American Prosperity 3.0 Coming Soon

"Cripple our senators, that their limbs may halt

As lamely as their manners!"

William Shakespeare, Timon of Athens, Act IV, Scene I

There are more job openings listed today in the United States of America than there are (officially) unemployed people. That does not mean it is super easy to find a job, but it is certainly a lot easier than it was in, say 2010.

There is no obvious bubble in the American economy. Sure, houses in some areas of California have become pricey again. Sure, a few stocks like Tesla stand out like sore thumbs. But on the whole housing is priced reasonably and so are stocks.

Even at the bottom there are glimmers of brightness, as a few states and cities raise their minimum wages.

But don't worry, if Congress or the Fed does not screw things up, at some point some group of greedy, shortsighted people will. Enjoy Prosperity 3.0 while it lasts. Tuck some savings away, if you are smart.

Looking at American history, you would almost believe that Americans prefer a roller coaster economy to steady improvement. It is a manic depressive economy. It was so manic depressive during the 1800's that the Great Powers — bankers and politicians and friends — set up the Federal Reserve in 1913 to try to dampen the economic cycles.

That did not work, as illustrated by the economic boom of the 1920s, followed by the Great Depression. Millions died in the Great Depression, although you won't hear mention of that from the Hoover Institute, which is too busy blaming Mao for every death that took place in China when he was in power. The New Deal probably helped, at least at first. In many ways the New Deal resembled Fascism as much as it resembled Socialism, but in any case it kept the economy going until World War II.

World War II was the best thing that ever happened to Americans. President Roosevelt wanted to get us into the war early, but between the Catholics in the Democratic Party (who liked Roman Catholic leaders like General Franco, Adolf Hitler, Benito Mussolini and Marshal Philippe Petain) and the Isolationists (some Democrats, mostly Republicans), we waited until it was optimal. By the time the Battle of Pearl Harbor forced us to admit we were already fighting Japan (in China) and Germany (in the Atlantic), the old empires were in trouble. Our farms and factories fed their war effort; their farms and factories were mostly destroyed.

World War II was great if you were an American worker. My high school drop out mother got a job in a war industry, and even my poker-losing lazy-ass grandfather deigned to take a job.

Which led to the 1950s and 1960s, the high tide of America relative to the rest of the world. It was a party! African-Americans were allowed in, even in the Democratic South, and not just to play banjo and serve drinks.

Sadly, while America was on a cocaine binge, the rest of the world mostly still had their belts tight and were rebuilding their factories and economies.

Which brings us to the 1970s. They sucked big time. In many ways they were as bad as the Great Recession. After the U.S. helped Israel beat up the Arab countries again, we had the Oil Embargo, an astonishing increase in fuel prices, and Stagflation, and Disco. Jobs were scarce. Factories started moving overseas.

Some of us muddled through to the 1980s, many died along the roadside. But the Hoover Institute doesn't rant about Ronald Reagan being a mass murderer for turning the mentally ill out into the streets. After the 70s the later 80s felt prosperous. The stock market began to go up as capitalists and their politicians began pushing more and more of the economic pie into their own mouths. Oh, and PCs (just spreadsheets and word processing back then) made people more productive, which meant lots of them got laid off, then retrained as part-time big box store employees.

The PC and Internet thing seemed to be turning out well by the late 1990s, as the usual gang of privileged college grads were hired into the dot com boom. Followed very quickly by the dot com bust. Followed by the housing boom, as the Federal Reserve failed to take the dot com money out of circulation, even after the companies themselves zeroed out.

Which led to the Great Recession, which unless this blog is being read more than 20 years from now, you know about.

You would think the American people would boot out both the Democratic Party and the Republican Party, hang the people at Goldman Sucks, and stop wasting their money on iPhones and AT&T contracts.

But no. We are about to have Prosperity 3.0. Grab what you can while you can, because if history teaches us anything, the party will come to an end when the alcohol and blow run out. No one is likely to be around to help you when this party is over, unless you are a major political donor.

Unemployment, Debt and Demand

I quote the following passage from William Manchester's The Glory and the Dream because it summarizes the liberal, New Deal position on the cause of the Great Depression and recessions in general:

"The real blame lay in he false underpinnings of the Coolidge-Hoover prosperity. Seen in perspective, the Depression appears to have been the last convulsion of the industrial revolution, creating a hiatus [break] before the technological revolution. In the aftermath of the World War [One], the techniques of mass production combine to increase the efficiency per man-hour by over 40 percent. This enormous output of goods clearly required a corresponding increase of consumer buying power—that is, higher wages. But the worker's income in the 1920s didn't rise with his productivity."

But some of the increased efficiency became consumer buying power through the issuing of credit. Hence people bought on credit during the 20s, and when credit-based buying collapsed in 1929-1930, the entire economy went into a downward spiral. Less demand resulted in less production, and so in workers being fired, and so in a further decrease in demand. It was Herbert Hoover himself who used the term "Depression," trying to imply the whole affair was about a wrong mindset, a lack of confidence. If only confidence would return, the economic downturn would reverse itself.

The natural conclusion, if you buy the analysis is the quoted paragraph, is that all society needed to do was to give people more buying power. Society needed to "share the wealth" as socialists said. Then better-paid workers would buy more things; manufacturers would hire more people to make more things, then these hired people would also spend more, until "happy days are here again" [the Democratic Party theme of 1932] and there's "an automobile in every garage" [the Republican slogan on 1928].

But the problems of the Great Depression must have been more fundamental. Under the New Deal [often passed by an alliance of progressive Democrats and progressive Republicans; both parties had conservative wings that resisted the legislation] the federal government used a variety of methods to increase aggregate purchasing power. By 1934 deficit spending was the order of the day. The economy did improve off its 1932-33 lows, but not to anything resembling prosperity. Beginning roughly in 1939 with war orders from Europe, and accelerating in 1940 when U.S. deficits became even larger to prepare for war, the economy finally got back to where it had been in the mid-20s.

Even Democrats worried about the national debt after World War II; by American standards it was unprecedented. But with the slow-motion collapse of the British Empire, the U.S. had become the dominant world power. The revived economy, and high income-tax rates, generated an equally unprecedented stream of revenue to the federal government. Most federal programs were cut back only minimally, and new programs like the Interstate Highway System created jobs and demand for commodities.

When President Franklin Delano Roosevelt and Congress started running up deficits and the national debt in the 1930s they were starting off a small base, most of it left over from military expenditures for World War I. By the late 1950s even most Republican politicians and businessmen believed in deficit spending. Workers and capitalists alike were prospering, if some more than others. It seemed like capitalism propped up by heavy federal spending was the recipe for permanent prosperity.

This all turned sour in the 1970s, following the prosperity of the 1960s resulting from economic imperialism, spending on the Vietnam War and cold war, and the expansion of the New Deal into the Great Society "War on Poverty" programs.

Demand, in itself, could lead to the opposite problem from the Depression: inflation. In order to stop inflation, the Federal Reserve raised interest rates (and tightened the money supply). A series of recessions, interleaved with booms, followed, with aftermath of the most recent and most serious of the recessions still lingering with us.

Also lingering with us is a $17 trillion federal debt. And therein lies the real problem for America and the world. If during periods of prosperity the debt had been paid down (as happened until about 1930), then the only federal debt today would be from the latest recession. Call it $3 to $5 trillion. But no, instead every problem since 1933 has been solved with debt. If you are ideological you can consider it military debt or welfare debt, but it is an obligation of the citizens, regardless of the specifics of its origin.

So where we are now, in early 2014, can be summed up as:

1. The economy has been growing slowly since 2009, partly because of high deficit spending by the government and partly because of the natural tendency to grow off a bottom.
2. Unemployment is well over 6%, and even that excludes a lot of individuals who are under-employed. It's not Depression or even Great Recession levels, but it isn't prosperity either.
3. Inflation has been minimal, lately.
4. People would buy more products if they made more money. Most employees are highly productive because of technological advances.
5. Because there are plenty of unemployed people, wages are stagnant; employers don't have to bid up wages to retain employees.
6. Economic imperialism is not really working anymore. It costs more to patrol the American empire (the entire world, for practical purposes) than the U.S. gets in economic benefit from the rest of the world (as seen by our negative balance of trade).
7. There is a $17 trillion and growing federal deficit. Interest payments already make up a considerable part of the federal budget, and if interest rates (on average on government debt) climb to say 5%, they will eat up a huge part of the annual federal budget.

In a Goldilocks scenario the capitalist class, either out of self-interest or forced by the federal government, would both increase wages significantly for workers and pay off a substantial part of the federal debt. The wage increase would increase demand, resulting in profits that would compensate the capitalists for their sacrifices. With increased demand more of the federal debt could be paid off; prosperous workers could help some with that. Inevitably another recession would roll around, at which time deficit spending would be appropriate to counter the economic cycle until growth resumed.

Do not plan on the Goldilocks scenario. It won't happen in our broken political system. Republicans have done a good job emphasizing the debt issue, but are unwilling to raise wages or tax the super-rich to reduce the debt. Democrats would raise the minimum wage, but won't tax the capitalists and won't do anything about the debt.

The Federal Reserve will keep making excuses to keep interest rates low, saying it is to help revive the economy. But the real reason is allowing interest rates to rise will show how naked the economy really is. The math is simple. 5% of $17 trillion is $0.85 trillion per year. The fiscal year 2013 federal budget resulted in spending $3.45 trillion. But revenue was just $2.77 trillion. So if interest rates rise to 5% on average, and revenue stays flat, interest payments on the federal debt will eat up over 30% of revenue.

So less spending, even on the military. And less spending means less demand, meaning fewer jobs. And lower tax revenue.

Or Congress can kick the can down the road a few last inches, into the wall of reality, and continue to increase the debt even when the economy is relatively good.

Which just happened when the Democrats and Republicans in Congress raised the debt ceiling.

Churchill's Gold, Rand Paul, and Janet Yellen

Senator Randal "Rand" Paul has threatened to hold up the confirmation of Barack Obama's nominee for Chair of the Federal Reserve Bank, Janet Yellen.

Rand Paul is suspicious of the Federal Reserve, and I don't blame him for that. The Federal Reserve is not very transparent about what it does, and it is not very accountable to Congress or even the President.

Rand Paul, on the other hand, is pretty transparent. He wants to be President, and he needs the Tea Party to support him in his bid for the Republican Party nomination. Like most Tea Party members, Rand Paul seems to be a primitivist with regard to economics. When the economy fails, that is always blamed on Socialism, even though there was precious little socialism to be had in the United States when the economy failed in 1929.

Rand Paul and other primitivist free-market faithful also tend to believe in the Gold Standard, the idea that only the metal gold is real money. Rand Paul's father, Ron Paul, is a famous proponent of gold. Which is to say, he ignores history when it interferes with his ideology.

Winston Churchill (best known to Americans for his leadership of the British Empire during World War II) was appointed Chancellor of the Exchequer by Conservative Party Prime Minister Stanley Baldwin in late 1924. On April 25, 1925 he proposed that Britain would return to the gold standard, and it did. Unlike many people, Winston was able to learn from experience. In September of 1931, Churchill said:

"I accept my share of the blame for restoring the gold standard in 1925. We were promised reality and stability by our financial experts. We have had neither. The price of gold has increased by 80 per cent. That is as though the foot rule had become twenty-two inches and the pound weight twenty-eight ounces. Think what that means in terms of debt—the extra production demanded to satisfy existing mortgage indebtedness. This financial condition amounts to a hideous oppression." [quoted in A History of England by Goldwin Smith, third edition, page 747]

The Federal Reserve may need better over sight by the public, but nothing, like imposing a gold standard, should be allowed to compromise its historic mission. Modern economies need an elastic money supply. We are long past the era of paper money. Money now consists of electronic accounting book entries.

Even when the Federal Reserve is doing its job, things can go wrong. The main problem with the modern (post-Depression) Fed is that it has been too lenient about asset bubbles. Such bubbles (the Internet stock bubble and the Housing prices bubble) cannot grow to a dangerous size if the Fed keeps the money supply inside of reasonable bounds.

I don't think there is any doubt that the way the Fed is set up favors banks (in particular the banks that it uses for its bond trades), and works on a trickle-down system. As Rand Paul and others (including Democrats and independents like myself) have pointed out, at the very least we deserve transparency.

Holding up Janet Yellen's nomination confirmation as a tactic to pass a particular bill the Federal Reserve Transparency Act is inappropriate. Congress should make sure the act is really about having a full annual public audit of the Fed (changing nothing else) and pass the bill, and Barack Obama should sign it.

The American economy is big and complicated, and many parts of it are rotted to the point that a small-scale collapse should be expected from time to time. The Fed needs to encourage growth while discouraging bubbles. It needs the power and the tools to do that. In my opinion it could use some reforms beyond the Transparency Act. But they should be carefully considered, and should be in the interest of the economic welfare of the citizens as a whole, not the wealthy Wall Street aristocracy.

William Meyer's work in progress is The Accounting: Your Fate is in the Cloud

The Accountings System #3: Bank Cycles of Credit and Gold

The banking system, which was at the heart of the accounting system, was also found to be wanting for a modern economy. This is because the banking system had three separate functions which did not go well together. It became the core of the social accounting system: a man might claim to be rich, but it his bank checks bounced, people knew the reality was otherwise. It allowed its depositors to keep their money safe and perhaps earn a bit of interest. To make a profit, bankers had to loan out the money of their depositors at an interest rate sufficient to keep their depositors happy, pay for the costs of operation, and still come out ahead.  This was the credit system.

The credit system of the early 1800's in the United States is worth a close look because of the way it resembled and differed from our present system. Individuals were more likely to be sources of credits, which typically took the form of "IOUs." Andrew Jackson, before he became President, is a well documented example. Like most Americans of the era, he seldom could put his hands on much cash or coin, but he owned land, race horses, and slaves of considerable value. If he purchased goods he would write a personal note, an IOU, which he pledged to redeem at a later date, say when he received some cash to pay for his cotton crop.

A creditor holding the Jackson note might want to spend it before then, and would sign it over to another man, perhaps to buy a horse. If a man was considered to have good credit, as Jackson was, his notes might circulate for some time and be considered more sound than bank notes. If a note was collectable, and you took it to the Hermitage to demand payment, and Jackson still had no cash, he might try to pay you off with a slave, dog, horse, or perhaps some wine or whiskey. In effect Andrew would discount his own note, giving you, perhaps, a $250 race horse for a $300 note. As long as creditors were happy with the exchange his credit remained good. Similarly, if you were another local slaver and wanted to buy some possession of Jackson's and he was willing to sell, he would probably accept your IOU (which, along with the shortage of gold, was one reason most people had very little cash to play with).

The primitive banks of that era were in a strangely similar position to private individuals like Jackson. The bank might actually own nothing but a license from the state (usually obtained by bribing legislators), but usually began with a little bit of gold or silver coin. Banks would take deposits – hopefully coin, but also other bank's notes – and then would start making loans, which is to say, creating credit. They tried to avoid loaning their coins, instead issuing their own bank notes. If too many people came in demanding that the bank notes be redeemed in coin, the coin would run out, depositors would demand their deposits, and the bank would fail. The more clever bankers liked to loan to people a goodly distance from home, so that their notes would circulate afar and be unlikely to be redeemed.

This system led to credit cycles of boom and bust. When people were confident in the banknotes and IOUs a speculator could buy land and be confident of selling it in a year or two for more money. Sound familiar? During a boom farmers got good prices for their crops, and manufacturers had little problem selling their wares to the farmers. When credit contracted, as it invariably did, no one wanted to take an IOU or banknote. With little gold to go around, commerce collapsed and people returned to bartering until time healed the wounds and another upward cycle began.

Eventually Americans got tired of this ridiculous system, made banknotes illegal, and tried various banking reserve systems cumulating in the Federal Reserve System. Only the federal government could issue paper money, and that was backed by gold or silver. But that system did not work long either, as the Great Depression proved.

Next: The Big Reversal

[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]

Gold, Black Friday 1869, and the Federal Reserve

Most Americans don't know about Black Friday 1869, a day that saw one of the many Wall Street Panics that have wracked our nation's history. Yet given the numbskull proposals for economic reform being bandied about today, a close look would be illuminating.

Typical treatments in American History books provide little insight. Take, for example, this passage from The American Pageant by Stanford historian Thomas Bailey:

"The low ethics of the [Ulysses S.] Grant era are well illustrated by a fantastic scheme of "Jubilee Jim" Fisk and Jay Gould. This precious pair conceived the plot, in 1869, of cornering all the gold on the New York market and netting additional millions. Their cunning game could succeed only if the Federal Treasury would hold back its funds. The conspirators worked on Grant directly, and also on his brother-in-law, who received $25,000 for his complicity. On "Black Friday" September 24, Fisk and Gould madly bid the price of gold skyward, while scores of honest businessmen were driven to the wall. The bubble broke when the Treasury, contrary to Grant's earlier assurances, was forced to release gold."

Returning to the gold standard is a hallmark of Ron Paul's presidential campaign. Running parallel to the current gold bubble (which may already be popping), the idea that gold is the only sound form of money (excepting maybe silver) has become quite popular. The idea only appeals because people have had time to forget just how unworkable the gold standard used to be. Black Friday 1869 illustrates that, and more.

The debate about creating a sound money and banking policy for the United States dates back to the colonial era. Money, until the 1900's, was thought of as either being metallic or paper. Metallic money tended to maintain its value better, but the U.S. had to import most of its gold and silver until gold was discovered in California in 1848. Prior to that time the economy was constrained by a lack of gold currency. While paper money could easily be printed to alleviate the shortage of coins, the temptation to just keep printing it has been difficult for politicians and bankers to resist. Too much paper money causes the prices of goods in terms of money to go up: we get inflation. It should be noted, however, that when new sources of gold were found, that also caused too much money to be coined, resulting in inflation. Gold has less inflationary danger as a whole because you can't just print all you want, so for the most part the gold standard has been associated with either price stability or deflation resulting from the constraint on trade from insufficient gold in circulation.

But wrap your head around this: most money today is electronic. That is right. While Tea Party economists prescribe gold as an antidote for Federal Reserve Notes, only a tiny percent of American money today is paper. Money now sits on computers. Bank computers, grouped together, are an accounting system that electronically registers how much money each person has or owes. What is important is not that it is in electronic form (it used to be on old-fashioned paper ledgers), but that the accounting system itself is fair, accountable, and manageable. The Federal Reserve's real job is to keep our economy, and our individual stakes in it, accountable. That is a very hard concept for people who shy away from abstract and complex thoughts, which is most of us most of the time.

The United States economy had seen numerous boom and bust cycles before the Civil War, each with their own unique aspects. The expense of the Civil War led to a number of important economic changes. Paper money was issued by the Federal government; previously it had been issued by private banks. These federal "greenbacks" were meant to supplement, not substitute for, the gold supply and bank-issued money. They could be redeemed for government gold. They allowed for a tremendous expansion of economic activity in the North during the war.

A national banking reserve system was also put in place before 1869. To make bank notes roughly equivalent and prevent bank failures, smaller (typically rural) banks had to keep reserves in larger (urban) banks, and in turn New York City banks held reserves of the banks around the country. While this helped with many old problems, it left a seasonal liquidity problem. Even after the Civil War America's wealth was largely farming-based. In the fall, when farmers sold their crops, "actual cash money" was needed to pay them. This drained the local banks, who in turn called in their reserves. In New York City the reserves drained out of the major banks, and out of the stock and commodities markets. Since this happened each year, and could be predicted, while some banks tried to be prepared, certain speculators took advantage of the situation. In the simplest version, if you wanted to take over a corporation, you could usually buy its stock cheaper in the fall than during the rest of the year.

As described in The First Tycoon: The Epic Life of Cornelius Vanderbilt by T. J. Stiles, railroads were the biggest American corporations of that era. "Commodore" Vanderbilt had achieved successful railroad takeovers partly by purposefully creating money crunches, then buying the stock of rivals cheap. Sometimes he even forced down the price of stocks he owned, so that he could buy back a larger share at low prices. On September 19, 1869 he dumped his stock in the Lake Shore railroad. Lockwood & Company, a large Wall Street brokerage house, had borrowed money to invest in Lake Shore, and was driven to bankruptcy.

Jim Fisk and Jay Gould were rivals of Vanderbilt. Vanderbilt's Lake Shore scheme came during the Gould-Fisk gold corner scheme, which was part of a bigger plan. If dollars sank in price compared to gold, then American crops would be more competitive overseas. Hence, they would need to be exported, and to do that they would have to be shipped to East Coast ports via railroads owned by Fisk and Gould. They would make money on the gold corner and make money for their railroads. They acquired large amounts of gold starting in August, and by mid-September gold was in a bubble, which they planned to deflate while taking profits and after the crops had been shipped.

On September 24, 1869, the Federal Government announced it would sell some (not that much, a few million dollars worth) of its gold. The price of gold collapsed; stocks followed gold down. Many Wall Street companies failed. Neither the gold supply nor the banking reserve system could supply enough liquidity to allow the markets to right themselves.

Vanderbilt, probably the richest man in America, calmed the markets. He had not meant to sink the entire American economy, just some of his railroad rivals. As gold dropped in value, people stopped hoarding it, so gradually both gold and paper money supplies returned to normal.

The nation had several more lessons in the need for a money system that could expand and contract in line with both short term economic conditions and longer trends. Finally, in 1913, the Federal Reserve System was formed.

There are certainly problems with the Federal Reserve System. The Great Depression was not prevented by Federal Reserve action. Neither was the inflation of the 1970s. Nor can the Federal Reserve by itself make up for the stupidity of Congress, or of Wall Street guys who, like Fisk and Gould, outsmart themselves.

But forget the Gold Standard. It is suitable only for antique shows along with muskets, horse-drawn trams, and cowrie-shell money.

Fix and improve the Federal Reserve System; don't abolish it. Clearly it needs to be run by better decision makers. They should put the public interest above the current mission of insuring profitability for bankers and their fat-cat Wall Street shenanigans.

Just as we really need to increase math and science literacy in the United States, we need to increase business and economics literacy. An ill-informed electorate is apt to elect ill-informed and crooked men who can break any system, no matter how well-constructed the system itself is. Discussing the gold standard is a great opportunity to explain how the modern electronic-money economy can be made to work.

States Rights and the Federal Reserve

"Such is the character of human language, that no word conveys to the mind, in all situations, one single definite idea; and nothing is more common that to use words in a figurative sense."

—John Marshall in McCulloch vs. Maryland, 1819

If your knowledge of American history is shallow enough, you might think that the question of states' rights was answered by the Civil War. The Republican Party opined that for a state to secede from the Union was an act of treason. A lot of people died to make the point. Yet states did not become mere administrators of Federal law. They retained important rights and duties.

Before considering how the Federal Reserve fits into our system of governance, it is worth a bit of review about the Bank of the United States. America had no banks at all in 1776, which at least proves it is possible to get along without them. Great Britain had a number of banks, including the Bank of England, which had been created by the British government, but which had not branches in the American colonies.

The first Bank of the United States was chartered by the first Congress under the new Constitution in 1791 for twenty years, based on a proposal from Alexander Hamilton, the Secretary of the Treasury under President George Washington. Like the Bank of England, it was set up as a private company that would hold federal funds, but act as a bank to commercial enterprises. From the beginning some political figures (anti-federalists) opposed it and believed that its creation was not a power granted to Congress by the Constitution. In 1811 Congress refused to recharter the bank (by a vote of 64 to 65). The War of 1812 created such financial chaos in the United States that the bank was issue a new charter in 1816.

In 1818, to prevent the Bank of the United States from competing with local banks, the State of Maryland passed a tax on all banks not chartered by the State. The Bank cashier, McCulloch, refused to pay the tax. The Bank lost in the Maryland courts, but appealed to the Supreme Court of the United States. By a vote of 8 to 1 the Supreme Court found the Maryland law to be unconstitutional. [See McCulloch vs. Maryland, 17 US 316 (1819)]

In the ruling John Marshall discusses the nature of the federal system at some length. He discusses how sovereignty can be shared or split by states and the federal government. He discusses the phrase "necessary and proper" at some length. He also splits the hair of the 10th Amendment by noting that it differs by one important word from the wording of its predecessor in the Articles of Confederation.

Even Marshall, the federalist, noted that the Constitution gives the Congress some responsibilities, and prohibits certain types of legislation, while reserving others to the states. Two basic problems remain, even if you are convinced by Marshall's reading of the Constitution. You may not agree with how the Constitution divides up responsibilities between the states and federal government. That could be fixed by amendments, although amending the Constitution is difficult, and what is already in place is favored.

The more difficult question arises when specific situations cross multiple issues, or when there are shades of gray within a single issue. The Supreme Court itself has often made differing rulings on the same subject during different periods of American history.

President Andrew Jackson did not like the Bank of the United States; he thought its powers exceeded those grantable under the Constitution. Jackson, like most Americans, wanted states' rights when he agreed with the states, and was against states' rights when he wanted to impose his ideas on the entire nation. When the people of South Carolina nullified an oppressive tariff (import customers duty), Jackson threatened to use military force. But when George asserted states' rights to evict the Cherokee nation, and the Supreme Court backed the Cherokee in Worcester v. Georgia (31 US 515), Jackson (and later President Van Buren) refused to use federal troops to enforce the Supreme Court's decision. In 1833 President Jackson took federal money out of the Bank of the United States, and its charter was allowed to expire in 1836.

The Federal Reserve was controversial when it was created in 1913 it was no less controversial than the Bank of the United States. However, it did not compete directly with private commercial banks, instead using its function as a reserve bank to maintain a money supply consistent with economic health. Recently the Tea Party and Republican presidential candidates have been attacking the Federal Reserve. Partly the attacks are pragmatic, partly they raise yet again the ancient question of what are the powers of the federal government under the Constitution.

Anyone can criticize the Fed on pragmatic grounds. Take your choice: the Fed created too much money, or the Fed created too little money. Heck, the Fed insiders debate that question among themselves.

Questioning the Federal Reserve's constitutionality is wacky, except perhaps as an academic exercise. The Tea Party has no good answers for the reasoning in McCulloch vs. Maryland. Congress has the power to regulate interstate commerce and to establish a system of currency, both of which it chooses to do through the Federal Reserve. Congress has the power to change the Federal Reserve, to replace it with something different, or to abolish it outright.

Many in the Tea Party now hold there is an Original Constitution, written by God himself, and easily interpreted by anyone with a rudimentary knowledge of English and the Ten Commandments, the amount you would get from their home schooling program. For them it is simple: the Constitution does not mention the Federal Reserve, so having one cannot be constitutional.

The first Congress (admittedly a rogue's gallery of corrupt men) chartered the Bank of the United States, and it was signed into law by George Washington. Who do you think is in a better position to opine on the meaning of the U.S. Constitution, the village idiots of the Tea Party, or the first Congress? The men who knew the men, sometimes even were the men, who wrote the Constitution, or Michele Bachmann?

We do not need to return to some mythic original Constitution. We need to amend the Constitution to bring it into line with what we, the people, have learned in the past 200 years. The problem with Congress is not that it has exceeded the power granted to it, though it probably has at times. The problem with Congress is that it has not done everything necessary and proper to "promote the general Welfare." Neither, for that matter, have the various state legislatures.

Republican, Democratic and Tea Party Debacle

The rhetoric was shrill, but in the end there was much to do about nothing. The federal government has no plan for reviving the economy, and it has no plan for not going bankrupt down the road a few years. But consumers, business decision makers, and bankers were filled with terror throughout July, making the economy worse, not better. A worse economy results in lower taxes and bigger federal deficits, the opposite of what the Tea Party claims to want.

In yesterday's Disecting the Bull blog, Plenty of Stimulus, intended primarily for investors, I argued that the federal stimulus, on the whole, is plentiful.

Unfortunately, Congress and the President, as a whole, have their priorities screwed up.

Military and homeland security spending were exempt from cuts. There are economists who will tell you that military spending creates jobs, but so does make-work spending. The finished goods from military spending create no value. Also, much of the spending goes to troops garrisoned in our overseas empire, rather than into the American economy. Military and homeland security spending do not help the U.S. compete in the international arena against export powers like Germany, South Korea, and China.

Research and development, science, and education are being cut. Can you spell s-t-u-p-i-d? Sure, education money could be better targetted. We have too many English and film majors, not enough people learning technical, business, and science skills. We have way too many high school drop outs.

Regulatory agency budgets are prime targets for cuts. A lot more Americans are going to die because of lack of enforecement of safety rules than could possibly be killed by international terrorists. Banks won't get examined, impure foods will make it to supermarket shelves, passenger planes will crash in mid-air. Thank the Tea Party for that.

What is truly amazing, though, is that nothing is being done about the families being devastated by long-term unemployment. True, at least until the end of 2011 the federal government will continue to extend unemployment benefits to 2 years (most state allow for 6 months, which is fine in a normal economy or mild recession). Unemployment started rising in 2007. Of course there are food stamps, homeless shelters and Medicaid, but unemployed people are economically unproductive. Talent is being wasted when we need to be competing vigorously against the Chinese and Germans. The Republicans pray to their Holy Trinity, gold, free markets, and capitalism, but while the price of gold is up (don't worry, it's a bubble, it will fall again), our free markets have been rather lax at creating jobs.

It CEO's won't hire, government should take action. Here's what an activist President and Congress would do: impose a 95% income tax rate on CEO's of profitable companies that fail to grow their workforces. Include stock options and other benefits when calculating the tax. My guess: full employment by the end of 2011.

Get the housing market started again by allowing the Federal Reserve to loan directly to credit-worthy home buyers at the same interest rates it charges banks. Oh no, that would be socialism! Better depression, suicide, homelessness, riots, and chaos than a bit of healthy socialism.

You can talk about economics, but in the end an economy is just the aggregate of a bunch of human decision makers. You don't want people to be overconfident, or you get bubbles, but you don't want them to be overly cautious either.

The July Debacle did anything but inspire confidence. Hey hey, ho ho, the Tea Party has to go.

Sarah Palin: Sell California, Not Alaska

Speaking to a Tea Party rally at Barack Obama's pretend birthplace of Honolulu, Hawaii, Sarah Palin screeched, "Selling Alaska to pay off the national debt would be socialism! Barack Obama's plan to sell Alaska is un-American!"

Warming to her topic like arctic sea ice, Palin suggested that if the Democrats want to sell a state to pay off the national debt, it should be California. "We could pay off the entire national debt of $14 trillion dollars if we sold California to the Chinese. Plus socialist baby-murdering nature-lovers like Barbara Boxer, Nancy Pelosi, Dianne Feinstein and Arnold Schwarzenegger would become ineligible to run for President. Let them see how they like Peking style socialism with its rapid economic growth, jobs, and lack of Christianity."

Questioned by a reporter from Foxy News Network, Palin denied she opposed selling Alaska because it would make her ineligible to become President. "This constant campaigning is not about me," she said. "America is becoming a second rate power because of socialist government programs like the interstate highway system, socialized senior services, and a government owned military system. I am campaigning to save America from Socialism."

The growing controversy about the Federal Reserve's now not-so-secret contingency plan to sell Alaska (known as "geographic easing") to the highest bidder is coming too late to be a major factor in the November election . The Obama Administration is apparently not entirely united behind the Alaska Plan. President Obama feels that selling Alaska would be a mark against him in the history books, but he has to weigh that against the possibility that he would also be blamed if America goes bankrupt.

People are saying that, anyway.

Gramm-Leach-Bliley, Glass-Steagall, and Bill Clinton

In the last couple of weeks some of the nationally known pundits, and the Barack Obama campaign, have started talking about how the Gramm-Leach-Bliley banking bill, which overturned the Great Depression-era Glass-Steagall act, has played a major part in the mortgage finance disaster of 2007-2008. I posted an article, Housing, the Credit Squeeze, and Glass-Steagall Act, back on February 4, 2008, when no one wanted to talk about the subject.

During an election, if the economy is bad, there is a tendency to blame everything on the party in power. Senator Obama's attacks on Senator McCain about Gramm-Leach-Bliley are not unjustified. However, Obama's party, the Democratic Party, was just as responsible for repealing Glass-Steagall as the Republican Party. Given Barack's spineless political career we can surmise that he would have voted for Gramm-Leach like everyone else, had he been in the Senate or House of Representatives at that time.

At the shallowest level, we are simply seeing the usual political-economic cycles that have been taking place since the first flint ax was traded for the first sea shell. Mixing ordinary banking (taking deposits, making loans) with Wall Street style banking (creating and trading stocks, bonds, and more complex financial instruments) was clearly a cause of the Great Depression. So Congress built a firewall with Glass-Steagall. At the time the bankers were bankrupt and unable to bribe their way out of the situation.

But when no fire transited from banking to brokerage houses, or vice-versa, for a number of decades, pressures began to build. That firewall did not just prevent fires, it prevent people from making quick bucks. Flexible politicians were found, particularly new ones who did not remember the Great Depression. One of the most flexible modern politicians was Bill Clinton, a Democrat. He named Robert Rubin to be his Secretary of the Treasury, and he kept Alan Greenspan as Federal Reserve Chairman. Think of these men as voracious predators with no respect for anything put power and money. Together they put in place the key "reform" that allowed the rapacious mortgage and derivatives frenzy of 2004-2006. Now taxpayers will be further burdened to clean up the mess.

So what is Senator Barack Obama going to do about it if he becomes President? What will Senator McCain do about it if he becomes President? The standard answer seems to be: make the Federal Reserve more powerful. None of the old "power to the people" solutions are even conceived of, except perhaps by Green Party candidate Cynthia McKinney. But it was the Federal Reserve that helped pressure Congress into repealing Glass-Steagall.

Politicians will say anything to get elected. Congress, not the President, is supposed to write the laws. Most American citizens vote without knowing anything about their representatives in Congress. Until people are better informed and more able to exercise power directly, don't expect any major changes in our system.

Double Bubble, Toil and Trouble

Two economic bubbles burst in less than a decade. Is that just a run of bad luck, or is it a financial engineering feat? And how is it related to politics?

Consider that the Internet stock bubble that peaked in 2000 cannot be directly blamed on the Republican Party, since Democrat Bill Clinton was President and his Vice President Al Gore was a early proponent of the Internet. Congress, however, was controlled by the Republicans. The Federal Reserve probably deserves most of the blame for that bubble.

The Housing mortgage bubble that burst in 2007, with aftershocks still shaking up 2008, cannot be blamed on the Democrats. Even though Democrats controlled Congress by the time the bubble burst, we had a Republican President, George W. Bush, during the build-up to the bubble. Again, the Federal Reserve deserves most of the blame for the bubble (if you don't count the banks, the mortgage brokers, and the fools who bought at the top of the housing market).

So should we blame the Federal Reserve? Is the two-party system just a circus to keep most citizens distracted while we are really governed by an all-powerful, appointed, cabal of the highest reaches of banking and government? The two-party system is a circus, but it is not just a circus. The Federal Reserve is powerful, but today the corporate new media is saying the bubbles were because the Federal Reserve had too little power, not too much. There is a bit of truth in that, but they did have the power to raise interest rates. Raising interest rates earlier during each of the bubbles would probably would have prevented many of the excesses that damaged the entire economy when the bubbles popped. Yet those who hate the Federal Reserve would have hated that even more. In the housing bubble, the left would have pointed to the injustice of raising interest rates to the point where ordinary people were unable to buy homes, and the right would have screamed because it would have slowed down a none-too robust economy.

Noam Chomsky has talked about the way our "free market" economy tends to privatize profits and socialize losses. That is, the workers have to clean up after the rich. We are seeing that now with the banking bailouts. Executives walk away with their winnings, they don't have to give anything back to the stockholders or customers or employees or other losers. No one is paying back the fees generated by mortgages that should never have been made. The financial press, at least that part aimed (propaganda should always be carefully aimed, otherwise there might be casualties from friendly fire) at the unsophisticated, have failed to talk about bondholders at Freddie Mac and Fannie Mae. When the U.S. Government backs these institutions, it is saving the bondholders' investments. The bondholders took a risk in lending money to Fannie Mae to lend (through middlemen) to home buyers, but instead of being forced to take their losses, they will get paid all the interest and principle promised. Stockholders are losing almost everything; bondholders are fully protected. Old money tends to be in bonds; new money tends to be in stocks. Even among the very wealthy there is a system of caste and privilege.

Most Americans are just going to have to work harder and make do with less. Of course finding a job if you are an unemployed carpenter or real estate broker is not easy to do right now: you can't work harder when you are not working at all. American workers find themselves in the modern equivalent of lying prostate in the cotton field, genuinely unable to move a muscle because of poor food, heat, and exhaustion, while the overseer (never the master, who is drinking fine whiskey while trying to guess what price cotton will fetch in New Orleans this year) lays on the whip, demanding that they get up and produce more, more, more. You can't work harder or smarter if no work is to be found because the nation's capital was allocated to financial speculation.

The federal government is going to have to raise taxes or spend a lot less money on services, or it will bankrupt the entire nation without having to wait for the long term. Fortunately the Bush Tax Cuts for the Rich (which many Democrats in Congress originally voted for) are apt to expire in 2010, regardless of who is elected President, as long as the Democrats control Congress.

Financial bubbles have many components, but the ones that are large enough to matter are always based on credit bubbles. Credit is needed to provide the money used to bid up the price of whatever assets are in the bubble. The Internet Bubble was a typical bubble; many people called it a bubble long before it burst. Only idiots owned the stocks when they started to crash. Every Internet stock was hyped as the next Microsoft, while stocks of companies that were making real goods and profits were neglected. The credit involved was the ordinary kind, made possible by the Fed keeping interest rates too low.

The Housing bubble was weirder. With an Internet company at least the fiction was there that it might become more valuable over time, when it learned to convert page views to real money. But a house is a house. A neighborhood might become more popular, driving up prices locally, but the whole nation is not a neighborhood. House prices rise gradually over time mostly because of inflation. The bubble got its start because housing was not a popular investment during the 1990's stock market boom. When the Internet bubble broke, housing was relatively cheap and interest rates on mortgages were exceptionally low. Buyers moved in, sending up prices and getting the ball rolling. Then the bubble was driven by short-sighted banks and mortgage companies that were able to give credit at no risk because it was other people's money, and collect big fees for that service. As soon as the Federal Reserve raised interest rates towards normal levels, the bubble started to fall apart.

I think a lot of people saw it coming and decided to grab while the grabbing was good.

The real estate industry has always been a major financial backer of both Democratic Party and Republican Party politicians, from local city councils up through Congress and the Presidency. Don't expect anyone to give the real estate speculators a spanking.

As always, the American worker and small businesses, and a few well-run, non-glamorous, large businesses, will pull everyone's ass out of this mess and get no credit for it. But until ordinary Americans wake up and think things through, organize and act on a sound analysis, they are going to keep getting lashed by the wise guys on Wall Street. Neither the Democratic Party, nor the Republican Party, as currently configured, are capable of taking on Wall Street or the real estate speculation lobby.

With interest rates nice and low now, and no shortage of stupid people in the world, the next bubble is brewing somewhere. Only time will show where.

Nancy Price v. 10,000 Demon Lawyers

My wife, Jan Edwards, was talking to an activist friend today, Nancy Price of the Alliance For Democracy. Nancy is known (and should be better known) as a water activist. So she gets asked to speak about water issues (especially who owns it and how it should be distributed). But what she really wants to speak about, she says is an extension of NAFTA called the SPP (Security and Prosperity Partnership).

Basically, the SPP is going to globalize parts of the United States. Globalize in the sense of ridding these areas of local control, including environmental and labor regulations. Apparently workers who are not U.S. citizens will be brought to these zones to work for sub-minimum wage.

SPP sounds horrible for people and the planet. It is based on the principle that economies must always expand. It was created with no input from 99.9% of the citizens of the U.S., Mexico, or Canada. It is corporate rule, international corporate rule, pure and simple.

So why don't people know about this? Sure, citizens in the U.S. are used to being ruled like sheep without consultation, but usually once something this big is set up, the New York Times and other hyenas that pretend to be a free press in this country gloat about it, if only in the Business section.

I read the financial pages every day. I have for years. I don't read every article, but I look at the headlines at the New York Times and CNN/Money online. I read The Economist, in the paper edition, every week.

Not only did I know little about SPP (though I did know about the Canada to Mexico superhighways they are building), I did not even know that in 2006 Congress passed, and George W. Bush signed, a law allowing the Federal Reserve to pay interest to banks for the money they are required to keep in reserves. I found this out yesterday because the Fed is thinking of actually implementing this option. It is an outrageous scam. But I'll have to write more about this later, because I want to present an even larger scale picture of our social-economic-political-environmental problem.

The rich people and their corporations have an army of lawyers, lobbyists, consultants and their demonic helpers to pass treaties and legislation, and to litigate in the courts. We have Nancy, an unpaid, volunteer activist. Nancy is a formidable person. In a fair fight I'm sure she could take on 10 spawn of Stanford Law School and defeat them. And there are a few more Nancies in the U.S., and even some paid activists in groups like Public Citizen.

But my side loses, over and over again, because of the Armies of Hell. The campaign donations. The phony "progressive" candidates for high office. Highly paid lawyers who can scare the brave and creep quietly like deadly fungi into the very fabric of American government.

We need to take their money away, first and foremost. By any means necessary. Money has always been the root of their power. Leave them with their money and nothing is safe.
I am tired of hearing from aging ex-corporate lawyers, generals, CIA agents and politicians that the system is bad and they wished they had not done the dirty deeds they did.

If we are going to save this planet and a scrap of dignity for ordinary human beings, it is time to declare war. We seem to be incapable of seizing the government; the two-party system is designed to prevent that. I suggest that we make America ungovernable by the parasitic elite.
You don't have to be a lawyer to disrupt a lawyer. You just have to put in the effort.

People have hopes for Barack Obama. Let us use that hope. Let us give Barack, or Ms. Clinton if she wins, and even John McCain if we wins, a to do list with some deadlines. And if they can't meet the deadlines, let's fire their asses. The whole lot of them. Let's burn their wicked laws and issue new law that is healthy and wholesome.

Six months, I think, is sufficient to dash any reasonable hope. So here is what I demand, and suggest that you demand, that Barack Obama and Congress sign into law within 6 months of Barack's inauguration:

1. All U.S. troops out of Iraq and Afghanistan (except the customary guards at U.S. embassies).
2. A single-payer health insurance plan for all Americans.
3. A required 40 mpg highway fleet average for new non-commercial automobile/SUV sales.
4. Repeal of NAFTA and the WTO trade agreements.
5. An 80% income tax on all persons' income of over $50 million a year, with all securities held by people in this category marked to market for tax purposes.

Of course my list could be longer and more detailed, but if they achieve those five things, I'll be very impressed and have to shut up for a while about what a bad lot the Democrats are.

If I were a betting man, I'd bet 5 to 1 that not a single one of these goals will be achieved by the deadline, and 2 to 1 that none of them will be achieved during Barack's four years in office.

For more of my opinion, visit my Politics page.

Water Drop Jewelry at Peaceful Jewelry

Housing, the Credit Squeeze, and Glass-Steagall Act

The current United States economic crisis is a direct consequence of the repeal of the Glass-Steagall Act [passed as the Banking Act of 1933]. While restoring the act's provisions will not end the crisis, it would go a long way to preventing future economic near-meltdowns.

The Glass-Steagall Act was enacted in 1933 after Congress had looked into the causes of the Great Depression. It was a wise law and did much to protect the American economy until it was effectively repealed by the passage of the Gramm-Leach-Bliley Act in 1999.

Before Glass-Steagall a bank was a bank and could even be a stock brokerage house. We can categorize banks into three varieties. Retail banks mainly take deposits for checking and savings and make loans for housing, consumer items, and business needs. You can include Savings & Loans and Credit Unions in this broad category.

The second type is an investment or merchant bank. A merchant bank deals mostly with businesses and mostly lends out its own capital. It may take ownership stakes in businesses, or speculate in stocks. It may arrange for corporations to raise money by selling bonds. It do other services for fees, like arranging mergers and acquisitions.

The third type of bank is usually called a brokerage house. It might do some things a merchant bank does, but its principle business is buying and selling securities for clients for a fee. If it helps launch new stocks or bonds for companies, or speculates with its own money, it may become more of a merchant bank.

In many cases as a brokerage house or merchant bank grows it adds functions and the two categories start resembling each other. Before Glass-Steagall a banking corporation could legally function as all three types of banks, though many banks, especially smaller ones, kept to their specialties. So, for instance, a bank could take retail deposits from customers, lend money out for residential house mortgages, run an internal brokerage operation, and even originate stock and bond offerings.

There were many reasons for bank failures during the depression, and economists still argue about what made the stock market and economy collapse. The congressional committee that wrote the Banking Act of 1933 concluded that a major cause of the economic collapse that followed the stock market collapse was the blending of functions in banks. Basically, instead of taking non-business deposits and lending them out as mortgages, some banks had used those funds to speculate in the stock market in the late 1920's, or had loaned them to investors (margin loans) who speculated in stocks. When the market crashed these banks then were unable to repay their ordinary depositors. In addition Citibank's brokerage arm had advised clients to buy stocks that it knew were overpriced and at the same time shorted those stocks so as to profit from the downswing.

Glass-Steagall forced banks to chose between being what we now call a bank, an institution that takes retail deposits, and a brokerage house or merchant bank that specialized in stocks, bonds, and related activities.

In the 1990's a concerted effort was made to overturn Glass-Steagall. While the banks and brokerages pushed at Congress and the Clinton Administration, the Federal Reserve led by Alan Greenspan and other regulators looked the other way while retail banks started merchant bank activities and vice-versa. Leading the charge was Robert Rubin, U.S. Treasury Secretary from 1995 until 1999 (he was a former Goldman Sachs partner). Having done the dirty deed, he joined Citigroup and still serves as its chairman.

Citigroup has been highly involved in the mortgage-based economic meltdown of 2007. Citigroup now consists of a retail banking arm, a merchant banking arm, and a stock-brokerage arm, an insurance arm, etc. Other large banks such as Bank of America, and JPMorgan Chase, all engage in multiple activities that would be prohibited by Glass-Steagall if it were still a law.

So has does that figure into the current credit and liquidity shortage resulting from the deflating of the housing bubble?

Banks, that is retail or consumer banks, used to hold mortgages. They took in deposits and made loans including mortgages. However, back in the 20th century mortgages started to be resold. After a bank lent money to buy a house, it had less money to lend. By selling the mortgage the bank received its money back and could make another loan. When this happened a bank was acting more as a mortgage broker than in its old capacity of lending out its deposits and making a profit from the difference in interest rates.

Next came repackaging. The idea was to spread risk and allow the lenders to select a level of risk, and of return on investment, that they liked. This is also called the securitization of mortgages. Mortgage origination companies suddenly had a new economic role. They originated mortgages and made their money on the transaction fees. The mortgages were repackaged by banks, which also repackaged their own mortgages. The mortgages were blended and sliced and diced to be sold as securities. Often the end holder of the mortgage-backed security was a pension fund, a financial institution, or a wealthy individual or family trust looking for higher returns (interest) than could be gotten by buying U.S. treasuries or corporate bonds.

It all smelled so sweet while the bubble was inflating. People got houses. Rich people got high-dividend securities that were AAA rated because, after all, housing prices always go up so all that risk was more theoretical than real.

Or you could look at it this way: what appeared to be a security was actually a loan. They people who borrowed the money don't know who the lenders are and would not care about them anyway. And loans don't always get paid back.

The problem for the banking system, beyond individuals failing to make their mortgage payments, is that the very credibility of the system was endangered by combining retail and merchant banking. Many of the mortgages were made with some fraudulent misrepresentation to the buyers. At the other end banks minimized the risks involved when selling the mortgage securities to the end lenders. Citicorp and Merrill Lynch, among others, came out looking particularly stupid because they bought their own sales pitch.

Some banks lost a lot of money quickly because they had speculated in the securities they had created. They also had become dependent on the fees generated at each stage of the process.

So the banks became illiquid in 2007 and had to be bailed out by the Federal Reserve. Now we are in February 2008 and many people can't get the loans they need to buy houses, even if they have downs and good credit records. So banks that made foolish loans two years ago can't make good loans today.

Citicorp's retail operations, its banks that take in deposits, have been endangered by its merchant arm that created and held mortgage-backed securities. We are really lucky that there is federal deposit insurance to reassure depositors. If Citicorp depositors had decided to more their deposits to other banks in 2007, we might be in a Depression already today.

We need a clear firewall between retail banking and the securities market. Hopefully the current hard weather will convince people to fix this problem instead of waiting for another Great Depression.

I believe the criminal behavior that led to the passage of the Gramm-Leach-Bliley Act needs to be investigated and punished. But that is a pipedream given how corrupt America's political and economic systems have become.

Saving, Spending, and the Federal Reserve

Those who give advice have told the American people, for decades, that they should spend less and save more. Apparently towards the end of 2007 Americans, or enough of them anyway, finally learned their lesson and cut back on spending. Now Wall Street and their servants at the Federal Reserve Board are in a panic. Their plan: cut interest rates, inject credit into the big banks, and get Americans over-spending again. Add to this the genius of politicians who will use this opportunity to do some more tax cuts and run up a higher federal deficit, and you have an election year.

You had to be really an idiot to believe in 2006 that house prices would go up forever. One might forgive the folly of some people who just wanted to own a home, but speculators and lenders should have known better. Even those who wanted to own a home were doing the typical American fatter-is-better thing: people who could easily afford a 1000 square foot home were taking out jumbo mortgages to move into 3500 square foot homes. For a year a two the American Dream, typified in the Beverly Hillbillies, had come true. Even a clerk at WalMart could get a loan to move into a MacMansion. People with real job skills were buying palaces. And the truly spendthrift, who bought houses before 2005 and saw their on-paper value of their comparables double or triple, added to their mortgage debt so they too could lead the American version of the good life.

So now interest rates are being cut down to practically nothing. It is mainly to save the greedy idiots who ran the big banks and brokerage houses, the Citicorps and Merill Lynches and Morgan Chases. It will help Americans spend their way through the slowdown or recession. It will lower interest rates on CDs, stressing out senior citizens. The Fed is bringing another truckload of bad hooch to the party. Hooray!

So is saving money bad? Is being thrifty bad? Is buying a Corolla instead of a Hummer bad? Is living in a 1000 square foot house bad?

According to the Fed and the creatures that pass for financial reporters in the U.S., saving is good for individuals, but bad for the economy. The savers loan to the spendthrifts and on we tumble; everyone can't save.

Of course all you have to do is look outside America to see that national economies don't have to be based on a spendthrift culture to grow. China is a good, big example. People save more their. This creates a virtuous cycle (if economic growth is the goal): savings is invested in production. Rising production allows for more consumption and more savings.

Americans, from the Fed to the average Jack and Jill, have forgotten about the value of productivity. Ignore for the moment the ecological impact of all this. Think: if we produce more we can sell more, locally, nationally, and globally. Then we can save more and even spend a little bit more too.

Well, a lot of houses were built in the U.S. between 2000 and 2007. They were big houses that require a lot of carbon fuel to keep warm in winter or cool in summer. So here's a project: lets split them all in half. Half a MacMansion should be plenty of room for most families. And affordable too.

How about a 3 month home construction holiday? Give the workers a rest and a vacation. Allow some of the excess inventory to be absorbed. When people see that prices are no longer falling, what with ultra-low mortgage interest rates being in the vogue again, the market will get on an even keel.

Ron Paul's Crazy Gold Standard Proposal

I like many of the stances of Ron Paul, currently in the U.S. House of Representatives for Texas and seeker of the Republican nomination to become President of the United States. I even agree with him on some of his critique of the Federal Reserve System. But his idea of returning to the gold standard for money is crazy, and it is important to understand why.

Let me begin by asking this: what would you think of a candidate that urged returning to the wampum standard? What do the gold standard and wampum standard have in common, and how are they different? What does the U.S. Constitution say? How does Ron Paul's proposal differ from the gold standard used in the 19th century in the United States? Finally, having covered that extensive ground, I

First of all, you should know that none of Ron Paul's ideas are new. They have been discussed by those interested in monetary policy since before Alexander Hamilton laid out the blueprint for the U.S. financial system (though he did not foresee the need for a Federal Reserve).

Wampum (see Wampum) is a kind of money made from sea shells that used to be used by Native American Indians. It had value because it was believed to have value. Like other forms of money, it could facilitate trade, lifting an economy above the pure barter level. While the shells themselves might have some ornamental value, mainly they were a symbol for work done. Much like a modern dollar bill. There were two problems with using wampum for money that would have shown up in a more trade-oriented, modern society. One is that there could be a shortage of wampum if not enough of the appropriate shells could be found. That could constrain trade. The other is that either too much wampum could be produced, or that it could be counterfeited. Then the value of wampum would fall relative to real goods; in effect, you can have inflation even on the wampum standard.

Gold (see Gold) is a metal used for ornamentation and other purposes; it used to be used as money. While more difficult to counterfeit than wampum, it had the same problems when used as money. It did not always prevent inflation. For instance, when the Spanish conquered Mexico and Peru, so much gold and silver was mined that there was inflation in Europe. In the 19th and 20th century, with major veins of native (metallic) gold mostly tapped out, there was not enough gold available to facilitate the rapid growth of commerce. With the introduction of modern methods of extracting low-grade gold ores a related problem arose: the high cost of producing metallic gold.

Even paper money is becoming obsolete; most money today is tracked electronically.

Ron Paul proposes to fix the problem of gold by allowing the value of gold relative to silver to float in value as determined by markets shows how far his mind has wandered from reality. This was a real issue in the U.S. in the 1880's. The Democratic Party, having lost the Civil War (it was the party of Slavery), tried to get back in power at a national level by changing the official silver-to-gold exchange ratio, as exemplified in (losing) presidential candidate William Jennings Bryan's famous Cross of Gold speech. The problem with gold and silver used as money lies not in their exchange ratio, but in the fact that the supply from mining varies over time and does not match the variation in economic activity.

So forget the gold standard.

Ron Paul does remind us that the U.S. Constitution does not clearly allow for paper money, much less authorize the Federal Reserve System. It specifically states in Article I, Section 10 "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts." However, here "state" is specifically one of the states, not the federal government. In Section 8 it had already given Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;" which seems to give it the power to issue securities, which could be bonds, but has been interpreted as the ability to issue paper money. Why allow issuance of federal paper money and then prohibit the states from accepting it for the payment of debts? This issue was got around for a time by issuing paper money backed by gold or silver. As in so many cases, when the Constitution should have been amended, it was simply re-interpreted.

As to the Federal Reserve, I agree there are problems with it. It is supposed to allow for creation of a money supply sufficient to allow the economy to improve, but not so great as to cause inflation. But it is composed of bankers. Bankers are not like the rest of us. They have a long history of being far more sympathetic to the perceived problems of the rich than to the very real problems of the poor, the working class, and the middle class.

So sure, let's talk about reforming the Federal Reserve to make it responsive to all the people, not just the banks and Wall Street. Let us make it more transparent and find a way to hold those running the Federal Reserve System accountable. But forget the gold standard.

More data:

Ron Paul's Presidential campaign site