Nomi Prins is a journalist and former Goldman Sachs director, the author of six books, the latest being Collusion: How Central Bankers Rigged the World. In this interview, Prins discusses how the stated reason for the creation of the Federal Reserve differs from its actual function, and how the Fed largely escapes public scrutiny. Watch part 1 of this interview with Nomi Prins and Thomas Hanna.
Laura Flanders: In the 10 or more years since the Great Recession, lessons have been learned and the economy has improved, right? Or maybe not. Nomi, your book begins with you going into 2015, probably leaving “The Laura Flanders Show” studio to go right on over to the Fed, the [International Monetary Fund (IMF)], the World Bank. What did they want to hear, and did they listen?
Nomi Prins: They had this conference in Washington. It’s closed-door, just amongst those three groups. It’s like a day at the Fed, a day at the IMF, a day at the World Bank, and lunches and dinners and stuff in between. I was asked to speak in the opening plenary at the Fed where it starts, right after Janet Yellen, about the topic that they selected for me, which was: How come Wall Street’s not helping Main Street?
When I first got the email to talk about this, I said, “Are you sure you got the right Nomi?” Because I’ve been very critical of the Fed for many, many years. They were like, “No, we want to bring in a critical voice.” I’m like, “Okay.” One of the things that I said to this roomful of central bankers, who were just starting to see a lot of more cracks in their economies throughout the world, was that Wall Street isn’t helping Main Street because, I say to the central bankers and the Fed officials in the room, “You never made them. You never said, ‘Here’s a boatload of money. Here’s some cheap rates and funds to get you going for an emergency,'” which started in the fall of 2008, now 10 years ago, “‘and you’ve got to give back. You’ve got to give to small businesses. You’ve got to restructure small individual loans and so forth.’ No ties attached to that money.”
Is that what the central bankers and the Fed are supposed to do? Is that what they were set up to do? What are they, exactly?
That’s a really good question. Theoretically, they were set up for multiple different reasons–
I mean we’re going back over a hundred years now–
Right. The Federal Reserve Act was passed in 1913, in December. One of the things that was the point of it, supposedly, was to be an emergency lender of last resort, such that when a banking collapse happened when there was a major problem with getting money around the country, in fact, there would be something in Washington that could independently help that maneuver. Then onto that, there was the added idea that the Fed was in this position whereby setting the cost of money, interest rates up and down, which is one of their jobs, they could jigger what was unemployment versus inflation or how much things cost and make sure that things were growing at a reasonable rate and that people were employed. But that was not really the reason that the Fed was set up. It truly was set up to provide capital to the largest Wall Street banks that wanted the Fed to exist for that purpose.
After the recession, we were given this promise that we would have something called quantitative easing, QE. It sounded great, right? Easing. We all needed it. It never stopped. What did it do?
That’s right. It just became global.
Tell people what it was.
Quantitative easing … I think it’s just a completely wonky term. But it is easing. It’s basically creating a situation where there’s an easy flow of money, not just with interest rates that they set at short ends of the curve … but for 10-year treasuries, for 30-year treasuries … and so forth. The idea would be that you can borrow in the future and not pay as much interest back. The idea would be that if that’s the case, people will borrow, people will invest in their businesses, corporations will invest, everybody will be happy, the economy will grow. That’s what quantitative easing was created to do. The Fed creates money out of nowhere electronically, so they’re flipping a switch, and uses that money to buy bonds in the system, to buy mortgage bonds, which are toxic at the time, from the system, and give cash, literally, to banks in return.
With the idea that they’ll do something with that?
Going back to my point before, the idea but not the requirement that they do something with it. It wasn’t just the Fed. Our financial crisis, the cause of which was what Wall Street did to rejigger people’s subprime mortgages, today they’re doing it with corporate loans–
The sale of derivatives, the mortgage crisis, all that.
That’s right. It was so massive that it required what has now become a global quantitative easing program of today $22 trillion, so much more than the GDP of the United States. The Fed itself still subsidizes — I call it a subsidy, they call it quantitative easing — quantitative easing amount to the tune of $4.1 trillion. At its height, it has been $4.5 trillion. They’ve offered this.
For lack of a better word, it sounds like a public subsidy. I mean, let’s be clear, where this money is coming from is public money, isn’t it?
It’s kind of not coming from anywhere except the reason it connects to the public is that because the Fed creates this money, it has the ability to give it to banks, banks turn around, they buy treasury bonds with it at lower rates, which means the government is borrowing money at lower rates, so they can borrow more and more cheaply. They go to the Wall Street banks, the Wall Street banks bring them back to the Fed, who has paid Wall Street banks to effectively purchase the government’s debt.
There is a public part of this triangle, but the reality is, if you take out the Fed and you take out the banks, the government wouldn’t have needed to issue that debt. That debt is sitting on the books, or some of it — $2.5 trillion of which is just treasury debt — is literally sitting on the books of the Federal Reserve. Otherwise, different countries throughout the world [are] doing nothing. The damage that has happened is that around the world, as this money has been infused freely into the financial system by the Fed, it’s also required other central banks around the world to figure out what they need to do either in cooperation or collusion, as I talk about it, or in protection for themselves.
One country that I was just in, actually, was Brazil. They’ve had a lot of turmoil, politically, in their system over these 10 years. Why? Ultimately, we had a financial crisis in 2008. It caused stuff to happen in Brazil, it caused leadership to change, because countries outside of [the U.S.] can’t manufacture the kind of money we’ve done because it would create real inflation as it did over the years, which creates real economic burdens to real people. They get annoyed, they vote out, and they get upset and they protest in the streets, which is actually what we’re still seeing around the world. The reason for a lot of that is because people don’t sit there and wonder what the Central Bank of Brazil is doing every day or what the Fed’s doing. They have lives to run, but they understand that there’s this economic unease and this instability, and where they take it out is on their elected officials. If the elected officials aren’t helping them, they vote them out.
Where are we now? They rigged the world, we’re in a new — as you say — very unstable and dangerous normal. Is this where we stay? What’s on the horizon?
Well, that’s right. What’s happening now is markets that have been the recipient of a lot of this extra cash, it goes through the banks, they’re not giving it to real people and real businesses. Where does it go? To speculative endeavors like stocks. Banks buy back their own stock. Corporations buy back their own stock. They use money for these purposes. That’s an issue. But at some point, that money — it was artificial to begin with. It’s being used to prop up the financial system. That’s an artificial stimulant. That means that the real growth that would actually put in real money to the economy to really create value, let’s say, for those stocks and for the economy isn’t really there. That’s one reason why the markets are starting to buckle and notice that and why all of these central banks are having some real issues as to how they can exit this catch-22 that they’ve all created by dumping this money on the world and not having a real plan for it and not knowing how to reverse course.
So, the future?
I think we’re going to have a lot of corporate debt problems and defaults and everything along the lines of what we had into the financial crisis 10 years ago. It might not look the same way, it might not be a drop, like one solid drop, but it could be pieces of a lot of instability, a lot of voting nationalists, a lot of economic uncertainty for a number of years to come.
All right, the book is Collusion: How Central Bankers Rigged the World. Nomi Prins is our guest. You can find out more and get your hands on a copy of the book through our website. That’s lauraflanders.org. Thanks. Nomi.
This interview has been lightly edited for clarity and length.