‘Let There Be MONEY’

by Andrew P. Napolitano by Andrew P. Napolitano Recently by Andrew P. Napolitano: The Case Against Military Tribunals

The American International Group (AIG) announced today that it has finalized a deal that would in effect reduce the insurance company’s debt to the Federal Reserve to the tune of $25 billion. This is a clear example of how the Federal Reserve (which is not possessive of a reserve of anything but its own unknown fantastic resources) can create wealth out of thin air, and enrich itself by "lending" money. The big picture here is that after numerous financial transactions involving AIG, JP Morgan Chase, the Treasury Department, and the NY Federal Reserve Bank during the fall of 2008, AIG ended up with $85 billion which it used to make emergency payments to its largest creditors, the largest of which was $13 billion to (are you ready?) Goldman Sachs. Now AIG has announced that it will pay back about $25 billion to the Fed. But the Fed never loaned real money to AIG, it loaned "fiat" money.

Here is how the Fed pulled off this deal. (I will use round numbers for the sake of simplicity.) JP Morgan Chase has an account at the Fed into which it has deposited, let’s say, for example, $500,000,000. The Fed asks Chase to be its intermediary to AIG. In other words, the Fed will "give" $49.5 billion to Chase and Chase will transfer $49.5 billion to AIG, and AIG will owe the Fed $49.5 billion, plus interest. Chase will earn a seven-figure fee for this service. So, how does the Fed get $49.5 billion into Chase’s hands? Does it send $49.5 billion in gold bricks to Chase? No. Does it send a wheelbarrow full of $49.5 billion in cash to Chase? No. Does it write a $49.5 billion check to Chase from its own money? No. The Fed "gives" $49.5 billion to Chase by adding two zeroes to Chase’s account at the Fed. Thus, $500,000,000 at the stroke of a few computer keys, becomes $50 billion. This is called "fiat" money ("fiat" is Latin for "let it be," as in "let it come into existence") because it was just created out of thin air on the Fed’s balance sheet. The Fed is the only bank in the U.S. which may lawfully do this. Chase then serves as the Fed’s agent, and sends a Chase check to AIG for $49.5 billion, and AIG promises to repay the $49.5 billion, not to Chase, but to the Fed. Note, that the Fed has not parted with so much as a dime of its wealth, but AIG now has $49.5 billion in real cash with which to pay its creditors.

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