The Weiner Component Vol.2 #10 – The Fed: Saving the Country & the Future

English: Janet Yellen being sworn in by Fed Ch...

English: Janet Yellen being sworn in by Fed Chair Ben Bernanke (Photo credit: Wikipedia)

Ben Bernanke, the Federal Reserve Chairman from 2006 to 2014, had developed the Bernanke thesis based upon his conclusions about the reasons for the Great Depression of 1929.

 

Official portrait of Federal Reserve Chairman ...

He found that the financial disruptions of 1930 to 1933 reduced the efficiency of the credit allocation process. The Fed had raised interest rates and made borrowing money more expensive. This resulted in higher costs and reduced availability of credit, which acted to depress aggregate demand. When banks face a mild downturn they are likely to significantly cut back on lending and other risky ventures. This further hurts the economy and creates a vicious cycle turning a mild recession into a major depression. When the Federal Reserve did that it far worsened conditions during the 1929 Depression.

 

Or to state the above simply: fear of a depression can turn a mild recession into a giant depression. Seemingly this is what occurred again in 2008. It would seem that Ben Bernanke was in the right place at the right time. He was able to utilize his principles and bring about a softening of the 2008 Crash from a major depression into a Great Recession.

 

What he did was drop the interest rate that the Fed charges banks to 0 and in his last two years as Fed Chairman he added 80.5 billion dollars a month to the National Cash Flow.

********************************

There were two major problems that emerged from the 2008 Housing Disaster. One dealt with the billions of pieces of mortgage paper that the banks had created from the mortgages. Left to itself it would take decades for this problem to be resolved. No one really owned the mortgages that had been broken up into hundreds of pieces and applied to multitudinous Hedge Funds. There were not even real records of their existence. The assorted houses would eventually go to foreclosure for none payment of property taxes. And no one knew when that could occur for the majority of them. They then would or could be sold for the price of the back taxes. The deserted homes would go first, after three of so years. The others, several years after people stopped paying property taxes on them. It was an impossible mess.

 

The second problem was that there was not enough money in circulation and the banks did not consider home loans safe investments. Money had to be loosened up.

 

What Bernanke did during his last two years in office was to add 85 billion dollars a month to the economy, an additional 40 billion was deposited in the banks, causing them to loosen up with financing new homes and refinancing old ones and 45 billion was spent buying up the multitudinous mortgage pieces.

 

The program was ended in 2014 by reducing the amount spent each month until 0 was reached in both categories. In February 2014, when Janet Yellen became the new Chairperson in charge of the Federal Reserve, she spent the first two months of her four year tenure ending the program. She also gave herself the option of renewing the program if she and the Fed Board felt it was necessary.

 

The mortgage pieces were at some point or points destroyed by the Fed. The Federal Government did not want to go into the real estate business, it wanted to get rid of this quagmire that was hanging over real estate in the U.S. After a little over two years this problem largely disappeared. Two years after that when Donald J. Trump became President no one seemed to remember it.

 

In essence while the Federal Reserve spent about six trillion, three hundred billion dollars straightening out the mortgage debacle a good percentage of that money came back in taxes. It was spent within the country on goods and services indirectly creating jobs and increasing the GDP. The Government did not waste the money; they expanded a shrinking economy.

 

The same can be said for the 40 billion a month being deposited in banks across the country. The approximately five trillion six hundred million dollars spent here tended to loosen up the banking attitude toward housing and got that industry growing again. It also added positively to the economy. In addition it also did not stir up any real inflation in the economy. Neither policy did.

 

This was the application of the Bernanke economic principle. It prevented the economy of the United States from collapsing and similar actions did the same thing for foreign economies. This action also made use of money as a tool to keep countries functioning and avoiding major depressions. Money was no longer an object of value for governments. Each government could produce it at will. It now became a means that could be used to control economic conditions. This action became Bernanke’s contribution to the principles of economics.

*******************************

Janet Louise Yellen assumed office as the Chair of the Federal Reserve on February 3, 2014. She had been the Vice Chair from October 4, 2010 to February 3, 2014. Prior to that she was President of the Federal Reserve Bank of San Francisco from January 11, 2004 to October 4, 2010.

 

Dr. Yellen is married to George Akenlof, a Noble prize-winning economist who is a professor at Georgetown University. Their son, Robert Akenlof teaches economics at the University of Warwick.

 

During her nomination hearings on November 14, 2013 Janet Yellen defended the more than three trillion dollars in stimulus funds that the Fed had been injecting into the U.S. economy. She also testified that U.S. Monetary Policy would revert toward more traditional monetary policy once the economy returned to normal.

 

Yellen is the first woman to hold the position of Chairperson of the Federal Reserve. On December 16, 2015, with Yellen as Chairperson, the Federal Reserve raised its key interest rate from 0% to ¼ of one percent. Since that time the interest rate has been raised twice, each time by ¼ of one percent. It now stands at ¾ of one percent. It has been announced by the Fed that there will be additional increases over the year 2017.

 

My overall impression of the Chairlady is that she is very caucus in all her actions. She initially misinterpreted the overall effects of the 2008 Housing Debacle feeling that it would not be that serious. She doesn’t want to make another mistake.

 

While the cost of a non-existent or very low interest rate has kept the cost of borrowing money down and has led to a resurgence in home buying it has also kept down the cost of interest the banks pay their depositors from whom they get the funds to lend out. Banks have and are paying as little as 1/10 of one percent interest to many of their depositors. In essence interest that the banks pay to their depositors is so low that the financial institutions are just about getting their money for free.

********************************

After the Presidential Election in 2016 of Donald J. Trump to the presidency Dr. Yellen vowed to protect Dodd-Frank, the law that limited the actions of the banks that was passed after the Housing Debacle of 2008.

 

Trump had denounced Dodd-Frank, stating that he will do away with it. Trump has also stated that he will not reappoint Janet Yellen in 2018, when her current term ends.

 

Janet Yellen is a Keynesian economist and advocated the use of Monetary Policy in stabilizing the economic activity of the business cycle. She has also stated that occasionally letting inflation rise could be a “wise” and humane policy if it increases output. She has stated that each percentage point drop in inflation results in a 4.4% loss of the Gross Domestic Product (GDP).

*************************************

Dr. Janet Yellen’s term ends in 2018. It is then up to the President to reappoint her or to appoint someone else as Chair of the Federal Reserve. President Donald Trump, if he is still President and if he follows his pattern of appointments, will probably appoint a non-economist to that position. It might even be a banker. What will the result be both to the country and to the Federal Reserve?

The Weiner Component Vol.2 #10 – Part 9: The Fed: Saving the Country & the Future

 

Ben Bernanke, the Federal Reserve Chairman from 2006 to 2014, had developed the Bernanke thesis based upon his conclusions about the reasons for the Great Depression of 1929.

 

He found that the financial disruptions of 1930 to 1933 reduced the efficiency of the credit allocation process. The Fed had raised interest rates and made borrowing money more expensive. This resulted in higher costs and reduced availability of credit, which acted to depress aggregate demand. When banks face a mild downturn they are likely to significantly cut back on lending and other risky ventures. This further hurts the economy and creates a vicious cycle turning a mild recession into a major depression. When the Federal Reserve did that it far worsened conditions during the 1929 Depression.

 

Or to state the above simply: fear of a depression can turn a mild recession into a giant depression. Seemingly this is what occurred again in 2008. It would seem that Ben Bernanke was in the right place at the right time. He was able to utilize his principles and bring about a softening of the 2008 Crash from a major depression into a Great Recession.

 

What he did was drop the interest rate that the Fed charges banks to 0 and in his last two years as Fed Chairman he added 80.5 billion dollars a month to the National Cash Flow.

********************************

There were two major problems that emerged from the 2008 Housing Disaster. One dealt with the billions of pieces of mortgage paper that the banks had created from the mortgages. Left to itself it would take decades for this problem to be resolved. No one really owned the mortgages that had been broken up into hundreds of pieces and applied to multitudinous Hedge Funds. There were not even real records of their existence. The assorted houses would eventually go to foreclosure for none payment of property taxes. And no one knew when that could occur for the majority of them. They then would or could be sold for the price of the back taxes. The deserted homes would go first, after three of so years. The others, several years after people stopped paying property taxes on them. It was an impossible mess.

 

The second problem was that there was not enough money in circulation and the banks did not consider home loans safe investments. Money had to be loosened up.

 

What Bernanke did during his last two years in office was to add 85 billion dollars a month to the economy, an additional 40 billion was deposited in the banks, causing them to loosen up with financing new homes and refinancing old ones and 45 billion was spent buying up the multitudinous mortgage pieces.

 

The program was ended in 2014 by reducing the amount spent each month until 0 was reached in both categories. In February 2014, when Janet Yellen became the new Chairperson in charge of the Federal Reserve, she spent the first two months of her four year tenure ending the program. She also gave herself the option of renewing the program if she and the Fed Board felt it was necessary.

 

The mortgage pieces were at some point or points destroyed by the Fed. The Federal Government did not want to go into the real estate business, it wanted to get rid of this quagmire that was hanging over real estate in the U.S. After a little over two years this problem largely disappeared. Two years after that when Donald J. Trump became President no one seemed to remember it.

 

In essence while the Federal Reserve spent about six trillion, three hundred billion dollars straightening out the mortgage debacle a good percentage of that money came back in taxes. It was spent within the country on goods and services indirectly creating jobs and increasing the GDP. The Government did not waste the money; they expanded a shrinking economy.

 

The same can be said for the 40 billion a month being deposited in banks across the country. The approximately five trillion six hundred million dollars spent here tended to loosen up the banking attitude toward housing and got that industry growing again. It also added positively to the economy. In addition it also did not stir up any real inflation in the economy. Neither policy did.

 

This was the application of the Bernanke economic principle. It prevented the economy of the United States from collapsing and similar actions did the same thing for foreign economies. This action also made use of money as a tool to keep countries functioning and avoiding major depressions. Money was no longer an object of value for governments. Each government could produce it at will. It now became a means that could be used to control economic conditions. This action became Bernanke’s contribution to the principles of economics.

*******************************

Janet Louise Yellen assumed office as the Chair of the Federal Reserve on February 3, 2014. She had been the Vice Chair from October 4, 2010 to February 3, 2014. Prior to that she was President of the Federal Reserve Bank of San Francisco from January 11, 2004 to October 4, 2010.

 

Dr. Yellen is married to George Akenlof, a Noble prize-winning economist who is a professor at Georgetown University. Their son, Robert Akenlof teaches economics at the University of Warwick.

 

During her nomination hearings on November 14, 2013 Janet Yellen defended the more than three trillion dollars in stimulus funds that the Fed had been injecting into the U.S. economy. She also testified that U.S. Monetary Policy would revert toward more traditional monetary policy once the economy returned to normal.

 

Yellen is the first woman to hold the position of Chairperson of the Federal Reserve. On December 16, 2015, with Yellen as Chairperson, the Federal Reserve raised its key interest rate from 0% to ¼ of one percent. Since that time the interest rate has been raised twice, each time by ¼ of one percent. It now stands at ¾ of one percent. It has been announced by the Fed that there will be additional increases over the year 2017.

 

My overall impression of the Chairlady is that she is very caucus in all her actions. She initially misinterpreted the overall effects of the 2008 Housing Debacle feeling that it would not be that serious. She doesn’t want to make another mistake.

 

While the cost of a non-existent or very low interest rate has kept the cost of borrowing money down and has led to a resurgence in home buying it has also kept down the cost of interest the banks pay their depositors from whom they get the funds to lend out. Banks have and are paying as little as 1/10 of one percent interest to many of their depositors. In essence interest that the banks pay to their depositors is so low that the financial institutions are just about getting their money for free.

********************************

After the Presidential Election in 2016 of Donald J. Trump to the presidency Dr. Yellen vowed to protect Dodd-Frank, the law that limited the actions of the banks that was passed after the Housing Debacle of 2008.

 

Trump had denounced Dodd-Frank, stating that he will do away with it. Trump has also stated that he will not reappoint Janet Yellen in 2018, when her current term ends.

 

Janet Yellen is a Keynesian economist and advocated the use of Monetary Policy in stabilizing the economic activity of the business cycle. She has also stated that occasionally letting inflation rise could be a “wise” and humane policy if it increases output. She has stated that each percentage point drop in inflation results in a 4.4% loss of the Gross Domestic Product (GDP).

*************************************

Dr. Janet Yellen’s term ends in 2018. It is then up to the President to reappoint her or to appoint someone else as Chair of the Federal Reserve. President Donald Trump, if he is still President and if he follows his pattern of appointments, will probably appoint a non-economist to that position. It might even be a banker. What will the result be both to the country and to the Federal Reserve?

The Weiner Component Vol.2 #7 – Part 4 – The Fed & the Inflationary Spiral

English: Former President Jimmy Carter and his...

English: Former President Jimmy Carter and his wife Rosalynn, wave from the top of the aircraft steps as they depart Andrews Air Force Base at the conclusion of President Ronald Reagan’s inauguration ceremony. (Photo credit: Wikipedia)

English: President Ronald Reagan, the 40th pre...

English: President Ronald Reagan, the 40th president of the United States of America, delivers his inaugural address from the specially built platform in front of the Capitol during Inauguration Day ceremony. (Photo credit: Wikipedia)

The Chairperson of the Federal Reserve heads this bank. Currently Janet Yellen is the chairwoman. She has held this position since 2014 when she was appointed by President Barack Obama. Prior to that Ben Bernanke was chairman from 2006 to 2014. He was appointed by George W. Bush and completed his term under President Obama. Alan Greenspan was the prior Chairman. His term was the second longest in the history of the Federal Reserve going from 1987 to 2006, 19 years. He was preceded by Paul Volcker, who served from August 1979 to August 1987. He was appointed by President Jimmy Carter and left toward the end of the Reagan administration. Paul Volcker served as Chairman for two terms, from August 6, 1979 to August 11, 1987.

 

These are the most recent people to serve as chairpersons on the Federal Reserve. If we go back to the Presidency of John Fitzgerald Kennedy, January 20, 1961 to November 22, 1963, the Fed Chairman was William M. Martin who had been appointed by Harry S Truman and served from April 2, 1951 to February 1, 1970.

 

The problem, when Kennedy became President, was that the country was in a recession cycle. By using fiscal policy President Kennedy was able to turn that economic phase into a recovery phase of the business cycle. At this time unemployment was slowly increasing and consumption was slowly decreasing. The economy needed an impetus. What the President proposed and Congress passed was a tax decrease. The result was that people had more money which they spent and the amount of Federal taxes collected actually increased. This move fairly quickly took the nation from recession to recovery.

 

Since that time, over fifty years ago, almost every Republican President has tried to follow that fiscal policy. In no case has it worked as announced. Instead from the time of President Ronald Reagan on it has allowed the National Debt to mushroom into the trillions of dollars. And during the last year of President George W. Bush’s presidency this tax reduction process led to the bursting of the Housing Bubble or the Great Recession in 2008. In the process of avoiding a Second Great Depression President Barack Obama was forced into excessive spending. It was the President and the Fed Chairman, Ben Bernanke, who enabled the country to squeak through the 2008 and 2009 Housing Crash or bubble bursting.

 

Currently President Donald J. Trump is proposing a massive tax cut for business and the wealthy. It has been suggested that this could bankrupt the U.S. Government. Whether his decrease in taxes and proposed increase in spending for the military comes about, if it does, then to what extent it will do so is still up for debate. Trump and some members of his Cabinet are claiming they can significantly lower taxes and increase production without adding to the National Debt. It should be an interesting experiment.

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President Lyndon B. Johnson, who had been President Kennedy’s Vice-President and succeeded him at his death in 1963, when he was reelected to office in 1965 massively accelerated the war in Viet Nam. He would have America, the strongest nation in existence, force North Viet Nam to accede to the wishes of the United States. And, at the same time, he would not lower the standard of living of any American. The country could both afford to fight a major war and care for its population as though it were still at peace; we would have both guns and butter. His only requirement was a small addition by everyone to their income taxes. This led to the beginnings of an inflationary spiral that would reach fifteen percent by the end of the 1970s. The inflation spiral would be broken by the Fed by taking drastic action in the very early 1980s.

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Paul Volcker was appointed was appointed Federal Reserve Chairman on August 6, 1979 by President Jimmy Carter. He began a process to end the inflationary spiral by making the borrowing of money so expensive that it would cause the percent of interest to rise to where it would cost too much to borrow. This, in turn, would cause the price of interest to drop toward zero.

 

If the inflation rate rises too high, like to 12 or 15 percent or more the way to reduce it is by raising the prime rate, the interest level the Fed charges banks, to a very high level. This forces the banks to raise their interest level to 20 percent or more. Money becomes too expensive to borrow.

 

Unfortunately many businesses have dormant periods during the year when they have to borrow money in order to meet their expenses. If the interest rate on loans is too high they cannot afford to borrow any money and consequently they go bankrupt. This causes an almost instant recession, with massive layoffs throughout the country. But it will end an inflationary spiral.

 

Early in this process President Jimmy Carter received innumerable complains from people around the country about what was happening to them and their businesses. He asked Volcker to back off and Volcker did so. The high inflation continued throughout President Carter’s term in office.

********************************

Paul Volcker served two four year terms as Chairman of the Fed. He retired from that position on August 11, 1987, when Ronald Reagan was President of the United States. Reagan succeeded Carter in 1981 and remained in office for two terms, until 1988. He allowed Volcker to break the back of the inflationary spiral.

 

Under Reagan the monetary policies of the Federal Reserve Board led by Volcker were credited with curbing the rate of inflation and the expectations that inflation would continue. The United States rate of inflation peaked at 14.8 in March of 1980 and fell below 3 percent by 1989. The Fed Board raised the federal funds rate that had averaged 11.2 percent in 1979, to a peak of 20 percent in June of 1981. The prime rate also rose to 21.5 percent in 1981. All of this lead to the 1980-1982 recession, in which the unemployment rate rose to over 10 percent.

 

All of this elicited strong political attacks and wide spread protests. There were high interest rates on construction, farming, and the industrial sectors. U.S. Monetary Policy eased in 1982, leading to a resumption of economic growth.

 

Perhaps the most unfortunate part of this necessary readjustment of the economic base of the United States was the fact that President Ronald Reagan made a presentation on television one weekend in 1981 in which he held up the business section of the Sunday Times and stated that there were twenty full pages of job offers in the Times. If a person lost their job then they should go to where there was jobs available. President Reagan did nothing else. He could or should have set up some federal agency that could offer reliable job information. But he did not do so.

 

What followed was that sections of cities became deserted as people filled their cars with their belongings and followed rumors going from place to place looking for work. Mostly there were no jobs. Temporary agencies did a land-office business that year. I remember reading about an instance where a man with a wife and small child, having stopped for a red light, opened the passenger door, and pushed his wife and child out of the vehicle. When the light changed he drove on.

 

Cars moved from city to city that year, following rumors. While there had been some homeless before 1981 they became very visible from that year on; there were so many of them. The problem is still with us.

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What followed from 1981 on was the Fed’s tight money and the expansive fiscal program of the Reagan Administration: large tax cuts, and a major increase in military spending. While the middle class got some tax relief the tax cuts were essentially for the upper echelon of society who had their taxes reduced substantially. While the inflation rate stayed low, which it still is today, President Reagan’s spending produced large Federal budget deficits.

 

This combination of growing deficits and other economic imbalances led to the growing Federal debt and a substantial rise in Federal costs. Under Reagan’s spending the debt would reach over one trillion dollars for the first time.

 

Presumably Paul Volcker was fired or replaced in August 1987 after serving two four year terms in office because the Reagan Administration didn’t believe he was an adequate deregulator. Volcker was replaced on August 11, 1987, by Alan Greenspan.

The Weiner Component #147 Part 3 – Money: The FED & the Treasury

English: Chart of M1 money velocity for the Un...

English: Chart of M1 money velocity for the United States. Nominal GDP, and M1 NSA stock data from Federal Reserve. M1 velocity calculated using nominal GDP divided by M1 stock. Data in log transformation. NBER Recessions in gray. Created in Excel. (Photo credit: Wikipedia)

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)

On Wednesday, February 10, 2016, the Chair of the Federal Reserve, Janel Yellen, met with the House Financial Services Committee to give her semiannual report on the state of the nation and answer questions from each of the members.  Again on Thursday, February 11, she met with the Senate Finance Committee to do the same thing.  As she has shown prior she emphasized caution and the need for the FED to carefully monitor the tenuously existing economic conditions in the world.

 

The major problem that exists today is the widening fallout or nervousness from concern over China’s weak currency and economic outlook, which is rattling financial markets around the world.  China’s GDP (Gross National Product) had traditionally been around 8%.  Over the last year or so it dropped considerably while the value of her currency has increased against other national currencies.  A higher Yuan would make China’s goods more expensive overseas.  The Central Government stated that they would lower the value of the Yuan on international markets.

 

This is done, following the Laws of Supply & Demand, by increasing the amount of actual currency available on the international exchanges, supplying more Yuans than are needed.  In this way the Yuan becomes more available than all the other currencies and its value against them drops.

 

This process, in turn, would bring down the cost of Chinese goods in trade with other countries.  Of course, all the non-Chinese markets did not appreciate their currencies increasing in value over that of the China.  This made numerous other countries nervous and some decided to react in a similar fashion.  Consequently a number of governments began attempting to manipulate their currencies.  These actions tended to deregulate international trade.  The United States dollar rose in value against all the other currencies, being considered internationally the most stable.

 

China made two attempts to do this.  Each did lower the value of the Yuan, but in both instances it fell fractionally.  China’s GDP did not rise to its coveted 8%.  Their Central Bank, by attempting to raise the GDP actually, lost control of their economy.  What they had achieved was a currency oscillating in value.  The value of some other currencies have tended to be equally erratic; but the other counties that attempted to manipulate their currency values did not advertise the fact.  Will a new equilibrium be reached in the future?  Probably, at some point.

 

Meanwhile most of the stock markets in these assorted countries went on roller-coaster rides, mainly ending downhill.  Nervous people sold some or all of their stocks; the different stock markets dropped hundreds of points; automatic computer-controlled programs owned by large holders like retirement funds automatically sold; and the drops became even more dramatic.  Exchange rates of the different currencies went on a tetter-totter basis and international stability tethered on a day by day basis

 

Using this information Ms. Yellen and her Board of Directors at the Federal Reserve have to make projections of what the international and national futures will be.  The American Stock Market has lost at least 10%, to date, of its value.  Most stocks are down considerably.  This is also true of most international stocks.

 

The Chinese Government has made two attempts to lower the Yuan.  They lowered it fractionally both times and then lost control of what they were doing.  Everything, inside and outside of China, has been erratic since.  The Central National Banks are now waiting for a sense of equalization to come again.  So far it hasn’t and everyone is still waiting for some return of normality; and this includes Chairwoman Yellen and the Board of Directors of the Federal Reserve.

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In her remarks Yellen said that the Federal Reserve expects to eventually raise its rates slowly; but they are not on any preset course.  She commented that it was possible that the recent economic weakness could prove temporary, and if so it could set the stage for further economic growth and a stronger increase in inflation than the FED is currently forecasting.  If this occurs then the FED would be likely to hike rates more quickly than anticipated.

 

Ms. Yellen said that various economic indicators demonstrate that China, the world’s second largest economy, was undergoing a sharp slowdown.  But recent declines in the value of that country’s currency have intensified concerns about her future economic prospects.

 

This uncertainty led to increased volatility in global financial markets and against the background of monetary weakness abroad, exacerbated concerns about the outlook for global growth, which generally caused the nervous or erratic actions within the various nations.

 

Yellen also stated that the shark decline in U.S. stock prices, rising interest rates for riskier borrowers and further strength in the dollar has translated into financial conditions that are less supportive of growth.

 

“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer term interest rates and oil prices could provide some offset.”

 

She stated that the labor market remains solid, creating 150,000 jobs in January.  That was enough to push the unemployment rate down to 4.9%.  Inflation, however, has continued to fall below the FED’s target of 2% annual price increases.  (At the beginning of February it was .7 of 1 %.)  The shortfall has been steeper recently because of the renewed drop in oil prices and stronger dollar, which holds down U.S. inflation by making foreign goods cheaper for American consumers.

 

But Yellen said the Central Bank continued to believe that the energy declines and dollar strength would fade in coming months.  Inflation would also begin to move closer to 2% as a healthy labor marker pushes up wages.  She also stated that worker pay has started to show its first significant gains since the Great Recession ended 6 ½ years ago.

 

In late 2015 the interest rate the FED charges banks went from 0 to ¼ of 1%.  When the next increase in interest rates will occur is not known.  The FED will examine the indicators again in March.  Many economists believe there will be few if any increases in interest charged by the FED this year.

 

After her report Chairwoman Yellen took questions from each of the members of the Committees, for the House on Wednesday and the Senate on Thursday.

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What Dr. Yellen implied in her statement was that the economies of China, the United States, and many European nations are far healthier than current economic conditions demonstrate.  She indicated that the international economic chaos begun by China will probably soon end in a new financial equilibrium and trade will probably be again balanced between nations.

 

What has caused the stock markets around the world to go through their current gyrations has been nervousness by investors within the individual nations.  It has been fear or an overreaction to the erratic international financing, a sort of terror that the different national economies could follow domestically the international situation.

 

Of course the irony here is that the currency of the United States is considered the safest in the world and the dollar is the most valuable currency available.  Particularly since the U.S. National Debt has supposedly reached about 19 trillion dollars.

 

Dr. Yellen indicated that the FED is doing nothing but wailing for international trade to stabilize again.  At that point the FED will again raise the subprime rate it charges banks another ¼ of 1% bringing it to ½%.  There will probably be very few, in any, raises this year; but it will pick up in the future.  She mentioned that the average depositor is being financially hurt by the low interest rates they’re receiving from their almost required deposits to the banks.

 

While she didn’t state this fact the implication is that countries like Venezuela, that function mainly on one major export like oil, and whose economies have suffered from the drop in oil prices, are now looking for other products or raw materials they can export to raise their economic levels within their borders.  This may take a few years; but that can’t be helped.  The current drop in the price of oil has been matched by the current drops in their standards of living.

******************************

After her remarks Dr. Yellen took questions and comments from all the members of the committee.  Each had a short period to deal with her.  The questions and comments tended to be quite enlightening.  The Democratic Congress people were a bit friendlier in their remarks than the Republicans.

 

One area of interest was that the Federal Reserve has, between 2009 and 2015 transferred over 600 billion dollars to the U.S. Treasury.  This is money that is separate from all the taxes and fines collected.  It was further denoted as no less than 100 billion dollars a year went to the Treasury.

 

The sources of these funds were not mentioned.  Some of these funds are interest on the part of the National Debt which the U.S. Government owns.  The Federal Government admits to owning 40% of its own debt.  That is a conservative estimate.  I would put it up to, at least, 50% or even over 60%.  The Federal Reserve uses parts of the Debt to adjust conditions within the economy at times.  Federal bonds are both short and long term.  Some are always being sold and other expire and are cashed out.  The FED can add money to the economy or National Cash Flow by selling less than it cashes out or the reverse can be done.  If inflation is too low or there is a recession they will sell less than they cash out.  If, on the other hand, inflation is too high then the FED will sell much more than they cash out. Reducing the amount of money available in the economy.  These changes do not necessarily totally solve the economic problem but they were and are a tool that lessens their impact.

 

Forgetting adjusting economic conditions, the rest of the cash transferred to the Treasury was just a simple money transfer.  All of this money was just brought into existence by the FED.  After all they control the printing presses and can issue money within legal limits as they decide it is necessary.  Remember, what stands behind the dollar is the word of the United States Government.  There is nothing else, no entity of value other than the Central Government.  All money today is a token, merely an instrument for exchanging goods and/or services for goods and/or services.

 

There was no mention of the 45 billion dollars a month that was spent for well over two years during this period resolving the housing dilemma created by the banks during the end of 2008 when the Real Estate Market crashed.  The FED bought 45 billion dollars’ worth of fractional mortgage pieces in all 50 states and territories upon which it would never be able to collect its investment.  In essence the FED bought the economy out of the bank caused Housing Bubble.

 

One area of concern that was brought up by several Black members of the Committee was the fact that unemployment is far higher in minority areas of the country, that the general 4.9 percent unemployment was as high as 50% in some of the Black and Hispanic neighborhoods and among young minority members entering the labor market.  Dr. Yellen stated that Monetary Policy was a general force that worked throughout the economy.  It did not differentiate between ethnic or racial groups, that this type of job creation was the province of Congress, using Fiscal Policy to create work projects in area where these people lived.

 

While she didn’t state it this Fiscal Policy was done from 1987 through 1980 during the Administration of President Jimmy Carter.  Assorted Public Projects were built throughout the nation that benefited both communities and created employment in areas that had larger than normal levels of unemployment.

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There is another factor which Dr. Yellen did not mention but that is highly important and that is the velocity of money.  New currency added to the overall economy or National Cash Flow is spent numerous times before it becomes part of the increased amount of money available in an increased National Cash Flow.  It can be spent three to eight times and in some instances as many as twelve times as goods and services are paid for and then reused by the person or institution who receives them.  This is a continuum.

 

If we take five as the average number of times the 800+ billion dollars, the FED added to the economy between 2009 and 2015, as the average velocity in which the money passed through the overall economy the amount of money Dr. Yellen stated was in excess of 4 trillion dollars.  And if we add to that the 45 billion a month that was used to resolve the mortgage crisis for a period of over two years, that makes another 540+ billion dollars, from which the government never collected back a dime.

 

With all this money added to the economy inflation by February of 2016 was 7/10ths of 1%.  The indication is that the total United States economy totally needed these funds, not only to avoid a Major Depression but to just function and grow.  Keep in mind that the overall population of the country is dynamic, constantly growing.

 

If we just consider the taxes paid on this money on a municipality, city, and federal level we are talking about survival for local and state governments.  For example a state like California charges a sales tax of 7½% Imagine how much additional sales tax would be paid by 40 some million people.  States like California and New York have state income taxes which are a small percentage of what the Federal Government collects, but can still be a substantial sum.  Try to visualize the additional amounts collected by these or other states that have their own income taxes.  And, of course, the increased Federal Income taxes on the additional 4.5 billion plus dollars.

 

In all probability the United States recovery from the 2008 Real Estate Crash was brought about by this Creative Monetary Policy brought about by the Federal Reserve with the support of the President.

 

If the Republicans in the House of Representatives were not so Penny wise and dollar stupid as they have been since 2011 when they took control of the House of Representatives they could, as Dr. Yellen suggested in her answers to questions and President Obama earlier proposed, have passed Fiscal Policy laws and the infrastructure of the United States could well be on its way to modernization.  This, in turn, on a more focused basis than just Monetary Policy would have brought unemployment well down from the 4.9% it is now and significantly increased the country’s GDP.  The difference it would have created in the National Debt by the increased government expenditures would have been made up by the increase in taxes on every level of government.  This also could have focused on minority areas which currently have inordinately larger levels of unemployment.

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One of the comments made by a Republican legislator was interesting in demonstrating his ignorance of the basic principles of Macroeconomics.  His comment referred back to the Golden Era of the Federal Reserve when Alan Greenspan was Chairman of the FED and, in the opinion of the legislator, we were living in a Golden Age.  How misinformed or ignorant can anyone be?  There should be an economics literacy test for people running for Congress

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It is because of people like Barack H. Obama, Dr. Ben S. Bernanke, and Dr. Janet L. Yellen that the country is as economically healthy as it is now.  Without them the United States would today be in a dire depression.

The Weiner Component #143 – President Obama & the Republicans

With his family by his side, Barack Obama is s...

With his family by his side, Barack Obama is sworn in as the 44th president of the United States by Chief Justice of the United States John G. Roberts, Jr. in Washington, D.C., Jan. 20, 2009. More than 5,000 men and women in uniform are providing military ceremonial support to the presidential inauguration, a tradition dating back to George Washington’s 1789 inauguration. VIRIN: 090120-F-3961R-919 (Photo credit: Wikipedia)

During the Republican Presidential Debates, which are being held nearly a year before the next Presidential Election, one of the constantly recurring themes that a number of the Republican Presidential candidates continually bring up is that the current President, Barack Obama, is a failed president, not capable of running the country.  Of course if he’s that bad one would expect a movement to impeach him.  But I haven’t heard of that happening.  So what we have is an interpretation by the prospective Republican candidates who of late have tied Hillary Rodham Clinton to President Obama as a failed Secretary of State.  I suppose the more they denounce him the greater they feel they themselves are.

 

Also after denouncing President Obama and Clinton the Republican candidates announce generally what they will do, the results from their handling of specific problems.  How they will solve military issues by sending in American troops, create a no-fly zone over Syria, create increased employment by getting rid of the Environmental Protection Agency (EPA).  But more pollution will not necessarily produce more jobs.  It will successfully, however, shorten a number of lives.  It must be wonderful to be that sure of oneself.

 

In essence most of the potential candidates are blowing in the wind!  Most, if not all, that they say they will do requires either an act of Congress or an Amendment to the Constitution.  According to what Donald Trump says as to what he will do would need a new document of government to drastically increase the powers of the president and limit Congress’ powers.  In the case of Carley Fiona I keep remembering that after she became CEO of Hewlett Packard the stock dropped to half its original value and she argued that she was a positive force even though she lied to her employees to get them to reduce their wages and thus reduce company costs.  She left the company or was fired by the Board of Directors not too long after with a buy-out package worth about 15 million dollars.  She has also lied or fabricated in her public announcements as a Presidential candidate.  Ted Cruz, it seems to me from much of what he has said, would like to become leader or fuhrer of the United States rather than just President.  He seems to have some of the elements of the late Senator Joseph McCarthy.

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I have often wondered what would have happened if in 2008 Senator John McCain had become President of the United States.  First off, he would have inherited a full-fledged Great Recession or potential Great Depression from former President, George W. Bush.  While Bush had temporarily initially bailed out many of the banks at the end of his presidency the question that arises is would McCain have continued the process?  According to the current Republican Presidential candidates no business is too big to fail.  The indication is that McCain would probably not have bailed out the banks.  The result would have been that the major banks in the United States would have gone under.  The movement of money through the economy would have slowed to a trickle and the country would have gone into a major depression that would make the Great Depression of 1929, which did not end until 1939 with the outbreak of World War II, look like a mild recession.  We would still today be feeling its strong negative effects.

 

In addition since the FDIC (Federal Deposit Insurance Corporation) insured every bank account up to a half million dollars the Federal Government would have had to pay out all the accounts of the bankrupt banks or take over and continue to operate those banks.  Either solution would have disrupted the dollar internationally and brought about major depressions in all the major industrial nations.

 

Unemployment in most if not all of these nations would have dropped to over 75%.  It was only 50% at the depth of the Great Depression.

 

In addition there would have been no bail out of the automobile industry and all the American car producing companies would have gone under in the U.S.  Mitt Romney distinctly made the point in 2012 when he ran for the Presidency, as the Republican candidate, that the auto companies should have been allowed to have gone through bankruptcy.  His point there is that in a bankruptcy the court generally declares the stock worthless.  The judge uses the value of the stock to pay off the company’s debt.  The same management that initially made the decisions that caused the bankruptcy stays in control of the company.

 

Way to go Mitt!  Your group stays in control of the company and the stockholders who trusted your leadership all get screwed.  It sounds very much like what Donald Trump did with his casinos in New Jersey.

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Barak Obama, in 2008, ran for President on a platform of change.  And it was indeed time for a change after the disasters brought about by the George Bush Jr. administration.  Presumably Bush had declared war against Iraq because they had secreted away weapons of mass destruction.  Actually he had the military invade the country because its leader, Saddam Hussein, had attempted to have his father, former President Bush Sr., assassinated and he was also acting as Sheriff of the Middle East, bringing American Democracy to Iraq.  The CIA was amazed when they heard his reasons for the act.  The United Nations, at the time, was legally searching Iraq for weapons of mass destruction.  Bush ended that with the U.S. invasion.

 

President Obama inherited a country ready to slip into total disaster.  Employment was rapidly dropping.  Property values were falling like a major landslide.  While he had been elected to bring about change his immediate problem was literally keeping the society functional.  He had to return to normality before he could inaugurate any real changes.  The fact that he also inaugurated Universal Health Care at this time is a demonstration of his level of competence.

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In periods of economic recession the government has two major weapons to fight the economic down-flow.  One is Monetary Policy which is controlled by the Federal Reserve (FED).  Here the FED can increase the amount and movement of currency in the general society by lowering the interest rates it charges banks.  This, in turn, forces the banks to lower their interest rates on the monies they lend out.  The effect of this is to loosen up the flow of currency through the economy, making the cost of borrowing cheaper, and thus encouraging growth or economic expansion.  Will this always happen?  The answer is generally; there are occasionally other variables which can hinder growth.

 

Under normal conditions there will be economic expansion and the GDP (Gross Domestic Product) would increase helping to end or counter-act the recession.  Going along with this is an increase in employment.

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The FED, which has twelve distinct branches throughout the fifty states, constantly monitors the entire economy.  It’s as though it has a thermometer throughout the nation and can interpret what’s happening in every part of the country.  Its main function is to keep the economy as healthy as possible.

 

Another tool the FED has is its control of how much money banks can led out.  This amount can be raised or lowered.  Every commercial bank or credit union has to keep a small percentage of every loan it makes.  The average is about 5% of all the monies it lends out.  For every $100.00 the bank lends out it has to keep $5.00 in cash.  If that is deposited in the bank then it has to keep 5% of that and so on until it has a $100.00 in cash.  By that time the bank has lent out $1,000.  If this amount is raised by the FED to 10% it then lowers the amount that can be lent out by 50%.  If it is lowered to 2 ½ % it increases the amount to $2,000.00 for every hundred dollars deposited into the bank.

 

The FED also controls the money flow in the U.S. by using the National Debt as a tool, buying and selling government bonds.  When the FED buys back government bonds and does not issue as much in new bonds it can increase the amount of money in circulation.  Doing the reverse of this decreases the amount of money available.  It can also, as it did after 2011, just issue currency to the National Cash Flow.  All this would be done with the concurrence of the President.  During Jimmy Carter’s four year administration he had the FED reverse its policy because of its adverse effect upon a segment of the population.

 

All of these are powerful tools for regulating the economy.  But in some instances they are not enough to bring about the needed positive change.  Such an instance was the 2008 Real Estate Crash.  At that time what was also needed was the other major Federal Government weapon that could help regulate the economy and that was Fiscal Policy.  Fiscal Policy would be one or more laws authorizing government spending passed by Congress and signed by the President.

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From 2009 through 2010, during President Obama’s first two years in office, he worked upon limiting the effects of the Great Recession.  This was done through an intensive use of fiscal policy with a Democratic Congress, continuing the bank bailouts and also bailing out the American automobile industry, among numerous other things.  During this period the Affordable Health Care Bill was passed.  This was the major visible change; the others, keeping the economy from crashing, were mainly invisible.  To many people who voted for him in 2008, the changes he had promised did not come about.

 

In the year 2010 the Midterm Election was held.  A large number of people who had supported President Obama in the Election of 2008 apparently were disgusted with him for not bringing about enough visible change in the society and stayed at home, not voting in the election; this resulted in the Republicans gaining control of the House of Representatives.

 

2010 was a census year in which the population of the country was counted so that the seats in the House of Representatives which are fixed in number could be properly reapportioned.  That year Republicans also won control of a number of states.  Those states and other Republican controlled states were then gerrymandered with new Voting Districts that would give Republicans an advantage in the future elections.

 

The new House of Representatives met as a caucus and took an oath not to cooperate with President Obama in anything.  The former minority Party in the House of Representatives, where the Democrats had had a majority, had taken the same oath two years earlier.  The Republicans had wanted to make him a one term president.  The new House of Representatives would not pass any Fiscal Policy laws.  When presented with a plan by President Obama they totally ignored his recommendations.  In fact they all opposed Obamacare and swore to rescind the Affordable Health Care law and passed such bills over 50 times from 2011 to 2014.  All these bills were ignored by the Senate.

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Because of the nature of what President Obama and his administration were doing there was very little publicity given to most of the changes they were bringing about, keeping the country from falling into a major depression and slowly bringing about recovery from the Housing Crash.  Visibly the President and the Democratic Congress seemed to be doing very little.  The one thing that emerged from that two year period was the Affordable Health Care Law, which was loudly denounced by the Republicans and passed strictly on a political party basis.  All Republicans voting against it and all Democrats, who had the majority in both Houses, voting for it.

 

As a note of irony the Affordable Health Care Bill (Obamacare) was modeled upon a Republican plan developed by a Republican Think Tank and originally applied in the state of Massachusetts by its then governor, Mitt Romney.  The plan, rather than have a single insurer, the Federal Government, relied on private enterprise, the many insurance companies across the country, in order to be put into operation.  It was a means of increasing the amount of business that the insurance companies did with some patient protective limitations.

 

To get Republican support on this bill President Obama and the Democrats had bent backwards to give the Republicans something they could easily support.  The Republicans have continued up until the present to oppose and denounce this law.  Ted Cruz has sworn to end this program when he becomes President.  The term Obamacare was originally stated as a put-down.

 

With the 2011 Midterm Election the Republicans were able to achieve a majority in the House of Representatives.  The voter turnout was very low.  A number of people who had voted for Obama in 2008, particularly among the Hispanics stayed at home and didn’t bother voting.  Thereafter virtually nothing President Obama supported was passed in the House of Representatives.

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One of the major problems within the United States has to do with its infrastructure.  The National Highway System was built in the 1950s during the Eisenhower administration.  Most of the ports are too small to allow the new giant container ships to use them.  Many if not most of the bridges built in the U.S. were done in the early part of the 20th Century if not earlier.  The majority of airports are inadequate in dealing with all the air traffic.  The electric grid throughout the United States is totally dated and in winter parts of it have stopped functioning by freezing up and parts of the country has lost electric power.  Most of the utility companies don’t have the resources to fix this problem, leaving it to the Federal Government.  These are just some of the infrastructure problems, there are many more.  Ultimately most of these come down to the Federal Government as the only source that has the resources to really upgrade the nation.

 

Most of these repairs would in a relatively short period of time pay for themselves by increasing the GDP and significantly increase the tax base on all levels of government.  With one exception, and that is renewing a functioning plan that already existed, both the House and the Senate have ignored these problems.  Ultimately a total upgrade would cost trillions of dollars.  And at some point it will have to be begun and ultimately done.

 

President Obama presented Congress with a detailed plan that would at the same time have begun work on the infrastructure and ended all the effects of the 2008 Real Estate Crash by totally ending unemployment in the country.  The plan would have reduced unemployment to about 2% which is the rate of people changing jobs.

 

The House of Representatives totally ignored the plan and did not even consider it.  To them spending government money they didn’t have to would be anathema; their basic problem was that they could only understand the present which meant that they would be spending additional funds.  The fact that the nation would get that money back with interest in the next decade or so was out of their realm of comprehension.

 

In fact what the Republicans have done in passing legislation in the House of Representatives and in the Senate has been to increase unemployment in the United States.  Using economy or reduced government spending as their excuse they have forced through bills that significantly reduce government spending.  Their final and most important cut was Sequestration which was passed when they could get no agreement with the Democrats in Congress to cut anything else.  This law automatically cuts by a specific percentage every year from just about every program unless a law is pass to stop a section of it from happening.

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The President requires the “advice and consent” of the Senate on most of his appointments of officials to government jobs; particularly supervisory positions such as judges, heads of government departments, etc.  There are more open judgeships now or unappointed heads of departments that at any other time in the history of the United States.

 

An individual that comes to mind is someone that both the Democrats and Republicans approve of whose expertise deals with a phase of banking wherein he can trace the movement of currency through terrorist organizations like ISIS and interrupt that movement.  The current Senate, that has a slight Republican majority, has refused to bring his name up for a vote.  Apparently they don’t want President Obama to have any successes regardless of the cost to the country.

 

However, even though the media just mentioned a small number of these incidents, U.S. explosive drones have killed most of al-Qaeda leaders as was Osama bin Laden in a military raid in Pakistan. They are no longer the military terrorist force they were when they blew up the Twin Towers during the Bush Republican administration.

 

President Obama has just signed a 1.15 billion dollar compromise with the Republican Congress that will keep the Federal Government going and achieve a number of Democratic programs.  It was a compromise bill and will also achieve a number of Republican goals.

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If we examine the achievements of the last dozen or so Presidents, Barak Obama emerges as one of our top leaders.  This is amazing in the respect that for the last five of his eight years in office Congress has consistently worked to keep him from achieving anything.  He emerges as a man among men who has achieved much regardless of the limitations continually set for him by the Republicans in Congress.

 

During most of his administration he has bent backwards to get the cooperation of the Republicans in Congress.  It hasn’t happened.  I suspect that by this time he had had it and will only accept positive results from Congress as he did with the 1.15 trillion dollar budget compromise.

 

In this bill the Republicans have added significantly to the National Debt, a principle they supposedly oppose.  They spent almost as much in 2014 with their last minute bill then to finance the Federal Government through 2015.  They achieved a number of their objectives but they did not defund Planned Parenthood or keep Syrians from immigrating to the United States.  They did however keep Planned Parenthood from getting an increase in funding from the government.

 

Personally I am glad that Barak Obama is President of the United States.  I would hate to think of what might have happened if John McCain or Mitt Romney had won.  President Obama has carried the United States through a very difficult time in our history.

The Weiner Component #120 – The Shrinking Economic World: Interdependence

Seal of the United States Federal Reserve Syst...

English: Clockwise from top-left: Federal Rese...

English: Clockwise from top-left: Federal Reserve, Bank of England, European Central Bank, Bank of Canada (Note: Uploaded for use on Wikinews) (Photo credit: Wikipedia)

Logo of the United States Tennessee Valley Aut...

On the one hand each nation today tends to be strongly nationalistic seeing itself as a unique entity while on the other hand each of the national and regional groups are also strongly interdependent. When any one nation is adversely affected economically then all the others are also negatively impacted. A prime example of this would be the late 2008 bursting of the U.S. Real Estate Bubble whose effect was felt throughout the major industrial nations for at least seven years.

We are today in the 21st Century and interdependent; either we all prosper or we are all undergoing stages of recovery from different levels of recessions. This situation seems to be intensified in some of the 19 nations that make up the Eurozone, which is actually a smaller version of the overall economic world. Whether they survive as an economic unit or not depends upon decisions they will make in the next few months

Most countries have a central government bank like the Federal Reserve in the United States or the European Central Bank for the Eurozone but there is a wild card in all these countries or regions and that is the private banks. To some extent they are limited by the National Banking House but mainly they operate for profit in a Market Economy environment. These banks are motivated by profit and their lending policies can create money or shrink the expenditure of funds within an economy.

An example of this would be in the U.S. after the Real Estate Bubble burst in late 2008. The major banks had recently been bailed out of bankruptcy by the Federal Government with loans and were expected to have a loose money policy to enhance economic recovery. The private banks, however, became ultra-conservative, essentially hording their monies and considerably slowing down the rate of economic recovery.

These banks as they exist today are necessary for the functioning of any National economy.  But, mainly, they exist for profit through fees or the interest rate they charge on their depositor’s savings and checking accounts.  The banks are responsible for the flow of money through the entire economy. Their CEO’s or presidents take home salaries in the millions of dollars while the government banking houses like the FED or ECB take home salaries that are in the thousands of dollars. These private banks are necessary, yet they pose a contradiction within the Free Market system.

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The economic system of a nation works simply. It always seems to follow the following

model.

IMG

                                  THE NATIONAL BUSINESS CYCLE MODEL

 

The above model is continuous.  The duration of each cycle can vary from a relatively short period of one to several months to a number of years.  The Great Depression of 1929 lasted until the Second World War, ten to twelve years before recovery was completed.

All of this operates in a Market Economy where the forces of the Market or Free Enterprise determine what is happening.   And what causes the Market to operate is the goal of profit.  During a period of prosperity many businesses that are doing well want to expand and do better.  They generally borrow money from the banks in order to do this. There may in addition be a shortage of labor and wages will be bid up raising the costs of production. Eventually more is produced than can be sold, be it manufactured items or food products; prices drop, there is overproduction, people are laid off, unemployment rises.  The economy moves into a recession which can lead into a depression or if it misses that then directly into the recovery stage, and the cycle eventually begins again with a level of recovery.  This pattern has been endless lasting at times for months and at other times for years, or for some period between the two. And always it has been propelled by profit

This is, of course, a simplification of the many forces at work within each economy during the business cycle but it is essentially the root that powers the economies, the wild card that the Central Banks can never really totally control.  And when one country is affected it is like a virus that then spreads and in different degrees affects other nations.

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It can be and has been argued that a planned economy controlled by central planners in the government, as it was in the Soviet Union, never worked. They were always beset by bottlenecks when production stopped while the factory waited for some necessary part to be produced and shipped to them before they could finish their product. This did occur prior to World War II when the Soviet Union was undergoing its 5 Year Plans that were to turn it into an industrial nation.  And if we check carefully we will find that it did also occur in countries with the Market System.

It can also be argued that this is a form of socialism which is by definition bad and has never worked.  But if one examines the history of socialism he or she finds that it is a late 19th and early 20th century form of utopianism, which in many cases also had religious overtones. They were reaching for a state of being in an early industrial society where everyone could live happily and fairly ever after.  We are looking at a state of being that could not, with the limited resources that existed then, really exist at that time in history.

What we are considering now is a state of being that is utilitarian; that is a possible and logical outcome to what is the most efficient course of action today. Most industrial nations have from some to many aspects of the society that are operated by the government for the public good.

In the United States, for example, there is Social Security, Medicare, and Affordable Health Care to name some social programs.  One can even quote the Tennessee Valley Authority (TVA) which serves only a section of the country supplying water and electricity sold by the Federal Government.  Even some municipalities will sell water and/or electricity to their residents.  These are all social programs run for the public good rather than for profit.

Most industrial nations have many more social and industrial programs that cover their citizens from the cradle to the grave. Their taxes are high but their protections for their citizens are far more extensive than those in the United States where many of these programs cost the citizens far more than these other industrial nation’s people pay for them in taxes.

The problem as it exists in the United States and many other industrial nations is that most of the major banking houses are too big to fail.  They keep a goodly percentage of the cash flowing through the economy.  If they were to disappear by going bankrupt through bad speculation or otherwise then the nation or nations would go into a deep depression.  The banks are in the business of making large profits with their depositor’s money, which generally is insured by the Central or National Government, but their executives make decisions that could lose that money as happened toward the end of 2008 when the Real Estate Bubble burst.  The governments bailed out most of the banking houses like the Bank of America.  The banks were needed for the economy to keep functioning.

If we, as individuals, invest money foolishly we can lose our investment but if the banking houses do it the National Government using taxpayer money will have to pay for the loses. They seem to have an advantage over the rest of the society, a very unfair advantage.

In the March 4, 2015 edition of the Los Angeles Times there was a short article dealing with the J.P. Morgan Chase bank.  They were to pay 25,000 thousand homeowners $50 million for failing to properly review payment-charge notices sent to these homeowners in bankruptcy.  The bank acknowledged that it filed about 25,000 payment change notices without a proper review.  They were signed in the names of employees who no longer worked for the company or who hadn’t reviewed the filings.

If we do a review of the major banking houses from 2009 to the present we find that all of these banks paid fines to the Federal Government of multimillions of dollars for various nefarious and outright dishonest practices with virtually no one going to prison for any of the illegal activities.  Outside of a fine there has been no legal penalty for banking houses instigating illegal activities.  In fact even after the fines were paid the banks, in most cases, still made a profit on these activities.

Are there solutions to these problems?  The banking practices as they now work are completely out of kilter with the needs of society.  In fact in many instances they seem to go against the interests of the general public.  A simple solution to this would be in the United States to expand the powers of the Federal Reserve which would allow them to deal directly with the general public.

The Federal Reserve divides the United States into twelve Federal Reserve Zones. Each has a main Federal Reserve Bank and ancillary banks.  The zones could be expanded to also include Federal Commercial Banks that would deal directly with the public

There are many advantages to this. The Federal Reserve can exercise its power more rapidly over the overall economy as it continually adjusts the business cycle and national cash flow, keeping the economy in a healthier state.  The contradictions in the system disappear with the Federal Banks serving the people for their benefit and not for profit.  It makes for a far healthier economy and the negative shifts in the business cycle should be massively reduced in a positive direction.

As to the concept of interdependence we need a consortium of the heads or leaders from each of the National Banks who would meet regularly and have the power to deal with the problems that affect all the member nations.  They can work toward international levels of prosperity for all the member nations.

Is all of this possible in today’s world?  The major nations are presently cooperating in the direction of ending national flare-ups.  They are cooperating in attempting to wipe out the terrorist group ISIS and other terrorist groups in the Middle East and North Africa.

Setting up an international economic consortium would just be another step in this direction.  Currently there is the G-20, an international forum for the governments and central bank governors from 20 major nations.  It attempts to address issues that are international in content.  Collectively the G20’s nations account for around 85% of the gross world products, 80% of world trade, and 2/3ds of the world’s population.

They have been meeting annually since 1999.  Actually under other names they have been meeting since the end of World War II.  The leaders of these nations confer together and can bring home recommendations to their individual governments.  If the individual nations were to give up a percentage of their sovereignty the group’s representatives could meet more often and they could be given power to implement their economic recommendations as acts of international law.

In addition there is the United Nations which has operated on various levels since 1945, the end of the Second World War.  In part it has been politicalized but that can be changed and it can be brought to operate as a world union

The tools for all these changes already exist. All that is required is that they are positively developed.

German Logo of the ECB.

German Logo of the ECB. (Photo credit: Wikipedia)