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The migrant crisis in Europe is breaking the back of the European Union

After a year of increasing refugee arrivals it’s safe to say that the pan-European approach, to the extent that it can even be said to exist, is a dismal and deadly failure.

Alex Christoforou

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Post originally appeared on The Automatic Earth.

On the day after a bunch of European countries headed into yet another -emergency- meeting, and as the refugee situation in Greece and the Balkans was more out of hand than ever before, not in the least because the numbers of refugees arriving from -in particular- Turkey are larger than ever, let’s reiterate what should always be the guiding principle driving the response to issues like this.

That is, the only way to approach a crisis such as this one is to put the people first. To say that whatever happens, we will do what we can, first and foremost, to not allow for people to drown, or go hungry or cold, or contract diseases. Because that contradicts our basic morals. The loss of lives and prevention of misery should be the most important thing for everyone involved, all the time, from politicians to citizens.

If we cannot approach both the issue and the people with decency and humanity, we are as lost as they are. If only because we have no claim to being treated better than we ourselves treat others. After all, if someone else’s life is neither sacred nor valuable, why should yours be?

Looking through the response across Europe to the growing numbers and the growing crisis, what’s remarkable is the difference between individual citizens and the governments that are supposed to represent them. Apart from outliers like Hungary PM Victor Urban and the ubiquitous fascist groups from Greece through Germany, citizens win hands-down and across the board when it comes to humanity.

The arguably worst record is set by the European Union, ironically the one body that claims to represent everyone in the 500 million strong continent. Individual politicians in leading nations like Germany, France and the UK are close behind. European ‘leaders’ are not looking for a European solution, they’re all only trying to deal with their own part of the problem. As long as the refugees don’t burden their nations, they’re satisfied.

After a year of increasing refugee arrivals it’s safe to say that the pan-European approach, to the extent that it can even be said to exist, is a dismal and deadly failure.

Yesterday’s ‘Balkan+’ mini-summit was no exception. The AP headline says it all: “EU Agrees To Tighten Border Controls And Slow Migrant Arrival”. Europe’s priority is not to fight or minimize the suffering, it’s to make the problems go away by making the people go away. The new deal that came out of the summit cannot possibly work because it is based on unrealistic predictions of stopping the flow of refugees.

Greece has agreed to ‘host’ 50,000 refugees, but with 10,000 arriving daily that is a meaningless number. Apart from that, this is supposed to take place in ‘holding camps’, and the term all by itself should make one shiver. The ‘hotspots’, another EU initiative, are already making the refugee situation even worse than they have been for months.

Moreover, these people don’t want to stay in Greece, because in Greece economic prospects are so bleak as to be non-existent for the simple reason that the EU itself has demolished the Greek economy. Those responsible for that demolition now seek to force Greece to keep refugees from traveling north in holding camps and severely undermanned fingerprint facilities.

Disgrace comes in spades. It was therefore good to see that Greece had the pretty perfect answer:

Greece Says Refugees Are Not Enemies, Refuses to Protect Borders From Them

Greece’s migration minister has rejected accusations by Germany and other European countries that Greece is failing to defend its borders against mass migration, insisting that the refugees and other migrants trekking to Europe constitute a humanitarian crisis, not a defense threat. “Greece can guard its borders perfectly and has been doing so for thousands of years, but against its enemies. The refugees are not our enemies,”Yiannis Mouzalas said in an interview.

Greece is under pressure from other European governments to use its coast guard and navy to control the huge influx of migrants who are making their way, via the Aegean Sea and Greece’s territory, from the Middle East to Northern Europe, especially Germany. [..] leaders from Greece and other countries on the latest migration route through the Balkans are facing allegations from Germany, Hungary and others that they are passively allowing migrants to pass through.

“In practice what lies behind the accusation is the desire to repel the migrants,” said Mr. Mouzalas. “Our job when they are in our territorial sea is to rescue them, not [let them] drown or repel them.”

Last week alone, Greece received about 48,000 migrants and refugees on its shores, the highest number of weekly arrivals this year, the International Organization for Migration said Friday.

Athens opposes an idea floated by European Commission President Jean-Claude Juncker to set up joint Turkish-Greek border patrols. Greece and Turkey have long-standing disputes over their territorial waters, which have led to military tension over the years.

“This was an unfortunate statement by Mr. Juncker,” Mr. Mouzalas said. “The joint patrols have never been on the table. They have no point anyway, as they wouldn’t help ease the situation.”

Mr. Mouzalas said Turkey should have been invited to Sunday’s summit.“Turkey is the door and Greece is the corridor; Europe should not treat Greece as the door..”

But count on Brussels and Berlin to issue Athens with more threats. It worked over the summer, so… Still, Europe as a whole, the 28 nations that make up the EU, can and will not agree on the entire issue and all its aspects. And that is why Yanis Varoufakis is wrong in his approach, and his call to Britain (which he shares with Xi Jinping of all people) and the rest of Europe:

Yanis Varoufakis Says Britons Should Vote To Stay In Union

Yanis Varoufakis, the former Greek finance minister, has called on Britons to vote to remain in the European Union in the upcoming referendum. The bête noire of the European political elite was speaking at a Guardian Live event at Central Hall in Westminster, central London, on Friday night. He said: “You have a referendum coming up. My message is simple yet rich: those of us who disdain the democratic deficit in Brussels, those of us who detest the authoritarianism of a technocracy which is incompetent and contemptuous of democracy, those of us who are most critical of Europe have a moral duty to stay in Europe, fight for it, and democratise it.”

Yanis is wrong because the EU is not a democratic institution, and can therefore not be “democratized”. It’s a pipedream gone horribly awry. It should be exorcised. And even if “democratization” were possible in theory, before you can reform the EU, you’re 10-20 years or more down the road. And there’s no such time available. The problems exist in the presence, not just in the future.

The EU is a loose collection of separate sovereign nations that came together in times of plenty. These nations will always, when pressured, seek their own advantages, never that of the collective if it means a disadvantage for themselves. The whole idea behind the union has been, from the start, that of a tide that lifts all boats. And that promise has already been smashed into a corner, bruised and broken beyond repair.

After Greece there can be no doubt of that. And the other separate EU-member economies are not exactly doing well either. Mario Draghi pumps €60 billion a month into the eurozone engine, but it keeps leaking just as hard and the best it can do is sputter.

In institutions such as the EU, organized like the EU, power will inevitably flow towards the center. And at some point in that process, democracy will vanish into thin air. Draghi’s €60 billion will just as inevitably benefit the power center most, and leave the periphery ever poorer. This is not an unfortunate coincidence, it’s built into the union’s structure. Which is therefore not merely undemocratic, it’s inherently anti-democratic.

Nobody in Europe ever voted for Jean-Paul Juncker -or had the chance to- to represent them, at least not in any direct democratic fashion. And nobody outside of Germany ever voted for Angela Merkel -or had the chance to- . Yet, these are arguably the most powerful people in the EU. That in a nutshell is what’s wrong with and in Europe.

Financial and political power reside with the rich and powerful nations, and they acquire more of each as they go along. This is unavoidable in the present situation. It can only be corrected by decentralization of power, but since that would run counter to what Brussels and Berlin envision (more power for themselves), it’s not going to happen. Europe will not be ‘democratized’.

Or put it this way: the only way EU nations can regain democratic values is by leaving the union. That is also the only real vote Europeans have left; a vote within the EU structure goes wasted. Ask the Greeks.

Europeans need to acknowledge that the EU has failed, and inexorably so. Schengen is already dead, walls and fences are popping up everywhere. All the rest is just make-believe. There will never be a consensus on the ‘distribution’ of the numbers of refugees. Views and national interests are too far apart.

And the vested interests in the centers of power are too strong. Merkel may be Europe’s unelected leader, but she will always put German interests before those of the 27 other nations. This may be accepted in 7 years of plenty, but it won’t be in the 7 lean years.

Meanwhile, it’s the hundreds of thousands of refugees who pay the price for the fundamental faultlines in what was supposed to bring and hold Europe together. And an interesting additional issue, which so far flies largely under the radar, arises.

First, refugee numbers keep rising, as Reuters reports:

Immigration flows to Greece surged to 48,000 in the five days to October 21, the highest weekly total so far this year, bringing the number of Mediterranean migrant arrivals in Europe to 681,000 the International Organization for Migration said today. Amin Awad, the Middle East director for the UN refugee agency UNHCR, said Russian airstrikes and increased fighting around the Syrian city of Aleppo had contributed to the “dynamic of displacement”, with about 50,000 displaced, but had not contributed much to the refugee exodus. But he said the number of internally displaced people within Syria had fallen from 7.6 million people to 6.3 million, a decline that could be attributed to the refugee flows to Europe, as well as people being missed from the latest count.

48,000 in 5 days in Greece from October 17-21, 12,000 in one day in Slovenia. Over 5,000 in 5 hours on Lesvos Friday. 52 refugees died off Greece in 10 days. That’s five lives lost every day. While Brussels stand by and watches, as does Merkel, paralyzed by fears of losing votes and power at home. And when they do act, it’s most of all to try and quell the refugee flood, not to minimize the suffering.

Turkey gets offered billions to built camps on its territory, Greece is threatened into doing the same. Makes you wonder where Juncker and Merkel think the people they want to lock up in these camps will eventually wind up.

Slovenia is the latest bottleneck, after many miles of walls and and fences and razorwire have been installed elsewhere.

MainMigrantRoute
Last Tuesday, Slovenia was first reported to be asking for “additional police forces”.

Slovenia Asks For EU Police Help As Thousands Enter Country

Around 19,500 have entered Slovenia since Friday after Hungary sealed its southern border with Croatia. Speaking after a meeting with European Council President Donald Tusk and EU chief executive Jean-Claude Juncker, President Borut Pahor said:

We need fast assistance of the European Union. Slovenia will formally ask for additional police forces to guard the border between Slovenia and Croatia and for financial help.

The country has deployed 140 soldiers to the border to assist police and hasn’t ruled out building a fence as part of its efforts to control the influx of migrants.

And I thought: police? What police? There is no EU police force. At least not a ‘boots on the ground’ one. There’s Europol, Europe’s own Interpol, but they do intelligence. There’s the European Gendarmerie Force, but that’s a (para-)military police force. And we’re dealing with sovereign nations here, so any police force, let alone a military one, would face huge legal issues; at least if people pay attention.

Then a few days later, Reuters had this:

Worried Slovenia Might Built Fence To Cope With Migrant Crisis

Slovenia said it will consider all options, including fencing off its border with Croatia, if European leaders fail to agree a common approach to the migrant crisis as thousands stream into the ex-Yugoslav republic. Migrants began crossing into Slovenia last Saturday after Hungary closed its border with Croatia. The Slovenian Interior Ministry said that a total of 47,000 had entered the country since Saturday, including some 10,000 in the past 24 hours. Slovenian officials said the country is too small and does not have enough resources to handle such large numbers of people. [..]

According to Slovenia’s interior ministry, the cost of fencing off the 670-km long border with Croatia would be about €80 million. Slovenia has asked for the EU for assistance and officials said Austria, Germany, Italy, France, Hungary, the Czech Republic, Slovakia and Poland offered to send police reinforcements.

That’s 8 different countries offering to send policemen. But what status would these people have? Would they be allowed to bear arms? In a foreign sovereign nation? I’d love to see the legal documents that justify such a move. Would these foreign police officials also enjoy immunity, as Europol officers do? Under whose command would they operate?

I can imagine perhaps these new policemen, or border guards, could be Frontex, but Slovenia is not on Europe’s border. And Frontex already lacks the personnel to execute its intended policies (halt the refugees) in places where Europe does have borders.

This looks like a deep and dark legal quagmire. So perhaps it’s not surprising that Slovenia digs a little deeper still, as the Guardian noted yesterday:

Slovenia To Hire Private Security Firms To Manage Migrant Flows

Slovenia is planning to employ private security firms to help manage the flow of thousands of migrants and refugees travelling through the country toward northern Europe, a senior official has said. Bostjan Sefic, state secretary at the interior ministry, said 50-60 private security guards would assist the police where necessary. More than 76,000 people have arrived in Slovenia from Croatia in the past 10 days. More than 9,000 were in Slovenia on Monday, hoping to reach Austria by the end of the day, while many more were on their way to Slovenia from Croatia and Serbia. The emergency measure was announced by the prime minister, who described the migrant crisis as the biggest challenge yet to the EU.

If a joint solution is not found, [EU] will start breaking up, Miro Cerar warned. About 2,000 migrants waited in a field in Rigonce on the Croatian border on Monday for buses to take them to a nearby camp to be registered before they are allowed to proceed north. [..] Slovenia, the smallest country on the Balkan migration route, has brought in the army to help police. Other EU states have pledged to send a total of 400 police officers this week to help manage the flow of people. Over the past 24 hours, 8,000 people arrived in Serbia en route to northern Europe, the UN refugee agency, UNHCR, said.

Now I know it all perhaps depends on what tasks the various ‘additional’ crew are supposed to handle. Frontex could be doing registration and finger printing. Europol could do some stuff behind the scenes, like sniffing out alleged terrorists. But actual policemen and soldiers and even private security operating inside a sovereign European nation?

The overarching question is how this is different, how far removed is it, from German soldiers and policemen patrolling in for instance Greece? And what would be the reaction from the Greek people to such a development? Or we can turn it around: how would Germans react to Greek soldiers operating on German soil? Once you provide a legal justification for one situation, this should cover all 28 nations, and equally.

Another question is Slovenia once hires private security, how far away are we from employing some subsidiary of Blackwater to patrol the Aegean and/or other parts of the Mediterranean? Or land-based border crossings for that matter?

It will become clearer, fast, what an awful mess Brussels and Berlin have created here, because with winter approaching more refugees will fall victim to the conditions under which they’re forced to live once they’ve entered Europe. Which, in their own eyes, will still be preferable to the conditions in their homelands. And then what will we do, when dozens start dying from cold and diseases? Send in more police and military?

This is a road to a very bleak nowhere. We can only possibly return to what I started out with: “the only way to approach a crisis such as this one is to put the people first.” That is, pay for and send in aid agencies, not officers bearing arms.

And perhaps Europe should begin to ponder the possibility that this is not something it can stop at will. That the 500 million citizens of the EU may have to share their bounty with a few million newcomers. Who, on the whole, look a lot fitter, more determined and more motivated than scores of Europeans do, by the way.

References:

http://www.theautomaticearth.com/2015/10/europes-on-a-road-to-a-very-bleak-nowhere/

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Macron pisses off Merkel as he tries to sabotage Nord Stream 2 pipeline (Video)

The Duran – News in Review – Episode 177.

Alex Christoforou

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The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss an EU compromise for Nord Stream 2 where EU member states, the EU Parliament, and its Commission will give the bloc more oversight on gas pipelines, with one caveat…the Nord Stream 2 project with Russia will not be threatened by the new regulations in the agreement.

Macron pushed hard to have the new regulations include (and derail) Nord Stream 2, an action which annoyed Angela Merkel, who eventually got her way and delivered another blow to Macron’s failing French presidency.

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Via The Express UK

Angela Merkel hit back at Emmanuel Macron over Russia and Germany’s pipeline project, declaring it would “not be a one-sided dependency”. The German Chancellor explained that Germany will expand its gas terminals with “liquified gas”. Speaking at a press conference, Ms Merkel declared: “Do we become dependent on Russia because of this second gas pipeline? I say no, if we diversify. Germany will expand its gas terminals with liquefied gas.

“This means that we do not want to depend only on Russia, but Russia was a source of gas in the Cold War and will remain one.

“But it would not be one-sided dependency.”

Via DW

The EU parliament and its Council are set to adopt new regulations on gas pipelines connecting the bloc members with non-EU countries, the EU Commission announced early on Wednesday.

The upcoming directive is based on a compromise between EU member states and EU officials in Brussels. The bloc leaders agreed to tighten Brussels’ oversight of gas delivery and expand its rules to all pipelines plugging into the EU’s gas distribution network.

“The new rules ensure that… everyone interested in selling gas to Europe must respect European energy law,” EU Energy Commissioner Miguel Arias Canete said in a statement.

For example, owners of pipelines linking EU and non-EU countries would also be required to allow access for their competitors. Brussels would also have more power regarding transparency and tariff regulations.

Russian ambassador slams US

Brussels has repeatedly expressed concern over the controversial Nord Stream 2 project which would deliver Russian gas directly to Germany through a pipeline under the Baltic Sea. Many EU states oppose the mammoth project, and the US claims it would allow Moscow to tighten its grip on the EU’s energy policy.

Berlin has insisted that the pipeline is a “purely economic” issue.

Speaking to Neue Osnabrücker Zeitung daily, Russian ambassador to Berlin, Sergey Nechayev, slammed the US’ opposition as an attempt to “push its competition aside” and clear the way for American suppliers of liquefied gas.

“It’s hard to believe that a country that is destroying the rules of free and fair trade, that is imposing import tariffs on its competition, that is flying slogans like ‘America First’ on its flags and often threatens biggest European concerns with illegal sanctions, is now really concerned about European interests,” the Russian envoy said in remarks published in German on Wednesday.

Last week, France unexpectedly rebelled against the project, but Berlin and Paris soon reached a compromise. Thanks to their agreement, the latest deal is not expected to impede the ongoing construction of Nord Stream 2.

Citing sources from negotiators’ circles, German public broadcaster ARD reported that the deal left room for Germany to approve exceptions from the EU-wide rules.

According to the EU Commission, however, exceptions are “only possible under strict procedures in which the Commission plays a decisive role.”

The Gazprom-backed pipeline is set to be completed by the end of the year.

 

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UK Defence Secretary looking for a fight with both China and Russia (Video)

The Duran Quick Take: Episode 87.

Alex Christoforou

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The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss UK Defence Secretary Gavin Williamson’s idea to deploy hard power against China and Russia, starting with plans to send Britain’s new aircraft carrier to the tense sea routes in the South China Sea.

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“Britain’s Gavin Williamson places Russia & China on notice, I’m not joking,” authored by John Wight, via RT

UK Defence Secretary Gavin Williamson is itching for conflict with Russia and China. He’s not mad. Not even slightly. But he is stupid. Very.

Unlike former fireplace salesman Gavin Williamson, I am no military expert. But then you do not need to be one to understand that while Britain going to war with Russia and China might work as a video game, the real thing would be an exceedingly bad idea.

So why then in a speech delivered to the Royal United Services Institute in London, did Mr Williamson’s argument on the feasibility of the real thing elicit applause rather than the shrieks of horror and demands he be sacked forthwith it should have? This is a serious question, by the way. It is one that cuts through British establishment verbiage to reveal a country ruled not by the sober and doughty political heavyweights of years gone by, but by foaming fanatics in expensive suits

Placing to one side for a moment the insanity of the very concept of Britain deploying hard power against Russia and/or China, the prospect of fighting a war against two designated enemies at the same time is a recipe for disaster. Not satisfied with that, though, Mr Williamson is actually contemplating a conflict with three different enemies at the same time – i.e. against Russia, China, and the millions of people in Britain his government is currently waging war against under the rubric of austerity.

“Today, Russia is resurgent,” Mr Williamson said, “rebuilding its military arsenal and seeking to bring the independent countries of the former Soviet Union, like Georgia and Ukraine, back into its orbit.”

For Mr Williamson and his ilk a resurgent Russia is a bad thing. Much better in their eyes if Russia, after the Soviet era in the 1990s, had remained on its knees as a free market desert; its state institutions in a state of near collapse and tens of millions of its citizens in the grip of immiseration. Yes, because in that scenario Western ideologues like him would have had free rein to rampage around the world as they saw fit, setting fire to country after country on the perverse grounds of ‘saving them’ for democracy.

As it is, he and his still managed to squeeze in a considerable amount of carnage and chaos in the years it did take Russia to recover. The indictment reads as follows: Yugoslavia destroyed; Afghanistan turned upside down; Iraq pushed into the abyss; Libya sent to hell.

By the time they turned their attention to Syria, intent on exploiting an Arab Spring that NATO in Libya transformed into an Arab Winter, Russia had recovered and was able to intervene. It did so in concert with the Syrian Arab Army, Iran and Hezbollah to save the day – much to the evident chagrin of those who, like Gavin Williamson, prefer to see countries in ashes rather than independent of Western hegemony.

As to the facile nonsense about Russia trying to bring Georgia and Ukraine back into its orbit, both countries happen to share a border with Russia and both countries, in recent years, have been used by the UK and its allies as cat’s paws with the eastward expansion of NATO in mind.

It gets worse though: “The Alliance must develop its ability to handle the kind of provocations that Russia is throwing at us. Such action from Russia must come at a cost.”

“Provocations,” the man said. Since British troops have been taking part in exercises on Russia’s doorstep, not the other way round, one wonders if Gavin Williamson wrote this speech while inebriated.

It is Russia that has been on the receiving end of repeated provocations from NATO member states such as the UK in recent times, and it is Russia that has been forced to respond to protect its own security and that of its people where necessary. Furthermore, not only in Russia but everywhere, including the UK, people understand that when you have political leaders intoxicated by their own national myths and propaganda to such an extent as Britain’s Defence Secretary, danger ensues.

The most enduring of those national myths where London is concerned is that the British Empire was a force for good rather than a vast criminal enterprise, that Britain and America won the Second World War together alone, that Iraq had WMDs, and that international law and international brigandage really are one and the same thing.

Perhaps the most preposterous section of the speech came when Mr Williamson tried to fashion a connection between Brexit and Britain’s military strength: “Brexit has brought us to a moment. A great moment in our history. A moment when we must strengthen our global presence, enhance our lethality, and increase our mass.”

Reading this, you can almost hear Churchill turning in his grave. Britain’s wartime prime minister had such as Gavin Williamson in mind when he famously said, “He has all the virtues I dislike, and none of the vices I admire.”

Mr Williamson obviously misread the memo talking up not the opportunity for increased conflict with China after Brexit but trade.

This was not a speech it was a linguistic car crash, one that will forever command an honoured place in compendiums of the worst political speeches ever made. As for Gavin Williamson, just as no responsible parent would ever dream of putting an 10-year old behind the wheel of car to drive unsupervised, no responsible British government would ever appoint a man like him as its Defence Secretary.

In years past, he would have struggled to find employment polishing the brass plate outside the building.

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The Birth Of A Monster

The banking establishment welcomed the Fed with open arms. What gives?

The Duran

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Authored by David Howden via The Mises Institute:


The Federal Reserve’s doors have been open for “business” for one hundred years. In explaining the creation of this money-making machine (pun intended – the Fed remits nearly $100 bn. in profits each year to Congress) most people fall into one of two camps.

Those inclined to view the Fed as a helpful institution, fostering financial stability in a world of error-prone capitalists, explain the creation of the Fed as a natural and healthy outgrowth of the troubled National Banking System. How helpful the Fed has been is questionable at best, and in a recent book edited by Joe Salerno and me — The Fed at One Hundred — various contributors outline many (though by no means all) of the Fed’s shortcomings over the past century.

Others, mostly those with a skeptical view of the Fed, treat its creation as an exercise in secretive government meddling (as in G. Edward Griffin’s The Creature from Jekyll Island) or crony capitalism run amok (as in Murray Rothbard’s The Case Against the Fed).

In my own chapter in The Fed at One Hundred I find sympathies with both groups (you can download the chapter pdf here). The actual creation of the Fed is a tragically beautiful case study in closed-door Congressional deals and big banking’s ultimate victory over the American public. Neither of these facts emerged from nowhere, however. The fateful events that transpired in 1910 on Jekyll Island were the evolutionary outcome of over fifty years of government meddling in money. As such, the Fed is a natural (though terribly unfortunate) outgrowth of an ever more flawed and repressive monetary system.

Before the Fed

Allow me to give a brief reverse biographical sketch of the events leading up to the creation of a monster in 1914.

Unlike many controversial laws and policies of the American government — such as the Affordable Care Act, the Troubled Asset Relief Program, or the War on Terror — the Federal Reserve Act passed with very little public outcry. Also strange for an industry effectively cartelized, the banking establishment welcomed the Fed with open arms. What gives?

By the early twentieth century, America’s banking system was in a shambles. Fractional-reserve banks faced with “runs” (which didn’t have to be runs with the pandemonium that usually accompanies them, but rather just banks having insufficient cash to meet daily withdrawal requests) frequently suspended cash redemptions or issued claims to “clearinghouse certificates.” These certificates were a money substitute making use of the whole banking system’s reserves held by large clearinghouses.

Both of these “solutions” to the common bank run were illegal as they allowed a bank to redefine the terms of the original deposit contract. This fact notwithstanding, the US government turned a blind eye as the alternative (widespread bank failures) was perceived to be far worse.

The creation of the Fed, the ensuing centralization of reserves, and the creation of a more elastic money supply was welcomed by the government as a way to eliminate those pesky and illegal (yet permitted) banking activities of redemption suspensions and the issuance of clearinghouse certificates. The Fed returned legitimacy to the laws of the land. That is, it addressed the government’s fear that non-enforcement of a law would raise broader questions about the general rule of law.

The Fed provided a quick fix to depositors by reducing cases of suspensions of their accounts. And the banking industry saw the Fed as a way to serve clients better without incurring a cost (fewer bank runs) and at the same time coordinate their activities to expand credit in unison and maximize their own profits.

In short, the Federal Reserve Act had a solution for everyone.

Taking a central role in this story are the private clearinghouses which provided for many of the Fed’s roles before 1914. Indeed, America’s private clearinghouses were viewed as having as many powers as European central banks of the day, and the creation of the Fed was really just an effort to make the illegal practices of the clearinghouses legal by government institutionalization.

Why Did Clearinghouses Have So Much Power?

Throughout the late nineteenth century, clearinghouses used each new banking crisis to introduce a new type of policy, bringing them ever closer in appearance to a central bank. I wouldn’t go so far as to say these are examples of power grabs by the clearinghouses, but rather rational responses to fundamental problems in a troubled American banking system.

When bank runs occurred, the clearinghouse certificate came into use, first in 1857, but confined to the interbank market to economize on reserves. Transactions could be cleared in specie, but lacking sufficient reserves, a troubled bank could make use of the certificates. These certificates were jointly guaranteed by all banks in the clearinghouse system through their pooled reserves. This joint guarantee was welcomed by unstable banks with poor reserve positions, and imposed a cost on more prudently managed banks (as is the case today with deposit insurance). A prudent bank could complain, but if it wanted to use a clearinghouse’s services and reap the cost advantages it had to comply with the reserve-pooling policy.

As the magnitude of the banking crisis intensified, clearinghouses started permitting banks to issue the certificates directly to the public (starting with the Panic of 1873) to further stymie reserve drains. (These issues to the general public amounted to illegal money substitutes, though they were tolerated, as noted above.)

Fractional-Reserve Free Banking and Bust

The year 1857 is a somewhat strange one for these clearinghouse certificates to make their first appearance. It was, after all, a full twenty years into America’s experiment with fractional-reserve free banking. This banking system was able to function stably, especially compared to more regulated periods or central banking regimes. However, the dislocation between deposit and lending activities set in motion a credit-fueled boom that culminated in the Panic of 1857.

This boom and panic has all the makings of an Austrian business cycle. Banks overextended themselves to finance the booming industries during America’s westward advance, primarily the railways. Land speculation was rampant. As realized profits came in under expectations, investors got skittish and withdrew money from banks. Troubled banks turned to the recently established New York Clearing House to promote stability. Certain rights were voluntarily abrogated in return for a guarantee on their solvency.

The original sin of the free-banking period was its fractional-reserve foundation. Without the ability to fund lending activity with their deposit base, banks never would have financed the boom to the extent that it became a destabilizing factor. Westward expansion and investment would still have occurred, though it would have occurred in a sustainable way funded through equity investments and loans. (These types of financing were used, though as is the case today, this occurred less than would be the case given the fractional-reserve banking system’s essentially cost-free funding source: the deposit base.)

In conclusion, the Fed was not birthed from nothing in 1913. The monster was the natural outgrowth of an increasingly troubled banking system. In searching for the original problem that set in motion the events culminating in the creation of the Fed, one must draw attention to the Panic of 1857 as the spark that set in motion ever more destabilizing policies. The Panic itself is a textbook example of an Austrian business cycle, caused by the lending activities of fractional-reserve banks. This original sin of the banking system concluded with the birth of a monster in 1914: The Federal Reserve.

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