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Finance: The United States, The Federal Reserve, Banks & Wall Street By Lonnie Hicks
Posted: Sunday, October 17, 2010
Last edited: Saturday, January 19, 2013
This short story is rated "G" by the Author.
Updated 10-22-10 What to do about the financial situation now.
Updated: 1/19/13 What the uproar about minting a million dollar coin tells us about our banking system
Updated: 10-24-10 more detail on how all this works and more reasons why we hate Wall street and the banks.
Updated: 10-25-10- The Beautiful, the Ugly and the Unavoidable--Our Near Financial Future.
Updated: 10-26-10 Who is Suing Who For What and I Have to Pay?
Updated: 10-28-10 Who Owns 40% of the American Economy?
Updated 10-30-10 Reform the Global Banking System. Seriously, it can be done.
Update: 11/30/10 But First A History of Banking in the United States. A Must Read
Update: 12/7/10 What Does The History Of Banking Reveal To Us Today?
Update: 12/12/10 Why is there no recession in China, India and the East?
Update: 1-29-11 The Chinese Issue a Warning
Updated: 1-31-11 Population Growth and Survival
Updated: 7-3-11 The Double Dip Is Coming
Updated: 10-16-11 The Occupy Wall Street Movement and How To Sustain It.
It is a tall order to look the history of banks, wall street, the Federal Reserve and the US govenment and their impacts historically and currently on this country. But let's have a go nonetheless.
Let's start with first principles with some basic history and definitions:
First what is a bank and what is the history of banks?
Banks are generally conceded to have come in to existence as early as the 18th century BC. and often operated out of religious sites or temples which had guards, natural and unnatural which, it was thought, made them safer depositories of everything from cattle, to grains to credits. Their function was safekeeping and to avoid moving goods and gold along dangerous routes. Rather a "credit" was deposited one "bank" and cashed at another bank.
But I propose to look at modern banking in its relation to the rise of the nation state.
That jump-starts us to the 12th century where a confluence of several factors caused the re-emergence of banking as we know it to into Europe. Those factors were:
1- The expansion of trade and exploration
2- The Crusades
3- The launching of expanded warfare.
Trade was driven by a new merchant and capitalist class whose profits from both trade and exploitation of other lands brought to Europe incredible new wealth and a lust for gold, salt, gunpowder, plunder and spices as key drivers in the whole process.
For the first time since ancient times medieval European princes could take new wealth, trade and plunder and parlay it, via war, into new conquests to protect and expand their interests both in and outside Europe.
Since taxation of an impoverished domestic population was not sustainable, this new wealth which banks controlled and this new merchant class offered vast new resources, and the Kings wanted to get their hands on it. So they compromised with the new middle merchant class to get it, giving up some political power in the process, and giving us essentially middle class democracy. Of course, these dynamics took centuries to work out but work out they did.
Banks played a key role in the early process especially the Templars, who are conceded to have created the first international banking system.
If a Lord or Duke was off on a crusade these Templar banks offered to keep safe his gold and previous plunder. Banks as fortified establishments inside huge, safe castles could offer that service for a fee and there was a network of such establishments (and the Knights Templar could offer just such a network,) it meant that a credit of gold at one end of the network could be cashed at the other end of the network without having to risk actually transporting gold and risking theft or plunder from highwaymen and thieving employees.
But the larger point is impoverished or aspiring European princes suddenly had new wealth from the merchant classes and they promptly sought to use that wealth to conquer other lands and the world itself, seeking new wealth, plunder, cheap labor, commodities and slaves.
Banks played a central role in financing these wars and still do as monarch, both democratic and non-democratic, seek financing in the form of taxes, loans, land confiscations and control of lucrative trade routes and commodities.
This is the central relationship between the modern state and banks. This remains the central relationship between the modern bank and the United States government.
Banks finance our wars in that the United States has 14 trillion in debt and much of it is owed to the banks of the United States, such that these wars would not be possible without the loans coming from the banks which buy US debt, bonds and other instruments.
Which banks? The ones we all know Wells Fargo, Chase, Citibank, B of A, and investment houses like Goldman Sachs. And the biggest bank of them all is the Federal Reserve Bank. And citizens, too, buy these treasury bonds. So we are all in it.
A closing point to be made here is that just as most Americans owe some bank loan money or otherwise, so does the United States Government owe the banks a lot of money and more depend upon these very same banks to pursue wars, pursue much of its domestic spending, and to pay most if not all of its debts. Taxes and arms sales are the United States governments other sources of revenue. Tax income for 2009 was only 2.7 trillion, arms sales maybe 200 billion, and the rest is borrowed or printed, So you see the picture.
Let's have a closer look at how this works tomorrow.
Oct 18, 2010
Well to understand a bank, think of it this way: you put into a bank your hard-earned 100 dollars and we now want to know what happens to that money. Here goes:
1-The happy dollar multiplies like Octo-mom and by magic multiplies that 100 dollar ultimately into 1000 dollars.
That is to say banks are allowed to keep only 10 dollars on hand while loaning out 90 dollars and that loan in put into other banks and money is literally created by banks labeled "loans."
"If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000)."
(From the Federal Reserve Website)
Behind this transaction is the assumption is that most folks will not want their money at the same time and, if more than expected do, the banks can get needed funds from the Federal Reserve overnight at virtually zero interest rates (while charging us 4-6 percent.)
In a bank panic, as happened in 1929, this is called a run on the bank because the bank does not really have the 90 dollars. It has been loaned out to others who will not in fact be able to pay it back, in most cases, or have years to pay it back in a situation which calls for the bank to have all that cash on hand immediately-or as is the case in recent history the banks have gambled on derivatives and lost it all.
So the bank closes down, the depositors lose their life savings and the bank owners walk free.
But, aside from financial ruin here for the many, the important point to understand is that the 90 dollars and 900 other dollars were created out of thin air. It was not really there and most importantly was probably never there. It was money created out of thin air. But how do banks spend money they don't have?
First some losses can and will be covered by the FDIC, or re-insurers like AIG (remember them?) so banks feel free to gamble with depositors money.
Second, the Federal Reserve Bank which is, most people don't know, the chairs of the major banks in the United States. Yes, those same major banks in which we place our deposits. If any thing goes wrong these banks put on their federal reserve hats and borrow the money from the federal reserve system which in fact can just virtually order that the money be printed up and give it to the banks (to themselves) at zero interest rate. And you thought the US treasury had control over the money supply. Not.
So banks have a kitty which includes trillions of dollars, depositor funds, free federal reserve dollars, Fanny Mae, Freddy Mac, Sally Mae, and FDIC insurance if things go wrong and in the end the tax payer’s foot the bill for recurring financial debacles and no one goes to jail.
This is a system which produces boom and bust and periodic recessions and depressions, for a very real reason; it makes no financial sense whatsoever.
Every once and a while the bubble bursts and the real losers are the taxpaying middle class who lose everything. The banks don't lose, you can bet.
I know, this is discouraging news. But this is how the system works. It is a game of musical chairs inside a bubble. Last one without a chair in the chair-parade is the hapless taxpayer every time.
But wait there is more bad news for the gloomy glutton. But let’s save that for tomorrow.
October 19, 2010
Now what, you may ask, is the Federal Reserve any way? It is essentially the privately owned central bank for the United States. Other countries have them as well.
Taxation revenues are not enough for governments, we can see, to pay the bills, pay for wars, pay for citizen services, so governments, several centuries ago, and hit upon the idea of accessing other funds other ways. To wit:
1-To expedite borrowing from banks, the concept of the central bank was created (reserves for the Feds, to coin a phrase) such that borrowing could be centralized among the major banks in a given country. This way governments could raise a lot of money quickly in this centralized system and get at citizen funds over and above direct taxes. This worked for while until the advent of fossil fuels.
2-With the advent of fossil fuels in the last 125 years, population growth on the planet has exploded meaning that governmental costs have also exploded. Such pressures also has meant wars over natural resources to feed these burgeoning populations. More people are alive today that in most of our past history. 6.5 billion souls vs. a population plateau which has existed at 2 billion souls for centuries.
Earth's population is now projected to reach 9 billion by 2050--fossil fuels have made this unsustainable life style possible. Now this growth has its repercussions as I have described above and elsewhere.
In a word, our population growth rates will quickly outstrip the capacity of the planet to sustain such growth.
The manifestations of all this are easily seen: we are running out, or foreseeably, will run out of everything at this rate of growth.
But back to the banks. The current Federal Reserve system was created in 20th century to help finance all of the burgeoning needs. It was essentially a huge credit card system for Governments which needed more and more funds to meet the exploding needs of population and the related wars, for growth, to expand technology, for what can be easily seen as the most expensive and wasteful century in the history of the planet.
But such waste is, and was obviously, unsustainable.
Now the banks had government as their greatest borrower and, as we all know, if you owe the bank the bank owns you.
This is true of governments as well. But where is the money coming from that banks are lending to these governments? Mostly from our deposits in those banks, from "investments" in third world countries, from "printed" and manufactured dollars and arms sales. Thus, governments desperate to keep the ship afloat, access funds through direct taxation, through our own bank deposits and borrowing, and this Federal Reserve bank--all to keep this leaky vessel afloat.
The current "austerity" programs we are seeing all around the world, where Britain is looking at cutting everything, in France where cutbacks are creating riots, in Spain, Ireland, and Greece as well, are all debt driven political manifestations of bank debt owed by those governments.
He who rules debt, rules the world.
So you see this bank thing is no small thing at all. We are the Debt Driven Century spending and borrowing more and more money to prop up a financial system which is in dire need of serious reform.
See, told you only a gloom-glutton would like this installment.
But there are solutions. There always are.
October 20, 2010
We pause in our exploration of banks to put out some solutions (to preserve our mental health) and then we will return to our main topic.
If, as I posit, that virtually all of the western world is in debt to the banks, who in turn got the money from depositors like us, from printed money and from third world markets and borrowing, what is to be done?
Conservative and radical right wing elites in virtually all of the western countries have seized upon this debt situation to demand cutbacks which is really using the debt situation to achieve right-wing political objectives.
This is the "a crisis is a terrible thing to waste" philosophy being used politically to demand the re-impoverishment of the middle classes in all of the countries of the west--to the benefit of the banks, the stock markets, and the super rich--because of the debt that is owed; we want to know to whom are these huge sums of money owed to?
The answer in the United States is Wall Street, huge hedge funds, the super rich investors, international banking interests and the like. There is not a shortage of money, rather it is its concentration in the hands of one percent of the population across all of the countries involved which constitute the problem.
Trillions of dollars exist in those hands as they put pressure on governments to dis-invest in their own middle classes, under so-called "austerity" programs under pain of not being able to borrow any more money from them in the future.
Right wingers in those countries are happy to oblige because it fits their political agenda.
These "bad economic times" is great cover to strike out at immigrants, at the middle classes, at minorities and at other historical enemies, under the guise of setting the economic house on a better footing.
This is false. In fact, it will quickly, within three years, bring on a second, more severe recession, probably a depression, in the entire west. We will also drag down China with us and the depression will be quickly world-wide in scope. After all, who will be buying all those Chinese products if the West's middle class population is jobless and homeless?
The financial engine of the world will grind to a halt, and worse:
1-We will enter a period of alternating deflation and inflation, permanent under classes in many countries, increasing concentration of wealth in fewer and fewer hands, riots, increasing warfare as countries seek to gain resources to feed their populations.
2-New debtor laws with interest rates rising (30 percent even now on certain credit cards, which means bank debt can never be paid off) and a permanently indebted class comes into being. Only a banker could love this scenario.
3- Bankruptcy laws which were re-written in 2008 in the United States which gave the banks and credit card companies the right to seize 25% of a family income in bankruptcy proceedings for an extended period is a horrible example. This is a stark statement in law which creates a permanent debtor class.
So now what will happen and what are the solutions to all this? Can it be headed off before disaster strikes?
Well yes. Let’s look at what likely scenarios might be which fall into two groups: constructive solutions and destructive solutions.
For today, let’s looks at one or two of the constructive ones.
1-Restructure, default, renegotiation and forgiving of debt national or personal are the first possibilities.
It happens all the time. Argentina defaulted on its debts and now Argentina thrives despite claims that such default would ruin the country. The fact of the matter is that world-wide current debt cannot be sustained or paid back under current terms and the social costs are too high even if it could be paid back. (Note this is what is and will continue to happen to mortgage debt in the United States. (The money to pay it back is not there.)
Restructure is an obvious eventuality. Restructure loans national and individual. The issue is that no company or country ever savaged its middle class and quickly returned to prosperity. One cannot cut one's way to prosperity; especially cuts which benefit only the few.
Shared prosperity is the only modern model that has really worked.
Financial blood-letting and "cutbacks" is a financial fantasy born in the bankers' heart.
2-Default is the other obvious way to go. In fact, in the housing sector in the United States, this aspect is already under way. If the people, or countries for that matter, cannot pay the banker debt, they default.
But what are the consequences of such a mass event financially? Default happens as anger at the system becomes overt, where trust in the system has eroded and citizens rise up and decide they will no longer play by the rules that the bankers themselves appear to have broken.
The social fabric will be rent and there will be the need for some serious needle work along some other lines. But default is already happening--and needs to happen. It is inevitable. In fact, threaten the bankers with default and restructuring most times will happen.
Tomorrow we look at still other possibilities and ways out of the mess.
October 21, 2010
Loan modifications are on the table now, but there are problems with it . The banks actually make money on foreclosures since many of them also own the loan servicing providers. Any chance of a modification a year ago, therefore, was moot and in fact did not happen for most.
What has changed, as of today, is that banks, now can make money on foreclosures still by charging fees and costs to these loan servicing companies they own. They have added other sources of income since then as well. (Ever wonder where those pay-day loan companies suddenly sprang from? The banks figured out they could charge 20-30 to a hundred percent interest to poor people and many of the major banks finance these little enterprises and no one complains.)
So money pours in from pay-day operations, from foreclosures since the they own the loan servicing organizations, they can also make money on modifications now since the Feds, mainly HUD, is now offering loan and loss guarantees for modifications which meet the guidelines, (in California 31% of total expenses) On top of that, if default occurs anyway, after the loan modification, there is Sally and Fanny Mae plus FDIC, (the latter three institutions now owed, repeat, owned, by the Federal Government,) meaning our money will be funneled to the banks via this route as well. And guess what, despite all this, the Federal Reserve is now also talking about a trillion more to buy "toxic" assets, there is still no credit coming forth to individuals and small businesses. The banks are taking the money and hoarding it, paying huge bonuses, and buying up small banks and the competition, with our money.
So the banks will do just fine, no matter what.
The homeowner has one weapon in his or her arsenal--walk away and default after living in the home mortgage-free for six months to a year.
The credit takes a hit but that may clear up in two years, but by then you have the cash saved up for essential needs, or declaring bankruptcy can forestall foreclosure altogether.
These are options not just for Americans, but for governments as well. We can expect to see more and more of this happening with governments as it becomes clear that most governments cannot, in fact repay their outstanding loans and face a population rebelling and rioting against "austerity" programs imposed by the banks on governments-cut backs which will, in fact, in two-three years, bring on yet another recession. Then the bitterness meter will have hit the roof, possibility endangering civil society itself. France is just the tip of the iceberg.
So destructive solutions will surface unless the monied classes realize that shared prosperity is best way to go, not hoarding gold and stacks of money in their vaults.
This realization is what saved the system in the great depression plus World War II. But elites today are not that smart. After all, the Marshall Plan was the attempt to re-build markets in Europe and Japan after war destroyed those economies. That was smart and it paid off in that these countries needed everything after the war and became crucial markets for American companies.
Now as I have mentioned in another blog, the best example of a constructive model is the German example. See my blog on "What America Must Do to Survive" on this site.
There are models and examples of solutions which are possible, constructive and within reach.
Moreover, as can be seen from this analysis, governments and government spending are not the problem, they are mere symptoms of issues that now face everyone, individuals and institutions.
Other constructive solutions I have proposed include:
1-Wall Street cannot be trusted with depositor's money, (remember Wall Street investment houses are now banks as well) so the thing to do is to deny these corrupt institutions their life-blood, our daily deposits, our 401k's, our labor union pension funds, and city and state government deposits as well.
Money is the only language they understand. Don't continue to give them ours.
No real interest will be forthcoming and remember the system has not changed one wit, financial reform bill or no. A threat to take the money out will work.
Take the money and have it invested locally or insist with your union, your city, your state, or your employer that funds be invested locally with local banks, coops, savings and loans and the like. Jobs will return and this economy will recover. Individuals can do this right away. Lobbying will have to take place to get the rest done and perhaps a state referendum.
If not, pass the hat, get yourself a stick and a red bandana.
2- A second thing to do after dealing with the money funnel is to deal with political minions who are prisoners of monied classes. Start with the referendum, and statutory law.
More on that later.
October 24, 2010
But first let’s take a closer look at the statement made above that banks make money out of thin air.
A deposit of 100 magically becomes 400 dollars in that banks take in the 100 dollars, and to meet reserve requirements, must keep, say, on hand 10 dollars. The remaining 90 dollars is lent out. The borrower takes the 90 dollars and deposits it into his or her bank and that bank does exactly the same thing--keeps 10% for reserves and loans out the rest.
Note there is something very odd about all this. To wit:
1-No new goods are being produced here, only money changing hands among banks.
2-This "multiplier" expands the money supply in what, to the very astute, can easily be seen as a gigantic ponzie scheme which will collapse periodically, domino-style, as exemplified in the 2008 wall street collapse. Even a few depositors demanding all of their money at the same time will cause the whole system to collapse, and it did.
3- The banks can take the risk because they have the Federal Reserve, the Government, FDIC and the tax payers and others to bail them out, as they were bailed out just this way.
4-Also we might ask what is all of this money backed by anyway.
Well, sit down for a second, shock might cause you to collapse. This is all backed by nothing.
Currency, this paper money we use, dollar bills and the like, used to be backed by silver or gold. That is, until 1971, you could take your dollar bill and go to the bank, or the government and demand a dollar in silver. They were then called "silver certificates." Now they are called "Federal Reserve notes. That should tell you something.
Also for international trade there was also gold, in which nations could demand gold in the place of IOU's or paper currency. A nation was obligated to keep gold supplies in amounts matching the amount of paper currency in circulation. (This is what FortKnox is supposed to be) Let's smile together.
In 1971 Nixon took the US off the gold and silver standards and the value of paper currency was allowed to float and its value then became whatever governments, individuals or countries thought it was worth or negotiated and/or agreed to.
Does this sound like a good idea to you? Me neither.
So paper money becomes subject to whatever the market will bear and becomes subject to the tender mercies of currency speculators with large sums of money to take advantage of fractions of a penny differences in currency values among countries to make even more money.
Governments sometimes step in and try to control the value of their currency, sometimes keeping it artificially low (China) as compared to other countries currencies so as to gain a trade advantage, namely exports. My goods are cheaper than your goods and my people, therefore, have jobs and your expensive goods don't sell and your people get no jobs and layoffs.
Finally, this paper currency is now severed from both gold and silver, has no actual goods of value representing its value, and can be artificially expanded and contracted by banks and countries, becomes the play thing of banks and wall street, thereby become purely financial transactions, not representing the production of actual goods and services and, artificially, become the economic engine of the world, where disaster is, and has been inevitable, periodic, devastating and recurring.
The clash over the currency and money and the quantity of currency or money in circulation is not an academic exercise. The struggle is between debtors and creditors. Anyone taking a look at economic history will quickly see that is the case.
Creditors loan me 100 dollars and if there is an expansion of the money supply there is inflation, too many dollars chasing too few goods (remember that from Econ 101? So it takes more dollars to buy the same 100 dollars worth of goods, say 105 dollars. The creditor, read here the banks, lose from their point of view, 5 dollars and get the loan paid back in cheaper dollars.
No, they would rather have a deflationary situation where there are fewer dollars in circulation so that those who have hoards of cash can buy up houses, loans and other items at less than their initial dollar cost. Say my house was worth 100 last year but only 60 dollars now, who wins here? This is what is happening today and why. The banks are making money buying up our deflated assets, houses and bank accounts a situation they themselves created precisely to pick up cheap less than original cost assets. They are making trillions from the homes they purposely foreclosed upon with the aim of making money off the deflated prices now current.
The banks win because they are the only ones with hoards of cash and can buy that house at 60 dollars not 100 dollars-cash. And if they don't have the cash they can borrow from the Federal Reserve to get the money with little or no risk in doing so.
Life ain't fair; never has been since the money system has looked like this.
So where are we? This last recession is not over, there's more to come.
But heads up we can get through this. But solutions have to wait for tomorrow--A little suspense never hurt anyone.
October 25, 2010
There are several solutions on the table. Above some solutions have already been suggested. There are others in my blogs on Obama, and in the blog "What America Needs to Do To Survive."
Here is a quick summary, and then, I will add more about what to do with the national and the international banking situation.
1-We are headed for a new deep recession/depression where defaults and renegotiations will surely occur. This must be organized in a planful way. Individuals and governments must now start to insist that debts be forgiven or drastically altered to affordability levels, rather than insisting on repayments which is now decimating the middle class of the entire western world.
If these austerity measures continue there will be no one to lead us back to recovery because the middle class of America and Europe will not have the money to purchase the goods--if there are goods produced. Why? How can the goods get produced if the banks won't loan us our own money to buy the machines or invest in the economy.? Rather we will see deflation in prices (we already have that) or rapid increases in interest rates or inflation. All of these are bad outcomes.
2-We need to be sure that large banks and investment houses never hold us over this kind of barrel again. We need to reform the financial systems of the western world (they are all now in it together protecting the money they got from the middle class in the first place.)
We should in most instances have to rebuild economies along the lines of the German example. A major reason Germany has survived the recession more or less intact is that it has a strong local, citizen-driven, community banking system. We need to follow that example in the western world. It a model that is sustainable.
3- We need to free ourselves from the monopoly banking and investment houses with a new model called "free banking." That is to say lets us treat these financial institutions as we do other enterprises, no bailouts, no Fanny and Freddie Mae (these are government bailouts in disguise) no quick fix loans from the Federal Reserve, no Dollar-Fiesta Handouts like in 2008. If they fail, they fail like any other business.
The Federal Reserve should put trillions into the Community Re-investment Act and bypass these characters altogether. (Look this act up. It is easy to see this act will be under attack in the new Congress because it is designed to do exactly what I am suggesting.)
4- To be taken seriously we should organize institutional power from cities, states, individuals, and pension funds and demand community investments of all kinds. Congress would love it since Congress represents mostly local communities. The banks would not support this for the sole reason it would cut into their profits and their investing in China.
5-Change the ERISA laws to accommodate these much-needed changes. If the Republicans like the free market so much lets administer some of that medicine to the banking system, to wall street, and the international profiteers.
Is all this possible? You bet. And it can start with each of us making the common sense decision to take our money out of a system which is exploiting us with our own money.
Make no mistake, change will happen and is already happening, people don't have the money to repay crooked loans made in a crooked monopoly system.
The only real issues are whether all this will happen in an orderly or a disorderly way.
I, for one, do not relish the disorderly way. That will be ugly.
Next time: Let's go down for more detail on all of this.
October 26, 2010
Speaking of disorderly I read in the papers that investors who got burned in the housing toxic assets caper are suing to get their monies back. This could tie things up for years and in effect, depress the housing market along with this kind of legal action. This is disorderly. If the investors win large the banks could see their reserves depressed or be eliminated preemptively, even before a case came to final determination. Their story can and could be: "We can't lend out since we don't know what the legal liabilities might be." An already depressed economy becomes more depressed and life looks glum indeed. No loans for you and me and our money moves overseas.
If the banks win the legal cases expeditiously then the investors take the financial loss and won't invest in other worthy job-creating projects and guess who will then have to step in--our friend the Fed and then us tax payers take another round of unemployment perhaps or at least have to finance, in the end the Fed's efforts, either through a stagnant economy, continued joblessness or rising inflation. In all of this there are no actual goods being produced, merely money hounds exchanging dollars and balance sheet assets, toxic or other wise.
October 28, 2010
A short note today: How much daily bad news can an optimist take? The note here is that in the last 35-40 years Wall Street firms, let's take Goldman Sachs, and has grown from 12 million in assets and 45 employees to the bemouth we know today.
How did that happen?
Wall street now receives over 5 trillion dollars a year of the American economies 13 trillion dollar economy-38 percent!
Why are we are sending that much money to them? We did not used to do this. So what happened we may ask?
How did wall street become the monster it is and too big to fail? That is the most important economic story of the last 30 years. America has essentially been looted of its basic production capacity and this has been replaced by a finance industry which is 40 percent of the entire economy and produces nothing except processing wealth from the middle class to its own coffers.
A society would have to be out of its mind to do this. This was all done with the promise that in 30 or forty years your money will be returned with interest. Except the 30 or forty years are now up and what happened? Sorry, not only was it not returned but 40% of our middle class wealth has disappeared and the explanation is "we told you investments are risky and you should have read the prospectus carefully."
Secondly what has occurred is that the enormous wealth is being used to a hostile takeover of our political systems and politicians, who could not and can not resist the bushels of money wall street funnels to them.
The substance of the republic is undermined. It reminds me of what happened in the Roman example: hoards of the poor in the cities, while the rich got richer-and that failed. This one will too.
But what to do about all of this? This financial debacle is not just an American failure, but this American failure is now global, most of Western society is involved.
A global problem now requires a global solution.
We now ask what might that be?
October 30, 2010
A global solution should first take a look at the current world finance and economic structure.
The current strategy is to dis-invest in the middle classes of Europe and the United States in order to pay trillions back to the monied classes is sure to end in default, renegotiation, re-structuring, modifications, and or forgiveness of debt.
If not we will get inflation, deflation, social unrest and general economic chaos with the rich building compounds, isolating themselves behind walls to protect their wealth while the rural and urban masses became poorer and more and more resentful.
Therefore, the issues go beyond the merely economic but reach the social, the political, and the geographic and basic resource allocations on a global scale.
Now in this blog we can start to look at what might work. The current WTO (World Trade Organization) attempts to allocate income based on trade. That in fact has been a methodology whereby wealth is transferred from the poor countries to the rich countries; where poor countries are stripped of their natural resources, their labor and these are consumed by the rich countries at highly favored trade agreements governed by the WTO.
The finance structure of all of this collapsed in 2008 revealing its weakness as a model for the future.
So what is to be the structure of the future? Mention this topic and people put a spooky finger to the wind and say "India and China will take over the world."
Let's have a look at that proposition. First China. China has tremendous economic growth rates of 5-15 percent and that is its strength. It has 1.3 billion people to feed everyday and that is its weakness.
Suppose you had 1.3 billion mouths to feed everyday? That is a tremendous burden. The US has 330 million or so as does Europe.
The Chinese will flatten out in resource allocations-coal, oil with population at about 2060 and replace the United States as the most voracious consumer of the planet's resources. This is bad news for China. Bad news because it is not sustainable.
The same argument can be made for India with its billion people.
Now Europe too, will die by demography since most European populations and that of the United States will disappear by 2060 or become distinct minorities in their own countries. The demographic handwriting is on the wall.
Now what is missing in this financial scenario is the likely emergence of Africa. Africa has a 1.3 trillion dollar economy, 60 % of the world's arable land, a young population, 52 cities of a million or more (as many as Europe) and rising disposable income. Africa has infrastructure issues but has enormous resource wealth (the Chinese are investing heavily) cheap energy, land resources, an labor pool in which 75% of young people are getting at least an elementary school education (See the Mckinsey Global Institute's report on emerging Africa) and a finance structure which is de-centralized (for now) and therefore, immune from central bank debacles. (Note however, centralization is being insisted upon by central banks from other countries.) But retail business are the basic businesses of the continent aside from the resources and extractive examples.
Add Africa to the mix and a path to sanity for global finance seems more possible.
A quick outline (we will do detail later) would state that the world financial stage must be protected from the predatory global banks. They merely suck the world dry and give nothing in return.
A more decentralized model is required, such as the German Community Bank system, and the Community Banking system in the United States. Re-instate the Glass-Steagall Act and get the investment houses out of the banking system once and for all. That is the path back to sanity.
Re-invigorate local and regional banks and let the Central and large banks live by the rules or die.
More on all of this later.
But for background one has to understand the real history and nature of banking in our own backyard--The United States. There we can see what our forbearers did to curtail the power of banks. They were seen as a threat from the very beginning in this country by none other than Thomas Jefferson who warned against them time and time again.
"Banking establishments are more dangerous than standing armies."
In fact the revolution was fought against England not over tea bags but over English banks who wanted control over currency in the new world. The colonies were printing their own currencies and prospering.
Battles over control of currency has occurred time and time again in our history as the banking industry sought to control finances, debt and the population. Now that battle has been rejoined as it was waged time and time again in American history.
I have had questions of exactly how do banks control much of the economy and some of you have suggested that I have been too hard on them.
But here is why they have been so powerful in American history and continue to be a threat to democracy and cannot be trusted with our money.
Think about it in the following examples:
1-If you make a million dollars today, by earning it or inheriting it, the first thing you do is take it to the bank. The bank now has your money to use anyway it sees fit and gives you a piece of paper every month telling you how much interest you are earning. But the fact is that your money has been loaned out to someone else who might take years to repay it.
2- The same example is true for individuals who put their monthly paychecks into banks, send off their 401k payments, etc, all landing into the banks bank accounts.
3-The same example is true for governments as well. They put money into those same banks. Banks have come to point where they have everyone's money to play with, with few controls or regulation over what they do with those funds.
One, in this, cannot underestimate the volatile situation where greed and large sums of someone else's money collide.
It is always disastrous for you and me.
But why, I have been asked, doesn't the government do something about this?
That is a good question best answered in the context of a current situation. There are two answers:
The chair of the Federal Reserve has announced the intent to put 600 billion new dollars into circulation thereby making dollars cheaper and thereby increasing our exports and thereby creating new American jobs.
The validity of this proposition aside, Bernanke has received a firestorm of criticism for doing this from the banking industry and wealthy individuals.
Why should this be so? See my above example, but this is the eternal battle between creditors and debtors. Creditors, the banks, want fewer dollars in circulation because that, makes the dollars they hold, worth more. The more dollars in circulation makes the dollars they hold worth less because more dollars with the same amount of goods equal inflation.
So the monied classes see this move as a direct threat to their wealth.
And this view is shared by the monied classes world wide--they all have the same interest in reducing the amount of money, in this case dollars, in circulation.
Now what is also important, but not generally discussed, is how these hostile reactions from the monied classes carries with it disguised threats and reveals thereby the true source of their power over the state and individuals.
The reaction they have can be measured in the price of gold. When it goes up, and it has, the monied classes are warning governments, individuals, politicians, corporations in the following way:
"If you support loose credit, more dollars in circulation, and don't back austerity programs we will simply take our money and put it into gold. We will take our ball and go home if you don't continue to let us win the game of stripping the middle classes of their wealth, wealth we got from them in the first place."
You will have no loans, no money for growth, industry will grind to a halt and there will be social unrest, perhaps revolution and modern society will become ugly. This is the out and out threat being enunciated here.
And it is no idle threat, They could do it and they did it in 2008 and panicked the US government into giving them 800 billion. This ploy works.
The debtor is obliged to do what the creditor wants him to do,(in this case the US government,) even if it means shooting the family dog--or in this case impoverish their own people and their own middle class.
In this only the politicians and the wealthy survive, everyone else, in the name of austerity, are obliged to help the wealthy protect the value of their dollars and their wealth. These are always the battle lines as societies have battled the banks and the wealthy for control all through history. The lesson is clear: Don't let a few people take over control of the people's wealth.
I know, astonishing. But this is the way things really work.
After all, it is an incredible act to punish your own people in these ways. Governments often will do it until the people revolt. (This is the true story of the reasons for the American revolution.)
Stories about "protecting the future for our kids," about "fiscal prudence," are smoke screens especially when we see the same happening to individuals in the foreclosure area, where families are paid small sums to clean up their own houses for the next occupants and then turn over the keys to the local sheriff's eviction squads operating as minions of the banks.
It doesn't get more stark than this.
Why and how does this kind of thing happen now, every day in America?
Jefferson's warnings about it echo down to us. Andrew Jackson's hatred of the First United States bank now make more sense. The crash of 1929 reverberates and we can see some of the causes behind it.
And now we face yet another, more global version of those same historical battles. It happened in Rome, and all down through history.
This time much depends upon the outcome since we are a global economy now.
So now we ask what is likely to be the outcome of this battle in our super global context and what is a stake and what are the remedies?
Dec 12, 2010
The global finance situation is as follows:
The western countries and the United States are busying decimating their middle classes at the behest of the banks and are, in essence, setting up their societies for long term recessions and or depression.
But note in the east, India and China, South Korea have not undergone any recession at all, and in fact, are still growing at 5-10% a year.
Why is this? Why are we in collapse and they are growing? The first and simple explanation--they have not allowed private capital and wealthy individuals to control their currencies. Their governments do.
What we are seeing is that when you have private banks (note here that the Federal Reserve is not federal at all, it is a private consortium of the most powerful banks in the country. They deliberately gave the organization that name to conceal it's private status.) It is an independent organization, despite the fact that the chair is chosen the president.
What we have then is our currency being managed in the interest of those private interests, our huge banks. Clearly bad things happen when you have your financial structure organized this way.
This is not the case in India, China and the east. Governmental controls, which we had in this country until the last 30 years, has been dismantled and we see what occurs as a result.
In contrast the Chinese people, save 20% of their income, much of it factory workers sending money back home to the rural areas, and government control means that political leaders have to manage currency in the best interest of the mass of people or risk rebellion or revolution. It also means that currency is not seen as profit center by private interests, so costs are lower. You can't have big bank making billions of charging the population to use their own money and expect things to go well. They don't.
The governmental example has no profit motive built into the structure of currency management and governments tax just enough for governmental expenses and some savings. Plus, savings rates in China especially, are high, but the government does not try to make a profit off those savings. This was how the United States was organized early on, until the private banks came in and took over, got beaten back and then they took over permanently about 100 years ago and we got the great depression as a result, wars, and boom and bust debacles.
In contrast again, note China today is not a warring nation partly because it does not have the profit motive so many of our bankers have in the profits that war brings.
True, China has rising inflation at 5% and the government can and will respond. The Chinese people don't want to pay half of their income on food as they have in the past.
But the point is that the government can be responsive. This is not possible with the currency is in the hands of the super-wealthy, the banks and wall street.
Second, under governmental control of the currency, the government can be responsive to global trends which move quickly and can manage its global finances strategically. The United States cannot do this.
The proof is in the pudding: China and India have prospered with their system and we have suffered near collapse under our system and are now decimating our own population to pay exorbitant debt back to banks and the rest of that crowd.
Yet Americans seem to be unaware of all this and still seem to believe that our system is better than the rest of the world. Huh?
But what to do? That is the question.
1-29-11 The Chinese fire a shot across our bow
The major Chinese bond rating agency has announced a further downgrading of American bonds and debt.
There is the clear threat that quantitative easing from the American Federal Reserve may set off a currency war and there is the strong suggestion in this Chinese report that the United States should institute strong austerity measures to sastify these requirements.
Meantime Timothy Giether is in Davos at an ecnomic conference of the most of the world's business powers announced there are no plans to institute such an austerity plan in America, citing that such an austerity plan will curtail recovery hopes.
Apparently the rumble is on and currency confrontations between China and the United States are on the way.
What is at state is that cheap American dollars reduce the value of the Chinese investment in American treasury and bonds and also give America an export advantage over Chinese goods. At least that is the fear.
Trouble ahead. See link below for article on the Chinese statement.
So I am asked what to do about all this?
Lets start the conversation with a few talking points.
What to do depends upon what we identify as the drivers in the global financial process. Once we identify the drivers we can move on to solutions. Let's talk drivers and then you can think about what you would do.
And then I will have a go at it.
Major financial drivers in global finance:
1-Rising population: There is no question that population growth is the major driver.
Most projections are clear: by 2060 the worlds population wlll be close to nine billion souls, an unsustainable number of people. Right now we are seeing food riots and energy and job riots with the population we currently have.
Population also cuts both ways--on the one hand we have too many people in certain countries and too few resources, and, in the rich western countries we have too few people and these countries have to import immigrant labor to maintain their life styles. This is happening in all of the western world including the United States, all of Western Europe, the Soviet Union as well.
Prosperity has been accompanied by a plummeting birth rate in the west along with the decimation of the male breeding populations in the west as a direct result of young men being killed in two major wars and over 10 other wars in this century; and now including Iraq and Afhganistan.
War, it seems, has a devastating effect upon having adequate population growth rates to sustain a society.
Now population growth has had other implications, too numerous to note, here but here are a few.
a. Skyrocketing population grow rates were possible because of petroleum, pure and simple. This new energy source of the last 100 years or so has made growth possible from a stable level of two billions people to an explosion to 6.8 billion people currently in slightly over 100 years.
Populations far apart are now exchanging goods, labor and energy because petroleum is there in gas, cars, busses, planes and trains which allow food production to be worldwide in scope. Figs grown and picked in Greece can be own our tables in San Francisco 24 hours later.
Of course, this supply train is also very vunerable. With "just in time" inventory stocks, grocers have only five days worth of food on the shelves. Oil supply lines critical to the day to day survival of whole societies now which are totally and dangerously dependent upon petroleum to survive.
We have boxed ourselves into a corner, whole societies now dangeously dependent upon this source of energy, to the point where war regularly occurs over it.
b. Growing population has meant that govenments have incurred skyrocketing expenses in order to house, feed and supply the new souls.
They have failed miserably and have not kept up. Povery, disease and a host of other bad things are happening as a direct result of the growth. It is a huge and rising expense for governments to keep up and they have had to mortgage the house so to speak to pay for it, making them easy prey to the banks and the monied classes. That is where we stand today and it is getting worse.
c. A third impact is that the some societies have responded to these new pressures by centralizing and instituting authoritarian controls in order to both control resources and control the unrest of their populations rising expectations.
The so-called democratic countries are in stark contrast to the authoritarian models, best represented by China. The question at hand is which system is best under burgeoning population scenarios such as we have today
Many see that the Chinese model is prospering while the western finance model is floundering. Why is that? Which system is most stable for global finance purposes?
A disturbing conclusion is becoming apparent--which does not involve communism vs. capitalism, because the Chinese are definitely capitalist in their outlook. It is the fact that privately run banks having control over money is bad idea as in the case in the west.
The Chinese example where the government controls the money supply is out performing the American example. Perhaps then control of the currency ought to with the United States government, with some neurtral body or should we be reducing our dependency on currency substantially.
Some countries are looking at this alternative, namely Russia and China.
Meantime, even the Wall Street journal is warning about revolution and class warfare in the United States
With the OWS movement at last the real issues are on the table. Money in the last 30 years has come to dominate the world. The solution is simple: deny the banks the money which they in turn use against us.
Now that the real issue is joined, and is being recognized worldwide, two questions loom: 1) How do we extract ourselves from the tenacles of wall street and the corporations; and 2) What do we put in their place?
The first step as I have alluded to above is the stop giving the banks our money everyday step. Close your bank account and move your money to credit unions, coops, community banks, small local banks and barter banks.
Establish family banks and I have suggested in another blog on this site.
But note the banks will fight back and have anticipated this move. They have made it extremely difficult to close your account and want to keep your money.
For details on the traps they have set in this regard see the link below:
The article makes it sound like it is merely an annoyance the banks are imposing upon us. It is not. They have invested billions in making sure they keep control of your money and to keep it in their pockets.
Don't fall for this. What you can do if your bank has control over your bill-paying, your checks, your savings and you don't have a lot of time to deal with the disentanglement process, is to insist that your local credit union do all this for you.
When you switch phone companies, or tv companies they handle this for you. The big banks don't because they want to keep your money.
Ask the credit union of coop to do this for you and be willing to pay a small fee. That way dumping the big bank is worry free. Or OWS can have someone do this for its members.
Next you want your local city, your state, your labor union, your employer to cease putting your money into these same big banks. Keep the money local where you can get at it, and insist that the money be invested locally to create jobs. Tell the millionarire liberals they should do the same with their money as well.
I promise the mere threat of this (a run on the big banks) will, with as few as 100,000 people doing this, initiate enormous changes. Nothing scares a banker more than you coming to get your money.
This is the single greatest thing the average citizen can do.
A second thing to recognize and to do is to realize what OWS has already achieved: They have created a sustainable village. This had never been done before in protest movements.
This is an alternative social organization built on the streets. They have organized in committees just like a small town, have a treasury-225 thousand dollars accumulated. They fed people, do PR, make decisons, love and protect one another. They have a functioning political process and can act very, very quickly. And they have a model which is being replicating around the world. They have a supply of people, of motivation and have captured many different points of view.
No other protest movement has done this and this is what makes this movement dangerous to elites--its organization makes it sustainable. Of course winter is coming that that will be a test. The solution is simple move it inside and stream it to others in other locations. This is the first test of my technological villiage idea, (see my blog on this site) and the first step of wedding technology, control over finances has been taken. Not complete but an idea once arrived is impossible to put back into the bottle.
This is also a verison of my Family Bank idea ( see the blog on this on this site)
Now the next step for QWS to survive is to have participants and others take some of the money they have taken out of the predatory banks and put it into a OWS Peoples bank.
Believe it or not a OWS Peoples Bank organized as a non-profit can do everything the predatory bank does and has the added advantage of providing sustainability to the movement. They can stay on the streets indefinitely with this model.
If those with jobs were to put their paychecks is this Peoples Bank the funds could be used to make micro loans to those on the streets, (to be paid back) and allow the movement to grow a war-chest for additional growth.
In short, a successful OWS understands it needs to be a small working village to continue to sustain-it must take care of most of the street people's needs, those on the front lines.
A Family Bank is also something people should look at in addition to the People's bank. This is simply pooling resources to sustain the movement over time and is an alternative to predatory institutions.
Doing these simple things, especially if global, will have an enormous, and immediate impact.
The next steip up is to get rid of the private banking system and in its place create a public option. The best example of a public non-profit banking system is the german example.
For insight on the German example of Community Banking see the link below:
This article outlines the option to private capitalisic banking-publically owned banks as seen in the German example. The Germans, because they have community banking, did not go through the recession as we have. Their community banks did not gamble with depositors money and keep the money local to provide financial supports to local communities. That is why the have the money to bail out other countries.
We should dump predatory private banking moguls who use our own money against us and go public. Why allow private individuals to grow obscenely wealthy off our money?
What minting a trillion dollar coin really tells us about our banking system.?
"Amid the cacophony of giggles and outrage over the coin plan, however, one liberty-minded blogger identified the real question Americans should be concerned with in this ordeal: How can the privately owned central banking cartel misnamed the “Federal Reserve” conjure infinite amounts of currency into existence out of thin air and charge interest on it, all while telling the elected government that it is not allowed to do the same? Why can the Fed create trillions of dollars to shower on its banker cronies worldwide but the government must either tax or borrow?
The issues strike at the heart of most of America’s current economic problems. “If the Federal Reserve had allowed Obama to print up a debt-free trillion dollar coin, that would have set a very dangerous precedent for the Fed,” explainedThe Economic Collapse blog, which covers financial and economic news from a generally pessimistic perspective. “The American people would have realized that the federal government can actually create debt-free money whenever it wants and that it does not actually have to borrow money from anyone.”
Creating debt-free money, of course, would put an end to the current usurious system in which the Fed banking cartel creates debt-based currency that must be repaid with interest — even when borrowed by the federal government."