In Europe, Banks Borrow Money and Lend it Back to the Government

Talk about scams… Elliot Spitzer is back in the news. Speaking to MSNBC, the disgraced crime-fighter described the Fed as a “Ponzi scheme”:

“You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.

“The Fed needs to be examined carefully.”

Poor Spitzer resigned as governor of New York in March 2008. At the time, he had been warning about sub-prime mortgage loans. Some think the feds found a way to silence him – by revealing that he had a bad habit…$1,000-an-hour hookers.

Investigative reporters maintain that federal enforcement officials had the option of leaving Spitzer out of the news. Instead, the Bush Administration Justice Department decided to out Spitzer.

The former NY Attorney General had this to say about regulatory reform:

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

Stimulus is a scam – on both sides of the Atlantic.

In Europe the banks have a good hustle going – almost as good as in the United States. They borrow money from the European central bank and then lend it back to the government.

The ECB loans money at low rates to the banks – hoping to encourage consumer and business lending. In June, for example, the banks borrowed 442 billion euros at a fixed interest rate of 1%. But lending to business and households is at its lowest level since record-keeping began – and slowing down, says James Saft in the International Herald Tribune.

In May, Europe’s money supply grew at a 3.5% annual rate, he notes. But lending to the private sector in June slowed to 1.5% from 1.8% a month earlier. Loans to nonfinancial corporations actually fell in May, while lending to households grew at less than 1%.

If they didn’t lend the money out…what did they do with it? Well, they did lend it – back to the people they borrowed it from. In June the banks bought $75 billion worth of government bonds and lent nearly $30 billion directly to European governments.

Of course, the banks are doing well. They earn money without taking the risk of lending to the real economy. But what good does it do? None.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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Mario Aeby

Lending from the Government back to the Government? Sounds scaringly like Pre-Revolutionary France:

“[…] what they [independent financiers] often did with it in practice was to lend it to the government in short-term credits—so that the king found himself borrowing and paying interest on his own money.”

p. 51 in section “The Financial Crisis” of Doyle, William: Origins of the French Revolution, Oxford, 3rd ed., 1999.

What happened next we all thouroughly know …

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