It's a Social Security Scheme

Jim Rickards' s Agora Financial forwarded this Vanity Fair article and video-taped interview with Jeffery Gundlach, a Forbes 400 Wall Streeter. According to Wikipedia Gundlach was the fund manager for the TCW total return bond fund. He was fired; then, he founded Doubleline Capital. Wikipedia suggests that he has sometimes been overly bearish. In 2011 he liquidated 55% of his position in municipal bonds, but municipals did not decline.

It is easier to know what will happen than when. Rickards forwarded the piece because Gundlach is bearish on bonds--six years after his pullout from munis.  That is understandable.  I too have been  bearish, cutting back on my stock holdings in 2016 and hence getting a smaller benefit from the 2017 rally than I might have. (As well, I am a tech skeptic, which also has been a costly mistake. C'est la vie.)

The current rally will snap, either in '18 or later, and there will be a correction. There will then be monetary expansion on top of the already immense monetary expansion since 2008, and Americans will continue to suffer declines in their real wages and real household income as Wall Streeters like Gundlach benefit handsomely and those with at least some assets in the market continue to gain.

What I found most interesting about Gundlach's talk is his cavalier attitude toward screwing middle income baby boomers by instituting means testing for Social Security. He does not seem to have thought through the issue carefully, but he seems to suggest that currently benefit-eligible elderly should have their benefits cut in order to make federal government bonds more attractive to him.

Like all Wall Streeters, Gundlach has benefited handsomely from public subsidization.  No one knows how wealthy Warren Buffett or Jeff Gundlach would have been without the massive monetary expansion since 1971, but neither would be nearly as wealthy as they are.  Feeling comfortable with his own benefits from the public purse, Gundlach sees the need to cure federal indebtedness fast by reducing Social Security benefits. That way bonds will surely rally.

Gundlach is right that benefits need to be reduced. Federal indebtedness is now in excess of 100% of GDP, not including the future unfunded liabilities of the Social Security System.   According to CNBC, if actuaries use an unlimited time horizon (beyond 75 years)  rather than a 75-year horizon, the future unfunded liabilities of the system are $32 trillion.  Current GDP is $19 trillion.

Projections beyond 10 or 20 years have little meaning because the assumptions that actuaries make become increasingly inaccurate.  Technological shifts, demographic shifts, wars, diseases, impoverishment of the middle class, inflation, and monetary expansion change life expectancy.  CNBC claims  that until 2034 Social Security will be able to cover benefits. Thereafter, there will be a 25% deficit until 2090.  After that the system will be in extremis.

Gundlach suggests that boomers' benefits be cut by instituting means testing.  In other words, the middle income savers whom Gundlach's backers at the Fed have screwed by reducing interest rates should be screwed again by means testing Social Security.  Those who made life decisions based on government lies that Social Security is an insurance plan should end their lives in poverty. Gundlach is confident that boomers will not complain. He claims that they are a unique generation, but he does not offer a reason. 

Gundlach is right: Through monetary policy Wall Street has screwed boomers who save, and they have been too dumb to complain for 40 years, so Wall Street's lackeys in Congress might as well once again screw them by cutting Social Security in order to gain a few extra years' bond rally. They likely won't complain again.   Gundlach will profit. That's what the phrase "a good economy" means in today's English language.

As Gundlach suggests, the retirement age should be raised.  An increase of one year beginning with  two years from now might be a fair solution. Thus, people born in 1953 wouldn't get full benefits until 2020; people born in 1954 (my birth year) wouldn't get full benefits until 2022, and so on. The full-benefit age might be raised to 72.  That would likely solve the short-term problem. Actuaries will need to determine the precise increase in retirement age.  Fairer still would be slower increases of say six months or to start the increases five years hence so that those nearing retirement will have time to plan.

In some areas Gundlach is surprisingly uninformed.  He suggests, for instance, that air conditioning repair men, competent, technically trained blue collar workers, are now permanently unemployed. That claim reflects economic illiteracy. I have seen this strange claim repeatedly coming from elite America. It reflects the lack of competent economic instruction at elite, left-wing universities.

In any case, the employment rate in America is currently at an all-time high. Many technical jobs remain unfilled.  The employment-to-population ratio  is slightly lower than in 2008, but that is to be expected given an aging population.  The employment-to-population ratio in Nov. 2017 was 60.1; it was 63.3 in January 2007. The number of employed is at an all-time high.

The high employment rate has been achieved by reducing real wages through monetary expansion.  More Americans work; they earn lower wages.  The wealth is transferred to Wall Street because the low interest rates boost the bond market. Insiders like Gundlach and Buffett benefit most as Americans work harder for suppressed wages.

Social Security was originally sold to Americans as an insurance plan combined with a welfare plan. There is no such thing. Insurance is actuarially fair. If there is no actuarial relationship between contributions and benefits, then the plan is not insurance. Social Security was designed to give higher benefits to lower earners than they have earned and lower benefits to higher earners than they have earned.  There was never any connection between the FICA tax and the OASDI Social Security benefit.

The plan was set up to fool people. It was set up to be a fraud.  The biggest fraud was the impression given to Americans that there is a fund into which their contributions go to fund their own retirement.  That deception was accomplished by pretending that FICA was somehow separate from other federal taxes and somehow linked to OASDI. It has always been just another, albeit regressive, income tax with no connection to the statutory welfare benefit that OASDI provides.

There is no easy way out of the mess that the two parties have caused with respect to Social Security.  There are ways to reformulate monetary policy.  The two parties will not betray Wall Street, and I'm afraid Americans are unable to think without the say-so of Wall Street-backed media.  Perhaps in the future the phrase "Social Security scheme" can replace the phrase "Ponzi scheme."

The Banking Interests Behind the New Deal

In 2014 Nomi Prins wrote this piece in Fortune about the bankers behind the New Deal.  The New Deal was a banking revolution. The social aspects, cherished by the Democratic Party, were window dressing. Franklin Roosevelt had been a Wall Street fund manager, and he gave the American monetary system to Wall Street. That was the main point of the New Deal. 

Prins's story leads to Winthrop Aldrich, uncle of Nelson Aldrich Rockefeller and David Rockefeller.

Aldrich's father, Senator Nelson W. Aldrich, was the architect of the Federal Reserve Bank.

Incidentally, Bush's great grandfather, Samuel P. Bush, had served on the first board of the Cleveland Federal Reserve Bank. Samuel had been the president of Frank Rockefeller, John D. Rockefeller's brother's, company, Buckeye Steel.

FDR's great great grandfather, Isaac Roosevelt, had been Alexander Hamilton's partner in founding the Bank of New York, now part of Mellon. There's documentation, including a court case, that a bank for which Prescott Bush, Bush's grandfather, served on the board had helped fund Hitler.

Franklin Delano Roosevelt's uncle, Frederic A. Delano, was a Hong Kong-based railroad tycoon who served as the first vice chairman of the Federal Reserve Bank in Washington in 1914.

FDR represented the open control of America by elite financial interests that his cousin, Theodore Roosevelt, had put into play. Wilson signed the Federal Reserve Act, but Wilson would not have been elected if TR had not run as a third party candidate. The funder of his party, the Progressive or Bull Moose Party, was George Perkins, a close assistant to JP Morgan and former president of International Harvester.

Frank Vanderlip, who was present at the famous Fed-planning session at Jeckyll Island in 1910, was also a personal friend of Woodrow Wilson because of their work on shaping the modern American university system. Wilson, who had met JP Morgan because Morgan was a donor to Princeton, dropped Vanderlip as a friend and associate at the point at which Wilson entered the 1912 race. Vanderlip talks about that in his letters. No one knows the reason for sure, but it seems obvious.

Future of America at the Wall Street Demonstration

H/t Contrairimairi.  I wonder what percentage of the Wall Street demonstrators are as smart as this guy.
.

Rick Lazio's Links to Wall Street

Wall Street is the chief force for the expansion of government. Wall Street sells the bonds that finance government, so its stake in the expansion of the state is enormous.  To cloak this relationship the media depicts the debate between advocates of small and big government as one between business and the poor.  That is nonsense.

The big government party in America has always been the pro-big business party.  That started with the Federalists and Alexander Hamilton, continued through the Whigs and Henry Clay, continued further through the Republicans of Abraham Lincoln and then Jay Gould, and was then reinvented by Theodore Roosevelt and the Progressives.  The Democrats learned from the Republicans and became the bigger government and the bigger big business party under Franklin D. Roosevelt, a wealthy New Yorker.

Hence, when Republicans claim to favor small government, voters need to look under the hoods of their lie-mobiles.  When chronically lying Whigs like George Pataki, George W. Bush or Alfonse D'Amato claim to be for small government, it is better to pass on the clunker. Rick Lazio appears to be offering New York a used, big government Whig-mobile, complete with bailout tires and big business subsidy spares.

According to Emily Lenihan of WIVB in Buffalo, Carl Paladino, who publicly states he will cut government by 20% if elected, has made the following statement:

"Rick Lazio is a nice fellow and we have developed a cordial relationship and I think he is a man of his word- but he took a $1.2million dollar bonus as a lobbyist for Wall Street Bank handed $25 Billion in the Federal bail out. That's our tax money Rick put in his pocket," Paladino said.

"While in Congress, Lazio served as the chair of the Banking Committee's subcommittee on housing and community opportunity and was a cheerleader for and supporter of Andrew Cuomo's Federal Housing Goals which forced Fannie Mae and Freddie Mac to buy $2.4 BILLION in sub-prime mortgages while lowering underwriting standards and lowed down payments on 105% financing," Paladino said. "As chair of the relevant House sub-committee with oversight Lazio said....nothing."

Rick Lazio is a supporter of big government, despite the engine sounds of his lie-mobile.

Government Waste and Wall Street

I just sent this letter to the Olive Press, our local newspaper:

Dear Editor:

Several local acquaintances have expressed surprise at the American media’s avoidance of discussion of waste in government.  “Why would the media support government waste?” they wonder.

Wall Street and the banking industry benefit from interest and sales commissions generated by the issuance of treasury bonds, bills and notes.  The more government waste, the more spending, the more government debt, the more Wall Street profits.  The left has been more aggressive in expanding government and so Wall Street likes it better than the right. In 2009, the first year of the Obama administration, Obama significantly increased total federal spending as percentage of gdp by ten percent over the Bush administration.  This causes the federal government to issue more treasury securities.    

It is true that Wall Street loved Bush’s wars, but the waste of the Obama administration does it better.  Wall Street profits by dealing and banks profit by holding bonds, which they can sell to the Federal Reserve Bank in exchange for monetary reserves, a ten fold multiple of which they can lend to the public at interest.  Thus, a single treasury security can generate (a) sales commissions to brokers; (b) interest payments to banks; and (c) a means by which commercial bank loans and the money supply can be expanded up to ten times the amount of the bond. 

Who owns the media?  The same Wall Street firms and commercial banks that profit from the government bonds.  One can tell which party is better for Wall Street by the degree to which it receives support from the banker-owned media.  Virtually all television stations and newspapers support the Democrats.  Since they are banker owned (for instance, MS-NBC is owned by General Electric) the party that is best for Wall Street and the banking industry is clear.  The media would not support the Democrats if they were not the best party for Wall Street.  Chris Matthews is a good GE man.

The Democratic Party’s spirit is embodied in Paul Pelosi, a corrupt San Francisco business man who has benefited directly from a range of subsidies that have been adopted under the aegis of the Speaker of the House, his wife.  As well, a host of billionaires and multi-millionaires, to include Bill Gates, George Soros, Warren Buffett, Steven Spielberg and Larry Page, have advocated the agenda of Barack Obama.  Wall Street contributed to Obama two to one over McCain, a much better ratio than Bush received, and Obama has rewarded and will continue to reward them.  The recent  financial industry law is an example.

  

Sincerely,

Mitchell Langbert

Greek Economy

According to the Financial Times the Greeks have had rising expectations and lifestyles even though their public sector is inefficient and, I would guess, they do not produce enough to live at the level they do. The FT reports that under its recent agreement with the European Union, Greece will reduce it budget deficit from 13.6% to 3% of GDP, and public debt will "stabilize" at 140-150% of GDP. Eager to stabilize the Euro, the Europeans, especially Germany, are lending Greece 110 billion Euros ($146 billion).  The result of the massive loans and spending cuts will be a contraction of the Greek economy of between 2 and 4 percent.

The German people are unhappy with the large loans.  As nasty as the US bailout was, at least it was mostly paid to US firms, although I am not certain that I would like to remain in the same country as the bailout recipients like Goldman Sachs.  Indeed, I would like to see the Fed shut down, which would curtail if not close most of Wall Street.  But in any case, the Germans must feel like fools for seeing their wealth be squandered not for incompetents of their own tribe, but of a different tribe.

Be that as it may, the big question is whether this frittering of $146 billion will work.  Perhaps in the short run, perhaps not.  In the long run, are you kidding?  They lend $146 billion to profligate clowns, and then expect what?  Isn't this just another version of sub-prime lending?  If the Greeks want to live as though they have economic freedom, might they consider adopting economic freedom as a policy instead of mooching off others?

The quicker the US can disassociate itself from the Fed, the better.  For the political use of the nation's money supply is but a way to divert wealth from productive Americans to thieves of various kinds. Wall Street, the federal government, incompetently run businesses, public contractors, foreign governments, all will benefit at the expense of hard working Americans under the authoritarian yoke of the Federal Reserve Bank.  And how effective has the Fed been at generating long term full employment? 

Americans Become Poorer as Our Money Flows to Banks

I was standing on line in Hannaford's supermarket on route 9W in Kingston, New York yesterday when I overheard two elderly women talking. One told the other that she had less money than in years and that she was starting a garden in order to provide herself with food, something that she hadn't done since her childhood during World War II. I suspect part of the reason is the freezing of the social security increase this year. The town in which I live, Olive, NY, raised taxes by six percent even as the social security administration claims that there is no inflation.

The ongoing transfer of wealth to money center banks and Wall Street has intensified under the Bush-Obama administration, with the claim that America desperately needs financial firms to stay in business despite ongoing abuse and mismanagement. In fact, the Fed heavily subsidizes money center banks and Wall Street even in good years.

In basic economics, the notion of a firm is that a good or service is provided in exchange for payment. The reason people pay firms is that they produce a valuable product. Numerous firms compete and price is driven to approximate long run total costs, eliminating excess profits.

In the case of Wall Street and the money center banks, there is no product produced. Trading stocks or borrowing money from banks to purchase securities in other currencies is not of value to anyone except the beneficiaries of the loans. But when they lose money, the federal government claims that the loss of investment banks would be harmful to the public.

This, of course, is nonsense. Firms that produce value do not need subsidies. The trillions that have been donated to the Wall Street Welfare mothers are proof that Wall Street produces no value and ought not to exist.

The Fed has been printing large amounts of money, and handing it to money center banks who in turn lend it to Wall Street for speculative purposes. This has been going on since the Fed began. The increase in the money supply reduces the financial holdings of non-loan beneficiaries. Lower and middle income retirees with certificates of deposit become poorer as the Fed cheapens the value of their assets. Wealthy people with stocks and extensive leveraged real estate holdings become wealthier.

In recent decades this process has resulted in misallocation of resources. Since World War II there has been over-construction of private houses at the expense of inner cities and investment in manufacturing and risky start ups. As a result, the best jobs have left the country as massive numbers of useless, super-sized houses have been constructed. In turn, the same party, the Democratic, that has pushed for massive subsidization of unnecessary construction of large, expensive-to-heat houses cries about "sustainability" and "global warming".

Now, wealth is being transferred from middle class bank account holders and workers simply to subsidize investment in the carry trade, borrowing at zero interest rates to invest at higher rates overseas. The welfare mothers on Wall Street have become increasingly brazen.

The grandma on line in the supermarket is seeing taxes and other prices rise while her income is stagnant. But hedge funds and Goldman Sachs are lent billions. This has become an economy managed largely for the benefit of a financial elite at the expense of the average American. America increasingly becomes a poor country to subsidize non-valuing creating investment concerns and government looters.

Peter Schiff: Ben Bernanke = Jack Madoff

This video is about investing in the current climate. The discussion of hyper-inflation spooks me. I've been waiting to get back into the stock market. My pension fund, TIAA-CREF, does not permit commodity or UDN (counter-dollar) investment. There is an international stock fund, though, but no commodity fund.

I missed the rally from May until now but I caught it from Thanksgiving until May. Schiff is recommending international stocks. I agree with his basic analysis. I'm not convinced it's straight up for the stock market, but it's suicide to hold bonds and dollars. I'd rather be in commodities and gold than international stocks. In my personal fund, I'm gradually getting back into gold and commodities and in TIAA-CREF gradually back into international stocks.

Also, I rode the dollar rally out in Euros and lost some money, but it's coming back quickly. In the stock market I'm down about 5-6% since June '08 (less since January '08) because of overly aggressive buying of gold stocks in fall '08, which was against my better judgment. But I was right on principle then and now. The dollar is going out the window, unless you trust the Republicrat Socialists to turn around and raise interest rates. That would cause the depression that is going to occur under any circumstances anyway. You can expect further dollar declines. The Republicrats are in a state of denial, and denial compounds pain.

The cause of these problems is the Federal Reserve Bank. Unless Americans decide to change the fractional reserve approach to banking, there will always be booms and busts. Unless they decide to eliminate the Fed, there will always be accentuated depressions. The Great Depression of 1930-1940 was entirely the result of Fed policy, compounded by dumb government fiscal moves by Roosevelt and Hoover.

The geniuses in the Republicrat Socialist Party are turning the United States into a third world feudal estate. The lords of the manor are George Soros, his Messiah, Barack Obama, and, most of all Obama's, Bush's and Henry Paulson's 12 apostles on Wall and Broad, who have been granted many, many trillions of dollars, not only in the recent "bailout", but via the Federal Reserve Bank for the past century.

You will note that the fundamental principle and theme of all academic and media left-wingers is the claim that Federal Reserve transfers to Wall Street are absolutely essential because of the threat of deflation and because they cannot imagine any other system than one in which large sums of money are counterfeited and handed to hedge fund managers. While advocating the Federal Reserve system, they simultaneously shed crocodile tears about income inequality, which is chiefly the result of the Federal Reserve System. Well meaning socialists, who would not be fooled by con men with their own money, happily believe the Ochs Sulzbergers' nonsensical claims of concerns for the poor, as the ideas that they advocate suck the nation dry.

What is the moral sense of people who fight to preserve a system that causes income inequality, and then claim that they hate income inequality? American universities and the American left are the intellectual class for the new feudalism, dictatorial rule by Wall and Broad and their puppet-king, President Obama.

Robert Welch on the Future, March 9, 1974

Nancy Razik forwarded this Youtube video of Robert Welch, founder of the John Birch Society, in 1974. Welch died in 1985 and so did not live to see the big government Republicans co opt the Reagan revolution which he helped engineer. Welch makes more sense than the majority of university professors. However, I disagree with his emphasis on conspiracy. The ideology of "progressivism" does not require a conspiracy; and Wall Street bankers and others with an economic interest in big government and socialism do not need to conspire to recognize that the economic interests of America's elite depends on squelching free enterprise in the interest of high taxes, big business and of course monetary inflation, the mainstay of America's commercial banks and Wall Street. The video is well worth watching. Welch makes more sense than any television announcer and most of the academics alive today.

Left Unhappy with PEBO

Pamela Hall and Sharad Karkhanis forwarded links that tell of the left's frustration with President-elect Barack Obama (PEBO). Hall links to her Silent Majority blog and focuses on anti-Iraqi-war activist Cindy Sheehan's article about PEBO and Hillary Clinton. Sheehan writes:

>"After the official appointments were confirmed, I told two of my closest friends that Obama has killed the US anti-war movement that has been on life support while it worked feverishly to elect him. But, in reality, Obama didn’t kill the movement, the movement committed suicide in (again) supporting a non-anti-war candidate solely because he is not George Bush and he knows how to say the words “hope and change” with a straight face and no hint of irony in his voice...

>"I would like to swallow the empty rhetoric of Obama and believe that everything’s going to be fine; but I know better. Even before he takes the oath of office, Obama has already sold us out to the US Military Industrial Complex. He has also sold out the people of Iraq, Palestine (the forgotten oppressed people), Pakistan, and certainly the innocent civilians of Afghanistan...

>"Obviously, Barack Obama does not want to solve any problems or stop, or even retard, the 'institutional momentum' towards disaster because his cabinet picks, advisers and staff (AIPAC hack, Rahm Emanuel) are all deeply mired (quagmire?) in the corrupt institutions and are directly responsible for the profound crap we are in today...If Obama really desired change, then he would appoint people who have been trying to fix the horrible problems that only worsened during the Bush years.

>"Well, I am starting a new group called: 'CWCBIMA' (Quick-be-ma)

>"'Change We Can Believe in, My Ass.'"

On December 8, the esteemed Sharad Karkhanis forwarded a link to a related politico.com article entitled "Liberals Voice Concerns About Obama":

"Now some are shedding a reluctance to puncture the liberal euphoria at being rid of President George W. Bush to say, in effect, that the new boss looks like the old boss.

"'He has confirmed what our suspicions were by surrounding himself with a centrist to right cabinet. But we do hope that before it's all over we can get at least one authentic progressive appointment,' said Tim Carpenter, national director of the Progressive Democrats of America.

"OpenLeft blogger Chris Bowers went so far as to issue this plaintive plea: “Isn't there ever a point when we can get an actual Democratic administration?

"Juan Cole, who runs a prominent anti-war blog called Informed Comment, said he worries Obama will get bad advice from Clinton on the Middle East, calling her too pro-Israel and 'belligerent' toward Iran. 'But overall, my estimation is that he has chosen competence over ideology, and I'm willing to cut him some slack,' Cole said.

"Other voices of the left don’t like what they’re seeing so far and aren’t waiting for more before they speak up.

"New York Times columnist Frank Rich warned that Obama’s economic team of Summers and Geithner reminded him of John F. Kennedy’s 'best and the brightest' team, who blundered in Vietnam despite their blue-chip pedigrees."

The "liberal" antidote to the last problem is to attack Sarah Palin as unqualified because she didn't go to Harvard, and appoint Caroline Kennedy to the Senate because she was on the board of directors of the American Ballet Theater but did go to Harvard and therefore is qualified in the view of pissant propagandists and their brainwashed, soon-to-be-impoverished-by-the-Fed minions. "Liberals" are true geniuses.

I'm sitting here drinking some hot chocolate and thinking--I disagree with Sheehan about the Iraqi War and Israel, but I agree with her in the abstract. I called the change that Obama represents "chump change" in a blog on December 2.

On June 16 I wrote:

"Mr. Obama claims to favor change, yet he is allied with specific economic interests, specifically Wall Street. In 2008, Goldman Sachs so far has given $2.7 million to Democrats and less than $1 million to Republicans. Goldman Sachs's contributions to Democrats has exceeded those to Republicans every year since 1990. To assuage public concern about excessive Wall Street influence on Obama, America's off-the-charts-insipid media provide testimonies from 'principled' Wall Street tycoons like George Soros and Warren Buffett that Obama is for 'change'. Of course, Messrs. Soros and Buffett do not discuss how Obama's 'change' will influence their own economic interests."

The kind of change that we can expect from PEBO was discussed yesterday in a New York Times editorial that I bloggedhere that admitted that the steps that Chair Ben Bernanke, Secretary Henry Paulson and President George W. Bush are taking will be inflationary, but the Times supports them anyway. In this context of saying that inflation is a necessary medicine the Times writes:

"For Barack Obama, the challenge is one of leadership. As president, Mr. Obama will have to convey optimism without over promising. He will have to inspire confidence, even in the absence of a dramatic turnaround — which is simply not in the cards. To his credit, Mr. Obama has already warned the American people that conditions will get worse before they get better."

Perhaps what then-Senator Obama meant by "change" during his campaign was inflation. That was going to happen with or without him, so he wasn't wrong. "Change you can believe in" means "Wall Street, the Fed and I are going to scr*w you, you can believe it".

Ms. Sheehan is right to be angry. When he appointed President Bush's Defense Secretary, Robert Gates, as his own secretary, PEBO confirmed that (a)my assertion back in June that his issues are domestic, economic, and linked to Wall Street was correct, (b) international issues and Iraq are of little consequence to him, (c) corruption will be the hallmark of his administration and (d) his followers are chumps.

The Progressives and the Fed Are Out to Starve You

Howard S. Katz, author of the Paper Aristocracy and soon-to-be-published Wolf in Sheep's Clothing has just written an excellent blog on what the Fed is doing to you. If you aim to retire, you'd better consider putting most of your money into hard assets. With a tripling of the money supply tin foil will be worth a heck of a lot more than $100 bills.

To be fair, this is not a Democratic-Republican thing. The Democrats will starve you but the Republicans have beaten them to it. The Democrats have no intention of undoing the tripling of the money supply, of course.

The left continues to puzzle me. Sam Walton spent his life figuring out ways to cut prices. Lower prices help the poor and working class. In contrast, Wall Street has spent generations figuring out how to get the government to "print" money so that it can have low interest loans for which the rest of the country pays through high prices. But no one on the left seems to criticize Wall Street.

The policy of starving retirees to further the aims of Wall Street began with the Progressives and the establishment of the Fed. Franklin Roosevelt and the New Deal, in the cloak of establishing social programs, re enforced the Fed's power to steal from retirees and workers in order to further the aims of bankers and Wall Street via monetary expansion and inflation.

In the past, idiot leftists like William Greider were taken in by the fatuous claim that inflation helps the poor. Greider's book "Secrets of the Temple" is an encyclopedia of ignorance and self contradiction. It is unfortunate that a writer as talented as Greider lacks common sense. He contradicts himself so often that it seems hard to believe he wasn't aware of it, but never overestimate the common sense of a "progressive". On the one hand he says that inflation helps the poor. On the other, he repeatedly notes that the fresh money loans stimulate Wall Street speculation. I suppose he thinks that the poor speculate on Wall Street.

In any case, Greideresque stupidity has become much more difficult to defend with the bailout. Inflation helps Wall Street and bankers, not the poor. The bailout is being monetized. Inflation that ensues will be due to the monetization of the bailout. Eight decades of lying about the Fed and inflation are drawing to an end.

But our ruling elite, Barack Obama, George Bush, Henry Paulson and the people they represent have decided to inflate to the heavens. As one of my students said they other day, they have decided to suck the life blood out of this country.

But the left continues to puzzle me. They are so wedded to inflation-helps-the-poor that one must wonder: (a) are they stupid? (b) are they tools of the power structure? or (c) are they hoping for a collapse so a latter-day Lenin can step in and turn America into a Soviet Union?

In any case, if you want to retire you are going to need to think about commodities investing. Either that or Swiss Francs.

Read My Lips: Obama Aims to Tax Middle Class

The specter of inflation coupled with Senator Barack Obama's intent to tax all who earn over $125,000 (which has been reduced recently from $250,000) is ultimately an open intent to tax the middle class. Within a decade the equivalent of a $50,000 or $60,000 income will be in excess of $125,000. The rhythm of the recent pissant media blitz becomes clearer.

To fund massive bailouts of Wall Street, higher taxes will be necessary to pay interest on the loans. The Federal Reserve Bank has monetized the bailout, doubling the size of the its bank credits within a month, an unheard of monetary expansion. This will be inflationary. Barack Obama's support comes from the media and from Wall Street, which also supported George W. Bush. Bush causes the inflation, Obama raises the taxes to cover the loans. The tempo is obvious. The media did not attack Bush in '04 the way it is attacking Palin in '08. There were nowhere near the stakes at play in '04. Bush was Wall Street's guy in '04. Obama is their guy in '08. Obama raises taxes on the middle class to subsidize Wall Street. Bush provides the subsidies and creates the inflation to prepare the way.

What is ironic in this is how the naive left believes the pissant media hype--"change", etc. This is the change Obama is talking about: bigger distributions to Wall Street; crippling inflation; and higher taxes on the Middle Class to pay for it. He will throw a few dollars to the poor, and enrage conservatives, satisfying the left that he is a man of the people.

As PT Barnum put it, a sucker is born every minute. In this election, there are about 100 million suckers.

Phil Orenstein Says Do Not Bolt!

Responding to my e-mail asking for opinions as to whether I should bolt the Republican Party in response to Bush socialism, Phil Orenstein writes:

"McCain has stated that he would cut off the golden parachute of the crooks who allowed their investment banks to suffer the massive failures they did, and hold the regulatory agency the SEC accountable to do its job by first firing its top exec. If the investors in the bank's stocks suffered loss, then the crooks at the top shouldn't walk away scott free. McCain, I believe has the integrity to lead, and hold the people around him accountable. A leader can give the people confidence in the soundness of the economy, to forestall a potential run on the banks or general panic, for example. While printing money is the fed's drug of choice, to stop cold turkey at this point, would cause massive suffering. We must be gradually weaned off 100 years of progressivism and socialism, and be given a solid understanding of free market principles and individual liberty while were at it, and I believe McCain/Palin understand this and are up for the job. That means we also have to start with our schools, which are not doing the job."

Unfortunately, I have not heard a plan from John McCain about how to end monetary expansion, revise current Fed policies, change the pattern of unending support for America's financial institutions that goes back to the Great Depression and has transferred immense amounts of wealth from America's producers to inept Wall Street financiers. Phil's point would be more believable if the Republicans express a strategy. But none is forthcoming.

Idiosyncracies of American Democracy

Democracy does not work so rationally as we would wish. The public knows the word "economy" and believes that there are difficulties with it. It is unlikely that many of those who believe that there are difficulties with the economy can identify the diffculties accurately. For example, real wages have been declining since the early 1970s, but the public has not generally been concerned about this trend, which ought to be of serious concern to anyone who works. However, now that the mass media has been telling people that house prices, which have increased dramatically during the same period, are too low, the public feels that there is a crisis.

When I was in college in 1974 I worked as a door man in an apartment building in Manhattan on 54th Street between 5th and 6th Avenues. It was down the street from Gucci's on 5th and across the street from the back entrance of the Museum of Modern Art. At that time I earned about $200 per week and a one bedroom apartment in that building was selling for $55,000. If you multiply $200 per week times 52 weeks and divide the result into $55,000 you get 5.3 times.

A one bedroom apartment in that same building now probably sells for over $1 million. However, wages for building workers have probably gone up about three or four fold. If you're generous to today's door men and you divide $1 million by $45,000 you get 22.2 times, and that is probably an understatement because the apartment may be selling for more than $1 million and the doorman may be making less than $45,000.

Despite apartment prices' having gone up at four times the rate of wages, the public is willing to believe that a reduction in housing prices constitutes a "crisis" and some kind of "unruliness in the markets" that requires massive government intervention.

Let real estate prices fall. Then, perhaps, I can afford a new apartment in Manhattan and move back to civilization!

Even odder than public unawareness that the average person earns less than his parents did is the belief that Barack Obama is somehow best qualified to alleviate the non-existent housing "crisis".

Andy Martin has forwarded a press release that indicates that:

"A new Washington Post poll now shows Barack Obama opening up a decisive lead based on the amazing belief that Obama is more competent to manage the economy."

The Washington Post article states that:

"Just 9 percent of those surveyed rated the economy as good or excellent, the first time that number has been in single digits since the days just before the 1992 election. Just 14 percent said the country is heading in the right direction, equaling the record low on that question in polls dating back to 1973.

"More voters trust Obama to deal with the economy, and he currently has a big edge as the candidate who is more in tune with the economic problems Americans now face. He also has a double-digit advantage on handling the current problems on Wall Street, and as a result, there has been a rise in his overall support."

This is especially odd because it is Obama who has received the lion's share of backing from Wall Street and from the pro-Wall Street media, for instance the New York Times and the media conglomerates that depend on Wall Street for financing. Given that the current "sub-prime crisis" is of Wall Street's making and Wall Street has primarily contributed to Senator Obama, current public opinion can best be described as idiosyncratic.

Part of the idiosyncratic public opinion is likely due to the media's slanted coverage of Obama and McCain. Jim Crum writes in an e-mail:

"I’ve said for months now that the main stream media need to be wearing...knee pads when dealing with Mr. Obama. It really has gotten that bad, and I doubt that there is any sin, now matter how grievous, that would escape their filters and be reported. Meanwhile, there is a near complete blackout on anything or McCain/Palin accomplishes. (Yes I have reservations about McCain & Palin, but given the alternative, there is no substantive choice)."

In an e-mailed press release Andy Martin states that McCain should break with the Bush administration and:

"speak clearly and simply and directly: he must announce in no uncertain terms his total opposition to the Wall Street bailout.

"First, over the past year I have repeatedly pointed out that the current financial crisis is a "manufactured" crisis. The urgency was created by maladroit steps to rein in sub-prime mortgages when they posed no threat to the overall economy. One bad step led to another. We have rather clumsily managed to topple our own financial dominoes. The mess is Wall Street's fault, not George Bush's responsibility."

In several e-mails about the media's reaction to the Obama's campaign lies about Senator McCain's supposed blocking of stem cell research Bob Robbins points out:

"That our media finds it all so amusing tells us just how much they value the truth as well."

The Progressives believed that a well informed democracy would be possible and that the public could fairly assert its own interests given an abundance of good information. Today's public is widely misled by the Progressives' descendants, the mass media, and is incapable of assessing even the most elementary facts about the political economy.

I have an increasing share of my assets either in hard commodities or outside the United States in foreign currency CDs. I do not believe that this country is headed for a healthy future, and it will be worse if Barack Obama, Wall Street's and the New York Times's boy wonder, is elected.

Schnorrers' Day on Wall Street

I blogged this back in March, but it is even more relevant today:

"Hooray for Chair Bernanke
The economic explorer
'Did someone call him 'schnorrer'"?

---Groucho Marx (Ben Bernanke), Animal Crackers

Groucho Marx was, of course singing about himself, Captain Spaulding, in Animal Crackers, but with a small modification or two the lines sing of Ben Bernanke. In case your Yiddish is rusty, "schnorrer" means beggar or sponger, according to Wikipedia. Is it fair that John Q. Public is subsidizing multi-million dollar Wall Street salaries for guys who can't figure out how to run a business?

Please review the entire song:

(All on Wall Street)
At last we are to meet him,
The famous Ben Bernanke.
From climates hot and cranky,
The Chairman has arrived.

Most heartily we'll greet him,
With plain and fancy cheering.
Until he's hard of hearing.
The Chairman has arrived.
At last - The Chairman has arrived.

(Butler)
Mr. Henry Paulson, Field Secretary to Chair Bernanke.

(Jamison/Zeppo/Henry Paulson)
I represent the Chairman who insists on my informing you of these conditions under which he camps here. In one thing he is very strict, he wants his women young and picked and as for Wall Street bankers, he won't have any tramps here.

(All on Wall Street)
As for bankers he won't have any tramps here,
There must be no tramps.

(Paulson)
The bankers must all be very old,
The women warm, the champagne cold.
It's under these conditions that he camps here.

(Voice off Screen)
I'm announcing Chairman Ben Bernanke

(All on Wall Street)
He's announcing Ben Bernanke

Oh dear, he is coming,
At last he's here.

(Chair Bernanke)
Hello, I must be going,
I cannot stay, I came to say, I must be printing.
I'm glad I came, but just the same I must be going.
La La.

(Mrs. Rittenhouse/Margaret Dumont)
For my sake you must stay.
If you should go away,
You'd spoil this party I am throwing.

(Chair Bernanke)
I'll stay a week or two,
I'll stay the summer through,
But I am telling you,
I must be printing.

(All on Wall Street)
Before you print,
Will you oblige us,
And tell us of your deeds so glowing?

(Bernanke)
I'll print as much as you say,
In fact I'll even stay!
I'll print dollars far and away!

(All on Wall Street)
Good!

(Bernanke)
But I must be going.
I must be printing.

(Paulson)
There's something that I'd like to say,
That he's too modest to relay.
The Chairman is a moral man.
Sometimes he finds it trying
To be printing and printing.

(Bernanke)
This fact I emphasize with stress,
I never print a buck unless - Somebody's buying.
I never print a buck unless - The public's paying.

(All on Wall Street)
The Chairman is a very moral man.

(Paulson)
If he hears of a high interest rate, He'll naturally repel it.

(Bernanke)
I hate a high interest rate I do.

(All on Wall Street)
The Chairman is a very moral man.
Hooray for Chair Bernanke, The economic explorer.

(Chair Bernanke)
Did someone call me Schnorrer?

(All on Wall Street)
Hooray, Hooray, Hooray.

(Paulson)
He went onto Wall Street where all the bankers pocket bucks.

(Chair Bernanke)
If I stay here I'll go nuts.

(All on Wall Street)
Hooray, Hooray, Hooray.
He put all his reliance, In courage and defiance,
And risked his life for economic science.

(Chair Bernanke)
Hey, hey.

(Mrs. Rittenhouse/Margaret Dumont)
You are the only Chairman to print money over every acre.

(Chair Bernanke)
I think I'll try and make her.

(All on Wall Street)
Hooray, Hooray, Hooray.
He put all his reliance, In courage and defiance,
And risked his life for economic science.

(Chair Bernanke)
Hey, hey.

(All on Wall Street)
Hooray for Chair Bernanke, The economic explorer.
He brought his name undying fame
And that is why we say, Hooray, Hooray, Hooray.

(Chair Bernanke attempts to speak)
My friends, I am highly gratified at this magnificent display of effusion and I want
you to know.........

(All on Wall Street)
Hooray for Bernanke, The economic explorer.
He brought his name undying fame
And that is why we say, Hooray, Hooray, Hooray.

(Chair Bernanke)
My friends, I am highly gratified at this magnificent display of effusion and I want
you to know.........

Hooray for Ben Bernanke, Wall Street's hero.....
Well, somebody's got to do it!

Hooray, hooray, hooray

Obama and Race

Yahoo! carries an AP piece on a Stanford University poll that found that 1/3 of Democrats harbor racial stereotypes. The pollers estimate that Obama loses 6% because of race. On the other hand, we Republicans are not opposed to Obama because of race but rather because of ideology. As well, Obama has virtually 100% support among blacks, which is also a racial preference-based phenomenon.

Overall, the poll gives a fair assessment. There is a percentage that will vote against Obama because of race, and six percent sounds too low. However, the article omits discussion of the possibility of cognitive dissonance. There are many people who are likely to vote for an African-American even though they are racist because confronting their own racism causes cognitive dissonance, which they resolve by voting for the candidate. Cognitive dissonance is a famous psychological cause of much unpredictable behavior. "Liberal guilt" may work as a kind of reverse racism.

Racism is an unfortunate phenomenon that goes back to the same tribal impulses on which feudalism, collectivism and socialism are based. Some variants of "international" socialism attempt to assert socialism without emphasis on race or nation although (a) nationalist socialism is the variant that has succeeded most often (to wit, the USSR's "socialism in one country" and Germany's "national socialism"); (b) in its post-modern form, socialism has tended to devolve into identity politics, which is inherently racist, and this includes Barack Obama's new left ideology (Obama's pastor, Jeremiah Wright and friend Rev. Michael Pfleger have made remarks that were racially distasteful, for example); and (c) by its own nature socialism assumes win-lose or distributive conflict, and one of the key categories through which this occurs is ethnic or racial, so despite claims of internationalism, internationalist socialism has often devolved into racism and anti-Semitism.

Candace de Russy did a great job of analyzing Barack Obama in National Review. There are many unanswered questions: the circumstances of his birth; his upbringing in Indonesia; his relationship to black liberation theology; his ongoing involvement with radical causes; the unusual support among Wall Street employees and his connection to George Soros and Warren Buffett; his George Bush socialist-style economic orientation; and his lack of understanding of elementary aspects of Middle Eastern issues.

I do believe that he is cut from the same cloth as George W. Bush, and Wall Street's enthusiasm for him is the same as its recent enthusiasm for bailouts and subsidies to Wall Street's incompetent schnorrers.

Dow Falls 504 Points as Obama's Chances Fade

The decline in Senator Obama's fortunes in the 2008 election have been followed closely by a sharp stock market decline today due to the bankruptcy of Lehman Brothers. This bodes ill for my home town, New York City, and for my home state, New York, as both depend heavily on Wall Street and finance for their revenues.

Contrairimairi has forwarded a seemingly unrelated piece of news. Jennifer Rubin of Commentary Magazine.com notes that Mr. Obama is one of the largest recipients of donations from Fannie and Freddie Mac. Back in 2007 the Washington Post noted that Senator Obama was the largest recipient of donations from Wall Street. Thus, 17 months ago, before he overtook Senator Clinton in the primaries:

"The Illinois senator raised $479,209 from employees at the banks in the quarter, according to Federal Election Commission filings. Giuliani collected $473,442, and Clinton got $447,625. The figures are based on employers listed by the donors; in some cases, names are incomplete or missing."

This was back in April 2007 when I and many others had heard little about Senator Obama. Of course, with the backing of George Soros and Warren Buffett, Wall Street has been absolutely thrilled with Senator Obama's candidacy. Obama was talking about change for Americans when he really meant million dollar bonuses for the good folks on Wall and Broad.

In June 2008 I blogged that:

"In contrast to Goldman Sachs, Morgan Stanley has traditionally given to Republicans, according to Open Secrets.org. However, in 2008 Morgan Stanley has donated $1.4 million to Democrats and only $824.8 thousand to Republicans. As far as the finance, insurance and real estate industry as a whole, open secrets reports that in 2008, for the first time since 1990 when it begins its report, the industry as a whole is favoring the Democrats over the Republicans."

Wall Street has benefited from decades of Republican financial subsidies in the form of artificially reduced interest rates that have inflated the stock market, enhancing stock valuations and hence the turnover of stocks as investors have speculated to a far greater degree than they would have. Clearly, the Republicans have been running out of steam, as their subsidies have gone into the pockets of Wall Street bounders who lack the competence to manage even a subsidized business. Wall Street probably hoped that Mr. Obama was a plumed knight come to rescue them from their self-created dragons of inflation and American economic decline. Wall Street has been slurping up the resources of hard working Americans via Federal Reserve Bank inflation for decades, and now they are going bankrupt nevertheless. This is not incompetence. It is corruption.

I can't help but wonder if the stock market is declining in part as a reaction to the reality that Mr. Obama won't be around to help them in the coming four years.

Centralization of Federal Power Has Led to Coddling of Business

The relationship between the state and federal governments fluctuates, but the overall trend has been toward centralization, with a few blips. This came about in part because of the Civil War, which enforced centralization in order to achieve noble objectives. The 13th, 14th and 15th amendments enhanced federal power over the states, requiring states to recognize citizenship, right to make contracts, equal treatment under the laws and voting rights to former slaves and, for that matter, to all citizens. The states' reaction to the growth of the railroads in the late 19th century was to subsidize them, and they enhanced the natural advantages of economies of scale through land grants, rights of way and other subsidies. In turn, the new, complex corporations faced multiple regulatory regimes across the states. This raised their costs. In the 1876 Munn v. Illinois Chief Justice Morrison R. Waite, writing for the Court, held that states have the right to regulate railroads because railroads reflect the public interest. In the 1886 Wabash, St. Louis and Pacific Railroad v. Illinois, law concerning the Illinois Grange's clamoring for regulation of railroad rates was federalized. The court held that states could engage in indirect regulation like safety regulation but not direct burdens on interstate commerce like rate regulation. The following year Congress passed and President Grover Cleveland signed the Interstate Commerce, which established the Interstate Commerce Commission. The ICC's responsibility was to set maximum railroad rates and eliminate individual discrimination. Thus, the age of centralization was born.

The aim of centralization was regulation coupled with subsidization. The regulation part reflected the impetus of Populist movements like the Grange, social Gospel Christianity, fear of labor unions and socialism and pressure from Progressives like Walter Weyl and Herbert Croly who, in the early 1900s argued that European-style social democracy was more "progressive" than American laissez-faire.

The centralization of regulation helped big business because it established a stable, unitary source of regulation that made it easy to comply. Fifty states pose a fifty times greater compliance problem than a single federal government. Moreover, industry or what Williams calls "syndicalist" influence over government is easier to organize. Mancur Olson and George Stigler have written about the economic conditions for effective lobbying, and centralization of power makes lobbying considerably easier for large firms and gives them considerable advantages over small. Many small firms over a national market are far more difficult to organize than one fiftieth the number over a state-wide market. At the same time, it is far cheaper for a few large firms to lobby a single federal government than it is for them to lobby fifty state governments. Thus, in the name of "regulation" the Progressives tipped the political scale in big business's favor.

Theodore Roosevelt and other Progressives of the early 20th century believed that big business produced wealth. Historians such as Alfred Chandler argued that transportation and communication advances with respect not only to canals, railroads and then trucking and air delivery but also with respect to telegraph, telephone, and then fax, e-mail and Internet, expanded markets facilitating reduced costs and enhanced economies of scale. There were other subsidies to big business, specifically the creation of federally subsidized credit and banking through the Federal Reserve System, tariffs almost continuously to the days of Wilson and then after, cartels and price fixing during World War I, and a host of regulations that make it more expensive for small business to compete with big.

But has big business really delivered? Since 1980 manufacturing firms increasingly exited the United States. Hence, the subsidization of manufacturing through credit and protection did not yield permanent jobs to average Americans. Executive compensation, rationalized through artificially elevated stock prices due to Federal Reserve policy, has been an exercise in self indulgence and waste. Increasingly, Americans hanker after a few high-wage investment banking and celebrity jobs, and are unwilling to work hard in traditional crafts. The images of today's youth, rap singers since the 1980s, Beavis and Butthead in the 1990s, Paris Hilton today, suggest a culture of dim wittedness and sloth. These images are broadcast by subsidized big business concerns, the media conglomerates, who profit from popular music that advocates drug use and violence. Television shows like "Entourage" suggest that the way to succeed is to hang out with other self indulgent boneheads, as long as they are good looking.

The transition from decentralized to centralized federalism and from laissez-faire to statism altered incentives in the economy. The combination of centralized creation of credit and inflation of scale enhances returns to stock offerings, first because large firms are artificially profitable because of their subsidization and second because monetary expansion itself inflates the stock market by reducing interest rates. This inflation of stock returns makes investment and commercial banking far more profitable than they would be in a decentralized and laissez-faire system. In turn, firms are encouraged to maximize stock returns by minimizing costs in that low interest rates make stock returns more elastic with respect to increases in net profit. This does several things. First, firms are encouraged to move plants overseas, where labor costs are lower. Second, their incentive to innovate is reduced because ample returns can be obtained due to the reduced interest rates and the elasticity of stock prices to small gains. Why risk invention of a new technology, when you can, like the typical US CEO, simply think about reorganization or moving plants to another country and so earn $100 million? Third, the returns to initial stock offerings are enhanced. Thus, returns to investment banking exceed market levels. Because the manpower needed to issue and trade securities is small relative to the inflated returns, the high salaries divert human resources from manufacturing to investment and speculation.

It is likely for these reasons that the innovation level of late nineteenth century laissez faire America was far greater than during the Progressive twentieth century. The most innovative Americans have been attracted to investment banking and law rather than manufacturing. Firms like Intel need to recruit engineers from overseas in order to compete. This misallocation of human resources leads to lower growth and less innovation in the economy than there would have been in a decentralized, laissez-faire economy.

The coddling of business results in a trade off between risk and return. In a laissez faire economy credit is difficult to obtain, profits are reduced and stock returns are reduced because interest rates are relatively high. This results in considerable discomfort to business executives, who in the nineteenth century complained about "overproduction" and "depression". However, the decreasing prices resulting from slow monetary growth increase real gains to labor. Real wages rise because firms are forced to think carefully about productivity given the intensely competitive milieu. Moreover, innovation is stimulated because that is the only way to earn large profits. Thus, the laissez-faire economy is rocky soil in which only the hardiest firms can grow, and they grow by extending roots that crush even the largest competitive rocks. Workers, the soil in which these competitive plants grow, benefit from the nutrients that the innovative stems produce. But the weaker plants, the firms that thrive in politically driven, low-innovation "Progressivism" complain endlessly about depression, the need for subsidization, the need for a central bank, the unfairness of the competitive economy. They are, of course, backed by feudalists and socialists, who similarly yearn for stability at the price of innovation.

The Progressive economy does not reward achievement. It rewards potential. Investment banks hire from the ranks of Ivy League students, who are in turn admitted to Ivy League schools on the basis of SAT scores. But SAT scores are not achievement, they are just potential, and they do not explain the majority of what might explain achievement. Americans are rewarded for ability, and this reduces their risk. But this also has the effect of draining men and women of ability from the ranks of the innovators into the ranks of transfer recipients. There may indeed be economic gains from stock offerings and trading, but they are minute compared to the potential gains from innovation. A single Tesla is worth all of the investment bankers in history times 10. Yet of all of the thousands of potential Teslas, only a handful will succeed. Why risk failure, when a certain career in investment banking has a far greater probability of significant success. Thus, elite Americans have become increasingly risk averse. They have chosen the way of relatively certain but high returns, but sacrificed the moral rectitude of economic creation and productivity. They have come to favor the sleight of hand that Wall Street capitalism offers, claiming to create efficiency but depending upon credit expansion and government largess.

The Paradox of Economies of Scale and Government Bounties to Big Business

One of the key arguments that economists and historians have traditionally made in favor of big business, and one that the public has generally accepted, is that it is necessary because of economies of scale. This image was exemplified by the Ford production plants of the 1920s, which could produce thousands of cars per week. The reason that economists and the general public have traditionally believed that economies of scale are important is that the fixed costs of production, costs that will be there whether one or a million units are produced such as advertising, rent, and administrative staff costs, when spread over a large number of units of output become lower per unit. The argument for scale amounted to an argument for centrally planned economies. In his book "Managerial Revolution", written in the 1930s before the murderous nature of Nazism had been fully revealed, James Burnham argued that a new managerial class was independent of owners and he cheered the advent of national socialism in Germany because government control and guidance of large industry reflected the realities of the new managerial power. Thirty years later, in the early 1960s, John Kenneth Galbraith described the economy of big business as based on planning by a "technocratic" elite in his book New Industrial State.

But while the public has accepted the argument that big business is necessary for consumerism because only large firms can produce large numbers of outputs, big business has tactically demanded and likely required government subsidies in order to survive. And there is a paradox. For if big business is most efficient, then why does it need subsidies? In his 1977 book Politics and Markets Charles Lindblom argued that business occupies a "privileged position". More fundamentally, ever since the days of Hamilton, and with the exception of some business interests in the late nineteenth century, much of American business has asked for two crucial kinds of subsidies: protectionist tariffs and monetary expansion. When Jackson abolished the Second Bank in the early 1830s he limited the degree of monetary expansion. That period, from the 1830s to 1900, was the period of greatest innovation in technology and strongest gains in real hourly wages of workers of any in American history. It was also a period of uncertainty, volatility and conflict between labor and management. However, even in the nineteenth century monetary expansion associated with the Civil War facilitated expansion of credit and therefore enhanced the size of business. By the late nineteenth century the Mugwumps, traditional, mostly Protestant (there were some Catholics and Jews as well in their ranks) Yankee elites in Boston and New York protested the support to speculators like Jay Gould that the monetary expansion had provided, coupled with erosion of their annuities and bank accounts.

The expansion of the railroads contributed mightily to the expansion of US markets into a single whole, and were the crucial step in making big business economically viable and efficient. But the railroads were largely the product of subsidy, and the canals that preceded them were government public works projects, not private enterprise. Neither the railroads or canals were entirely responses to market demand. Rather, they were made possible by land grants and rights of way granted by often corrupt state and local governments. An example is New York, where Jay Gould was so indebted to Boss Tweed that he paid Tweed's bail when Tweed was arrested for corruption. Thus, the Civil War inflation and government subsidies to railroads made expansion of the railroads possible. In turn, the railroads coupled with high tariffs made expansion of business possible. In turn, business enjoying both these supports and economies of scale, consolidated in the nineteenth century.

Late nineteenth century big business was poorly managed. It is likely that the labor conflicts and inefficiencies of the large firms were due to their too-rapid expansion. In management, experience is the foundation on which expansion depends. In a laissez-faire market, a firm becomes large as its managers gain expertise in one market and then duplicate the success in subsequent markets. An example is McDonald's. The founders of McDonald's, Dick and Mac MacDonald owned a single store in San Beranardino, California. Ray Kroc, a multi-mixer distributor, read about their success and visited the store. Kroc's vision of a national chain of stores led to his agreement with the McDonald brothers. But it took Kroc many years to make McDonald's a success. He had to learn the importance of standardization through multiple false starts in California. He had to learn the importance of professionalization of the franchisee relationship through mismanagement of franchises by his friends from his country club who did not focus on managing the stores. He had to learn how to use real estate investment to help finance store expansion and contribute to profit margins from Harry J. Sonneborn. He had to learn how to standardize equipment and the size of French Fries. Kroc did not conceptualize almost any of the food offerings, most of which were the result of suggestions from franchisees. He did not create the clown, which was the result of a local advertising campaign by one of his large Washington, DC franchisees.

Would any of the steps that McDonald's took have been made had there been a massive tariff on hamburgers or if state governments, in return for bribes, had offered exclusive distributorships to Ray Kroc, or if credit expansion through the Federal Reserve Bank had benefited McDonald's as it does Wall Street today? Would any of the innovation in McDonald's have occurred?

In the early 1960s Ronald Coase wrote about the reason that organizations reach a given scale or size. He argued that, like much else in economics, it is due to an equilibration of costs and benefits. The costs of scale include ability to manage, incentives to top management, conflicts between labor and management, difficulties in obtaining information about operations, inflexibility in changing direction when markets change and office politics. The advantages of scale include economies of scale and economies of scope, i.e., the ability to share information learned in one business to a different business, much as Time Warner's AOL unit was able to share information with Roadrunner (that's a joke; the Time Warner and AOL units were in constant conflict after their ill-advised and incompetently executed merger).

The subsidies to big business have increased, not diminished, over time. The Democrats have inadvertently or not, been big business's best friend by demanding regulation, supposedly in support of big labor, that squelches smaller firms by further increasing the advantages of scale economies. They have also established the Federal Reserve Bank, which once the Republicans realized was actually the most important of all the subsidies to big business went on a binge and nearly doubled the rate at which the money supply grew after 1971. The Democrats have never complained, and have follwed the same course since. Thus, both parties have seen subsidization of Wall Street and big business at public expense as the cornerstone of their economic policies. The Democrats came up with the idea and the Republicans enhanced it. I became a Republican because the Democrats are better at initiating big government programs that subsidize big business. They do it by telling everyone that they support the poor and that the regulation supports the poor. But there were no segregated inner cities before the Democrats began to "support" the poor.

Which will outbalance the other--office politics or economies of scale and scope? Clearly, if government is providing support to big business, the amount of support needs to be subtracted from the gains from economies of scale.

Moreover, time has revealed that scale is not the most important factor in management. The Japanese were able to defeat big American business not because of scale but because of skill. Wal-Mart was able to defeat K-Mart not because of scale (it was a smaller firm until the 1990s) but because of skill. In particular, management of information, incentives, labor relations, inventory, factory management, total quality management, technology, product design and marketing, and similar factors can generate competitive advantages. Large firms like Nike have found it necessary to emulate small firms. They outsource their manufacturing and reserve the product design and marketing for themselves. In effect, they are consultants who control the business. These ideas have been circulating for many years. Yet, they bring into question whether scale provides much of an advantage. Coca Cola has found that local manufacturers can out-think them with respect to understanding local tastes, and has had to scramble to decentralize in order to compete globally. Its original vision of a one-world market drinking trillions of gallons of Coca-Cola was illusory.

Thus, the American idea, rooted in the expansion into the frontier, that scale and the expansion of markets is necessary results in a paradox. If scale is the source of economic gains, then why are such extensive subsidies to big business necessary? And if scale is crucial, why has there been so much volatility in world business?

Schnorrers' Day on Wall Street

"Hooray for Chair Bernanke
The economic explorer
'Did someone call him 'schnorrer''?

...

This fact I emphasize with stress,
I never print a dollar unless - Somebody's buying.

---Groucho Marx (Ben Bernanke), Animal Crackers

Groucho Marx was, of course singing about himself, Captain Spaulding, in Animal Crackers, but with a small modification or two the lines sing of Ben Bernanke. In case your Yiddish is rusty, "schnorrer" means beggar or sponger, according to Wikipedia. Is it fair that John Q. Public is subsidizing multi-million dollar Wall Street salaries for guys who can't figure out how to run a business?

Please review the entire song:

(All on Wall Street)
At last we are to meet him,
The famous Ben Bernanke.
From climates hot and cranky,
The Chairman has arrived.

Most heartily we'll greet him,
With plain and fancy cheering.
Until he's hard of hearing.
The Chairman has arrived.
At last - The Chairman has arrived.

(Butler)
Mr. Horatio W. Jamison, Field Secretary to Chair Bernanke.

(Jamison/Zeppo)
I represent the Chairman who insists on my informing you of these conditions under which he camps here. In one thing he is very strict, he wants his women young and picked and as for Wall Street bankers, he won't have any tramps here.

(All on Wall Street)
As for bankers he won't have any tramps here,
There must be no tramps.

(Jamison/Zeppo)
The bankers must all be very old,
The women warm, the champagne cold.
It's under these conditions that he camps here.

(Voice off Screen)
I'm announcing Chairman Ben Bernanke

(All on Wall Street)
He's announcing Ben Bernanke

Oh dear, he is coming,
At last he's here.

(Chair Bernanke)
Hello, I must be going,
I cannot stay, I came to say, I must be printing.
I'm glad I came, but just the same I must be going.
La La.

(Mrs. Rittenhouse/Margaret Dumont)
For my sake you must stay.
If you should go away,
You'd spoil this party I am throwing.

(Chair Bernanke)
I'll stay a week or two,
I'll stay the summer through,
But I am telling you,
I must be printing.

(All on Wall Street)
Before you print,
Will you oblige us,
And tell us of your deeds so glowing?

(Bernanke)
I'll print as much as you say,
In fact I'll even stay!
I'll print dollars far and away!

(All on Wall Street)
Good!

(Bernanke)
But I must be going.
I must be printing.

(Jamison/Zeppo)
There's something that I'd like to say,
That he's too modest to relay.
The Chairman is a moral man.
Sometimes he finds it trying
To be printing and printing.

(Bernanke)
This fact I emphasize with stress,
I never print a buck unless - Somebody's buying.
I never print a buck unless - Somebody's paying.

(All on Wall Street)
The Chairman is a very moral man.

(Jamison/Zeppo)
If he hears of a high interest rate, He'll naturally repel it.

(Bernanke)
I hate a high interest rate I do.

(All on Wall Street)
The Chairman is a very moral man.
Hooray for Chair Bernanke, The economic explorer.

(Chair Bernanke)
Did someone call me Shnorrer?

(All on Wall Street)
Hooray, Hooray, Hooray.

(Jamison/Zeppo)
He went onto Wall Street where all the bankers pocket bucks.

(Chair Bernanke)
If I stay here I'll go nuts.

(All on Wall Street)
Hooray, Hooray, Hooray.
He put all his reliance, In courage and defiance,
And risked his life for economic science.

(Chair Bernanke)
Hey, hey.

(Mrs. Rittenhouse/Margaret Dumont)
You are the only Chairman to print money over every acre.

(Chair Bernanke)
I think I'll try and make her.

(All on Wall Street)
Hooray, Hooray, Hooray.
He put all his reliance, In courage and defiance,
And risked his life for economic science.

(Chair Bernanke)
Hey, hey.

(All on Wall Street)
Hooray for Chair Bernanke, The economic explorer.
He brought his name undying fame
And that is why we say, Hooray, Hooray, Hooray.

(Chair Bernanke attempts to speak)
My friends, I am highly gratified at this magnificent display of effusion and I want
you to know.........

(All on Wall Street)
Hooray for Bernanke, The economic explorer.
He brought his name undying fame
And that is why we say, Hooray, Hooray, Hooray.

(Chair Bernanke)
My friends, I am highly gratified at this magnificent display of effusion and I want
you to know.........

Hooray for Ben Bernanke, Wall Street's hero.....
Well, somebody's got to do it!

Hooray, hooray, hooray.