Fall of the Republic

There is an interesting video produced by Alex Jones called "Fall of the Republic", which in my view merits watching, and is available for free here.

Though I don't agree with everything in the video, and think certain things are overly sensationalist, the main points of the video are sound.

One of the amusing things is in the beginning is that one of the contributors attributes to America the concept of the separation of powers, limited government and the establishment of government in such a way that it serves a common good. This idea actually comes from St. Robert Bellarmine, whose political treatises never left Thomas Jefferson's desk.

Nevertheless, they trace the work of globalism and the current globalist banking industry in creating the crises that grips us presently. The contributors to this documentary compare it to oligarchy, and demonstrate how the international elite function by that and force various policies to erode the rights of the general population.

The video also exposes the establishment of a world governing body of scientists who enforce the state doctrine of population control, family planning, social engineering and climate change.

The significance of global warming doctrine is that by identifying carbon dioxide as the evil which is "destroying the planet", the world governing body will have the right to tax you and me for the right to breathe. This is essential to breaking down sovereignty and self government, which are so necessary to defending a society from control by an external force.

It also shows us many examples of how a police state is on the verge of being created, and (in my opinion) strongly makes the case for a hidden hand controlling Obama by demonstrating the numerous flip flops from his campaign promises of transparency and change and the reality of continuation of Bush policy, and has nothing at all to do with change.

The movie also has the benefit of not being partisan with respect to right and left, taking aim at both Obama and Bush and demonstrating continuity of Obama and Bush's administrations. In reality of course (as it seems to me), there is total continuity of government since 1988.

The film, bringing us several contributors in the form of economists, climate scientists, researchers and bloggers, really hits the nail on the head of the present crisis. It is also aided by numerous video clips of the elites themselves telling us from their own mouths that accountability, sovereignty and freedom do not matter.

Where the movie fails in my view, is in the concluding half hour they describe the work of the global financial elite as trying to destroy capitalism. What they fail to note is that it is the logical and necessary conclusion of capitalism. The instabilities of capitalism are only solvable, those who have can only make certain they continue to have if they turn modern economies into a slave state. The world the film attempts to show us was predicted by Hilaire Belloc nearly 100 years ago in his work "The Servile State", which he makes the case that capitalism must ultimately end in the restoration of slavery.

Another shortcoming (in my view) of the film is that they do not spend enough time explaining the mechanisms of banking. They spend some time talking about derivatives, and the breakdown of regulation with respect to them, but they do not spend enough time talking about banking either in its proper role or its abuse which is at the heart of today's problems.

The proper function of a bank is to put capital into the community. If x number of people have invested in a bank, and they find (as has always been the case) that people need only 10% of their money at a time, they make an investment on some kind of productive enterprise. This gains the bank a profit, and it was on a productive loan for something say such as mining or manufacturing. The fee they charge for the use of their money is just, it is a percentage of the profit earned with their productive loan. In that sense their money was capital, without which the productive venture could not have worked, and thus the bank has infused capital into the community.

Banking today by contrast takes capital out of the community, and then demands more from the government when they run out of money.

Another of the film's flaws is they act as if America is now the last country standing in the way of the global elite. There are many other countries with many members of their populace just as alarmed as we are, albeit they might be a little less organized and noted than resistance in this country.

Nevertheless, in spite of these and other shortcomings or its Amero-centric outlook, "Fall of the Republic" is an important movie with an important message, our allegiance ought not be to democrats and republicans, neither to 3rd parties, but to a unifying principle of society guaranteeing our freedom and sovereignty, which as Americans is the constitution and the bill of rights. Even as a monarchist I can take that over the new order that is coming.

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Worst...Bailout...Ever!

The bailouts are coming at such a regular basis that they ought to make them into a “reality” TV series. What distinguishes “reality” TV from other forms of entertainment is that one, they are “unscripted” but highly manipulated formats, and two, they have nothing to do with reality. Certainly the weekly bailout plans qualify. If not exactly unscripted, they are poorly thought out and are mainly a matter of trying to manipulate markets. And they are certainly unrealistic. Hence, they are good candidates for being made into regular TV episodes, perhaps as “Survivor—American Economy” or “Last Bank Standing.” Something like that.

However, if they were made into a TV serial, they would be subject to the judgment of Comic-Book Man from The Simpsons, and this latest installment would likely earn from him his oft repeated honorific, “Worst...episode...ever!” First, let us see how these new “public-private partnerships” are supposed to work. The best explanation comes from Nouriel Roubini's RGE Monitor site:

Sample Investment Under the Legacy Loans Program:
Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Sample Investment Under the Legacy Securities Program:
Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.

Note that in the first case, the “investor” puts up $6 dollars for every $84 dollars of “assets” being purchased, while in the second he puts in as little $25. True, these 12-to-1 and 4-to-1 leverage ratios are much lower than the 30-, 50-, or 80-to-1 leverages that the banks and hedge funds are used to. Nevertheless, the leverage is all from public money. Supposedly, this “shares” the risk between the public and private sector, and allows the so-called private sector to price the toxic assets. But for every dollar at risk from the private sector, the public has from $3 to $12 at risk. So much for sharing. Further, the loans are “non-recourse.” That means that if the investment fails and the loan can't be repaid, the public takes the full loss, while the investor only loses the amount of money he put up initially; he has no liability to repay the public.

This is supposed to establish a “market price” for the toxic waste, but it will not. Rather, it will allow select investors to play the toxic-waste market with public money. This will not lead to market behavior. People play the market differently with their own money than with other people's money. And the program does nothing to address the underlying problem. Either the investors will offer enough money to clear the banks' balance sheets, which might mean that they've paid too much, or they won't, which means that the banks won't sell. But in either case this is a huge commitment of public funds for a problem which has a simpler and time-tested solution.

A few of the money-center banks, some insurance companies and many hedge funds made a series of bad bets. They are insolvent. There is a procedure for insolvency. The banks should be go into receivership and be broken up. The losses should be written off, and that's that. Nothing new or radical in that solution, it happens time and again.

So why not use it? Two reasons. These are no ordinary banks. They are huge behemoths so complex that even the managers and directors do not understand them. This, in fact, is the complaint of the man who took over AIG. That whole company was brought down by the activities occurring in one small division of about 400 employees, the very ones who are now getting the bonuses. But the very size of these institutions grants them great power over the economy. Further, their counter-parties, the people on the other side of the bets, tend to be powerful governments and institutions. Between them, they have the power to help themselves to a few trillion of the taxpayer's money. You will note that there is never enough money for such luxuries as health-care or education, but they can't print it fast enough for war or bankers.

Even if the plan works, it will fail, because it doesn't address the underlying problem. And that problem is that we no longer make what we consume. Unless we restore the real economy, the economy that makes real things and provides real services, we cannot restore the banks. Even solvent banks require productive enterprises to which they can lend money. But we ran out of these a long time ago. There simply isn't enough demand, even in good times, for loans from our diminishing productive sector. Hence, the banks turned to lending it for houses people couldn't afford and credit they shouldn't be using, but must because the wages are too low.

Making the big banks solvent again will not provide them with solvent customers. That can only come from a restructuring of the economy that shifts us back to real production rather than financial black magic. If we restore the economy, restoring the banks will be a trivial problem. If we do not restore the economy, it simply will not matter how “sound” the banks are.

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The Tennessee Ernie Ford Solution

The markets took great comfort in Ben Bernanke's testimony to congress yesterday, reading it as a statement that the economy could recover by the end of the year. However, his statement was in the subjunctive mood, not the indicative; it was a conditional statement: IF all the bailout plans work by the end of the year, THEN the economy will recover. Well, duh. But as well-intentioned as the bailout plans are, there is good reason to believe that we are nowhere near the bottom. Further, all the plans do--if they do anything at all--is restore the pre-crash economy. But that economy was not viable; it was a house of cards to begin with, and restoring it will not place the economy in a secure position.
For example, a large portion of the capital of the banks is tied up in mortage obligations and, more importantly, "derivatives" based on those mortgages. But the housing values are nowhere near their bottom, if historical averages can be trusted.
If housing prices correct to their historical averages, which is likely, then the banks balance sheets will weaken and there will be a lot more "troubled assests" for the Troubled Assets Relief Program (TARP) to buy.
The President also laid out his plans last night. It is certainly a comprehensive and well-meaning plan, but I doubt that it will work. The problem with the plan is that it fails to recognize the structural problems in the economy. Obama hopes to restore American manufacturing through a heavy investment in "green" technologies. But even if this was successful, there is no reason to think that manufacturing of these new products won't be outsourced. This is the Tennessee Earnie Ford solution: in the end, we will be "another day older and deeper in debt," but we will not have accomplished anything.
A nation can only grow prosperous by making things. It can never grow properouse by speculation. Our economy is built not on real assets, but on speculative bets. But in speculation, for every winner there is a loser; one party's gains are precisely measured by another party's losses. Only making things can make the nation wealthy, only in the farms, fields, forests, fisheries, factories, and mines can we find our future. Bailing out the old economy will at best give us the old economy. At worst--and more likely--it will bankrupt us.
So what should the President be doing? There are many things he could do, but there are at least four things he ought to do over the course of the next four years:

1. Devalue the dollar. The worth of money relative to other currencies should reflect their trade balances. A country like the United States, with a constant trade imbalance should have a constantly "shrinking" dollar, which by itself is sufficient to bring trade back into balance. But we have the worst of both worlds: a strong dollar and a trade deficit. Devaluing the dollar over the next four years will make imports more expensive and exports cheaper.
   
2. Devaluing the dollar will make lenders more reluctant to lend. But this is not bad news, it is good news. Instead of borrowing the money for infrastructure improvements, we should just print it. While this seems radical, the fact is that we borrow it from people who just print it up themselves: the banks and the Chinese. The idea of "printing" money conjures up visions of hyperinflation. And if the money is just printed to finance tax cuts and operating expenses, this is a possibility. But if it is used to finance actual improvements, like roads, education, and the like, there need be no monetary inflation, so long as there are unemployed resources in the economy. In other words, we can invest our own money in our own future, and provide both jobs and real improvements along the way.
   
3. Finance the highways through weight and distance based tolls. Right now, the "free" ways constitute a subsidy to long distance shippers and the globalized economy. But if the shippers had to pay the full cost of transporting their products, local and regional manufacturing would suddenly have a great advantage over foreign producers, no matter how little they pay their workers.
4. Buy up and break up the institutions that claim to be "too big to fail" (see Buy it Up! Break it Up!.)

Whatever happens, nothing good will happen without a restructuring of the economy. Geithner, Bernanke, and company are trying to chase falling assets and prop them up, but they will fall faster then the government can build supports. It is like trying to "catch a falling knife"; you are likely to get cut. We cannot go back to where we were because where we were was nowhere. The nation will have a distributist solution, or no solution at all.

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Don't Bail It--Rebuild It!

There is certainly a great deal of anger over the bailouts, and particularly over the proposed bailout of the Big 3 automakers. Of course, the major problem is that they are no longer the “Big 3” worldwide, and even domestically. The public, or a large portion of it, perceives the management as arrogant and unresponsive, and the unions as lazy and overpaid. A bailout seems to violate the basic principle of capitalism. Further, it is felt that a chapter 11 bankruptcy is not the end of the company, it is merely a reorganization which will allow the company to abrogate its labor contracts and drive down the labor costs to be more competitive with third world competition (where many of the parts are made). Many feel that even if the auto companies disappear, foreign auto plants in America would simply pick of the slack and there would be as many jobs as before.

There is a partial truth in all of this, but as with all partial truths, they hide more than they reveal. Japan's American plants would probably not expand their production, they would simply import more cars. Honda and Toyota have assembly plants in America mainly for political purposes. And these plants help to keep factories in Japan open because they mainly assemble Japanese parts. There would be no need to expand their American production, since there would be no domestic competition to exert a political threat. Further, the profits from these plants are repatriated to Japan to help their economy, not outs. And it is somewhat odd to see people urging that the union contracts be violated, since this call generally comes from that political quarter which professes to believe in the sanctity of contract. And in any case, the situations between American producers and the Japanese are not comparable. The so-called “legacy” costs for health-care and retirement are socialized costs in Japan; they do not appear on the company's books, but are paid for by taxation. And despite the claims of a lazy workforce, the opposite is the truth; the American workers in general and the auto workers in particular are the most productive in the world.

Finally, there is a great deal of doubt that people would buy a car from a company in Chapter 11, which means that an “11” would go quickly to a “7”; that is, into liquidation. Cars are not a momentary purchase, but involve a “life-of-the-car” relationship for parts, service, warranties, etc. So long as there are doubts about the future, there will be few sales in the present. This means that a large part of the already-shrinking industrial base of America would simply vanish.

Policy makers are thus faced with an almost impossible choice: they must either bail out “private” business, or they must witness the significant and near-fatal contraction of America's ability to make things. The problem is that only by making things can a country hope to be prosperous, and no reasonable person believes that there is any industry capable of replacing the auto industry. Of these two choices, no principled policy maker will want to do the first, and no responsible policy maker can afford to do the second. So what are they to do?

Let me suggest that this presents a great opportunity for a new model of industrial organization in America. A radical model, to be sure, but nevertheless a working model, and one that has shown itself to be highly successful over a long period of time. I am speaking of the model used by Europe's largest supplier of automotive parts, the Mondragón Cooperative Corporation. We would thus replicate a tested model and bring new opportunities to rebuild America's industries.

The biggest liability the automakers have is likely to their own employees in terms of pension obligations. Employees should be able to exchange these debts for ownership of the companies. They would become employee owned and operated, a model that has proven to have both social and competitive advantages. Competitively, employee-owned companies often prove to be more productive, more agile, more creative than their corporate competitors. Socially, the Mondragón corporation has been able to run its own social safety-net programs, its own banks, its own school system, its own R&D, training institutes, retirement programs, and even its own university all without government support. If one is looking for a true libertarian model, one that actually works, and has worked for 50 years, than look to the Basques of Spain for your model.

The devil, of course, is in the details. I think it would be a mistake simply to continue the current organization and merely replace the owners. One of the problems is that the industry, with only three companies, is “too big to fail,” and can thus hold the economy hostage, as they are doing. And bigness works against the cooperative spirit. In Mondragón, they get around this by organizing the corporation as 250+ individual cooperatives, each with its own product line, management, books, etc. The individual worker does not get swamped by the sheer size of the overall corporation (close to 90,000 worker-owners). Scale is as important a factor in industrial organization as anything else. The vertically integrated car companies are in fact dinosaurs. The new companies could be organized as final assembly and distribution companies, engine companies, transmission companies, finance agencies, etc., each with their own products and research.

A reorganization along these lines would allow a rethinking of American industrial practice. For example, companies could be encouraged to use standard parts, thereby lowering the cost of maintenance. No longer would you pay an exorbitant amount for a bolt that is only used by one company and carries a monopoly price. Assembly plants could be dispersed throughout the country, placing them closer to the end markets and lowering costs.

This plan would not reward current management for their mistakes, and would make America more competitive both domestically and globally. However, there is one group more than any other that is likely to oppose such a plan, and that is the UAW. When workers become owners, the need for a union evaporates, and they are left without a function. Union officials then have to go back on the line to make a living, one with far fewer perks than they now enjoy. This is not to disparage the idea of unions; workers need to be represented in bargaining. However, unions, whatever other virtues they may have, institutionalize an opposition between capital and labor. But as John Paul II noted, a labor system is just precisely to the degree it overcomes this opposition.

Sometimes a disaster is also an opportunity, and this is one of those times. We can bail out failure, or we can watch the nation's industrial capacity shrink to third-world levels, or we can use this as an opportunity to build a new American model of industrialization. True, it will be a model we borrowed from the Basques and from Emilia-Romagna (where 40% of GDP is from cooperatives, and enjoys one of the highest standards of living in Europe), but this only shows that we start with a working model, and adapt it to American needs. It would be a great shame if we let this opportunity pass.

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How to go Broke...

...just take advice from the experts! Here is a collection of discussions on Fox News from August of 2006 through December of 2007 in which noted economic "experts" talk about the economy and make their predictions for 2008. All of the experts, save one (Peter Schiff) are wildly optomistic, and they spend their time making absurd predictions, recommending disastrous stocks, and riduculing Schiff, the only speaker who comes within haling distance of reality.

The ignorance about both basic economics and the reality of the economy is frightening; these are supposed to be the people "in the know," the counselors of candidates and kingmakers, the shapers of public opinion. Their disconnect from reality could not be more complete. And yet, one still has to have some sympathy for them. Modern economic education bears so little relation to real-world economies that the "educated" are usually the last to know what the man on the street has long since learned.

Thanks to Richard Spencer of TakiMag for finding this gem.

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Banksta' Rap

See it here.

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