Posted by: danielfee | December 30, 2011

Faux Capitalism

What is capitalism? Can you define it? Today, it seems that many people define capitalism as anything that is done in the private sector with the goal of making a profit. On the flip side they define socialism as anything done by the government that could impede the “free markets” and making profits.

 According to the definition in Merriam-Webster dictionary capitalism is:

an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market”

and socialism is defined as:

any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods a: a system of society or group living in which there is no private property b: a system or condition of society in which the means of production are owned and controlled by the state.”

The term capitalism did not exist until the middle of the 1800’s even though economic trade for profit has existed for millennia. However, over the past forty years the definitions of both capitalism and socialism have been transforming and broadening as Wall Street has become more sophisticated in the field of financial engineering. The shift began slowly as new financial derivative products were introduced such as: foreign currency futures (1972), equity futures (1973), T-bill futures and futures on mortgage backed bonds (1975), currency swaps (1980), equity-index futures (1981), interest rate swaps (1981), collateralized mortgage obligations (CMOs) (1983), futures on the U.S. dollar and municipal bond indices (1985), collateralized debt obligations (CDOs) (1987) and Credit Default Swaps (CDSs) (1994), just to name a few. The early derivatives, such as commodities futures, did retain the basic principals of capitalism. In simple terms, they were private agreements between two parties to deliver a product at a specified price at some future date, and they were traded on an open exchange. But as they became more complex and expanded into other areas they became further detached from any underlying product and entered the realm of “faux capitalism”.

Simultaneously with the growth of derivatives, the groundwork was put in place for the explosion in the credit markets starting with the passage of the Alternative Mortgage Transition Parity Act (AMTPA) (1982) which made it legal for a lender to offer more creative mortgages including Adjustable Rate Mortgages (ARMs), ARM’s with balloon payments, interest only loans, piggyback loans and negative amortization loans. The AMTPA also pre-empted state laws which prevented these types of loans. As the regulatory structure that was put in place during the Great Depression was dismantled and finally eliminated, with the repeal of the Glass-Steagall Act in 1999, the rate of introduction and complexity of new financially engineered products and creative financing both accelerated. Derivatives trading – mostly futures contracts on interest rates, foreign currencies, Treasury bonds, etc. — had reached a level of $1,200 trillion ($1.2 quadrillion) a year. This estimate was based on information available for those derivatives that were traded on exchanges and does not include the large volume of private contracts for CDOs or CDSs which are traded in the opaque OTC market. But even the known volume traded in the open market is huge considering by comparison the U.S. GDP in 2006 was only $12.456 trillion.

Most people still have the old quaint notion that Wall Street’s primary function is the trading of stocks and the allocation of capital so that it can be put to the most productive use to generate economic growth and profits. But today Wall Street’s real business is trading debt, and betting on whose debt will fail. Lou Ranieri, who invented the process of “securitization” in the 1970’s while he was at Solomon Brothers and then worked with the Reagan Administration to deregulate the financial industry in the 1980’s to legalize and legitimize “securitization”, predicted at that time that once the debt securities market took off, it would dwarf equities. He was certianly correct. The total credit market debt as a share of GDP was approximately 130% in 1984, roughly where it had been since 1952. It then exploded to 335% of GDP by 2006. This debt explosion provided Wall Street with the basic material they needed to create an entirely new way to generate fees and trading profits. No longer did they need the private companies who wanted to raise capital by going public, or existing public companies seeking to raise more money by selling secondary placements of stocks or bonds, or even companies looking to do mergers and acquisitions. Sure these services are still provided by Wall Street firms in order to keep up the facade of capitalism, but the real money is made in the “faux capitalism” market of trading and betting on debt. It was the combination of these two factors, the explosion in the derivative and credit markets, that lead to the subprime mortgage crisis and the housing bubble.

As this shift occurred, the financial services sector went from being 14.0% of the U.S. Gross Domestic Product (GDP) and only 20% of total U.S. corporate profits in the 1970’s to 20.4% of GDP and 45% of total U.S. corporate profits in 2004. At the same time manufacturing went from 23.8% of GDP to just 12.0% of GDP. So we transitioned from a country that makes things to a country that makes things up. During this period another important transition occurred. The Wall Street investment firms went from partnerships to publicly traded corporations. This allowed the partners in the firm to stop risking their own capital and begin using other peoples money. They no longer shared the same level of risk with their clients and their compensation packages became tied to short-term performance as opposed to sounder long-term investing decisions. Churning stocks and other investment products in order to generate more fees and short-term profits led to inventions like high-frequency trading in their own proprietary accounts. High-frequency trading uses complex computerized mathmatical algorithms to analyze market data and implement proprietary trading strategies in investment positions which are held only for very brief periods of time. They will rapidly traded into and out of those positions, sometimes thousands or tens of thousands of times a day, and at the end of a trading day there is no net investment position remaining. By 2010 high-frequency trading accounted for over 70% of all equity trades taking place in the U.S. Trading into and out of a position in a matter of seconds, minutes or even hours certainly does not fall withing the definition of investing.

However, just because it is a new “financial product” which is being created or a new high speed trading system being implemented, does that automatically qualify it as capitalism? In the 1920’s Charles Ponzi created a new financially engineered product, and it made a profit, at least for those who invested early. But I don’t think there is anyone today that will argue that a Ponzi scheme is capitalism. Nor can you find anyone today who will defend Bernie Madoff as a capitalist. But ten years ago, those people who are still defending Wall Street’s actions and their innovative products like derivatives also were defenders of Bernie Madoff.

An economic bubble is similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant until inevitable collapse ocurs. A bubble involves ever-rising prices in an open market where prices rise because new buyers bid more because prices are rising. As with the Ponzi scheme, the price eventually exceeds the intrinsic value of the item; unlike the Ponzi scheme, there is no one person misrepresenting the intrinsic value. It is a systemic misrepresentation by many participants operating in the open market with each participant providing their own contribution.

The housing bubble in large part was created by Wall Street’s introduction of a new financially engineered product called collateralized debt obligations (CDOs). The first CDO was issued in 1987 for Imperial Savings Association, a savings institution that later became insolvent and was taken over by the Resolution Trust Corporation, which was an early version of a government bailout for the failed savings and loan industry. The collapse of the S&L’s was a precursor for what was to come and should have been a warning to everyone. However, ten years later, CDOs emerged as the fastest growing sector of the asset-backed synthetic securities market. The bubble was fueled by easy credit given to borrowers, many unqualified, by the fractional reserve banking sysytem and the shadow banking system, together with low interest rates and easy monitary policies from the Federal Reserve. There were mortgage brokers and other lenders who were playing fast and lose with the few regulations that were still in place. These loan orginators would pass the debt along to Wall Street who would “securitize” the loans into CDOs. There were rating agencies that were giving triple-A ratings to investment products that they clearly didn’t understand so they had to rely on the computer modeling provided to them by the company creating the product being rated. This was because the mathmatical formulas were too difficult to recreate, especially when the rating agency didn’t have the underlying data to do an independent analysis. Then these CDOs were sold all over the world as if they were some of the safest investments.

But one of the most important factors that fueled the housing bubble, which is rarely discussed, is the decoupling of the lender from the borrower. Before the deregulation of the financial industry there was a direct connection between lender and borrower. The lender had a strong financial motive to make sure that borrowers were qualified and that they would make their payments. Even though some of these loans may have been packaged together and sold off to private investors or entities such pension funds, Fannie May or Freddie Mac, these activities clearly fell within the definition of capitalism. It represented the efficient use of savings and investment capital with the banking system acting as the intermediary and charging fees for their services.

But deregulation of the financial services industry and the lack of any regulations or transparency in the fast growing derivatives markets changed everything. First, the deregulation led to a significant consolodation in the financial industry. Banks grew bigger and services such as commercial banking, investment banking, insurance and brokerage service and the ratings agencies could now be provided by one fully integrated company. There were a few early critics that warned this would lead to big problems down the road because these companies would become too big and they would be able to stovepipe these new financial products that were being created with little or no transparancy, to the detriment of the consumer and investor. But the critics were dismissed, deregulation proceeded and the creation of new financially engineered products such as CDOs, synthetic CDOs and Credit Default Swaps (CDSs) exploded in the 1990’s and early 2000’s.

By design, a CDO was intended to be complex and difficult for most people to understand. But the regulators were told they didn’t need to worry about them because they were a private contract between two sophisticated counterparties who understood the complexity and risk. In simple terms, a CDO is a financial product that is created by packaging together loans (home loans, car loans, student loans, bonds, etc.) and their value is derived based on the anticipated cash flow from these loans. Packaging loans was not new but the twist with these new financial engineered CDO’s was that the underlying loans were tranched and put into multipule CDO’s. In therory this was done to spread the risk and allow those who could afford to assume more risk to recieve a higher return. So a loan would be divided up into a hundred or thousand parts, known as “tranches”. Each of these parts would go into different CDO’s with other tranched loans. Each tranche coming from a loan offered a varying degree of risk and return and they would be combined so as to meet various investors desires. “Senior” tranches are considered the safest securities. Interest and principal payments from the underlying loans were made in order of seniority, so that junior tranches offered higher payments and interest rates or lower prices to compensate for additional risk of default. Once the loans were tranched and the CDO was sold off to investors, the lenders and borrowers were decoupled. A service company was then placed in the middle, usually the same one that created the CDO, which would take in payments and pay out to the various CDO’s investors the appropriate proportion of the payment to each CDO that owned a tranche of that loan. Of course they charged fees for providing this service, just as they had charged fees for creating the CDO in the first place. But the loan servicer had no real interest in making sure that the loans were performing.

The inital loan between lender and borower is clearly within the definition of capitalism. Even packaging whole loans and selling them to investors falls within the definition of capitalism. But once a new financial product is created which derives its value from some other financial product, then we have entered the relm of “faux capitalism”.

But Wall Street didn’t stop at the creation of just CDOs. They went farther and created synthetic CDOs, also known as CDOs squared. These were CDOs that were not based on underlying loans. They were based on other CDOs being the underlying asset that was being securitized. So they were two off from the initial loan. What would be the benefit of creating a synthetic CDO, other than collecting more fees? What Wall Street was able to accomplish with synthetic CDOs was to create more triple-A rated products out of CDOs that were of higher risk and lower ratings. The triple-A rating is important because many institutional investors are restricted to buying only the safest investments with the triple-A rating. There were not enough investors to buy all of the junior level tranched products, but by combining the riskier CDOs into a synthetic CDO, the senior tranches of this new product would get a triple-A rating from the agencies. Obtaining a “faux triple-A” rating on these synthetic CDOs derived from riskier CDOs is clearly “faux capitalism.”

However since the payouts from the underlying loans went to the original CDO, the synthetic CDOs could only work if there was an investor on both the long and short side of every tranche. In order for this to happen, the invention of two additional financial products was necessary. The first of these was Credit Default Swap (CDS), which was the inital way to take a short position on a CDO, and the second was the creation of the ABX index which made shorting the mortgage market easier. This exploded the subprime mortgage market and the dollar volume of the derivatives market.

The first CDS was created in 1994. A CDS is a private agreement whereby the seller of the CDS will compensate the buyer in the event of loan default. The buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if the loan defaults. In effect it is an insurance policy against a potential default. There is no restriction on who can purchase a CDS. Even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan can purchase a CDS. When this occurs it is referred to as a “naked” CDS. The buyers of the CDS are effictively betting on a default in hopes of a big payoff.

The ABX is an index based on subprime mortgages which began trading in January 2006. It traded just like any other index fund and the ABX made shorting the mortgage market much easier than it had been previously.

The result was a dramatic increase in the amount of money that moved among market participants and, of course, the fees being charged by the middle men on Wall Street. Since multiple insurance policies or “bets” could be stacked on the same CDO or synthetic CDO, there was no longer a limiting factor such as the dollar amount of underlying loans to place a cap on the expansion of the derivatives market. All that was needed was someone to take each side of the bet. Because the derivatives market was unregulated and opaque, there was no way to determine the exact value of the outstanding bets. But the Bank for International Settlements estimated it to be $681 trillion dollars in 2008. That is more than ten times the output of the entire world economy. It is analogous to a bookie taking on as many bets as he can on the Cowboys-Redskins game and taking his cut for facilitating the bet, with no concern for the overall dollar volume being bet. No one would call the bookie a capitalist, nor would they call a bet on a football game capitalism. So why call the big Wall Street firms capitalists for facilitating bets on CDOs? Shouldn’t we call them what the are, “faux capitalists” or con-men who created the biggest economic bubble in history?

Following the burst of the housing bubble and after they secured their taxpayer bailouts, in classic con-man mentality, Wall Street and their media mouthpieces began to blame the marks. In their view, the housing bubble was caused by subprime mortgage borrowers who were too stupid or greedy or both. They tell us we shouldn’t blame Wall Street for the naivety of the people who took out loans they could not afford. But are we supposed to believe that a bunch of people, who didn’t know each other, had limited financial knowledge and poor credit histories, outsmarted and tricked the MBA’s and PhD’s on Wall Street and created the housing bubble. Really?

The “blame the victim” argument started in February 2009 when CNBC’s Rick Santelli, in a broadcast from the floor of the Chicago Mercantile Exchange where derivatives are traded, went on a rant in opposition to a proposed government plan to refinance mortgages. He said that those plans were “promoting bad behavior” by “subsidizing losers’ mortgages”. It is quite ironic considering Wall Street had just recieved $780 billion from taxpayers in the TARP bailout and, as we would find out later, over $7 trillion in assistance from the Federal Reserve, rewarding their bad behavior. In addition, the Federal government took over AIG, the worlds largest insurer, who had issued many CDSs that were on the losing end of the bets, and proceeded to pay out 100 cents on the dollar, thereby “subsidizing loser bets” with more taxpayer dollars. Of course Mr. Santelli did not provide a similar rant against Wall Street’s “bad behavior” or its “loser CDOs”.

Unless we begin to distinguish “real” capitalism from “faux” capitalism, the anti-Wall Street sentiment will continue to grow. The next time a financially engineered crisis is brought on by the “faux” capitalists it may bring down the entire economic system and representative democracy with it. What is needed are laws that make these “faux capitalist” schemes illegal just as a Ponzi scheme was made illegal.

FDR understood after the banking collapse that you could not just tell people that the banks were safe and expect them to accept that. He knew strict regulations were needed so we got the Glass-Stegall Act. We can no longer tell people that whatever Wall Street does is called “capitalism” and expect they will accept that. We must pass regulations to severely restrict financial engineering coming from the “faux” capitalists. Too many of the best and brightest students have gone into the financial sector because that is where the big money can be made. We need to get back to making things.

As Paul Volker once said to an old civil engineering professor who was lamenting the fact that there is hardly an elite university in the United States who pays attention to civil engineering, “The trouble with the United States recently is we spent several decades not producing many civil engineers and producing a huge number of financial engineers. And the result is shitty bridges and a shitty financial system.” Mr. Volker, the former Federal Reserve chairman from 1979 to 1987, is from an era when Wall Street was still a bastion of “real” capitalism. Reagan replaced Volker with Alan Greenspan, who brought a new ideology and played a significant role in the development of “faux capitalism.” Greenspan, as the top regulator over Wall Street, believed that banks could better assess their own risk tolerance level, set their own capital ratios, and that they would do a better job of regulating themselves based on their own rational self-interests. He even testified before Congress in favor of an unregulated derivatives market. It was only after the housing bubble had burst and Wall Street had been bailed out with taxpayer dollars that Alan Greenspan finally admited there was a flaw in his ideology. Before a House Congressional committee, he was questioned about the role his “free market” ideology played in his decision making process. Greenspan responded, “You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I am saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.” When pressed a little farther by Representative Henry Waxman who asked, “In other words, you found that your view of the world, your ideology, was not right, it was not working?” Mr. Greenspan, a man known for his ability to use Fed speak to obfuscate his real intent, made one of his clearest statements he ever made before Congress replying, “That is — precisely. No, that is precisely the reason I was shocked, because I have been going on for forty years or more with very considerable evidence that it was working exceptionally well.”

In a nut shell, that is precisely the problem with “faux capitalism”. It seems to work well right up to the point when it doesn’t and collapses the entire economy. Since 2008, Wall Street has made a spectacular comeback but Main Street has been left behind. Nothing has changed significantly and the Dodd-Frank legislation only made some initial first steps in an attempt to reign in Wall Street excesses. But the “faux capitalists”, with their bought and paid for allies in Congress, are attempting to undermine or repeal even these initial steps. What we need is for the American public to reach the epiphany that Alan Greenspan had, which is an unregulated free market ideology is flawed, and then demand that Congress regulate Wall Street and make “faux capitalism” just as illegal as a Ponzi scheme.



  1. Well done, but the conclusion is still a offline from where I would like it.

    I think the whole problem is solved by letting capitalism truly work to it’s conclusion. By that, I mean that there should have been no bail outs. No TARP. None of that. We have various levels of bankruptcy to handle those situations already. Some companies could have restructured, others could have liquidated, and it would have opened the way for other business with better business practices to fill the void. By bailing out these businesses, all we have done is encourage more risk taking in the future.

    By calling for new and more regulations from our current government is just asking for additional foxes to guard the proverbial hen house. What we need to do is get rid of the foxes, reform our government, level the playing field in the free markets by deregulating and having everyone paying the same tax rates, improve our education through freedom of choice, and reform many structures within our government to prevent career politicians at the Federal level.

    • G,
      It seems that you have this mystical, almost religious like view of capitalism. Your view that the whole problem can be solved by just having a little more faith in pure laissez-faire capitalism is as dogmatic as the religious person who believes that they just need to pray a little harder, or have just more faith to make things better. Alan Greenspan, who was a member of Ayn Rand’s inner circle, was in your camp and did everything he could to make sure the derivatives markets remained unregulated. This, the derivatives market, is as close to laissez-faire as we have ever been in any market. We can now look back at the results of what happens when Wall Street is given more freedom with less regulation and oversight. I am sure it was very difficult for Greenspan to admit on the public record that there was a flaw in his ideology. Those of you in the Tea Party are going to need to come to the same realization. Having a purer form of what caused the problem in the first place is not the solution. I know it is a deeply held core value of the Tea Party, and the Republican Party in general, that the government is not the solution and that regulations and government intervention are what create the problems in the capitalist market. This was the core of the Reagan philosophy which is why he is such an icon for Republicans. But this philosopy has been very damaging a created a very deep divide in the country. Before the arguments were over what government should do, but both parties believed the government should do something. Today the argument seems to be over doing “something” or “nothing” and in some cases undoing the previous “somethings”.
      There are somethings that we do agree on, like, “there should have been no bailouts or no TARP”. But you cannot handle bank failures through the bankruptcy process. Banks are inherently different from other companies and when they fail they have to be taken over by the government and unwound. This happens all the time through the FDIC with smaller and medium sized banks. I agree that the big banks should not have gotten a taxpayer bailouts. They should have been seized and nationalized. All of the management should have been fired, all stock and bond holders should have been wiped out and the books needed to be cleaned up before they should be privatized again. But can you imagine the uproar that we would have heard from those of you on the political right if the government had taken over the big Wall Street banks. It would have been very ugly. For better or worse we need to have a system in place that controls the money supply. There are only two choices, either a public or private system. Right now we have a private system (Federal Reserve) with some limited government oversight. The Fed’s job was to regulate and oversee the private fractional reserve banking system to make sure that we didn’t have a systemic failure. They failed miserably! But once that failure occurred, there are only three choices that are available: 1) do nothing 2) prop up the existing system (bailout) or 3) set up and alternative financing system. Obviously, doing nothing is not a solution. With the credit markets frozen because the banks won’t lend to anyone, good companies that are preforming well get sucked into the vortex because they cannot continue to operate without their lines of credit. So the problem would quickly spread from the banking sector to every business that is not operating on a cash basis. Option two is what was chosen. But my preferred option was number three. The government should have set up an alternate financing system to loan to people and corporations and then allowed the Wall Street banks to fail. They should have made them (the too big to fail banks) suffer the consequences of their bad behavior, but provide the mechanism for those who were not part of the problem to obtain the necessary capital to keep operating their businesses. Have you read my “Not Enough Real Money” post? I got into this topic in a little more detail.
      We cannot operate a national monetary system with competing private central banks. Just think about what would happen to the U.S. Dollar (actually a Federal Reserve Note) if we allowed the six biggest banks establish their own currency. We would have Goldman Dollars, Morgan Dollars, Citi Dollars, B of A dollars, etc. The U.S dollar would cease to exist and it would no longer be the world’s reserve currency. Banks would be free to issue as many of their own dollars as they wished. What would stop them from printing their own dollars 24/7? Nothing, and eventually everyone of them would collapse, only to be replaced by someone else who would do the same thing all over again. You should read the story about Andrew Dexter, Jr. and his Boston’s Exchange Coffee House, which is the story of America’s first banking collapse. The book is “The Exchange Artist”. This is exactly what Dexter did, printed bank notes 24/7. In those days, early 1800’s, the bank notes were still backed by gold but Dexter printed them at remote locations, like Detroit and New Orleans and put them into circulation in those locations, but people could only redeem them for gold in Boston. Not an easy task in the early 1800’s since it would take a week or more to get to Boston. Today, since currencies are no longer backed by gold it would be even easier for competing banks to keep printing bank notes. Each would want to make their own note as ubiquitous as possible in order to be the primary currency. Which of course would drive down the value of their notes until they collapsed and wiped everyone out who was holding their notes. This is why you cannot have a country’s monetary system operating in a private competitive market. This is where Ron Paul is wrong. Money needs to be just the medium of exchange so that other businesses can operate operate in a capitalist system. It should be a boring utilitarian function, which in my opinion should be run by the government. I don’t think that private sector companies should be making a profit by “creating” money. I have no problem with them moving it around to put capital to better use and charging fees or interest for their services. But private banks should not be permitted to “create” new money on their own.
      If you were referring to GM and Chrysler, both did go through bankruptcy. So I would not classify the government intervention as a bailout. Here is a question that I ask everyone who I have spoken with that was opposed to Obama’s intervention with the car companies. Are you saying that you think that GM and Chrysler should have gone through Chapter 7 liquidation? So far everyone has said no, they should go Chapter 11 restructuring. Many are surprised when I point out that they did. But they still object to the government intervention. So the next question I ask is, think back to early 2009 and all of the problems the banks were having at that time, who was going to provide the debtor in possession financing to allow the car companies to restructure throug bankruptcy? The banks were not loaning to anyone, so there was only one entity big enough to provide the financing, the government. They have no answer and change the subject.
      Those of you that fall on the right of our political spectrum need to get over this irrational hatred of the government. Yes, we have problems with foxes guarding the proverbial hen house, but that is because the foxes on Wall Street are buying and putting the foxes in Washington. This is why we all need to get together and get the money out of the political system. Until this occurs we cannot reform government, level the playing field, or any of those other things. The government is “we the people” but we have allowed it to be hijacked by a small minority with their large sums of money. We need to take it back from this minority.

  2. The only way to get the money out of the political system is to get enough politicians into the political system to make it happen. That was what the Tea Party movement attempted to do, but the corrupt media and corrupt establishment have attempted (and sadly successfully) to use the Tea Party (who only have a small contingent in congress) as the scape goat.

    Laissez-faire capitalism has never truly existed, not should it. I believe that regulations are needed, but they need to be fair and treat people and businesses equally. Economic busts are not a new phenomenon of this century, but have occurred throughout history both in America and around the globe. Normally following an artificial bubble, such as tulips in the 1630s, railroad shares in the 1840s, stocks & bonds in the 1920s, or recently real estate. The underlying common theme in all of these is the government artificially lowers the price of money below it’s true market level. They keep the rate of interest lower than what it ought to be. This creates an apparition that certain investment opportunities are profitable, when in fact they are not sustainable.

    I 100% agree that the too-big-to-fail banks should have been allowed to fail. I also agree that the car companies should have been allowed to fail too if no banks were willing or able to loan them money to restructure. It is not the governments place to prop up private companies on the tax-payers dime. That was more about handing the car company over to union control. Crony capitalism at it’s worst.

    Happy new year!

    • Happy New Year G,
      I want to start by telling you that I appreciate your comments and that we are able to carry on a dialog that doesn’t devolve into name calling. I find it informative to converse with a self described Tea Party person who can actually articulate their position beyond just repeating the typical talking points they hear on TV and radio. By the way, I am still waiting for all those corrections you are going to make on some of my older posts. 🙂
      On this topic, my opinion of most politicians is that they are not leaders so I don’t expect them to take the initiative to get the money out of politics. This is going to have to come from the people. There are a few who are true leaders but most just wait for the parade and then they run to the front and say “follow me”. I don’t agree with the opinion that the Tea Party was attempting to get the money out. The Tea Party politicians that got elected have made zero efforts to get the money out. In fact, I have seen more of them echoing the position that corporations are people and money is free speech. None have denounced Citizens United. Or have I missed something? My view of the elected Tea Party representatives is that they are radically anti-government and their goal is to blow it up. Or as Grover Norquist said, shrink it to a size that we can drown it in a bathtub. And of course every Tea Party congressperson has signed the Norquist pledge. When I exam the rhetoric and actions by both Norquist’s and the Tea Party Congress members I come to the conclusion that at heart they are nihilist.
      There have been bills introduced into both the House and Senate for a Constitutional amendment which would clearly state that corporations are not people, money is not speech and that Congress has the authority to adopt campaign finance reform laws. Not one Tea Party Congress member has signed on to these bills to get the money out of politics or even voiced support for it. Unfortunately, I happen to have one of the most high profile Tea Party members as my representative. He is more interested in throwing verbal bombs than he is in getting the money out or even governing. The man is an embarrassment. Last year I went to one of his town hall meetings and it was really creepy. First of all it was held a mega church. The crowd was about 95% conservative Christians who belonged to the church. I assume most supported the Tea Party, but there was no way to tell for sure except they all supported him. This so called town hall meeting was very scripted, which of course you expect for the opening remarks. But when we got to Q&A they made everyone write down their questions and then his staff hand selected which softball questions he would answer. They were just used as a setup so he could go into another scripted response. If anyone shouted out an unauthorized question they were immediately removed by the police. Considering that it was the Tea Party that was raising all of the commotion the summer before at the town hall meetings over health care it was ironic and as I said creepy that this leading Tea Party Congressman was shutting down debate and decent using the authority of the state. I guess that first amendment right only applies when he is the one using it.
      The Tea Party caucus is big enough to prevent legislation from being passed because the Republican leadership in the house will not bring any bill forward unless less they can get it passed by a majority of the majority. Boehner doesn’t want anything passed that he has to rely on Democratic votes in order to pass. So I don’t think it is scape goating to say the Tea Party caucus is controlling the house in a significant way. If you look at it from a different perspective they are actually being given credit for holding the Republican leaderships feet to the fire and forcing them to the right politically. Whether or not you agree or disagree with them you have to admit that the Tea Party has a large influence over the Republican’s agenda. So they get credit and blame on the same issue. However, when an overwhelming majority like the 70-80% who supported the payroll tax extension see them blocking the approval they are to blame so it is not scape goating.
      We agree that laissez-faire capitalism has never truly existed and that it shouldn’t. It is a theoretical ideal that can’t actually be implemented in the real world. So the real arguments is about how much and what types of regulations are needed. Of course what is “fair” and “equal” are subjective. I may consider it both fair and equal to establish a maximum amount of CO2 that can be emitted and anyone exceeding this limit should be taxed or fined. You might think that is unfair and unequal because it will hit some business harder than others. Every regulation will hit some harder than others, but the goal has to be which way provides the biggest benefit to the most people.
      On the issue of bubbles, true they are not a new phenomena and they are fueled by easy credit and excessive speculation. But I can find no evidence that the Dutch government was expanding the money supply that lead to the tulip bubble. What appears to be the primary cause was the financialization of a commodity, tulip bulbs. Because they could only be transplanted after the blooming season, the Dutch invented this new financial instrument which was effectively a futures contract. A private agreement to sell the bulbs at a specific price when it became available. It was the “futures contract” on which the speculation occurred and it was fueled by purchasing them on margin with a small percentage down. Without the invention of the futures contract the bulbs could only have been sold once a year and it would have been essentially an auction with the bulbs going to the highest bidder. No bubble would have been created.
      With our more recent bubbles, easy credit has been a big key in fueling the speculation that created them. But it is incorrect to say that “the government artificially lowers the price of money below it’s true market level”. Ever since 1913 the government officially gave up its authority to operate the monetary system to a private central bank, the Federal Reserve. The Fed is the central bank for a banking cartel. It is owned and operated on behalf of the big money center banks. The Federal government has limited oversight and authority over the Fed’s actions. Until Ron Paul and Bernie Sanders got an amendment passed that required a minimal audit with public disclosure the government had very limited information on what the Fed was doing with monetary policy. And that information was limited to what the Fed wanted them to know. So let’s put the blame in the right place, on the central bank for the private banking cartel. Blame the government for giving up its control over monetary policy, not for the actions taken by the Fed.
      OK, so we are in complete agreement that the too-big-to-fail banks should have been allowed to fail. Then what alternative system would you have put in place so that companies, which had no involvement in the housing bubble, who need access to capital in order to operate, could get that needed capital? If the credit markets are frozen because banks won’t lend, or the banks have failed, should these other companies be forced into bankruptcy? Should we just let the bankruptcies continue up the supply chain and then just let everything get worked out in the courts over the next several years? Don’t you think that would have led to a total economic collapse? My solution is to nationalize the Federal Reserve and all of the failed banks. The government should reclaim the control of the money supply and turn it into a neutral instrument that is used simply as a means of exchange. Once the banks at allowed to fail what is the Tea Party solution to providing a credit market for capitalism to operate?
      On the car companies are you saying that if no banks were willing or able to loan them money to restructure then they should have been forced into Chapter 7 liquidation? If so, then you are the first one that has given me that response. But if that really is your opinion, which of course you are entitle to, I think you might have a little of that nihilist streak in you. The government has always propped up private companies on the tax-payers dime. Many wars have been fought for this purpose. Read General Smedley Butler’s “War is a Racket.” Why shouldn’t the government use it resources to help U.S. companies restructure through bankruptcy when the alternative would have been big reduction in the tax dollars coming in due to all of the people losing there jobs at the car companies and all they way through the supply chain?
      Lots of food for thought for the new year. I hope you didn’t eat too much yesterday. And I hope 2012 is a great year for you. Except when it comes to the elections. 🙂

  3. Sorry for the delay in a response. I took a long, and much needed, holiday.

    When I speak of the Tea Party, I speak of the movement itself and we commoners who make it up. What makes us different from the norm is we do not put all our faith and trust in a few elected elite with catchy slogans and then go bury our heads in the sand trusting them to do what is best. We continue to educate ourselves on the issues and change our stances as more information comes in. If we make a mistake with candidates we elect, we can correct that mistake in the following primary election for the seat.

    I’ll agree that the Tea Party has been slow in denouncing Citizens United. When it first came around, our short-range misguided thinking was, “Finally. If Michael Moore can do it, why can’t ‘our side’?” I think the Republican Primaries are giving us a long look at the repercussions and opposition will continue to grow.

    I agree that the Tea Party has much influence, thankfully, with Republicans in Congress. Unfortunately, they are not adroit in using the media to sway public opinion. The blocking of the payroll tax had merit, but they did a poor job of expressing the reasons. Politically, I just would have done it and moved on, but I give them credit for standing up for what they felt was right.

    There was more to the tulip bubble than you mentioned. The Netherlands debased their currency by overvaluing gold and undervaluing silver. They also had policies increasing the quantity of money in the country fostering an environment of speculation and malinvestment.

    My solution to having capital available for investment is to have the government take less of it. Have a low flat tax rate and make it permanent. If businesses have risky investments that lead to their failure, then let the markets run their course. Government intervention may keep the floor higher than it would have been by intervening, but the country will be at that floor for a longer duration. The markets will rebound quicker on their own.

    • G,
      Did you get away for your holiday? As you can tell from my blog we love to travel and we have gotten around. Next up for us is China. While I am there I am going to look for all those jobs we sent over. 🙂
      I have a question, does the Tea Party caucus represent the positions of the “commoners” in the movement? Or are they part of the elite that are just using the Tea Party for electoral purposes? I saw a report last week that the Tea Party caucus is the wealthiest of any caucus group in Congress. That doesn’t seem to line up with the grassroots movement.
      How big is your Tea Party group, and do they use left and right leaning media sources, as well as mainstream source for education? I have had conversations with other self proclaimed Tea Party people and they seem to rely heavily, if not exclusively, on sources like Fox and Drudge. The discussions tend to end fairly quickly because they keep circling back to the same points so you can’t get into a deeper discussion.
      At the beginning of the Tea Party movement I thought they did get it with respect to Citizens United. The first poll I saw after the ruling was over 80% disagreed with the Supreme Court. More than 80% has to include a lot of Democrats, Republicans and Tea Party members. But it seemed to me that when groups like Freedom Works got involved with the Tea Party the agenda shifted and Citizens United disappeared. It also seem to become a partisan issue after Obama denounced it in his State of the Union address and Alito shook his head and mouthed “that’s not true”. I think Judge Alito is being proven wrong and the Republican primaries are showing everyone just how bad the ruling was. Just think this is the inner party Super PAC fighting. Wait until we get to the general election. Yikes, we will all be sick of the attack ads. I think what Steven Colbert is doing to expose how ridiculous the Super PAC are is great. Educating with humor is a good way to expose them.
      What was the merit of blocking of the payroll tax? I pay close attention to these things, but they did such a poor job of expressing their reasons I don’t know what they were. The Taxed Enough Already (TEA) Party couldn’t be against a tax cut, could they? The two month extension came from the Senate Republicans because they couldn’t agree how to pay for a full year extension and the clock was running out for the year. Arguing that the 2 months wasn’t long enough was grasping at straws for not going along with the Senate’s compromise. So the impression that was left was that they were against a tax cut because Obama proposed it.
      I am not following how even if the Netherlands debased their currency by overvaluing gold and undervaluing silver would create the bubble. Or even increasing the quantity of money by itself would lead to a bubble. Sure the increased money supply could be inflationary, but that would not concentrate it in a specific market to cause a bubble without other factors. An inflation caused by an increase in the money supply would be across the board, not just on one commodity. Without the invention of the “futures contract” and expansion of credit using margin accounts (which doesn’t require the government expanding the money supply) the bubble could not have occurred. If it was just an increase the amount of money in the system, without a futures contract or margin, then there would have been in effect an auction at the time of year the bulbs could be moved. Sure they would have bid up the prices and over paid with the excess money in the system, but it still would not cause a speculative bubble. If you have something that you could recommend for reading that supports your position, let me know because I would be interested in reading it.
      If your solution to having capital available for investment is to have the government take less of it, how does that work when the lenders controlling the flow of capital just refuse to lend to anyone? Even if the government’s share was zero it doesn’t change the fact that the banks had so many toxic assets on their books and they didn’t know which of their counterparties would fail, so credit just froze.
      I am all in favor of letting banks that have risky investments fail and then letting the markets run their course, as long as they have not become so big and so interconnected that they become a systemic problem. That is why I think the government has to reclaim the authority to create and expand the money supply as needed, so that one company or a cartel cannot bring down the entire economy with their failure. The markets will have no chance to rebound quicker on their own if the availability of capital is frozen. Play this scenario out. Lets assume the too-big-to fail banks where permitted to fail. Trillions of dollars of capital would have been wiped out. Other businesses, not in the financial sector, would be left to scramble for a much smaller supply of available capital from alternative sources. What will happen to the cost of borrowing when the supply is shrunk and everyone is trying to get their piece of the smaller pie? They will go up significantly, which will result in higher cost for manufactures, or anybody else borrowing, prices will also go up and profits will go down. How does the market recover quicker while this scenario plays out?

  4. I went to the Orange Bowl in Miami, then spent some time in Key West, Orlando, and Savannah. So a pretty fun trip. The only place I’ve been in Asia is the Philippines, but I love it there.

    It is difficult to determine at this early juncture if any in the Tea Party caucus are using the movement for their own gain. I’m hopeful and expect that the percent who are doing that are well below the average among federal politicians. And I expect the Tea Party movement will not simply give them a pass for talking-the-talking if they do not walk-the-walk. I would not be surprised that the Tea Party caucus is among the wealthiest as it does take some degree of success before running a winning campaign. Nice to know that most of the Tea Party caucus developed their wealth prior to getting to congress.

    I went to one Tea Party rally here and participate in some online Tea Party blog message boards, but I unfortunately do not have the time to attend the weekly meeting for the local Tea Party. In all of 2011, including my vacation time, I took 42 days off work and typically work 9 – 12 hours a day (management). So the meeting was usually over before I was able to arrive.

    The payroll tax is specifically targeted to fund social security which is already projected to be unsustainable. The Tea Party was okay with the extension, but wanted government cuts in order to pay for it. Specifically, they wanted to freeze federal pay through 2015 and reduce the civilian workforce by 10%. In addition, the Tea Party is aggressive in attempting to leverage every situation for the betterment of the country and strongly pushed to have the Keystone Pipeline approved in the bill. I felt that close to the holidays, the American public was too engrossed in personal affairs to closely monitor details of any argument and they should have caved sooner. But, I also realize that many Tea Party voters would remember those who caved and hold them accountable in subsequent elections, so it was a Catch22.

    I have faith that banks who made risky investments and failed due to those risky investments would have had their capital reallocated at the reduced market value and others would have filled the void in the lending market. Even with the bailouts, lending has been slow and those most responsible for the crash have had to pay very little for the risks that they partook in.

    As for tulips, check out the book Early Speculative Bubbles and Increases in the Supply of Money by Douglas E. French.

    • G,
      So you were down here in my neighborhood. I live in Ft. Lauderdale. Are you a Clemson or West Virginia fan? Hopefully for you it’s West Virginia. Key West is a fun place. Last time we went down there was New Years 2004.
      Thanks for your take on the Tea Party caucus. We will see how it plays out this year. I don’t think they will have the same impact this year in the general presidential election like they did in the off year elections of 2010. I anticipate that a significant number of them will not be reelected and their impact will shrink. I also think there is a better than 50-50 chance that the Democrats regain the house which would put them in the minority. However, the Republicans have a good chance of taking the Senate.
      True, the payroll tax is to fund social security, and there are some on the left who have argued against cutting the payroll tax because they don’t want to reduce the amount coming in to Social Security. I have never bought into the argument that S.S. Is unsustainable. In 1983 when they doubled the payroll tax the intent was to build up a trust fund that would be drawn down when the glut of baby boomers hit retirement age. It was never intended to be a permanent trust fund, but rather to make up for the shortfall in the out years. We are now entering the out years. The current projection is that S.S is sustainable for another 27 years, just as it was designed. At that point if there is a shortfall they could raise the payroll tax, or raise the cap, cut benefits, or some combination. In our current debate the question is how to replace the the 2% for the next year. I get the argument about reducing the government and freezing pay from the ideological stand point of wanting to shrink government, but how does that provide a revenue source to replace the 2%. By the way 554,000 government jobs have been lost since January 2010, but this does include federal, state and local. But I am not sure what percentage applies to federal.
      The Keystone Pipeline had no place in the payroll tax cut bill. Even the Trans Canada spokesman said that it would mean hundreds, not thousands of permanent jobs. During construction there would be maybe 4 to 5 thousand. Politically it was a dumb move to force Obama to decide in 60 days. It guaranteed that he would turn it down because they don’t even have a route selected yet. Their initial proposed route was opposed by Nebraska (not what you you would call a blue state) because of the environmental impacts on their aquifer. There is no way the federal government can give out a blank permit (just fill in the details later) to a foreign country. Even a friendly one like Canada. What would the Tea Party say if Obama agreed to give a Mexican company a permit to put a pipeline across Texas and Arizona, without an agreed upon route, against the wishes of their state governments? Do you think we would be hearing this was for the purpose of getting the Hispanic vote? They gave Obama the easy out, deny it now and allow them to resubmit after a new route is selected. The whole issue is pushed to after the election.
      After the banks who made risky investments have failed and shut their doors, who would reallocate their capital? Don’t forget the taxpayers would be on the hook for all of the insured deposits. For others to fill the void in the lending market they would have to massively expand their balance sheet at the same time they are trying to deleverage and clean up their balance sheets. True, “even with the bailouts, lending has been slow and those most responsible for the crash have had to pay very little for the risks that they partook in.” The slow lending is because the banks have been taking ll of that free cash from the Fed and investing it in Treasuries and the markets. Why lend and take the risk when you can get 3% risk free by borrowing at zero and lending to the government at 3%. It was a Fed give away to the banks to help them recapitalize. Until they have completed the deleveraging and cleaning up their books, you will not see an expansion in credit. They will also be very careful about who they lend to. If the Fed really wanted the new money to make it into the economy they have to raise interest rates to the banks so that they will want to lend into the markets to get some return. But remember the Fed is a private central bank, owned by the big banks and is operated to stabilize the banking industry. We the taxpayers are not their constituency.
      I will check out the book.

  5. I was born and raised in West Virginia. Moved away 13 years ago, but once a Mountaineer, always a Mountaineer. That was a great game for us!

    The Tea Party caucus are not shrewd politicians for sure, and although I admire their grit, they sometimes get embarrassed with their overreaching. This was a prime example. Some issues you just need to punt on. However, I do understand that their constituents who voted them in expect them to battle hard on everything, lest they appear to be just rubber stamping things and taking the easy road. I don’t envy the spots they find themselves in at times.

    I won’t get into our current social security system other than we need to do away with it. I’m all about the Chilean model or something similar.

    As for the bailouts, there are many options a failing company has. Downsize. Merge. Demerge. Liquidate assets. Restructure. Renegotiate loans, whether as the lender or the lendee. Businesses can get quite creative when they need to and work within the parameters in front of them, but our government gave them the easy way out on the tax-payers dime. It would have been a prime opportunity to break up some of the large banks and foster an environment where new banks could emerge. The large banks would have had to sell off assets at the current market value, which would probably be at a loss, and allow more sound companies to expand and grow by acquiring assets at a reduced price.

    If/when any banks filed for bankruptcy, at that point it would be up to the bankruptcy courts to discern what occurs after that. I’ve a feeling that most of the big banks would have found a way to navigate the waters. Tax payers would be on the hook for Fannie & Freddie, but those two organizations need to go afterwards. Some suggest we should have handled the banking crisis the same way Iceland ended up doing it.

    Keep in mind that the Fed was created by Congress. And even though it is technically an independent body, it is subject to congressional oversight. The Federal Open Market Committee that determines interest rates is comprised of 12 voting members, seven of which are appointed by the US President and approved by the Senate.

    • G,
      I agree with you about the Tea Party’s lack of shrewdness. They need to learn to be less dogmatic. You can’t take everything to the wall even if it excites your base.
      I don’t agree with you on Social Security. I don’t want to get off on a long tangent discussion, but the Chilean model was a disaster for the Chilean people. I think our system has been very effective at preventing high rates of poverty with seniors. If you look at history pre New Deal the rates of poverty and starvation among the elderly were very high.
      As a general matter, I agree with you on bailouts. The options you listed are available for most companies, but banks are a different animal. Banks do not go through a bankruptcy process. If they fail they go into receivership and are wound down and the remaining good assets are sold off. Without the FDIC insuring depositor accounts, we would be back to the good old fashion bank runs that occurred during the depression and before. With a fractional reserve system the entire banking system is nothing but a confidence game. If you put your money in a bank you need to have the confidence that you can get it back. But if the bank has leveraged their capital up to 30 or 40 to one, very few people will get their money back. The whole purpose of the FDIC insurance was to give people confidence their money was safe and to prevent bank runs. It worked very well. But the deal was that in order to get the FDIC backing on deposits a commercial bank had to agree to tight regulations. Investment banks on the other hand, could take as many risks as they wanted, but they had no backing. So if you put your money in them and they went under, too bad you loose. This was the primary purpose of Glass-Steagall. The problem created by deregulation is that the separation between commercial and investment banks was eliminated. With mergers and acquisitions the industry consolidated and they all got involved in the riskier investment bank activities. This is where all the big profits could be found which is why they all were participating in this “faux capitalism”. When the CDO’s and CDS’s blew up, and nobody could place a value on them, the banks were unable to sell these assets. They could no longer even use them as collateral to roll over their overnight Repo loans. The sheer size of these bets overwhelmed any other assets the banks held. Therefore, the banks would have had no other options and would have closed their doors. We saw what happened when just one bank, Lehman Brothers, was shut down and how it rippled through the markets. What would happen if it was Citi, Bank of America, Merrill Lynch and a few others shutting their doors at the same time? Even the relatively healthy banks like JP Morgan or Goldman would have been force to shut their door when the counter parties on their loans and bets defaulted. I am not sure why you would have a “feeling that most of the big banks would have found a way to navigate the waters.” The only thing I can conclude is that you don’t realize how big these “faux” bets were in comparison to the amount of capital the banks had on hand and that no one, even the banks themselves could place a value on these “faux” assets. Even if they could have determined a current market value, which would have been way below the value they were carrying them on their books, who would have bought them when they all had too many toxic assets on their books? I understand the desire to require the big banks to suffer the consequences of their action. I am all in favor of that. But there has to be another way to provide capital for individuals and businesses when the current fractional reserve system implodes. This is where my idea of Uncle Sam’s Bank comes in. (read some of my older posts on this idea). Essentially it would be the similar to federalizing the Fed. This is where I agree with Ron Paul, the Fed should be abolished as it exists today. I don’t agree with his solution (but this would be another long sidebar). The control and growth of our money supply should not be given to a private central bank. Yes, the legislation that created the Fed did provide for Congressional oversight, but this was just a ruse. How could any entity provide oversight when you are not permitted to look at the books. The oversight provision wasstrictly for public relations purposes and had no real affect on the Fed’s actions.
      I am not sure I follow what those suggesting “we should have handled the banking crisis the same way Iceland ended up doing it” are talking about. Iceland voted to default on their loans and bets. Are they saying that what the U.S. Should have done. It may sound good, but is totally unrealistic.

  6. I could only find very little information pertaining to the Chilean SS model being a disaster, and it was an obvious leftist website. Even the facts they used to discredit their system actually still support their system. In a private system, there will be times of a negative return, but over the longer course of time a much higher yield.

    I fear you have too much faith in our government if you want to give them even more control or our banking institutions.

    Megabanks defaulting will cause ripples in the market, but part of growing is destructing weak enterprises. The reason we are the most powerful and wealthiest country in the world is we mostly have been allowed to prosper and fail. You start taking away the capacity to fail, you’ll also take away the opportunity to prosper.

    I don’t have enough information yet on what Iceland did. I didn’t say I supported what they did, I said that “some suggest” we should have done something similar. I mentioned it to see if you had any input on it as I’ve not had time to research it in depth.

    Did you have a chance to check out my blog on income inequality?

    • G,
      The lack of information on the Chilean model should tell you something. If it was such a success you would be able to find volumes of information, particularly since Bush was proposing to privatize our system. It is true that “in a private system, there will be times of a negative return, but over the longer course of time a much higher yield.” Of course the flaw in this logic is that if you happen to reach retirement age in one of these negative times, you are screwed. Also, the “longer course of time” is an undefined period and could span your entire retirement. The reason Social Security has worked to keep the vast majority of seniors out of poverty is that it is a defined benefits program. When they know what their income will be they can budget their living expenses.
      When it comes to the monetary system we only have two choices. Either it will be controlled by government or by the private sector banking system. Ron Paul’s idea of a free market where competing banks could issue their own competing scripts is totally unworkable. The first problem is that the U.S dollar would cease to exist and would no longer be the reserve currency, which would lead to a collapse of not just the U.S. but the world economy. So we have to choose between government and a private central bank. We have been operating under the private central bank model since 1913. How are you liking it so far? 🙂 I don’t know if you have read my post “Not Enough Real Money” yet, but please do so for a more detailed discussion. This argument over government verses private control goes all the way back to the founding of the country. But we have not really had a serious discussion of the issue since the late 1800’s. I know the Tea Party members are not big fans of the Fed, but what is their alternative? I have not heard any proposed. Do you have one? At this point, since the taxpayers have ended up on the hook for the failures of the private fractional reserve banking system and their creation of excess money supply (in the form of a massive credit bubble). Yes, I would be more comfortable with the government taking control of decisions on expanding the money supply. If we the taxpayers pay for it in the end either way shouldn’t those we elect in a representative democracy be the ones making the decision? But at the same time we do need to address the issue of special interests capturing the government. This is where getting the money out comes in to play.
      Mega-banks defaulting will cause a lot more than ripples in the market. You saw what happened to the markets when Lehman was allowed to fail. The entire banking system went into a panic and the stock markets collapsed. You could hardly consider Lehman to be a “mega-bank”. You cannot apply the same philosophy that they should be allowed to “prosper or fail” to the banks that are controlling the money supply. It is fine for other industries, but as the system exists today we cannot allow the mega-banks to fail without destroying the entire economy. That is why we must break up the “too big to fail” banks. This is also why I argue that the government must reclaim its constitutional authority to create the money supply. If this was the system we have in place then we could have allowed the banks to fail.
      I have not read a lot on Iceland, but Michael Lewis newest book “Boomerang” has a chapter on Iceland. Basically, the entire country became a hedge fund. Everybody got involved in financial engineering, became investment bankers and gave up fishing. They had discovered they could make money from money, so why waste your time fishing. It worked great for a few years while the credit bubble was expanding but as soon as it burst, the whole system crashed. Iceland was on the hook for billions in lost bets to European banks. The people in Iceland voted and said, screw it we are not going to tax ourselves to payoff these losing bets the banks made, so they defaulted.
      I have not had a chance to check out your blog on income inequality yet, but I will.

  7. Let me start that this conversation with you has led me down many paths of research that have made me a better and more informed person.

    Now… what I had said in the earlier post was… “I could only find very little information pertaining to the Chilean SS model being a disaster, and it was an obvious leftist website. ” I was speaking specifically in researching your claim it was a disaster and I could find no information pertaining to that. I found a wealth of information discussing the merits of the Chilean model and how successful it has been.

    How are you screwed if you reach retirement age during a down time in a private retirement fund? A remodeled more free system could allow people to decide when they wanted to retire. Even if your account loses money from where it was from 5 years ago, it will still be well ahead of where it was 20 years ago. And, you only lose the money if you actually cash it out during the downtime.

    I researched the Iceland thing. That was a debacle. I’m trying to find the source that suggested it so I can strike it from future references, haha!

    It appears the Fed can’t be trusted. Many of us know the government can’t be trusted. I admire you for at least putting your own thoughts out there. I guess I should not criticize since I have not done the same. I’ve been slowly researching Ron Paul’s views that are based on Hayek’s Choice of Currency. I see some good aspects to the idea, but I also see some of the same problems existing under new clothing.

    I’m currently researching Ludwig von Mises theory of money and credit. I’ll let you know what I find out.


    • G
      I am also enjoying the conversation and it has helped me get a better understanding of where Tea Party supporters are coming from. I have attempted these types of conversations with others and they don’t go very far because in short order they resort to name calling. I get accused of being an Obama loving socialist who will lead us down the path to communism or totalitarianism. I am sure you have heard that before. It is nice to have someone articulate a thoughtful position, even if I may not agree with it. It is also great that you will take the time to research and think about what the next step would be. One of my biggest complaints about the Tea Party is that they want to blow things up, but then what, they have no solutions for the aftermath. Hey, but that is what a good debate is all about, learning from the other person and expanding your own thoughts.
      I really don’t want to go down the S.S. debate in this thread. It is much too long of a subject and off topic for this post. But I will answer your question: “How are you screwed if you reach retirement age during a down time in a private retirement fund?” Let’s say you were someone that was nearing retirement age in 2000, and you had been saving and investing for the past 20-25 years in a private account and built up a nice nest egg that would carry you through the next 25 years of retirement. Your gains were made in the markets and you were counting on cashing some out each year as you need the income. You don’t want to pull it all out at once and get hit with the capital gains and have to pay taxes. Plus you want that money to continue to grow. Then the markets peaked and tech bubble burst. The markets had around a 60% decline and your individual investments were probably even a little worse. Now your stuck with a retirement fund that is less than half of your needed amount. So your choice is that you have to continue working way past 65 or if you do retire you will have to live on substantially less and your fund will be depleted much faster as you are drawing out principal. Here we are 12 years later and even though we have seen a significant increase it the markets (with big ups and downs) we still haven’t reached the peaks in 2000. How can some one depend on market timing to plan a retirement? Individual accounts are great for supplemental retirement income, but there needs to be a baseline defined benefit.
      Yes, Iceland was a debacle. But I still want to go there on vacation.
      I am not sure you will find anything from Hayek or von Mises with respect to who should control the money supply. I think it is implicit in their writing that they assume it will be by a private banking system. This goes for Keynes also. They all had their ideas on the type of currency and whether or not it should be backed by gold, but I don’t think they wrote about who should control it. Hayek was supposed to write “The Pure Theory of Money” as a second part to his “Pure Theory of Capital” but he never did.
      The last time I am aware of the issue of control being debated was right after the Civil War. Lincoln began issuing the “greenback” which was controlled by the government. But it wasn’t the sole source of legal tender and the backers of the privately controlled currency began speculating to drive the greenback down and eliminate it as a competing currency. The arguments continued until the late 1800’s into the early 1900’s. But by 1913 when Congress established the Fed the debate was over and nobody has seriously talked about it since. Some of the better books I have read on the subject are:
      Web of Debt, by Ellen H. Brown
      The History of Money, by Jack Weatherford
      The Money Men, by H.W. Brands
      I just finished another book you might like. Kenyes-Hayek; The Clash That Defined Modern Economics, by Nicholas Wapsott. It just came out recently and he has done a great job of covering both. I did not find it to be slanted one way or the other, but rather it covered the back and forth between the two men and how their economic philosophies have played out over the past 80 years. I wore out a highlighter.

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