The Weiner Component Vol.2 #8 – Part 5: Alan Greenspan & the Federal Reserve

Former Chairman of the Federal Reserve Alan Gr...

Former Chairman of the Federal Reserve Alan Greenspan, receiving a Presidential Medal of Freedom in 2005 (Photo credit: Wikipedia)

In 1935, Cret designed the Seal of the Board o...

In 1935, Cret designed the Seal of the Board of Governors of the Federal Reserve System. (Photo credit: Wikipedia)

On August 11, 1987, Alan Greenspan became the Chairman of the Federal Reserve. He was appointed by President Ronald Reagan and served until January 31, 2006, when he retired from that office. There was a rumor that he had lobbied for the position.

 

After four years in office he was reappointed by President George H. W. Bush who later claimed he lost his reelection bid because of Greenspan’s Monetary Policy. Bill Clinton also reappointed him and so did George W. Bush.

 

Greenspan was a Republican conservative with a classical education in economics, who got his P.H.D. from N.Y.U. He supported privatizing Social Security and tax cuts which, according to the Democrats, would increase the deficit. In fact it has been suggested that the easy money policies of the Fed during Greenspan’s tenure there was a leading cause of the subprime mortgage crisis that occurred in 2008, after he left the Federal Reserve as Chairman.

 

Alan Greenspan was nominated by President Reagan on June 2, 1987 and was confirmed by the Senate on August 11 of that year. To Congress he quickly assumed the role of a seer, generally when he was questioned by Republican members of either House of Congress, they spoke to him with a large degree of reverence, as though his answers to their questions were the absolute ones. He was considered the maestro of economics; his words being gems of economic wisdom. This occurred throughout his entire term as Chairman of the Federal Reserve.

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The issue that Greenspan did not deal with, which, in fact, he stated that the Fed could not control or even really deal with was the amount of money in the National Cash Flow. His successor, Ben Bernanke did not have this problem and he both increased the amount available for over a two year period and solved an economic quagmire that the banks had created in 2008 following Greenspan’s easy money policy.

 

According to the late economist Paul Samuelson the process of splitting mortgages began during the late 1970s. For innumerable reasons banks had traditionally allowed people to take out second mortgages on their homes charging them slightly more in interest than they were paying on their first mortgage. Occasionally the banks would sell these mortgages to individuals in order to get their money back for a more profitable use. In the late 1970s many banks broke these mortgages up into large pieces in order to sell them and sold each one to a multitude of Hedge Funds who then used them as securities.

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In 1981 Ronald Reagan became President of the United States. He and his aids believed in a totally free Market where all economic decisions were made by the Market. The basis by which the Market operated was the profit motive. It had been explained by Adam Smith in his preindustrial revolution book that he published in 1776. The Reagan Administration did away with virtually all government regulation that controlled the form and actions of the banks, giving them a complete free hand in dealing with the public; but they kept the FDIC in which the Federal Government insured all bank deposits up to ½ million dollars.

 

Regulations limiting the form and actions of banks were brought in during and after the Great Depression. Among other things many bankers had abused their positions and used depositor’s money to make individual profits for their executives. When the stock market crashed in 1929 so did numerous banks and multitudes of depositors lost their savings. The Roosevelt Administration from 1933 on brought about legislation to stop this from occurring again. Apparently the Reagan Administration in 1981 on believed this was no longer a problem.

 

During the Reagan Administration the major banking houses in the United States like J. P. Morgan-Chase, Bank of America, Wells Fargo, and others decided to break up the mortgages into fractional shares, split the shares among Hedge Funds, and sell shares in the Hedge Funds. This included both first and second mortgages.

 

This was a good bet since people valued their homes. What happened was that the banks encouraged people to use the equity in their houses as bank accounts, mortgaging and remortgaging their homes. With the constant action, following the economic laws of supply and demand, the value of properties continued to rise like hot air balloons. The value of the homes kept growing, allowing people to take more and more money out of their homes to buy anything they desired. By this action the banks created trillions of dollars of new money and presumably everyone prospered.

 

On the one hand Greenspan stated he could not control the amount of money in circulation but on the other hand the Fed’s low interest rates encouraged this behavior. What the banks did was to issue and reissue mortgages which they, in turn, split into hundreds of pieces, placing them into different Hedge Funds from which these funds paid the banks endless service charges. The banks then used the money for new mortgages but serviced the accounts, charging fees for each action.

 

In essence the banks lent the initial funds, sold the mortgages to innumerable Hedge Funds, got their initial investment back, and lent it out again, endlessly repeating the process and endlessly charging innumerable fees for the continuing processing. Many banks also owned many of the Hedge Funds.

 

The bank and everyone in the bank involved in this process did well financially. As home prices rose the homeowners kept getting their equity back and could afford to remortgage their homes. It seemed like an endless Christmas!

 

Ordinarily every change in any property has to be registered in the city or county where it occurs. This is a fairly slow system. The banks were able to set up their own record keeping agency that they could use quickly. The problem here was that there was endless amounts of information. This system made innumerable errors in their bookkeeping. In 2008, when the system crashed, the records were worthless. There was no reliable information on all the transactions.

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By 2007 it was fairly obvious that the system was tottering and could fail. For the last quarter of a century this had been going on. It spanned the entire career of most bankers. They were in a state of denial that the housing bubble could burst. Some banks offered loans of 125 percent of the appraised value of homes.

 

The Housing Bubble burst late in 2008 while George W. Bush was still President of the United States. Suddenly many banks were on the verge of bankruptcy. President Bush and his Secretary of the Treasury lent some of the banks enough money to keep them solvent.

 

The new Chairman of the Federal Reserve, Ben Bernanke, authorized a loan to AIG, the leading insurance company in the United States. It seems they felt left out of all the money making and wanted their share. They insured a number of loans for high premiums. Their actuaries underestimated the risk involved. When the collapse came they didn’t have the funds to pay off the claims and without additional funds would have gone under costing a large percentage of the American public both the premiums they had paid and the protection these premiums bought.

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It is important to note that the flow of money in the United States and the rest of the industrial world, whether credit or cash, is through the banking system. If the major banks were to go under the flow of currency would be a dribble. In addition every bank account is insured up to ½ million dollars by the Federal Government.  The banks paying a small premium to the Federal Deposit Insurance Corporation (FDIC). If the banks go bankrupt the Government is still liable for those monies.

 

In addition AIG (American International Group) is the major insurance company in the nation, insuring, among many other things, millions of insurance policies throughout the nation. If it were to go under billions in premiums paid for years by countless Americans would suddenly be lost. It would be a major negative catastrophe in the country. AIG was literally too big to fail.

 

The failure of both the banks and the insurance company could easily bring down the economy of the United States. These concerns are necessary for the United States to function. They are not only too big to fail but also too important, in relation to the country.

 

This is the position in which President George W. Bush and Chairman Ben Bernanke found themselves in toward the end of 2008. And this is the position that Barack H. Obama inherited when he became President of the United States on January 20, 2009.

 

As Chairman of the Federal Reserve Alan Greenspan had supported an easy money policy. He retired shortly before the results of this policy exploded. Did he foresee the occurrence?   Was he responsible for it?

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From the 1980s on the American economy needed a greater Cash Flow. There literally wasn’t enough money available throughout the economy. Historically the Federal Reserve had never directly supplied money to the overall country. In fact up until 1933 all monies were comprised of gold and silver. All gold mines in the United States were required to sell all the gold they mined to the Federal Government for $16 an ounce. It was then minted into gold coins. Paper money could be issued: ones and five dollar bills were silver certificates and technically could be exchanged for silver coins at any time. Tens, twenties, fifties, and hundred dollar bills, and higher denominations could be exchanged for gold coins. From 1933 on gold disappeared and from ten dollar bills up money became Federal Reserve Notes. Later the five would also become a Federal Reserve Note. Thereafter the gold was stored in depositories and presumably stood behind the dollar.

 

In 1933 Roosevelt raised the value of money by law from $16 an ounce for gold to $32 an ounce. By doing this he doubled the available money in the United States and easily paid for the New Deal.

 

Consequently from that time on gold being behind the dollar was a fiction. Theoretically any Federal Reserve Chairman and his Board thereafter could have added money to easily to the National Cash Flow. But none did. During World War II the Federal Government spent a lot more than it took in in taxes. But it never just added money to the economy. In fact it used various devices such as War Bonds to attempt to limit the amount of money people could spend.

 

From what he has said and written Alan Greenspan did not believe that the government could just add money to the economy. That power was reserved to banks who could do so through their lending policies. Greenspan tended to understand economics as it was and had been. He ran the Federal Reserve on that basis. He lacked the imagination to do things any other way.

 

Possibly he suspected a crash in 2008 and so he retired before it came. Possibly he did not and felt he had been in that office long enough. Only he can answer that question.

The Weiner Component #156 – Fear & the Economic Situation

Official photographic portrait of US President...

Official photographic portrait of US President Barack Obama (born 4 August 1961; assumed office 20 January 2009) (Photo credit: Wikipedia)

Starting slowly, probably around the 1970s, the process of splitting real estate loans into a few parts began, and then, with the election of Ronald Reagan as President of the United States in 1981, the concept took off on a refined bases, with each real estate mortgage being broken into innumerable parts and having each piece put into a different hedge fund and sold as a safe investment. It was considered safe because any single or few losses on any one of these hedge funds would be so small that it wouldn’t be noticeable and would not really affect the amount of the dividend.

 

Two things occurred from the 1980s on: one was the election of Ronald Reagan to the presidency of the United States and the imposition of a total Free Market Economy and the other was an incessant need in the general society for a much greater cash flow.  We were in a period where there was not enough money available to serve the overall needs of the population.  More cash was needed for the economy to function.

 

The agency of Federal Government that was supposed to be keeping track of this problem and monetarily serving the needs of the nation was the Federal Reserve.  It’s Chairman from 1987 to 2006, Alan Greenspan, like the President believed in a totally Free Market that would automatically adjust itself.  Consequently he and the FED did nothing to alleviate the problem. 

 

This in turn left the need prevalent and either purposefully or inadvertently it was picked up by the banks which were also deregulated by the Reagan administration.  They, at first, gradually and then, with ever increasing speed, using real estate as their base, picked up the speed of creating new value or money throughout the society.  This was to continue through late 2008 when the banks had far     exceeded the amount of money needed for the society to properly function and the Great Real Estate Crash occurred.

 

What happened was that the banks, by their lending policies from the 1980s until late 2008, over 28 years, created trillions of dollars of additional value based upon the public housing industry within the United States.  In addition deregulation also allowed them to freely invest their deposits into the agencies or funds that directly serviced this expansion.

 

By 2007 most bankers were aware that property values had far exceeded a sane level and that a crash was probable.  But by 2007 most of the bankers had been making high commissions on the property market for most, if not all, of their banking careers; they were in denial that conditions could ever change. 

 

The Real Estate Market crashed or the Real Estate Bubble burst in late 2008 under President George W. Bush.  Virtually overnight the economy of the United States went into an instant depression.  There was suddenly mass unemployment, many people owed more on their homes than they were then worth.  Some people just walked away from their homes, others stayed, the hedge funds, which many or the deregulated banks had also invested in, collapsed from non-payment on mortgages.  Bush and his Treasury Secretary bailed out some of the banks; then his term ended and Barack Obama became the next President of the United States.

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Barack Obama would spend his eight years in office dealing with this mess.  For his first two years he had a Democratic Congress and their full support.  From 2011 on the House of Representatives gained a Republican majority and thereafter passed no legislation that dealt with the economic emergency.  In fact they passed economizing laws that actually increased the disaster.  President Barack Obama and the Federal Reserve Chairman, Ben Bernanke, using Creative Monetary Policy were able to change the depression into a recession.  The country is still dealing with this problem that the House of Representatives refused to deal with.

 

Conditions have improved.  Unemployment is now at about 5%, a long way from the initial 12½%  The Republicans still have done nothing to improve conditions, instead they have actually worsened them.  They are a great political party for complaining and blaming.  But what they are blaming President Obama for, is mainly for what they, themselves, have not done, passing fiscal laws creating jobs and upgrading the infrastructure.

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In 2008, the year of the Real Estate Crash, the Gross Domestic Product   was at 800 trillion dollars.  In 2009 it dropped to 700 trillion dollars.  By 2010 it was slightly above where it had been the year before.  By 2015 it was in the area of 17.95 trillion dollars.

 

Keep in mind that the GDP refers to the market value of all goods and services produced within the country during the fiscal year.  Interestingly the United States is now ranking first in the world’s GDP level.  That makes it, even now with 5% unemployment, the world’s richest nation.

 

If, as we’ve seen in the GDP, the overall wealth within the United States was continually increasing by 2010 above the 2008 Real Estate Crash level then why was the U.S. up to 12 ½% unemployment?  The answer, of course, comes into the area of spending priorities mostly by the United States Government and the overall population.

 

Congress, from 2011 on, with a Republican majority in the House of Representatives, was on an economizing bilge. The country underwent and is continuing to undergo Sequestration, spending cuts across the board in virtually every area.  The President, on the other hand, particularly in 2009 and 2010 underwent expansive spending programs to avoid a depression greater than that of 1929.  Basically what started from 2011 on was a redistribution of income, with gradually more and more money going to the upper echelon of society and less and less being available for the middle and lower classes, these amounts increasing yearly.

 

In 2009 and 2010 the Obama Administration spent inordinate amounts of money extending unemployment benefits, saving the American banking and auto industries, among other things.  From 2011 on gradually most of these programs ended and government began a struggle between the House of Representatives and the President.  In 2013 we had both Sequestration and a shutdown of the Federal Government from October 1 through October 16, 2013, for 15 days.  The shutdown was over the issue of government funding for Planned Parenthood in the 2014 funding bill.  The Republican House of Representatives attempted to force its will upon the President and the Democratic led Senate.  The President and Democratic Senate would not cooperate with the Republican led House of Representatives.  In many cases Congress has refused, or through different Republican disagreements, has been unable to act.

 

The positive movement that had occurred in the economy, turning a potential Great Depression into a Great slow-moving Recession came about through Creative Monetary Policy, government spending policy, by the Federal Reserve with the compliance of the President.  In essence it’s been a battle between the President and the Republican House of Representatives, with the administration slowly winning since national unemployment is today in the area of 5%.

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The question that arises: if the GDP (Gross Domestic Product) today is greater than it was in the period prior to the 2008 Real Estate Crash then why is the middle class in the United States continually shrinking and why are more and more people continually having a harder and harder time economically surviving?  The answer to that questions is that the National Income is like a balloon filled with helium, slowly and continually rising and becoming part of the incomes of the top few percentile, the upper 5 or so percent of the population.

 

In essence the rich are getting richer and everyone else has less money.  It would seem that the society is geared so that the rich pay a lower percentage of their incomes in taxes than everyone else does.  For example: Donald J. Trump, who is running for the presidency in 2016 as the Republican candidate, has refused to show his tax returns for any prior year.  Trump claims to have over ten billion dollars.  The probability is that he is not showing his income taxes because he doesn’t pay any of these taxes.  Being in real estate he would have endless write-offs and building depreciations.

 

But it isn’t just people in real estate who have these tax advantages, it’s anyone who earns over $464,850.  The income tax system is graduated up to that point; that is the more one earns, the higher a percentage of his/her income he/she pays in taxes.  Anyone earning over $464,850 pays the same rate as those earning that amount.  A person earning a million dollars or 25 million a year pay the same percentage of the incomes as the person earning the above figure.

 

While the number of individuals is not large compared to the overall population of 350 million people, yet the taxation system is rigged in favor of the very rich.  The more they earn over $464,850 the smaller a percentage of their income do they pay in taxes.

 

This change or decrease in taxes was brought about during the last five years of the Obama administration.  The Republicans actually lowered taxes for the very rich.  The Democrats were forced to go along with this in order to pass other similar required legislation.

 

The Republican argument for this action is that the rich need more money because they are the ones who invest in new industry.  Without them there would be no growth in the economy.

 

This argument that has been endlessly repeated over the years sounds wonderful.  But it is a myth.  It has never happened.  The rich invest their surplus incomes in old established industries that pay a set reasonable income or they, like Mitt Romney, bank some of it overseas where somehow they pay no taxes on the interest received.

 

Taxes are geared so the less an individual earns the higher a percentage of his/her income is paid in taxes.

 

The United States is the wealthiest nation in the history of the world.  Yet its unequal taxation system taxes the poor and middle class far more than the wealthy, they pay a higher percentage of their income in taxes.  It also has an underclass that is so poor they live in the streets and even though these people pay no income tax they also pay a higher percentage of their incomes in other taxes than the rich.  The national distribution of income is today a farce.  Someone like Warren Buffet has remarked that it’s a strange situation where he pays a smaller percentage of his income in taxes than his secretary.

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In 2016, the year of the next Presidential Election, this created a strange phenomenon within both political parties within the nation.  Currently there is a Republican majority in both Houses of Congress.  Very little if any needed legislation is being passed.  This situation has existed since 2011 when the Republicans took control of the House of Representatives.  In both major political parties there are large numbers of people who are totally frustrated with their Federal Government.  Many of whom are not overly well educated or generally too busy with their lives to follow what is actually happening in Washington D.C.  Their knowledge of the government is what they’re told by the news media, which can be tilted to the right or the left by which channel they are watching.  This doesn’t really answer their questions or needs. 

 

What exists today are large segments of the population which are looking for easy answers to what seems impossible questions or problems.  They want a simplistic solution which, in essence, is a return to a past which never existed.  They want a simplistic solution to their economic problems, to bring the manufacturing jobs back to the United States and allow people to earn more money so they will no longer be economically stressed out.  Whether this is real or not is beside the point; there is a strong desire among many for a simplistic change within the society.

 

For the Republicans the person who will do this is Donald J. Trump.  He claims that he will force the companies that have moved their manufacturing overseas or to Mexico to bring these jobs back to the U.S.  In addition he will get rid of all illegal foreigners in the U.S. and lessen competition so that there will be jobs available for everyone who wants to work.  He will also make the U.S. safer by not allowing alien radicals to migrate to the U.S. and keep Mexicans out of the country by building a wall between the United States and Mexico.  And so on.  He will bring us to a golden age that never existed in the U.S.

 

In essence Trump is feeding on all the basic prejudices and fears that seem to still exist in this country.  He is opposed to Mexicans, Hispanics, Muslims, Syrians, Blacks, Women having a right to deal with their own bodies, and the list goes on.  Trump has promised to take us all to-never-never land if he becomes president.  He seems to open up all the hidden prejudices in a large percentage of his followers.  He has also increased bullying among the children of his followers.

 

For the Democrats there is Senator Bernie Sanders, a Democratic Socialist.  Over a year ago he changed his party registration from an Independent Socialist who always caucused with the Democratic Party to a Democrat.  Sanders now calls himself a Democratic Socialist.  This has enabled him to run as a Democratic candidate for the presidency in 2016.

 

I strongly suspect that Bernie Sanders initially expected to run as a protest candidate with no chance of winning.  However he inadvertently tapped into the younger generation of voter; those who had been too young to vote in prior Presidential Elections.  To these people and the others who have joined them he offers a utopian future. Free education from pre-school through college and free medical coverage for everyone.  He supports abortion rights and a more liberal drug policy.  He believes in gun control, immigration reform, LGBT rights, expanding social security, and tax reform.  Among other things he has stated: “We need to get big money out of politics and restore our democracy,” and “Climate change is real, it is caused by human activity.”

 

He has also brought large numbers of Independents and some older Democrats to his cause.  His campaign took off like a rocket shooting upward and Bernie could almost taste victory.  But he never quite caught up with his competition, Hillary Clinton. 

 

He is promising a new society with benefits for everyone.  And all this will be paid for by the rich who have up to this point exploited their position in society.  The image is wonderful but the reality doesn’t exist.

 

I suspect that the majority of the population agrees with most of if not all of Senator Bernie Sander’s goals.  But they would have to be paid for if they were to be put into laws.  And his solution to this is rather naïve.  He says he would put a tax on Wall Street’s excess profits.  Traditionally in United States history, going as far back as the Revolutionary War from 1776 on the practice has been to make someone else pay for what you want.  The Southern planters owed millions to English merchants which they never paid after the Revolutionary War.  Afterwards Daniel Shay, a Revolutionary War veteran, led Shay’s Rebellion where the inland farmers refused to pay taxes that were brought into being by the Tidewater merchants in the coastal cities.  In recent years there was an attempt on the California side of Lake Tahoe to tax the Time Share facilities to pay for the public schools in the region; it failed.  It’s always nice to get someone else to pay for what is needed or wanted but generally it doesn’t work.

 

The term Wall Street is an abstraction; it has no specific meaning.  Are they talking about the banks or the large commercial corporations, or any company that sells stock?  An excess tax on the sale or purchase of stock or company profits would bring about economic disaster.  A tax on profits already exists, increasing it could destroy incentive.  Senator Bernie Sanders funding solution sounds just but it is nonsense.

 

Hillary Clinton is much more pragmatic.  The very existence of Senator Bernie Sanders has pushed her farther to the left in her own position.  She may be able to achieve many of Bernie’s goals which he should be able to get into the 2016 Democratic Platform. 

 

Sanders, on the other hand, as President would face endless frustration, even if he were to get Democratic majorities in both Houses of Congress, which is a low probability.  In all likelihood the House of Representatives will retain its Republican majority.  And even if Senator Bernie Sanders were to get an all Democratic Congress he would still have trouble both passing and funding his program.

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In the early 1800s England began the Industrial Revolution in the cotton industry.  Eli Whitney invented the cotton gin which allowed the cotton plant to be quickly separated from it many seeds.  Machinery was developed for spinning the cotton plant into thread and machinery was also invented for weaving the thread into cotton cloth.  Overnight spinners and weavers became obsolete, their occupation ceased to exist.  Some became luddites, breaking into factories and destroying the new machines in an attempt to bring back the past when they had a functioning occupation.

  

 Even if Trump, by some strange miracle, were to get elected the probability is that the results of the 2016 Presidential Election would leave a number of people totally dissatisfied  with the changes that don’t seem to be happening,  You can’t bring back the past, real or otherwise. 

 

Can conditions be improved?  Jobs are available in the United States.  The problem is that they require training and mobility.  It now requires a trained skilled employee for the jobs that pay a decent wage.  For those who refuse to undergo any training or move to where these jobs exist there are public sector occupations that do not pay much but that take almost no skills to do.

English: Seal of the President of the United S...

English: Seal of the President of the United States Español: Escudo del Presidente de los Estados Unidos Македонски: Печат на Претседателот на Соединетите Американски Држави. (Photo credit: Wikipedia)

 

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The Weiner Component #57 – The Rapaciousness of Banks, Solutions (Part 4 of 5)

In 1935, Cret designed the Seal of the Board o...

There is a basic contradiction in banking within capitalism in a Market Economy.  Adam Smith, in his classic work, speaks about the “invisible hand,” the motivating force of the market system.  This is the profit motif; people do things under capitalism because they come out ahead monetarily.  We work for pay; we create businesses to make profits.  Everything we do under this system increases our level of wealth.

This motive applies to banking as well as every other business enterprise.  In fact the major banking houses work toward phenomenal profits.  Yet the rules of the Free Market do not apply to banking.

There are different types of banks; the lines between them in recent years have become obscured.  Commercial banks take in deposits from their customers, pay a small amount of interest on these monies, and then use the money for all sorts of loans, private and commercial.  Since the Great Depression the Federal Deposit Insurance Corporation insured all bank deposits up to a certain amount that has been increased over the years.  Currently all bank deposits are insured up to $250,000.  For this the banks are required to pay a minimal premium.  In the event of a major economic collapse in which the banks fail the Federal Government or the taxpayer would be responsible for paying or repaying these funds.

Investment banks like Goldman Sachs have investors who put their money in these banks hoping to make a profit.  These funds are not insured by the Federal Government.  The investment bankers are supposed to be experts in financial management.  They make their money from assorted fees.  They also invest their own funds.

Today, with an easing of banking laws, the lines between the various banks are very gray.  At the tail end of 2008, with the Real Estate Debacle, the U.S. economy came very near almost total collapse.  Federal bailouts saved the banks and the economy.

The Financial Institutions have never accepted responsibility for their acts of economic mayhem.  They function like bodies of water always flowing downhill, except the banks are always flowing in the direction of the greatest profits.  In 1929, the ten percent margin investments stopped for a period of time, then began again, but by law, then, margin could not be less than 50% of the investment.  This is still true today.

After the Great Depression all sorts of banking regulations came into existence; and they persisted well into the second half of the 20th Century.  From the 1980s on, with Reaganism, where “the problem” in society “was the government,” which presumably held back progress in a free society, banking regulations began to disappear.  This attitude, combined with a need in the economy for a much greater flow of cash, brought the country to the disaster of 2008.  Paul Volcker, a former Federal Reserve Chairman, led a committee to come up with new regulations for the banks.  These new regulations were largely watered down by bank lobbyists and this brought us to the current situation.

The Volcker Rules are again being reconsidered.  Will they, if instituted, stop the current bank abuses?  They will certainly help do so for at least a period of time.  Of course the bank lobbyists will still be arguing to members of Congress against them.

Currently the Federal Government is not only financially penalizing a bank; it is also considering indicting one of its executives.  If it does so and this action becomes a common practice, then whether the man is found guilty or not by a jury, the illegal activities that the banks perform for profit will slow down.

Will these actions change bank policies?  Will the flow toward phenomenal profits cease?  The answer, at best, is temporarily.  Laws and government practices can be changed gradually.  The reform that came about after the Great Depression lasted for about half a century.  The same could be true of these reforms.  The nature of private banking is profit, the more the better.  What is needed is a new system of banking whose ultimate goal is to serve the public and the welfare of the overall society.

In essence the Commercial Banks are taking risks with other people’s money, the executives are making fabulous salaries, and they are calling on the Federal Government if their investments fail.  Also up until now there has been no chance of anyone being held liable for mistakes or for most criminal activities in which they may engage.  In fact outside of specific criminal acts like using insider information no one has been held criminally responsible even for narcotic money laundering or supporting terrorism.  The banks pay massive fines that represent a small percentage of what they have made and the executives apologize one or more times and promise not to do it again.  But from what I gather the profits are so great that most of these banks do perform these acts again.  One might say that all people are equal before the law but bankers consider themselves more equal than anyone else.

Where, then, is the Free Market when it comes to banking?  Obviously, there isn’t one.  Banking operates outside the Free Market System.  The big banks cannot lose, they are supported by the United States Government; which, in doing so, is protecting the small investor.

Banking, as we’ve seen, as it occurs in the United States, and for that matter in most European countries, is ridiculous.  It is government backed “so called” free enterprise – a contradiction of terms and concepts, a system of irresponsibility, supported by the government.  The way it functions allows all sorts of economic downturns and upturns that keep the assorted economies in a state of confusion or near-confusion and it exists mostly for the benefits of the profit-hungry banking executives.

What we need is a system of continual growth, a system where the government controls and can constantly fine-tune the economy of the nation.  The Federal Government does not operate for profit but, rather, for the benefit of the people, for the “common good.”

Can this be done?  The answer is, YES.  Not only can it be done but also the agency that can rectify the current situation exists.  It was created exactly one hundred years ago because of constantly occurring economic disasters, particularly then because of the Panic of 1907.  This agency is the Federal Reserve.  It, after the Midterm Elections of 2010, has not only kept the nation afloat but has also brought about economic growth despite a recalcitrant House of Representatives that has refused to utilize fiscal policy to bring about any economic recovery.

The Federal Reserve needs to have its powers expanded to the point where it can do away with the contradictions in the U.S. banking system.

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The Weiner Component #41 – Obama Care, Socialism, & the Free Market

English: President Barack Obama speaks to a jo...

English: President Barack Obama speaks to a joint session of Congress regarding health care reform (Photo credit: Wikipedia)

There was an article recently in the Wall Street Journal, which stated that a larger and larger percentage of the National Income is going to the top one percent of the population.  Consequently there is less and less available yearly for anyone else and standards of living keep going further and further downhill.  This is the Free Market in action, giving more and more to the top and less and less to everyone else.

Meanwhile the Republicans in Congress are keeping taxes relatively low for the top percentile and vigorously denouncing Obama Care, the Affordable Health Care Bill that largely comes into being in October of 2013.  They are, among other things, threatening to shut down the Federal Government by stopping all spending, rather than let Obama Care come into being.  There have been about forty separate votes over two different sessions of the House of Representatives defeating this law.  The Senate, which has a Democratic majority, will not even bring this bill up for a vote and the President, if it were to come before him for his signature, would veto it.

Looking over statements by prominent Republicans and others I find that there are only two reasons for discarding this law.  The first, which seems minor, is that it will bankrupt the government.  That is nonsense; the law, in the long run, will actually lower medical costs for everyone.

The second reason, which seems to be major, is that it is socialistic.  They are offering no alternatives for the millions who have no medical care; they just want to do away with the law, presumably because it is evil in their estimations.  Why is it evil?  It is so because it takes choice away from individuals by giving them medical insurance, something every member of Congress has. The Republicans are afraid that people will lose their self-reliance.

Actually, to paraphrase one of their more verbal proponents, Ted Nugent, it takes free choice away from many Americans by requiring them to have medical coverage.  It is therefore rampant socialism, which everyone knows is a bad thing because it makes him or her dependent upon the Federal Government.  Therefore it is bad.  While the Republicans in Congress do not tend to be as dramatic or as loud this is still their basic attitude.

My problem with all this postulating is that it overlooks the fact that socialistic practices already exist in our society.  For example there are Social Security and Medicare.  Shouldn’t these programs also be done away with to make people less dependent upon the Federal Government?  In addition aren’t subsidies and tax-breaks for wealthy individuals and some major corporations like oil another form of socialism since the government allows these industries to pay less or no income taxes and in some cases gives them subsidies for running their highly profitable businesses.

Aren’t people like Michelle Bachmann, whose families have received subsidies from the government for their farms and business, also accepting socialistic practices that, in turn, limit their competitive free choice and make them dependent up the government? 

It’s an interesting conundrum.  Basically if one looks at government activity across this nation, that activity is rife with socialistic practices, both on state and Federal levels.  If a state offers a particular corporation tax benefits to locate in their area, isn’t that a form of socialism?  That would make Rick Perry, the governor of Texas, guilty of spreading this ism.

Of course, if we look at the assorted Republican statements we find that one can draw a line across what they consider socialism and what it is all right to do.  When it comes to individuals, the working class, then that is socialism and those programs should be cut or done away with; but when it comes to the earning classes, the businesses, corporations, and high earning people, the activity is perfectly okay.  It is a view that could best be defined as “Government of the rich, by the rich, and for the rich.”

I could respect the Republicans in Congress if they were at least consistent and actually stood for their principles but they are essentially hypocrites.  If they want to do away with the Affordable Health Care Law then they should also propose to do away with their own health care coverage and, for that matter, also everyone else’s.  That would significantly lower the price of most employment in the United States and make all those workers competitive with those in other countries.  Of course it would also sustancially lower standards of living.  If they did away with all tax breaks and bonuses that would significantly increase the amount collected in taxes.  It might even make the free market honest! 

But they do none of this.  The Republicans in Congress are largely dependent upon the large corporations and wealthy individuals for the contributions they need to run their political campaigns.  In a manner of speaking they have sold their principles, if they have any, for the financing needed to remain in office.

What is being asked of the people who support them, particularly those individuals who have no medical insurance, is to object to a law that will protect them by giving them medical coverage that they do not have.  They want to give the poor the right to die sooner than they might with Oboma Care.

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The Weiner Component #13 – Agricultural Parities, Pushing The Envelope

Michelle Bachman speaking.

Congresswoman Michele Bachmann, one of the darlings of the Tea Party, who believes in the Free Market and massively reducing Federal Government regulation, not too many years ago wrote at least two letters to the National Government thanking them for keeping the price of pork high.  She and her husband were involved in running her stepfather’s pork farm during his period of illness.

This is one example of pushing the envelope.  The government maintains price parity on a large number of agricultural commodities.  The object here is to protect the particular item so that falling prices will not cause its producers to go bankrupt.  Since pork is a good part of many people’s diets it is important to keep it on the market at a reasonable price.  Thus the government sets a minimum price on pork and will buy up all the excess pork on the market to maintain this price. This is price parity.  The government maintains a relatively high price for pork so the farmer can continue to produce the product.  If the government ends up with massive amounts of excess pork it will destroy it rather than let the price fall below its parity price.  The pork has to be destroyed because if the Federal Government were to give it away that could force the price of pork to drop below the cost level of producing pork.

This practice goes back to the Great Depression.  The Hoover Administration bought up the surplus cotton crop one year and ended up being stuck with tons of cotton that were later destroyed.  They burned it.  During the Roosevelt Administration many farmers found that it cost more to produce their crops than they could be sold for.  This resulted in milk being poured on the sides of roads and other crops being left to rot in the fields while the people in the cities went hungry.

The concept of parity seemed to make sense.  If the farmers could be guaranteed a reasonable profit for their labor and the use of their land then everyone would be better off.

In this way the concept of “parity” was born.  The Federal Government would guarantee a minimum price level for assorted agricultural products so that the farmers could produce these products for market without fear of bankruptcy   The theory seemed valid and worked during the Great Depression.  But, in time, if there is a price guarantee then any number of people could go into the business of producing these food commodities and no matter how much is produced they could be sure of a market and a profit.  Agriculture became big business.

In 1945, after World War II, the European countries began producing their own food products.  The U.S, farmers no longer had the world as their market.  They had pretty much fed the Allied Nations during the war.  Now, suddenly, they began to have terrible surpluses.  Earlier, after World War I the price of American foodstuffs dropped like a rock falling down a mountain.  The American farmers never really recovered until the outbreak of World War II.

The United States Government began using parity at this time.  One example was wheat.  After World War II the U.S. government bought up all the surplus wheat produced in the nation, waiting for a propitious time when there might be a shortage.  This never happened.  The surplus was stored in the decommissioned Liberty Ships that were birthed in various ports throughout the United States.  When the hulls of these ships were filled with wheat and the surplus continued coming in, tugboats hauled these vessels out to sea.  By using hoses and air pressure the hulls were emptied with the wheat being shot out into the ocean; the empty ships were hauled back to their former ports, where the whole process was repeated again and again.  This was the government supposedly on a practical basis, going against the Free Market.  It may have been practical after World War II but is price parity practical today?

The concept of the Free Market, as enumerated by Adam Smith in his 1776 work, Inquiry into the Nature and Causes of the Wealth of Nations, developed the modern concept of the Free Market. It specifically pushes government out of any interference with the production of any goods and services.  According to Smith all types of production are brought about by demand.  If there is a demand for any particular product entrepreneurs or farmers will produce the food item or commodity.  These producers are motivated by what he called “the invisible hand,” profit.  Demand, which engenders profit, will bring about a need for supply.  Initially, when limited amounts of any product are available the price will be high.  As more and more producers come into the field and supply increases the price will drop.  Eventually the price could drop to below the cost of production for many of the producers, then the least efficient farmers, producers, entrepreneurs will be forced out of the market.  The more component ones will continue to produce the product for a profit. The final result is that at some point equilibrium will be reached.  The most efficient producers will continue to function, getting a reasonable profit for their product or commodity and the consumer will get the item at the best or lowest possible price.  Under no conditions is the government to interfere in the process because that would disrupt the balance.  This is how the Free Market is supposed to function.

In the case of pork, parity artificially raises the price of the meat.  Too much is produced, and much of it at higher than necessary prices.  Government interference protects the inefficient producers and floods the market with overly expensive products.  The concepts of the Free Market and price efficiency are ignored.

In times of crisis or during extreme economic downturns the concept of “parity” has been necessary.  But once started it seems to go on forever.  What happens is that large-scale producers can and do jump into the market and begin producing on a very large scale, the particular product.  Theirs is a no lose proposition for the pork farmer.  Currently the taxpayer through the Federal Government is spending well over twenty billion dollars a year on this practice.  They are paying for the benefit of keeping the price of their daily food items high.

What I find interesting and ironic is that the Republican Party and particularly its Tea Party component, which strongly supports the idea of the less government the better, is adamant against dropping any of these costs.  And, I understand that upward of eighty percent of these parity payments go to large agricultural corporations that run their farms as major industries.  I would suspect that many of these concerns are regular contributors to politicians and political campaigns.

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