The Crashing U.S. Economy Held Hostage Our Economy is on an Artificial Life-support System by Richard C. Cook | |
Global Research, July 7, 2007 | |
Rememberwhen the U.S. was the world’s greatest industrial democracy? Barelythirty years ago the output of our producing economy and the skills ofour workforce led the world. What happened? It’s hard to believe that in thespace of a generation our character and capabilities just collapsed as,for example, did our steel and automobile industries and our familyfarming. What then are the causes of the decline? Here’s how I would put it today: our economy is onan artificial life-support system, a barely-breathing hostage in alunatic asylum. That asylum is the U.S. and world financial systemswhich are on the verge of collapse. The inmates are the world’s central bankers, alongwith most of the financial magnates big and small. The fact is that theeconomy of much of the world is in a decisive downward slide which thefinanciers cannot stop because the systems they operate are the primarycause. As often happens, the inmates rule the asylum. The problems aren’t confined to the U.S.Unemployment worldwide is increasing, debt is rampant, infrastructuresare crumbling, and commodity prices are rising. In such an environment, crime, warfare, terrorism,and other forms of violence are endemic. Only the most naïve,self-centered, and deluded jingoist could describe such a scenario interms of the freedom-loving Western democracies being besieged by the“bad guys.” Rather what is happening highlights the growingfailures of Western globalist finance whose impact on politicalstability has been so corrosive. As many responsible commentators arewarning, we are likely to see major financial shocks within the nextfew months. The warnings are even coming from high-flying institutionalplayers like the Bank of International Settlements and theInternational Monetary Fund. We may even be seeing the end of an era when thefinanciers ruled the world. At a certain point, governments or theirmilitary and bureaucratic establishments are likely to stop beingpassive spectators to the onrushing disorder. It is already happeningin Russia and elsewhere. The countries that will be least able to mastertheir own destiny are those like the U.S. where governments have beenmost passive to economic decomposition from actions of their financialsectors. The financiers are the ones who for the last generation havebenefited most from economies marked by privatization, deregulation,and speculation, but that may be about to change. Whether the changewill be constructive or catastrophic is yet to be seen. THE HOUSING BUBBLE SETS THE STAGE FOR THE U.S. COLLAPSE Within the U.S., foreign investors, above allCommunist China, have been propping up our massive trade and fiscaldeficits with their capital. To keep them happy, interest rates—aftersix years of “cheap credit”—must now be kept relatively high. Otherwisethe Chinese, et.al., might bail-out, leaving us to fend for ourselveswith our hollowed-out shell of an economy. Even so, these investors are increasingly uneasywith their dollar holdings and are bailing out anyway. Foreign purchaseof U.S. securities has plummeted. And our debt-laden economy, where ourmanufacturing base has been largely outsourced, is no longer capable ofproviding our own population with a living by utilizing our ownproductive resources. For a while we were floating on the housing bubble,but those days are now history when, according to a Merrill-Lynchstudy, the artificially pumped-up housing industry, as late as 2005,accounted for fifty percent of U.S. economic growth. As everyone knows, the Federal Reserve underChairman Alan Greenspan used the housing bubble, like a steroid drug,to pump liquidity into the economy. This worked, at least for a while,because consumers could borrow huge amounts of money at relatively lowinterest rates for the purchase of homes or for taking out home equityloans to pay off their credit cards, finance college education fortheir children, buy new cars, etc. When the final history of the housing bubble iswritten, its beginnings will be dated as early as 1989-90, when creditrestrictions on the purchase of real estate first began to be eased.According to mortgage industry insiders interviewed for this article,they began to be taught the methods for getting around consumers’ weakcredit reports and selling them homes anyway in the mid to late 1990s. The Fed started inflating the housing bubble inearnest around 2001, after the collapse of the dot.com bubble, whichfailed with the stock market decline of 2000-2002. Then, over atrillion dollars of wealth, including working peoples’ retirementsavings, simply vanished. Also according to mortgage specialists, it was inMarch 2001, two months after George W. Bush became president, that a“wave of intoxicated fraud” started. Mortgage companies began to beinstructed, by the creditors/lenders, on how to package loanapplications as "master strokes of forgery," so that completelyunqualified buyers could purchase homes. There could not have been a sudden onset ofindustry-wide illegal activity without direction from higher-up in themoney chain. It could not have continued without reports being filed bywhistleblowers with regulatory agencies. Today the government isprosecuting mortgage fraud, but they certainly had to know about itwhile it was actually going on. The bubble was coordinated from Wall Street, wherebrokerages “bundled” the “creatively-financed” mortgages and sold themas bonds to retirement and mutual funds and to overseas investors.Portfolio managers were directed to buy subprime bonds as other bondsmatured. It’s the subprime segment of the industry that has nowcollapsed, triggering, for instance, the recent highly-publicizeddemise of two Bear Stearns hedge funds. And it’s not just lower-income home purchasers whoare affected. The Washington Post has reported that for the first timein living memory foreclosures are happening in Washington’s affluentsuburban neighborhoods in places like Fairfax, Loudon, and MontgomeryCounties. The subprime bonds were known to be suspect. Onereason was that they were based on adjustable rate mortgages that wereactually time bombs, scheduled to detonate a couple of years later withmonthly payments hundreds of dollars a month higher than when they werewritten. Many of these mortgages will reset to higher payments thisOctober. Purchasers were lied to when they were told theycould re-sell their homes in time to escape the payment hikes. Now thecollapse of the market has made further resale at prices high enough toescape without losses impossible. One way the system worked was for mortgage lendersto maximize the “points” buyers were required to finance, making themortgages more attractive to Wall Street. Of course bundling andselling the mortgages relieved the banks which originated the loansfrom exposure, pushing a considerable amount of the risk onto millionsof small investors. This was in addition to the normal sale ofmortgages to quasi-public agencies like Freddie Mac and Fannie Mae. Was it a scam? Of course. Did the Federal Reserve know about it? They had to. Did Congress exercise any oversight? No. What did the White House know? Amy Gluckman, an editor of Dollars and Sense,reported in the November/December 2006 issue: “During the Clintonadministration, Greenspan was relatively ‘unembedded’—averaging onlyone meeting per month at the White House…. “But when George W. Bush moved into 1600Pennsylvania Ave., Greenspan’s behavior changed. During 2001, heaveraged 3.3 White House visits a month, more than triple his rateunder Clinton and much more often with high-level officials like VicePresident Cheney. His visits rose to 4.6 a month in 2002 and 5.7 in2003. “Whatever White House officials were whispering inGreenspan’s ear, it worked: Greenspan abruptly changed his tune on taxcuts, lending critical support to Bush’s massive 2001 and 2003 taxgiveaways, and he loosened the reins by cutting Fed-controlled interestrates repeatedly beginning in January 2001, a gift to the Republicansin power.” Along the way, the bubble caused housing prices toinflate drastically, which officialdom touted as economic “growth.”Even today, periodicals like Barron’s naively boast that this inflationboosted American’s “wealth.” But this source of liquidity for everyday people hasbeen maxed out, like our credit cards, and there is nothing to replaceit. There is no cash cushion anymore, because years ago people stoppedearning enough money for personal or household savings. As purchasers lose their homes to foreclosure, thereal estate is being grabbed at bankruptcy prices by the banks and byany other investors with ready money. Whole neighborhoods of citieslike Cleveland or Atlanta are turning into boarded-up ghost towns. What we are seeing are the results of an economiccrime on a fantastic scale that implicates the highest levels of ourfinancial and governmental establishments. It spanned threepresidential administrations—Bush I, Clinton, and Bush II—though theworst of it came with the surge of outright lending fraud after 2001. As usual when hypocrisy is rampant only the smallfry are being called to account. Commentators, including a sleepwalkingCongress, have self-righteously railed at consumers who got in overtheir heads. The Mortgage Bankers Association is even lobbying Congressto allocate $7 million more to the FBI to go after the supposedly roguebrokers within their own industry who are being scapegoated. THE BUBBLES ARE ONLY SYMPTOMS But there’s much more to it than that. These bubblesare symptoms. They are created because our wage and salary earners lackpurchasing power due to stagnant incomes and various structural causes.These causes include the outsourcing of our manufacturing industries toChina and other cheap labor markets and the super-efficiency of theremaining U.S. industry which is able to manufacture products withever-fewer workers. Also, our farming, mining, and other resource-basedindustries are in a long-term slide. This and the decline of hardmanufacturing have been going on since our oil production peaked in the1970s, followed by the Federal Reserve-induced recession of 1979-83.Next came the deregulation of the financial industry. It was all partof the economic disintegration that led to today’s “service economy.” Now, for the first time in modern U.S. history,there are no new economic engines at all. The last real engine was theinternet which has now reached maturity with marginal players beingweeded out. Our biggest sources of new private-sector jobs todayare food service, processing of financial paperwork, health care forthe growing numbers of retirees, and menial low-paying jobs, likelandscaping and building maintenance. These are increasingly beingperformed by immigrants who are also underpricing U.S. citizens in manyservice jobs like childcare and auto repair. Today the rank-and-file of our population mustincreasingly turn to borrowing in order to survive. Only the banks andthe credit card companies are the beneficiaries. The total societaldebt for individuals, businesses, and government is over $45 trillionand climbing. This is happening even while the real value of wages andsalaries is decreasing. What I have just been saying is bad enough, but here’s where the real lunacy enters in. A major factor connected to the decline in the valueof employee earnings is dollar devaluation in the overarching financialeconomy due to the proliferation of huge quantities of bank creditbeing used to keep the stock market afloat and to fuel the speculativegames of equity, hedge, and derivative funds. In other words, while our factories continue to shutdown, the Wall Street gambling casino—like its Las Vegas counterpart—isrunning full-bore, 24/7. This, along with financing of the massivefederal deficit, is what critics are talking about when they speak ofthe Federal Reserve “printing money.” The main growth factors for federal spending areMiddle East war expenditures and interest on the national debt. Butwithin the private sector it’s leveraged loans to businesses which TheEconomist recently said “mirror….interest-only andnegative-amortization mortgages” in the subprime market. But here’s thebig difference: in the leveraged business economy, the amount of assetsat stake are even greater than with the housing bubble. The financial world, which Dr. Michael Hudson callsthe FIRE economy—Finance, Insurance, and Real Estate—has been producingmillionaires and billionaires among those who know how to play the game. The Wall Street hedge funds stand out as the mostirresponsible financial scams in history. Unregulated and secretive,they account for a third of all stock trades, own $2 trillion inassets, and pay their individual managers over $1 billion a year. Thinkabout this the next time someone you know has their job outsourced toChina or when his adjustable rate mortgage resets and drives up hismonthly house payment past the level of affordability. The hedge funds borrow huge sums from the bankswhich generate loans under their Federal Reserve-sanctioned fractionalreserve privileges. Often this money is used by the hedge funds to“short the market,” thereby earning profits when stock prices decline. In other words, the hedge funds and their bankingenablers use banking leverage to bet against the producing economy. Indoing so, they may actually drive stock prices down, causing ordinaryinvestors to lose a portion of their own wealth. Can this be calledanything other than a crime? The livelihood of much of the U.S. workforce andperhaps half of the rest of the world’s population—maybe three billionpeople—is being threatened by such financial lawlessness. Thejustification that was first used for financial deregulation and taxcuts for the rich was that the trickle-down effect of wealthy peoples’earnings would spill over to the rank-and-file. The Reagan administration ushered in these policiesin the 1980s under the heading of “supply-side economics.” But theopposite has happened. The system has institutionalized an increasinglystratified worldwide culture of haves and have-nots. THE ROOT CAUSE OF THE CATASTROPHE How did today’s looming tragedy come to pass? Looking for causes is like peeling an onion. What weare really seeing are the terminal throes of a failed financial systemalmost a century old. It’s happening because, since the creation of theFederal Reserve System in 1913—even during the period of the New Dealwith its Keynesian economics aimed at full employment—our economy hasbeen based almost entirely on fractional reserve banking. This means that under the regime of the world’sall-powerful central banking systems, money is brought into existenceonly as debt-bearing loans. Interest on this lending tends to growexponentially unless overtaken by real economic growth. Remember that every instance of bank lending, frompurchase of Treasury Bonds, to credit cards, to home mortgages, tobillion-dollar loans to hedge funds for leveraged buyouts or sheerspeculation, must eventually be paid back somewhere, somehow, sometime,by somebody, with interest. In the end, it all comes back to people whowork for a living, whether in the U.S. or elsewhere, because that isthe only way the world community ever creates real wealth. In an anemic economy like that of the U.S., growthcannot catch up with interest in a deregulated financial marketplacewhere interest rates are high. Rates may not seem high compared with,say, the twenty percent-plus rates of the early 1980s, but they arehigh in an economy with, at best, a two percent GDP growth rate. And they have been high on average since the 1960s,as the banking industry became increasingly deregulated. Interestingly,since 1965, the U.S. dollar has lost eighty percent of its value, whichtends to validate the contention by some observers that higher interestrates not only do not reduce inflation, as the Federal Reservecontends, but actually cause it. The situation today is worse in many respects than1929, because the debt “overhang” vs. real economic value is muchhigher now than it was then. The U.S. economy was in far better shapein the 1920s, because so much of our population was gainfully employedin factories or on farms. The question is not when will the system start tocome down, because this has already begun. It’s shown most clearly bythe fact that according to Federal Reserve data, M1, the part of themoney supply most readily available for consumer purchases, is not onlylagging behind inflation but has actually decreased in eleven of thelast twelve months. This means that the producing economy is already ina recession. The federal government is trying to figure out whatto do. Their biggest concern is that foreign investors have started topull out of dollar-denominated markets. The government’s “plunge protection team”—knownofficially as the President’s Working Group on Financial Markets—istrying to engineer what they call a “soft landing.” It’s been likenedto the process by which you cook a frog in a pot where you raise thetemperature one degree a day. The frog doesn’t hop out because the heatgoes up gradually, but before long it’s too late. The frog has beencooked. Even if the plunge protection team succeeds, and thefrog cooks slowly, there will be a massive de facto default ondollar-denominated debt and a long-term degradation of the U.S.standard of living. The inside word is that we are likely to see majormonetary shocks and a possible stock market crash as early as December2007. The worst off will be people locked into retirementfunds which have a heavy load of mortgage-related securities. Entireinvestment portfolios are likely to disappear overnight. The banks, along with the bank-leveraged equity andhedge funds, are preparing for the biggest fire sale in at least ageneration. Insiders are going liquid to get ready. If you think Enronwas “the bomb,” you won’t want to miss this one. WHAT CAN BE DONE? There are so many flaws in the system that it’s time for real change. As I have been pointing out in articles over thelast several months, the key to a rational solution would be immediatemonetary reform leading to a fundamental shift in how the worldconducts its financial business. It would mean taking control of theworld’s economy out of the hands of the private bankers and giving itback to democratically elected governments. I spent twenty-one years working for the U.S.Treasury Department and studying U.S. monetary history. For much of ourhistory we were a laboratory for diverse monetary systems. During and after the Civil War (1861-5) we had fivedifferent sources of money that fueled our economy. One was theGreenbacks, an extremely successful currency which the government spentdirectly into circulation. Contrary to financiers’ propaganda, theGreenbacks were not inflationary. Another was gold and silver coinage andspecie-backed Treasury paper currency. The third was notes lent intocirculation by the national banks. The fourth was retainedearnings—individual savings and business reinvestment of profits—whichwas the primary source of capital for industry. The fifth was the stockand bond markets. After the Federal Reserve Act was passed by Congressin 1913, the banks and the government inflated the currency through wardebt and destroyed most of the value of the Greenbacks and coinage. Thebanks never entirely displaced the capital markets but eventually tookthem over during the present-day era of leveraged mergers,acquisitions, and buyouts, while the Federal Reserve created anddeflated asset bubbles. The banking system which rules the economy throughthe Federal Reserve System has produced the crushing debt pyramid oftoday. The system is a travesty. Banks, which can be useful infacilitating commerce, should never have this much power. Manyintelligent people have called for the Federal Reserve to be abolished,including former chairmen of the House banking committee Wright Patmanand Henry Gonzales and current Republican presidential candidate RonPaul. Some might call such a program a revolution. Iprefer to call it a restoration—of national sovereignty. Central to theprogram would be the elimination of the Federal Reserve as a bank ofissue and restoration of money-creation to the people’s representativesin Congress. This is what our Constitution says too. It’s the system wehad before 1913. THE MONETARY PRESCRIPTION The fundamental objectives of monetary policy shouldbe to secure a healthy producing economy and provide for sufficientindividual income. The objectives should not be to produce massiveprofits for the banks, fodder for Wall Street swindles, and a blankcheck for out-of-control government expenditures. Note I referred to income. I did not say “createjobs.” That is the Keynesian answer, because Keynes was a collectivist,and the main thing collectivists like to come up with is to giveeveryone more work to do, even if it’s just grabbing a shovel anddigging ditches like they did with the WPA during the Depression. It’s what President Clinton did with hiswelfare-to-work program that threw hundreds of thousands of mothers offthe welfare rolls and into a job market where sufficient work at aliving wage did not exist. It’s another reason the government isconstantly borrowing more money to fuel the military-industrial complexby creating more military, bureaucratic, and contractor jobs. Back to income. The idea of “income,” as opposed to“jobs,” is a civilized and humane idea. When are we going to realizethat everyone doesn’t need a paying job in order for an industrialeconomy to provide all with a decent living? When are we going torealize that the productivity of the modern economy is part of theheritage of all of us, part of the social commons? Why can’t mothers have the choice of staying homewith the kids like they could a generation ago? Why can’t some peoplechoose to do eldercare? Why can’t others comfortably go intolower-paying occupations like teaching or the arts? Why can’t some justopt to study or travel for a while or learn new skills or start abusiness without facing financial ruin as they often must today? Whycan’t retirees enjoy their retirement instead of having to stay in thejob market or worrying about Social Security going broke? The U.S. and world economies are on the brink ofcollapse due to the lunacy of the financial system, not because wecan’t produce enough. Contrary to so many doomsayers, the mature worldeconomy is capable of providing a decent living for everyone on theplanet. It cannot because the monetary equivalent of its bounty isskimmed by interest-bearing debt. These are things that monetary reformers have knownabout for decades. The first steps within the U.S. would be 1) alarge-scale cancellation of debt; 2) a guaranteed income for all atabout $10,000 a year, not connected to whether a person has a job; 3)an additional National Dividend, fluctuating with nationalproductivity, that would provide every citizen with their rightfulshare in the benefits of our incredible producing economy; 4) directspending of money by the government for infrastructure and othernecessary costs without resort to taxation or borrowing; 5) creation ofa new system of private lending to businesses and consumers atnon-usurious rates of interest; 6) re-regulation of the financialindustry, including the banning of bank-created credit for speculation,such as purchase of securities on margin and for leveraging buyouts,acquisitions, mergers, hedge funds, and derivatives; and 7) abolishmentof the Federal Reserve as a bank of issue with retention of itsfunctions as a national financial transaction clearinghouse. While these proposals are basically simple, theoverall program is so different from what we have today with ourfinancier-controlled system that it takes careful reading and a greatdeal of thought to understand exactly how it would work. One way toapproach it is to look at the likely effects. These measures would immediately shift the basis ofour economy from borrowing from the banks to a mixed system that wouldinclude the direct creation of credit at the public and grassrootslevel. The size of government would shrink, our producing economy wouldbe reborn, debt would come down, economic democracy would become areality, and the financial industry could be right-sized. Finally, theinternational situation could be stabilized because we would no longerbe driven to a constant state of warfare to seize other nations’resources as with Iraq and to prop up the dollar as a reserve currencyabroad. Such a system would work by creating indigenoussources of credit needed to mobilize the natural wealth andproductivity of the nation. There are people who could implement thisprogram. Systems to do so could be installed within the U.S. Treasuryand the Federal Reserve within a matter of months. Fundamental monetary reform implemented to restoreeconomic democracy is what America’s real task should be for thetwenty-first century. One thing is for certain. The out-of-controlfinancial system that has wrecked the U.S. and world economies over thelast generation cannot be allowed to continue. How the outcome will play out may well depend onwhether there is a Jefferson, Lincoln, or Roosevelt waiting in thewings. The success of each of these great leaders was due to onecritical factor: their ability to implement monetary reform at a timeof national emergency.
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Richard C. Cook is a frequent contributor to Global Research. Global Research Articles by Richard C. Cook | |
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