Wednesday, December 3, 2008

End Fractional Reserve Banking--Send Bankers to the Hoosegow

Everyone blames the current economic volatility on credit default swaps and similar kinds of derivatives. Sub-prime loans were "stripped", securitized and sold. Rights to payment in the event of default were purchased. The buyers and sellers weren't able to value the risk. The profits from the sales were recorded as profit...

Wait a minute! Let me understand this. Banks were registering profits on derivative instruments whose risks they did not understand? If that is so, then the profits they recognized during the years when they were buying and selling the derivatives were fraudulent, and criminally so. What the banks did was the equivalent of a fire insurance company's telling investors that insurance premium money needed to cover payments for losses due to fires was profit. If that occurred, the firms and the executives were engaging in outright fraud, no different from what Ken Lay and Jeffrey Skilling did at Enron. If Andy Fastow rightly ended up in jail, the heads of the money center banks that engaged in derivatives-related fraud belong there as well.

Oddly, though, both the Bush and Obama administrations view the bank presidents' fraud not as a matter of criminal enforcement, but as an activity that warrants subsidization. The pissant propagandists at Fox, CNN and the Times all agree. Henry Paulson, friend of the perpetrators, has succeeded in effecting a near trillion dollar bailout. Ben Bernanke, whose job includes stopping reckless banking practices, has tripled the monetary base in order to subsidize the fraud. Like a horde of drooling morons, the progagandists applaud.

The complaint among many of the propagandists is that there needs to be "regulation". In fact, regulation already exists. The Federal Reserve Bank is empowered to oversee commercial banking, and can tell commercial bankers anything it wishes to tell them. Chairmen Greenspan and Bernanke could have hired experts to evaluate the risks and degree of fraud involved in the derivatives trading. But they did not. Nor did Congress even hint that that they should do so in light of Warren Buffett's public statements over the past few years that the derivatives were leading to trouble. That wouldn't have anything to do with all those Goldman Sachs contributions to the Democrats last year, would it?

In 1913 the nation adopted a specific approach to banking that lacked justification. The nineteenth century was a period of increasing real wages among workers, far greater levels of innovation than in the 20th, and increasing immigration as millions around the world aimed to come to America to participate in the real wage growth. There were three groups who suffered during this period: capitalists, landowners and farmers. The reason these groups suffered was that the gold standard era was characterized by deflation because the greenbacks that had been created during the Civil War were retired in the 1870s and innovation created highly intense competition. So prices were declining and stockholders, landowners and farmers were hurting. Innovation came from the free economy, absence of income taxes and increasing real wages, which permitted many new business start ups. Thus, this was a land of opportunity but pressure was on those who speculated in stock and held wealth in land.

Family farmers combine two elements. They are property owners and workers. Richard Hofstadter, in the book Age of Reform, has argued that 19th century American farmers were in large part land speculators. They sold land in New England and pushed into the midwest and then into what we now call the west in part to make gains on land values that were increasing due to increased population. This process was stalled by deflation during the post Civil War gold standard era. Hence, William Greider's claim that the Populist movement, which argued for inflation in the 1880s and 1890s, was a working class movement is mistaken. Although farmers were often workers, in this role they were benefiting from deflation. Real wages were rising across the board. It was as capitalists and landowners who were facing declining asset values and prices that farmers were hurting. Lower food prices are good for workers, but Greider omits this consideration in his discussion of the Populist movement. Deflation is good for workers but bad for capitalists, sellers and landowners. In claiming to be workers' friend, Greider somehow makes an argument that supports real estate speculators and bankers. He does this while saying hard money helps bankers. (Funny how the left manages to say that they help the poor while they are helping the rich, and then turn around and get donations from George Soros!)

Because of the massive gains to workers during the late nineteenth century (due to increasing real wages) the Democrats' attempt to introduce an inflationary economy was voted down in 1896 by popular vote. William Jennings Bryan ran three times altogether and was voted down each time. However, when JP Morgan approached death, bankers realized that in order to maintain fractional reserve banking as a system there would need to be a replacement for Morgan, who frequently arranged loans that provided liquidity to rescue banks. This was accomplished by the establishment of the Fed in 1913, which Wilson, a gold standard advocate, introduced with little fanfare or debate.

There is no evidence that fractional reserve banking was essential to the dynamic economic growth of the nineteenth century. Other countries had fractional reserve banking but did not grow to the same degree that America did. Other countries had more frequent wars and had more inflation, though. Nor is there evidence that the key growth areas of the economy, manufacturing and innovation, received more funding from banks than would have been available without fractional reserve banking. In the case of Standard Oil, which revolutionized the oil industry, Rockefeller and his partners financed the business from their own savings and then profits. Bondholders and investors were brought in and over time a "trust" was formed. Although banks played a role, there is no evidence that fractional reserve banking was necessary to this or any other important business.

The public has accepted the need for a money supply managed and controlled by commercial banks. But is such a system essential? "Progressives" (the very name is laughable) argue staunchly for the 1913 system based on the conservative argument that it's been that way for 95 years. But since 1971 real wages have been declining, not rising. The 20th century has seen some innovation, but much less than the nineteenth. Fractional reserve banking facilitates allocation of credit to incompetent investment schemes, derivatives and crackpot investments such as Enron, the tech bubble and the sub-prime bubble. Redlining, excessive real estate development and the rape of cash savers and Americans on fixed incomes (the lower middle class) in favor of William Greider's* favored elements, millionaire construction firm owners, big banks, Wall Street investors, stockholders and major borrowers like billionaire hedge fund managers have all resulted from fractional reserve banking and from the Fed.

There is no evidence that bankers are or were better at allocating capital than a free market would be. With a trillion dollar bailout whose costs may mount to five trillion, a tripling of the money supply in order to subsidize the mistakes of the commercial banks, and large scale economic dislocation purely because of fraudulent and incompetent investment and profit-recognition practices in which the money center banks have engaged, people who claim that fractional reserve banking creates surplus for the economy have begun to look like delusional cranks.

The declining real wage of the past 36 years is evidence enough that fractional reserve banking has failed. Add the two bubbles of the past ten years to the mix, and the claim that fractional reserve banking contributes to the economy becomes laughable. Now that the banking system aims to absorb trillions of dollars from the productive economy in order to subsidize fraud, the time has come to consider scrapping it--and sending the money center bank CEOs to the hoosegow.

*See William Greider, Secrets of the Temple.


milt tomkins said...

This is a great post!!! glad I found it..….very educational…thank you…I will put it on my favorites list.. I also learned a lot about trading strategies from 3 other great books. Hedge Fund Trading Secrets Robert Dorfman..and Confessions of a Street Addict of course by Jim Cramer..written before he got really famous.and Richard ARMS..STOP AND MAKE MONEY….all 3 are riveting and very informative. You should check them out if you like reading behind the scenes stuff about hedge fund and what methods they use to make money.

Mairi said...

Suppose you were an idiot. And suppose you were a member of Congress.... But then I repeat myself.
-Mark Twain

When will Americans WAKE UP, and sweep the House and Senate? If they will not mandate term limits, voters MUST! Anyone who thinks these people have Americans best interests at heart are VERY sadly mistaken. We must begin electing reps who agree to throw out the Federal Reserve. Your income taxes are NOT paying for Federal services.

Anonymous said...

The hoosegow!! No, anything but that. lol How about they hand over every dime they made while they committed the fraud? Then their punishment would be Obama's community service for the same amount of time they committed the frauds that filled their pockets. AND never working in the type of institution again in their lifetime.

Bawney Fwank and the rest involved should be stripped of any voting or pay for the same amount of time they knew this was going on and lied to the public.

Anyone who got land deals or special interest rates for housing, VIP loans etc, should lose the house or land to 10 homeless people.

Obama, not eligible con, along with the CONgress, has his people all over these bailouts. In order to make sure Obama's backers get whatever they want as payback. Where the H*ll is Bush?

December 04, 2008
Categories: Housing crisis

Frank decries 'No Girls Allowed' on the bailout team

House Financial Services Chairman Barney Frank Thursday urged President-elect Barack Obama to lend a stronger voice in urging Treasury officials to help distressed homeowners avoid disclosure.

Voicing his well-known frustration with Treasury Secretary Henry Paulson and other officials for resisting calls to use funds from the $700 billion bailout package to combat foreclosures, Frank said lawmakers are being told that the back-and-forth consultations with the Obama transition team has delayed consideration of such actions.

“I’m a great fan of the president-elect, but I think it’s probably the case that he’s going to have to be more assertive than he’s been,” Frank said, addressing the Consumer Federation of America’s annual financial services conference. “And I know what he says is ‘Well, we only have one president at a time. My problem is, at a time of great crisis and [massive] mortgage foreclosures. ... I am afraid that overstates the number of presidents.”

And Al Gore has made a request so his hedge fund continues to grow.

Finish My Fight With Big 3: Gore to Obama
Posted Nov 30, 08 6:34 PM CST in US, Politics, Technology
(Newser) – Al Gore doesn't want a White House job, but he does have advice for Barack Obama: Use the bailout plan to transform the Big Three automakers. As vice-president, Gore rolled out a billion-dollar program to pay for fuel-efficient Detroit vehicles—"but as soon as they felt they were off the hook, they pulled the plug and walked away," Gore tells Newsweek. Now Obama can transform Michigan into a hybrid electric car hub, he says.

But he admits that Obama's cap-and-trade alternative would also be "effective."

Sure it would be effective Gore. Effective for your future.

BarfDOA said...

Are You A Lawyer???
How about a Class Action Lawsuit Based on Jarome Daly Lawsuit in 1968.
I know 100 folks ready to sue...
Lets Change The WORLD..

BarfDOA said...

I am ready to collect 100 folks for a class action lawsuit.
Looking for a Lawyer who is seeking Fame of a case that goes to The Supream Court.
It will cost banking 700Trillion dollars
To forgive a nations debt.
From a nation of Corrupt Bankers.
Then lets make The Federal Reserve Owned by US Consumers.

4 Justice Now said...

Now, that would be a CALS worth supporting.

Unfortunately, I think it would be nearly immpossible to find a law firm that is any less corrupt than most of our so-called representatives, as well as, the banksters themselves or their political whores.

Anonymous said...

Quote: When will Americans WAKE UP, Unquote

When will people stop writing and emailing "When will Americans WAKE UP?"

We ARE awake, and horrified, but we're in a slow-motion train wreck and no leader has come forward yet, with a plan the majority would be pleased to follow.

I hope it will happen, keep waiting for the email revealing the plan, but even without that you can bet that most people ARE awake, and they're terrified. If they're not they should be.

Calls for waking up are simply redundant. Plans are remarkably few.

I'd like to be on the list of the 100, please.

Anonymous said...

Quote: Anyone who got land deals or special interest rates for housing, VIP loans etc, should lose the house or land to 10 homeless people. Unquote

Obama got a great land deal from Rezko in Chicao! Does that count? Rezko's still in jail, no news whether he's singing yet or not. There have been several mysterious deaths relating to politics (as usual), so he may want to stay behind bars to stay alive.

Obama should get the land-deal parasite treatment in addition being punished for lying to the electorate and making things worse economically. He claims he's so smart and that he knows what he's doing... He can't both know AND not know.

Anonymous said...

Quote: Unfortunately, I think it would be nearly immpossible to find a law firm that is any less corrupt than most of our so-called representatives, as well as, the banksters themselves or their political whores. Unquote

Banksters and political whores in control. All pols are, and new ones are or will turn into them too.

And that's why probably nothing will be done, no plan will surface, and no leader will emerge to "save us".

We're on our own, I think, like all peons before us and after us.