreed interest that
has accrued.
However, if at the time when demand for repayment is made, the bank is
bankrupt (i.e. in a liquidation) then the depositor/customer in law is
deemed an “unsecured creditor” and must join the queue of all unsecured
creditors to share the proceeds of any remaining assets after all secured
creditors have been paid.
If there are no remaining assets, the depositors
get zilch! Ouch!!!!!!
That is why and as illustrated in the bank confiscation of deposits in
Cyprus banks acting in concert with central banks can expropriate all
customers’ deposits to pay their secured creditors.
I will elaborate on this issue later.
Let’s return to the issue of excess reserves.
How Did The Excess
Reserves Balloon To A Massive US$1.794 Trillion?
A Simple Summary
The FED’s overall balance sheet has expanded from about $909 billion before
the
crisis (i.e. before 2008) to about $3.3 trillion in 2013. Of the
$2.4 trillion increase, approximately $1.8 trillion is excess reserves.
Banks were up to their eyeballs in toxic assets (financial sewage) and they
are drowning in this cesspool but for the rescue efforts of the FED and
other central banks they would have sunk to the bottom of the cesspool.
First Stage of Excess
Reserves Scam
From the diagram below, you will see that the FED created trillions of money
out of thin air by a digital entry in its books to purchase the toxic assets
(financial sewage) in batches from the banks.
The objective of QEs is to save the banks and to
save the US Treasury from bankruptcy and not Joe Six-Packs. However, in this
article we are focusing on the banks.
So, let’s say that the banks HAVE OVER US$10 trillion of financial sewage
AND WANT TO DISPOSE THEM WITHOUT AROUSING ANY ALARM.
From the diagram below, you will see the monies flowing from the FED to the
banks to purchase the financial sewage. The financial sewage is sucked into
the FED’s financial vacuum.
However the monies are not channeled to the
banks’ branches in Main Street to be loaned out to
Joe Six-Packs. It is re-routed back to the
FED as “reserves”. When the reserves exceed the minimum 10% requirement, the
excess is classified as “excess reserves.”
This is merely a book entry! And adding insult and injury to Joe
Six-Packs, interest of 0.25% is paid on the reserves (i.e. giving
profits to the banks).
The banks are allowed to survive in spite of their massive frauds and other
financial hanky-pankies. The banks are allowed to use digital technology
(e.g. high-frequency trading) to corner the market and destroy
Joe-Six-Packs.
But, Joe-Six-Packs have to suffer the
indignity of,
...and other austerity measures.
Additionally, and to prevent any opposition to
the financial and ruling elites, Joe-Six-Packs are now under intense
surveillance by
NSA’s Prism Program that tracks every move,
phone calls, emails, etc.
Can you now see the audacity of this scam?
The money flows from the FED to the Too
Big To Fail (TBTF) Banksters to Buy Toxic Assets, which is sucked in
by the FED’s Financial Vacuum, thereby cleansing the TBTF banks’ balance
sheets.
The money is then re-routed back to the FED
as “excess reserves”.
The FED create monies out of thin air to
bail-out the Too Big To Fail banks (TBTF banks) by purchasing their
financial sewage (valued at book value as opposed to mark-to-market i.e.
instead of paying only 10 cents on the dollar or less, the FED pays dollar
for dollar) thereby removing the financial sewage from the balance sheet of
the TBTF banks to reflect a “healthier” balance sheet as there are now less
financial sewage in the banking system.
And, because the TBTF banks are suffering losses, the FED pays 0.25%
interest on the “excess reserves” created so as to generate easy profits for
the TBTF banks for doing nothing at all. They are earning profits merely
from a book-entry in the FED’s books!
The propaganda which I referred to earlier that such monies were meant to
enable the TBTF banks to extend credit is therefore bullshit and a load of
financial nonsense.
So why are the so-called reputable economists at
leading universities such as Harvard, Princeton, Cambridge, Oxford etc.
touting this propaganda?
There is so much financial sewage in the banking system, that in law the
banks cannot extend further credits to Joe Six-Packs unless and until
the balance sheets of the TBTF banks are cleaned up, and the banks properly
re-capitalized to continue with their banking business. (See
Basel III Accords).
The so-called record profits declared by the TBTF banks and the huge bonuses
given out to the bankers and their hire-lings are all window dressing as
long as the toxic assets are not marked-to-market and not declared as junk.
If such assets are properly declared, the fiat
money banking system would be staring at a bottomless black-hole of toxic
assets and indebtness! This is the reason
why QE has to continue. The QE programs are
to drain the financial sewage from the banking system.
I had earlier stated that banks are required at have at least 10% of the
deposits as reserves.
This has compounded the problem.
After
the
Global Financial Tsunami, all the TBTF banks don’t have enough
reserves to meet the withdrawal of deposits placed by customers before the
crash. The TBTF banks don’t even have the requisite 10% reserves to meet
these demand deposits (Old Deposits). That is why this scam was perpetrated
by the FED as illustrated in the above diagram.
However, banks are continuing to receive deposits from customers of which
10% of these deposits must be transferred to the FED as reserves.
Under the fractional reserve banking system, the banks are allowed and can
loan out the remaining 90% of the deposits as loan by a multiplier of ten -
i.e. if new deposits total US$100 million, US$10 million will be transferred
to reserves to meet withdrawals as explained above.
By fractional reserve banking principles, the
bank can loan out (based on a multiplier of ten) US$90 million x 10 = US$900
million. Data shows that customers’ deposits are at an all time high (since
2007), but bank lending is not keeping pace.
Banks are not lending out what they are entitled to do so for two reasons:
-
The banks are using a portion of the
“New Deposits” to meet the liability of having to repay the “Old
Deposits” in the system. This is because even the excess reserves
(created under the QE) are insufficient to meet the demand for
repayment of the Old Deposits. So, part of the current New Deposits
would be utilized for that purpose. This is the Deposit Ponzi
Scheme.
-
Banks are earning no risk profits from
interests on “Excess Reserves” at the FED and are only willing to
lend to credible borrowers. In the present economic climate, there
are just too few credible customers. This is another reason why
banks are not lending.
Therefore, and as stated earlier, the problem is
not liquidity but rather, it is and always has been the insolvency of the
TBTF banks and the financial sewage clogging the entire fiat money banking
system.
Food For Thought
“Reserves don’t even factor into my model,
that’s not what causes inflation and not how the FED stimulates the
economy. It’s a side effect.”
Former FED Governor Laurence Meyer
co-founder of Macroeconomic Advisers
Second Stage of Excess
Reserves Scam
If and when the economy recovers (maybe 2019??), the FED will
repackage the toxic assets into new financial products to be sold to a new
generation of stupid investors.
Banks are not even required to pay, as the
monies are still kept with the FED (book entry). In this final transaction,
there will be a reverse-entry in the banks’ books.
Laurence Meyer is saying what many has deliberately ignored and or missed
out completely. When QE stops, the FED would not be out on a limp because
the monies used to purchase the financial sewage from the TBTF banks are
still in the FED’s books.
The FED need only to have a reverse entry in it’s books after re-packaging
the financial sewage INTO SOME NEW FORM OF FINANCIAL PRODUCT OR WHATEVER
(which the TBTF banks are adept at doing before the crash and are still
continuing to do so) and dumping them back to the banks and another
generation of stupid investors at such time when and if the banks have
recovered - maybe 2019?
Further, with the bank’s unbridled right (sanctioned by law) to confiscate
the customers’ deposits (now commonly referred as “Bail-In”) using the
Cyprus template, banks have additional financial resources to continue
with the plunder and financial rape of the public.
Wake Up, I rest my case.
