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The Cause and the Cure.The American Revolution of 2012

January 3, 2012
Jan03

The Debtwatch Manifesto

by Steve Keen on January 3rd, 2012 at 8:40 am

Posted In: Debtwatch
 

Preamble

The fundamental cause of the economic and financial crisis that began in late 2007 was lending by the finance sector that primarily financed speculation rather than investment. The private debt bubble this caused is unprecedented, probably in human history and certainly in the last century. Its unwinding now is the primary cause of the sustained slump in economic growth. The recent growth in sovereign debt is a symptom of this underlying crisis, not the cause, and the current political obsession with reducing sovereign debt will exacerbate the root problem of private sector deleveraging….
The debt and asset price bubbles were ignored by conventional “Neoclassical” economists on the basis of a set of a priori beliefs about the nature of a market economy that are spurious, but deeply entrenched. Understanding how this crisis came about will require a new, dynamic, monetary approach to economic theory that contradicts the neat, plausible and false Neoclassical model that currently dominates academic economics and popular political debate.
Escaping from the debt trap we are now in will require either a “Lost Generation”, or policies that run counter to conventional economic thought and the short-term interests of the financial sector.
Preventing a future crisis will require a redefinition of financial claims upon the real economy which eliminates the appeal of leveraged speculation….
Regulators in its thrall—such as Greenspan and Bernanke—rescued the financial sector from a series of crises, with each one leading to yet another until ultimately this one, from which no return to “business as usual” is possible.
Neoclassical economics therefore played an important role in making this crisis as extreme as it became. It is time to succeed where Keynes failed, by both eliminating this theory and replacing it with a realistic alternative…
Keynes’s failure to overthrow Neoclassical economics led instead to its reconstruction after the Great Depression in an even more extreme form. This process culminated in “Rational Expectations” macroeconomics in which, rather than dealing with the present “by abstracting from the fact that we know very little about the future”, deals with it by assuming we can accurately predict the future!…

A Modern Jubilee

Michael Hudson’s simple phrase that “Debts that can’t be repaid, can’t be repaid” sums up the economic dilemma of our times. This does not involve sanctioning “moral hazard”, since the real moral hazard was in the behaviour of the finance sector in creating this debt in the first place. Most of this debt should never have been created, since all it did was fund disguised Ponzi Schemes that inflated asset values without adding to society’s productivity. Here the irresponsibility—and Moral Hazard—clearly lay with the lenders rather than the borrowers.
The only real question we face is not whether we should or should not repay this debt, but how are we going to go about not repaying it?
The standard means of reducing debt—personal and corporate bankruptcies for some, slow repayment of debt in depressed economic conditions for others—could have us mired in deleveraging for one and a half decades, given its current rate….
That fate would in turn mean one and a half decades where the boost to demand that rising debt should provide—when it finances investment rather than speculation—will not be there. The economy will tend to grow more slowly than is needed to absorb new entrants into the workforce, innovation will slow down, and justified political unrest will rise—with potentially unjustified social consequences.
We don’t need to speculate about the economic and social damage such a future history will cause—all we have to do is remember the last time.
We should, therefore, find a means to reduce the private debt burden now, and reduce the length of time we spend in this damaging process of deleveraging. Pre-capitalist societies instituted the practice of the Jubilee to escape from similar traps (Hudson 2000; Hudson 2004), and debt defaults have been a regular experience in the history of capitalism too (Reinhart and Rogoff 2008). So a prima facie alternative to 15 years of deleveraging would be an old-fashioned debt Jubilee.
But a Jubilee in our modern capitalist system faces two dilemmas. Firstly, in any capitalist system, a debt Jubilee would paralyse the financial sector by destroying bank assets. Secondly, in our era of securitized finance, the ownership of debt permeates society in the form of asset based securities (ABS) that generate income streams on which a multitude of non-bank recipients depend, from individuals to councils to pension funds.
Debt abolition would inevitably also destroy both the assets and the income streams of owners of ABSs, most of whom are innocent bystanders to the delusion and fraud that gave us the Subprime Crisis, and the myriad fiascos that Wall Street has perpetrated in the 2 decades since the 1987 Stock Market Crash.
We therefore need a way to short-circuit the process of debt-deleveraging, while not destroying the assets of both the banking sector and the members of the non-banking public who purchased ABSs. One feasible means to do this is a “Modern Jubilee”, which could also be described as “Quantitative Easing for the public”.
 

Taming the Finance Sector

Finance performs genuine, essential services in a capitalist economy when it limits itself to (a) providing working capital to non-financial corporations; (b) funding investment and entrepreneurial activity, whether directly or indirectly; (c) funding housing purchase for strictly residential purposes, whether to owner-occupiers for purchase or to investors for the provision of rental properties; and (d) providing finance to households for large expenditures such as automobiles, home renovations, etc.
It is a destructive force in capitalism when it promotes leveraged speculation on asset or commodity prices, and funds activities (like levered buyouts) that drive debt levels up and rely upon rising asset prices for their success. Such activities are the overwhelming focus of the non-bank financial sector today, and are the primary reason why financial sector debt has risen from trivial levels of below 10 percent of GDP before the 1970s to the peak of over 120 percent in early 2009…
There are many other proposals for reforming finance, most of which focus on changing the nature of the monetary system itself. The best of these focus on instituting a system that removes the capacity of the banking system to create money via “Full Reserve Banking”.

Full Reserve Banking

The former could be done by removing the capacity of the private banking system to create money. This is the substance of the American Monetary Institute‘s proposals, which are now embodied in the National Emergency Employment Defense Act of 2011 (HR 2990), a Bill which was submitted to Congress by Congressman Dennis Kucinich on September 21st 2011. This bill would remove the capacity of the banking sector to create money, along the lines the the 100% reserve proposals first championed by Irving Fisher during the Great Depression (Fisher 1936), and vest the capacity for money creation in the government alone.
A similar system is proposed by the UK’s New Economic Foundation with its Positive Money proposal.
Technically, both these proposals would work. I won’t go into great detail on them here, other than to note my reservation about them, which is that I don’t see the banking system’s capacity to create money as the causa causans of crises, so much as the uses to which that money is put. As Schumpeter explains so well, the endogenous creation of money by the banking sector gives entrepreneurs spending power that exceeds that coming out of “the circular flow” alone. When the money created is put to Schumpeterian uses, it is an integral part of the inherent dynamic of capitalism. The problem comes when that money is created instead for Ponzi Finance reasons, and inflates asset prices rather than enabling the creation of new assets.
My caution with respect to full reserve banking systems is that this endogenous expansion of spending power would become the responsibility of the State alone. Here, though I am a proponent of government counter-cyclical spending, I am sceptical about the capacity of government agencies to get the creation of money right at all times. This is not to say that the private sector has done a better job—far from it! But the private banking system will always be there—even if changed in nature—ready to exploit any slipups in government behaviour that can be used to justify a return to the system we are currently in. Slipups will surely occur, especially if the new system still enables speculation on asset prices to occur.
Since in the real world, people forget and die, the memory of the chaos we are living through now won’t be part of the mindset when those slipups occur, especially if the end of the Age of Deleveraging ushers in a period of economic tranquillity like the 1950s. We could well have 100% money reforms “reformed” out of existence once more.
Schumpeterian banking also inherently includes the capacity to make mistakes: to fund a venture that doesn’t succeed, and yet to be willing to take that risk again in the hope of funding one that succeeds spectacularly. I am wary of the capacity of that mindset to co-exist with the bureaucratic one that dominates government.
*****

 
THE CURE ???
 

America,Where we went wrong and How we can fix it.
 
The America Revolution of 2012.

PERHAPS,WE NEED A MILLION CITIZEN MARCH ON WASHINGTON ORGANIZED FOR JUNE 2012 .
-WE NEED:
TO CHANGE OUR ELECTED CHOICES!
TO GET OUR CANDIDATES IN OFFICE!
TO GET THOSE ELECTED TO OFFICE AGREE TO THE ONE MOST IMPORTANT ITEM OF CHANGE;THEY WILL ENDORSE THE “AMEND THE FEDERAL RESERVE CHARTER,THE NEW  INCOME TAX FORM WITH 0%

 

On 60 minutes (12/11/11) ,President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.”

AMERICA SHOW HIM THE WAY!

 

“Believe nothing merely because you have been told it…
But whatsoever, after due examination and analysis,
you find to be kind, conducive to the good, the benefit,
the welfare of all beings — that doctrine believe and cling to,
and take it as your guide.”
— Buddha
[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism

 
CHALLENGE IT-VERIFY, -MAKE IT BETTER-THEN CLING TO IT!_ 
 
1. AMEND THE FEDERAL RESERVE CHARTER; TURN THE FED RESERVE INTO THE FEDERAL RESERVE  BANK OF AMERICA (FRBA),RESTORE MONETARY POWER BACK TO THE PEOPLE ,OPERATE  WITH  ABSOLUTE TRANSPARENCY,ESTABLISH THE FRBA AS THE ONLY MEANS FOR MONETARY SUPPLY,ALL OTHER INSTITUTIONS MUST MAINTAIN 100% MARGIN ON ALL INVESTMENTS.
2.ESTABLISH  A ONE PAGE INCOME TAX FORM,AN INCOME TAX  THAT STARTS WITH 0%  AND FICA 0%.INTEREST INCOME WILL REPLACE PERSONAL AND CORPORATE INCOME TAXES.
FORM is needed only to help control the quality and quantity of the monetary system.
 
The Federal RESERVE Bank of America,the melting pot for Federal Reserve.,FDIC,FHFA,and the GSE’s.
AMEND THE FEDERAL RESERVE CHARTER making it a people’s owned bank.
Adam Smith’s “Invisible Hand” guided by Martin Gruenberg (Chairman FDIC) with  a nod from Sheila Blair (former FDIC head,and Edward DeMarco (FHFA) with a nod from Brooksley Born (former head of  CFTC) can restore the American financial system,and put America on the road to prosperity.As a settlement to the legal actions brought against banks, both the FDIC and FHFA can agreed to the banks insolvency ,they would place these banks into  receivership! (11-01-11. This could read JPM Chase,or both BAC and JPMC.,but I am hopeing that BAC gets “thrown under the bus” ,OR ANY AND ALL BANKS ,as all banks should be placed in receivership that are insolvent. ) THE BANKS IN RECEIVERSHIP are  to be placed along with Freddie,Frannie, Ginnie and Sallie,along with the FDIC, and FHFA, and the Federal Reserve into one new agency; “The Federal RESERVE Bank of America”(FRBA).
1a*All loans by any financial institution must be backed with 100% reserves.No more fractional reserve banking.No more production by private banks of this Monetary Sovereignty’s currency. 
1b*The Federal Reserve will no longer be needed as its mandate (control inflation,deflation and stagnation,as well as unemployment) will be passed on to THE FEDERAL RESERVE  BANK OF AMERICA. Also the FDIC and FHFA as their mandates will no longer be required. Private banks will have to get their own insurance ,risk there own investors money 100% risk for 100% reward.
1c*THE FEDERAL RESERVE BANK OF AMERICA (FRBA) will be a fully taxpayer owned bank and by law must be FULLY TRANSPARENT. (“GLINDA,the Good Witch,  owns a Great Book of Records that allows her to track everything that goes on in the world from the instant it happens.”_The Road to Oz)
 1d*It will be operated by the people,of the people and for the people”.THE FEDERAL RESERVE  BANK OF AMERICA will be the source for the American borrower to acquire funds and the interest paid shall be revenue income for the funding of their government.

 
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