The Weiner Component #117A – The United States & the Eurozone: Growing Interdependence: Working For the Common Good

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

Countries using the Euro de jure Countries and...

Countries using the Euro de jure Countries and territories using the Euro de facto Countries in the EU not using the Euro (Photo credit: Wikipedia)

Toward the end of the year 2008, while George W. Bush was still President of the United States, the Real Estate Bubble exploded in the U.S. causing phenomenal economic misery throughout that nation and, on a slightly lesser level, throughout the Industrial World.  Many of the major European banks and many European citizens had purchased and held onto Hedge Fund Real-Estate bonds that now became worthless or nearly worthless. In essence the entire civilized world took a downward economic fall. This included for both banks and many individuals, particularly in Greece, Spain, Portugal, Iceland and Italy. In fact the three major banking houses in Iceland all went bankrupt. Some nations fared better than others but all were hit to some extent.

The real estate hedge fund sales, dividing up mortgages into microscopic parts, selling them through numerous hedge funds, and continually driving up real estate values,   had been going on for over thirty years. The process had existed through the entire careers of many bankers and investors. It had been a traditional safe hedge or investment which paid reasonable dividends. Suddenly all this ended with trillions of dollars’ worth of bonds being virtually worthless.

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The Federal Reserve tends to supervise the United States and the European Central Bank controls the Eurozone. They can add or subtract money from within their domains. Unfortunately this process can work toward solving economic problems but within a relatively slow period of time.

Economics tends to be a loose science that seemingly becomes better understood as time and situations happen.  Economic recovery is a gradual process and the FED or ECB does not have total control of the tools of recovery.  In the case of the United States the legislators, whether they understand it or not, control fiscal policy and by some of the laws they pass can hinder or aid recovery . In the case of the ECB there are 19 separate nations, with separate histories, languages, and a sense of nationalism, that have agreed to cooperate together with a single currency, for the mutual benefit of all of them.

Some of these 19 nations are currently in a dire economic condition with high unemployment and heavy debts exceeding their GDP and undergoing extreme austerity as they attempt to pay off their killing loans to those members who have supported the bailouts of their economies. Greece, for example currently is the worst off of all the nations in the Eurozone. She has 25% unemployment, has been bailed out at least twice by the ECB and is needing another loan in order to not go bankrupt.

In addition the agencies within each country that control the currency flow, and can increase or decrease it by their actions, are the banks within each nation.  These operate separately and for profit. Under both the Federal Reserve and the ECB the interest they can charge is largely controlled. They, however, until the end of 2008, were the instruments that filled the void where the societies needed freer flowing cash. They did this for three decades and finally continued forcing the process in such a way as to bring about the recessions of 2009 throughout most industrial nations.

In the United States the Federal Reserve, despite the actions of the Republican led House of Representatives whose policies tended from 2011 on to shrink the size of the Federal and State Governments creating even more unemployment, was able by creative Monetary Policy to work toward improving economic conditions within the country

The Federal Reserve largely solved this problem for the United States by both adding money at the rate of 40 billion dollars a month to their economy and by buying up 45 billion dollars a month’s worth of mortgage paper. Without ever announcing what they were doing the Fed forgave the mortgage holders their property debts. This, in turn, added much of this money to the cash flow as it was spent on new productivity rather than retiring debt.

The European Central Bank is currently facing a similar problem; they are currently facing the beginnings of deflation. Their GDP is actually decreasing while their population is increasing. The ECB’s immediate solution for all 19 nations in the Eurozone is to add 60 billion euros to the overall economies every month until September 2016. This is a giant economic stimulus plan that will hopefully boost the sagging economies and fend off deflation bringing about recovery.

Will this help countries like Greece, Spain, Portugal, and Italy who are currently following intense austerity programs in order to pay back their debts to other Eurozone countries?  This is an interesting question?  These nations have been directly aided by the ECB.  At different levels they are undergoing stringent living in order to pay off individual and government debt.  Will the people in these states continually be willing to undergo a lower standard of living than the rest of the Eurozone?

Greece, which is probably in the worst shape of all of these countries, has voted No in its last election. Their new government, with the support of the bulk of their population, is currently attempting to negotiate an easing off or forgiveness of some or all of the debt.  Will they succeed?

If the negotiations break down and nothing is resolved then Greece will be forced to leave the Eurozone and probably, sooner or later, declare bankruptcy and the ECB will collect nothing. If the ECB attempts to force payments from Greece, who currently needs a further bailout of a billion or more euros and attempts to make the repayment even more stringent than its current state, then the Greeks will be forced to withdraw from the Eurozone. If a compromise is reached then, at least, part of the debt will have to be forgiven.

If that happens then the other countries that are in extreme debt to the Eurozone will also want and expect their debts to be modified.  Spain, for example, has an extreme left party that will be running in the next election on a platform of ending stringent living in Spain.

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There are certain factors we should keep in mind.  Up to the 2008 Crash virtually all the banking houses were encouraging all the people and governments to borrow money. Times were good and could only get better was the popular belief. Not all the nations within the Eurozone took this up; some were much more conservative in their borrowing and spending habits than others. Five or six within the Eurozone did take it up and carried the borrowing as far as they could. There was a similar situation within the United States and in some of the other industrial nations.

It should also be remembered that money is no longer gold coins. That ended in the 1930s. Today money is paper which is used as a means of exchange and has nothing behind it except the word of the government that prints it. Also that the amount in circulation is determined by the particular government or the ECB or in the case of the United States by the Federal Reserve.

The amount is arbitrary and can be increased or decreased at any time. The Federal Reserve forgave many of its debtors and the country now seems to be rapidly moving toward recovery. The ECB needs to rethink its position. Many of its members still have the fixation that money is gold or that those who had been living freely through 2008 must pay their debts. It is time for these people to mentally enter the 21st Century and ask themselves what is best for all of its members. After all, Europe is probably one of the major industrial centers of the world and cash or money serves only as a means of exchange. Punishing the people of a country for careless living which was encouraged by the financial institutions does not solve major economic problems. It can, if fact, exacerbate them so that everyone will economically suffer.

In the United States a goodly percentage of the homeowners in 2008 ended up owing more on their properties than they were worth. The Federal Reserve forgave many of them what they owed. It never admitted that it did this. If it had there might have been a hue and cry against this action.   If that had happened the U.S. would probably still be in a deep recession or another Great Depression.

This is a strange issue. Given a choice, what would the American people have chosen? Allowing a large number of people undeservedly to be forgiven their debts and see the country head in the direction of a return to prosperity or fair and equal treatment of everyone and a major depression.

This is actually the problem the Eurozone is facing now. Currently the Greek government is negotiating to either reduce or be forgiven its debts. Germany and France want it to pay its debts.  After all, they have to be punished for overspending prior to 2009.

Is the issue economic justice or a solid return to prosperity for all the nations in the Eurozone? Which is more important to see immediate justice or deal with what is best for all the nations within the Eurozone? An interesting question!

Fortunately the Federal Reserve in the United States was able to act surreptitiously. The European Central Bank does not have that option. The only realistic action it can take is to partially forgive the loan in the present and eventually drop it completely. If it does this, combined with the stimulus the Eurozone will once again reach a high level of prosperity. If the ECB demands the full return of what is currently owed in order to negotiate a further stimulus, that is, equal fairness for every country; then these nineteen countries face a hard economic future.

On Friday, February 20, 2015 at a negotiating meeting of Eurozone finance ministers a compromise was reached giving Greece four more months on its bailout. One result of this temporary compromise sent the Dow Jones industrial average and S&P 500 to new highs. The Euro resounded to $114 and Germany’s DAX index closed at a record high.

Depending upon the actions of ECB in June the situation could be back to where it was a week before the temporary compromise. By then it should be obvious to everyone involved that rigid enforcement of the original agreement would have strong adverse effects upon all the nations involved. What will happen will depend upon the ability of all these people to define the best common goal for all of the Eurozone.

English: The European Central Bank. Notice a s...
English: The European Central Bank. Notice a sculpture of the euro sign. (Photo credit: Wikipedia)

The Weiner Component #89 – Money, Economic Growth, & The National Debt

English: President Barack Obama confers with F...

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

According to the last time I checked the Census Bureau the population of the United States was increasing at the rate of one person every 11 seconds. This included births, deaths, and immigration. This increases the overall population by about 117,818 people per year. In order for the per capita level to remain at 0% it must rise several points every year. In order for the economy to grow it has to rise beyond this point.

In order for the economy to function positively there must be a reasonable level of growth. For this to occur there must be a reasonable yearly growth of the money supply. If the amount of currency in circulation is stultified or decreases the country is in recession moving toward depression.

By the mid1970s the money supply in circulation was not increasing at a rate needed by the country for economic growth. At this point the banks by their lending policies, gradually began to fill the currency void. They gradually discovered that they could bundle their mortgages, dividing them up into infinitesimal pieces, set up hedge funds, sell the mortgage shares like stock, recover their investment, lend the money out again, and continue to do this endlessly, charging assorted fees on every level of this process. In doing this they created first billions of dollars and then trillions, always keeping a good percentage of this in the form of fees. While this process was needed for growth within the nation eventually, thirty odd years later, it had become a mad race for endless profits by the banks.

In 2008 this housing bubble the banks created burst and the country fell almost instantaneously into economic depression. What had been a dollar in value a few days earlier now became worth a nickel or at most a dime in value. The country was headed for a depression deeper than that of 1929.

Newly elected President Barak Obama and his administration stepped into the void and the Federal Government made massive loans to the banks and later to the dying American auto industry. Where did they get the money? They printed it and temporarily took on additional massive debt. All the loans were repaid within a few years with interest.

A word about the National Debt. What is it and where does it come from? The Debt is money the government spends in excess of the taxes it collects. It is currently more than 17 trillion dollars. The money is borrowed and has interest paid on it. This money is owed to individuals in and out of the United States, it is owed to countries like China and Japan, to both of whom is owed in excess of one trillion dollars, and mostly the money is owed to itself and its agencies such as Social Security, who is owed well over 2 1/2 trillion dollars, and Medicare. In fact just about all government agencies that have a surplus have had their excess taken and used in the General Fund. The interest on all of this is paid by the Federal Reserve to the General Fund. I remember reading several months ago about 88 or 89 billion dollars being transferred from the FED to the Treasury.

The National Debt is divided into two parts, public and private. Public would be what is owned by individuals or countries like China and Japan, generally acquired to balance international trade. Private ownership of the Debt is what the Federal Government owes itself. It admits to owning about 50% of its own debt. By my estimate the Federal Government directly or indirectly through its agencies actually owns roughly about 75% of its own debt.

Where does it get all this money? Simple! It prints it and issues the currency as needed. After all there is nothing behind the United States dollar but the word of the U.S. Government. There is nothing behind any currency but the word of the government using it.

By the year 2000 the banks had created trillions of dollars and were going strong with mortgages, both new ones and refinanced ones. Money that had been needed for economic growth and development was being readily supplied with the banks taking a good share of this currency. Large numbers of people were using their homes as bank accounts, refinancing again and again. The major banks were making billions in fees and wanted profits of many more billions. The mortgages were considered safe investments and they sold like shares of stock with a promised safe return. These were the Hedge Funds bought nationally and internationally that were touted as hedges against any type of financial loss and they paid nice dividends.

The situation grew more-tense as time went by with many bankers encouraging homeowners to lie on their applications. After all prices had been and were continually rising on real estate. Anything that could be mortgaged was mortgaged more than once. The situation grew more and more chaotic, until toward the end of 2008 when the entire economy collapsed. Shortly thereafter Barak Obama took office as the 45th President of the United States.

His theme had been “It’s time for a change.” By 2010 the economy had been saved but there wasn’t enough “change” to satisfy the majority of the voting population and the Republicans gained control of the House of Representatives. The Tea Party was in control of the Republican Party, moving its position far to the reactionary right. All possibility of fiscal policy ended. There would be no more government projects. In fact the Republicans had two specific goals: one was to shrink the economy by curtailing spending and the other was to make Barak Obama a one term president by not allowing him any legislative victories or successes.

They successfully achieved their first goal of contracting government expenditures, particularly on entitlement programs to the poor and to the states, forcing state governments to shrink their services, and they added to the unemployment caused by the Real Estate Bubble bursting. The House of Representatives would not even take up fiscal policy, keeping unemployment high and forcing the country to continue with an infrastructure well over fifty years old. They left any possible improvement to the economy to the Federal Reserve which, under Chairman Ben Bernanke’s guidance, used imaginative Monetary Policy to bring about some recovery.

Two major problems developed from the 2008 economic crisis: first the amount of money in circulation had to be increased significantly and second, many people were underwater on their mortgages; that is, they owed more on their property than it was worth. Something had to be done to alleviate the housing crisis. An additional crisis was who controlled the mortgages that had been broken into hundreds of pieces and attached to innumerable hedge funds. What the FED came up with was to add 85 billion dollars to the economy; 45 billion was spent buying up mortgage paper and 40 billion was used to buy up government debt. This was done monthly for several years, adding trillion of dollars in currency to the economy.

Toward the end of his tenure as chairman of the Federal Reserve, Ben Bernanke announced that the FED would decrease its purchases by 10 billion monthly. The new chairperson of the FED, Janet Yellen, stated that she would continue the policy, ending it in October of 2014.

Many prices had been gradually rising and the fear was that the country might fall into an inflationary spiral, too much money being in circulation and forcing prices up.

Toward the end of 2013 the housing crisis seems to have leveled off. There has been new construction throughout the United States and property values have gradually risen, taking a lot of people out from being underwater.

On Tuesday, July 16, 2014 Federal Reserve Chairperson Janet Yellen announced in her report to Congress that the FED might not completely stop buying debt and mortgage paper at the end of October.

What will happen should be very interesting. Following October is the 2014 Midterm Election. How will the country react if there is a stoppage of all Monetary Policy? Will there be a significant drop in the Stock Market, which today is far higher than it was just before the 2008 Crash?

How will the country react? Will they even notice the change? Will the election be affected in any way? The times are certainly changing!

There is enough money now in circulation, far more than there was in 2008. The problem is its distribution. More and more of it seems to go to the upper 20% of the population, forcing many in the middle class economically downward. Unemployment has dropped to a fraction above 6%. What the country needs is a redistribution of the National Income downwards and a rebuilding of its infrastructure. Affordable Health Care should have a single entity running it and not for profit. This would be the Federal Government and it should be paid for out of taxes like Social Security and Medicare. Instead we allow private companies to become richer running it. We need a greater level of fairness in this country.

 

 

 

 

 

 

The Weiner Component #57D – The Federal Reserve (Part 5 of 5)

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

It became obvious during the Panic of 1907 that the Federal Government had no controls over banking practices in the United States.  The Panic was caused by speculators attempting to corner the market on United Copper Company stock.  Failure to do this led to the collapse of the Knickerbockers Trust Company, New York City’s third largest trust.  The failure spread fear throughout the City’s Trusts.  Panic extended across the nation as large numbers of people withdrew their deposits from regional banks.  At the time the United States did not have a central bank to inject liquidity back into the market.  The following year a Senate commission investigated the crisis and proposed future solutions, leading to the creation of the Federal Reserve System in 1913.

The Federal Reserve (FED) is the central banking system of the United States.  It was created in December of 1913 by the passing of the Federal Reserve Act.  This was largely in response to a series of financial panics, particularly the Panic of 1907.  It consists of twelve regional Federal Reserve Banks located throughout the United States, with the main branch in Washington, D.C.  The chairman of the Federal Reserve heads this bank.  Over time the roles and responsibilities of the FED have expanded and its structure has evolved.  It is still in this process of evolution as new financial crises occur.

It was through the Federal Reserve and the Treasury, with the compliance of Presidents Bush and Obama that the nation was saved from total economic disaster caused by the Real Estate Debacle of 2008 that was brought about by the Financial Institutions within the United States.  The assorted banking houses had been bundling and selling mortgages for about the last thirty years; maintaining control over these mortgages with no cash investment in them and then continually using the funds from the sales to issue new mortgages. The banks made fat profits from continually handling all this paper.

There had been a need for more funds in the National Cash Flow and, in this manner; the banks kept adding money to the economy.  By 2007 the level of money creation reach a point of insanity with a larger and larger percentage going to the banks.  At this point most bankers were in denial that the system could crash and the insanity continued until the crash came toward the end of 2008.

The problem that existed from the 1970s on was a great need for a continual increase in currency in the National Cash Flow to keep up with needed economic growth.  The FED was not in a position to fulfill this need; the banks did so; and the process became a way of life until it was abused and over-abused and the bubble burst to the point of destroying the economy, if the Federal Government had not interceded and saved it.

Paul Volcker headed a committee that proposed new laws that would reign in bank excesses and put the country on a solid financial footing again but bank lobbyists got these proposals watered down and since 2009 the major banking houses have again endangered the economy by their excesses.  This does not even consider the damage that has been done to a multitude of individual households where, in many cases, the homeowners have lost their homes through bank foreclosures, a number of which were illegal.  The Federal Government has responded with massive fines for malfeasance but with no criminal cases against any banks or individuals who have brought these abuses into being.  It is time for a change in the situation. For one or many forms of reform to bring these banks into line with the needs of the American public.

The only way this can be done is to upgrade the powers of the Federal Reserve so they can fully and effectively carry out their function of keeping the public safe from the excesses of the financial institutions and also keep the economy at a healthy level.

How can this be done?  The major banking houses must once again become institutions that deal specifically with people and businesses.  They must become either commercial banks or investment banks; they can no longer be both.  And if some or many continue as investment banks then the FDIC (Federal Deposit Insurance Corporation) must no longer insure their deposits.

Also the Federal Reserve must have its power extended to be able to instantly add or subtract currency from or to the National Cash Flow.  In addition Congress needs to take a revolutionary step, it has to increase the power of the FED so that it is able to lend money directly to homeowners and small businesses.  Each of the Twelve Federal Reserve Banks must also get the power to set up their own lending banks within each of the Twelve FED Zones.

After the 2008 & 2009 Bailouts the banks did not function as they had before the crash.  They hoarded their funds and looked for investments that would give them large returns; these were largely in the futures market.  In essence from 2009 on the major banks, which had been saved by the Federal Government and indirectly the taxpayers, found ways to exploit the general public for their own benefit.  They actually worked against economic recovery.  The contention at that point in 2009 that once the Financial  Institutions were saved they would return to their traditional roll was a myth since the large banks were solely motivated by the profit motif and could care less about the welfare of the individual worker and homeowner, or for that matter, the welfare of the country.

Since private enterprise, particularly private enterprise backed economically by the Federal Government cannot be trusted with the welfare of the nation it has become necessary for the Government to insure that welfare and that can only be done by the Government taking over the financial structure of the nation in the name of the “People” for the “Common Good” and not for profit.

There will be problems in establishing this system but they can gradually be resolved.  There are the smaller banking houses and the Credit Unions that have generally functioned for the welfare of the general public.  Should they continue to be part of the system?  Do they continue to have FDIC insurance?  These questions will be answered as we go along.

The major banks in the United States, JP Morgan Chase, the Bank of America, Wells Fargo, to cite a few examples, have grown in size since the 2008 Disaster.  They are today too big to fail.  Their demise could bring down the economy of the United States and possibly also some of the European nations.  In essence they hold the world prisoner while they act making all sort of economic decisions for their own benefits using public funds.

We need, at this point, to take a closer look at the banks and their ownership and control.  The stockholders obviously own the financial institutions but the people who control these companies and make all the decisions would be the CEO and all the upper management.  The actual owners of the banking concerns have almost no say in what happens in these companies.

The compensation packages of the upper echelon runs into the multi-millions of dollars. The stock dividends of a company like the Bank of America runs into the pennies.  The Bank of America pays one cent per share per quarter or four cents per share of stock each year.  One hundred shares of stock that cost anything from $14 to $17 per share pay four dollars a year.  For an investment of $1,500 the shareholder earns $4.00 per year.  For an investment of $15,000 he earns $40.00 a year.  That is a return of .0027%, twenty-seven thousands of one percent.  By putting that much money in a commercial bank the return is at least one tenth of one percent.  So much for owning stock in The Bank of America!  The other major banks pay more but not significantly more in dividends.

What happens to all the fabulous profits that the Bank of America makes?  Most of it goes to management as salaries, compensation, and bonuses.  If the Bank of America is a true example of American banking then the financial institutions are making money for the sake of making money.

It is a sad commentary if one remembers President Franklin D. Roosevelt’s comment that he made once during the Great Depression and again later during World War II that an individual can only spend so much during a year, that to earn far more is a total waste in terms of society and that this excess should be taxed.

The heads of the various banks earn more, in many cases, in one year than they can reasonably spend in a lifetime.  Jamie Dimon, the CEO of JP Morgan Chase had his yearly compensation package cut, after bank losses, from 22 million to only 11 million a year.  This, then, becomes the function of banks in the United States and beyond.  It is a silly or stupid reason for running the finances of a nation.

The American economy deals with the needs of over 350 million people.  This is a complex issue.  The large banking houses have failed the public.  To what extent should they be allowed to continue to exploit them?  Or should these major Financial Institutions go off on their own in a Free Market System, functioning within the law and succeeding or failing without protection from the Federal Government and the taxpayers?

Taken together all the games, illegal and otherwise, that the banks have played have been in the trillions of dollars, the fines that the banks have paid have been in the billions of dollars.  How many trillions have the banks extorted; how many average Americans have the banks ruined; and how many additional trillions will they extort before this current system is changed?  Even with new Volcker rules the current system is bankrupt, incapable of working for the welfare of the people.

It is time for a basic, realistic change in the way finance works within the nation.  The needs of the people are far more important than the quirks of the modern day bankers.

 

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The Weiner Component #40 – The Water/Money Pump

Franklin D. Roosevelt

Cover of Franklin D. Roosevelt

Before we had in-house sinks and faucets from which water could freely run and after we used buckets in wells to bring up the liquid, we had the mechanical water pump that allowed people to pump water up from a sealed well.  If you wanted the water pump to work you had to prime it with water, pour some water into the pump to break any air locks, otherwise nothing flowed through it.

Unfortunately the same principle applies to money in the society.  If you want a level of prosperity for all the citizens there has to be enough money available in circulation to hire and pay them.  Once they all work they spend their earnings to supply their needs and wants and there is an ever-increasing flow of money through the economy, the same currency being used by different people numerous times.  Everyone, on all levels of society, benefits from this growing cash flow.  But without this infusion of currency there is stultification within the society, massive unemployment, very limited economic growth, and basically hard times for a large percentage of the people within the country.

During the Great Depression of 1929 John Maynard Keynes wrote The General Theory of Employment, Interest, and Money. He propounded what became known as Keynesian Economics, which supported large-scale government planning and spending to promote employment during times of recession or depression.  This was watering the trough of unemployment with government funds to bring about recovery.  It was argued that during times of prosperity the National Debt could be reduced but during a period of economic decline the government must step in and spend.

This is what Franklin Delano Roosevelt did with his New Deal program from 1933 on, helping to bring about recovery.  However since the concept was new the Roosevelt Administration was not able to spend enough to bring about full recovery.  This did not happen until World War II.

Keep in mind that since 1933 in the United States and shortly after that in all other industrial nations money was paper, printed by the government presumably as needed.  At first there was the fiction that there was gold behind the paper dollar but that totally ended in 1969 in the U.S. when the last smidgen of gold was removed from supposedly being behind the dollar.  After that date there was nothing behind the dollar but the word of the government.  This is true for all currencies of all nations today.

What then is the problem of not printing more currency when the country needs it to properly function?  There are two reasons for this.  The first and primary reason is the great fear that exists of run-away inflation, that is, the extent to which currency is available throughout the entire economy.  If far more money is circulated then there are goods and services available in the society then prices are bid up and the currency decreases in value.  It can descend to a point where it becomes worthless as it did in Germany in the early 1920s.  If that occurs the entire economy goes berserk and the people can revert to a form of barter and there is economic chaos.  A balance is needed in each country.  There has to be enough money in circulation so there is full employment and full production of all the goods and services needed by the population with very low, if any, inflation. 

If, at any time, prices begin to rise rapidly then there is too much money available in the National Cash Flow and we are moving toward a run-away period of inflation.  The government has to restrict the amount of in the Flow and bring it in line with the needs of the country.

The second reason for limiting the amount of currency in circulation is the fact that money had been actual gold up until 1933 when the U.S. left the gold standard and went completely over to paper money.  All the gold coins, with the exception of a few that people could keep for souvenirs, were collected, melted into heavy blocks, and buried in places like Fort Knox.  Most people still maintain the myth in their minds that money is gold.  It is to the extent that one ounce of gold, which in 1933 was a twenty dollar gold piece weighinf one ounce and is now worth between sixteen and seventeen hundred dollars an ounce.  We have to pass beyond this mythic notion.

Today the Federal Reserve monitors all spending within the entire country, recording daily what is happening throughout the entire economy.  They essentially know what the nation needs to attain and maintain a level of prosperity; but only partially and indirectly do they control the instruments that allow them to do this. 

The Federal Reserve affects the economy through Monetary Policy.  It, more or less, controls through various means the money supply within the United States.  The term “more or less” is used because there are limits upon this control.  The FED cannot add money to the economy by directly adding to the National Debt but it can buy government debt on the secondary market from individuals or entities that have previously purchased these bonds, like private corporations or the Bank of China or Japanese individuals or companies.

For, at least, the last year the FED has been utilizing Monetary Policy by purchasing monthly 40 billion dollars worth of government paper (bonds) from primary purchasers and by buying 45 billion dollars worth of mortgage paper.  This has both added needed funds to the economic currency flow and created a shortage in housing, which, in turn, has created a housing shortage and allowed for new construction throughout the nation.  In May of 2013 the Fed announced that it might increase its purchases in the future.

The effect of this has been to allow for economic growth in the country even though the sequester and other state and Federal legislative actions have caused economic shrinkage by reducing spending in both Federal and state governments.

The other entity that the Federal Government uses during an economic contraction of the economy, which was used in 2009 when President Obama took office and the Democratic Party had a majority in the House of Representatives, was fiscal policy.  This action saved the country from going into a deep depression from the Real Estate Fiasco caused by the major Financial Institutions in the country.

Since the Republicans took the leadership of the House of Representatives in 2011 there has been no application of fiscal policy even though a section of a fifty-year-old bridge collapsed and the country’s infrastructure is badly out of date and needs massive repair and renewal.  I heard comments over TV that the Republicans are willing to spend whatever is necessary to fight additional wars in Syria, Iran, and even North Korea but they are unwilling to spend anything to upgrade the United States and create jobs for a percentage of the unemployed.

In terms of controlling the economy the Federal Reserve is supposed to use Monetary Policy and Congress and the President should utilize fiscal policy. It is interesting to note that any improvements in the condition of the country would accrue to President Obama and the Democratic Party but additional wars would add to the overall glory of the United States.

Somehow the basic function of Congress has been lost in the current yearning for power by the leaders of the Republican Party.  The welfare of the country and its people has become secondary.  The Republican goals have been to curtail Federal spending and strangely enough to limit the control women have over their own health, with the Republicans acting as father figures to a goodly percentage of the female population.  Economic prosperity has become lost.

The House of Representatives met in 2012 for 120 out of 365 days; in 2013 it will meet for 125 days.  Thirty-nine of those 120 days were devoted to continually getting rid of the Affordable Health Care Act (Obama Care) even though that bill will never come up in the Senate and would be vetoed by the President.  At least one day was spent officially declaring that “in God we trust” is whom we trust.  Currently a bill is coming up in the House making abortions illegal after twelve weeks and accepting the concept that pregnancy, in cases of rape, is truly rape only when that rape is reported officially to the police at the time it happens.  An interesting comment on the ability of all women in the United States!

Isn’t it time for Congress to get back to its original purpose, passing laws for the welfare of the people in the United States!  The mechanical water pump required, requires priming for the water to flow.  The same is true of the economy.  It needs priming.  The government has to spend money to generate a new flow of cash and welfare throughout the United States.

The title page to Keynes' General Theory.

I suppose if nothing happens before the Mid-term Election of 2014 then the People of the United States, state by state, can decide what they want over the next two years: a return to prosperity or more of what we have now.

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The Weiner Component #15 – The FED’s New Adaptation of Monetary Policy

The Federal Reserve: The Biggest Scam In History

In 2008, because of the irresponsible behavior of the major banks in the United States, real estate values collapsed, throwing the economy into a major decline, costing millions of jobs, and heading the U.S. toward a depression many times greater than the Great Depression of 1929.  Both Presidents Bush and Obama saved the banks with massive loans (bailouts) and monetary payments to all taxpayers.  President Obama stopped the decline and reversed the unemployment.  But with the financial bailout and fiscal policies unemployment hovered at about 9%.  In 2010 the Republicans gained a majority in the House of Representatives and that with the excessive use of the filerbuster in the Senate all fiscal policy ceased.  Congress passed not one real jobs bill from 2010 to 2012.

The Federal Reserve, however, has continued to foster Momentary Policy.  Under its chairman, Dr. Ben Bernanke, it has expanded the amount of currency in the National Cash Flow largely by buying its own debt and interest rates on all loans have been dropped to the point where they are almost nonexistent.

The Federal Reserve (Fed), a largely independent government agency, controls Monetary Policy, the regulation of the amount of currency in the economy.  The Real Estate Debacle of 2008 dropped the amount of money in circulation to a fraction of what it had been earlier causing massive disruption in the economy.  From 2010 on the Republican House of Representatives has passed no bills to increase supply or aid the unemployment situation.  Their excuse has been that they will not increase the deficit.  The Fed has done everything it could to increase the money supply.  This has improved conditions but not ended the problem.  Toward the end of 2012 the Fed has come up with a new variant of Monetary Policy, one never used before.  They began on a large scale directly buying real estate paper; that is, the Fed is now the largest landlord or property owner in the United States.

What does this mean?  How does it help the economy?

In essence this solves two major problems.

How long has this process of the Fed buying toxic housing been going on?  Dr. Ben Bernanke, the chairman of the Federal Reserve, casually announced that the Fed was buying this paper during the last three or four months of 2012.  Fannie Mae and Freddy Mack knowingly bought toxic loans from 2008 on.  There are people who have been living in their underwater houses for well over three or more years without having made any payments on their loans.  No one has bothered them about foreclosure.

What is the current significance of all of this?  The number of houses available for resale has shrunk tremendously.  New construction of family housing is going on and increasing throughout the country.  People are being put to work.  The ones who have made no payment on their homes are spending their money causing growth in the economy.  The multitudinous pieces of ownership, which many or most of these properties were broken up into, are in the process of being sorted out.  The overall economy is returning to health.

To understand the home ownership mess one has to go back to the period before the Real Estate Crash.  Each bank had a different formula for splitting every single mortgage they sold into a hundred or more parts.  With these formulas no two individual mortgage packages were similar.  The records of these transactions that were kept were so hurriedly put together that there was a twenty to forty percent chance of error.  These were the packages that were sold by the hedge funds.  It will take one to two decades to unravel this mess.

Will the government ever foreclose on these properties?  It will probably not do so during the lifetime of the current recipients of these homes.  They are, more or less, maintaining the property, adding their incomes to the National Cash Flow by spending their money.  Foreclosures would mean shrinking the money supply and fostering a possible recession by limiting spending, making more houses available than are needed, and lessoning, if not stopping, new construction.  It is not a good idea.

We don’t know the amount that the Fed has spent on procuring these properties, nor how long this process has been going on, but, since it is on a national scale, the amount spent may very well exceed one trillion dollars.

The point has been raised.  Do these people deserve free housing, possibly for the rest of their lives?  The issue here is not a moral one.  Whether they deserve it or not is immaterial.  What matters in this instance is for the government to be able to restore the economy from the debacle brought about by banking in the United States and being able to sort out the ownership mess brought about by these same financial institutions.

When the banks inadvertently created the real estate disaster by splitting each mortgage into a hundred or more pieces to be sold by the hedge funds, with a sloppy system of recording these sales, they created a calamity that would take one to two decades to sort out.

After the Debacle of 2008 the many banks initially foreclosed on properties they controlled but did not own.  Since these financial institutions later paid off forty-nine states with 29 billion dollars so no one would go to jail they have walked away from this problem leaving it to the government to solve.  It will be a while before the issue is totally resolved.  The Fed is attempting to solve the problem and, at the same time, bring about economic recovery.  To a good measure they are being successful.

Who, specifically, are these people who are benefiting from this government largess?  That is a good question, for they do not know who they are.  Discovery will come after the fact.  The individuals or families will continue living in their homes, paying taxes on the property,  knowing they could be dispossessed at any time.  But it will not happen.  No one will come and evict them.  Their own careless or irresponsible behavior put them in this situation; and they have actually lucked out.  Their properties will gradually revert to the government with their demise and the government wills, one way or another, dispose of their ownership.

Where does the Fed get the money to buy all this real estate from the banks and hedge funds?  It’s billions, if not trillions of dollars?

To the individual, family, corporation, state and local governments money is an object of value.  It consists of an income; that is, the amount that is earned through work, investment, taxes, or some form of acquiring currency.  It is a fixed amount.  If more is needed it must be borrowed, “rented.” And paid back over a period of time with interest.  The study of this area is called Microeconomics (Small Economics).

The Federal Government does not function in this manner.  It utilizes a system called Macroeconomics (Big Economics).  Its use of money is as a tool that regulates the economy and attempts to maintain it at a level of maximum health.  The Federal Reserve controls the money supply.  It can increase or decrease the amount in the National Cash Flow: increase it during a recession; decrease it during a period of rapid inflation.  In a manner of speaking the Fed controls the printing press, which produces the money supply.  While the Fed’s powers are to a certain extent limited it still controls the money supply.

And currently the Fed is using money to indiscriminately buy real estate paper.

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