Senator Sanders followers love his attacks on Hillary Clinton. They love his promises of free things: free college educations, free medical care, and free money without working.
They love his alleged Socialism.
When asked who his hero is, Sanders said FDR, Franklin Delano Roosevelt, President-for-life from 1933 until he died in 1945.
Yet Sanders voted, along with Tea Party Republicans, against renewing the Export-Import Bank of the United States (ExIm). According to Sanders, ExIm is just corporate welfare. Sanders says the government should not own a bank that finances exports and provides jobs for American workers.
Um, might I point out that under Socialism, the government is supposed to own businesses, including banks? That pushing for state (as in California, or Oregon) owned banks is something that lefties and socialists have been pushing for recently?
The federal government actually makes money from ExIm. So it is not really a subsidy for corporations. It makes money from corporations. At the same time allowing businesses to make money exporting American products, creating jobs for U.S. workers.
But Senator Sanders (a certified member of the Establishment since 1980) gets confused easily. He calls this confusion "having principles." Is Socialism one of his principles or not? Don't ask, he'll wave his hands in the air, act indignant, and change the subject.
Did he ever retract the FDR is his hero statement? Let's take a good close look at that. Unlike Sanders, Roosevelt was a lifelong Democrat, though his uncle, President Teddy Roosevelt, was a Republican. FDR was not an independent.
And talk about Rich. FDR was born richer than Hillary and Bill will ever be.
And talk about militaristic. FDR was appointed Assistant Secretary of the Navy in 1913 when he was just 31 years old. His qualifications? He was from a rich and powerful family. On his mother's side, the Delano fortune came from running opium into China. His father was one of the Robber Barons in coal and railroads.
But FDR presided over the complex system of programs that came to be called the New Deal. In some ways it was socialist, but there was also a fascist element to it. In any case:
Franklin Roosevelt (by executive order, without help from Congress) created ExIm in 1934.
Sanders can't think straight. But he is one of America's longest reigning politicians because he is really, really good at making promises and at lying.
No serious American leftist could support Senator Sanders based on his actual voting record in Congress. He gives a good stump speech. It sounds like he is a leftist. It sounds like he is for the poor, impoverished, college-educated white male voters that fund and power his campaign.
But look at his votes at the beginning of the Great Recession, and you can see why it would be folly to make the man President. In 2008 things fell apart for a variety of reasons, not just because some banks were too big, too stupid, and too greedy.
The important thing for Government was arresting the downward spiral. Poor people and working people are the ones hurt worst by a downward spiral. A family with $100 million can lose 90% of it and not starve. But for most people losing a job will wipe out any savings or assets they have, and may scar them for life. And if things got as bad as during the Great Depression, masses of people would have been dying in the streets
The first thing FDR did when he took office in 1933 was rescue the banks. Why was Senator Sanders against rescuing the banks in 2008-2009? Because he doesn't like big banks. Like anyone much does. He was willing to let America go down the tubes just so he did not have to go on record as doing what his hero did, saving the banks. Same for the auto industry. And again, the bank-saving plan turned out to be sound, eventually earning the government more than it put in.
So why is Bernie such an idiot? You might speculate he took too many hallucinogens between when he arrived in Vermont in the 1960s, the son of a rich Brooklyn business owner, and when he emerged from the fog in 1980 to take his first decently-paid job as a politician.
I don't know about the origins of Bernie's mental and emotional disabilities, but I have an analogy that explains how his current personality operates. He is like a foody who goes into a party with a giant smorgasbord and notices some offending food. He waves his hands, twists his face into a parody of an insane person, declares everyone at the party unclean, and walks out.
But what particularly saddens me is all the leftists who have fallen for his BS. College students I can understand. They are typically privileged children of privileged parents, and he has promised them more privilege, not having to pay for college, not having to make any contribution to society, just reaping the rewards of high-paying jobs requiring college degrees.
But leftists and even progressives should know better. They should be able to check voting records and do a little bit of critical thinking. Instead most have just been caught up in the hatred Bernie peddles.
Showing posts with label banks. Show all posts
Showing posts with label banks. Show all posts
Friday, March 25, 2016
Wednesday, June 5, 2013
The Accounting System #11: The Great Unraveling of 1930
previous: #10, The Federal Reserve and Accounting Money
In short, in 1930 the economic system unraveled because of the way it was built. The previous upward spiral of increasing economic activity was enabled by the ability of the banking system to expand both deposits and loans. Over time, however, many people had withdrawn deposits from banks to buy stocks, while others took loans from banks that were used to buy stocks. When stock prices started dropping (because enough people had realized it was a fool's game), people could no longer easily take money out of the market like they could take it out of a bank deposit. For loans to be repaid more stocks needed to be sold, and when stocks became relatively worthless, deposits had to be drained to make loan payments or for ordinary expenses. Loans and deposits, accounting money, disappeared rapidly, even when there was plenty of cash to facilitate cash transactions.
At the end stage banks could not collect on loans (because so many people had lost their jobs), and so had to use reserves to pay depositors who wanted to make withdrawals. When reserves were gone, the accounting rules said the banks had to close. There was no deposit insurance, so accounting money in the form of deposits, simply disappeared. Suddenly self-accounting with cash seemed like a better idea than bank accounting with numbers in ledgers.
We are largely trained to forget that there was one large, industrialized nation whose economy did not collapse in the 1930s. In the U.S.S.R. (essentially Russia) there was no stock market to collapse, and state banks and most of the economy were all government-owned. The government had total control of the accounting system. Despite the other defects (even atrocities) of the Communist system, there was a realization that money, the economy, and accounting were all human creations, and it was possible to run a command economy with some success (although command economies also have very high failure rates. It mostly depends on the commanders).
The New Deal can be fairly said to replace the free market economy of the United States by a command economy supervised by the government. In the end it took the increased demand created by World War II to get the American economy on its feet, and the legacy of the New Deal was not a command economy but a re-engineered free market economy. Some of the changes had little to do with the accounting system, but two made noteworthy changes.
While most of the bubble in stock market prices was simple human folly, there was also fraudulent accounting at some corporations that was used to jack up stock prices. The SEC (Securities and Exchange Commission) was created in 1934 to attempt to insure that investments traded in public markets were neither fraudulent or manipulated. Among other reforms, the accounting of individual listed corporations now had to be audited by a (hopefully) independent auditor, and reported to all investors at least quarterly in a standardized format. Their accountants and their auditors were giving accounting rules they had to follow, Generally Accepted Accounting Principles (GAAP). This standardization of the accounting system meant that any person, not just accountants, could learn to read and understand any American business accounting statement.
The creation of the Social Security system would have long-term repercussions far beyond what was originally envisioned. Because many Americans were alive who had the same name, each person who paid into or received money from the system was given a Social Security Number. Later this number would come to be used as a national, individual identity number, thus vastly enlarging the domain of The Accounting System.
Next: #12 Electronic Money Takes Over
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
In short, in 1930 the economic system unraveled because of the way it was built. The previous upward spiral of increasing economic activity was enabled by the ability of the banking system to expand both deposits and loans. Over time, however, many people had withdrawn deposits from banks to buy stocks, while others took loans from banks that were used to buy stocks. When stock prices started dropping (because enough people had realized it was a fool's game), people could no longer easily take money out of the market like they could take it out of a bank deposit. For loans to be repaid more stocks needed to be sold, and when stocks became relatively worthless, deposits had to be drained to make loan payments or for ordinary expenses. Loans and deposits, accounting money, disappeared rapidly, even when there was plenty of cash to facilitate cash transactions.
At the end stage banks could not collect on loans (because so many people had lost their jobs), and so had to use reserves to pay depositors who wanted to make withdrawals. When reserves were gone, the accounting rules said the banks had to close. There was no deposit insurance, so accounting money in the form of deposits, simply disappeared. Suddenly self-accounting with cash seemed like a better idea than bank accounting with numbers in ledgers.
We are largely trained to forget that there was one large, industrialized nation whose economy did not collapse in the 1930s. In the U.S.S.R. (essentially Russia) there was no stock market to collapse, and state banks and most of the economy were all government-owned. The government had total control of the accounting system. Despite the other defects (even atrocities) of the Communist system, there was a realization that money, the economy, and accounting were all human creations, and it was possible to run a command economy with some success (although command economies also have very high failure rates. It mostly depends on the commanders).
The New Deal can be fairly said to replace the free market economy of the United States by a command economy supervised by the government. In the end it took the increased demand created by World War II to get the American economy on its feet, and the legacy of the New Deal was not a command economy but a re-engineered free market economy. Some of the changes had little to do with the accounting system, but two made noteworthy changes.
While most of the bubble in stock market prices was simple human folly, there was also fraudulent accounting at some corporations that was used to jack up stock prices. The SEC (Securities and Exchange Commission) was created in 1934 to attempt to insure that investments traded in public markets were neither fraudulent or manipulated. Among other reforms, the accounting of individual listed corporations now had to be audited by a (hopefully) independent auditor, and reported to all investors at least quarterly in a standardized format. Their accountants and their auditors were giving accounting rules they had to follow, Generally Accepted Accounting Principles (GAAP). This standardization of the accounting system meant that any person, not just accountants, could learn to read and understand any American business accounting statement.
The creation of the Social Security system would have long-term repercussions far beyond what was originally envisioned. Because many Americans were alive who had the same name, each person who paid into or received money from the system was given a Social Security Number. Later this number would come to be used as a national, individual identity number, thus vastly enlarging the domain of The Accounting System.
Next: #12 Electronic Money Takes Over
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Monday, May 6, 2013
The Accounting System #7: Virtualization in early Banking
previous: #6, Coin, Counting and Crashes
We know that credit and debt are early historical phenomenon because they were recorded in ancient documents. The Bible requires the returning of borrowed land and goods, as well as the liberation of slaves, every 50th year [Leviticus chapter 25]: "ye shall return every man unto his possession, and shall return every man unto his family." Laws regulating loans may pre-date writing.
Credit requires a tracking system, which of course is an accounting. A written record had considerable merit over human memory.
Trade, as indicated earlier, is facilitated by an accounting system. The portable accounting system that used coins came to be supplemented at a very early date (certainly by the time of the Roman Republic) by systems based on the letter of credit.
It was a simple enough system. A wealthy Roman, wanting to send his son to receive an education in Athens, could go to a merchant banker who would write a letter of credit. This light, paper document would be taken to Athens and presented to an associate of the Roman banker, who would issue coin, up to the amount stated in the letter, to the travelling student. Because citizens of Athens often travelled to Rome carrying letters of credit, to a large extent the two-way flow of credit might cancel out. Each of the banking associates kept careful records. At intervals, if flows were lopsided, then could even up their mutual accounts by shipping coin or by sending desirable merchandise.
Letters of credit are an early example of the portability of accounting combined with its virtualization. A letter of credit, in the coin age, would be thought of as virtual coin. In fact, once we drop the coin blinders from our eyes, we see that it accounted for goods and services up to the point when coin was issued.
The most remarkable discovery that allowed accounting systems and trade in real goods and services) to escape the limitations of coin systems probably evolved among Italian city-state proto-bankers in the late middle ages. No, not double-entry bookkeeping (we'll get to that in Chapter 3). They discovered that they only needed a small reserve of coins to do business and make a profit through loans.
Next: To be continued
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
We know that credit and debt are early historical phenomenon because they were recorded in ancient documents. The Bible requires the returning of borrowed land and goods, as well as the liberation of slaves, every 50th year [Leviticus chapter 25]: "ye shall return every man unto his possession, and shall return every man unto his family." Laws regulating loans may pre-date writing.
Credit requires a tracking system, which of course is an accounting. A written record had considerable merit over human memory.
Trade, as indicated earlier, is facilitated by an accounting system. The portable accounting system that used coins came to be supplemented at a very early date (certainly by the time of the Roman Republic) by systems based on the letter of credit.
It was a simple enough system. A wealthy Roman, wanting to send his son to receive an education in Athens, could go to a merchant banker who would write a letter of credit. This light, paper document would be taken to Athens and presented to an associate of the Roman banker, who would issue coin, up to the amount stated in the letter, to the travelling student. Because citizens of Athens often travelled to Rome carrying letters of credit, to a large extent the two-way flow of credit might cancel out. Each of the banking associates kept careful records. At intervals, if flows were lopsided, then could even up their mutual accounts by shipping coin or by sending desirable merchandise.
Letters of credit are an early example of the portability of accounting combined with its virtualization. A letter of credit, in the coin age, would be thought of as virtual coin. In fact, once we drop the coin blinders from our eyes, we see that it accounted for goods and services up to the point when coin was issued.
The most remarkable discovery that allowed accounting systems and trade in real goods and services) to escape the limitations of coin systems probably evolved among Italian city-state proto-bankers in the late middle ages. No, not double-entry bookkeeping (we'll get to that in Chapter 3). They discovered that they only needed a small reserve of coins to do business and make a profit through loans.
Next: To be continued
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Friday, April 19, 2013
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]
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]
Wednesday, February 13, 2013
The State of Barack Obama
An interesting way to teach American History would be to have the students read each of the State of the Union addresses, starting with George Washington's first. What students would mainly learn would, hopefully, was to not put too much stock in the opinions of a single politician, even if he is the President of the United States. [for the record, I have read only a limited set of these addresses, notable those I included in my Internet Biography of Andrew Jackson.]
In four years we will know how much of the objectives outlined in Barack Obama's speech have been achieved. Probably little.
What we already know is the 2013 State of the Union speech failed to inform Congress or America of the State of the Union. It was filled with misleading statistics, political hype, digs at the Republicans, meaningless tales of individual Americans, and just plain obfuscation. President Obama wants some good things: more confidence in the private sector, resulting in more jobs; world peace (without sacrificing American power or imperialist loot); a higher minimum wage; more careful Federal spending. He even wants both more natural gas production and less global warming. But wanting things is the easy part. We all want to have our cake and eat it too. That is why we are not a nation of savers.
The word "bank" is not mentioned in the speech, except for "food bank." That is a pretty funny thing. Compare Andrew Jackson's speeches, which almost always had something to say about banks. What's wrong with this picture, Mr. President? Could not 90% of the problems of "middle class" Americans be summed up in one word: banks?
His speech provokes the Islamic faithful, which means we must continue to spend more money on bloodshed, or leave the Islamic nations to work out their own fates. "And we will stand steadfast with Israel in pursuit of security and a lasting peace." Which means the private property of the Palestinians will not be returned to them, nor will damages be paid. So the prior sentence, "but we can -- and will -- insist on respect for the fundamental rights of all people," is just a bold-faced lie. The oppression of women in Israel, Ireland, Saudi Arabia and numerous American allies will be overlooked, but used to justify murder with drones in Pakistan, Somalia, Iran, and other states not buckling under our imperialist demands.
As to good jobs, the President wants to fill them with immigrants: "real reform means fixing the legal immigration system to cut waiting periods and attract the highly-skilled entrepreneurs and engineers." Perhaps the President should be required by the Constitution to report on his campaign donations. Then we would know what policies he will pursue.
Getting $9 per hour will not make anyone "middle class." Thirty years ago, even, $9 an hour would not have made a person middle class. Why won't the President use the term "working class?" There are a lot more working class American citizens than middle class ones.
History has shown their is only one sure way to make working class Americans middle class. Unionize them, and use the power of the union (One Big Union, united to seek fairness for all) to take, not just higher wages, but a fair share of capital and a majority share of decision making power. But the state of union organizing is not mentioned.
Nothing about clear cut forests from sea to shining sea. Nothing about mountaintop removal. Nothing about overpopulation. Nothing about reproductive rights.
Nothing about the rapid proletariatization of the work force by robots and artificial intelligence. No honest talk about foreign policy or the destruction of the American economy by the imperialist military budget.
Nothing about the Obama policy of closing down marijuana clinics in states where they are legal; nothing at all about the effects of U.S. recreational drug consumption on crime in the U.S. and in Mexico.
Mr. Obama just proved again that he is a very good political campaigner, but can't settle down to actually governing a nation with liberty and justice for all.
Of course Democrats will find much to love in the speech, and Republicans will find much to hate. Again, illustrating what George Washington and other Founders foresaw, that the party system would be bad for America. That is why political parties are not mentioned in the U.S. Constitution.
In four years we will know how much of the objectives outlined in Barack Obama's speech have been achieved. Probably little.
What we already know is the 2013 State of the Union speech failed to inform Congress or America of the State of the Union. It was filled with misleading statistics, political hype, digs at the Republicans, meaningless tales of individual Americans, and just plain obfuscation. President Obama wants some good things: more confidence in the private sector, resulting in more jobs; world peace (without sacrificing American power or imperialist loot); a higher minimum wage; more careful Federal spending. He even wants both more natural gas production and less global warming. But wanting things is the easy part. We all want to have our cake and eat it too. That is why we are not a nation of savers.
The word "bank" is not mentioned in the speech, except for "food bank." That is a pretty funny thing. Compare Andrew Jackson's speeches, which almost always had something to say about banks. What's wrong with this picture, Mr. President? Could not 90% of the problems of "middle class" Americans be summed up in one word: banks?
His speech provokes the Islamic faithful, which means we must continue to spend more money on bloodshed, or leave the Islamic nations to work out their own fates. "And we will stand steadfast with Israel in pursuit of security and a lasting peace." Which means the private property of the Palestinians will not be returned to them, nor will damages be paid. So the prior sentence, "but we can -- and will -- insist on respect for the fundamental rights of all people," is just a bold-faced lie. The oppression of women in Israel, Ireland, Saudi Arabia and numerous American allies will be overlooked, but used to justify murder with drones in Pakistan, Somalia, Iran, and other states not buckling under our imperialist demands.
As to good jobs, the President wants to fill them with immigrants: "real reform means fixing the legal immigration system to cut waiting periods and attract the highly-skilled entrepreneurs and engineers." Perhaps the President should be required by the Constitution to report on his campaign donations. Then we would know what policies he will pursue.
Getting $9 per hour will not make anyone "middle class." Thirty years ago, even, $9 an hour would not have made a person middle class. Why won't the President use the term "working class?" There are a lot more working class American citizens than middle class ones.
History has shown their is only one sure way to make working class Americans middle class. Unionize them, and use the power of the union (One Big Union, united to seek fairness for all) to take, not just higher wages, but a fair share of capital and a majority share of decision making power. But the state of union organizing is not mentioned.
Nothing about clear cut forests from sea to shining sea. Nothing about mountaintop removal. Nothing about overpopulation. Nothing about reproductive rights.
Nothing about the rapid proletariatization of the work force by robots and artificial intelligence. No honest talk about foreign policy or the destruction of the American economy by the imperialist military budget.
Nothing about the Obama policy of closing down marijuana clinics in states where they are legal; nothing at all about the effects of U.S. recreational drug consumption on crime in the U.S. and in Mexico.
Mr. Obama just proved again that he is a very good political campaigner, but can't settle down to actually governing a nation with liberty and justice for all.
Of course Democrats will find much to love in the speech, and Republicans will find much to hate. Again, illustrating what George Washington and other Founders foresaw, that the party system would be bad for America. That is why political parties are not mentioned in the U.S. Constitution.
Saturday, March 17, 2012
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.
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.
Sunday, October 9, 2011
Demands
I'm not going to Occupy Wall Street, probably won't even make it to Sacramento (though it's tempting), but here are my five top demands (or fantasies):
Withdraw all U.S. troops and warships into U.S. territory. Allow no U.S. troops on foreign soil unless Congress officially declares war. Cut the military budget 80%. Educate the U.S. public about the history of U.S. war crimes, and allow for an international trial of our war criminals.
Nationalize the 10 largest U.S. banks, not by giving the federal government ownership, but by giving an equal share to every citizen.
Amend the Constitution to give Congress the clear duty and power to protect the environment.
Restructure taxes. Raise the maximum income tax rate to 50%. Raise the estate tax on fortunes of over $10 million to 90%, to help prevent the rise of an entitled nobility, as the Constitution intended. Make customs duties a major source of revenue again.
Cut back the federal government in favor of the states, which being closer to the people are, or could be, more democratic.
For those of us who have seen how rigged the U.S. social and economic system is, the problem is not formulating demands, but achieving them. I certainly recommend that everyone leave the Democratic Party and Republican Party and back independent candidates or parties more to their liking. Outside electoral politics, a little study of the marxists, anarchists, and particularly anarcho-syndicalism might go a long way.
Withdraw all U.S. troops and warships into U.S. territory. Allow no U.S. troops on foreign soil unless Congress officially declares war. Cut the military budget 80%. Educate the U.S. public about the history of U.S. war crimes, and allow for an international trial of our war criminals.
Nationalize the 10 largest U.S. banks, not by giving the federal government ownership, but by giving an equal share to every citizen.
Amend the Constitution to give Congress the clear duty and power to protect the environment.
Restructure taxes. Raise the maximum income tax rate to 50%. Raise the estate tax on fortunes of over $10 million to 90%, to help prevent the rise of an entitled nobility, as the Constitution intended. Make customs duties a major source of revenue again.
Cut back the federal government in favor of the states, which being closer to the people are, or could be, more democratic.
For those of us who have seen how rigged the U.S. social and economic system is, the problem is not formulating demands, but achieving them. I certainly recommend that everyone leave the Democratic Party and Republican Party and back independent candidates or parties more to their liking. Outside electoral politics, a little study of the marxists, anarchists, and particularly anarcho-syndicalism might go a long way.
Sunday, November 23, 2008
Robert Rubin: Exposed
Many citizen activists have tried to inform the public about the criminal activity of Robert Rubin during the Clinton administration. Today, finally, the "paper of record," The New York Times in an article on why Citigroup (aka citi, Citibank, Citicorp) is melting down titled, "The Reckoning – Citigroup Saw No Red Flags Even as It Made Bolder Bets”, (dated November 22, 2008) set out the basic facts for all to see:
"When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.
" And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another."
What the New York Times failed to mention (and the journalist had much to cover in the article, and limited space), was that Rubin and Alan Greenspan openly engaged in criminal activity. They violated their oaths of office by letting Citigroup and other banks know that they could go ahead and act as if they were already deregulated, even before Congress actually passed the laws that Rubin was pushing. Bill Clinton, of course, was complicit (as were leading Republicans and other leading Democrats including Vice-President elect Joe Biden (the Senator from Mastercard).
Rather than repeat myself, I'll refer you to my earlier postings:
Gramm-Leach, Glass-Steagall, and Bill Clinton
Housing, the Credit Squeeze, and Glass-Steagall Act
You can get some somewhat-sanitized information on Robert Rubin at Wikipedia.
Can we recycle crooks from past administrations to be Barack Obama advisors? Yes We Can!
Sunday, September 28, 2008
Saving Wall Street, Pros and Cons
Readers of this column know that I don't much approve of how this nations' government or economy are run. But you know I like to illuminate the stuff in the box by gazing at it from outside the box. Right now the stuff in the box is a bail out for some of America's biggest investment banks, which in turn will bail out some of their biggest clients, who are holding mortgage-related investments. In all cases, we are talking about obscenely rich people who could care less about ordinary people and have repeatedly shown that with their actions.
Yet joining the criticism of the strange coalition of left-of-center Democrats and right-wind House Republicans who "opposed" the Treasury plan mainly to make political hay just seems like jumping on a pile of big guys who have already caused permanent injury to a quarterback who had a million dollar arm just a few moments earlier. The House Republicans say they don't want ordinary taxpayers to bail out Wall Street. That is a laugh, except that some of their constituents are so brain dead they probably swallowed that poll-driven excrement without a thought.
,
I agree with progressives that a bottom-up rescue plan would be better. But we are stuck with the decision makers that the American voters chose, and the way things work is most incumbents will be re-elected to Congress in November. I have never drunk the free-markets always work kool-aid, but I also know that a credit freeze will almost certainly throw this country into an economic depression, and quickly. It would be very hard to dig our way out of such a Depression. In 1929 when the last Depression began the national treasury was almost debt-free. That is not the case today. The government won't be able to spend its way out of a Depression because no one will be willing to finance that level of spending. The only alternative is the kind of inflation that destroyed Germany in the 1920's, or enduring the pain until the business cycle eventually gets back on track by itself. The possibility of the complete collapse of civilization as we know it is no longer totally improbable in the short run.
So I am for the $700 billion (probably more like $1 trillion, by the time it is over) bail out of Wall Street. In effect taxpayers are buying assets that may increase or decrease in value. Congress did insist on some good changes to the original plan. It could be much worse.
It is not the first bailout in American history, and it is not always Wall Street that gets bailed out. Remember that IRS "refund" check you got a few months ago? That, aside from being a shameless election year ploy, was a bailout for us all. And some bailouts are so institutionalized we don't think twice about them, like receiving unemployment insurance or Social Security disability payments, or food stamps.
The problem with bailouts evenly distributed among the citizens or taxpayers is that they just don't work in the kind of situation we have right now. Quite a few people may have caught up on a single mortgage payment with the tax refund, but they are in trouble precisely because they habitually spend more than they make, so most of them were probably in trouble again the next month. They need their life styles to be cut back. If they did that it might be worth the government doing something about refinancing their mortgage payments.
When Wall Street was raking in profits 3 years ago, it was because they concentrated the profits from millions of relatively small transactions. In this crisis we see the concentration of millions of small losses (small here might mean up to $1 million dollars per mortgage). To deal with the crisis quickly, the fire must be put out where it is burning, not where we would like to fight fires in the future.
What is sad is that once the crisis goes away, no fundamental reform is likely. There were a few fundamental reforms in the Great Depression partly because the crisis was not averted early on, in 1930. Some radicals might argue, (and I'm tempted) that therefore it would be best to let Wall Street and the entire free-market Capitalist religion fall. The problem is that good cultural, political and economic systems don't automatically spring up after bad systems have crashed. In the last Great Depression many nations ended up with Fascist governments (See my fascism pages): Italy, Germany, and Spain of course, but also France, Austria, Slovakia, Poland and others. Even the New Deal had many fascist-type elements, most notably the death-grip on power held by President-for-life Roosevelt.
Yet joining the criticism of the strange coalition of left-of-center Democrats and right-wind House Republicans who "opposed" the Treasury plan mainly to make political hay just seems like jumping on a pile of big guys who have already caused permanent injury to a quarterback who had a million dollar arm just a few moments earlier. The House Republicans say they don't want ordinary taxpayers to bail out Wall Street. That is a laugh, except that some of their constituents are so brain dead they probably swallowed that poll-driven excrement without a thought.
,
I agree with progressives that a bottom-up rescue plan would be better. But we are stuck with the decision makers that the American voters chose, and the way things work is most incumbents will be re-elected to Congress in November. I have never drunk the free-markets always work kool-aid, but I also know that a credit freeze will almost certainly throw this country into an economic depression, and quickly. It would be very hard to dig our way out of such a Depression. In 1929 when the last Depression began the national treasury was almost debt-free. That is not the case today. The government won't be able to spend its way out of a Depression because no one will be willing to finance that level of spending. The only alternative is the kind of inflation that destroyed Germany in the 1920's, or enduring the pain until the business cycle eventually gets back on track by itself. The possibility of the complete collapse of civilization as we know it is no longer totally improbable in the short run.
So I am for the $700 billion (probably more like $1 trillion, by the time it is over) bail out of Wall Street. In effect taxpayers are buying assets that may increase or decrease in value. Congress did insist on some good changes to the original plan. It could be much worse.
It is not the first bailout in American history, and it is not always Wall Street that gets bailed out. Remember that IRS "refund" check you got a few months ago? That, aside from being a shameless election year ploy, was a bailout for us all. And some bailouts are so institutionalized we don't think twice about them, like receiving unemployment insurance or Social Security disability payments, or food stamps.
The problem with bailouts evenly distributed among the citizens or taxpayers is that they just don't work in the kind of situation we have right now. Quite a few people may have caught up on a single mortgage payment with the tax refund, but they are in trouble precisely because they habitually spend more than they make, so most of them were probably in trouble again the next month. They need their life styles to be cut back. If they did that it might be worth the government doing something about refinancing their mortgage payments.
When Wall Street was raking in profits 3 years ago, it was because they concentrated the profits from millions of relatively small transactions. In this crisis we see the concentration of millions of small losses (small here might mean up to $1 million dollars per mortgage). To deal with the crisis quickly, the fire must be put out where it is burning, not where we would like to fight fires in the future.
What is sad is that once the crisis goes away, no fundamental reform is likely. There were a few fundamental reforms in the Great Depression partly because the crisis was not averted early on, in 1930. Some radicals might argue, (and I'm tempted) that therefore it would be best to let Wall Street and the entire free-market Capitalist religion fall. The problem is that good cultural, political and economic systems don't automatically spring up after bad systems have crashed. In the last Great Depression many nations ended up with Fascist governments (See my fascism pages): Italy, Germany, and Spain of course, but also France, Austria, Slovakia, Poland and others. Even the New Deal had many fascist-type elements, most notably the death-grip on power held by President-for-life Roosevelt.
Wednesday, September 17, 2008
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.
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.
Sunday, September 14, 2008
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.
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.
Wednesday, August 27, 2008
Citicorp Stole from Its Credit Card Customers
Citibank, or Citigroup as the parent company is known, just plain stole money from its credit card customers in California using a computerized theft system that must be the envy of hacker gangs. They have agreed with the Attorney General of California to give as-yet undetermined millions of dollars back to the victims.
This criminal adventure is just the latest in a long series of crimes committed by Citibank during its history. In many cases transactions that would be crimes were legalized by bribing elected officials to write laws to Citibank's liking. See my Citibank page for an outline of this criminal history.
According to a Press Release from the California Office of the Attorney General Edmund G. Brown, Jr., Citibank used a sophisticated computer program for the thefts, called a "credit sweep process." For a variety of reasons a credit card account might show a temporary positive balance, for instance if a customer paid their monthly bill twice, or returned a purchased item for credit. The positive balances were detected by a computer program that automatically disappeared them from the victim's statements. The program was especially designed to target consumers who were deceased, had sought bankruptcy protection, or were involved in litigation.
The release indicated that "Citi" also stole from customers in the other 49 states in the United States of America, but it appears that the settlement only affects California, and that the the governments of the other states either can't be bothered or can be bribed.
A whistleblower who discovered the fraud was fired by Citibank. A Citibank executive said "Stealing from our customers is a business decision, not a legal decision."
The California investigation was launched in 2005. The Citibank actions violated the California False Claims Act.
The settlement [See State of California ex rel Mellon v. Citigroup Final Judgment] provided for a permanent injunction against credit sweeps in California, refunds for the victims including 10% interest, a penalty of $3.5 million to be paid to the State of California, and an independent audit of the process.
While I can applaud Jerry Brown for this action, in general the astonishingly corrupt Legislature of the State of California has done a terrible job regulating credit card companies. In fact, credit cards were deregulated (I think back in the 1980's). Back in the good old days the state set maximum interest rates and late penaltied. The industry argued that if it were deregulated interest rates and penalties would drop due to competition. An even stronger argument was a flood of money to the campaign funds of politicians, Republican and Democrat alike. Of course after deregulation late penalties and interest rates jumped and never came down.
Computer programmers from corporate fraudsters like Citibank talk of all kinds of tricks used to milk the public. The simplest is sending out bills after the first of each month. Many customers pay bills once a month, coinciding with when rent is due. The credit card bill arrives after that, is put in a pile, and is not paid until the end of the month, by which time a penalty is added to it. Billions of dollars have been stolen that way.
According to consumers, banks even simply allowed physical payments to ripen in a warehouse for a week or so before processing them. Most people pay their bills barely on time, so the extra week made the payment late and added a penalty. Complaining customers were told the fault must be with the U.S. Postal Service. Another scam is having payments post the day after they are received due to arbitrary deadlines that make no sense in this computerized world [ See Why Your Credit Card Payment Posts Late].
California - and the rest of the nation - needs real banking and credit card reform. Don't expect to get it as long as you keep voting for the Democratic and Republican Party machines' candidates.
Tuesday, February 5, 2008
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.
Friday, January 18, 2008
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.
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.
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