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.

Chump Change

Barack Obama's famous campaign slogan was "change". At the same time, the most important issue to his supporters and cultish followers was the Iraqi War. Today, President-elect Obama announced the re-appointment of Robert Gates, President Bush's Defense Secretary. Secretary Gates has overseen recent Iraqi War policy, including the surge. Thus, his reappointment is a refreshing surprise, because it suggests a victory of practicality over ideology. But the reappointment does not represent change. It represents continuity.

President-elect Obama has played his cards smartly. But his followers and supporters are chumps. They are suckers. Marks. The suckers include both his hordes of brown shirt-like young followers and the propagandists formerly known as the mainstream media.

I have suggested over many months that Obama's young supporters have been chumps. This younger cohort is a generation that does not read books and that considers Bill Maher to be an information source. Their teachers have not read John Locke. They have never heard of him.

One of my students, a gay activist, became upset with me a few weeks ago when I mentioned during a social occasion (I occasionally have a drink with my MBA students after class) that I thought that George Bush and Barack Obama represented the same interests. His anger was palpable. When I questioned this student, a product of elite universities, whether he had read anything about the Iraqi War; the dispute between Shias and Sunnis; or anything else about the Iraqi War, his answer was "no". When I suggested a couple of books to read, he was not interested. However, he became enraged when I suggested that there would be little difference.

America's failed democracy naturally flows from its failed educational system. Like the ignorant hordes that have supported socialism, fascism and communism, Obama's supporters emphasized slogan over substance, and viewed asking questions as to Obama's vital information and true intentions with venomous hostility. One of his supporters, who calls himself "Diogenes", has seen it so important to suppress any questions that he has come onto this blog repeatedly, hurling curse words and insipid invective such as "tin foil hat" any time that I have raised questions about Mr. Obama. He recently used several insults and curse words when I suggested that Americans need to read John Locke.

In early September I argued that Barack Obama would be a George W. Bush clone and in June, I had suggested that:

"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."

It remains to be seen how far Mr. Obama's blithe, sociopathic lying goes and whether he carries it into realms that are potentially harmful to the United States. However, for now he seems to have made clear that change with respect to the Iraqi War is not a top priority for him. In this, he has played his millions of young supporters, including the MBA student, for chumps.

Supreme Court to Review Donofrio Case

Bob Robbins just forwarded this link to WorldNet Daily:

"Most Americans don't realize it yet, but this Friday, the U.S. Supreme Court will review whether Barack Obama is indeed constitutionally eligible to become the next president.

The justices will hold a conference on the question and consider the case for formal review.

The case is brought by Leo C. Donofrio against Nina Wells, the New Jersey secretary of state, and questions whether Obama is a "natural-born citizen" as required by Article 2, Section 1 of the Constitution."

"If four of the nine justices vote to hear the case in full, oral argument may be..."

Read the whole thing here.

Indian Commandos May Have Killed Some Chabad Hostages

Dan Friedman sent me this tragic Jerusalem Post story.

Nov. 30, 2008

Yaakov Lappin , THE JERUSALEM POST

Col. Yossi Turgeman, IDF attaché to India, said that the two Israelis announced missing by the Foreign Ministry were not among the dead, Army Radio reported on Sunday evening.

Israelis murdered in Mumbai Chabad House to be laid to rest in Israel on Monday

Therefore, Turgeman assessed that the missing Israelis were not killed in the Mumbai terror attacks.

Earlier on Sunday, the Foreign Ministry announced that the number of Israelis unaccounted for in Mumbai had dropped to two, after contact was made with two Israelis thought to be missing.

The Indian commando raid launched to save the lives of Jewish and Israeli hostages at Mumbai's Chabad House may have inadvertently ended the lives of one or more of the hostages, the head of a six-man ZAKA team in the terror-stricken Indian city told The Jerusalem Post on Sunday.

Speaking by phone from Mumbai, Haim Weingarten, the head of the Mumbai ZAKA team, said, "Based on what I saw, [although] I can't identify the type of bullets in the bodies [of the victims], I don't think the terrorists killed all the hostages, to put it gently."

All six Jewish and Israeli hostages found dead in the Chabad House were killed by either gunshot wounds or shrapnel from grenade blasts, or both, Weingarten said, adding that he didn't know who threw or fired the grenades that wounded the hostages.

Although he lacked forensic tools to determine time of death, Weingarten said his team's observations led him to believe that "some of the hostages were killed on Wednesday [when gunmen first entered the building], some on Thursday, and some on Friday morning [during the start of the commando raid]."

After a prolonged delay, an air force transport plane carrying Israel Police forensics experts and a second ZAKA team took off for Mumbai on Sunday evening. A ZAKA source told the Post the plane would probably return to Israel with the bodies of the hostages on Monday night.

ZAKA officials believe that in a final act of love, the director of the Chabad House, Rabbi Gavriel Holtzberg, wrapped the body of his wife Rivka in a tallit before succumbing to his own wounds during the final hours of the siege.

Read the whole thing here.