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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Breaking the Oligararchs

Capitalism is as unsafe as the Bank. --G. K. Chesterton

Simon Johnson knows something about banking. In particular, he knows when banking goes wrong. As the former Chief Economist of the IMF, it was his job to know that. Nations that had gotten themselves into trouble would come to him hat in hand and ask for a bailout. He knows why these nations get into trouble, for the trouble is always the same, and he recounts the troubles in an article in the Atlantic Monthly. The trouble with these economies is oligarchy, the control of the many by the few:

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

We have normally associated these conditions with “Banana Republics” and third-world kleptocracies. But these nations were only doing on small-scale what the American Bankers were doing on a grand-scale:

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Remarkably, the solution Dr. Johnson advocates is exactly the same one that Distributism does, break up the oligarchies:

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

As things now stand, the Obama Administration is mortgaging the future to restore the oligarchs to their positions of power, in the naïve belief that only oligarchy can save us. Even if the plans were to work, the best they could do is restore the conditions that created the current crises. Why this failure of vision? Johnson identified the reason last night on the Bill Moyers Journal:

I think the banks have control of the state, Bill. Not the state control of the bank. If the state had control of the banks, the banks wouldn't be able to turn around and say, no on your Chrysler deal and no way on modifying the rules about mortgages and allowing bankruptcy judges to modify mortgages in bankruptcy. These are two hot issues this week. The banks are saying no to the government.

While Dr. Johnson does advocate the Distributist solution, his analysis does not go as deep as does that of the Distributists. G. K. Chesterton identified the problem: Capitalism is as unsafe as the Bank. Modern banking is an inherently unstable business; you borrow short to lend long, which as any investor can tell you is a recipe for disaster. The problem is exacerbated by the fractional reserve system: the banks take the depositor's money and leverage it by printing 10 times the amount to lend out. This makes it a very profitable business in good time, but it also means that even a small amount of defaults can wipe out a bank's capital. Further, since the banks can print such enormous amounts of money, we need a “central bank” to control the level of lending with all sorts of Rube Goldberg financial contraptions. On this inherently unstable financial base rests the entire system of modern capitalism.

Since the banks do hold the system hostage, they can get whatever they want from the government. In fact, the more dire their situation, the stronger their bargaining position. They demand—and get—a veto power over the government; they are, in effect, the effective rulers of the state. But it is a state that is no longer sustainable. Johnson makes it clear that the oligarchies must be broken before economic order can be restored.

And if they are not? Simon Johnson leaves us with a dire warning:

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

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Blaming the Poor

You have, no doubt been wondering who to blame for the current market meltdown. Was it the greedy bankers, the venial politician, the Wall Street manipulators? Was it a free market failure? All of the above?

The right-wing blogosphere answers, “It was the poor.” And, of course, their powerful corporate and congressional allies. We all know how powerful the poor are; we just never heard before that they were capable of bringing down the whole financial system. But the right wing has uncovered the nefarious plot. For example, Grant Havers, at Takimag.com, states that the “Democrats insisted on a mass affirmative action program to help the poorest Americans acquire mortgages they could never afford.” Stan Leibowitz of the Independent Institute claims that in the drive to increase homeownership, “particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards.” Neil Cavuto of Fox News laments “Loaning to minorities and risky folks is a disaster.” And National Review Online proclaims “One of the reasons so many bad mortgage loans were made in the first place is that Barack Obama’s celebrated community organizers make their careers out of forcing banks to do so.”

What is the act that has all the right up in arms? It is an obscure law known as the Community Reinvestment Act (CRA) which was passed in 1977. How did this 30 year-old law cause the current crises? According to the mythology, community groups like ACORN used it to strong-arm banks and mortgage companies into the subprime business. Hence, the poor bankers, under threat from community organizers like Barrack Obama (yes, “that one”) were forced into a business they had no intention of entering.

The interesting thing about this claim is that none of the bankers and mortgage bankers are making it. In fact, most of the loans were made by organizations not even covered by the act, as Business Week points out. The CRA was originally passed to combat “red-lining,” the practice by which credit-worthy applicants were denied loans because they lived in certain neighborhoods which the banks had “red-lined.” In fact, loans made under the CRA “loans made under the CRA program were made in a more responsible way than other subprime loans,” according to Business Week.

So why the effort to blame the poor in this matter? The reasons are partly political and partly ideological. For the defenders of the free market, the subprime meltdown has been a big embarrassment. The fact that the market could err as badly as it did contradicts the theory of an all-wise and all-knowing market. “If only the market is unregulated, everything will work out fine.” Well, no, actually. The market is capable of great errors, errors the rest of us are expected to pay for.

The other reason is that the right is desperate. McCain's campaign seems to have stalled, and the economy is the biggest reason. Having someone to blame, and especially “minorities.” absolves the right and the Republicans of any responsibility.

Which is unfortunate. Understanding a problem is the first step towards fixing it, and misunderstanding guarantees that the “fix” will only make it worse. The left is out to blame the greed of the bankers, and the right the venality of the poor. Both answers are wrong. To be sure, there are those who are greedy, or venial, or both. But this is not the root cause of the problem. The real root concerns the way we create money.

Money is created by the banks (not, as the myth has it, by the government), who must keep creating money, even when there is no need for it. Ideally, banks would only lend to solvent borrowers for productive purposes. But suppose there is a shortage of productive investments. Suppose that the productive economy was actually shrinking, that jobs were being shipped overseas and not being replaced. Suppose that wages were stagnant or shrinking, so that demand was actually diminishing. In such circumstances, there would be little need for new money. But the banks must keep creating money in order to stay in business. In such circumstances, they will be forced to lend to weaker consumers to prop up demand and to speculators, whose demand for money is infinite.

This is, in fact, the circumstances in which the American economy finds itself. Median wages have been stagnant for the last 30 years and have actually shrunk since the start of the Cheney-Bush administration. The banks had to find borrowers, and the pool of prime quality borrowers was insufficient. So they went to subprime borrowers.

This actually worked pretty well. One thing must be clearly understood: the subprime market did not fail; it had a higher rate of foreclosures, but that was already priced into the higher interest rates. Most subprime borrowers are paying their notes, and will likely continue to do so until the economy collapses and they lose their jobs. They not the cause of the problem. Rather, the problem is caused by the vast market for “derivatives,” a series of side bets on the mortgage markets (See Economic Truth and the Bailout.)

One can legitimately critique the CRA on a number of grounds. One can certainly critique ACORN, or Obama, or the Democrats, or whatever. But to say that the CRA forced even a single subprime loan simply ignores the facts and keeps us from addressing the real problem. It may soothe our ideology, and may be useful in our politics, but it is sure to prevent us from addressing the very real problems we face. These problems have to do with rebuilding the real economy. Even the banks are victims in the current system; they did what they had to do to stay alive, and it killed them.

But even more importantly, this myth-making breaks the solidarity with the poor, and solidarity should guide all of our policy decisions.

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Warren Buffet and The Finanacial "Pearl Harbor"

As many readers may have noticed, I am not a big fan of capitalism as it is currently constituted. Nevertheless, I am a big fan of one of capitalism's leading lights, Warren Buffet. The genial Mr. Buffet is, perhaps, the most successful investor Wall Street has ever known. The irony is that he never gets anywhere near Wall Street; he lives in the Omaha home he bought in 1958 for $31,000. Granted, he also has a summer home in Laguna Beach, worth some $4 million, but these are modest accommodations for a man who may be the richest in the world.

Buffet's company, Berkshire Hathaway, is likely the most successful firm in the world, judged by the return to investors. The book value of the firm, from its founding in 1965 to last year, grew by an annual compounded rate of 21%/year, which is 10.8% above the S&P 500. The total increase in value over that period is in excess of 400,000%. Not bad for a country boy.

But aside from avoiding Wall Street and living a relatively modest lifestyle, Buffet is unusual in other ways. He believes that the rich pay far too little in taxes. He also believes capital gains should be taxed at the same rate that wages are. This is significant, since Mr. Buffet's salary for running B-H is only $100,000/year; no golden parachutes here! His fortune is entirely the result of his investment expertise. He decries the fact that, as the world's richest man, he pays a proportionately lower share of his income in taxes than does the lady who cleans the office. He also points out, to those who claim that the rich pay too much, that they are ignoring the effects of the Social Security taxes, which raise almost as much as the income taxes, but are only levied on the first $100k or so of income. This means that the less you make, the higher the proportion you pay in taxes.

Like the E. F. Hutton ad of years ago, When Warren Speaks, the Nation (ought) to listen. And Warren spoke with Charlie Rose last week for an hour. For those of you who didn't hear it, here it is:

Mr. Buffet believes that we are in the midst of a “financial Pearl Harbor.” The meltdown will last at least six months, but more likely several years. He supports the bailout, but he thinks the public should buy the toxic paper the banks are trying to foist off on us at their current market value. This is an important point (see “Market Mysticism”) since the banks want us to buy this stuff at its “mark-to-model” value, which means, in effect, any old price the banks put on it. If we buy this stuff at its market price, the public will get a good return on its investment.

As a matter of full disclosure, I am a stockholder in Berkshire Hathaway. But this old distributist will listen to the old capitalist. Pearl Harbor was a rather severe wake-up call. This melt-down is another. How will we respond? Trouble in life is inevitable; the real test, for a person or a nation, is how we deal with it.

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Banksta' Rap

See it here.

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Economic Truth and the Bailout

To the surprise of absolutely no one, the Congress passed the bailout bill, now renamed a “rescue” act. Mind you, they did not do this easily. At first, they rejected the idea. Apparently, the original bill was far too stingy to the rich, so the Congress had to sweeten the deal by giving them another $100B in tax breaks, subsidies, and other earmarks. Nevertheless, the $800B package would actually be worth it if, as the candidates claim, it would really cure our financial hangover.

But it won't.

Or not for long. Congress has given $700B in booze to the Wall Street alcoholics; it will make them feel better for a bit, but it will cure neither their disease nor the country's illness. For a while, they will make loans. But the same underlying causes of the crises will quickly overtake the market once again and we will be right back were we started, only $700B further in debt. Or rather, more than a trillion further in debt, because we have already spent $350B+ in previous bailouts, none of which seemed to work very well; AIG, for example, has already burned through $61B of their $85B package and it is no closer to being stabilized. This is how collapses work: everything done to fix the problem makes the problem worse, because the real problem is not understood.

What is the real problem, the real cause of the crises? First, let us talk about the apparent cause, which isn't the real cause but only the symptom of a deeper cause. Nevertheless, any good doctor starts his diagnoses with the symptoms. And the obvious symptom that we see is the so-called subprime mortgage mess. Yes, it truly is a mess, a sizable mess. But is it sizable enough to be causing this problem by itself? There are, perhaps, $1.4T in outstanding subprime loans (out of a total mortgage market of perhaps $11T), of which 20% are likely to go into foreclosure. But let us say that twice that, or 40%, goes into the tank. That would still only amount to $560B in losses, even if every penny is lost, which of course it isn't. This is insufficient to explain the need for a trillion in bailouts.

But on top of the subprime loans, Wall Street built a vast pyramid of speculative bets, called “derivatives.” The loans were packaged into Mortgage Backed Securities and sold to investors; good loans were mixed with bad ones. But the presence of the bad loans undermines the whole package and makes it difficult to price. But the rot doesn't stop there. The mortgage bonds were “hedged” with complex instruments such as Credit Default Swaps, by which speculators are able to place bets on the direction of the markets. How big is this derivatives market? No one really knows, since it is completely unregulated and even unregistered. But there are at least $600T of nominal values in derivatives. By comparison, the GDP of the entire planet only comes to some $50T. Granted, the amounts at risk are far lower than the nominal values, less than 1%, but this is still a very large number. Huge amounts of money was lent to make these bets, and when the underlying security (the subprime loan) went bad, the whole structure collapses.

This gives us a good view of the immediate problem. However, if we stop our analysis there, we will miss the deeper and more pervasive cause. For now we have to ask, “Why did the banks and others make so many speculative loans?” These are, after all, intelligent and well-educated folks. Why make such absurd subprime loans in the first place, and why “double-down” on those loans with such complex speculative instruments? To blame it all on greed would be to miss the real point, to miss the deep predicament in which the bankers find themselves. Why did they make all these bad loans?

The answer is simple: “They have to. They have no other choice.”

Banks must lend money to stay in business. Ideally, they lend money for productive purposes, money to expand production and provide jobs, goods, and services to the economy. Second best is lending money to finance consumption. But suppose there is not enough productive uses for all the money. Suppose people do not have good enough jobs for the banks to finance consumption. The banks must still lend, productive capacity or not. In these circumstances, the banks must turn to speculators to absorb the excess lending capacity. They must lend or die, and if no one has a productive use for the funds, they must turn to non-productive uses.

Speculation is non-productive. True, a person can get very rich by speculation and many do. But in a speculative bet, one man's gains are measured precisely by another's losses; there is no net gain to the economy. You can get rich at the race track only because others got a little poorer; for every winning bet there are dozens of losers. But at least the race track track adds a real value—entertainment—to the economy. The derivatives add nothing.

Here is the Great Economic Truth that bankers and economists have forgotten: A nation grows wealthy only by producing things. Only through its farms, fisheries, forests, factories, and mines can real wealth be produced. Everything else, insurance, banking, education, housing, armies, government, churches, entertainment, etc., must live off the wealth produced in the fields, forests, factories, fisheries and mines of a nation. Without these, there can be no original wealth to support all of the other things.

Lending for speculation creates another problem. When a bank lends money it actually creates the money it lends. If it is lending for productive purposes, this is not a problem; the amount of money in circulation and the productive capacity of the nation will be tied together. But with loans for speculation, money is created with no corresponding increase in productive capacity. That is to say, the whole process is inflationary, and the root cause of the financial bubbles; prices go up in some sector for no apparent reason, and must sooner or later deflate; the bubble must pop. This is what happened in housing. When the economy began to falter in the early years of the Cheney-Bush regime, Alan Greenspan encouraged the banks to lower their lending standards and promised them that the regulators would look the other way. He urged them to provide new and exotic loan products. And the banks complied, because there didn't seem to be a better use for the money. Hundreds of billions were provided to the housing market, but there weren't enough solvent borrowers to absorb all that money. Hence, the banks continued to lend to weaker and weaker customers. The flood of funds drove up housing prices, and the housing sector drove the economy.

But this is economic nonsense. The housing sector should never drive the economy; rather, the economy should drive the housing sector. People should buy homes because they have good jobs and are getting good raises. But throughout this period, the median wage actually declined by $2,000 in real terms. The housing bubble occurred not because the real economy was improving, but because the banks were providing loans to an increasingly weakened consumer. And on top of these shaky loans, they were building a vast speculative pyramid. Now it is coming apart, for reasons which should be obvious to banker, politician and economist. But few of them comprehend the real problem.

The most frightening words one hears about our economy are the words one hears nearly every day: 2/3^rds of the economy is consumption. No one seems to notice the frightening absurdity of this statement. If 2/3^rds is in consumption, then no more than 1/3^rd can be in production. This means that we consume twice (at lest) what we produce. This is, obviously, a recipe for disaster. And that disaster is now overtaking us.

The foolish doctrines of “free trade” and unregulated markets have denuded the country of good jobs and productive capacity. Our factories are shipped overseas, our farms are gathered into or dependent on vast corporate collectives known a “agri-businesses,” our mines and oil fields are played out or insufficient to support our consumption, our forests are not competitive with cheap foreign products, and our fisheries are over-fished and non-productive. These are the underlying problems we must face, and “fixing” the subprime mess will fix nothing, or at least nothing important.

To fix the problem, to restore our prosperity, we must restore our productive capacity. But to do this, we will have to break the power of the corporate collectives and the money-center banks. We have to ensure that no enterprise is “too big to fail,” and can hold the whole nation for ransom. But mostly, we will have to break the power of false economic theories, theories that have brought the country to the edge of disaster. If we do not repair the sources of our wealth, we will soon have no wealth. We will leave our children an economic desert.

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Market Mysticism

The Republicans have an intriguing solution to the current crises: Let the banks lie about the value of their assets.

Now, it is hardly surprising that a group of politicians would find no problem with lying. Of course, they do not call it “lying”; that would be telling the truth, and liars never do that. Such direct statements would be impolitic, I.e., likely to get you defeated. No, the convoluted language that they use is to replace “mark-to-market” accounting with “mark-to-model” pricing. Some explanation may be in order.
Both sound accounting and common sense tells us that an asset should be carried on the books at its market value (called “mark-to-market.”) However, many of the “assets” that the banks hold are not real assets and hence do not have real value; they are largely derivatives, that is, side bets placed on the movement of some particular market, say interest rates or housing values. Right now, everybody is knows that housing values are in the tank—and are likely to get worse—and both the mortgages and the derivatives are not worth much, and certainly not worth their nominal values.

Since the banks' assets are not worth anything, the banks are insolvent and can't make loans. The Republicans want to allow the banks to use “mark-to-model” to value these assets. What does this mean? The SEC puts it this way:

When significant adjustments are required to available observable inputs [that is, the market price] it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment.

Wow! Let the banks value their assets on “unobservable inputs” and use “significant judgment.” One might note that the observation of the unobservable requires a certain mystical vision which this writer has never experienced, but which seems to be part and parcel of the Republican Religion. Still, it seems strange that a religion which makes a fetish of the market to determine real value now proclaims the insufficiency to the market for that purpose and hence we must rely on mystical visions of unobservable inputs.

Nevertheless, this ingenious plan will allow the banks to state the value of their assets at anything they like. They will all be instantly solvent and able to make loans again. Hence, no bail-out will be required. But now comes the truly mystical part. This is not being offered as a substitute for the bail-out, but as an addition to it! In other words, the banks will get to price their assets anyway they like, and will still get the $700B. This suits Bernanke's plan just fine, since he wants to buy the assets at their “hold-to-maturity” price, a price sure to hand huge losses to the public purse, and huge profits to the private banks.

Of course, mark-to-model will do nothing to alleviate the bank's current problems. They can state their assets at any value they like, but no one will believe them (the Republican Religion is not shared by investors, at least not while they are investing) and no one will lend them the capital to get their books right and start the flow of funds. The only purpose of the Republican plan is to stick it to the public. In the view of Market Mysticism, the Market Knows All, except when the Market Knows Nothing. In the former case, nothing can be done to interfere with the sacred Markets; in the latter case, only the High Priests can interpret the Market.

That's far too much theology for me, and too much faith-based accounting.

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Negotiating with (Economic) Terrorists

I was in Chicago last Friday for a conference of the American Monetary Institute, so I only got to hear a bit of the financial news as I left the hotel room. The bit I heard, however, was extremely interesting. The reporters for CNBC, the financial network, were waxing indignant on two points: one, that capitalism was the greatest system in the world, and; two, Congress ought to pass the $700 billion bailout without delay and without modification. Now, one can make a defense of either of these two statements, but surely the combination should at least raise some questions. The combination of “get the gov't out of the market” and “get the gov't to bail-out the market” should, at a minimum, lead to some cognitive dissonance. But apparently not; the statements were offered without any hint of irony. Yet, if one believes in “free markets,” one might question the freedom of a market that requires such a great raid on the public purse.

As to whether capitalism is the greatest system, I couldn't say. One can only judge such things by looking at actual systems and their actual functioning. But nobody, in the entire history of the world, has ever seen a capitalist system for any sustained period of time. What attempts there were to establish such systems have always led, and that rather quickly, to economic chaos and social disorder. The history of capitalism is the history of government rescues of capitalism; the greater the capitalist power, the greater the use of government power to defend it and make it work. The accumulation of property and the accumulation of government power to defend that property go hand in hand. So the most recent request for the public funds to support private privilege are hardly surprising, at least to anyone who owns a history book.

What distinguishes the current bailout is not merely the size and scope, but the threat under which the money is being extracted. In our system, money is created by credit rather than by the production of goods and services. That is, money only exists when it is lent. The amazing thing about modern money is this: when you sign a note for a car of a home, or a credit slip for a hamburger, the money to buy the car, the home, or the hamburger does not exist until you sign the note. Money is called into being by the act of borrowing it. This power of creating money from notes has been granted to the banks, that is, to private entrepreneurs. But of course the banks have to find solvent borrowers who can pay them back, or otherwise the whole thing collapses. Just as it is doing right now. The poor are getting the blame for taking out mortgages they could not afford, but that is only a small fraction of the problem. The greater problem is that the banks and other institutions made loans for “derivatives,” which are complex bets on these and other loans, bets which magnified what would otherwise have been a manageable problem. The result is that the banks have lost all their capital, and they need to keep a fraction of what they lend on hand to continue making loans (this is called “fractional reserve banking.”)

Now the banks are in a position to make what amounts to a terrorist threat: give us all your money, or we will not make a single loan; you will not be able to sell a single car, house, or hamburger except for cash. Without surrendering to them our future, they will take away our present; hence we must make a great present to them of $700 billion (which everybody things will rise to perhaps double that amount). The President, the Fed, the Congress, and the candidates are all for surrendering to this economic terroism, the argument being that we have no other choice.

But is this correct? Banks go insolvent all the time, even if not all at the same time. But when they do go insolvent, there is a well-established procedure and some clear choices. The bank needs more capital, and the current owners can supply it, or they can sell off some assets at whatever they can get for them to raise new capital, or they can sell themselves, in whole or part, to new owners. But what the banks want the government to do is none of the above. They want the public to purchase their toxic paper, and purchase at well above its market value. In other words, they want the public to take the loss and the banks to keep the profit.

The current owners are unwilling or unable to supply the new capital, the banks' assets have little or no market value, and the banks do not want to take on new owners, even if such investors could be found. That is to say, the banks do not want to rely on market mechanisms to fix their problems. Too bad. But that being the case, I suggest that the government act as a market player in behalf of the people and use the established market mechanisms. We'll buy the paper, at market price. Or we'll buy the bank, also at market price, and then supply the capital to keep them in business. This would, of course, amount to a nationalization of the banks, but only of such banks that wanted to be. Those who can find another solution in the free market are free to do so, much as Goldman Sachs did with Warren Buffet.

Once we own the banks, we can make prudential decisions about what to do with the bad loans, whether to extend them, renegotiate them, or to liquidate them. We can also decide what the CEO's pay will be. We can decide anything we want. We will be the owners. Further, it would return the money creation power to where it belongs: to the public. We would finally gain control of our own finances, and would not have to pay interest (now amounting to $430 billion/year) to the banks and foreign governments to get the money we could ourselves create at no interest.

The original plan was three pages and gave Henry Paulson dictatorial powers over the economy with no review of his actions by the courts or any other public body. It was the greatest giveaway to the people who plundered the public in the history of capitalism, a history already filled with such plunder. And it is completely unnecessary. The current bill is 110 pages, but the additional 107 pages are mostly window dressing designed to soothe the consciences of “conservative” and “liberal” alike without actually doing anything different than the original three pages.

I am not one of those who say that we cannot negotiate with terrorists. I do say that we should not surrender to terrorism. I do say that we negotiate from our strengths, and play our high cards. And in this game, we have all the trumps—700B of them—and we should not throw these cards away, or give them to the economic terrorists.

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Devils In The Details

The currently proposed legislation under discussion in the US Congress - the one proposing to bail out Wall Street – has more constitutional horrors in it that anyone thought.

Mike Whitney, writing for the anti-Establishment Left publication Counterpunch, reports on a provision within the legislation that would give the Secretary of the Treasury unlimited power regarding economic policies. He quotes directly from Section 8 of the proposed law, and it is frightening, to say the least.

We urge you to contact your Congressmen and Senators today, and demand they not back this proposed Wall Street bailout. Don't let the Congress abdicate any more power for the sake of either greed or cowardice. Thank you.

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The Ownership Society, V. 2

The local TV news did a story on progress about the new Cowboy's stadium in Arlington, which is to be ready in time for next season. The Cowboys will vacate their current government-subsidized quarters and move into swankier digs, also at taxpayer's expense. The stadium is, of course, a place where moderately rich men go to make their living, and where a very wealthy man gets wealthier. Being wealthy requires a subsidy from the citizens of Arlington, Texas, and the greater the wealth, the higher the subsidy. This is not the first time the said citizens have done this. George Bush's one accomplishment as a businessman—aside from looting some energy companies which then went bankrupt—was to persuade the City of Arlington that the Rangers were apt welfare cases. And anybody who has seen them play might agree that he was right. But the subsidy greatly increased the value of George's small share of the Rangers into a sizable fortune, proving once again that anybody can make it in America, provided he was born into the right family and has the right connections.

Jerry Jones's subsidy, if memory serves me correctly, comes to something like half-a-billion. And since the stadium is publicly supported, it was necessary to raise the prices substantially to keep most of the public out. You know, the wrong class of people might track in mud on the new carpet. Now, I think the City of Arlington is very foolish in all these subsidies. Located between Dallas and Fort Worth, the would get development no matter what, and some of that development might produce more revenue, at less cost, then the revenue produced by the eight days a year the Cowboys will actually play a regular-season game in their new shelter.

But whether it was a good idea of not, it was at least an idea that the citizens of Arlington got to vote on. They pay a higher sales tax to support Jerry Jones because a majority of them, or at least a majority of those who showed up to vote, agreed to do so. It might be democracy gone a muck, but at least it is democracy.

Yesterday, $85 billion was given to AIG. In the past year, between bailouts and “injecting liquidity” into the banks, the Fed has spent nearly a trillion of the public's money. But unlike the citizens of Arlington, the public did not get to vote on this. The public treasury is raided, the public accounts driven further into the red. But no act of congress authorized this. The theft of public funds was performed mostly by the Federal Reserve Bank. Who are these gentlemen at the Federal Reserve Bank, and where do they get such power? And where do they get such money? A bridge to nowhere is beginning to look like a bargain, and if money is needed for schools or roads, the Congress bewails the growth of government. But money for wars and money for the rich always seems to be available, and debating the subject is regarded as unpatriotic.

If there was any doubt that America is a socialist country, the events of the last few days should have dispelled those doubts. But it is a peculiar form of socialism, a socialism that is available only to the rich. True, a few bones are tossed in the direction of the general populace, “free-ways” and social security, systems that are crumbling and in danger of bankruptcy. But the main beneficiaries are the wealthy. Like Jerry Jones, they can't seem to make it without some help from the Federal Reserve Welfare Office. The people, by and large, are still capitalists. Not that many of them have much in the way of capital, but they still believe, and believe it so deeply that a candidate who does not present himself as a convinced capitalist is considered to be a convinced communist, unfit for office. This, apparently, is what John McCain means when he says the “fundamentals” are sound: it means that the people believe in an economic fundamentalism that their leaders have long ago abandoned. The public knows of no other choices, because the parties give them no real choice. And what choices are presented to them, by furtive “third party” candidates, are usually “all or nothing” type choices, such as radical libertarians who want to abolish government entirely. Of course, such “all or nothing” choices always work to the advantage of the “all”; nobody chooses nothing; there just aren't that many nihilists. So a discussion of what a proper government should properly do is ruled out before the discussion starts.

But back to the fed. Surely, this is an anomaly in a democratic society. They wield great power, and great money—our money—but nobody elected them and nobody knows quite what they do. We are not even sure if they are part of the government. Some say they are, some say they are a private bank. Who is right? Both sides. The Fed is a key part of that peculiar American brand of socialism. Technically, they are no part of the government. The employees of the bank are not employees of the government and their names do not appear on the Federal Register. The Fed is owned by the member banks, that is the 12 regional Federal Reserve Banks that each federally-chartered bank is required to join. The largest is the Federal Reserve Bank of New York, which owns 53% of the Federal Reserve System, and which in turn is largely owned by Citibank and JP Morgan/Chase. This makes the whole banking system overly sensitive to the needs of two New York super-banks.

But on the other hand, seven of the 13 members of the governing board are chosen by the President of the United States for fixed terms of office; the other members are the chairman of the regional Fed banks; the chairman of the New York bank is a permanent member, and the other slots are filled on a rotating basis by the other Fed Bank chairmen. The Fed has broad powers to regulate the banks, and any profits, over any above the interest payments they make to member banks, go to the Treasury. They are charged with controlling the money supply by varying capital requirements, setting the discount rate, and various other monetary tricks. They have enormous powers in our country, but they are under the direct control of no democratic institution. Oh, the Congress can threaten to change their powers, but in truth, the honorable members of that body are just like you and me: they have little understanding of money matters and are easily intimidated by the “experts” at the Fed. Alan Greenspan learned that he could talk in gobbledygook and the Congress would take his words as if they were spoken by the Delphic Oracle or a financial wizard.

So what is the Fed? It is that peculiar genius of American Capitalism/Socialism: the combination of private privilege and the public purse. Here it is quite literally the public purse, since the Fed controls the purse strings. Profits are privatized; losses as socialized. The “Ownership Society” that Bush talked about at the beginning of his first term has come to pass. Only it means we own the failures after they have drained the assets.

Henry Ford once said that if the people understood how money was created, there would be a revolution before morning. He was wrong. If you tell people how money is created, they will stare at you blankly in disbelief, and dismiss you as a crank. Surely, the banks cannot just create money. But they do. When you sign that mortgage for your home, that note for your car, the mastercard receipt for a night on the town, the money to pay it off does not exist until you sign the mortgage, the note, the receipt. The banks call money into being by loaning it out. People find that impossible to believe. And they should, since it is unbelievable. But it is true. The Fed is supposed to inject some prudence and rationality into the process, but we see what kind of rationality has ruled for the past eight years. The mild expansion in the economy was strictly a monetary phenomenon; it had nothing to do with the expansion of manufacturing, mining, or farming. It was simply a matter of pumping out money for houses and such, and thereby giving the appearance of prosperity, but postponing the day of reckoning.

That day is upon us, and now the sad reality beneath the appearances is revealed. Todo has pulled back the curtain and the wizard is revealed as a sad little man. But you and I now own Freddie and Fannie and AIG. How does it feel to be a big time capitalist? Don't get too used to it, however. Once they start making a profit, there will be a push to privatize them again. The good people of Arlington got to vote on owning stadiums, you had no voice in owning AIG, and will likely have no voice when they sell it.

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The Money Power

Hardly a day goes by when I do not get a posting or read an article by somebody complaining about the government “creating” money and thereby causing inflation. Now, the people who write these articles are absolutely correct about there being too much money created; they are absolutely wrong about who creates it. Only 5% of the money in circulation is created by the government; the rest is created by the banks. And if that were not astounding enough, even more astounding is how they create it: They create it out of thin air, out of nothing.

Most of us believe that when we get a loan from a bank, the bank is lending us money that comes from the depositors. But this is not true. The banks lend out 10 times the amounts on deposit. Where does this extra 900% come from? From nowhere. They just make an accounting entry and create the money. This means that all money is debt, and that without debt there would be no money.

Look at your dollar bill. At the top is says “Federal Reserve Note.” This has several implications. One, a “note” means that it is a debt. When you buy a home or a car on credit you normally sign a “note” for the loan. The dollar bill is exactly like that. The second thing about this is that the Federal Reserve Bank is not, as most people believe, a department of the federal government. Rather, it is a privately-owned bank. Or rather, 12 privately owned banks. These banks are owned by all of the federally chartered banks. The president does appoint the chairman of the board of the Fed Banks governing body and seven of the directors, and the law gives the FedBank certain powers. But for all that, it is a privately owned and operated system of banks.

Look to the left of Washington, and you will see the stamp of one of these 12 banks. That is to say, that it is one of these private banks, and not the government, that issued that particular dollar (The stamp has been removed from the new issues of higher denominations, but the system works the same way.) Up until 1913, that stamp would have borne the name of your local bank, rather than the local federal reserve bank, but the system is the same.

By having the power to create money from nothing, the banks have tremendous influence and control over the economy, and indeed over political life as well. Most people have difficulty believing that this is the way money works. As Marshall McLuhan noted, “Only puny secrets need protection; Big discoveries are protected by public incredulity.” And it is certainly hard to believe that all money is debt, created out of thin air by a private group with no responsibility towards the public good. Further, it is obvious that such a system must be (and is) unstable, one that requires constant “bail-outs,” bail-out that the government has no choice but to perform if the entire system is not to collapse.

No of what I have said here is particularly controversial. Any economist, of whatever stripe or ideological bent, will, if pressed, admit that this is the way money works. Few, however, will face the implications. Indeed, the whole subject is usually pushed to the back burner; like the dead mouse in the kitchen, it is considered gauche to bring the subject up in public. Therefore, the subject of money remains a complete mystery to the general public. Yet, no other issue affects them in their daily economics lives as does this one. It is important that each of us understand it.

Paul Grignon has brought up the subject; he has put together an interesting film on this topic. It is 47 minutes long, but it is well-worth your time. You can view this film at

http://silverbearcafe.com/private/moneyasdebt.html. I think it is important to take the time to view this film, and even to buy it and share it with your friends and neighbors.

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About Those "Fundamentals"...

They say that a “gaffe” in politics is when a politician tells the truth. It would be more correct to say that a gaffe is when a politician says what he thinks is the truth. True, this formulation gives politicians more credit for thought than they normally deserve, but I didn't say they were serious thoughts. Nevertheless, Phil Gramm was quite serious when he called the Americans “a nation of whiners.” It is easy to understand why Senator Gramm is sensitive these days. Aside from being the McCain Campaign's vice-chairman, he is also the vice-chairman of the UBS investment bank, one of the major culprits in the current financial crises. You would think that is enough chairs of vice for any man, but there is more. As a senator, he passed the infamous “Enron Exception” while he wife was serving on the board of Enron. He also pushed through a bill deregulating the banking industry in 1999, leading directly to many of the problems we have today. He is also a lobbyist for UBS, working on mortgage matters, among other things. So it is easy to think that the nation “whining”; thinking anything else would mean having to admit to some involvement in the current crises. And whatever politicians think, they never think about their own responsibility. That is simply unthinkable.

But Gramm, and those of like mind(-lessness) like to say that the “fundamentals are sound.” Yet here one wonders what they are thinking about. The dollar is certainly “fundamental,” yet it has lost nearly 50% of its value against the Euro in recent years. Energy is fundamental to any economy, yet it is running at record prices. Manufacturing is fundamental, yet it has shrunk since the free trade dogma has become official policy. Certainly the credit system is fundamental, yet it is in disarray. George Will says that Gramm must be right, because unemployment is only at 5.5% and that's a fundamental. But what Will doesn't say is that the labor force is shrinking; that is, fewer people are looking for jobs, and are thus not counted in the “unemployment” statistics (see Physics Envy and Unemployment by the Numbers to see how this works.) Housing is a disaster, and that is a fundamental part of the economy. Government debt is out of control, as are state budgets, as is household debt. And of course, wages are fundamental, but the median wage has been stagnant for 30 years. The most fundamental thing to any economy are the great cultural institutions, things like the family, education, the churches, but don't even get me started on those subjects. So what are the fundamentals that Phil & Company are sounding? Have I missed any? I don't wish to whine, but it's better than weeping, and I don't hear any sounds but agony coming from the fundamentals.

Of course, not all whining is equal. When Wall Street whines, the White House listens. And Wall Street has been whining for a long time. Each time, the receive the care and concern of the Federal Government, and especially of the Federal Reserve Bank. For some time, that bank has accepted the bank's riskiest loans as collateral for short-term loans. The rates the banks pay for these loans are well below the rate of inflation. This means that this is essentially “free money,” and it would seem that you don't need to be much of a businessman to make money by borrowing at below the rate of inflation and lending above that rate. But no, an irresponsible loan tends to lose money, no matter what the interest rate spread. You would think by this time that the banks had learned their lesson, and would be more responsible about their lending. But I can tell you, as a real estate agent, that the same funky loans that created this problem are still the norm today. In fact, I will close on another one this afternoon and did one yesterday. Why should the banks continue to do this? Because they have an implicit promise from the government that they will be rescued from whatever foolishness they undertake.

When the banks began to have “liquidity problems,” that is, finding money to lend, the government responded by expanding the role of the “GSE's” (Government Sponsored Enterprises) like Fannie Mae and Ginni Mae. The GSEs increased their borrowing from $4.9T in 2001 to $7.5T (and rising) today. The GSEs buy loans from the banks and sell them as securities. The GSEs could raise money by selling bonds because these bonds, coming as they did with an implicit promise from the government to pay them off, were treated by the market as quasi-government bonds, but at a half- to three-quarter-point rate above the treasuries. Further, even when the GSEs sold the loans, they still guaranteed that they would take them back if the loans failed. Question, if you “sell” a loan, and still guarantee it, in what sense have you “sold” it? It still appears on the books as a liability. This is a clear case of privatizing the profits and socializing the losses; the “private” sector takes all of the rewards and none of the risks. The risks are borne by the taxpayer. But there is a limit even to that. Soon, the debts will have to be paid off, debts that cannot be paid off. The only solution is to inflate our way out of the debt, pay it back in dollars worth far less than the ones that were lent.

Is hyper-inflation a possibility? I don't know, but we certainly cannot ignore it. It happened to Germany in the 20's after the banks were privatized and the job of money creation turned over to the private sector. The stamps below (from http://ingrimayne.com/econ/EconomicCatastrophe/HyperInflation.html) tell the whole story.

Mailing a letter went from 5 Marks to $50,000,000,000 Marks. If we did that, we could wipe out the entire national debt (and all other debts) with a few postage stamps. There might, however, be some negative consequences. It might be a bit disconcerting to look at your retirement fund and think, “I could almost mail a postcard with that.” That might even cause some whining.

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