Archive for the ‘Bail Out’ Category

An Open Letter to President Barack Obama’s Economic Recovery Team: Full and Equal Rights and a Quality life for All

Saturday, January 17th, 2009

By J.W. Smith

With the world economy still imploding the U.S. Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke pulled out all stops.

The Federal Funds rate was dropped essentially to zero and they declared their intention to recapitalize financial institutions through buying up their worthless debt, taking an ownership position through buying preferred shares, and giving them access to almost zero interest money. All that and more is promised for the ethereal world of high finance.

Pouring Trillions at the Very People Who Caused the Current Crisis

Thoroughly frightened, these managers of the crash originally part of the same ethereal world of high finance just mentioned, as they saw the economy still worsening, finally decided to also pour a few trillions at the real economy.

The collapsing auto industry is now to be bailed out, commercial paper funding daily operations will be purchased, loans will be made directly to industries that are unable to obtain financing, and—along with other governments—if unsaleable the paper guaranteeing every shipload of commodities or manufactures will be financed, and close to a trillion is planned to be passed out to all taxpayers.

Sound accounting and law put maximum leverage (debt to equity ratio) for banks and other stockholder industries at 12:1. The leverages of 30:1 or even 70:1 worldwide, attained by operating off book (Citibank’s rose to 280:1, before being bailed out), are unwinding. When values drop 50%, those leverage numbers double.

Thus trillions and trillions of both borrowed money (those zero interest treasuries as finance capital flees to safety) and created money are being poured at the world economy to try to inflate values so these now bankrupt banks, industries, homeowners, etc, will be solvent.

In 2008, financial institutions were to bring their off book business back on book and the 12:1 leverage rule was to be re-imposed. But, as most financial institutions and many others would be immediately bankrupt, the imposition of that law has been suspended.

If these efforts provide enough liquidity and confidence to turn those collapsing values back up, the unequal and unjust monopoly system can be saved for a while.

The Undeveloped World May be Gaining Their Freedom

But, except by war, they cannot avoid the reality that the rest of the world will be developing rapidly, they will be turning their resources and labors to producing for their own citizenry, and this will destroy the worldwide monopoly system. (See From Plunder by Raids to Plunder by Trade for the origin of plunder by trade which is only now being effectively challenged as the worldwide populist revolution rapidly gains speed.)

Towards that end, the value of the dollar started dropping fast the day those plans for the creation of trillions more dollars were announced.

The cheapest and quickest route to full and equal rights, elimination of poverty, and restructuring to a quality life for all is the current collapse being total.

Only then, with the former self-satisfied population cold and hungry, will the monopoly structure be rejected and hopefully replaced by an efficient, easily understood, social structure with the citizenry paying socially-owned bank profits and privately owned resource (land) rents to themselves and used to provide single-payer health care, retirement, building and maintaining infrastructure, running governments and all other essential social needs as addressed in the above hotlink.

More than half our economy is a waste of time, money, labor, and resources

Before we can understand the error of pouring those trillions of dollars at the ethereal world of high finance, we must first understand that it is totally non-productive and that social needs can be provided at less than half the costs of this monopoly system.

Labor created real values and monopoly created fictional values

Nature produced all the resources on and under the land and offered it to us all for free. Banking and money are only social technologies understood and used for centuries.

Land has tangible values but they were not created by labor and its wealth was offered to all for free. The only value in banking is a little brick and mortar, and banking and money are nothing more than social technologies in use for centuries, so most those profits too are unearned and thus properly belong to us all.

As each are nature’s wealth offered to all for free, those land (resource) rents and bank profits should be paid to ourselves (socially collected) and those funds providing all social services. This leaves only food, fiber, shelter and recreation, the basics of a quality life, to be paid for out of our earnings.

Quintuple gains by abandoning monopoly values and embracing real values

The shock of such a statement disappears when one realizes they are quintuply repaid by all taxes disappearing; the price of land dropping to zero even as use rights are retained, use values rise, and governments, infrastructure (roads, railroads, postal systems, water and sewer systems, electric and gas systems, and all other natural monopolies) education, health care, and retirements are funded.

Measured in required employed working hours to earn the money, the costs of providing all needs of society, including those basics (food, fiber, shelter, and recreation) drops to half of today’s monopoly costs.

These efficiency gains expose over half of our labors and resources being ground up within the superstructures of these monopolies we are told to not exist. A substantial share of those unnecessary costs go to the military protecting this monopoly structure.

Owning those bankrupt banks

Trillions of dollars have been wasted pouring money at the ethereal world of high finance. This created money should be poured at the productive real economy providing our goods and services, not at an ethereal world of high finance producing nothing and these are the very people who caused this crash.

Of course centuries of perception management (propaganda) have trained us to believe this ethereal world of high finance was crucial to running our economy.

It is not. By the rules of capitalism, by law, by custom, and by virtue of the trillions of dollars already poured at them, society should already own the banks and other financial institutions running our economy.

It is only necessary to declare that reality by Presidential decree or Congressional action. Governments have done this over and over again over the centuries, taken title to those banks, turned them back to the inefficient private sector after having nursed them back to health, where they return to their corrupt ways a generation later, and the boom and bust cycles goes on forever.

If governments can nurse bankrupt banks back to health and private banks crash economies, there is no logical reason for private banks

The very fact that society can nurse those bankrupt banks back to health where they go on to again crash the economy a few decades later once they are again privately owned proves the efficiency and power of a Socially-Owned Banking System and the inefficiency and powerlessness (during a crisis) of privately owned banks.

One monopoly, the banking system, has already been theoretically eliminated and this could be done quickly once we realize that monopoly is there. Those banks are bankrupt and it is only necessary for the government to declare that reality and take them over.

The elimination of the banking monopoly is the key to eliminating all other monopolies and doing that job while keeping the real economy running is where all those trillions of public funds should be going.

The process is not complicated. Already 38 of the 40 most developed counties have eliminated the 2nd of these monopolies we will be addressing through providing single-payer, privately provided, health care.

Other sectors of the economy are also doubly overcharging the consumer

Using Britain as an example, she provides better health care to her citizenry at 43% the cost per person as in America where 46 million essentially have no health care.

In this economic crisis there is an every-increasing cold and hungry citizenry. Simply pass the single-payer health care bill that over 5,000 physicians and thousand of others have petitioned President Barack Obama to do and those health care costs will immediately start dropping towards the 40% of today’s costs that it should be.

The funds to pay those health care costs come right out of the once bankrupt, but now healthy, socially-owned and operated banking system. That is two monopolies eliminated already, those two sectors of the real economy well financed, and all at zero cost to government or the citizenry beyond that already poured behind the once bankrupt banking system.

The unearned monies that once went to monopolist are now financing essential social services, governments, education, health care, retirement, and infrastructure. There are no personally paid health care costs and each one’s medical needs are privately provided by a single-payer health care system funded by the profits of the now socially-owned and operated banking system. See again the above two hotlinks.

At this point, it will be necessary to push aside the belief systems imposed upon us by centuries of perception management (propaganda [see also They Who Write History Control History and thus Control the World]).

Continuing with how President Barack Obama’s economic recovery team could establish an efficient economy

We will assume the alert Obama Presidency explains to the citizenry that Social Security, which is retirement insurance, costs only ½-of-1% of premiums paid (payroll deductions) to operate while the monopoly superstructure overseeing most other insurances cost 50% of premiums paid.

Once the citizenry realize that their insurance premiums would drop by half, they will insist on, and a frightened Congress afraid of a cold and hungry awakened citizenry would pass legislation establishing that efficient insurance structure.

Insurance costs, still privately paid except for that spent for health care addressed above which is paid for by socially-owned banking profits, immediately drop by half.

That is three monopolies eliminated and the replacement of insurance offices and their wasted labor visible in every town and city replaced by a central insurance office that nobody ever sees exposes the superstructure of current insurance monopolies.

With that exposure, the citizenry will now look for, spot, and understand the superstructures of all monopolies.

But they will also realize that, as these inefficient social structures are rationalized, more and more people will be unemployed.

Subsistence payments for the unemployed until they are reemployed

Knowing all this in advance, the alert Obama Presidency simultaneously asks Congress to pass subsistence payments for all unemployed heads of households who have no resources to draw on.

Once that law is passed, a decree is issued for every head of household—husbands, wives, or singles—without a job and without other income or resources to apply to their bank or credit union for a monthly subsistence based on single households receiving 75% that of married couples and an allowance for each dependent.

The loan institutions will put the applicant’s electronic transfer number on that application. That form will include testimony, under oath, that they have no income or resources.

Upon signing, and on the 1st of each month thereafter until receiving their first full paycheck, subsistence funds will be computer-deposited into those accounts.

Heads of family will walk out with funds in that secure bank to cover food, fiber, and shelter for that month and each month thereafter until employed.

Those who would be against a non-bankruptable bank and subsistence funds for those with no equity and no income would be so out of sync with events they will be few and irrelevant.

Though only modest amounts of cash can be withdrawn, all purchases or bills can can be quickly paid through checks, credit cards, or debit cards which are the real money in a modern economy.

With this latest break from unequal property rights laws as applied to nature’s resources and technologies over the past 700-plus years, denying others their rightful share of what nature offers to all for free, all Americans are now fed, clothed, and housed and the worst aspect of the crisis, a cold and hungry citizenry, is under control.

Spending of those subsistence funds will increase demand and quickly stabilize the economy.

Compare this financing of the real economy with created money halting the economic collapse in its tracks with the current failure of trillions poured at the ethereal world of high finance and the house of cards still crumbling.

With money flows across national borders controlled through countries and regions issuing new currencies spendable only within their borders, any shortage of circulating money for subsistence payments’ and continued funding or repairing of economic infrastructure can, up to the level of a balanced money supply, be created debt free and interest free.

Inflation threats due to too much circulating money are easily handled when a currency is spendable only within a nation’s borders.

Inflations are easily prevented

If required reserves of 3% are increased to 6% in step with money creation doubling reserve deposits (base money), the circulation of money will be reduced by half and the money available (to borrow or to spend) remains the same.

A 30% increase in reserve deposits, due to an increase in created money, will require a mandated reserve increase from 3% to possibly 4% to maintain the same money supply.

However, both money and investment confidence will have been destroyed in the economic collapse, creating inertia in velocity of money circulation which will give the appearance and effect of a further destruction of money, and increasing those required reserves (limiting surplus circulating money) will be only after an economy has returned to normal and threatens to inflate.

Meantime, as addressed above, the citizenry are quintuply repaid for paying those resource rents and bank profits to themselves.

The initial distribution of socially-created money and destruction of any surplus through increased mandated reserves, along with careful loaning choices, are tools to point money to the owners, operators, and workers within the real economy.

Bypassing the nonproductive ethereal world of high finance, avoids deflations and inflations and the only crisis would be from natural disasters.

Over half of current finance capital is wasted

Once monopolization is eliminated, only 40% the former level of finance capital will run the American economy efficiently. That unnecessary 60% had been operating the superstructure of those monopolies providing unearned monopoly profits.

Ownership of that capital will now be very broadly diffused, and it will be democratically and equally shared with all transactions visible, touchable, and understandable.

The ethereal world of high finance, which is nothing more than massive sums appropriated through unequal property rights law—denying others their rightful share of what nature offers to all for free—being loaned back to those from which it was appropriated and the still massive surplus with no place to be safely invested placed on the gambling tables of derivatives and hedge funds, will be history.

By this time monopolists will know their secret was out and they will not be investing in monopolies they know will soon no longer exist.

Rights to land is a human right

The citizenry worldwide and those locally will be watching closely the on-going drama and by now will understand the key concept of paying resource rents and bank profits to themselves:

“Human labor did not produce land (resources), nature offers it to all for free, and a rightful share for each can be had through socially-collected resource rents and bank profits returned to all citizens through essential services being fully funded by the wealth once consumed within monopoly superstructures and the unearned profits that once went to monopolists.

Taxes disappearing as those funds (bank profits, created money, and resource [land] rents) are returned to the citizenry through being expended on running governments, building and maintaining economic infrastructure (water and sewer systems, roads, railroads, electricity, communications superhighways, and all other natural monopolies), universal health care, retirement, and, in an emergency, any social need will quickly gain the respect and loyalty of the citizenry.

With the citizenry understanding these quintuple gains, society collecting all resource (land) rents and expending it on social needs will pass by law or referendum.

The mother of all monopolies (land [resources]) will have been eliminated along with its twin (banking monopolies), all would be receiving their share of the wealth produced by nature, and, for the first time in history, an honest capitalist society will have been established.

This funding of the real economy, stopping the financial collapse in its tracks, is many times cheaper than the current pouring of trillions of dollars at the ethereal world of high finance which caused this crisis in the first place.

Dual currency systems crucial for full and equal rights worldwide

In fact this plan costs nothing to society as a whole. Under a DualCurrency system, properly spent created money costs nothing, any surplus money can be drained out after an economy is rebalanced, and a restructured world economy that provides a quality life for all its citizens has to be a real value, owned relatively equally by everybody, many times greater than today’s monopoly values.

As proven by the savings possible under an economy fully restructured to full and equal rights, investment funds from socially-collected resource rents and bank profits replacing unearned appropriated values capitalized into huge blocs of capital are so enormous that money to fund this peaceful society will be in plentiful supply.

Shortage of investment capital is fiction. Currently only 40% of finance capital is operating the real economy. The rest is wasted within the superstructures of the monopoly system, wars, on high living and appropriating unearned wealth.

Revaluing values and debts

While all the above is taking place, accountants experienced in real estate will be assessing the value of all property before and after the financial collapse.

With reassessment ongoing, the alert Obama presidency proceeds to clear up titles to all property and, with the greatest good for the greatest number in mind, restore the financial health of the citizenry and the nation.

The land under all homes, all farms, all mines, and all industries will remain under the name of the current owners (previous owners if property has been foreclosed upon) but they now must pay monthly resource rents to society (which is themselves).

Considering rent payers are quintuply repaid as those funds come right back in the form of all taxes eliminated, operating governments, building infrastructure, education, universal health care, retirement, etc, socially collected resource rents and bank profits is the most efficient and profitable social structure.

As land has no sale value under these restructured property rights, it will incur no purchase costs.

Loans against land must be erased from the records and that against structures built upon it reappraised to current values. If 50% of loan values were backed by the land before the crisis, that 50% loan value is erased and the remaining 50% revalued.

If homes and structures, separate from the land, were half paid for before the collapse, the remaining loan would be discounted to 50% those structure’s current value.

Autos, boats, and other loans would be similarly restructured. Paid-for real-estate would not be affected except that landowners monthly rent paid to society would, when all efficiencies were factored in, be quintuply compensated as addressed above.

Erasing debts

A private bank can write off only a modest amount of loans before they are bankrupt while a socially-owned bank can erase all debt that is necessary.

The process is simple and the rights of all can be protected while stabilization of a severe crisis is not viable under private banking and restructuring an economy is equally impossible. Protecting borrowers would be in direct conflict with current property rights and private banks’ maximization of profits.

With the citizenry understanding the monopoly system they previously were unaware existed, and with property rights of all secure, this is the time to tackle the doubling of consumer costs due to patent monopolies.

Consumer costs, measured in employed labor time, drops by half

Explanations to the now alert citizenry on how consumer prices are at least twice that necessary will make those legal changes imperative. Whether by Congressional action or referendum, those patent laws will change to paying inventors well (a capitalized value and placing patents in the public domain.

When that law is fully in place, 85% of the activity of casinos known as stock markets, the superstructure of the patent monopoly system where those unearned profits are collected, will disappear. Again an unnecessary and wasteful monopoly superstructure stands out in bold relief.

The resources and talented labor previously battling within equity markets over who shall claim the enormous wealth produced by technology will be available for truly productive use.

Reduce employed working hours that 50%

Among the large numbers of unemployed will be people well qualified to calculate the number of productive jobs in a fully rationalized, efficient, economy.

We will assume their calculations will match ours, two to three days work per week for each employable citizen. From that calculation, Congress would pass and a President would sign, or a voter referendum would mandate, a reduction of the work week to that level. A productive job for each is now guaranteed.

Subsistence payments continuing as wages during the first one to two months, or more, of an employment-learning period will readjust the workforce smoothly. Highly skilled jobs, pilots, railroad engineers, etc, will take longer.

A few skills, such as scientists, may take years to rebalance the workforce but that and a stable money supply can be seamlessly accomplished. The workweek will be lowered and subsistence payments withdrawn as fast as labor is trained.

All this can be done much faster, much cheaper, and create a far more efficient economy than pouring those massive sums of created money at the same ethereal world of high finance that created this crisis and all others in history in the first place.

Some people are much more productive than others but not so productive as to justify the current wide disparity in pay. There will be exceptions—an Einstein, an Oprah Winfrey, a president, and a few others—but serious researchers have concluded that most should be paid equally with a differential in pay no greater than two to one is reasonable.

Through raising the wages of the lower paid, this badly needed social adjustment should be put into effect simultaneously with sharing those productive jobs. Both poverty and subsistence payments are now history and all at no net cost to society. Creating money incurs no costs if a society is properly structured.

Cost of products and services would drop roughly the same as hours worked, living standards will average higher than before the collapse, and the economy has no where to go but up.

All wealth is now earned

Within this restructured economy the massive unearned, appropriated, blocks of capital disappear and are replaced by a socially-owned and operated banking structure fully capable of handling the financing needs of regions, states, communities, companies, and entrepreneurial individuals.

Look at this closely: Each citizen pays land and resource rents and banking charges just as they do now. But those funds are paid to ourselves (society) and spent for health care, retirements, education, economic infrastructure, funding entrepreneurial industries, and running governments.

In this efficient economic structure, an equal sharing of now-productive jobs assures those honest earnings will be spent providing quality life styles.

That assured flow of money provides assured markets for the production of industries and business which, in turn, assures that the money will be there to fund them.

The ethereal world of high finance disappears

There is no need for the ethereal world of high finance which created this inefficient economy which loaned the very money taken from true producers back to them so they can pay for the monopolized products and services necessary to live.

This efficient economy operates on roughly 40% the flow of money even as it provides a higher quality of life for every citizen. The 60% of current flows of money that disappears measures the current wasted labor and resources of the monopoly system.

That there was ever a shortage of finance capital within a modern economy producing massive wealth is fiction. This unearned—privately collected—money was only being wasted on conspicuous consumption, war to protect the monopoly system, ground up within the superstructures managing each monopolized sector of the economy, and banked as unearned profits.

Back to the ethereal world of high finance which is currently crumbling:

The shadow banking system (commercial banks, hedge funds, etc.) have leveraged themselves 30:1, 70:1 and more (Citibank’s leverage had risen to 280:1 before being bailed out).

Leveraged buyouts for 40 years forced corporations operating the real economy to leverage below the legal limit of 12:1 However a drop in values of 50% immediately doubles leverage and even a conservative 7:1 leveraged company is now 14:1 and technically bankrupt.

Those high leverages had been made quasi legal by paying lobbyists massive millions of their unearned dollars to get Congress to change the laws.

Those changes permitted moving hedge funds and derivatives off book where a small amount of borrowed (leveraged) capital could earn massive profits.

A leverage of 50:1 on these bets (that is all they were, they were not productive investments in the real economy) would earn 100% on capital with only a 2% average move in the market up or down (those bets were placed both directions).

As these financial institutions knew almost everything that was going on within the financial community and they also had the ability to influence those markets, most of their bets were on the right side and massive unearned profits were made even as nothing was produced.

But when those financial markets collapsed control was lost. Bets were typically on the wrong side, and, most important, those high leverages on both sides of those bets meant that many debts could not be paid.

The ongoing massive collapses of the ethereal world of high finance from all those failures to pay is specifically where most the bailout money is going.

The ethereal world of high finance had, and still has, control of the Treasury-Federal Reserve-government, and they were/are pouring that money at themselves.

As we have shown, the best thing that could happen is the ethereal world collapsing of its own idiocy and silliness and be replaced by an honest monetary and economic structure.

With trillions of dollars thrown at the problem, this inefficient monopoly structured house of cards may be shored up for a while. But there is also the possibility that no amount of money poured at this ethereal world of high finance can stop the collapse.

Reason 1: The economies of nations are slowing across the world which destroys both buying power and wealth and the rate of slowing is increasing.

2: At least $30 trillion of wealth has already been destroyed worldwide and that is many times the dollars than have been created to replace those values.

3: Maximum profits are made by leveraging money, leverage means debt, and those leverages had risen to 30:1 70:1 and higher in the current collapse. Citibank’s leveraged rose to 280:1when they were finally taken over by the Paulson/Bernanke bailout team.

4: Each 50% drop in values doubles those leverage ratios which what caused those quickly rising numbers.

5: Accounting rules and the law stated that maximum leverage of American stock companies was to be 12:1. Those rules were both relaxed by law and by these stock companies moving the hedge fund-derivatives operations off book. Thus the high leverage ratios to begin with.

6: Realizing these evasions of common sense and law through off-book operations was the problem, companies were given until October 1st, 2008 to bring these operations back on the books. Because every corporation running off book companies would be immediately bankrupt, that order was put on a permanent hold.

7: Fifty years ago, corporations were sensible and sound. But again the high profits of leverage was the base of their undoing. Throughout those past 50 years the threat of leveraged buyouts forced virtually every stock company to maximize their debt. If they did not do so, buy out artists would buy up enough stock to gain control, immediately leverage with high debt, sell out, and—since the buyouts were done with borrowed money—increase their monies invested many times over.

8: Those companies are all rapidly losing value and their leverage ratios have doubled, tripled, quadrupled, or even far greater, again witness Citibank’s 280:1 leverage at the time of their bailout.

10: Leveraged profits being the route to massive individual fortunes for those engineering the leveraging and ever higher valued stocks for stockholders, the entire world is now highly leveraged and those ratios are doubling and then redoubling again, and again, as values drop.

11: In step with those collapsing values, shuttered businesses, lost jobs, declining wages, and both shoppers and businesses refusing to spend for fear they will soon need their money just to survive, the world economy is rapidly slowing and losing value faster than money is being created

12: As each created dollar’s (base money’s) normal circulation adds 9-to-10 dollars to the money supply, it appears the several trillion dollars created so far should have replaced the money destroyed.

But the real money supply is the circulation of base (created) money. The money supply is not base money itself, it is the velocity of that money as it circulates.

The speed of that circulation has slowed down as individuals, highly leveraged companies, and extremely highly-leveraged financial institutions save their money for what appears to be even tougher times ahead.

13: Those highly-leveraged financial institutions and now equally highly leveraged, low-stock- value corporations have to hang onto every dollar thrown at them during the current bailout frenzy.

This is what is meant when the evening news tells us that banks are not loaning the bailout money being poured at them. They do not dare loan it out. They need to keep it on their books in a so-far-failing effort to comply with the 12:1 accounting and legal leverage rule when it is enforced.

14: Once a population has lost trust in an economy and its banking system, no amount of created money can make them spend beyond their base survival needs.

The Ascent of Money story is the 600 year history of collapses of bubbles. After watching that, we felt that the money being thrown at the ethereal world of high finance is like throwing a bucket of waste water directly into the wind of a hurricane.

There we learn that the massive leveraging of the entire financial structure through off books accounting was copied directly from Enron’s Kenneth Lay. There was never ever any intention of producing anything. The intention was to totally privatize, monopolize, move the high leverage off books, and pull in massive profits.

To keep this short, I had to gloss over many aspects of this restructuring to an efficient economy. But we have continually hotlinked to that bigger story.

The even more complete story is in the just released 2009 editions of Economic Democracy: A Grand Strategy for World Peace and Prosperity and Money: A Mirror Image of the Economy.

These books were started over five years ago on the assumption that this crash was coming.

More important, as we have addressed herein, they show how to stop this financial and economic crash in its tracks and quickly restructure the world economy to full and equal rights for every world citizen.

The elimination of the 50% of the economy (perhaps half is preparation for, and loss from, those wars) that is wasted labor and resources permits each that quality life while reducing paid employment by half.

The simple cause of this crash, massive increase in leverage as economies and corporations collapse in unison leading to a massive drop in the money supply as circulation of money slows seems not to be addressed because it seems few really understand what money is. So we threw in our understanding of the problem.

Thank you.

J.W. Smith

Those crucial 170 words describing an honest, efficient, capitalist economy. Does anyone have the ear of President Barack Obama’s Economic Recovery Team?

Credit Default Swaps, Derivatives, The Federal Reserve, Henry Paulson, Ben Bernanke, and How the Financial Crash Could Have Been Avoided

Sunday, October 12th, 2008

By J.W. Smith

Steve Kroft in Sixty Minutes did a great job describing what credit default swaps were and how they were bringing down the biggest banking houses in the nation.

As explained in the above video, credit default swaps are nothing but insurance policies given a different name so as to avoid retaining the reserves required by regulations of the insurance industry.

Instead of retaining reserves, these gamblers expected cash flows from premiums to cover losses and paid out their massive earnings in the form of multi-million dollar salaries, bonuses, stock options, and profits.

With the insurer, now called a credit default swap derivatives holder, having nothing set aside to cover major defaults when the housing bubble collapsed, they simply did not have the money to pay those losses.

These derivative companies were held “off the books” so the parent companies (Bear Stearns, Merrill Lynch, Lehman Brothers, Washington Mutual, AIG, etc.) could avoid the accounting rules of marking those credit default swaps to market.

All went well and massive profits were made as the bubble economy inflated. But when the bubble collapsed the losses were so massive that, though at first they tried, the parent companies could not rescue their off-the-books creations.

Though, as explained by Steve Kroft in the above video, they are what triggered the current, 2008-09, financial crash, credit default swaps are only about six percent of all derivatives. There are still over $600 trillion more derivatives out there and it is agreed by all that they are nothing more than bets on which way a company or some aspect of the economy will go.

When this financial collapse first started a year ago (October 2007), there were $530 trillion worth of derivatives, almost 10 times the GDP of the world economy. As the world economy lost $30 trillion in value during this financial crash, total derivatives rose to $700 trillion.

The Federal Reserve/Treasury is now speaking of trading an investment stake in financial institutions in for the money it takes to recapitalize these financial institutions to solvency.

The citizenry is becoming aware of the give-a-way of created money to the very people whose greed created this crisis. September through November money was created at the rate of 300% a year, from $836 billion to $1.479 trillion. Much more money will to be thrown at bankrupt banks and corporations.

If those who have to pay off those bets have no more money behind them then the credit default swaps people and the Fed/Treasury bailout effort fails to crank this house of cards back up, the people will own the entire banking system.

That analysis is based on the Fed/Treasury taking a creditor ownership stake in these companies which supersedes stockholder rights. But with the foxes guarding the henhouse the money thrown at bankrupt corporations could be a cover story to satisfy the masses as the foxes move as much of the taxpayer bailout money to overseas safe havens as they can.

But once ownership of a large percent of the world’s wealth is traceable to those supposed safe havens (currently $23 trillion worth), they are no longer safe. There is no way those $23 trillion, and rising fast, could be earned money and their property rights would simply be extinguished by law.

I am sure these thieves, currently called investors and unaware they are trading under property rights laws which are a system of theft, will prefer that to the normal angry citizenry response, the guillotine or the hangman’s noose.

To understand our failure to realize our property rights laws are a system of theft, we need only analyze how those rights evolved.

We are taught that Western culture evolved out of aristocracy but that is not true. Current Western property rights law, as applied to nature’s resources and technologies, denying others their rightful share of what nature offers to all for free, is only slightly adjusted aristocratic property rights law.

Aristocracy held exclusive title and all others had to pay them for the use of the land which nature had offered to all for free. Thus the extinguishing of the rights of all others was done through the principles of exclusive title as opposed to conditional title.

Society is Quintuply Repaid for Paying Land (Resource) Rents to themselves. Those socially collected funds pay for operating governments (local, regional, and national), builds infrastructure (water and sewer systems, roads, railroads, electric systems, and all other natural monopolies), and, when adding in the current unearned profits of banking which too should properly go to all, there are enough funds to cover health care and retirement.

Recapitalizing banks with public funds will, by those same property rights laws which created this crisis, transfer those bank titles to society.

That is not the disaster we are being told. That is an opportunity to have the costs of government, infrastructure, health care, and retirements paid by the rental value of the fruits of nature and the profits of banks.

For an understanding of the fraud of current property rights law and how those inequalities are responsible for both poverty and war, we need only analyze each monopolized sector of the economy and the massive efficiency gains from the elimination of those monopolies.

Just above we have already addressed exclusive title to land (resources) with society being quintuply repaid by by restructuring to conditional title (society paying rental values of nature’s resources and technologies to themselves).

Land’s tangible values were created by society itself simply by forming, they were not produced by human labor, society should collect those rental values, and return those funds right back to the citizenry by providing essential social services.

As opposed to land, Banking has no tangible values beyond a little brick and mortar, furniture, and computers. Fair return on tangible bank values plus the cost of labor has been proven to be covered by 1% interest on loans a century ago with expensive hand labor. The costs of computerized banking is not over 1/2 of 1% interest on loans.

Thus most the profits of banks are misnamed, they are unearned. Those massive unearned sums of money are properly termed “thefts of social wealth.” We have already pointed out that, just like the rental value of land (resources), those unearned funds should be collected by a socially owned banking system and used to provide essential social services (health care and retirement).

Britain providing better health care to all their citizens at 40% the cost per person as in America which has over 60 million essentially uninsured citizens and inadequate insurance on others exposes 60% of America’s health care as wasted. In that one sentence the monopoly of the our health care system stands exposed and the waste quantified.

The Monopoly within the insurance industry is exposed with equal simplicity. Social Security is only retirement insurance and its operating costs are 1/2 of 1% per year. Except for life insurance, all other insurances (automobile, home, health, business, etc.) are a necessity and thus a social right.

Simply replace marketing rights for essential insurance to a social right, establish the framework where that insurance is available simply by signing up, and costs drop roughly 50%. Those insurance offices every few blocks apart are replaced by one central office such as Social Security utilizes today.

Virtually every technology (industrial, chemical, or electrical) is an aspect of nature waiting to be discovered. Those technologies are monopolized through exclusive patent rights.

The unearned profits of monopolized technology are collected through the stock market. Currently inventors receive very little for their inventions. Most the profits go to monopolists.

Simply pay inventors well, place those technologies in the pubic domain, and 85% of the stock markets as well as the wasted labor and capital those savings represent disappear. Those savings permit the price of consumer products to drop fully 50% and we really think it would be 75%.

Those massive cost savings represent the equally massive savings of labor, capital, and resources as the monopoly superstructures operating those monopolies disappear as well as the massive unearned profits no longer collected.

In the case of land (resources) and banking, those unearned rental values and bank profits collected are returned right back to the citizenry. In the case of all other monopolies, the funds to operate the superstructures of those monopolies (labor, capital, and unearned profits) simply are not appropriated from the citizenry in the first place.

Unearned profits are the least of the waste incurred. By far the greater waste of our monopoly system is the unnecessary labor, capital, and resources necessary to operate the superstructure of those monopolies.

We calculate the total waste to be fully 50% of the current cost of operating the economy and this does not consider the cost of the military which is no longer needed. These past 60 years military might has only been protecting this monopoly system and the wars of the previous 800 years have primarily been over who will control those resources and the wealth producing process which is exactly what those earlier battles were about.

We needed to establish the above foundation before we could explain the real cause of the current worldwide financial crash. The above has already explained how to avoid them.

The rents privately collected on all the land and resources in America, including that which is savings due to property being paid for, is a truly massive sum. That and the fifty percent of the current costs of the health care and insurance industries currently wasted is a lot of money.

As the ethereal world of high finance is currently many times larger than the finance capital necessary to run an efficient economy and operating that superstructure costs huge sums of money, the funds that should never have been appropriated from the citizenry in the first place, and the honest profits available for distribution to them by an efficient socially-owned banking system, is also a huge sum.

The disappearance of the superstructure operating technologies, 85% of the stock markets, also saves massive sums.

Most of those savings are in the form of labor and resources no longer wasted. This permits a reduction in employed labor time of roughly 60%. labor time spent caring for the home and children will see a moderate increase. Self employed labor time will see a large increase and that productive employment will further decrease those in the labor force employed by others.

On top of those labor and resource savings are the finance capital savings. As just stated, this ethereal world of high finance is many times larger than that necessary to run the real economy. That is the real story that the finance industry does not want you to ever know.

Massive unearned wealth was spent lavishly in conspicuous consumption (mansions, wedding costing millions, private airplanes for pleasure, underwater submarines to cruise the oceans, etc,) investments, and still they could not spend all their unearned wealth.

More money than places to invest led to export of capital. This is the foundation for the massive export of capital and enforced privatizations (by the IMF, World Bank, and other infrastructures of world control) all over the world and also within the imperial centers. There simply was not enough safe place to invest these massive sums so safe places to invest were created.

But they still had too money left over that they could neither consume nor invest. And that massive amount of appropriated wealth with not enough places to invest is where the ethereal world of high finance came from.

As capitalist societies came out of their periodic crashes or wars, at first places could be found to invest all their money. But once those safe places to invest were all filled, money with no place to safely invest would start building.

The stock markets can absorb massive sums of unearned money and their values would rise in step with the absorption of that surplus finance capital. All stock values above monopoly values is gambling and all those unnecessary charges are a tax on society by monopolists who are not even aware this is a monopoly structure.

Too much money into stock markets would lead to bubbles and eventual collapse. So little by little other gambling games were inserted into capitalism’s financial structure.

This is where the $700 trillion derivatives market came from. Some point out that possibly 8% to 10% of the derivatives market has a legitimate purpose, primarily insurance. I could accept that except that those credit default swaps were the fake insurances that are bankrupting our financial structure as this massive gambling casino collapses.

The entire $700 trillion derivatives structure, fully 85% of the stock market (as addressed above), a good share of merchant bank business (the shadow banking system), and the monopoly aspect of all banking is nothing less than the ethereal world of high finance. Only a part of it is tied to the real economy. The rest is essentially producing nothing as it sucks massive sums of money out of the economy that belongs to us all in roughly equal shares.

This is what is missing in all financial and economic analysis, these massive sums of unearned finance capital should never have been appropriated in the first place. As laid out above, eliminate these monopoly structures and economic efficiency more than doubles.

If the serfs had won those early struggles and established a sharing society as laid out early in this posting, production would have doubled. That would have produced industrial capital for more people both within that society and other societies.

That sharing culture would have shared as it crossed the oceans instead of enslaving. As they met other people, they would have said, “We will teach you how to read, write, smelt ore, build ships, etc.” Soon the production of those newly literate people would have doubled. In a few years doubled again, and then again.

In short, if Western culture had established a cooperative capitalist society instead of a monopolized economy, there would have been little poverty, few wars, and we would have had a peaceful prosperous fully developed world decades ago.

The simplicity of eliminating poverty and war will stun you. That page is the conclusion of this author’s two primary books (Economic Democracy: A Grand Strategy for World Peace and Prosperity and Money: A Mirror Image of the Economy).

That conclusion alerts us that a financial collapse such as we are currently experience can be stopped in its tracks, all citizens can be quickly provided the income for food, fiber, and shelter, and the world economy quickly rebuilt with no poverty and no wars by simply following the rules of full and equal rights for all through a restructuring of property rights law and eliminating Plunder by Trade (addressed in that hotlink).

We should alert Henry Paulson and Ben Bernannke that their task is really simple if they, and all others, were willing to give up their massive unearned wealth as we restructured to an honest economy. Thank you. J.W. Smith

Those crucial 170 words describing an honest, efficient, capitalist economy. Does anyone have the ear of President Barack Obama’s Economic Recovery Team?

Reviving Main Street-A Bailout we can use

Sunday, October 5th, 2008

By Nick Polimeni

One of the reasons the Paulson bailout was touted necessary, was that Main Street economy (consumer-production, employment) couldn’t work without it. Nevertheless, a wide base of economists have maintained the bailout was not necessary; that even with the bailout there would be problems, as James K. Galbraith puts in his Washington Post article, “A Bailout We Don’t Need: “First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won’t be enough.” Others worry about the huge increase of the national debt, and yet others fear deficit spending and candidates whether they’ll be able to keep their promises.

As you can see, the lowest common denominator is: There isn’t enough money. What’s wrong with this idea?

What’s wrong with it is the underlying fallacy, wherein we take for granted that

a) The only way to create liquidity is to capitalize things through collateralization of assets in our nation’s real economy, and

b) Only the financial community can generate this liquidity.

Further, it appears that no conventional economist ever bother to go beyond the current system to examine the underlying relationship between the financial community and the consumer-production (real) economy. It’s a marriage made in hell, ready for divorce. When one pours over the thousands and thousands of public postings on the subject they are all based on the same underlying assumption: liquidity can ONLY be generated by the financial community. Even the government has to borrow from them, building an unsustainable national and international debt.

When currency was backed only by gold and silver, or other commodities, the quantity of currency was significantly restricted or subject to the ebbs and flows of the availability of that commodity. Today, however, there is no commodity upon which the value of the currency depends. The currency is backed by the productive capability of the population, and the process of monetizing (creating liquidity based on that productive ability) is not the exclusive right of the financial community, nor if we want to engage their participation, do we need to do it by surrendering all power to determine the use of that liquidity.

While there is no explicit details on how to create liquidity, the US constitution, Article I, Section 8, provides the basis for authority over the economy, with the right to: “To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;” and “to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Under that authority, the government can and should, for each economic period (a year, six months, or as reasonable):

1. Assess the available human resources (people who need and want employment).

2. Determine the productive capacity of the nation.

3. Determine if the natural resources or raw material is adequate to support that capacity.

4. Determine the consumption needs of the population.

5. Monetize whatever new amounts are required to fuel this new additional production above the previous year.

These steps can be done to any degree of detail necessary or desirable to ensure adequate monetization. The congress will pass as part of its budget a provision for new liquidity, by ordering the Treasury secretary to enter in its accounting records, under the asset heading of “New Liquidity,” and the equivalent cash increase to the Treasury.

Of course, this is sacrilege by traditional economic theory, and these schools, and their wealthy sponsors will publish hundreds of thousands of pages calling it fiscal irresponsibility, and voodoo accounting, and decree money, and they will produce historical precedents to show this is the beginning of mad hyperinflation.

In the end, this is just a method of monetizing which bypasses borrowing from the super-wealthy, and borrowing from next year’s productive capability of the population. The promissory note or security is given to the population instead. Why? It is obvious that since the currency is backed by the productive capacity of the population, then, the population has to be the primary beneficiary of that production.

The Treasury then will distribute the funds through community banks, which have explicit instruction on the distribution of the new liquidity, based on the five point assessment above. Community banks stocks are owned by its depositors (not unlike ‘credit unions”), and there is a cash ceiling to the amount of stock an individual could own, to eliminate concentrated ownership in the hands of a small group.

This process would totally alter the concept of loans, credit, and taxes. Taxes would be used to equalize wealth, or miscalculations or misestimating on the original assessment; they would withdraw directly for the bank’s liquidity any excess that could become inflationary.

In the article, “An Alternate Economic Paradigm there is a more detail description of managing the system as if it was a “complex navigational system, with locks, gates, and reservoirs,” and the management provide and monitor liquidity to float all boats. With this process, we can rebuild our industrial base, employ everyone who wants to be employed, and have the necessary liquidity to maintain a rational growth rate, with a stable currency.

It is absurd that that the only way to add liquidity to the economic system can only be done through borrowing from the financial community, or failing that, through government borrowing, and astronomically increasing its debt to the super-rich. We run our lives and our country’s economy based on available credit (ability of desire of the financial community to lend); and not on what we need and on supporting our human resources with the necessary liquidity to employ everyone who wants to be employed. We buy oil and coal because it’s “cheaper” than solar and other alternative energies, instead of supporting the alternative sources with sufficient liquidity to make it viable. Where’s the money? Is the financial community the God appointed source of it?

The real reason this method of monetization and liquidity generation is not even brought up or the status quo challenged with this, as an alternative is because it would radically alter the balance of power between the population and the super-wealthy, and this is something they powerful have not allowed for hundreds (maybe thousands) of years, and they will vigorously oppose it today. Two possible reasons conventional economists don’t bring it up is either because they’ve not thought outside the economic box they are trained into in college and MBA programs, or they have a vested interest in the status quo


A Bailout we Don’t Need-New Paradigms

Sunday, October 5th, 2008

By Nick Polimeni

James K. Galbraith’s in his “A Bailout we Don’t need” in the NY Times, makes suggestions that are rational, and would be viable to eliminate the need for the bail out bill. He admits, however, that his solutions are not going to help the economy recover quickly:

“Two vast economic problems will confront the next president immediately. First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won’t be enough.”

The fact is that we take for granted that the only way to create liquidity is to capitalize things through collateralization of assets in our nation’s real economy, and only the financial community can generate this liquidity. Further, no conventional economist ever got past the current system basic, to examine the underlying relationship between the financial community and the consumer-production (real) economy. It’s a marriage made in hell, and there has to be a divorce. And when you pour over the thousands and thousands of public postings on the subject, you can see the same underlying assumption: liquidity can ONLY be generated by the financial community. Even the government has to borrow from them, building an unsustainable national and international debt.

Considering that the currency is backed by the productive capability of the population, there are many type of organization which would be superior to our financial community to take charge of monetization, including expanding the credit unions (depositors’ owned banking), or cooperatives of people in communities.

It is absurd that that the only way to add liquidity to the economic system can only be done through borrowing from the financial community, and when all the existing assets are already monetized, and “there is no more new money,” further monetization (additional liquidity) can only be done through government borrowing. In fact, the most logical method would be to monetize (create liquidity) that is necessary to supportable the productive capacity increase from year to year.

We run our lives and our economy based on available credit (ability of desire of the financial community to lend); and not on what we need and on supporting our human resources with the necessary liquidity to employ everyone who wants to be employed. We buy oil and coal because it’s “cheaper” than solar and other alternative energies, instead of supporting the alternative sources with sufficient liquidity to make it viable. Where’s the money? Is the financial community the God appointed source of it?

The real reason this is not even brought up or challenged as an alternative is because it would radically alter the balance of power between the population and the super-wealthy, and this is something they powerful have not allowed for hundreds (maybe thousands) of years, and they will vigorously oppose it today.

Two possible reasons conventional economists don’t bring it up is either because they’ve not thought outside the economic box they are trained into in college and MBA programs, or they have a vested interest in the status quo.

This idea has been discussed before, but taken off the table on specious basis, while the underlying reason is the protection of the power wielded by the financial community, servants of the super-wealthy.


Fannie Mae and Freddie Mac, a $5.2 Trillion Bankruptcy

Sunday, August 3rd, 2008

By J.W. Smith

When established in the 1930s, Fannie Mae was a government sponsored, non-profit financial institution, designed to provide low-cost home loans to a nation traumatized by the Great Depression.

In 1970, FMae was privatized so as to remove it from the federal budget and Freddie Mac was established the same year. As government sponsored organizations (GSEs), neither paid local or state taxes, they were exempt from Securities and Exchange registration and fees, they were permitted to operate with lower reserves than banks, and they could each borrow up to $2.5 billion directly from the U.S. Treasury at low interest. The faith that they were backed by the government and operated so cheaply gave them access to massive sums of low-interest money looking for both profits and security.

With those advantages mortgages bought directly from lenders provided a large and steady profit stream which was reflected in high and secure stock prices. Even larger immediate profits were made when those loans were packaged into bonds (Mortgage Backed Securities) and sold to investors at a high capitalized value justified by the expected profits on these packaged mortgages and the normal low interest on bonds.

This proved so profitable that banks and other lenders packaged their loans into bonds, sold them on the market for that quick profit (especially the agent rake offs), loaned out those replenished funds, and did this over and over again with riskier and riskier loans as housing prices climbed higher and higher and security requirements were lowered to essentially nonexistence.

When bankruptcies jumped above normal, the value of those Collateralized Debt Obligations (CDOs) collapsed. The market now knew home prices were going to drop, the losses were going to be very large, and those CDOs, SIVs, (Structured Investment Vehicle) or any other name they went by were unsaleable.

Starting with the Bear Stearns collapse in March 2008, The Federal Reserve has pledged to pour several trillion dollars into banks and other financial institutions (including other central banks) to stem their collapse and the financial markets have still not liquified.

Each knows the various ways of being leveraged beyond the rules of prudent banking, know both they and all others were way over leveraged, so they must keep the money handed to them by the government to bring their debt ratios down from 30:1 to 70:1 (Citibank was 280:1 when bailed out) and do not loan to each other. Realizing the new rules will force them to reduce their leverage (meaning reduce those debt to equity ratiios), those trillions are being kept in reserve to pay down their debts and keep them within the parameters of prudent banking as demanded by those new rules. Both accounting rules and the law says a maximum of 12:1.

As homes and other equities continue to lose value (11 million homeowners with negative equity and prices expected to fall at least another 30%), the financial institution’s debt to equity ratios  look worse faster than money can be poured at them. Bankruptcies and walk-aways are rapidly increasing and prime loan walkaways and Alt A bankruptcies, expected to start in 2009, are anticipated to create greater losses than subprime loans.

The soothing words of $25 billion being available to shore up the two FMs and even that may not be needed fooled few people. Two hundred billion has been spent and another $800 billion is budgeted to buy up their toxic debt. And it is still far from sure the two FMs can survive.

Lets do the math. The housing rescue bill just passed, December, 2008, is intended to protect the $5.2 trillion in mortgages of the two FMs which are now guaranteed by the government. The value collapse of the remaining $7 trillion in mortgages is supposedly protected by the trillions poured at the rest of the financial structure, including the shadow banking industry. Thus GMAC and may other shadow banking corporations have officially became banks and eligible for bailout money.

Since most those trillions authorized by Congress is to replenish the coffers of financial institutions and only possibly $800 billion will go to homeowners to stave off their bankruptcies, it would appear two or three million will still lose their homes. And this is before the much larger 2nd wave of foreclosures and bank crises–the keep up with the Jone’s Alt A loans, prime mortgage holders whose income has collapsed, home mortgages up to 50% under water walk-a-ways, and credit card defaults–hits.

This financial crisis was never necessary. On GRIT TV, 7/18/08, Headrick Hertzberg pointed out that Fannie Mae did not have that high overhead when originally established. He said, “What is the purpose of all that overhead, those high profits, the huge salaries, and the annual payoffs to presidents and others?” It is obvious that providing low cost home loans was the proper function of the two FMs and neither should have ever been privatized.

One of the key aspects of our research is that so much unearned wealth is appropriated through Plunder by Raids and property rights law as applied to nature’s resources and technologies that denies others their fair share. Those huge blocs of unearned finance capital within the ethereal world of high finance get larger and larger, they cannot find enough places to safely invest it, and this is why they insist on privatizing, privatizing, privatizing.

Not even massive conspicuous consumption and investment in new privatizations can consume all the massive funds being appropriated from its proper owners. So investors turn to hedge funds and derivatives which produce absolutely nothing. They are only bets which decide who will end up with most of the stolen wealth.

They reach down into the real economy to appropriate more wealth and they grind up (waste) ever more wealth as they gamble between themselves (hedge funds and derivatives, $526 trillion worth, are only bets between each other).

Instead of pouring money at the ethereal world of high finance, it should have been pointed towards those millions threatened with loss of their homes, in short, towards the real economy.

In The simplicity of eliminating poverty and war will stun you we demonstrate a society can stop a financial collapse in its tracks if they point newly created support money at the real economy (those troubled home owners, the unemployed, and the underemployed). In the process it is possible to restructure the economy to double its current efficiency, the ethereal world of high finance disappears, a quality life for each citizen of this world is provided at less than half the current resource consumption, and future financial collapses are eliminated.

Instead of running such a society with full and equal rights for all, the corrupt financiers now controlling the money creation process are pointing most this money at themselves, the ethereal world of high finance which we prove are negative producers reducing economic efficiency by fully 50%.. Thank you

J.W. Smith

We are a cooperative publishing house dedicated to the elimination of poverty and war that pays ourselves double the normal royalty and will pay higher yet as soon as we can.

We need more cutting edge researchers. If you can broaden our understanding and that of our readers, have a high-quality book within you that you wish to use in class, or just wish to reach the world, please Contact Us.