Posted by: danielfee | July 17, 2011

Privatization – Just Another Word for Stealing

     There is an epidemic of privatization occurring in cities, states and at the federal level. It is even occurring internationally, with Greece being a prime example. What is privatization? In simple terms, it is the transfer of public assets or public service into the hands of private individuals or corporations. Governments everywhere are being forced into selling off their public assets to cover the cost of expenses and interest on their debts. They are also being pushed into privatizing government services under the false assumption that outsourcing these services to a private for profit company will somehow result in a lower cost to the taxpayers. This transfer of public assets and services into private hands is being done under what has been described as “disaster capitalism”, which Naomi Klein explored in depth in her book “The Shock Doctrine: The Rise of Disaster Capitalism”. Others have also called it “crony capitalism” because the assets are being transferred into the hands of friends and political supporters of the government officials doing the transferring. But no matter what you call it, when you strip away all of the rhetoric that is used as the rationalization for privatization, what you are left with is stealing.

     Before I go further, let me give a simple example to explain how this works. Let’s say I loan you (or give you a credit) of $1000 “Dan” dollars that you can use in my store and you have to pay me back the $1000 “Dan” dollars plus 10% interest in one year. So at the end of the year you owe me $1100 “Dan” dollars. To insure that you will pay me back, we agree that your car, valued at $10,000, will serve as collateral. But if I only loaned you $1000 “Dan” dollars, where are you going to get the other $100 that you need to pay the interest? Therefore, at the end of the year I will get your car. But this is a little too obvious that I am just stealing your car. Because I just created the “Dan” dollars out of thin air and unless I create more of them there is no way you can pay me back the principal plus interest. Therefore, I have fraudulently induced you into giving me your car valued at $10,000 for something that had no initial value, the credit of $1000 “Dan” dollars that you could use in my store. Your best case scenario is that you received $1000 worth of goods or services from my store, but I still got your car at the end of the year. But I don’t want to be that obvious and go to jail, so I need to make this a little more complicated. Let’s say I also loan (give credit) $1000 to nine of your friends and relatives at the same terms, 10% interest with principal and interest due in one year. Now there are $10,000 “Dan” dollars in circulation. The ten of you can swap them amongst yourselves during the year but at the end of the year at least one of you is going to come up short and I will get your car. One of you might be really clever and have accumulated $5000 “Dan” dollars through the course of the year, so that will leave at least five of your friends and relatives whose cars I will get. This can be repeated a thousand times or a million times, but it is the same scenario. But when this is done billions of times, we call this “fractional reserve banking”.

     The creation of the country’s money supply has been outsourced to a private banking system, through the Federal Reserve Act of 1913. In turn, they have created “Dan” dollars, which they call Federal Reserve Notes, out of thin air. These Federal Reserve Notes (aka dollars) are loaned to private citizens, businesses and the governments at various interest rates and terms. But the principal still holds that unless the Federal Reserve creates more “dollars” by giving out more loans, someone is going to come up short at the end of their loan term and lose their property that was used as collateral. We all just seem to accept this system because few of us were alive before the Federal Reserve Act went into affect, so it is all we have ever known. The only way we might learn of an alternate system is to study history. But many think history is boring, so we just accept that this is the way it is and assume this is the way it will always be.

     When the Federal Reserve, through the fractional reserve banking system, continues to expands (inflates) the money supply by issuing new credit, no one pays much attention to those who lose out. The rationalization is they just don’t know how to play the game as well, so it is their fault that they were not clever enough to get the “Dan” dollars from their friends and relatives that they needed to pay off their loan plus interest. Somehow people have come to believe that this is capitalism or the free markets at work. It is not. Let’s assume for the moment that credit is given out to private individuals, businesses and governments at zero interest. Therefore, at the end of the loan term all a borrower needs to pay back is the principal. They no longer need to obtain additional “Dan” dollars from their friends and relatives to pay interest. They can still use the money they borrowed to produce goods and services and sell them to others in a capitalistic free market system. Nothing has changed, except the provider of the loan is not taking a fee (interest) for creating something (credit) out of thin air. But why would the Federal Reserve and its money center banks want to give out credit at zero interest rates (except, of course, to themselves). Exactly; they wouldn’t. So why does the U.S. government outsource the creation of the nations money supply (medium of exchange) when the Constitution, Article I, Section 7 states that Congress shall have the power “to coin Money and regulate the value thereof”? Good question; but a bit off topic for this discussion. You can refer back to my June 4, 2011 post.

     However when the Federal Reserve does not either by its own choosing, or cannot expand the money supply because they cannot find enough borrowers to take on additional credit, the money supply deflates. When the money supply contracts, more people, businesses and governments are left to fight over the pieces of a shrinking pie and many won’t be able to pay off their credit. When this happens on a large scale, like what is happening today, more people begin to take notice because it has an effect on the overall economy. So even those who are able to pay back their credit are affected by the slow down in business or the loss of value in their assets, such as their house, even though they have played the game well and by the rules. Those private individuals and businesses that didn’t do so well will have their assets seized and sold off by the lenders. But it is a little trickier when it comes to seizing the assets of local, state and the federal governments. The lenders cannot just seize public sector assets and sell them off, so this is where “privatization” comes in. It is simply forcing a governmental agency to sell public sector assets (i.e. utility systems, roads, prisons, park land, buildings, etc.) in order to pay the interest on their loans.

     Today, Greece is a perfect example of how this works. But it has occurred in many countries starting with Chile in the 1970’s. A national government typically only pays the interest on their loans (bonds) and the principal amount is continually rolled over into new bonds (loans) so that the principal remains as a permanent part of the money supply. The leverage that is used to force a government into privatizing their public assets is the threat that their bonds will not be rolled over. So even though they may still be making the interest payments on their current debt, they cannot obtain new loans and are effectively being forced into default since they would now have to pay both the principal and interest immediately out of current revenues. So the bank is holding the metaphorical gun to government’s head and demanding that they “privatize” (aka sell off) public assets as a condition of getting their loans rolled over. There are some that will argue that the government is receiving remuneration for these assets, so it is not really stealing. But if I put a gun to your head and demand that you give me your car keys (and by the way, sign your title over to me) and in turn I decide to give you the $100 dollars that is in my wallet, so that I can claim that I didn’t steal your car, would you think that was a legitimate transaction? Or did I just steal your car and try to cover my butt by giving you a nominal amount that was nowhere near the value of your car? The principal is the same when a government is forced into privatizing public assets by creditors, no matter what percent (10, 50, 80%) of CYA money is paid.

     In the Greek crisis it is obvious to even the casual observer that the Greek government has no control over their own money supply since they are part of the European Union (EU), and it is the European Central Bank (ECB) and International Monetary Fund (IMF) who are holding the gun. In addition to demanding the sale of public assets, the ECB and IMF are also demanding “austerity” measures to be implemented. In short, the demand for austerity is simply, as a condition for rolling over their loans that the government must spend less on programs for their citizens so that they can continue to pay higher interest on the loans to the banks. At some point Greece, like Argentina previously, will be forced into a default on their loans. But this will only come after the ECB and IMF have extracted everything of value that they can, and then the Greek government and people will be left to pick up the remaining pieces on their own. At that point they will probably no longer be part of the EU.

     In America it is not so clear who actually controls the money supply. Most people believe that the Federal Reserve (Fed) is part of the Federal government. It is not. It is a private bank, owned by its member banks, that has been given the authority to control the nation’s money supply. Further clouding the issue, the Fed and the government appear to be working hand in hand to address the economic crisis that we have been facing since the bursting of the housing bubble in 2007. So we don’t have the same situation of the central bank holding a metaphorical gun to the governments head to force privatization. But still we are seeing privatization of public assets occurring all over the country. A lot of this is occurring at state and local levels. However, it is the same principal of the “Shock Doctrine” that is being applied, to force through privatization of public assets and governmental services. For a more comprehensive understanding of how it works, everyone should read Naomi Klein’s book. To briefly summarize, the “Shock Doctrine” principal is utilizing a crisis that is either real, such as a natural disaster, or manufactured, such as the current debt crisis debate, to push through reforms or the sale of public assets that would be widely unpopular under normal circumstances. But they are sold during the crisis as reasonable steps to take to solve the impending crisis. When in fact, what is being done is that the crisis is used as a smoke screen to push through ideological policies that really have little to do with the crisis at hand.

     What has happened in Wisconsin since the 2010 election is a classic example. When the new governor and legislature were sworn in after the election, they inherited a balanced budget for the current fiscal year. In fact it was projected they would end the year with a surplus. But once in office, the new governor and Republican-controlled legislature quickly passed legislation which included corporate tax breaks and special interest spending to create a budget deficit of $140 million. The governor then declared they have a budget crisis because the state must balance its budget. So the next step was to introduce a “budget repair bill”. While most of the media attention was focused on the stripping of union rights contained in the so-called “budget repair bill”, there were other buried treasures in that bill that included things like selling off 37 of the State-owned heating, cooling and power plants through a no-bid process which gave the governor ultimate authority to decide to whom to sell and what was an acceptable price for these facilities. Since these facilities provide low cost heating and cooling to state facilities, the new owners would then continue receiving future revenues from the taxpayers to recoup their investment and turn a profit. Does anyone believe that the cost for heating and cooling at these state facilities will remain low after the power plants are privatized? The budget repair bill also proposed to make major modifications to the Wisconsin Retirement System (WRS) even though it is one of the country’s best managed pension systems and had $75 billion in reserves. The proposal would raid its assets to offset further tax cuts and the public employees would be shifted into 401k plans to be managed by Wall Street money managers, for a fee of course. If this type of a change had happened to the WRS say 5 or 10 years ago, is there any doubt in your mind that the Wall Street money managers would have been buying Triple AAA-rated securitized mortgages for the public employees 401k plan? Where would the $75 billion in reserves be today?

     In Michigan, the newly elected Republican governor and legislature took it one step further. While in Wisconsin, Governor Walker had to deal with a messy democratic process of passing the budget repair bill through both the assembly and senate, face massive protest by citizens, remove some of its provisions and then defend the bill in court, in Michigan they decided it would be best to just skip that whole messy democratic process thing. In March, while all the protests in Wisconsin were in the news, Governor Snyder rather quietly signed into law what is commonly now referred to as the “financial martial law”. Under this new law, if a local government or school board is having financial difficulties, the Governor can appoint an Emergency Financial Manager. But who decides if a local government or school board is having a financial emergency? The Governor of course. Who appoints the Emergency Financial Manager? The Governor of course. While Michigan has had an emergency manager law in place for some time, and it has been used by Democratic and Republican governors before, what made the new law different is that it gives absolute authority to the Emergency Financial Manager. In the past, these emergency managers would work with the local elected officials to help straighten out the financial problems. That is fine. In fact, it sounds like a good idea to bring in outside expertise to help local officials. But under the new law, the Governor-appointed Emergency Financial Manager no longer needs to bother with the local elected official. They now have complete dictatorial control over every decision made in that city, democracy be damned. Michigan now has their own version of the Enabling Act in place.

     The City of Benton Harbor was one of the first to be taken over by their own local dictator. On April 14, 2011, Mr. Joseph L. Harris, the duly appointed Emergency Manager for Benton Harbor, issued Order No 11-05 which stated, “Absent prior express written authorization and approval by the Emergency Manager, no City Board, Commission or Authority shall take any action on behalf of the City whatsoever other than: i) call a meeting to order, ii) approve of meeting minutes, iii) adjourn a meeting. Mr. Harris now has absolute authority to resend or modify any city contract, enter into new ones with whomever he chooses, or sell off (aka privatize) any city asset or service at whatever price he decides, even if the citizens or local elected officials object strenuously. By the way, there is a city park along Lake Michigan that was granted in perpetuity to the city for the children. The Emergency Manager now has the sole authority to sell all or part of that land or to swap it or make any other modifications that he deems to be in the best interest of the city. Not surprisingly there is a golf course development that has included a portion of the park land in their development plans. But the developers could not get the elected city officials to go along with their proposed land swap of a portion of the park’s lake front property for some old industrial land. In fact, the local officials have sued in Federal Court to prevent the privatization of their park. Not withstanding the pros and cons of the proposed development, there is something seriously wrong with circumventing the entire democratic process to give complete control to one man, even if it is only a small city in Michigan.

     In Washington D.C., a Florida congressman is suggesting that one way to close the Federal budget deficit is to “start liquidating” public lands in Utah. Think about the possibilities; “Arches National Park brought to you by McDonald’s”. But just like in Wisconsin, the federal budget deficit crisis is a manufactured crisis that is now being utilized in an attempt to push through some very unpopular changes to some very popular programs such as Medicare and Social Security. Think back just ten short years ago. We had a federal budget surplus and Alan Greenspan testified in front of Congress that he was concerned that the national debt might be paid off too quickly. Therefore, he was in support of the 2001 Bush tax cut, which passed of course. The Afghanistan war then started, then the Iraq war and another round of tax cuts passed in 2003. A Medicare prescription drug benefit was approved without providing the funding for it. Then some more specialty tax cuts and what do you know? We have decreased revenues and increased expenditures and now we have a budget crisis. Sounds exactly like what Governor Walker did in Wisconsin, just played out over a little longer timeframe.

     So what is the proposed solution to the “budget crisis”? Rescind the tax cuts that reduced revenue, draw down the military forces in Afghanistan and Iraq more quickly to reduce expenditures, or at least allow Medicare to bargain with the pharmaceutical companies for lower prescription drug costs? No, let’s privatize Medicare, a very popular government program that over 80% of Americans in poll after poll say to leave alone. But you hear it everyday, every time you turn on the TV or radio – we have a budget crisis and the primary cause is the entitlement programs. The propaganda is relentless.

     First let’s dispense with Social Security misinformation. The Social Security Trust fund has a 2.7 billion dollar surplus. The trust fund was established in 1983 because everyone recognized that when the baby boomer generation hit the retirement age in 25 to 30 years their numbers would overwhelm the system if it remained as a pay as you go system. So Social Security payroll taxes were doubled and the extra funds were put into a trust fund managed by the S.S. Administration so that when the system reached a point that the payouts would exceed the inflows, there was an established surplus to draw from. We have now hit that cross-over point and the Social Security system is functioning as it was designed. In fact it is a great example of a well designed, efficiently administered governmental program. But you have undoubtedly heard the argument that Social Security is going broke and that it won’t be able to pay out full benefits in 30 years. Let’s assume for a moment that might be true 30 years from now. What does that have to do with the budget deficit today? Nothing. Social Security does not contribute a dime to the deficit. The other argument that is often heard is that the S.S. Trust fund doesn’t really have $2.7 trillion dollars in it, that all they have are a bunch of IOU’s. So what is a treasury bond but a government IOU for money that has been borrowed by the government? It doesn’t matter who is holding the bond; it could be the Federal Reserve, Social Security Administration or China. They are all backed by the same full faith and credit of the United States. So unless the person that is making the argument that Social Security has nothing more that IOU’s is advocating for a default on some government bonds, then they are simply making an ideological argument against Social Security because they have always opposed the program. If they really are advocating for a default on the IOU’s owed to the Social Security trust fund, then look out because they are trying to steal all of the extra money you, I and every working person has been paying into the system since 1983.

     Next let’s address Medicare. The Ryan budget plan which has been passed by the Republican House of Representatives is being touted by them as a budget deficit reduction plan. However, what it really does is privatize Medicare. An independent analysis of the Ryan plan shows that it will only reduce the budget deficit by $155 billion over ten years, even though Ryan has claimed it will cut spending by $4.3 trillion. Why the huge difference? Because Paul Ryan is only telling half the story. What he does not like to mention is that the Ryan budget also contained $4.2 trillion in additional tax cuts which would reduce the corporate and top marginal tax rates to just 25%. So the real net budget reduction affect of the Ryan plan is $0.15 trillion, a drop in the bucket. Once you come to the realization that it is not a budget reduction plan, you need to look into the details of what it is really accomplishing. What you find is that the primary goal of the plan is to change the Medicare program from a government run defined benefits program into a privately operated insurance exchange program where seniors are required to buy their health insurance on the open market with some level of financial assistance from the government. Ryan calls it “premium supports” and critics call it “a voucher plan”. No matter what you call it, the government is going to give seniors only a portion of the amount of the premium and they have to come out of pocket for the balance. While everyone can agree that health care costs are out of control and rising at a much faster pace than the rate of inflation, simply shifting the burden of payment from Medicare to seniors, no matter how big the voucher is that they will receive from the government, will do nothing to control health care costs. Privatizing and disbursing the payment system will reduce the leverage that might be used to bring down costs, leaving every senior to fend for themselves. What little savings seniors may have will be taken from them very quickly by the cost of insurance premiums. But the peace of mind that they have knowing that the majority of their medical costs are covered by Medicare is the most valuable thing that is being stolen from them in the Ryan budget plan.

     So whenever you hear of a proposed plan to “privatize” any government asset or service, your first thought should be “what are they trying to steal and who is trying to steal it?” Look past the PR spin of the proponents to see what it is they are really after. There may be some occasions where privatizing is actually a good thing, such as selling off Federal office buildings that are no longer being utilized, but more often than not what you will find is that someone is attempting to become a middle man for a service that is still needed, and they are looking to take their cut of taxpayer dollars. In the short run it might plug a budget hole for the current fiscal year, but in the longer run it will cost all taxpayers a lot more.

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Responses

  1. “We all just seem to accept this system because few of us were alive before the Federal Reserve Act went into affect, so it is all we have ever known. The only way we might learn of an alternate system is to study history. But many think history is boring, so we just accept that this is the way it is and assume this is the way it will always be.” As a history grad student: Nice.

    • Thanks, I confess when I was in collage I thought it was kind of boring. As I got older it became much more interesting. I think at some point we will need to resurrect the arguments of the 1890’s and redebate the entire money supply issue. Ron Paul has it half right in abolishing the FED, but he wants to leave the creation of the money supply to the “free markets”. I think that after Andrew Jackson defeated the Second Bank’s charter renewal, this is basiclly what we had and it was a disaster. I think that a sovereign government is who should control the money supply creation in their country. Any thoughts on this subject?

  2. “If they really are advocating for a default on the IOU’s owed to the Social Security trust fund, then look out because they are trying to steal all of the extra money you, I and every working person has been paying into the system since 1983.”
    I think this is exactly what’s being advocated, but since the SS trust fund is too complicated for a 30 second media sound bite, it’s described in PR spin as lowering payouts, or “entitlement reform.” That way under the current plan, continuing entitlements won’t require the borrowers of the fund to pay it back. In other words, making a default legal. It’s become an ideological debate about lowering social services rather than a logical debate based on actual revenue and tax flows.

    It is also true that we seem to never learn from history. If so we would remember the disaster of crony capitalism when the Soviet Union collapsed. Industries were sold without bidding at below-market prices, and costs only rose for consumers. Very similar to the situation with Wisconsin’s state-owned power plants, save for the mobsters and protection rackets.

    • Jennifer, I also believe that they are advocating for what you might call a backdoor defult on SS. From its inception the Republican party has been ideologically opposed to SS (Medicare also) and they voted against it. Frontal assults on the program have had disasterous election consequences for them so that have been looking for other ways to attack and bring the programs down. Bush made an attempt at “privatizing” SS after the 2004 election and the more he spoke of it the faster he and his proposal dropped in the polls. The new tactic has been to bankrupt the programs. For Medicare, the Republicans in a 3 AM vote that was held open for 3 hours to get enough votes, passed the Part D perscription drug benifit. The first thing someone should ask themself is why would a party that has opposed Medicare from the beginning add a new benifit to it? By the way the same bill included partial privitazation by setting up what is called Medicare Advantage (private insurance paid for through Medicare). But when you look at the details of Part D you find that it prohibits Medicare from negotiating drug prices with the drug companies. So the largest group in need of drugs cannot use their size to negotiate a bulk rate price? Why would anyone tie their hands like this, unless there is an ulterior motive. Which of course there is. The goal is to create run away cost that cannot be sustained and then use that as leverage to dismantle the system. On SS the 1983 changes were done to make sure there was a trust fund for the baby boomers when they retired, because they will overwhelm a pay as you go system. However, by borrowing from the SS trust fund for general purposes, and then defaulting on repayment they will put SS in the position that people recognized and planned for in 1983, too many recieving benifits without enough people paying into the system. The next step will then be a full out assult on the program insisting that it must be cut and privatized because why, it is bankrupt. It is a very cynical approach to politics. Naomi Klein’s book the Shock Doctraine does a good job of explaining how either a real or manufactured crisis is used to push through radical ideas which a majority are opposed to under normal times.


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