Economic rebirth through monetary reform

Democrats and Republicans in Washington are emitting much sound and fury on the issue of federal debt and a balanced budget. What they won’t be telling us is that we could have it all: a balanced budget, no national debt, full employment, greatly reduced income taxes and expanded social programs. How this is even remotely possible will never be addressed by our two corporate political parties or the U.S. corporate stream media.

I recommend reading Ellen Brown’s Web of Debt—The Shocking Truth about Our Money System and How We Can Break Free. It is reasonably priced and must reading for anyone trying to get a handle on the present economic crisis, along with a way out of our dire straits.

Systemic debt

Our repressive monetary system is based on debt. When the economic crisis was revealed to the public in 2008, we were told that we had to bail out private banks and financial institutions so that they would begin lending again. In other words, the only way to get the economy rolling again was to give lenders taxpayer money so they could begin making loans to put us further in debt. Corporate shill Obama told us time after time that we had to bail out those big bad banks on Wall Street so that capital would be available to loan to mom and pop businesses on Main Street. Our President never told us how these mom and pop businesses on Main Street were supposed to operate when their customers were broke and out of work.

We were not told that the so called “too big to fail” Wall Street financial institutions were functionally bankrupt. And they weren’t bankrupt because a few mortgage loans went south. They were vastly over leveraged in worthless financial instruments at unheard of and completely unregulated rates of 30/40/even 400 to 1 against their assets.

Derivatives

Derivatives are financial instruments intentionally made so complex that almost nobody, especially investors and the public, can understand them. Basically they are bets that a certain investment will go up or down in value. They represent no value and are pure gambling. [1] The Bank of International Settlements (BIS) is the central banker’s central bank. It overseas the U.S. Federal Reserve and all other capitalist central banks. It estimated that in 2010 the “notional value” of the worldwide derivatives market was $601 trillion dollars. [2] More than ten times the world GDP of $58 trillion! Notional means “fanciful, imaginary, dreamlike.” “Notional value” means just pick a figure out of thin air. The central bankers’ central bank chooses this term “notional value” to describe gambling bets equal to ten times the labor of the entire world’s population for a year and upon this “fanciful, imaginary, dreamlike” value rests the solvency of worldwide capitalist markets.

There are no regulations on derivative markets and that is why they have become so large as to dwarf all other investments. Yet they represent nothing. They are an insurance policy that has no money to pay, when that which they insure collapses. When these collapses come as they did in September of 2008, the ruling elites in the U.S. will do whatever is necessary to bailout the perpetrators of this fraud. Yet nothing will be done to clean up the mess and hold those responsible to account. This was evidenced when President Obama and his Justice Department failed to investigate and prosecute those responsible for this gigantic fraud. It was further evidenced when the Democrats in Congress and President Obama passed their touted financial regulation bill. In it they failed in any way to put regulations on the completely unregulated derivative markets that were the root cause of the financial collapse.

Warren Buffet on derivatives

Berkshire Hathaway Chairman Warren Buffett is considered by many as the world’s most respected financial investment guru. An icon of capitalism, he is also the second wealthiest person in the country. In a February, 2009 letter to his company’s shareholders he gave his take on derivatives: These instruments “have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of ‘disclosure’ in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don’t know what is going on in their portfolios. And then I reach for some aspirin.” [3]

Lyndon LaRouche on derivatives

While Warren Buffet is considered a sage of U.S. capitalism and revered by those who worship the amassing of individual wealth, Lyndon LaRouche has had a career as an outsider of the U.S. establishment and critic of what he believes is oligarchic domination of the earth by “Rockefellers, the London financial center, the British royal family, the Anti-Defamation League, the KGB, the Heritage Foundation . . . , Nazis, Jesuits, Freemasons, Communists, Trilateralists, international bankers, the American Civil Liberties Union, and the Socialist International.” [4] I am not a disciple of Mr. LaRouche, but in researching this article I discovered that for decades he has been sounding a clarion call warning us of the absurdity of financial derivatives.

He wrote the following in 1993: “If you were a visitor from another solar system looking at Earth and looking at the situation here, and taking into account derivatives, would you advise anyone to invest in this planet?

“I think the answer would be, on first impression: No. The significance of the derivatives, is the fact that they can be tolerated. The fact that they are tolerated in the way they are tolerated, in the way they are discussed in the financial community, indicates that no one in their right mind would invest in this planet, as long as the kind of thinking behind derivatives is hegemonic.

“What are derivatives? It’s risk management. It’s called capital. What kind of capital? Is it industrial capital? No, absolutely not. Rather, it is a manner of participating in a bubble which sustains itself by taxing the real economy, by sucking the life’s blood out of it as premiums to pay these charges on risk management. Because it is the net charges on risk management, as against risk, that is the basis of the system. In order to have a charge which exceeds the risk, you must extract that relative amount from the real economy.

“Where does it come from? It comes from not maintaining infrastructure, water systems, and so forth. It comes from not maintaining industrial capacity; it comes from shutting down a plant in order to get something cheaper, presumably, from a cheap-labor area in a foreign country. It means looting of eastern Europe. It means looting the former Soviet Union. It means looting China through slave-labor projects, such as those in Hainan, or the enterprise zones, where Chinese are being gobbled up in Auschwitz-like patterns . . .” [5]

Deregulators extraordinaire: Dr. Wendy Gramm & Senator Phil Gramm

The above quote was reproduced in a 2005 piece detailing Mr. LaRouche’s differences with Chairman of the Federal Reserve Alan Greenspan, “‘Greenspan Shrugged’ LaRouche vs. Greenspan: an 18-Year Fight over Financial Derivatives.” Presented as a timeline beginning in 1987 when Greenspan becomes Chairman. It also details the culpability of Dr. Wendy Gramm, wife of former Senator Phil Gramm (R-Tex). Wendy Gramm was Chairman of the Commodity Futures Trading Commission (CFTC) from 1988–1993. She then became a member of the Board of Directors of Enron, after supporting during her chairmanship at the CFTC removing energy derivatives and interest rate swaps from the oversight of the CFTC. These deregulations allowed the Enron bubble to exponentially grow before it burst in 2001. [6]

Senator Phil Gramm was the principal architect of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 that repealed the Glass-Steagall Act of 1933 that kept depository banks, investment banks and insurance companies separate. This deregulatory act has been hailed as a leading cause of the financial meltdown that gave us the Recession 2007–2009 and the Neoliberal Depression [7] that continues with no end in sight. [8]

U.S. zombie banks

The top 5 U.S. bank and trust companies holding derivative contracts in December 2009: [9]

JP Morgan Chase

$78 trillion

48:1 leverage exposure
Bank of America $44 trillion 30:1 leverage exposure
Goldman Sachs Bank $41 trillion 457:1 leverage exposure
Citibank National $37 trillion 32:1 leverage exposure
Wells Fargo $ 4 trillion 4:1 leverage exposure

These five have a derivative exposure of $206 trillion representing 97 percent of the total derivative holdings of all U.S. bank and trust companies. Their leverage exposure of derivatives to assets shows that when the derivative bubble bursts, they will burst with it. They are giant zombies, kept alive by both political parties subservient to the elite class that owns them.

Banks own Capitol Hill

In our system of private banks, private Federal Reserve and fractional reserve lending, money is created out of thin air when private banks make loans. As you can imagine, this has enabled the banking class to become quite wealthy.

Senator Richard Durbin of Illinois, in a rare moment of candor for a U.S. politician, told us of the banking class’s relationship to Congress: “And the banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place,” he said on WJJG 1530 AM radio show “Mornings with Ray Hanania.” [10]

Where does our money come from?

One might think that it comes from the printing presses of the U.S. government. Yet, less than 3 percent of the total U.S. money (M3) is money as we know it, paper bills and coins. M1 is coins, paper currency and checking account deposits. M2 is M1 plus savings accounts, money market funds and other individual or small time deposits. M3 is M2 plus institutional and other larger time deposits (including institutional money market funds) and eurodollars (American dollars circulating abroad).

For a half century the M3 report had been a measurement of the dollar’s soundness and our government’s transparency, but the looming derivates crisis had to be kept secret from the public and in March, 2006 the Federal Reserve stopped reporting M3. Finally the cow manure hit the fan in September of 2008 as the public was informed of the economic crisis (Neoliberal Depression) and the urgent need to bail out huge Wall Street banks and financial institutions.

In 2005 the last year we have official M3 figures, there were $227.5 billion in Federal Reserve Notes (paper money) in U.S. circulation and $993 million in coins. M3 was $9.7 trillion. The dollar bills and coins were only 2.4 percent of this total. Where did the other 97.6 percent (electronic accounting entries) of our money supply come from? [11]

It was created out of thin air every time a private bank issued a loan as an accounting entry. That’s what our system is. It’s called fractional reserve lending and a bank can loan out 10 times what its reserves are. After it does that it can sell the loans to another institution and start all over again. Don’t forget that the private banks get to charge interest on this money that never existed before you bought that house or car and they created it from nothing (fiat money). As principal and interest payments on the loans roll into the banks, they either get to increase their reserve amounts with the funds or pay off their wealthy shareholders, along with fat bonuses for their management and boards of directors.

In 1913 it was legalized so to speak by the creation of the Federal Reserve, which is a group of private banks that are not required to answer to the American people or our representatives in Washington. The Federal Reserve buys U.S. paper money and coins for the cost to produce them and puts them into circulation. The Federal Reserve buys U.S. treasury bonds with fiat money they create out of thin air accounting entries and then charges the government interest. The Federal Reserve also secretively overseas the private banking industry. The Federal Reserve does return to the Federal Government the interest income they accrue less expenses, but their is no return for the uncounted billions and trillions created out of thin air by the U.S. private banking community and paid back with the sweat off the brow of the indebted U.S. working class

As our population and economic activity expands, there is a need to create more money (fiat money) or we would have deflation (falling prices). While deflation might sound good on the surface, who would want to buy a house and watch the value of it fall every year while struggling to make mortgage payments? Actually that is our present housing situation, but for different reasons.

Return to gold standard?

Many believe that a return to the gold standard would solve our monetary problems. That inflation is caused by too much money for not enough goods and that the money supply must be kept low by pegging it to gold reserves that are both precious and limited in supply. That a government creating its own money out of thin air is inflationary and that instead, if necessary the government should borrow the money needed at interest from private bankers.

What we haven’t been taught is that the private bankers create the money themselves out of thin air using fractional reserve lending. If it is inflationary for the government to create fiat money out of thin air, then it is inflationary for private lenders to do it also. So why on earth should a government indebt itself to private lenders when it has the capability to create its own money supply debt free? The public creation of a money supply should be as basic a duty of government as a police or fire department? [12]

Full employment is possible

If the increase in the money supply is used to produce new goods and services (a jobs program to guarantee full employment at a living wage), it should not be inflationary. We would simply be increasing our commerce or Gross Domestic Product with goods and services to balance out the newly created government fiat money. While continuing to allow private banks to create fiat money in the form of loans to our already over-indebted working class is inflationary, to the degree that the interest we repay represents no new goods or services.

what do we do now?

Simply take the power to create money away from private financial institutions and put it back where it belongs with the federal government. I could write a laundry list of necessary steps, but it has already been done:

The American Monetary Act

In the preface to the Act, Stephen Zarlenga, Director of the American Monetary Institute lists the three elements necessary for reform:

“First, incorporate the Federal Reserve System into the U.S. Treasury where all new money would be created by government as money, not interest-bearing debt; and be spent into circulation to promote the general welfare. The monetary system would be monitored to be neither inflationary nor deflationary.

Second, halt the bank’s privilege to create money by ending the fractional reserve system in a gentle and elegant way. All the past monetized private credit would be converted into U.S. government money. Banks would then act as intermediaries accepting savings deposits and loaning them out to borrowers. They would do

what people think they do now. This Act nationalizes the money system, not the banking system. Banking is not a proper function of government, but providing the nation’s money supply is a government prerogative!

Third, spend new money into circulation on 21st century eco-friendly infrastructure and energy sources, including the education and healthcare needed for a growing and improving society, starting with the $2.2 trillion that the Civil Engineers estimate is needed over the next 5 years, for infrastructure repair; creating good jobs across our nation, re-invigorating local economies and re-funding local government at all levels.”

Other features of the act:

  • Interest rate ceiling of 8 percent will be established throughout U.S.
  • Monthly monetary grants disbursed to states based on population
  • Interest free lending to local government bodies
  • Farming parity program to provide loans at 90 percent parity to farmers
  • Education funding program to put us at least on par with other highly developed nations
  • Citizens Dividend, an initial tax free dividend to all U.S. citizens to provide liquidity in monetary system before infrastructure programs have been able to work their way into economy
  • Universal Health Care: this section will be written following consultation with those in the medical community
  • Resolving the Mortgage Crisis: this section is still being worked on
  • Recover the Stolen Funds: The Monetary Authority in consultation with the U.S. Attorney General will move to recover funds obtained through systemic financial fraud, from 2000 thru 2012, before, during and after the crisis; as determined by Congressional investigation. Triple penalties may apply, where fraud doers are not cooperative, and criminal penalties will also be recommended. [13]

My recommendation for resolving the mortgage crisis

Home values have shrunk by 32.7 percent across the country during the crisis. [14] Require all mortgage institutions to reduce the principal amount owed by each homeowner by the specific amount that values have declined in his or her particular area. If a homeowner has a home valued at $200,000 at the start of the crisis, reduce his mortgage by 30 percent of the original value or $60,000, regardless of the principal owed. If it is less that $60,000 then wipe out the mortgage completely. Those fortunate enough to have no mortgage on their home will also see a benefit as home values rise. A public that understands that their bankers created the money they lent them for their home mortgages from thin air should have little sympathy for the howls sure to come from the banking class when told to write the principal balances down.

Start immediate program to put foreclosed upon families back in refurbished homes. Our building trades and remodelers are starving for work. Let’s put them back to work rebuilding America’s housing stock and cities.

The rub

With a real unemployment rate estimated at 22 percent for the last three years and no lessening of it anywhere on the horizon [15], with 30 percent of home mortgages underwater [16], with home prices down 32.7 percent and still falling; it would seem that a democratic society would be open to looking for ‘outside the box’ solutions such as a change from a private monetary system to a public entity chartered to “promote the general welfare” called for in the U.S. Constitution.

Unfortunately the U.S. is not and has never been a functioning representative democracy. Our revolution was fought to replace elite British rule with local elite rule. Yes, over the years more Americans (Women, Native Americans, African Americans and non property owning White males) have been allowed to vote that were originally excluded from doing so. But the complete absence on the American political center stage of any candidate who does not support continuing U.S. capitalism in its present form confirms the antidemocratic nature of U.S. society. If we were a democratic society we would be treated to an intelligent discussion in Washington on the pros and cons of changing our monetary system to bring about an end to unemployment, budget deficits, national debt and a crumbling national infrastructure. With politicians of both parties beholden to corporate funding and corporate media exposure for their continued political life, anyone challenging corporate values will be attacked viciously with unlimited funds. Real representative democracy (“government of the people, by the people and for the people”) is antithetical to the money funded politics and corporate media of the U.S. system. [17]

Preceding Senator Durbin’s 2009 quote that the banks own Capital Hill by two centuries is the statement by the founder of the Rothschild banking cartel Mayer Rothschild, “Give me control of a nation’s currency and I care not who makes her laws.”

U.S. media is owned by the same elite interests that own our private banking system and fund both political parties’ candidates. It’s not hard to understand why we will never have a public debate on U.S. capitalism.

A few more reforms in addition to the American Monetary Act

  • Electoral overhaul: 100 percent federally financed elections with runoff elections if no candidate polls 50 percent. No political commercials allowed to be bought and paid for, but all media outlets would be required to carry side by side policy positions for all candidates.
  • Reinstitution of tariffs that allowed U.S. manufacturing to grow for two centuries and would level the playing field with countries paying slave labor wages and with weak or non existent environmental regulations.
  • Cancel all federal debt originating with the creation of money out of thin air by private banks.
  • Authorize Congress to issue new currency and spend it on programs promoting the general welfare that contribute new goods and services to the economy. Amount would be capped by the unused capacity of the national workforce, giving us full employment and paying a living wage.
  • Audit the small number of mega banks that hold almost all the derivatives that brought about the financial collapse precipitating the present Neoliberal Depression. Either an outright ban on derivates trading or a .25 percent tax on derivates trading should accomplish the collapse of this house of cards. Then nationalize the failed institutions.
  • Eliminate the odious international debt that is destroying the fabric of Greece, Ireland, Spain, Portugal, Italy and numerous developing or Third World countries. It was created out of thin air after speculation by tax free hedge funds had wreaked havoc on their economies.

If it makes you feel good, by all means call, write, petition and visit in person your Congress Person and Senators to lobby for monetary reform. However, these entreaties will all have no effect on entrenched elite rule. Better yet, to band together in local groups to create an agenda for social and economic justice in People’s Movement Assemblies. [18] Initially this agenda will have no effect on the money power that rules our nation. Educating our countrymen and women, one at a time, will call for sustained commitment, but as the number grow and momentum is created the opportunity for an Egyptian moment will present itself. Will you join me in working for this?

Nick Egnatz

Research Notes

1. Ellen Brown, “Web of Debt,” Third Millennium Press, 2010, pg. 190–192

2. Bank of International Settlements, Table 19: Amounts Outstanding of Over-the-Counter Derivatives

3. McClatchy News, March 9, 2009, “Regulatory reports show 5 big banks face huge loss risk

4. Wikipedia, “Lyndon LaRouche

5. Executive Intelligence Review, October 28, 2005, “‘Greenspan Shrugged’ LaRouche vs. Greenspan: an 18-Year Fight over Financial Derivatives

6. Ibid

7. Nick Egnatz, Intrepid Report, March 31, 2011, “Neoliberal Depression of 2008 and beyond

8. Wikipedia, “Gramm-Leach-Bliley Act

9. Notional Amount of Derivative Contracts

10. Huffington Post, “Dick Durbin: Banks ‘Frankly Own the Place’“, April 29, 2009

11. Brown, pg. 26

12. Ibid, pg. 96

13. American Monetary Act, July 18, 2009

14. CNN Money, “Home Prices: ‘Double-dip’ confirmed,” May 31, 20011,

http://money.cnn.com/2011/05/31/real_estate/march_home_prices/index.htm

15. EUTimes.com, “Real U.S. unemployment rate may be 22.1 percent for February

16. CNN Money, Feb 9, 2011, “30 percent of mortgages are underwater

17. Nick Egnatz, Intrepid Report, April 19, 2011, “Boycott undemocratic U.S. elections

18. The People’s Movement Assembly Organizing Kit

Nick Egnatz is a Vietnam veteran. He has been actively protesting our government’s crimes of empire in both person and print for some years now and was named “Citizen of the Year” for Northwest Indiana in 2006 for his peace activism by the National Association of Social Workers. Contact Nick at nickatlakehills@sbcglobal.net.

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4 Responses to Economic rebirth through monetary reform

  1. “October 2011 is the 10th anniversary of the invasion of Afghanistan and the beginning of the 2012 federal austerity budget. It is time to light the spark that sets off a true democratic, nonviolent transition to a world in which people are freed to create just and sustainable solutions.”
    http://october2011.org/welcome
    The massive Stop the Machine! Create a New World! demonstration starting on October 6, 2011 is the perfect opportunity to press for monetary and financial reform on a national scale. Join me in Washington.
    Nick Egnatz

  2. John R Bell

    You could not find anybody better to quote than Larouche on the financialized bubble economy? Why not Minsky? Strange? Hudson? Re Larouche: even a stopped clock is right twice a day. Larouche should win a price for the most bizarre Wikipedia entry ever.

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  4. Mr. LaRouche was quoted because he has been right about the derivative crisis from the inception. The quote was from 1993.

    You may choose to dismiss Mr. LaRouche as bizarre, but do you disagree that his assessment of the crisis some 18 years ago was not correct?