Archive for the ‘Banking’ 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?