The Weiner Component Vol.2 #8 – The Federal Reserve During the Bernanke Years: 2006 – 2014

English: President Barack Obama confers with F...

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

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 January 31, 2006, Alan Greenspan retired or resigned as Chairman of the Federal Reserve and on February 1, 2006, Ben Bernanke became the new Chairman. He served two four year terms, initially being nominated by George W. Bush and being re-nominated the second time by President Barack Obama. Chairman Bernanke would find, among other things, the means to avoid a depression far greater than that of 1929. He would do this through the use of Creative Monetary Policy; that is, essentially by flooding the economy of the United States with money.

 

To understand in detail what he did one has to read his 2015 book, The Courage to Act. In this work he explained how the world’s economies came close to collapse in 2007 and 2008. Bernanke explained how it was the efforts of the Federal Reserve utilizing Monetary Policy and cooperating with other national agencies of the U.S. and agencies of foreign governments that prevented an economic catastrophe far greater than the Great Depression of 1929 which lasted for over ten years.

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Generally speaking: in 2008 the Housing Crash came. It had gradually been developing since the 1980s. While President George W. Bush and his Secretary of the Treasury, Hank Paulson, made large loans to banking houses to keep them from failing Bernanke bailed out AIG, the largest insurance company throughout the United States.

 

If AIG went bankrupt millions of people would have lost their insurance coverage and the premiums they had paid over the years. AIG had also insured some of the Hedge Funds that went under. They had wanted some of the profits that the banks were making from the Housing Market and their actuaries had no experience in dealing with Hedge Funds. I assume that Bernanke wanted to avoid the misery this would cause nationwide.

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It is important to keep in mind that the Federal Government under Presidents Bush and Obama were making loans to the banks, AIG and to the auto industry. These loans were repaid by all three groups with interest.

 

President Obama set a condition on the loans that Bush did not. That was to limit compensation packages for the executives of these struggling institutions. To the President it seem ridiculous that CEOs and other bank executives should continue to receive salaries of over a million dollars after bring the banking houses to the point of bankruptcy.

 

The CEO of the Bank of America complained bitterly about this. He wanted to pay off the Government loan quickly so the leading executives could go back to salaries in the multi-millions. Today in 2017, and for a number of prior years, their remunerations go from about four million up.

 

It should also be noted that the banks, taken together, have paid multimillions in fines for illegal practices. And no one has ever gone to jail but the banks have paid at times massive fines.

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The Housing Debacle and the increase in unemployment (up to 10%) that accompanied it should have been handled by both the Federal Reserve applying Monetary Policy and the Congress and the President applying Fiscal Policy, Congress passing spending bills and the President signing them. From 2011 on, when the Republicans gained control of the House of Representatives there were no Fiscal Policy Bills passed through Congress.

 

The year 2011 on was an ideal time to begin rebuilding the infrastructure of the United States. Most of the infrastructure had been built in the late 19th and the first half of the 20th Century. The population had practically doubled since then and a good part of the infrastructure of the country was well out of date.

 

The National Highway System had been built by President Eisenhower in the 1950s. By 2009 most of the airports, railroads, government buildings, the electric grid, many public schools, even the education system was/is grossly out of date. In fact, for what it’s worth, President Donald Trump has defined the infrastructure of the country as a “disaster.”

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After the bank bailouts the Obama Administration expected the banks to return to a reasonable level of what they had been doing before the crash. This did not happen. The banks became ultra conservative in their lending policy. People buying new homes had to have a fairly large percentage of the cost of the new home. Chairman Bernanke lowered the interest rate the Fed charges banks to 0% giving them free money.

 

From this point on in approximately 2010 the banking houses looked for new way to make profits with their funds. What they came up with, among other things, was the Futures Market.

 

Future Markets are exchanges that buy and sell future contracts. A future contract gives the buyer an obligation to purchase an asset and the seller an obligation to sell an asset at a set price which is to be delivered at a future point in time. The purchasers are interested in selling the asset the future time at a profit. They are often blamed for big price swings in the Futures Market.

 

The assets underlying future contracts include food commodities, stocks and bonds, grain, precious metals, electricity, oil, beef, orange juice and natural gas to name a few. They are bets that the price of the product at the eventual delivery price will far exceed the earlier purchase price.

 

It can be assumed that the rise in food and gasoline prices after 2010 exceeded what they would have been if the banks had not been involved. In essence the banks exploited the general homeowner up until 2008 and from 2010 on they exploited the general public whose tax dollars had bailed them out of the economic disaster which they had caused in their perennial search for more and more profits.

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In the year 2010 the American public elected a Republican majority to the House of Representatives. With their ascension to the House in 2011 all possibilities of Fiscal Policy Bills ceased. The Republicans wanted to reduce government spending and make President Obama a one term president by not allowing him to succeed in anything. In fact what the House of Representatives did was to worsen the Housing Debacle by reducing, forcibly at the time, government spending. They even shut the government down by not funding it.

 

President Obama offered an Infrastructure Bill that never even came up in the House of Representatives. The fact that President Obama and Chairman Bernanke were able to turn the Housing Crash and limit initial unemployment to only 10% with actual opposition from the Republican House of Representatives was itself miraculous. What the Fed and the President did was to turn a possible depression into the Great Recession. Even though economic conditions were far from ideal this was truly an act of wonderment.

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What happened with the Housing Crash was a situation that looked like it might take decades to straighten out. Virtually overnight the value of homes deflated at the speed of an exploding balloon. Many people who had financed and refinanced their property more than once suddenly discovered that they were underwater, that is, that they owed more on their homes than they were worth. A percentage of these people just walked away from their property, leaving it deserted.

 

This raised an interesting problem both for these properties and for those in which the people continued living. Who owned these mortgages? Remember the mortgages had been divided up into innumerable fractional pieces. In order to control any one of these property mortgages one needed to own over 50% of it. No Hedge Fund owned that much of any one property. The records of mortgage ownership were highly inaccurate. Consequently in point of fact no one really owned these properties.

 

Most of the banks that had been charging endless fees to administer these mortgage loans felt that they could foreclose on these properties, either because they were deserted empty houses or because the inhabitants could, for one reason or another, no longer afford to make their monthly payments. A goodly number of these people had lost their jobs.

 

The banks used their computers to generate the needed documents since no real records of ownership existed. The banks had earlier been in too great a hurry to generate loans than to keep accurate records.

 

Some of these cases went to court and initially the judges felt that a solid institution like a bank would do nothing illegal. Some of the attorneys who made this point were declared to be in “contempt,” and were disbarred. Eventually after a large number of cases were determined in favor of the banks the evidence of their wrongdoing was acknowledged by the Courts. Whether the disbarred lawyers got their licenses back I don’t know, but the banks were severely fined for wrongdoing and the illegal foreclosing ended leaving a lot of people living in homes for which they were not paying.

 

The problem was left up in the air. As long as the people living in these homes paid their property taxes no one could legally disposes them even if they never made another house payment on the mortgage. Most of the Hedge Funds had gone bankrupt; they didn’t own enough of any property to foreclose on it. Of course no one knew which properties these were and which actually had owners of the mortgages. Some of the banks had owned some of the Hedge Funds.

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What generally happened across the nation from that point in time on was interesting. Numerous individuals, generally not being employed, no longer paid their mortgages. If they were reemployed or eventually got a job they still did not make payments. Why bother? No one had foreclosed on them. In essence these people now had extra cash which they tended to spend. Suddenly, among other things, eating out with their families became very popular. A good part of their housing funds were being spent. The National Cash Flow or the amount of money available in the general society increased with all this spending and it helped keep the level of national unemployment to no higher than ten percent. This was an interesting irony that was initially funded by the banks but ultimately payed by the taxpayers in the bail outs.

 

Had the House and Senate passed the Infrastructure Bill that President Barack Obama suggested then the overall effects of the Great Recession would have disappeared by the end of his first term in office and the country would have dropped to a 2 ½ percent unemployment level which is considered full employment because it is the rate generated by people normally retiring, changing jobs, and first entering employment.

 

The result would have been more taxes being paid which would have largely offset the increased government spending. But the Republicans dominated House of Representatives was penny smart and dollar stupid. By forcing down government expenditure they also cut down the Gross National Product (GDP) and shrank taxable income throughout the United States, keeping unemployment higher.

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On August 25, 2009, President Barack Obama announced he would nominate Bernanke to a second term as the Chairman of the Federal Reserve. He stated, with Ben Bernanke standing at his side that Bernanke’s background, temperament, courage and creativity helped to prevent another Great Depression in 2008.

The Weiner Component Vol.2 #6 – Part 3: The Purpose of the Federal Reserve

The title page to Keynes' General Theory.

Unemployment rate in the US 1910–1960, with th...

Unemployment rate in the US 1910–1960, with the years of the Great Depression (1929–1939) highlighted. (Photo credit: Wikipedia)

The Federal Reserve was established on December 23, 1913. Its major mission was to avoid panics or major recessions in the future. It would at that time do this by being able to move money quickly anywhere throughout the National Economy. In essence since the nation functioned through its banking system the new Fed would protect its financial institutions from runs or panics where the depositors could all withdraw their funds, generally following a rumor that the bank was on the edge of failing.

 

In addition the United States economy had/has systematically gone through regular business cycles of recession, slump or depression, recovery, and boom. Invariably each of these stages of the economy leads to the next stage. During a boom period overproduction is invariably reached, workers are laid off, there is less income available, which accelerates the recession. This, in turn leads to a trough or low economic point which can be a depression with high unemployment. Eventually there is a shortage of goods and the amount of money being spent in the National Cash Flow increases; people are hired; there is more and more money available and recovery begins, continuing until a peak or production boom is reached again. The duration of the cycles can and do vary, going from less than a year to over ten years as the Great Depression did from 1929 to 1940. It was ended by World War II. These depressions can be regional or they can cover the entire nation, if not the world, as it did in 1929. They generally last between the two periods given above.

 

In simple terms this is the economic pattern of every industrial nation. Does it have to continue? That’s an interesting question. The probability is that it can be controlled by the Central Government’s actions.

 

In 1929 the science of economics was generally not understood well enough to determine exactly or why the depression was happening. In 2008 when the country had what is now called the Great Recession, enough was understood to avoid a greater depression than that of 1929. This depression was avoided by actions of the Federal Government.

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Even today economists disagree as to what caused the Great Depression and how it should have been dealt with. There are numerous theories. Probably The Keynesian theory is the most accepted. Keynesian economics deal with the various theories about how in the short run, mainly during recessions, economic output is strongly influence by aggregate demand or total spending. Aggregate demand does not necessarily equal the productive capacity of the economy. Instead it is influenced by a host of factors that can behave erratically, affecting production, employment, and inflation.

 

Keynes theories were first presented during the Great Depression in his 1936 book, The General Theory of Employment, Interest, and Money. Keynes’ approach contrasted with classical economics. Keynesian economists believe that the private sector’s decisions sometimes lead to inefficient economic outcomes which require active policy responses by the public sector (government). It is a combination of the two that stabilize output with the government exercising control over the private sector. Monetary policy actions are needed at times by the Central Bank and fiscal policy actions (Government spending.) in order to stabilize output over the business cycle. Consequently Keynesian economics requires a mixed economy, predominantly private sector with a strong role for government interventions during recessions and depressions.

 

Traditional or classical economics as developed by Adam Smith in his 1776 book, An Enquiry Into The Wealth of Nations, set the Market making all the societal decisions. The motivating force, according to Smith was the “invisible hand,” the profit system. Adam Smith was responding to an economic system called mercantilism, where gold was considered the basic wealth of the nation and the economic decisions were being made by the kings of the various countries.

 

John Maynard Keynes during the world economic disaster called the Great Depression was questioning the validity of this system, saying what was needed to solve this problem was a combination of private enterprise balanced by state control of the marketplace. To him unfettered classical economics had brought about the Great Depression.

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The actual causes of the 1929 Great Depression have been extensively discussed by economists and remains a matter of intense debate. In fact they are part of the larger debate about economic causes. The economic events that took place at that time have been studied thoroughly: a deflation in assets and commodity prices, dramatic drops in demand and credit, disruption of trade, widespread unemployment, over 13 million by 1932 the lowest point of the economic decline, and hectic poverty.

 

There is no consensus as to overall causes other than it started with the initial stock market crash that began on Black Tuesday, October 29, 1929 when panic selling of securities led to a continued dropping of value of the securities until the end of 1932 when it reached its lowest point. The Crash triggered the depression which had reached a high level of deteriorating economic conditions such as rising unemployment, over production, a totally unequal distribution of incomes, under consumption, and extremely high debt.

 

Both the stock market and the economy would slowly improve after 1933 with the new President, Franklin D. Roosevelt. It would rise to new heights after 1939 with the outbreak of World War II in Europe. The stock market and the economy would rise to new heights with a massive infusion of money for goods and services within the United States. War will have brought about its end within the U.S. It is interesting to note that it was the money spent during the war, first by European and Asian nations, then after December 7, 1941 also by the United States that specifically ended the Great Depression.

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Once the Great Depression had started there were massive mistakes made by the Federal Reserve. The Fed actually caused a shrinkage of the money supply and greatly exacerbated the economic situation. Deflation caused people and businesses to owe ever increasing amounts upon money they borrowed actually shrinking the money supply in the U.S. by about 1/3.

 

With the election of Franklin D. Roosevelt to the presidency in 1932 a form of Keynesian economics became the policy of the President from 1933 on when he assumed power. Roosevelt’s policy was the “3 R’s: Relief, Recovery and Reform.” This comprised Roosevelt’s “New Deal;” his attack upon the Great Depression, which essentially lasted from 1933 to about 1938. The Federal Government put itself in a position to help turn the country around. It brought about great improvement but not a complete end to the Great Depression.

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Toward the end of 2007 in the last year of the George W. Bush’s Presidency what is generally called the Great Recession began. The Housing Market in the United States collapsed. A great many people had been using their home as bank or checking accounts generally from the 1980s on, constantly refinancing their home and taking their equity out as property values continually increased. People bought the toys they always wanted: new cars, fancy trucks, boats, expensive vacations; just about anything they felt was desirable.

 

This had been going on for about thirty years, the entire career of many people in banking had taken place during this period. Housing loans or second mortgages were divided into miniscule fractions, put into a multitude of different Hedge Funds and sold to the general public as safe interest paying loans. The process brought the value of the home loans up millions, if not billions of dollars. The banks were earning large amounts in fees as the demand for loans actually forced up the value of the homes. By 2007 the end had been reached, property values had been raised beyond the point of sanity. The bankers were in denial that conditions could possibly change. Some banks were lending out 125% of the appraised value of the properties, working on the premise the housing values would rise endlessly.

 

The economic collapse began during the second week of March, 2008. It tended to be worldwide. In the United States, on Tuesday, with the encouragement of the President, George W. Bush and the Secretary of the Treasury, Hank Paulson, the Chairman of the Federal Reserve, Ben Bernanke injected $236 billion dollars into the American banking system. Citigroup, the world’s largest bank spent one billion dollars bailing out six of its hedge funds. Lehman Brothers, America’s fourth largest bank went under. AIG, the world’s largest insurance company, had moved into the business of insuring leveraged debt right at the time when the financial system was at the point of collapse. When the Housing Bubble burst Ben Bernanke, as chairman of the Fed, announced an $85 billion loan for them. Hank Paulson, the Secretary of the Treasury proposed buying up hundreds of billions of dollars’ worth of toxic assets.

 

With the accession of Barack Obama on January 20, 2009 as President of the United States that country and the rest of the Industrial Nations continued to hover on the point of economic collapse. This would have occurred if the governments had not interceded with masses of cash. They prevented, using taxpayer money, a depression that would have made the Great Depression of 1929 look like a weekend holiday. It would have been the total collapse of the banking systems which, in essence, run the economies of all those nations.

 

(Interestingly Donald Trump’s administration wants to do away with all the regulation in the U.S. which came about to avoid a repeat of this situation. Memories are short!)

 

President Barack Obama continued the bailout, saving the banks from their own stupidities, and he added the American automobile industry which was also on the point of total collapse. The governments of the various countries spent a lot of money saving their economies and returning the world to economic sanity.

 

Recently President Donald Trump commented in one of his speeches that President Barack Obama increased the National Debt more than any other prior President. He did so cleaning up the financial messes that they had helped to create.

 

We have passed beyond Keynesian economics to the point where the Free Market is today a farce. The governments of the United States and of the other industrial nations have assumed responsibility for the welfare of both the rich and the poor within their societies. How long will it take for the populations to understand this?

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In the United States and in most industrial nation there are groups that want to return to the good old days. Whatever they were. Everything is changing. The 21st Century will be completely different from the 20th Century.

 

It should also be noted that it was the Federal Reserve, under Chairman Ben Bernanke, who used creative Monetary Policy in a period of a little over 24 months, with strong encouragement from President Obama, to buy up the toxic mortgage pieces throughout the United States at the rate of 45 billion dollars’ worth a month and also he added another 40 billion dollars a month directly to the National Cash Flow.

 

The Republican dominated House of Representatives from 2011 on did nothing to help the situation. They should have applied Fiscal Policy, creating jobs by spending money on infrastructure modernization. Instead they tended to cut government spending and worsen the Great Recession. Mitch McConnell, the Republican majority leader in the Senate, announced that they would make Obama a one term president by not cooperating with him on anything. To them no price was too high in order to make Obama a one term president. Somehow the needs of the American people were lost.

 

It was the Federal Reserve and the President who saved the country from falling into the worst depression in its history. The Republicans, once they got control of the House of Representatives, refused to pass anything that would make President Obama look good. This was true even if it had a negative effect on the country and hurt the majority of its citizens. President Obama offered a Bill that would engender spending on our decaying infrastructure. It did not even come up for discussion in the House of Representatives.

The Weiner Component Vol.2 #6 – Part 2: The Federal Reserve

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (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)

The Federal Reserve System (Fed) was established in December of 1913 as the central banking system of the United States by the passage of the Federal Reserve Act. It came into existence largely in response to a series of financial panics, particularly the Panic of 1907. Its purpose was to establish a semi-independent agency that would control and regulate Monetary Policy within the United States. At that time it meant mainly being able to freely and quickly move currency around as needed in the country.

 

The Fed consists of twelve regional banks that cover the entire nation. They are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Each of the twelve sections has its own Federal Reserve Bank, generally with at least one auxiliary bank. For example: California has the main Fed Bank located in San Francisco and an auxiliary one in Los Angeles. The Federal Reserve Banks are located throughout the United States, with the main branch in Washington, D.C. Each can also handle and make the other branches cognizant of any problems within its region.

 

The Fed was initially establish to devise and implement Monetary Policy. In 1913 this meant to control the supply of currency available throughout the nation. This was and still is its main function. But after 1913 the law establishing it was gradually expanded, generally as the need existed, expanding the definition of Monetary Policy, and giving the Fed numerous other responsibilities.

 

Today Monetary policy remains its primary function but today the Federal Reserve System’s mandate is also to promote economic growth, high levels of employment, stability of prices, to help preserve the stability of the dollar, and to moderate long-term interest rates. We can say that the Fed’s mission is, in addition to regulating Monetary Policy, to foster a sound banking system and a healthy economy throughout the nation. That in order to accomplish this the Fed serves as the banker’s bank, the government’s bank, the regulator of financial institutions, and as the nation’s money manager. We can also say that all of this is the current definition of Monetary Policy.

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The problem here is that economics is not an exact science and that the regulators of the Fed have to continually read and interpret what’s happening in the economy. The different Federal Reserve members do not always agree upon what should be done. The agency is run by consensus with the Fed Chair being in charge.

 

In 1908 Congress enacted the Alrich-Vreeland Act which established the National Monetary Commission to study banking and currency reform. The Bill set up two commissions, one to study the American monetary system in depth and the other to study the European Central Banking system and to report on them. Thereafter Congress took two years to come up with the Federal Reserve Bill. It was passed late in 2013 and signed by President Woodrow Wilson the same day it passed Congress. The Bill was constructed largely by bankers as a necessary reform of the U.S. financial system.. It set up a fairly independent entity, The Federal Reserve.

 

In its initial period it was opposed by agrarian interests. They stated that it favored the mercantile class over the farmers. It has long since passed beyond this period of discontent within the United States. While it is still at times opposed by many Republicans largely for being too independent it has stood the test of time as a necessary entity of the U.S. Federal Government.

 

Interestingly the Republicans who still oppose it feel that it should be under rigid control of the Congress. But Congress is afraid to mess with it. An error on their part could bring about a massive depression. And that would bring about a voter rebellion at the next election.

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As was pointed out even though the Fed has control of the money supply that aspect of the Fed’s power is fairly limited. They cannot always control completely or even handle all the factors that are affecting the economy. It is a very difficult process to predict what is occurring within the nation, virtually from day to day, and to make exact changes that can or will always affect it in a positive fashion.

 

Also Congress, by its actions can strongly affect the economy by, among other things, its spending policies. This is called Fiscal Policy, where Congress can increase or decrease the amount of money it spends upon various programs like decreasing aid to the poor in Affordable Health Care or perceptibly increasing military spending. Decreasing aid programs to the needy takes large amounts of spending out of the overall economy while increased spending on the military will substantially increase the amounts of money that go to the upper class. This can make for a redistribution of income from the poor to the upper class.

 

All these changes, plus others that have not been mentioned, become reasons for differences in the economic flow. They become factors that the Fed has to consider in mapping out its policy. And they are dynamic changes that all always going on. This means that the Fed is in a constant state of studying the economy and continually fine-tuning what is happening in the country. It is a constant process and the changes can take months to come about or not come about. It takes a steady hand to deal with this process.

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The United States Government probably is the largest spender in the world. It has a checking account with the Fed through the U.S. Treasury Department. All revenue generated by Federal taxes, licenses, etc. and all outgoing government payments are handled through this account. In addition the Fed sells and redeems government securities such as savings bonds and Treasury bills, notes, and bonds. It does this to raise money, or to limit the amount of money in the National Cash Flow, and otherwise adjust the economy.

 

The factor that deals with this is the overall rate of inflation in the country. If it starts going up the Fed has to reduce the amount of money in the National Cash Flow. There is too much money chasing too few goods and services, forcing prices up as more and more people bid for the same products and/or services. At this point the Fed sells more bonds and Treasury Bills than it redeems. It does this by raising the interest rate it pays for the money. If, on the other hand, there is not enough money in the National Cash Flow then the Fed will increase the amount by buying back more bonds and Treasury bills than it sells. Or for that matter the Fed can just add money to the National Cash Flow making more cash available for everyone as it did for over two years under the Obama administration.

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The Fed also issues all coins and paper currency. The U.S. Treasury prints and mints the cash and the Fed distributes it to its financial institutions. This includes replacing worn-out and torn bills. In fact if one visits and takes a tour of one of the Federal Reserve Banks, they get a little package a shredded old money as a souvenir.

 

The Federal Reserve Board also has regulatory and supervisory responsibilities that include monitoring banks that are members of the system and the international banking facilities in the U.S., the banking activities of member banks and the U.S. activities of foreign owned banks. In addition the Fed helps to ensure that banks act in the public’s interest by helping to develop federal laws governing consumer credit. Such laws as The Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, and the Truth in Savings Act are examples of this. The Fed is supposed to be the policeman for banking activities for the U.S. and abroad.

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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. The term of this office is four years. President Trump has stated that he will replace her when her term expires in 2018.

 

Chairperson Yellen tends to be overly cautious in her approach. She gradually ended the policy of the Fed contributing money to the National Cash Flow and has been overly cautious in terms of raising the interest rate that the Fed charges it member banks, bring about two quarter of a percent raised while threatening three further quarter of a percent increases. The Fed has gone from a 0% charge to banks borrowing money from it to one half of one percent which it is at present. This has kept interest rate that the banks charge low but has gotten their depositors a rate of one tenth of one percent interest on the money they have deposited into the banks. Consequently the Commercial and Saving Banks are practically getting free money from their depositors, and feeing their depositors for everything thing they do for them, and while charging a lower interest than they used to still making millions in interest. It would seem that the banks are not operating in the interest of their depositors.

The Weiner Component #147 Part 1 – Development of Money & Its Uses

Various Federal Reserve Notes, c.1995. Only th...

Various Federal Reserve Notes, c.1995. Only the designs of the $1 and $2 (the latter not pictured) are still in print. (Photo credit: Wikipedia)

Embed from Getty Images

Probably the most misunderstood entity that exists today is money, currency, what it is and all the ways it works in the existing societies.  The problem with money is its history, what it was and is, and how the concept is generally understood by most people today.

 

Originally money was an object of value like gold, silver, or some other precious entity.  Presumably, in places like early Phoenicia, well over two thousand years ago, goods were traded for precious metals.  This was done with scales; gold or silver would have a fixed value and an equal value of goods would be traded for a set amount of the precious metal.  Eventually someone or a group of someones came up with the idea of stamping a set weight on the gold and coins came into existence.  They were gradually refined, as time went on, with stamped pictures of the rulers profile and with these specific coins with set amounts of money came into existence.  From this, over the centuries, with occasional breaks in the sequence, the concept and use of money, set amounts of gold or silver, developed.  It was until the end of the first third of the 20th Century an exchange of value for value, the goods and services for the coins (money).  Money was as good as gold because it was gold.

 

The problem that developed over time was that the amount of gold and silver available for currency was dependent upon mining discoveries or exploitations of different parts of the world.  For example in the 16th Century Spain gutted the New World of its gold supply causing a 90 year period of inflation in Europe that lasted through most of the fifteen hundreds.  By the 17th Century there was again a shortage of the gold supply in Europe and not enough money (gold coins) available to supply all the monetary needs for economic growth on the Continent.  Consequently the value of gold rose and periods of deflation occurred, the value of the gold coins increased.

 

The problem here was that there were two totally different processes which were supposed to balance each other but never did.  Precious metals had to be discovered and mined at the same rate that business between and within nations expanded.  This never happened.  Added to this were economic systems like mercantilism, which hoarded gold by creating royal monopolies within European nations.  Economically much was not understood then.  And the amount of gold was never enough to cover all the needs for monetary growth.

 

The use of paper came into existence largely during the Renaissance with letters of credit, which allowed simple transfers of large amounts of currency.  This would eventually become paper money and checks.  Paper money was initially issued by banks and could, presumably, always be exchanged for gold or silver.  Of course if everyone decided to exchange their paper money for gold at the same time there would be a run on the bank and it would go bankrupt since generally they issued a lot more paper than they had gold.

 

Paper money was also issued by governments during times of crises when gold was in short supply, like the United States government did during the Revolutionary War or the Northern and Southern Governments during the American Civil War.  They did not have adequate gold or silver supplies to pay the cost of the wars.  Since the South lost the Civil War its money became worthless while the Northern greenbacks were eventually redeemed for gold coins.

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Up until 1933, when Franklin D. Roosevelt had assumed office as President, money was mostly gold and silver.  Other metals like nickel and copper were used for smaller coins.  The paper one and five dollar bills could be redeemed for silver; they were silver certificates.  The larger denominations were presumably redeemable for gold; they were Federal Reserve Notes.

 

Actually after 1933, the use of large bills being exchanged for gold ceased.  In the U.S. the Roosevelt administration collected all gold coins, melted them down into gold bars, issued paper gold certificates that were held by the Federal Government, and issued paper money starting with the ten dollar bill and going up.  These were Federal Reserve Notes which the banks distributed then and thereafter.  They were used in place of the gold coins.

 

The gold standard was essentially a fiction.  In 1933 the money supplied was doubled as the value of gold was legally doubled, going from $16 an ounce to $36 an ounce.  This essentially paid for Roosevelt’s New Deal.  Similar actions would also be done in other industrial nations.  The problem that existed was that there still was not enough money in circulation to meet the actual needs of most nations.  There would not be enough money available until World War II when it tended to be freely printed by the various governments.  During the war, since most production was going toward the war effort, there was more money available than the goods and services that could be purchased.  People worked double shifts in the factories and earned lots of currency, far more than they could spend.  At the end of the war there would be a large buying splurge that would create jobs for a good percentage of the returning veterans.

 

In 1969, under President Richard M. Nixon, the last limited amount of stored gold behind the dollar would be removed and the Federal Government would sell a large percentage of its gold supply.  It would cease to legally buy all gold mined within the country.  Gold would within a relatively short period of time, several years, go from $36 an ounce to $800 an ounce.  It would later go to well over $1,000 an ounce and eventually rise to $1,800 an ounce.  At this time one of the agencies in Texas would buy gold and set up its own depository.  Later, gold would drop down to around $1,100 an ounce, where, with continued slight oscillations in price, it would remain in 2016.

 

This entire process has been going on for the last 46 years.  The value of gold is determined by the economic laws of supply and demand.  The value of gold, silver, platinum, titanium, and other precious metals are determined by the amount of supply and the demand for that supply.

 

In 1969 the silver would also be removed from new coins and all money would become tokens, generally copper sandwiches, having almost no value within themselves.  All money became a valueless instrument for the exchange of goods and services, having no real innate value in itself except that of the word of the nation issuing it.

 

Today money of one country has to be exchanged for that of another when one visits Europe or Asia or, for that matter anyplace else that isn’t part of one’s country.  With very few exception it has no relevance in another country but it does have an exchange value in the banks of other countries, where generally, for a small fee, it can be exchanged for the currency of that particular nation.

 

Money is no longer as good as gold, there is no longer any gold behind it.  The metal has become too expensive and its supply is too limited to be used for a base for currency.

 

This in a nutshell is a short simplified history of money and its uses.

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Now, in terms of the modern world what is money and what are it uses?  Today money serves a myriad of purposes.  While it is no longer an object of intrinsic value it still serves as an object of inherent value.  It is, first of all, a form of score-card which demonstrates ones’ standing in the overall society, like Donald J. Trump the billionaire.  Mainly it allows the traditional exchange of goods and services within the society and between nations.  But in addition to this money also functions within the nation in relatively new ways.

 

According to most economists there are various forms of economics.  For our purposes the two more important ones are Microeconomics (small) and Macroeconomics (large).  Everything that has so far been considered falls into the area of Microeconomics (small economics).  In essence an individual has so much wealth (gold) or earnings that comprises what he/she possesses and earns.  That can be spent to satisfy needs and wants or saved for a future time of need or desire.  Some of it can be used as a commodity and invested in income gaining property or stocks and bonds or anything that will pay an income.

 

Virtually every individual or family unit fits into this category.  So also do government entities like municipalities and individual states.  Their incomes would be comprised of taxes and fines.  If any of these people or entities need more money than they are taking in or have then they can borrow.  For individuals and families there are banks and credit unit loans or credit cards.  For municipalities and states there are short and long term bond issues.  These eventually must be paid off with interest.  This is usually tax free for state and local governments and ridiculously high for credit cards.

 

Of course the object with individuals and families is to live within their incomes.  There are big-ticket purchases like automobiles and homes that generally do require long term payments or occasional emergencies like a large auto repair bill or a sick child.  With cities and states the taxes are supposed to be high enough to cover their expenses.  But they also have long term expenditures like roads and bridges which are inordinately expensive and must also be paid off over the long term.

 

The problem that comes up with individuals and families is when too many short-term expenses are charged to credit-cards, much more than can possibly be paid off in a billing cycle.  Then the recipients are paying 18 or more percent interest on these loans and life becomes an uncomfortable struggle to survive.  Particularly since the standard of living for many people will continually exceed their incomes.  This is not unusual with many families.

 

With municipalities and states the same pattern can occur.  The entities income does not match their expenditures.  This can be caused by a large number of reasons besides irresponsibility on the part of the city fathers.  Industry can move out of the area drastically reducing the tax base or other changes that drastically affect the tax base such as a natural disaster or a recession or depression.

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All this, prior to 1933, would also include the individual nations.  They would also be funded by their incomes in taxes and fines.  But from that point on, by changing from money being precious metals to printed paper, the situation became different for all the industrial nations that had switched to paper money.  And in the United States, particularly since 1969, all printed money is just that, official paper with numbers stamped upon it which in itself has no real value; it has become merely a means of trading goods and services for goods and services.

 

Federal or Central Governments still follow the age old practice of Microeconomics, collecting taxes and issuing fines for different forms of misbehavior.  But, more importantly, now in addition they also practice Macroeconomics, wherein they attempt to control the amount of money continually present within the nation.  They tend to try to keep inflation low and economic growth at a steady pace of about 3 to 4%.  Countries like modern China prefer a growth rate of 8% which they are no longer able to maintain.

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Economics is concerned chiefly with the description and analysis of the production, distribution, and consumption of goods and services.  What we have mainly looked at so far has been Microeconomics, dealing with individuals, families, local and state governments.  Macroeconomics deals with the National or Federal Government and applies these principles to the entire economy of the nation.  Its ultimate purpose is to use this knowledge to positively regulate the economy of the entire state in order to avoid economic downturns and keep the nation at its level of highest efficiency.

 

Consequently Macroeconomics (Big Economics) is now, in addition to collecting, controlling revenue, and attempting to maintain a regular level of growth a regulatory device, attempting to even out the overall incomes of the majority of the population.  Income taxes are graduated, that is, the more the individual earns the higher is his/her tax rate.  This is truer in European and Asian nations than in the United States where the graduated income tax rate is currently toped-off at $400,000 and the percentage of income paid at that amount stops rising regardless of how high the income is beyond that amount.

 

It would seem that the bulk of the Congressional Legislators, particularly the Republican legislators, have no real knowledge of modern economics and are still functioning with only an awareness of Microeconomics.  Some of the far-right, Tea Party, legislators have publically stated that they totally understand economics because they have raised families.  Consequently their reaction to economic downturns is to use a “common sense” approach which, in turn, worsens conditions.

 

It would seem that in the United States the one occupation that requires no knowledge of economics or government is that of a Republican Congressman.  Since taking over the House of Representatives in 2011 they have just passed one bill in 2015 that applied Fiscal Policy; and that was a continuation of a law that expired which added a small tax to the purchase of gasoline that has been used for road maintenance.  Every other bill dealing directly or indirectly with employment actually decreased it, adding to the level of unemployment within the nation.  One can safely say they have been penny wise and dollar stupid.  They have favored government economizing over growing employment.  And even here they have not been consistent, going on mad spending splurges like the 1.145 Trillion Dollar Funding Bill of 2015.

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Basically the Central Governments issues paper money as it is needed by their particular society.  The National Debt is itself partly a fiction since the Government owns the majority of its own National Debt and will use it at times to adjust conditions within the nation.  The amount of money in circulation within the society is supposed to be the full amount needed for the nation to operate at its highest level of efficiency.

 

The Agency, in the United States, that does this is the Federal Reserve.  It continually monitors the entire economy throughout the fifty states and territories belonging to the nation.  On a constant basis it is supposed to continually fine tune the overall economy.  The Federal Reserve has twelve districts that cover the entire nation.  To a certain extent its powers are limited.  It can make adjustments to the economy but the changes or corrections it makes generally are slow in coming about.  Even though its’ Board of Directors meet once a month and carefully considers what is happening in the overall economy it can miss or misconstrue important economic changes within the society.

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The Democrats, the political party begun by Thomas Jefferson in the late 18th Century which still persists, during the Great Depression of 1929 took control of the Federal Government in 1933.  They tended to totally dedicate themselves to helping the public pull out of the Great Depression.  They dedicated or rededicated themselves to helping the ‘forgotten men” survive in what had become almost overnight an alien world.  They became responsible for the welfare of all their citizens, creating what Franklin D. Roosevelt called a “New Deal” for everyone, caring for those who could no longer properly care for themselves.

 

Freedom to the Democrats meant freedom from want and need.  President Barack Obama’s Affordable Health Care (Obamacare) meant an extension of these rights.  To the Republicans, on the other hand, freedom means government withdrawal from the public lives, giving them, among other things, the right to starve, freeze, and die.

 

In solving societal problems the Federal Government in 2009 and 2010, with the Democrats controlling both Houses of Congress and the Presidency, saved the banks and the United States auto industry by extending them massive loans and the Public by enacting Affordable Health Care.

 

According to Mitt Romney, speaking for the Republicans during his 2012 Presidential Campaign, he would have done neither of these.  It should be noted that the Affordable Health Care Law was modeled after a similar law which Romney had signed into law during his one term as governor of Massachusetts.

 

The probability would have been in 2009, if Republican actions were taken by the Republican candidate, John McCain that the United States and the industrial world would have fallen into a depression far greater than that of 1929.

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What we are dealing with here is Macroeconomics (Big Economics).  The application of vast amounts of money to parts of the economy to avoid an economic disaster that would affect everybody in the U.S. society.  President Obama did this upon assuming office over a two year period.  At the end of that time two important events occurred: first, for various reasons during the Midterm Election of 2010 the Republicans achieved a majority in the House of Representatives and second, 2010 was a census year in which the seats in the House of Representatives were reapportioned to adjust for the increase in the national population.  In those states which the Republicans controlled they gerrymandered the new voting districts to their advantage whereby they were able to get enough seats in the House to maintain control of that body.  In fact they were able to get and keep their majority in the House even though more votes were cast for Democrats throughout the United States in the next Midterm Election.

 

What followed from 2011 on was that no fiscal policy bills were passed.  In fact what the Republicans did in Congress was to shrink the size of the Federal Government when possible and actually increase the unemployment problem by decreasing funding for both federal and state governments.  The chairman of the Federal Reserve at this time was Ben S. Bernanke.  After unsuccessfully requesting that Congress pass Fiscal Policy laws numerous times he came up with Creative Monetary (Money) Policy.

 

Both Bernanke and Obama were able to work through the Great Recession and point the country toward recovery by the use of massive blocks of spending, adding large amounts of currency to the National Cash Flow.  What was being dealt with here is called Macroeconomic (Big Economics), the Federal Government controlling the economics of the nation and freely spending money in order to avert disaster.

 

The question arises: How much currency can the Federal Government print and distribute without destroying the economy?  That’s an interesting question?  Remember the money itself has no inherent value.  Theoretically any amount can be printed and issued.  But if it is done endlessly growing inflation will occur and the value of the currency will systematically decrease until it becomes valueless.

 

The limitation in terms of the amount issued would be determined then by the rate of inflation.  Once inflation reaches some single digit point, say 5 or 6%, then the limit would be reached.  But this limit was never reached.  Inflation stayed at 2 to 3%.  In 2009 President Obama added well over a trillion dollars through bank and auto loans, plus other forms of expenditure and the inflation rate stayed at its original level.  Later in the Presidency the FED for a period of well over two years added 85 billion dollars a month to the Nation Cash Flow, $45 billion buying up pieces of mortgage paper and adding $40 billion directly to the National Cash Flow. The FED added well over a trillion dollars.   Again there was no change to the inflation rate.

 

Interestingly, with all this cash being added the indication was that the country had a phenomenal need for additional money to circulate so that economic growth could occur.  Congress should have been the agency applying most of these funds.  If they had the monies could have been more focused on upgrading the dated infrastructure of the United States.  Instead over half the funds resolved the Housing Dilemma created by the deregulated banks from the 1980s on.

 

It should be noted that the money spent on mortgage paper, unlike the bank and auto loans which were repaid with interest, was never directly recovered.  The mortgages in all 50 states had been fractionalized into well over a hundred parts each and applied to many different Hedge Funds.  The record-keeping that the banks had set up to expedite the financing and refinancing was unbelievably sloppy.

 

In essence no one owned a fair percentage of those houses because it was almost impossible to put enough pieces of mortgage paper together to make up over 50% of the ownership in these properties.  Consequently how could anyone foreclose on any of these homes?  The spread sheet or sheets that the government would need to determine when it owned enough of any property would probably cost more to generate than the properties were worth.  In any event the Federal Government was more interested in solving the Housing Problem than in collecting on its debt.

 

In addition all those people would no longer be deducting their interest payments on their income taxes.  And a percentage of the home owners suddenly had more disposable income which they spent on short term activities like more eating out, infusing the additional currency into the National Cash Flow which, in turn, increased productivity and employment in the nation.  The government would indirectly get a good part of this money back in increased taxes across the nation.  Here the Federal Government was spending vast amounts of money, which Congress refused to do, upgrading the entire nation.

 

 

 

 

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 #141 – Fiscal, Monetary Policy & the Republican Party

English: James Earl "Jimmy" Carter

English: James Earl “Jimmy” Carter (Photo credit: Wikipedia)

English: United States mean duration of unempl...

English: United States mean duration of unemployment 1948-2010. Data source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Average (Mean) Duration of Unemployment [UEMPMEAN] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed August 14, 2010. (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)

Historically and in the present, Fiscal and Monetary Policy are the two major tools that the Federal Government is supposed to use to continually fine-tune the American economy.   Fiscal Policy is used by the Congress passing specific economic enhancing laws signed by the President and Monetary Policy is used by the Federal Reserve continually adjusting the U.S. money supply to maintain a healthy economic national environment.

 

During the Presidency of Jimmy Carter (1977 – 1980) unemployment rose to 7%.  This was also the post Viet Nam War period.   From 1977 on the government engaged in an expansive fiscal policy; there was an expansion in Public Works strongly supported by the President.  It averaged $4.38 billion per quarter.

 

At that period I was teaching Social Science classes at a High School in Southern California.  The School District was asked by representatives of the Federal Government to make a wish list of what they would like for the District.  A list of ten items was prepared by District officials and, as an afterthought, someone suggested a second or girl’s gymnasium and it was added to the bottom of the list.  The government officials choose the girl’s or second gymnasium as the item that would create the most jobs.

 

I remember that the high school got a second gym which was gray, the color of the concrete.  The money that paid for the gym ran out at that point and it was a few years before the School District came up with the funds to have the building painted.

 

It seemed that all the tasks and labor involved in building the gymnasium, both directly and indirectly, would create the maximum employment possible for the expenditure of the funds required for the project.  I suspect that Troy High School in Southern California is one of the few secondary schools in the country that has two separate gymnasiums.

 

To understand how this expenditure works for the benefit of the overall economy we have to trace the money and see what happens to it.  Usually money spent is actually spent six to eight times; it is a volatile substance.  For example, in producing and packaging the concrete used in the building the manufacturer has to pay his employees.  They, in turn, have to pay rent or a mortgage or, for that matter, buy food.  The landlord, bank, or supermarket continues the same process, and on and on for six to eight times becomes part of the natural flow within the economy.  This occurs with everyone directly or indirectly involved in producing that building.

 

Every million dollars the government spends creates six to eight million dollars in the exchange of goods and services.  To use an analogy, a child throws a rock into a quiet lake.  There are a large number of ripples spreading out in all directions from where the stone hits the water.  They spread out and dissipate as the stone drops to the bottom of the lake, infinitesimally raising the level of the water.  Consequently the $4.38 billion that the government added quarterly to the economy of the United States was actually generating a little over 26.3 to 35 billion dollars in new productivity every three months.  This also gives us an idea of the volatility of new money added to the National Cash Flow.  Of course if the reverse were to occur for any reason, such as the 2008 Real Estate Crash, the 26.3 to 35 billion dollars would be removed from the National Cash Flow.

 

In 1977, when Jimmy Carter became President, the 95th Congress was elected.  In that Congress the Democrats had a majority in both Houses of Congress; in the House of Representatives they had 292 elected Democrats to 143 Republicans and in the Senate there were 61 Democrats to 30 Republican Senators, a super majority which made the Senate filibuster proof, as only 60 votes are needed to end a filibuster.  The Democrats could pass any legislation they felt was needed and they applied, among other things, fiscal policy to the post Viet Nam War period.  Unemployment during the Carter period was considered high, running from 6.9% to 5.8%, and ending in 1980 at 7%.

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From the beginning of President Lynden Johnson’s acceleration of the Viet Nam War inflation slowly began to increase in the country.  The country was both fighting a war and allowing the public to maintain their peacetime standard of living.  By 1980 it had reached two digits and would that year eventually rise to about 15%.  The economic situation that occurred was labeled, stagflation.  It consisted of both stagnation, high unemployment, and inflation, prices rapidly rising because of shortages brought about by having fought a major war, maintaining the military during the Cold War, and supplying all the needs of the American people at the same time.

 

Generally during a period of inflation there are not enough goods and services available to match the demand and prices rise until a new equilibrium is reached of the goods and services offered.  If anything there should be lower unemployment.  But in this case there was also stagnation; there were not enough jobs for everyone able to work and wanting employment.  This was stagflation, the concurrent existence of two economic opposites.

 

There was a way to break this economic condition by having the Federal Reserve raise interest rates far higher than they were, raising the rate of inflation until it exploded.  But this would throw a lot of small businesses and even some large companies into bankruptcy.  This action would bring about immediate adverse economic conditions for a large number of people; it would bring about a short term depression which would temporarily increase unemployment.

 

President Carter had the Federal Reserve Chairman, Paul Volker, begin this process but then after receiving innumerable complaints President Carter backed off.  The next President, Ronald Reagan, allowed Volker to carry out this policy.  It took about a year and a lot of human misery to break this economic cycle.

 

When this came about, early in the Reagan administration, the President got on national television holding a copy of the Sunday New York Times Business Section and said something to the effect of there were umpteen pages of jobs available according to the newspaper and that if there were no jobs where the people lived then they should go to where there were jobs.  This presentation exacerbated the problem because suddenly there were old jalopies crisscrossing the country, being driven by people looking for employment, following whatever rumor promised jobs somewhere else.  This so-called friendly advice or thoughtless act created the homeless problem in the United States.

 

This policy, by the Federal Reserve which was necessary that broke the inflation cycle which had been begun by President Lynden B. Johnson in the 1960s, created an instant depression but ended the stagflation.  Interest rates dropped to a low single digit where they remained until 2008, when they dropped even further almost approaching zero, where they remain today.

 

As a footnote it should be noted that the people who pay for this low interest are the people in the United States who deposit their money into the banks and receive an interest payment on most of their deposits of one tenth of one percent per year.  The amount of interest most people get on their bank holdings is so low it is not even taxable.

 

Fiscal Policy with other economic remedies ended this economic crisis.  The other equally important economic remedy was Monetary Policy.  This is controlled by the Federal Reserve.

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Monetary Policy is the process that the Federal Reserve uses to control the supply of money, its availability, and the cost of money or its rate of interest in the country.  Its objective is aimed at the growth and stability of the economy.

 

The Federal Reserve (FED) has twelve regional banking districts, each with a major regional bank and each with a possible auxiliary bank covering the entire United States, with the major one in Washington, D.C.  It is a private government banking system that controls all the public banks in the country.

 

The FED’s major function is to regulate the private or public banks and to help control economic growth and stability, as well as maintain low unemployment and maintain predictable exchange rates with other currencies.

 

The tools the FED uses are:

(1) Its Open Market operation, constantly buying and selling bonds to increase or decrease the amount of money available in the National Cash Flow.  Here it works from the Public or National Debt, increasing or decreasing it to fine-tune the economy.

2) Adjusting the Discount Rate, setting the interest rates in the private banks by the amount it charges them interest.  The private banks determine the interest they charge the public based upon the interest they pay the FED.  They have to make a reasonable profit above what they pay to the FED.  The higher the FED’s interest rate the more expensive the money is and the less is borrowed.  Conversely the lower the interest rate potentially the more will be borrowed and used for economic expansion.  And the more employment will occur.  Since the 2008 Real Estate Crash the interest rate has dropped to almost zero (one tenth of one percent), and expansion has very slowly occurred.  In fact we are still, seven years later, in the process of recovering from that crash.

(It should also be noted that since 2011, when the Republicans took control of the House of Representatives there has been no Fiscal Policy.  In fact the House has forced through bills increasing the unemployment level and exacerbating the recession.  They have been very good at worsening economic conditions and then blaming the Democrats for it.

3) The third method is raising the Reserve Requirements that the banks are required to observe.  The public banks have to keep a certain percentage of their deposits for every loan they make.  But regulating the amount that the bank has to keep the Federal Reserve can significantly increase or decrease the amount of money that a bank can lend.

 

Among all the dollars deposited in the banks this would also include demand deposits (checking accounts).  Most people deposit their paychecks and reserve funds in banks which pay them a token interest for these funds.  People can at any time withdraw part or all of their money.  Meanwhile the banks lend out this money.  By law they must keep a small percentage, about five percent.  The banks can then lend out or invest ninety-five percent of the money deposited.  This expands the amount of money in circulation.  If the FED were to raise the Reserve Requirement to ten percent this would lower the amount that the banks can lend out by 50%.

The actual amounts that the banks have to keep in reserve are: up to 14.5million 0%, over 14.5 million to 103.6 million, 3%, over 103.6 million, 10%.  It should also be noted that after a bank lends out all its available funds it can deposit its loan papers with the FED and lend out the money all over again under the same conditions.  It should be noted that once the money lent out is redeposited into the banks 95% of it can again be loaned out.  Interestingly the FED is now considering raising the current reserve requirement.

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Using their Reserve Requirements, up to the end of 2008, the major banking houses in the United States had created trillions of dollars in real estate value by constantly mortgaging and remortgaging individual properties at higher and higher rates throughout the 50 states.  This collapsed virtually overnight towards the end of 2008.  President George W. Bush, at the very end of his presidency bailed out the major banking houses which were then facing bankruptcy.  This process was continued by the new president in 2009, Barak Obama.  While a few banking houses went under and were absorbed by other banking houses the Federal Government had no choice but to bail out most of the banks.  For one thing all the commercial banks had all their deposits insured up to ½ million dollars each by the Federal Insurance Deposit Corporation (FDIC).  The Federal Government would be liable for all this money if most of the banks failed.  In addition most of the business transactions in this country are paid for by either checks or credit cards that are all processed through the banks.  If the major banking houses like the Bank of America, JPMorgan Chase, Wells Fargo and most other bands were to suddenly disappear the movement of money throughout the United States would practically cease and the country would face a depression that would make the Great Depression of 1929 look like a weekend disruption.

 

Interestingly the potential 2016 Republican presidential candidates in their Third Debate, on November 10, 2015, mostly stated that if they were elected to the presidency one of the first things that they would do would be to get rid of the Dodd/Frank Bill that was passed to avert a possible repetition of the 2008 Crash and, if there were to be another economic crash they would not bail out the banks, that nothing is “too big to fail.”

 

What this 3d Republican Debate illustrated was that these people are blatant liars who will say anything to get elected or that they are totally ignorant of Macroeconomics or any other type of economics.  I don’t know which position is worse?  I was also shocked that the “media,” who seems very conscious of “fact checking” didn’t pick up on any of this.

 

If another Banking Crash were to occur and one of them were President of the United States at the time he/she would be forced by their own advisors to again bail out the banks.  For one thing it would probably cost the Federal Government and taxpayers directly more money to not bail them out and the following economic breakdown of the society would last for well over a decade, which is how long it took for the Great Depression to end.

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President Barak Obama’s major problem, after he assumed office in 2009 was dealing with the Real Estate Crash that he inherited from the Bush Administration.  For his first two years in office he had a Democratic majority in both Houses of Congress that cooperated with him.  The Republicans at this point at a meeting agreed to oppose everything he did and make him a one term president.

 

In 2006 Ben Bernanke was appointed Chairman of the Federal Reserve by President George W. Bush.  Bernanke replaced Alan Greenspan.  Bernanke working with President Obama utilized creative Monetary Policy to essentially pull the country out of a major depression without being able, after 2011, to get any cooperation from the House of Representatives.  Up until 2015 there was no Fiscal Policy applied.  Toward the end of 2015 both Republican dominated Houses of Congress passed a bipartisan bill to extend Federal Funding on road construction and maintenance throughout the nation which had initially been passed into law before the Republicans took control of the House and was due to end.

 

Initially after 2011 Bernanke innumerably called for Congress to enact Fiscal Policy legislation.  Obama even presented a proposal for much needed infrastructure improvements which would also create a large number of jobs.  This proposal never even reached the floor of the House.  If anything the Republican House of Representatives cut Federal Government funding to a multitude of programs and decreased, on a number of levels, government jobs actually worsening unemployment under the guise of economizing.

 

The FED then came up with a creative twist to Monetary Policy.  One additional major problem that came with the Real Estate Crash was who owned the properties/homes that then had mortgages on them of greater value than the property was worth.  The mortgages had been divided up into fractional shares, distributed to innumerable hedge funds, and the banks had reorganized record keeping on a very sloppy basis.  It was, in many cases almost impossible to discover who owned 50.1% of many if not most of the properties.  This was a dilemma that would ordinarily take two or more decades to clear up.

 

The FED’s solution to this problem and the shortage of money in the National Cash Flow that was causing the massive unemployment was to add 85 billion to the economy every month for a period of over two years.  45 billion was used to buy mortgage paper (fractional pieced of mortgages) in all fifty states and forty billion was used to buy back debt paper (government bonds).  This added one trillion twenty billion dollars to the National Cash Flow a year.  It was gradually phased down and ended in 2015.

 

Currently it looks like interest rates for the public will remain at almost zero for at least the balance of 2015.  But unemployment has dropped nationally to around 5%.  Creative Monetary Policy had turned a possible great depression into a recession and brought the country well in the direction of economic recovery.  All this has been done under the administration of President Barak Obama largely with no cooperation from the Republicans in Congress.

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Issues are never simple cause and effect actions.  There are always multitudes of variable affected in addition to the major outcome desired.  Everything consists of hard choices.  These should be made by experts who are aware of all the possible outcomes.  Or, at the very least, it will be people who will listen to experts and act accordantly.

 

In November of 2016 a major election is coming up, the next Presidential Election.  Both major political parties will be presenting a host of candidates for the Presidency and Congress.  The entire House of Representatives will be up for election and also one third of the Senate. In addition there will be major elections in all 50 states.  The people will speak by voting or not voting.  If the Republicans maintain their majorities in both Houses of Congress and in the majority of the states then very little will be done in the next four years.  The public by their action or inaction will decide what the future will hold.

 

 

 

 

 

 

 

 

The Weiner Component #140D – Congress: Fiscal Policy & the Infrastructure

Dwight D. Eisenhower, official portrait as Pre...

Dwight D. Eisenhower, official portrait as President. (Photo credit: Wikipedia)

One of the greatest problems facing the United States today is the fact that most of its infrastructure was built in the late 19th and early 20th Centuries.  By definition the infrastructure is the basic physical systems of the cities, states, and country.  Largely our local cities, states and nation have acted as though they will last forever with little or no maintenance, repair, or modernization.  If something breaks down it is generally fixed.  In essence this nation has taken a Band-Aid approach to maintaining our infrastructure and as a result yearly the country falls farther and farther behind as its infrastructure slowly rots or becomes obsolete.

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It should be noted that when an individual buys a new automobile he knows or will quickly learn that the vehicle will need constant maintenance over its lifetime or it will stop functioning.  The same can be said for the basic apparatuses of our cities, states, and country as a whole.  Their roads, bridges, water supply, school buildings, transit systems, sewerage disposal facilities, electric grid, ports, airports, dams, etc. also need occasional replacement as they become obsolete or continual maintenance over their lifetimes otherwise they will eventually grow out of date or stop functioning, or, for that matter, both of the above.  All of these are called the infrastructure that allows the community, cities, states, and nation to function.  When they partially or completely break down there is chaos.  How come most people are responsible when it comes to their individual possessions but irresponsible when it comes to their communities of nation?

 

Specific responsibility for these entities can be local government or privates industry or a combination of these.  It can also be state government.  In the final analysis the ultimate responsibility rests with the lawmaking body of the National Government, the Congress.  They are responsible for the overall functioning of the nation.  They alone have the resources available, financial and otherwise to modernize, repair, or rebuild parts and pieces of the infrastructure, to provide for the needs of the entire nation.

 

Cities and states follow a system of microeconomics.  They have an income, the fees and taxes they collect.  If they have to spend more than they collect then they can issue tax-free long term, bonds to finance the project, usually a 30 year low interest, tax-free bond.  They are limited as to how many of these they can issue by their projections of their incomes over the next three decades.  The Federal Government does not have this problem.  They utilize macroeconomics and can issue money as needed.  They are also limited as to how much they can issue, but their limitation goes far beyond what any state or city can do.

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Because the problem currently seems insurmountable it has been largely ignored on virtually every level of government and keeps getting worse with each passing year.  In the third Republican 2016 Presidential Debate in early November of 2015 several of the potential candidates commented on the infrastructure, stating that it was the responsibility of the states and local governments to solve these problems, that the Federal Government should not be involved.  This is passing the buck or dropping the rock.  The cost of solving this problem is in the trillions of dollars.  No city or state can afford to do more than light maintenance of this problem.  The statement itself by potential candidates like Ted Cruz denotes total ignorance of the problem or total cynicism toward it.  No city or state can sell trillions of dollars’ worth of tax-free 30 year bonds and hope to be able to pay them off and operate the government at the same time.

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The city of Pittsburgh is known as the city of bridges, both highway and railroad bridges.  Most of them are old, nearing the end of their useful lives.  There are over 4,000 bridges in the city.  Over 20% of them are structurally deficient.  This includes one located as part of the city’s main arteries.  This bridge was built in 1928 when cars and trucks were lighter.  It was designed to last 50 years.  It is now 86 years old.  Five million people use it daily.  The bridge connects the northern and southern sections of the city.  It should have been replaced years ago.  At one point structural damage was discovered on the bridge.  It was closed for two weeks while structural repairs were made on that section causing great hardship to the people of Pittsburgh.  An arch bridge in the city had a platform type structure built under it to catch falling concrete which would otherwise hit traffic underneath it.

 

In Minnesota in 2007 a bridge collapsed, that was over 50 years old, killing 13 people and injuring another 145.  The antiquated Skagit River Bridge in Washington State collapsed last year after a truck hit one of its trusses.

 

The overall cost of repairing and replacing the needed bridges in Pittsburgh has been estimated at being over two trillion dollars.  It has been estimated that about one of every nine bridges in the country, about 70,000 of them are considered structurally deficient.  Some have had a section collapse.  Essentially repair has been done on a band aid basis, just repairing the damaged section.

 

The majority of airports in the United States are out of date.  They need to be modernized.  The majority of seaports are in danger of becoming obsolete as the ocean going ships gradually increase in size and number.  A report from the American Society of Civil Engineers states that 32 percent of the main American roads are now in poor condition and in need of major repairs.

 

In 1956 Congress passed and President Dwight D. Eisenhower passed a bill establishing the Highway Trust Fund.  The law directed federal fuel tax to the fund to be used exclusively for highway construction and maintenance.  Over the years both Democratic and Republican presidents have increased the tax to 18.4 cents per gallon on gasoline and 24.4 cents per gallon on diesel fuel.

 

In 2008 the fund required an additional $8 billion dollars from general revenue funds to cover shortages brought about by the recession of that year and higher gas prices.  It seems that from that year on there has been less driving and more efficient vehicles that used less gas for greater mileage.  Since 2008 Congress has authorized $65 billion from the General Fund of the U.S. Treasury to keep the Trust Fund solvent.  These monies go to all the individual states in the form of block grants and are more or less matched by state spending.

 

The Highway Trust Fund is only authorized to spend money through November 20, 2015.  In August of 2015 the Senate passed a six year highway bill.  The Republican House of Representatives ignored the bill and went into recess.  During the summer a short term $8 billion spending bill was passed by the House extending infrastructure spending until November 20th. Early in November the House passed a six year highway bill which they only funded for three years by a bipartisan vote of 363 to 64.  It was the new Speaker, Paul Ryan’s, first major accomplishment.  The bill has to be reconciled in a Conference Committee with the Senate or voted on by that body as it stands and signed by the President before it becomes law.  One comment on the bill is that it is a six year bill that is only funded for three years.

 

The basic problem with this bill, as with most bills dealing with the infrastructure is that the funding is mostly inadequate; it helps more or less maintain the system but it is never adequate to bring about the fully needed repairs or replacement.  If we take Mississippi as our example then in 2012, a national report found that that state had an estimated $30 billion in highway and bridge needs but had at most $15.3 billion to meet these expenses.  This is true for every single state in the nation.

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Today public spending on infrastructure has fallen to its lowest level since 1947.  The U.S. which used to have the finest infrastructure in the world is now ranked 16th according to the World Economic Forum.  It is behind Iceland, Spain, Portugal and the United Arab Emirates.  Many large corporations like Caterpillar and GE have complained that it’s hurting their ability to compete abroad.  The conservative U.S. Chamber of Commerce at a Senate hearing early in 2015 expressed strong business support for raising the gasoline tax.

 

In addition to roads and bridges and the gas tax there is aviation.  Throughout the United States there is a shortage of airport runways and gates along outmoded air traffic control systems.  These have made U.S. air travel the most congested in the world.

 

Around the industrial world there are over 14,000 miles of high speed railroads operating around the world but none in the United States.  In Chicago it can take a freight train nearly as long to go across the city as it would take a high speed train to go from Chicago to Los Angeles.

 

In New Jersey there is an old railroad bridge, the Portal Bridge, going over the Hackensack River that was built in 1910.  It gets almost 500 trains a day and is one of the busiest bridges in the country.  The bridge was based upon a design from the 1840s and was obsolete shortly after it was completed over 100 year ago.  It is a swinging bridge that needs to be opened several times a week to allow river traffic to pass.  Its major problem is that it doesn’t always lock when it is swung back and rail traffic can back up infinitely in both directions while is being made usable again.  The bridge has to be replaced.  The project would cost just under a billion dollars.  A new bridge was designed two years ago in 2013.  Everyone agrees it has to be replaced but there is no consensus or political support from Congress to raise the necessary funds.  Its eventual failure could stop traffic in the Northeast.

 

As far as the seaports go we now have a new generation of large cargo ships that will be going through an expanded Panama Canal in another year or so.  On the East coast only two ports of the 14 major ports will be dredged deep enough to accommodate these ships.  Do we then limit all foreign traffic to these two ports?  And if we do then how rapidly can these ships be unloaded and reloaded?

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We have mostly looked at forms of transportation that are a major part of the infrastructure but far from all of it.  There is also maintaining drinking water quality throughout the nation, dams and dikes that are essentially obsolete, extension of power grids, modernizing public school laboratories and structures, plus a number of other factors that allow the society to function.

 

In the winter of 2014 – 2015 a section of the national power grid froze and ceased functioning.  A section of this country was one step away from losing electric power.  We have not been that lucky in the following year.  A section of the northwest, Washington State, lost power during a period of freeze.  Conditions could still get worse in the near future.  Do we have to wait for additional crises before any action is taken?

 

Actions will have to occur at some point.  Now is considered a good time since interest rates are low and estimates indicate that these projects would generally pay for themselves in the near future.  This will be increased employment, there will be more productivity, a greater GDP, and more collected in taxes on every level of government.

 

Some of it can be done by having local and state governments team up with the private sector.  There are currently such projects in 33 states.  These arrangements are called P3s (public-private partnerships).  They are popular abroad.  But their financial effect is limited according to the extent of the infrastructure needs.  Only Congressional action can bring about substantial improvement.

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The two major weapons that the Federal Government has to fight economic recession or a major depression are Fiscal Policy and Monetary Policy.  Fiscal Policy is carried out by the Congress and Monetary Policy is done by the Federal Reserve.  Since 2011, when the Republicans gained control of the House of Representatives, there has been no real Fiscal Policy.  If anything, with one exception in late 2015, Congress has largely ignored this responsibility.  The Federal Reserve, under the leadership of its former Chairman, Ben Bernanke, with support from the President, had used creative Monetary Policy to move the country toward economic recovery from the late 2008 Real Estate Crash.  The country is still in the process of recovering.

In March 2012 the Treasury Department published, “A New Economic Analysis of Infrastructure Investment.”  This multipage document explained all the advantages of infrastructure investment, also detailing programs the President was trying to initiate.  From what I understand the issue was never even raised in the Republican dominated House of Representatives.

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In the 19th Century being a Congressman was a part time job.  The Congress met for only a few months and passed all the necessary laws for the year and then adjourned.  The President spent the entire year running the country but Congress only met for a few months.  The House of Representatives have again reached that point except that they have stretched it out over the entire year.

 

The current schedule calls for the House of Representatives to meet for 111 days over their fiscal year.  They work three days a week and take a four day weekend.  They have extended all their holiday breaks by half again as many days as they used to take.  And for this they are paid $170,000 per year.  All this at a time when the nation is seething in problems, many of which they have no time and probably no inclination to consider.

 

The new Speaker, Paul Ryan, has a bed in his office and lives there the short week he is in Washington and, from what I understand, spends his four day weekends home in Wisconsin with his wife and young children.  That was part of his agreement in becoming Speaker.  The rest was to pacify the conservative elements in his party.

 

What will happen in Congress is anybody’s guess.  I would suppose the country is stuck with these Republican majorities for another full year.  How much will this Congress achieve?  To me that’s an interesting and frightening question.  I don’t expect much.

 

What happens in the 2016 Presidential Election is up to the public voters, whose vote has not been suppressed in Republican dominated states.  We know in a recent Midterm Election the Democrats cast more votes for members of the House than the Republicans did but through earlier gerrymandering the Republicans were still able to maintain the majority in the House of Representatives.

 

What will the attitude of the current Congress be toward the infrastructure?  Ted Cruz and some of the other potential Republican Presidential candidates stated in their third debate that it should be the province of the states.  The states are investing less and less money into infrastructure as their other costs increase, especially their unfunded retirement costs.  Hopefully no additional major infrastructure disasters will occur during the winter of 2015 – 2016.

 

If we ask ourselves how Congress does get away with its current attitude or attitudes?  The answer is quite obvious.  This action and a number of other things Congress does is essentially invisible to the general public.  The media does not consider these items as newsworthy.  They are not really dealt with or dramatically brought before the public.  The concept of the infrastructure itself tends to be more abstract than concrete.  If something specific happens and there is a public hue and cry about it then something is quickly done to resolve the problem.  But as a small piece of information that can be dug up with some effort it is not that important.  While Congress should be concentrating on all these problems they ignore them until they are specifically brought to their attention.  Basically the thinking is that the country has done well and will continue to do so if left alone.

 

An example of this was sequestration, a law passed two years ago to cut government spending across the board.  An immediate result was enhanced waiting time at all the airports as the number of air controllers was immediately cut back.  The complaints were loud and vociferous.  Within a day or so

Seal of the United States Department of the Tr...

Seal of the United States Department of the Treasury (Photo credit: Wikipedia)

Congress had passed a law exempting the air traffic controllers from sequestration.  The military in late 2015 had reached a point where its efficiency was drastically effected by sequester cuts.  This problem was resolved when the debt limit was raised.  Refunding the military became part of that deal. Generally once members of the public are inconvenienced or the change will obviously effect the country change is quickly brought about.  But until that time nothing is done.  In a sense we are waiting for obvious crisis to occur before positive change is brought about on parts of the infrastructure.

 

 

 

 

 

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

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

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

Countries using the Euro de jure Countries and...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Weiner Component #117 – Following the Federal Reserve’s Example: the European Central Bank

The 2008 Real Estate Debacle affected not only the banks and economy in the United States but also those in Europe and other parts of the industrial world. And like conditions during the Great Depression each country or region has had to fend for itself, work its way through the economic disaster.

The United States followed a method of creative monetary policy, adding gradually trillions of dollars to its national cash flow in order to bring about a return to the direction of prosperity. In essence it created and added 85 billion dollars a month to its economy for well over two years. The result of this was partial recovery with national unemployment dropping to slightly over 5 percent.

(It should be added that had Congress also applied fiscal policy unemployment would probably be down to 2 1/2 to 3 percent.  But that would today be impossible with a Republican majority in both Houses of Congress.)

The European Central Bank (ECB) is the equivalent of the Federal Reserve, controlling monetary policy for its 19 member Eurozone economy. Mario Draghi, the director of the ECB has begun their version of creative monetary policy to bring about economic recovery within the 19 nations that make up the Eurozone. It should be remembered that this economic union was initially called The Common Market.

The European Central Bank will buy $69 billion or 60 billion euros in bonds each month until September 2016. They do not have the mortgage dilemma that had existed in the United States but they do have a debt crisis in a small number of their member states that they are currently essentially attempting to ignore. The ECB is beginning this process with traditional monetary policy. But even this is a radical step for the ECB because they will be adding 60 billion euros to the cash flow every single month. This will be done by buying back bonds.

In all they will be adding a total of over one trillion euros. Where is all this money going to come from? The ECB will print it and add it over a twenty month period. At the end they will be adding 1.2 trillion euros to the Eurozone cash flow.

Remember, currency has no real value. There is nothing behind it but the word of the agency or country that provides it. This is true for all nations today because there are not enough precious metals in existence to conduct all the business that occurs within and among all the nations. The value of this currency is set in the nations using the money by their governments and by what other countries are willing to trade for it.

There are several major problems the Eurozone is facing. To use a historical example: When the United States was first formed during and immediately after its Revolutionary War in the late 19th Cwntury its government consisted of thirteen separate states and a Continental Congress made up of representatives of these states. In order for Congressional legislation to pass, each of the individual states had to sanction it. Also only the states could tax. Congress had to request money from each of the states which each of the thirteen states could send or not send. What existed was 13 sovereign states with an essentially powerless central government.

This is largely what exists in Europe today, nineteen sovereign nations that largely speak different languages who have bound themselves into an economic union. Some are wealthier and more efficient than others. It is to everyone’s advantage to belong to the union but some of the members are currently in dire straits.

In the period prior to 2009, some of these countries using creative bookkeeping, which was largely created for them and their citizens by large American banking houses like Goldman Sacks, slowly incurred extensive debt. The basic premise, I assume, was similar to that used by the banking houses in the United States that their increasing prosperity would grow the debt out of existence. At the end of 2008 the Housing Industry collapsed in the U.S. shrinking economic growth throughout the world and leaving these nations and many of their citizens hopelessly in debt.

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The Eurozone is a monetary union of nineteen European states that have adopted the euro as their official currency. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other European states are getting ready to join and some have adopted the euro unilaterally.

The current major problem facing the ECB is deflation. Their Gross National Product (GDP) has been slowly shrinking; it is currently down .02%. This means, particularly with their population slowly increasing, that the average standard of living for most of the people is slowly dropping.  In order to avoid this and to begin growing the GDP again the ECB will, using monetary policy, increase the cash flow throughout the Eurozone by 60 million euros per month for about twenty months. Obviously they believe that this will reverse the current pattern. Hopefully in this they are right.

The euro tends to be a far better currency than most of the 19 nations had before the Common Market. It has been between 1.2 to 1.5 percent above the U.S. dollar. The only currency that has been higher has been the British pound which has been between 1.5 and 1.7 cents above the U.S. dollar.

All the nations involved have benefited from this economic union, but all these countries are not economically equal, and all of them have otherwise remained independent sovereign nations with strong feelings of nationalism. Currently Greece, which had a youth unemployment level of 53.5% in November of 2014, had its government for a number of years borrowing off the books billions of euros. In November of 2010 Eurostat revised the debt of Greece putting the deficit at 15.4% of GDP and public debt at 126.8% of the GDP. This was the greatest deficit among all the EU member nations. The European Central Bank (ECB) bailed Greece out with money and an austerity package.

Despite the austerity measures, possibly because of a continuing recession, the deficit continued to grow and in the beginning of July 2014 there was a second bailout of one billion euros that was due to be paid back in late July. Greece ended its six year recession in the second quarter of 2014 but was still facing, economic and political instability and heavy debt

There has been spontaneous protests strikes, heavy unemployment, and large scale discontent ever since the bailout loans were first made. In the January 25, 2015 Election the Left Wing Syriza Party won the majority position with 149 out of 300 seats, 36% of the popular vote. The second, out of the 20 functioning political parties in Greece, was the (NO) New Democracy with 27.81% of the vote.

Syriza campaigned as the anti-austerity party. They are a radical left-wing political party whose platform was to end Greece’s austerity measures. In a manner of speaking by the way they voted the Greeks held out their middle finger to the European Central Bank (ECB).

It’s understandable in a country which, for whatever reason, has been in an ever increasing recession for the last seven years, has seen its GDP decrease about 25% and unemployment rise above 25%, with the ECB now asking for further austerity.

The new Prime Minister, Alexis Tsipras, has promised to renegotiate the country’s 270 billion bailouts. He is also seeking forgiveness for most of Greece’s 270 billion euro debt. He has pledged to reverse many of the austerity reforms, such as cuts in pensions and the minimum wage and public sector layoffs.

Germany and France want the ECB to adhere to the original austerity agreements; in a sense they want to continue to punish Greece and the other nations who overspent and received bailouts from the ECB. Some of the other countries are Spain, Portugal, Ireland, and Italy.  In Spain a radical left party is presently organizing protest marches in the country. They may well emulate Greece in their next popular election.

As of now nothing has been done. The European Central Bank has put off any possible settlement for several months. What will happen then is anyone’s guess.

The ECB needs agreement from all its members in order to act. If it demands that the austerity continue then Greece will be forced to leave the Eurozone and go back to its old currency, the Drachma, and eventually be forced to declare bankruptcy since at the present it is at the point of needing another bailout for which its new prime minister swears he will never ask. If, at that time, the ECB accepts a compromise it will be establishing a precedent that will apply to the other nations that have overspent in the past and need or will need bailout funds.

All this is an interesting dilemma! This is particularly true since the euro has no intrinsic value. Additional funds can be printed and issued as needed. In fact this is the Monetary Policy plan that the ECB is about to start that will hopefully reverse the current deflation cycle the Eurozone is presently undergoing.

This problem is another result of the U.S. Real Estate Bubble bursting in late 2008 and causing a world-wide recessions. Both the Eurozone and U.S. property dilemmas were caused by the major banking houses.

In the United States the Federal Reserve, with the approval of President Barak Obama, by its monthly purchase of 45 billion dollars’ worth of mortgage paper, essentially forgave a large percentage of the multitude of homeowners who found themselves over their heads in debt on their homes. The result of this has been to solve the multi bundling of mortgages and return the housing industry to sanity and to move the country largely in the direction of economic recovery. Hopefully the dual actions will eventually occur.

Ultimately the ECB will have to take a similar type of action, largely forgiving the debt of the few nation’s that are currently in dire straits and add over a trillion euros to their overall economy or see the Eurozone largely fall apart. And if this happens and the Eurozone is largely broken up then Europe could see a return to the conditions of 1929 when each individual nation had to fend for itself during the time of the Great Depression.

(Footnote: Many of my readers have asked me questions in their comments. I carelessly did not number the original publication of “The Weiner Component #114.” However all the questions are answered in that blog: “Responding to Your Enquiries.”)

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)

English: Various Euro bills.
English: Various Euro bills. (Photo credit: Wikipedia)

The Weiner Component #116 – The U.S. & the Federal Reserve

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

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

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

By Friday January 9, 1915, the Federal Reserve had turned over $98.7 billion to the Treasury for the year 2014. In 2013 it was $79.6 billion and in 2012 it was $88.4 billion. All of this was the interest on the National Debt bonds, much of which the Federal Reserve had purchased since 2009.

In 2008, the last year of the Bush Administration, the country faced the explosion of the Real Estate Bubble that had been gradually building over the prior thirty years. The big banks had been going crazy with denial in 2007 with their abuses when the oncoming failure became obvious. In essence every dollar in circulation suddenly dropped in value to about a dime. The Obama Administration did two major things in 2009 and 2010. They were able to avoid through rapid action an economic crash potentially larger than the Great Depression of 1929 and they passed Affordable Health Care (Obamacare). In 2010 the country elected a Republican majority in the House of Representatives and thereafter nothing was done by the House to alleviate conditions caused by the Real Estate Bust. In fact Congress passed laws to exacerbate the negative conditions.

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It should be noted that the Federal Government has two major tools to deal with downturns in the economy. One, used by the Federal Reserve, is Monetary Policy and the other, used by Congress and the President, is Fiscal Policy. This is Macroeconomics.

Fiscal Policy has to do with Congress passing bills that add money to the economy. Keep in mind that all currency has nothing behind it other than the word of the National Government. All money is now a means of exchanging something of value for something else of value, goods and services for goods and services.

In 2011 or 2012 President Obama proposed a bill that would create jobs by updating the infrastructure of the United States. The electric grid across the U.S. is well over fifty years old, much of it predating World War II, and parts of it are in constant danger of breaking down. It has not dealt with the changes in demography or increases in population that have occurred over that period. The country has come close to power outages because of cold weather conditions or for other reasons. Many of the bridges throughout the nation are also well over fifty years old. A number have collapsed; many are still waiting to be refurbished.  Also many schools, some of which were built over one hundred years ago, also need refurbishing or replacement throughout the country. Many of the sewers in cities are well over one hundred years old; a few have collapsed in parts.

All of these and many other projects will have to be done at some point in the future. Maintenance is required to keep all aspects of society properly functioning. From 2011 on the House of Representatives with its Republican majority has tended to squeeze the society, downsizing government and adding to unemployment, in fact at one point it closed down the Federal Government by refusing to fund it. The present is an ideal time to do a lot of these fiscal projects as interest rates are at just barely above 0.

Monetary Policy is a tool of the Federal Reserve. It can be used to increase or decrease the amount of money in circulation. Ordinarily the Fed adjusts the money flow in the economy by increasing or decreasing the amount of money it borrows through the sale of bonds. What happens is decided by the rate or non-rate of inflation. The Fed is always cashing out and selling bonds. There are short term, medium term, and long term bonds, lasting from a few months to a number of years. The rate of sale is determined by the level in interest paid on these bonds. The higher the interest the greater the sale and the lower the interest the less the sale. These interest rates are determined by the level of inflation in the country. The higher the inflation the higher the interest. Here money is taken out of the national cash flow so that there is less available to be spent, thus gradually forcing down the rate of inflation. If the opposite is true then the Fed will sell less bonds than it cashes out and continually add currency to the national cash flow.

With no help from Congress during a period of recession or depression the Fed under the chairmanship of Ben Bernanke had to be quite innovative to pull the nation out of the Real Estate Debacle. This was done by the Fed buying $85 billion worth of bonds each month for well over two years: $45 billion in mortgage paper and $40 billion in government bonds. The effect of these two actions was to add well over a trillion dollars to the national cash flow per year; and also to essentially resolve the big banks activity in splitting up individual mortgages into well over one hundred parts. By my estimate it would have taken well over twenty years to straighten out the housing mess if the Fed had left it alone. The Fed did it in a relatively short time by buying most of the pieces. We again have new construction and older houses are being resold.

What is interesting to note here is that 40 billion was utilized on traditional monetary policy while 45 billion dollars was used to purchase mortgage paper from the assorted hedge funds which each owned fractional pieces of mortgages in each of their funds that had been very sloppily catalogued. For the Fed to collect or foreclose on any of these properties it would have to set up a table of all the homes on which it held mortgages within the 50 states and gradually build up its portfolio to the point where it owned over fifty percent of each particular mortgage. The cost of setting up this information bank would have been prohibitive even for the Federal government. The probability is that the Fed did nothing with this paper and a percentage of the population ended up living in their homes for nothing, in essence the government forgave these loans.

Of course the people living in these houses still had to pay property tax. If they did not the municipality would eventually foreclose on the property and sell it for back taxes. These people would suddenly have a lot of disposable income, which many of them spent freely, and they could not claim any home interest payments on their income taxes. This, in turn, added billions of dollars circulating in the National Cash Flow throughout the country.

The practice of adding money to the economy was ended in October of 2014. Janet Yellen, the new Fed chair left the ending of the policy tentative. It could be started up again if the need arose.

Interest rates had also been dropped to a fraction of one percent, practically giving the banks free money from all the savers and checking accounts which they could lend out at a decent rate of interest. Currently the Fed is considering when to raise interest rates. Meanwhile most of the larger banks have announced large profits for 2014.

What is interesting here is that the Federal Reserve used part of the National Debt as a means of positively controlling the amount within and the flow of national currency. They actually increased over time the flow of money by trillions of dollars and, in this way, diminished the effects of the Real Estate Debacle caused recession.

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What Bernanke did was to use part of the National Debt as a means of getting the country out of a serious recession. Since Congress would not act he used the Debt itself as the tool by which a large percentage of recovery was gradually brought about.

The National Debt is divided into two parts: public debt which the government owns and private debt which is held by private countries and by individuals. For example the two largest holders of U.S. debt are China which as of November 2014 held 1.25 trillion and Japan had 1.24 trillion.

All foreign holdings at that time were 6.11 trillion dollars. It should be noted that the National Debt currently is 18 plus trillion dollars. Who owns the balance? Private individuals and companies within the United States and elsewhere would hold at least another trillion dollars. The balance would then be held by the U.S. government and its agencies. For example Social Security has well over 2 1/2 trillion in government debt. All this means that the Federal Government holds well over 50 percent of its own debt and pays the interest on that debt to the U.S. Treasury.

It should be noted that Treasury securities are seen as one of the world’s safest investments. This has been the situation in the world and will, in all probability, remain so.

The 114 Congress, which recently met for the first time and has a Republican majority in both Houses, shows no indication that it is even slightly interested in fiscal policy. While unemployment is down to 5 plus percent for the first time in the nation since the 2008 Debacle it still could be a lot lower with fiscal policy.

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Another factor of importance here is population; it is always gradually increasing. According to the Census Bureau’s Population Clock: there is one birth every 8 seconds, one death every 12 seconds, and one international migration every 33 seconds. The result of all this is a net gain of one person every 16 seconds.

That is an increase in the population of the United States of 3.75 people per minute, 225 per hour, 5,400 persons per day, and 1,965,600 people per year, if we count each month as 30 days and do not allow for each leap year. The current overall number of people in the country is in excess of 350 million people.

Most of these new settlers will reside along either of the coastal areas. In order for standards of living to not decrease with this additional population the GDP (Gross Domestic Product) has to increase one or two points yearly. If it stays at exactly the same point or decreases slightly then the overall standard of living has dropped for the bulk of Americans.

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What will happen with this new Congress should be interesting and economically uninspiring. From now until July 2016 when the Republicans hold their Presidential Convention there will be a lot of jockeying for the lead position in the Republican Party. The major issues like immigration, fiscal policy, job creation, plus whatever else comes up will be largely ignored. They will try forms of blackmail with the President in order to achieve some of their goals. This will be done by attaching riders that he will not approve of to necessary bills. That means that President Obama will probably have to veto the necessary legislation causing all sorts of economic and other problems. The question there is who will take the blame for causing all these disasters?

The Republicans will certainly not be creating any new jobs. Janet Yellen, the current chair of the Federal Reserve may have to restart the program of buying bonds for economic recovery to continue since the Republicans will be doing their dandiest to constrict the economy and inadvertently increase unemployment. What will probably occur between the present and the next presidential election is two years that the future historians will in all likelihood essentially ignore.

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)