Tuesday, September 18, 2012

The awesome power of central banks - 3

How QE works to spoil productive economies is a theme of Professor Michael Hudson's recent article/podcast. He is Distinguished Research Professor at the University of Missouri-Kansas City, the leading Post-Keynesian university in America. He brings insights that the usual media view doesn't dig for and expose. For example: 

Last year the Federal Reserve had an $800 billion quantitative easing. At one-quarter of one per cent interest, the Federal Reserve lent – gave – this money to the banks. The banks used part of this money just to leave on deposit with the Federal Reserve and get interest, but actually an amount equal to $800 billion was lent abroad in foreign currency speculation (mainly to the BRIC countries) and arbitrage.
In other words, they take this quarter-per cent money, they buy Brazilian bonds that were yielding 11%, they pocket 10.75% difference, and they not only get the 10.75% difference, but all this Federal Reserve money, spilling out of the US economy into the Brazilian economy forced up Brazil’s currency and gave the banks a foreign exchange free ride over and above the interest free ride. 

There is a nice point about what the 'market system' means which shows how central banks are the hidden essential hand within the visible glove of the commercial banks.  Hudson was asked wouldn't it be better for the market system if some banks were allowed to fail, rather than saddling the public with debt to support them? 

MH: The market system here is that the banks are supposed to run the economy. That’s what the market system basically means. Of course it would be better for the real economy, but the governments are not supporting the real economy, they’re supporting the bankers and the bankers’ gain is the real economy’s loss.

To a question as to why in the US have sales taxes risen so much last year? And why is there reliance on such 'user pay-charges'? 

MH: Because if you didn’t tax consumers through the sales taxes, then you’d have to do what governments used to do and tax real estate! And if you taxed real estate, then it wouldn’t have as much money, rental income, free to pay the banks. And the idea is to free all of the income from real estate rent and natural resource rent so that instead of this being the tax base, it can be paid to the banks and the financial sector, so the financial sector, now that it has become the de facto government of the economy, wants all of the rent that used to be the tax base to go to it. And its aim is to shift the taxes off real estate, off finance, off insurance and off monopolies, on to labour to shrink the living standards as rapidly as it can.

Hudson's punchy.

posted by Charles Bazlinton

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