Creature From Jekyll Island by G. Edward

two large banks in the system could completely wipe out the entire fund.

And it gets even worse. Although the ledger may show that so many millions or billions are in the fund, that also is but creative bookkeeping. By law, the money collected from bank assessments must be invested in Treasury bonds, which means it is loaned to the government and spent immediately by Congress. In the final stage of this process, therefore, the FDIC itself runs out of money and turns, first to the Treasury, then to Congress for help. This step, of course, is an act of final desperation, but it is usually presented in the media as though it were a sign of the system's great strength.

U.S. Neivs & World Report blandly describes it this way: 'Should the agencies need more money yet, Congress has pledged the full faith and credit of the federal government.'1 Gosh, gee whiz. Isn't that wonderful? It sort of makes one feel rosy all over to know that the fund is so well secured.

Let's see what 'full faith and credit of the federal government'

actually means. Congress, already deeply in debt, has no money either. It doesn't dare openly raise taxes for the shortfall, so it applies for an additional loan by offering still more Treasury bonds for sale. The public picks up a portion of these I.O.U.s, and the Federal Reserve buys the rest. If there is a monetary crisis at hand and the size of the loan is great, the Fed will pick up the entire issue.

But the Fed has no money either. So it responds by creating out of nothing an amount of brand new money equal to the I.O.U.s and, through the magic of central banking, the FDIC is finally funded.

This new money gushes into the banks where it is used to pay off the depositors. From there it floods through the economy diluting the value of all money and causing prices to rise. The old paycheck doesn't buy as much any more, so we learn to get along with a little bit less. But, see? The bank's doors are open again, and all the depositors are happy—until they return to their cars and discover the missing hub caps!

That is what is meant by 'the full faith and credit of the federal government.'

1. 'How Safe Are Deposits in Ailing Banks, S&L's?' U.S. News & World Report, March 25,1985, p. 73.

THE NAME OF THE GAME IS BAILOUT

39

SUMMARY

Although national monetary events may appear mysterious

and chaotic, they are governed by well-established rules which bankers and politicians rigidly follow. The central fact to understanding these events is that all the money in the banking system has been created out of nothing through the process of making loans. A defaulted loan, therefore, costs the bank little of tangible value, but it shows up on the ledger as a reduction in assets without a corresponding reduction in liabilities. If the bad loans exceed the size of the assets, the bank becomes technically insolvent and must dose its doors. The first rule of survival, therefore, is to avoid writing off large, bad loans and, if possible, to at least continue receiving interest payments on them. To accomplish that, the endangered loans are rolled over and increased in size. This provides the borrower with money to continue paying interest plus fresh funds for new spending. The basic problem is not solved, but it is postponed for a little while and made worse.

The final solution on behalf of the banking cartel is to have the federal government guarantee payment of the loan should the borrower default in the future. This is accomplished by convincing Congress that not to do so would result in great damage to the economy and hardship for the people. From that point forward, the burden of the loan is removed from the bank's ledger and

transferred to the taxpayer. Should this effort fail and the bank be forced into insolvency, the last resort is to use the FDIC to pay off the depositors. The FDIC is not insurance, because the presence of

'moral hazard' makes the thing it supposedly protects against more likely to happen. A portion of the FDIC funds are derived from assessments against the banks. Ultimately, however, they are paid by the depositors themselves. When these funds run out, the balance is provided by the Federal Reserve System in the form of freshly created new money. This floods through the economy causing the appearance of rising prices but which, in reality, is the lowering of the value of the dollar. The final cost of the bailout, therefore, is passed to the public in the form of a hidden tax called inflation.

So much for the rules of the game. In the next chapter we shall look at the scorecard of the actual play itself.

Chapter Three

PROTECTORS OF THE

PUBLIC

The Game-Called-Bailout as it actually has been

applied to specific cases including Penn Central,

Lockheed, Nezv York City, Chrysler, Common-

wealth Bank of Detroit, First Pennsylvania Bank,

Continental Illinois, and others.

In the previous chapter, we offered the whimsical analogy of a sporting event to clarify the maneuvers of monetary and political scientists to bail out those commercial banks which comprise the Federal-Reserve cartel. The danger in such an approach is that it could leave the impression the topic is frivolous. So, let us abandon the analogy and turn to reality. Now that we have studied the hypothetical rules of the game, it is time to check the scorecard of the actual play itself, and it will become obvious that this is no trivial matter. A good place to start is with the rescue of a consortium of banks which were holding the endangered loans of Penn Central Railroad.

PENN CENTRAL

Penn Central was the nation's largest railroad with 96,000

employees and a payroll of $20 million a week. In 1970, it also became the nation's biggest bankruptcy. It was