Esei oleh Prof.Antal Fekete (gold-eagle.com) : Mechanism of Capital Destruction
People tend to have a religious faith in the Fed’s miraculous power to create something out of nothing. They think that the Fed is above capital requirement and accounting rules. They think that the Fed is above the law. They dismiss the idea that the Fed, too, can suffer from capital inadequacy, or that it may not be able to escape the ill effects of falling interest rates.
The Federal Reserve Act (as amended) explicitly forbids the Treasury from participating in the earnings of the Fed. The purpose of this provision is to retain the undivided surplus in the Federal Reserve System to meet emergencies precisely like the present crises. The conspiracy of the Treasury and the Fed ignores this provision of the law. Year in and year out the Fed remits about 90 percent of its earnings to the Treasury under false pretences, calling it the “franchise tax on Federal Reserve notes”. No sooner had the Treasury received the remittance than it spent the proceeds, and more, on consumption. As a result, the Fed is left with no undivided surpluses and no cushion to fall back on in hard times. And the Treasury has debt far greater than it has resources to retire. This high-handed disregard for the law is motivated by the desire to foster a public image of the Fed as an institution with supernatural powers. The Fed has the magic wand and can wave it to solve any problem by throwing money at it. In this view the Fed is not a bank, but the embodiment of divine power.
The printing press is sputtering
Chairman Ben Bernanke is given to boasting publicly that the government has given the Fed a tool, the printing press, with which it can print any amount of currency necessary to stop any deflation and any depression.
I submit that the Chairman is wrong. The printing press is not everything. The Fed has to operate under the same rules as all other banks. It has to have capital; it has to have an unimpaired balance sheet; it has to observe capital ratios. Above all, the Fed has to put up collateral before it can print new Federal Reserve notes, or create new Federal Reserve deposits. The fact is that the Fed, in addition to dissipating its earnings decades after decades after decades, has also been digging its own grave by pushing interest rates ever lower. Its capital has been destroyed just as that of all other banks. Right now it is near the point that it cannot put new currency into circulation in want of collateral. The printing press is sputtering. The magic wand is broken.
Dead man walking
The Supplementary Financing Program of the Paulson-Bernanke duo means that, in preparation for the $700 billion bailout, the Fed is given securities by the Treasury directly, bypassing the open market. The last time this imprudent departure from the principles of sound central banking has been invoked was during World War II, when the exigencies of war finance were used to justify the bypassing of the open market.
But what does it all mean in practical terms, if we strip away the jargon created in order to mystify the public? It means that the Fed, just like all other banks, has virtually zero capital. It means that the Treasury must recapitalize the Fed by giving it $700 billion worth of newly issued securities. It also means that the bad assets of the banks, some of which have been absorbed into the balance sheet of the Fed, are monetized through the back door.
But the worst part is that the Fed is now a dead man walking, propped up by conspirators who want to conceal from the people the fact of its demise. This is just the latest of conspiracies between the Treasury and the Fed. In creating a central bank in 1913, the government usurped powers not granted to it under the U.S. Constitution. One successful usurpation calls for another. Now, 95 years later, the government is frantically trying to resurrect its creature, the Fed, from the dead.