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We learned on February 27th of the Treasury's plan to convert up to $25 billion of their $45 billion preferred Citigroup shares to common equity. According to the company, the existing shareholders would be diluted by 74%. Thus, the taxpayers will cease collecting dividends on their holdings and they'll slide down the capital structure in Citigroup to the lowest rung on the ladder. Ostensibly, it looks like a good deal for the bank and not such a great deal for the government/taxpayer.
So why would the government allow such a deal to occur? The answer is to gain more control over Citigroup (with other major banks next in line) in order to garner complete control over the money supply. The Treasury's preferred holdings in Citigroup carry no voting rights, whereas the common shares will. After conversion, the government would own 36% of the common stock. The government does not need to be the largest shareholder in the company to dictate policy, but it does greatly facilitate the process. The power grab will increase the Administration's and Fed's ability to direct bank lending, which can lead to an abrogation of the system of checks and balances that control our money supply.
Under "normal" conditions in a fiat currency system, a Central Bank influences the cost of money through the manipulation of the overnight interbank lending rate. In the U.S., the Federal Reserve influences the Fed Funds rate and Discount rate through the everyday operations (buying and selling of Treasuries) of the Federal Open Market Committee (F.O.M.C.). Those rates in turn influence interest rates across the yield curve and therefore, indirectly controlling the cost of money. Additionally, the Federal Reserve directly controls the amount of money in the Monetary Base (high powered money) through the expansion and contraction of its balance sheet. Base money is then used by banks through the Fractional Reserve System to multiply "high powered" money tenfold or greater.
Therefore we know that the amount and cost of money is highly influenced by the government. But the system has built in one key element which allows for a condition of checks and balances to exist. The consumer must still want to borrow and banks must still desire to lend. Unless that situation exists, the larger monetary aggregates will be very slow to increase. And if base money is not loaned into existence, it remains limited in its ability to drive up prices. In today's economy, banks' balance sheets are in disrepair and the consumer has taken on a record amount of debt. Thus, despite the best efforts of the Fed and Administration to force-feed more borrowing, market forces have determined not to increase the amount of debt regardless of its availability or rate.
However, none other than Ben Bernanke himself said at his February 25th House Financial Services Committee hearing that the Treasury may own a "substantial minority" of banks' common shares. Their goal is not to nationalize banks but to garner significant control. If they can control the lending practices of financial institutions, they dominate all three factors in the process that determine the supply of money -- the quantity of base money, the level of interest rates and the amount of lending provided by banks.
The U.S. government would then be able to expand the money supply buy purchasing Treasury's burgeoning debt relatively unfettered. The American consumer, businesses and banks may be cut out of the equation. All that will matter is government's desire to spend our way out of a depression and their ability to finance it with alacrity. As of today there are $673 billion in excess reserves sitting on the Fed's balance sheet, which government can then use to purchase Treasuries and keep yields low by forcing banks to finance their spending plans.
One of the most important freedoms which made America great was the protection of the purchasing power of our money. The wisdom of our founding fathers was such that they understood the cornerstone for a successful economy was to ensure the stability of our nation's currency. While that protection began to be eroded with the signing of the Federal Reserve Act of 1913, we may now be abdicating complete control of our money supply to the government. If so, we'll be able to thank our government for not only creating a depression, but making sure it is accompanied by intractable inflation.
Michael Pento is the Chief Economist for Delta Global Advisors and a contributor to greenfaucet.com
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Be very simple about it: if a bank is declared insolvent (and CitiBank most certainly is...) then there is no reason for We the People to be monkeying-around with their stock. The company is insolvent, therefore it is seized outright. "Authority has its privileges
And perhaps the very first thing to be done is to restore the rules that make the stock-shares of banks to be restricted again, with no public trading. A bank's role is special. There is no place in that role for any sort of speculation; it cannot share the same roof with a gambling-den.
There is not only insolvency here, but also crime and high-crime. When a company has become insolvent even as it defrauded millions of people, you don't go around buying its shares with public money . . .
Why don't we go back to beads and shells for currency?
We have had fiat money for a very long time. Is it possible that the US Government lacks the skills & discipline to retain control of the USA's money supply--if the US Government is give legal permission to control the USA's money supply?
Michael.
Here's a clue.
When is the FED not the government?
When it is called the federal reserve bank, a private corporation owned by its investors and member banks.
Here's a for-instance of the difference.
When the Treasury decided it wanted to lend a few hundred BILLION to some banker friends, it needed to go to Congress with a 3-pager.
They may say 'yes".
They may say "no".
Depends on how big the threat is.
When the FED wants to lend a few THOUSAND BILLION to its friends, it does not go to Congress, it goes to "exigent circumstances" clause of its charter as a private corporation and does so.
Printers away!
Notably, when it does so, it creates a contingent liability on the American taxpayers, meaning we may be responsible for paying ALL that amount back, and MORE.
And when the Congress, or even the uber-pro-capitalist foxbiznews wants to know where ALL that money went, guess what.
We cannot find out - because the FED is not part of the government and is not subject to the Freedom of Information Act.
So, in case it's a surprise, I am sorry to tell you this - the FED has HAD complete control over the money supply for about a hundred years.
This is not the Second Grade here.
We are just beginning to take it away from them.
GREENBACKS !
See Michael Pento's Profile
The Fed has direct control over only one part of the money supply. It is called the monetary base. It only influences the other aggregates M1, M2 MZM and M3. Those grow when banks lend money and expand base money via the fractional reserve system. It is not allowed by law to purchase debt directly from the Treasury. It must use banks. So the more they influence bank assets the more they will be able to control the money supply.
The M's. I'm impressed, Michael.
Perhaps I DO need to clarify a certain fact for discussion.
The FED.
The PRIVATE Federal Reserve Banking System, as established by the Federal Reserve Act of 1913 is made up of its MOTHER FED in Washington, with its Board of Governors, the Twelve Regional Federal Reserve Banks, each with their own Board of Directors, AND THE MEMBER BANKS OF EACH OF THOSE 12 Federal Reserve Banks.
So, ALL the commercial bank members of the Federal Reserve Banking System are part of that system, and all of them work collaboratively in a cartel that controls the money system in this country.
The MOTHER FED has no reserves, but creates new reserve money out of thin air, as a debt repayable by the people, and provides that reserve money to the Regional banks, who, in turn, provide it to the member banks.
Each of those MEMBER BANKS of the Federal reserve use the fractional reserve banking system to increase the supply of money-as-debt in this country, ostensibly in a system of cooperative competition.
Here you seem to be defending the logic and correctness of the fractional reserve banking system.
Elsewhere, you posit that we need to move to 100 percent reserve banking.
Which is it?
With 100 percent reserve banking, ALL of those Open-market Committee activities would be abolished. That is the way to go.
With GREENBACKS !
Well In truth, The Government does not create Money, its true they print it, but that only accounts for about 3 percent of the money supply. In our system, money is created in four steps:
Step 1. The Fed Open Market Committee approves the purchase of U.S. Bonds on the open market.
Step 2. The bonds are purchased by the New York Fed Bank from whomever is offering them for sale on the open market.
Step 3. The Fed pays for the bonds with electronic credits to the seller’s bank, which in turn credits the seller’s bank account. These credits are based on nothing tangible. The Fed just creates them.
Step 4. The banks use these deposits as reserves. Most banks may loan out ten times the amount of their reserves to new borrowers, all at interest. (From: TheMoneyMa
This of course is all out of thin Air which makes Money Debt vs an Resource, which results in its value depending on the outstanding money supply, whew, what a mess. Plus the Fed is not a Government Agency like most people think, it is a Commercial Bank and like Mr Pento Points out, they control our Monetary Policy. We need to get Rid of the Fed or we will continue to face these Boon/Bust Business Cycles.
According to the constitution, the government SHOULD be in control of our money supply, not private banks or the semi-private Fed. I would rather have the government control our money than the criminal bankers who are controlling it now.
See Michael Pento's Profile
Do you really trust the government over a gold standard. I don't trust the government or depraved bankers. I trust the constitution which says only gold and silver should be considered money.
Thats a Good Point Michael, but even with a Gold or Silver Standard, would not the Government still have to control the Money Supply and set Banking guidelines? Surely getting rid of the Fractional Banking system and placing more control back in the into Government body would be better than what we have now
The money supply is currently severely limited by banks. Which it should be! And now you are complaining. But you should have been complaining years ago when it was essentially unlimited and when the problem happened.
KillTheMessenger;
I think you are missing the point here, the money supply is not the issue, the valuation and who sets the valuation is the real culprit. The Fed is at the center of all this mess.
Yawn. The government can just print money and always has. What's the problem?
See Michael Pento's Profile
But they are not allowed to buy Treasury Debt directly. They must go through banks. Now they can do so with ease.
The government can do pretty much whatever they want. If they want they can take you to an undisclosed place outside of US territory and waterboard you. Big deal.
Now, seriously. What's the difference between the budget excesses of the past years and this? Nothing so far has stopped them from generating income without tax revenue. I don't see the necessity to go through these lengths. States are essentially printing money and so does the federal government. And as far as I know there is not much to stop the fed from setting the interest rate to 0% which would mean that even infinite debt would be free.
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