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Bernanke Feeds the Panic, Announces
QEIII; Only Glass-Steagall Can Stop It

July 13, 2011 (EIRNS)—This release was issued today by the Lyndon LaRouche Political Action Committee.

With Europe engulfed in debt-panic and the European Central Bank (ECB) becoming a huge "bad bank" for unpayable debt assets, Federal Reserve Chairman Ben Bernanke stepped into the breach July 13 by announcing to the House Financial Services Committee that the Federal Reserve is preparing a QEIII, with more expansion of its asset book. Stocks and the Euro momentarily soared, the dollar plunged.

Bernanke seemed to be defying what just-released minutes of June 22 Federal Open Market Committee (FOMC) meeting showed, namely, that only "a few members" were in favor of even considering another round of "monetary stimulus," or money-printing. A few hours after Bernanke's announcement in Congress, Dallas Fed president Richard Fisher said in a speech there, "We've exhausted our ammunition, in my view, and expanding the Fed's balance sheet from about $2.7 trillion to more than $3 trillion might spook the marketplace. I do not personally see the benefit of more monetary accommodation even if the economy weakens further." One day earlier, retiring Kansas City Fed chief Thomas Hoenig, no doubt aware of what Bernanke would do, had blasted Fed money-printing in a speech: "Part of our basic problem worldwide and here in the U.S., is that the emperor has no clothes and no one's willing to say it. You print money, print money, and print money, but you don't create real wealth."

All commentary focussed on the fact that Bernanke was trying to save the Euro single currency—a hopeless task, and one that leads the Fed further into violating even the Federal Reserve Act of 1913. Note that on June 29, the Fed extended unlimited currency swap lines of credit to the ECB and the Swiss, British, Canadian, and Japanese central banks. The ECB is being widely described as a "European bad bank" in the growing debt crisis, as it has lowered the standards for the collateral assets it is buying from banks, to below junk grade, and is buying from private equity funds, hedge funds, and investment banks. Will the Fed now be directly buying European sovereign debt, or European bank bonds, in support of the floundering ECB? Without waiting to find out, QEIII should be stopped.

An interesting report appearing July 6 on the financial analysis website "Zero Hedge", used Federal Reserve flow-of-funds and bank reserves charts to show that all $600 billion of the so-called QEII money-printing appeared to go offshore to big Inter-Alpha and other European banks. The Fed's purchases of Treasuries with its newly printed reserves from November 2010 to June 30, 2011 evidently were overwhelmingly from BNP Paribas, RBS, Barclays, Credit Suisse, Deutsche Bank, HSBC, and UBS. The "Zero Hedge" analyst concluded: "The only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains ... why US banks have been unwilling and unable to lend out these reserves."

Arguably, this violates the 1913 Federal Reserve Act, even with its 1932 "exigent and unusual circumstances" amendment, which still requires AAA-rated collateral in the form of U.S. Treasuries or equivalent, for the Fed lending to any "non-bank."

But on more fundamental Constitutional grounds, an attempt to repeat this in a QEIII would be barred—and the QEII effects could be reversed—by immediate passage of legislation restoring the Glass-Steagall Act through both Houses of Congress. Under Glass-Steagall, not only were commercial banks separated from various kinds of securities-speculation and insurance firms. The Glass-Steagall principle is that only those commercial banks, thus separated, in the Federal Reserve System—U.S. banks—are eligible for Federal support in the form of discount window and special lending, deposit insurance, and other protective regulation. All the big European banks are famously "banking supermarkets" stuffed with investment banking arms, speculative hedge funds, insurance divisions, money-market funds, etc.

The current trans-Atlantic bad-debt bubble, imploding in Europe now, does not qualify for such lending or support; that gambling debt should be left on the shoulders of those who bet on it. Glass-Steagall passage would stop this latest panic bailout.