Sunday, February 7, 2010

Next in Line for a Bailout: Social Security

Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.

Social Security hasn't been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did. Those actions produced hefty cash surpluses, which until this year have helped finance the rest of the government.

But even then, it was clear the surpluses would be temporary. Now, years earlier than projected, Social Security is adding to the government's borrowing needs, even though the program still shows a surplus on paper.

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume.

Social Security currently provides more than half the income for a majority of retirees. Given the declines in stock prices and home values that have whacked millions of people, the program seems likely to become more important in the future as a source of retirement income, rather than less important.

It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.

Even though an economic recovery might produce some small, fleeting cash surpluses, Social Security's days of being flush are over.

To be sure -- three of the most dangerous words in journalism -- the current Social Security cash deficits aren't all that big, given that Social Security is a $700 billion program this year, and that the government expects to borrow about $1.5 trillion in fiscal 2010 to cover its other obligations, about the same as it borrowed in fiscal 2009.

But this year's Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it's a problem for the present.

Copyrighted, Fortune. All rights reserved.

Moody's cuts Hawaii bond outlook to negative as revenue drops

Hawaii, the third-most indebted U.S. state, had the outlook on $4.7 billion of general-obligation bonds lowered by Moody's Investors Service because it's depleting budget reserves as declining tourism reduces revenue.

The state closed a $2.7 billion deficit for fiscal 2009 through 2011 partially with reserves and faces another $1.2 billion gap as tax collections fall, Moody's said today in changing its outlook to negative from stable.

Reserves that equaled 8 percent of general revenue at the end of fiscal 2008 will be 2.4 percent when fiscal 2010 ends June 30, it said.

"Strong reserve levels are important for Hawaii given the state's heightened vulnerability to national and international shifts in its essential tourism-based economy," New York-based analysts Nicole Johnson and Nicholas Samuels said in a report.

The U.S. recession curbed travel to Hawaii, causing the number of visitors to fall 10.6 percent in 2008 and 4.5 percent in 2009, Moody's said, citing state figures that call for 2 percent growth this year. Tourism accounts for about 17 percent of non-farm jobs in Hawaii, nearly twice the national average.

Revenue is forecast to decline 2.5 percent in fiscal 2010 before a 7.6 percent gain in fiscal 2011, Moody's said. "Tax revenues are not expected to recover to the 2008 pre-recession peak until fiscal 2012," the ratings company said.

Moody's assigned its Aa2 rating, the third-highest, to $537 million of general obligation bonds being sold next week in two series including taxable Build America Bonds. Some proceeds will be used to refund debt outstanding to save $88 million of interest cost over the next two fiscal years, Moody's said.

Gov. Linda Lingle has proposed $284 million of cost reductions for fiscal 2010 and $600 million next year, Moody's said. The state shifted a $130 million pension payment to 2010 from 2009 and proposed delaying tax refunds until 2011 to conserve cash, it said.

Hawaii's 2009 debt per capita of $3,675 is the third-highest among the 50 states and more than four times the $865 median, Moody's said.

Obama's muddled solutions

The president is trying to please everyone, but he needs to take tough action to prevent the US economy's second freefall

Defeat in the Massachusetts senatorial election has deprived US Democrats of the 60 votes needed to pass healthcare reform and other legislation, and it has changed American politics – at least for the moment. But what does that vote say about American voters and the economy?

It does not herald a shift to the right, as some pundits suggest. Rather, the message it sends is the same as that sent by voters to former president Bill Clinton 17 years ago: "It's the economy, stupid!" and "Jobs, jobs, jobs". Indeed, on the other side of the United States from Massachusetts, voters in Oregon passed a referendum supporting a tax increase.

The US economy is in a mess, even if growth has resumed, and bankers are once again receiving huge bonuses. More than one out of six Americans who would like a full-time job cannot get one; and 40% of the unemployed have been out of a job for more than six months.

As Europe learned long ago, hardship increases with the length of unemployment, as job skills and prospects deteriorate and savings gets wiped out. The 2.5-3.5m foreclosures expected this year will exceed those of 2009, and the year began with what is expected to be the first of many large commercial real-estate bankruptcies. Even the Congressional budget office is predicting that it will be the middle of the decade before unemployment returns to more normal levels, as America experiences its own version of "Japanese malaise".

As I wrote in my new book Freefall, Barack Obama took a big gamble at the start of his administration. Instead of the marked change that his campaign had promised, he kept many of the same officials and maintained the same "trickle down" strategy to confront the financial crisis. Providing enough money to the banks was, his team seemed to say, the best way to help ordinary homeowners and workers.

When America reformed its welfare programs for the poor under Clinton, it put conditions on recipients: they had to look for a job or enroll in training programs. But when the banks received welfare benefits, no conditions were imposed on them. Had Obama's attempt at muddling through worked, it would have avoided some big philosophical battles. But it didn't work, and it has been a long time since popular antipathy to banks has been so great.

Obama wanted to bridge the divides among Americans that George W Bush had opened. But now those divides are wider. His attempts to please everyone, so evident in the last few weeks, are likely to mollify no one.

Deficit hawks – especially among the bankers who laid low during the government bailout of their institutions, but who have now come back with a vengeance – use worries about the growing deficit to justify cutbacks in spending. But these views on how to run the economy are no better than the bankers' approach to running their own institutions.

Cutting spending now will weaken the economy. So long as spending goes to investments yielding a modest return of 6%, the long-term debt will be reduced, even as the short-term deficit increases, owing to the higher tax revenues generated by the larger output in the short run and the more rapid growth in the long run.

Trying to "square the circle" between the need to stimulate the economy and please the deficit hawks, Obama has proposed deficit reductions that, while alienating liberal democrats, were too small to please the hawks. Other gestures to help struggling middle-class Americans may show where his heart is, but are too small to make a meaningful difference.

Three things can make a difference: a second stimulus, stemming the tide of housing foreclosures by addressing the roughly 25% of mortgages that are worth more than the value the house, and reshaping our financial system to rein in the banks.

There was a moment a year ago when Obama, with his enormous political capital, might have been able to achieve this ambitious agenda, and, building on these successes, go on to deal with America's other problems. But anger about the bailout, confusion between the bailout (which didn't restart lending, as it was supposed to do) and the stimulus (which did what it was supposed to do, but was too small), and disappointment about mounting job losses, has vastly circumscribed his room for manoeuvre.

Indeed, there is even skepticism about whether Obama will be able to push through his welcome and long overdue efforts to curtail the too-big-to-fail banks and their reckless risk-taking. And, without that, more likely than not, the economy will face another crisis in the not-too-distant future.

Most Americans, however, are focused on today's downturn, not tomorrow's. Growth over the next two years is expected to be so anaemic that it will barely be able to create enough jobs for new entrants to the labour force, let alone to return unemployment to an acceptable level.

Unfettered markets may have caused this calamity, and markets by themselves won't get us out, at least any time soon. Government action is needed, and that will require effective and forceful political leadership.

Copyright: Project Syndicate, 2010.

Shares tumble and pound plummets as crisis looms for the Eurozone

Stock markets tumbled worldwide yesterday amid fears that crippling debt levels in southern Europe could destabilise the euro and derail economic recovery.

Portugal and Spain became the latest Eurozone countries to cause a panic among investors, as economists cast doubt on their ability to control their national debt.

With Greece already expected to need a bail-out of up to £16billion from the European Central Bank, there are real concerns that the Eurozone may become unviable in its present form.

Enlarge euro falls

The euro yesterday tumbled to the lowest point against the dollar since May

In London, the FTSE 100 share index fell 78.39 points to close at 5060.92, a 1.5 per cent drop and a two-day decline of 191 points.

The pound rose sharply against the euro because of the turmoil. It now stands at 1.144euros, a climb of almost 15 per cent since October. But it fell to $1.56 against the dollar, seen as a safer haven by investors.

Earlier in the day, Asian stock markets also fell, with Japan's Nikkei index down by three per cent. In New York, Wall Street dropped by more than 100 points.

Some economists say the turbulence in Europe could be enough to tilt the UK back into recession.

Enlarge euro falls

A broker is seen at the Stock Exchange in Madrid yesterday

Enlarge euro plunge

Currency market across the world proved volatile yesterday

The economy grew by a disappointing 0.1 per cent in the final quarter of last year, and the fragile revival could easily be derailed.

Jim Reid, a strategist at Deutsche Bank in London, warned: 'These problems could be a dress rehearsal for what the U.S. and UK may face further down the road.'

Around half the UK's trade is with Europe, so if countries there are forced to curtail their spending and raise taxes, it is likely to depress demand for our exports.

Greece and Ireland have already taken tough steps, with Spain and Portugal expected to follow suit.

But yesterday opposition parties in Portugal defeated a government austerity plan. They passed their own bill which will allow the country to rack up more debt and could further unsettle financial markets.

Enlarge euro plunge

European Central Bank president Jean-Claude Trichet addresses a press conference in Frankfurt yesterday

Countries that are members of the euro do not have control over their interest rates or exchange rates. If they need to improve competitiveness and boost growth, they must reduce costs and slash wages.

The UK on the other hand, can use interest rates as a weapon to help the economy.

The Bank of England has cut the base rate to 0.5 per cent, which relieves pressure on businesses and consumers. It has also helped cause a fall in the pound which has made our exports more competitive.

If budget cut-backs fail to tackle the problems in countries in the Eurozone, there is a chance that some countries could try to break free from its shackles and launch their own currencies again.

Enlarge euro plunge

A trader works on the floor of the New York Stock Exchange in New York. The Dow Jones Industrial Average closed down nearly 270 points for the day

Greece and Portugal account for three per cent or less of Eurozone GDP. But Spain is its fourth largest economy, accounting for around nine per cent of GDP.

Deutsche Bank's Mr Reid said the U.S. and UK had similar issues, but also 'the luxury of a flexible currency as a first defence if the market wants to attack them'. He added: 'The market, for now, thinks there are easier targets.'

Howard Wheeldon, senior strategist at BGC Partners, said: 'This is a phase of jangled nerves, with every justification. But we will get through this. It is a necessary and very right correction.'

Curry spice saffron 'could stop you going blind'

It is one food colouring that you won't mind giving to the family.

Research has shown that saffron, which gives chicken korma and paella their yellow colour, helps keep vision sharp.

Test findings suggest the spice reverses age-related macular degeneration, or AMD, the most common cause of blindness in old people.

'Patients' vision improved after taking the saffron pill,' said Professor Silvia Bisti, of the University of Sydney, who carried out the research.

'When they were tested with traditional eye charts, a number of them could read one or two lines smaller than before, while others reported they could read newspapers and books again.'

The finding is timely as it is thought the number of AMD sufferers will treble in the next 25 years as the population ages.

It currently affects a quarter of over-60s in the UK and more than half of over-75s.
There are few treatments for the condition - and no cure.

While peripheral vision is not affected, the damage to central vision leads to many sufferers being registered as blind or partially sighted.

Saffron has actually been used in traditional medicine for centuries to treat a range of ailments, though Professor Bisti is the first to look at its effects on eyesight.

In tests carried out in Italy - where saffron is widely cultivated - pensioners with AMD were given a daily saffron pill for three months followed by a dummy drug for a further three months.

A second group took the supplements in the reverse order. Twenty-five took part in all.

'All patients experienced improvements in their vision while taking the saffron pill,' Professor Bisti said. 'But when they stopped taking it, the effect quickly disappeared.'

009.1ST.06.jpg

She added: 'The chemistry of saffron is quite complex. It is well-known as an anti- oxidant but no one has explored its effects on eyesight before.'

She believes saffron, which is widely used in Spanish and Indian cooking, affects the amount of fat stored by the eye, making vision cells 'tougher and more resilient'.

Saffron is used in traditional medicine for treating conditions including cancerous tumours and depression. The spice also has properties which encourage oxygen flow and prevents cell death.

Researchers are now hoping to discover the ideal dosage. They will also look at saffron's ability to treat genetic eye diseases that can cause life-long blindness.

Fire Departments Billing Homeowners to Put Out Fires!

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Is Global Warming a "Crock of S*%t?"

Many scientists and the media warn that global warming is a man-made danger. But others argue that climate change is nothing new


(This column has been corrected. A previous version cited findings by the author that misstated conclusions of a scientific report by Wolfgang Knorr of the Earth Sciences Department at the University of Bristol. The paragraph in question has been removed. The author, while admitting the mistake, stands behind the thesis of the column.)

"Global warming is a crock of s*%t!"

When Bob Lutz, vice-chairman of General Motors, said this in February 2008, it immediately became the most widely distributed quote regarding global warming on the Internet. After all, this was one of the major power players in the automobile industry, and he was implying that anyone who believed that global warming was real, man-made, and altering the planet was something akin to a moron. But the problem with that quote is that it's incomplete. I know. I was there.

It was at a small private luncheon at Cacharel in Arlington, Tex., when Lutz uttered those words. But the quote omits what he said next: "Don't misunderstand me, I'm not a climate denier." As he explained to those present, he simply questions the mindset that blames all the climate change of the past few decades on mankind.

Lutz's comments that day were far more balanced and thoughtful than anyone who heard that particular quote might believe. And therein lies the problem with the current discussions on global warming: The media have taken the position that the science is complete and settled. A unanimous agreement that global warming not only exists but is man-made—and we're almost past the point where we can still save the planet from it. Moreover, anyone who questions those absolute statements is quickly labeled a "Climate Change Denier." This label is intended to shame and discredit doubters, much like 500 years ago when church officials prosecuted anyone who preached the earth was not the center of the universe.

However, labeling to discredit someone by calling them a "denier" is a distorted and completely unjust position to take on such an important subject. In fact, virtually no one believes the earth has not gone through a period of unexplained warming. Therefore, the term "denier" is not just inaccurate, it's a complete and intentional mischaracterization of those wanting more open and honest scientific studies on the subject.

As for the position that the science is settled and there is no dissent, as Bob Lutz might say, "that's a crock of s*%t!"

Science Totally Not Settled

On Dec. 8, 2009, during the Copenhagen Climate Challenge, an open letter was sent to the U.N. Secretary General signed by close to 150 scientists involved in physics, climatology, meteorology, and geophysics. The opening two sentences say it all: "Climate change science is in a period of 'negative discovery'; the more we learn about this exceptionally complex and rapidly evolving field, the more we realize how little we know. Truly, the science is NOT settled."

Lest we forget, only 36 years ago it was widely believed we were on the verge of the next Ice Age. As Gary Sutton reported in Forbes on Dec. 3 last year, "In 1974, the National Science Board announced: 'During the last 20 to 30 years, world temperature has fallen, irregularly at first but more sharply over the last decade. Judging from the record of the past interglacial ages, the present time of high temperatures should be drawing to an end … leading into the next ice age.'"

Given the money and reputations now at stake, it should not be surprising that over the past year a number of scientists have tried to rewrite the history of the 1970s. Even during that period, these scientists contend, the majority were already warning that a far warmer future was coming.

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Fitch: Delinquencies for commercial mortgage backed securities rise in January

NEW YORK (AP) - Delinquencies for commercial mortgage-backed securities rose in January, fueled by increases in five main property types for the fifth straight month, Fitch Ratings said Friday.

The delinquency rate for commercial mortgages that are bundled and sold to investors was 6 percent in January, up from 4.71 percent the month before.

The five property types that posted higher delinquencies were office, hotel, retail, multifamily and industrial.

The biggest increase was in hotels, which recorded a 7 percent increase due to a delinquent loan belonging to Extended Stay America, which has filed for bankruptcy protection.

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Gerald Celente - More debt, please!

Click this link ...... http://eclipptv.com/viewVideo.php?video_id=9868

Financial Collapse 2010 - Repetition of the 29 Depression

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Residential Mortgage Delinquency Rate Surpasses 10%: LPS

Home loan delinquency rates in the United States have now surpassed 10 percent, Lender Processing Services (LPS) reported this week.

When you factor in homes already in the foreclosure process, the total rate of noncurrent mortgages sits at 13.3 percent, according to the data in the Florida-based company’s national loan-level database.

This rate indicates that more than 7.2 million mortgage loans are now behind on payments, LPS explained, with another one million properties already taken back by banks and in REO status.

LPS’ January 2010 Mortgage Monitor report, shows that within the population of loans that were current at the end of 2008, the percent of “new” serious delinquencies is 4.64

percent – higher than any other year analyzed. Of loans that were current as of December 31, 2008, by December 2009 there were 2.3 million new loans that were considered seriously delinquent.

Seemingly less-risky, prime mortgages continue to loom large as the industry’s big, pink elephant. Prime loans, including agency, non-agency, and jumbo, have experienced deterioration at a worse pace than subprime, Federal Housing Administration (FHA) insured mortgages, and all loans as a whole, LPS said. The company’s analysis shows that within the prime loans category, those with unpaid principal balances between $417,000 and $600,000 have performed the worst.

The Mortgage Monitor report also indicates that 2009 vintage loans are performing better than loans from any of the prior five years and have been steadily improving as pools of loans grow larger. This improvement is attributed to more restrictive underwriting guidelines, but that also means “liquidity is still not available where it is needed most,” LPS said.

The company’s analysis shows that states with most noncurrent loans are: Florida, Nevada, Mississippi, Arizona, Georgia, California, Indiana, Michigan, Illinois, and Ohio.

Those with the fewest include: North Dakota, South Dakota, Alaska, Wyoming, Montana, Nebraska, Vermont, Colorado, Oregon, and Washington.

Hawaii bankruptcies up 33 percent in January over January 2009

HONOLULU (AP) - Federal figures show there were 276 bankruptcy filings in Hawaii in January.

That was a 33 percent increase over January 2009, when bankruptcy filings in the state surged 82.5 percent.

According to the Office of the U.S. Trustee for U.S. Bankruptcy Court, only one island business filed for Chapter 11 reorganization last month. ERT Sales of Hawaii does business as Price Busters, The Seasonal Store and Let's Party Hawaii.

Last month's 33 percent rise in bankruptcies was the second-lowest increase since May 2008.

Honolulu bankruptcy attorney Blake Goodman says the 3,101 bankruptcy cases filed in Hawaii last year was on par with the 3,102 filed in 2004, "a relatively prosperous time" in the islands.

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Pennsylvania Capital Harrisburg Has Bankruptcy Option (Update1)

Feb. 4 (Bloomberg) -- Harrisburg, the capital of Pennsylvania, will consider Chapter 9 bankruptcy protection along with tax increases and asset sales as options to address $68 million in debt service payments due this year, the chairwoman of a City Council committee said last night.

Every option, including tax and fee increases, bankruptcy and a state takeover through Pennsylvania’s Act 47 municipal oversight program will be considered, said Susan Brown-Wilson, chairwoman of the Budget and Finance Committee, which began a week of hearings last night to consider a 2010 spending plan.

The $68 million in debt service payments that Harrisburg faces in connection with the construction of a waste incinerator this year is four times what the city of 47,000 expects to raise through property taxes, and $4 million more than the city’s entire proposed operating budget.

“We need to see, what does Act 47 do for us; what does bankruptcy do,” Wilson said in an interview during a break in the opening budget hearing at Harrisburg City Hall. “You have to have all of them on the table.”

Harrisburg skipped more than $3.5 million in debt-service and swap payments last year, prompting draws on reserves and back-up payments by Dauphin County, where Harrisburg is located. The county has sued the city to recover its payments.


Budget Proposal


Wilson was among five Council members who voted last year to reject a 2010 budget proposal by former mayor Stephen Reed, who left office last month after 28 years. The proposal would have attempted to cover the debt service costs by selling assets such as an historic downtown market, an island in the Susquehanna River that includes the city’s minor-league baseball stadium, and the city’s parking, sewer and water systems.

The plan to raise $69 million by selling downtown features was reinstated last month by Linda Thompson, the newly elected mayor, in a substitute budget. The seven-member council has until Feb. 15 to approve a final 2010 budget.

Brown-Wilson said she would support leasing only city assets that don’t generate revenue, as the parking and water systems do.

Carol Cocheres, bond counsel for the incinerator’s operator, the Harrisburg Authority, told the city council at a Dec. 14 hearing that the city is already in danger of legal action for payments that were missed last year on $288 million in debt it has guaranteed with its full faith and credit.

“There’s never been a default like this in Pennsylvania municipal history,” she said. “This is all new territory.”


Risking Suit


Cocheres told council members that by skipping payments that are made on behalf of the authority, the city risks being sued and ordered to raise taxes or fees by Assured Guaranty Municipal Corp., formerly FSA Insurance, which has insured the bonds, or by the deal’s trustee, TD Bank.

City Controller Dan Miller, who was vice president of the council until January, has advocated bankruptcy as an alternative to selling assets.

Harrisburg’s credit rating was lowered two levels below investment grade to Ba2 by Moody’s Investors Service in October. The city faces a $164 million deficit over the next five years, mostly because of debt created by the incinerator, according to Management Partners Inc. of Cincinnati, a consulting firm hired to study the city’s finances as part of a state review.

Budget hearings are scheduled to continue tonight at 5:45 p.m. local time in Harrisburg City Hall.




--Editors: Mark Tannenbaum, Pete Young

Cannabis and the Federal Reserve System

William Randolph Hearst, who arrived on the scene in 1887, was already in control of the headlines on a day-to-day basis because of his efficient business practice within the industry. He was able to produce his Newspapers at next to nothing by manufacturing the tree pulp used and controlling the channel of production down to his papers, the San Francisco Examiner, and eventually the New York Journal (Which became a leading Newspaper).

He teamed up with Henry Dupont to manufacture the ink used in the New York Journal and the partnership began to grow.

ALONG CAME HEMP

Hemp grows 4 times faster than the timber used for tree pulp by Hearst.

Hemp grows annually and can be grown more times

Hemp produces a better quality paper.

Hemp can be grown in any region of the United States.

Since Hemp grew so fast and it grew in every region, Hearst could not stop the middle class farmer from decentralizing the industry. Hearst knew that he could not provide the intellectual property to keep Hemp from destroying his industry and replacing it with middle class producers.

In other words he was afraid of the free market. He was afraid of us… he had to stop it!

Dupont and Hearst knew then that not many Americans understood the difference between Hemp and Cannabis. So they used it against the Americans by claiming Cannabis will make you rape and kill your sister if smoked, illustrating the dangers of inhaling by using grim reapers in their newspapers with joints. And people believed it!

Time and Time again they would use this propaganda through the New York Journal, claiming that Mexicans bringing Marijuana across the border would sleep with White Wives and take White Jobs. They were also saying this about Black Americans who took up smoking and started the Jazz movement.

Dupont’s banker was Andrew Mellon, Mellon bank of Pittsburgh (5th largest bank at the time). Andrew Mellon had a Nephew, Harry Anslinger. Andrew Mellon financially backed Anslinger and threw all of his weight into convincing the U.S. treasury that Marijuana is dangerous and it should be heavily regulated by way of taxation and prohibition.

The treasury could use a program that would generate that much income for the government so in June of 1930 the treasury gave birth to the Federal Bureau of Narcotics.

Ansligner hated Mexicans, Blacks, and Cannabis. He was on a mission to eliminate all of them. Immediately Ansliger waged war on Cannabis regurgitating claims made by Hearst in his Newspapers. (Success stories followed in the New York Journal).

Then, in 1937 Anslinger approached congress with intent to fully regulate all Cannabis. The entire meeting was comprised of Ansliger making emotional outbursts and attempting to offer evidence, all of which was newspaper clippings out of Hearst’s Newspapers.

With the exception of one congressman, all agreed and the act passed, Marijuana became criminal giving birth to the Drug War.

Not to mention Hearst, Dupont, and Mellon were all filthy rich now and had their hands in official pockets.

But the story doesn’t stop here. Andrew Mellon had to study the enemy, He saw what happened with Alcohol Prohibition and he knew it wouldn’t be long before the public caught on.

Mr. Mellon then financed Pharmaceutical companies through government grants and private equity to try to create a synthetic substitute for the over 60 different medicinal properties Cannabis contains. (They have yet to accomplish this goal)

If you look into the history you will find that fossil fuels would have never existed if it wasn’t for this intervention in the market place.

CANNABIS CAN SUPPLY THE ENTIRE NATION WITH ENERGY ON ONLY 1% OF U.S. LAND. ALL CARBON CLEAN.

(AND REMEMBER IT GROWS EVERYWHERE)

This is where the Federal Reserve comes in. The Federal Reserve System does not want to see the decentralization of resources towards localism because if that were to happen the Fed would lose a stronghold on the liquidity pools it artificially creates. It would also mean they couldn’t use the Carbon Tax to consolidate wealth across the world.

With Cannabis being legal and having over 25,000 uses there would be no way to compete against local and more sustainable banks.

So, the Federal Reserve uses banks like the Mellon to fund the DEA and keep money flowing and keep marijuana illegal. The Fed knows that with Cannabis being legal our GDP would boom but not in favor of large monopolies like the FED, but quite the contrary.

This is why I always say...the day we legalize it is the day we end the FED!

Deepening Debt Crisis: The Bernanke Reappointment: Be Afraid, Very Afraid

If the economy deteriorates in the L-shaped “hockey-stick” rut that many economists forecast, what political price will President Obama and the Democrats pay for having returned the financial keys to the Bush Republican appointees who gave away the store in the first place? Reappointing Federal Reserve Chairman Ben Bernanke may end up injuring not only the economy but also the Democratic Party for years to come. Recognizing this, Republicans made populist points by opposing his reappointment during the Senate confirmation hearings last Thursday, January 27 – the day after Mr. Obama’s State of the Union address.

The hearings focused on the Fed’s role as Wall Street’s major lobbyist and deregulator. Despite the fact that its Charter starts off by directing it to promote full employment and stabilize prices, the Fed is anti-labor in practice. Alan Greenspan famously bragged that what has caused quiescence among labor union members when it comes to striking for higher wages – or even for better working conditions – is the fear of being fired and being unable to meet their mortgage and credit card payments. “One paycheck away from homelessness,” or a downgraded credit rating leading to soaring interest charges, has become a formula for labor management.

As for its designated task in promoting price stability, the Fed’s easy-credit bubble has made asset-price inflation the path to wealth, not tangible capital investment. This has brought joy to bank marketing departments as homeowners, consumers, corporate raiders, states and localities run further and further into debt in an attempt to improve their position by debt leveraging. But the economy has all but neglected its industrial base and the employment goes with manufacturing. The Fed’s motto from Bubblemeister Alan Greenspan to Ben Bernanke has been “Asset-price inflation, good; wage and commodity price inflation, bad.”

Here’s the problem with that policy. Rising prices for housing have increased the cost of living and doing business, widening the excess of market price over socially necessary costs. In times past the government would have collected the rising location rent created by increasing prosperity and public investment in transportation and other infrastructure making specific sites more valuable. But in recent years taxes have been rolled back. Land sites still cost as much as ever, because their price is set by the market. Land itself has no cost of production. Locational value is created by society, and should be the natural tax base because a land tax does not increase the price of real estate; it lowers it by leaving less “free” rent to be paid to the banks.

The problem is that what the tax collector relinquishes is now available to be paid to banks as interest. And prospective buyers bid against each other until the winner is whoever is first to pay the land’s location rent to the banks as interest.

This tax shift – to the benefit of the bankers, not homeowners – has made Mr. Obama’s hope of doubling U.S. exports during the next five years ring hollow. This is the upshot of “creating wealth” in the form of a debt-leveraged real estate and stock market bubble. Labor must pay more for debt-financed housing and education, not to mention payments to health insurance oligopoly and higher sales and income taxes shifted off the shoulders of financial and real estate.

Once the Republicans were certain which way the vote would go, they were able to voice some nice populist sound bites for the mid-term elections this November. Jeff Sessions of Alabama and Sam Brownback of Kansas voted against Mr. Bernanke’s confirmation. Jim deMint of South Carolina warned that reappointing him would be “The biggest mistake that we’re going to make for a long time.” He added: “Confirming Bernanke is a continuation of the policies that brought our economy down.”

Among Democrats running for re-election, Barbara Boxer of California pointed out that by spurring the asset-price inflation, the Fed’s pro-Bubble (that is, pro-debt policy) has crashed the economy, shrinking employment. The Fed is supposed to protect consumers, yet Mr. Bernanke is a vocal opponent of the Consumer Finance Products Agency, claiming that the deregulatory Fed alone should be the sole financial regulator – seemingly an oxymoron.

Mr. Obama supports Mr. Bernanke and his State of the Union address conspicuously avoided endorsing the Consumer Financial Products Agency that he earlier had claimed would be the centrepiece of financial reform. Wall Street lobbyists have turned him around. Their logic was the same mantra that Connecticut insurance industry’s Sen. Chris Dodd repeated at the confirmation hearings: Mr. Bernanke has “saved the economy.”

How can the Fed be said to do this when the volume of debt is growing exponentially beyond the ability to pay? “Saving the debt” by bailing out creditors – by adding bad private-sector debts to the public sector’s balance sheet – is burdening the economy, not saving it. The policy only postpones the crisis while making the ultimate volume of debt that must be written off higher – and therefore more traumatic to write off, annulling a corresponding volume of savings on the other side of the balance sheet (because one party’s savings are another’s debts).

What really is at issue is the economic philosophy that Mr. Bernanke will apply during the coming four years. Unfortunately, Mr. Bernanke’s questioners failed to ask relevant questions along these policy lines and the economic theory or rationale underlying his basic approach. What needed to be addressed was not just his deregulatory stance in the face of the Bubble Economy and exploding consumer fraud, or even the mistakes he has made. Republican Sen. Jim Bunning elicited only smirks and pained looked as Mr. Bernanke rested his chin on his hand, as if to say, “I’m going to be patient and let you rant.” The other Senators were almost apologetic.

One popular (and thoroughly misleading) description of Bernanke that has been cited ad nauseum to promote his reappointment is that he is an expert on the causes of the Great Depression. If you are going to create a new crash, it certainly helps to understand the last one. But economic historians who have compared Mr. Bernanke’s writings to actual history have found that it is precisely his misunderstanding of the Depression that is leading him tragically to repeat it.

As a trickle-down apologist for high finance, Prof. Bernanke has drawn systematically wrong conclusions as to the causes of the Great Depression. The ideological prejudice behind his view is of course what got him his job in the first place, for as numerous observers have quipped, a precondition for being hired as Fed Chairman is that one does not understand how the financial system actually works. Instead of recognizing that deepening debt, low wages and the siphoning up of wealth to the top of the economic pyramid were primary causes of the Depression, Prof. Bernanke attributes the main problem simply to a lack of liquidity, causing low prices.

As my Australian colleague Steve Keen recently has written in his Debtwatch No. 42 (http://www.debtdeflation.com/blogs/), the case against Mr. Bernanke should focus on his neoclassical approach that misses the fact that money is debt. He sees the financial problem as being too low a price level for assets to be collateralized for bank loans. And to Mr. Bernanke, “wealth” is synonymous with what banks will lend, under existing credit terms.

In 1933, the economist Irving Fischer (mainly responsible for the “modern” monetarist tautology MV = PT) wrote a classic article, “The Debt-Deflation Theory of the Great Depression,” recanting the neoclassical view that had led him to lose his personal fortune in the 1929 stock market crash. He explained how the inability to pay debts was forcing bankruptcies, wiping out bank credit and spending power, shrinking markets and hence the incentive to invest and employ labor.

Mr. Bernanke rejects this idea, or at least the travesty he paraphrases in his Essays on the Great Depression (Princeton, 2000, p. 24), as Prof. Keen quotes:

Fisher’ s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.

All that a debt overhead does is transfer purchasing power from debtors to creditors. Bernanke is reminiscent here of Thomas Robert Malthus, whose Principles of Political Economy argued that landlords (Malthus’s own class) were necessary to maintain economic equilibrium in a way akin to trickle-down theorists through the ages. Where would English employment be, Malthus argued, without landlords spending their revenue on coachmen, fine clothes, butlers and servants? It was landlords spending their rental income (protected by England’s agricultural tariffs, the Corn Laws, until 1846) that kept buggy-makers and other suppliers working. And by the same logic, this is what wealthy Wall Street financiers do today with the money they make by lending to enable homeowners and savers to get rich making capital gains off asset-price inflation.

The reality is that wealthy Wall Street financiers who make multi-million dollar salaries and bonuses spend their money on trophies: fine arts, luxury apartments or houses in gated communities, yachts, fancy handbags and high fashion, birthday parties with appearances by modish pop singers. (“I see the yachts of the stock brokers; but where are those of their clients?”) This is not the kind of spending that reflects the “real” economy’s production profile.

Mr. Bernanke sees no problem, unless rich people spend less of their gains on consumer goods and the products of labor than average wage earners. But of course this propensity to consume is precisely the point John Maynard Keynes made in his General Theory (1936). The wealthier people become, the lower a proportion of their income they consume – and the more they save.

This falling propensity to consume is what worried Keynes about the future. He imagined that as economies saved more as their income levels rose, they would spend less on goods and services. So output and employment would not be able to keep pace – unless the government stepped in to make up the gap.

Consumer spending is indeed falling, but not because economies are experiencing a higher net saving rate. The U.S. saving rate has fallen to zero – because despite the fact that gross savings remain high (about 18 percent), most is lent out to become other peoples’ debts. The effect is thus a wash on an economy-wide basis. (18 percent saving less 18 percent debt = zero net saving.)

The problem is that workers and consumers have gone deeper and deeper into debt, saving less and less. This is just the opposite of what Keynes forecast. Only the wealthiest 10 percent or so of the population save more and more – mainly in the form of loans to the “bottom 90 percent.” Saving less, however, goes hand in hand with consuming less, because of the revenue that the financial sector drains out of the “real” economy’s circular flow (wage-earners spending their income to buy the goods they produce) as debt service. The financial sector is wrapped around the production-and-consumption economy. So an inability to consume is part and parcel of the debt problem. The basis of monetary policy throughout the world today therefore should be how to save economies from shrinking as a result of their exponentially growing debt overhead.

Bernanke’s apologetics for finance capital: Economies seem to need more debt, not less

Bernanke finds “declines in aggregate demand” to be the dominant factor in the Great Depression (p. ix, as cited by Steve Keen). This is true in any economic downturn. In his reading, however, debt seems not to have anything to do with falling spending on what labor produces. Taking a banker’s-eye view, he finds the most serious problem to be the demand for stocks and real estate. Mr. Bernanke promises not to let falling asset demand (and hence, falling asset prices) happen again. His antidote is to flood the economy with credit as he is now doing, emulating Alan Greenspan’s Bubble policy.

The wealthiest 10 percent of the population do indeed save most of their money. They lend savings – and create new credit – to the bottom 90 percent, or gamble in derivatives or other zero-sum activities in which their gain (if indeed they make any) finds its counterpart in some other parties’ loss. The system is kept going not by government spending, Keynesian-style, but by new credit creation. That supports consumption, and indeed, lending against real estate, stocks and bonds enables borrowers to bid up their prices, enabling their owners to borrow yet more against these assets. The economy expands – until current revenue no longer covers the debt’s carrying charges.

That’s what brings the Bubble Economy down with a crash. Asset-price inflation gives way to crashing prices and negative equity for real estate and for much financial debt leveraging as well. It is in this sense that Prof. Bernanke’s blames the Depression on lower prices. When prices for real estate or other collateral plunge, it no longer can be pledged for more loans to keep the circular flow of lending and debt repayment in motion.

This circular financial flow is quite different from the circular flow that Keynes (and Say’s Law) discussed – the circulation where workers and their employers spent their wages and profits on consumer goods and investment goods. The financial circular flow is between the banks and their clients. And this circular flow swells as it diverts more and more spending from the “real” economy’s circular flow between income and spending. Finance capital expands relative to industrial capital.[1]

Higher prices in the “real” economy may help maintain the circular financial flow, by giving borrowers more current income to pay their mortgages, student loans and other debts. Mr. Bernanke accordingly sees FDR’s devaluation of the dollar as helping reflate prices.

Today, however, a declining dollar would make imports (including raw materials as well as key consumer goods) more costly. This would squeeze the budgets of most families, given America’s rising import dependency as its economy is post-industrialized and financialized. So Mr. Bernanke’s favored policy is to get banks lending again – not for the government to spend more on deficit spending on infrastructure, social services or other full employment projects. The government spending that Mr. Bernanke has endorsed is pure bailouts to the banks, insurance companies, real estate packagers and other Wall Street institutions so that they can support asset prices and thereby save the economy’s financial balance sheet, not its employment and living standards.

More debt thus is not the problem, in Chairman Bernanke’s view. It is the solution. This is what makes his re-appointment so dangerous.

Devaluation of the dollar FDR-style will make U.S. real estate, corporations and other assets cheaper to global investors. It thus will have the same “positive” effects (if you can call making homes and office buildings more costly to buyers a “positive” effect) as more credit – and without the debt service needing to be raked off from the economy. This policy is akin to the International Monetary Fund’s “stabilization” and austerity programs that have caused such havoc over the past few decades.[2] It is the policy being prepared for imposition on the United States. This too is what makes Bernanke’s re-appointment so dangerous.

The problem is a combination of Mr. Bernanke’s dangerous misreading of economic history, and the banker’s-eye perspective that underlies this view – which he now has been empowered to impose from his perch as central planner at the Federal Reserve Board. Pres. Obama’s support for his reappointment suggests that the recent economic rhetoric heard from the White House is a faux populism. The President promises that this time, it will be different. The former Bush appointees – Geithner, Bernanke and the Goldman Sachs managers on loan to the Treasury – will be willing to stand up to Goldman Sachs and the other bankers. And this time the Clinton-era Rubinomics boys will not do to the U.S. economy what they did to the Soviet Union.

With this stance, it is no wonder that the Obama Democrats are relinquishing the populist anti-Wall Street card to the Republicans!

The Bernanke albatross

Mr. Bernanke misses the problem that debts need to be repaid – or at least carried. This debt service deflates the non-financial “real” economy. But the Fed’s analysis stops just before the crash. It is a “good news” theory limited to the happy time while the bubble is expanding and homeowners borrow more and more from the banks to buy houses (or more accurately, their land sites) that are rising in price. This was the Greenspan-Bernanke bubble in a nutshell.

We need not look as far back as the Great Depression. Japan since 1990 is a good example. Its land prices declined every quarter for over 15 years after its bubble burst. The Bank of Japan did what the Federal Reserve is doing now: It lowered lending rates to banks below 1%. Banks “earned their way out of debt” by lending to global speculators who used the yen loans to convert into foreign currency and buy higher-yielding assets abroad – capped by Icelandic government bonds paying 15%, and pocketing the arbitrage difference.

This steady conversion of speculative money out of yen into foreign currency held down Japan’s exchange rate, helping its exporters. Likewise today, the Fed’s low-interest policy leads U.S. banks to borrow from it and lend to arbitrageurs buying higher-yielding bonds or other securities denominated in euros, sterling and other currencies.

The foreign-exchange problem develops when these loans are paid back. In Japan’s case, when global financial markets turned down and Japanese interest rates began to rise in 2008, arbitrageurs decided to unwind their positions. To pay back the yen they had borrowed from Japanese banks, they sold euro- and dollar-denominated bonds and bought the Japanese currency. This forced up the yen’s exchange rate – eroding its export competitiveness and throwing its economy into turmoil. The long-ruling Liberal Democratic Party was voted out of power as unemployment spread.

In the U.S. case today, Chairman Bernanke’s low interest-rate regime at the Fed has spurred a dollar-denominated carry trade estimated at $1.5 trillion. Speculators borrow low-interest dollars and buy high-interest foreign-currency bonds. This weakens the dollar’s exchange rate against foreign currencies (whose central banks are administering higher interest rates). The weakening dollar leads U.S. money managers to send more investment funds out of our economy to those promising stock market gains as well as a foreign-currency gain.

The prospect of undoing this credit creation threatens to lock the United States into a low-interest trap. The problem is that if and when the Fed begins to raise interest rates (for instance, to slow the new bubble that Mr. Bernanke is trying to inflate), global speculators will repay their dollar debts. As the U.S. carry trade is unwound, the dollar will soar in price. This threatens to make Mr. Obama’s promise to double U.S. exports within five years seem an impossible dream.

The prospect is for U.S. consumers to be hit by a triple whammy. They must pay higher prices for the goods they buy as the dollar declines, making imports more expensive. And the government will be spending less on the economy’s circular flow as a result of Pres. Obama’s three-year spending freeze to slow the budget deficits. Meanwhile, states and cities are raising taxes to balance their own budgets as tax receipts fall. Consumes and indeed the entire economy must run more deeply into debt simply to break even (or else see living standards eroded).

To Mr. Bernanke, economic recovery requires resuscitating the Goldman Sachs squid that Matt Taibbi so artfully has described as being affixed to the face of humanity, duly protected by the Fed. The banks will lend more to keep the debt pyramid growing to enable consumers, businesses and local government to avoid contraction.

All this will enrich the banks – as long as the debts can be paid. And if they can’t be paid, will the government bail them out all over again? Or will it “be different” this time around?

Will our economy flounder with Mr. Bernanke’s reappointment as the rich get richer and the American family comes under increasing financial pressure as incomes drop while debts grow exponentially? Or will Americans get rich off the new bubble as the Fed re-inflates asset prices?

The Road to Debt Peonage

Last week, Senator John Kerry of Massachusetts acknowledged many Americans’ anger about the bailouts of the big banks: “It’s understandable why there is debate, questioning and even anger” about Mr. Bernanke’s re-nomination. “Still,” he added, “out of this near calamity, I believe Chairman Bernanke provided leadership that was urgent, nimble, strong and vital in staving off greater disaster.”

Unfortunately, by “disaster” Sen. Kerry seems to mean losses for Wall Street. He shares with Chairman Bernanke the idea that gains in raising asset prices are good for the economy – for instance, by enabling pension funds to pay retirees and “build wealth” for America’s savers.

While the Bush-Obama team hopes to reflate the economy, the $13 trillion bailout money they have spent trying to fuel the destructive bubble takes the form of trickle-down economics. It has not run up public debt in the Keynesian way, by government spending such as in the modest “Stimulus” package to increase employment and income. And it is not providing better public services. It was designed simply to inflate asset prices – or more accurately, to prevent their decline.

This is what re-appointment of the Fed Chairman signifies. It means a policy intended to raise the price of housing on credit, with a corresponding rise in consumer income paid to bankers as mortgage debt service.

Meanwhile, rising stock and bond prices will increase the price of buying a retirement income. A higher stock price means a lower dividend yield. The same is true for bonds. Flooding the capital markets with credit to bid up asset prices thus holds down the yield of the assets of pension funds, pushing them into deficit. This enables corporate managers to threaten bankruptcy of their pension plans or entire companies, General Motors-style, if labor unions do not renegotiate their pension contracts downward. This “frees” yet more money for financial managers to pay creditors at the top of the economic pyramid.

Mr. Bernanke’s opposition to regulating Wall Street

How does one overcome this financial polarization? The seemingly obvious solution is to select Fed and Treasury administrators from outside the ranks of ideologues supported by – indeed, applauded by – Wall Street. Creation of a Consumer Financial Products Agency, for instance, would be largely meaningless if a deregulator such as Mr. Bernanke were to run it. But that is precisely what he is asking to do in testifying that his Federal Reserve should be the sole regulatory agency, nullifying the efforts of all others – just in case some state agency, some federal agency or some Congressional committee might move to protect consumers against fraudulent lending, extortionate fees and penalties and usurious interest rates.

Mr. Bernanke’s fight against proposals for such regulatory agencies to protect consumers from predatory lending is thus a second reason not to re-appoint him. How can Mr. Obama campaign for his reappointment as Chairmanship of the Fed and at the same time endorse the consumer protection agency? Without dumping Bernanke and Geithner, it doesn’t seem to matter what the law says. The Democrats have learned from the Bush and Reagan administrations that all you have to do is appoint deregulators in key positions, and legal teeth are irrelevant.

Independence of the Federal Reserve is a euphemism for financial oligarchy

This brings up the third premise that defenders of Mr. Bernanke cite: the much vaunted independence of the Federal Reserve. This is supposed to be safeguarding democracy. But the Fed should be subject to representative democracy, not independent of it! It rightly should be part of the Treasury representing the national interest rather than that of Wall Street.

This has emerged as a major problem within America’s two-party political system. Like the Republican team, the Obama administration also puts financial interests first, on the premise that wealth flows from its credit activities, the financial time frame tends to be short-run and economically corrosive. It supports growth in the debt overhead at the expense of the “real” economy, thereby taking an anti-labor, anti-consumer, anti-debtor policy stance.

Why on earth should the most important sector of modern economies – finance – be independent from the electoral process? This is as bad as making the judiciary “independent,” which turns out to be a euphemism for seriously right-wing.

Over and above the independence issue, to be sure, is the problem that the government itself if being taken over by the financial sector. The Treasury Secretary, Fed Chairman and other financial administrators are subject to Wall Street’s advice and consent first and foremost. Lobbying power makes it difficult to defend the public interest, as we have seen from the tenure of Mr. Paulson and Mr. Geithner. I don’t believe Mr. Obama or the Democrats (to say nothing of the Republicans) is anywhere near rising to the occasion of solving this problem. One can only deplore Mr. Obama’s repetition of his endorsements.

Allied to the “independence” issue is a fourth reason to reject Mr. Bernanke personally: the Fed’s secrecy from Congressional oversight, highlighted by its refusal to release the names of the recipients of tens of billions of Fed bailouts and cash-for-trash swaps.

Does it matter?

Now that the confirmation arguments against Mr. Bernanke’s reappointment have been rejected, what does it mean for the future?

On the political front, his reappointment is being cited as yet another proof that the Democrats care more for bankers than for American families and employees. As a result, it will do what seemed unfathomable a year ago: enable GOP candidates to strike the pose of FDR-type saviors of the embattled middle class. No doubt another decade of abject GOP economic failure would simply make the corporate Democrats appear once again to be the alternative. And so it goes … unless we do something about it.

The problem is not merely that Mr. Bernanke failed to do what the Fed’s charter directs it to do: promote employment in an environment of stable prices. The Republicans – and some Democrats – read out the litany of Bernanke abuses. The Fed could have raised interest rates to slow the bubble. It didn’t. It could have stopped wholesale mortgage fraud. It didn’t. It could have protected consumers by limiting credit card rates. It didn’t.

For Bernanke, the current financial system (or more to the point, the debt overhead) is to be saved so that the redistribution of wealth upward will continue. The Congressional Research Service has calculated that from 1979 to 2003 the income from wealth (rent, dividends, interest and capital gains) for the top 1 percent of the population soared from 37.8% to 57.5%. This revenue has been expropriated from American employees pushed onto debt treadmills in the face of stagnating wages.

Meanwhile, the government is permitting corporate tollbooth to be erected across our economy – and un-taxing this revenue so that it can be capitalized into financialized wealth paying only a 15% tax rate on capital gains. It pays these taxes not as these gains accrue, but and only when they realize them. And the tax does not even have to be paid if the sales proceeds of these assets is reinvested! Financial and fiscal policy thus reinforce each other in a way that polarizes the economy between the financial sector and the “real” economy.

Behind these bad policies is a disturbing body of junk economics – one that, alas, is taught in most universities today. (Not at the University of Missouri at Kansas City, and a few others, to be sure.) Mr. Bernanke views money simply as part of a supply and demand equation between money and prices – and he refers here only to consumer prices, not the asset prices which the Fed failed to address. That is a big part of the Fed’s blind spot: Messrs. Greenspan and Bernanke imagined that its charter referred only to stabilizing consumer prices and wages – while asset prices – the cost of obtaining housing, an education or a retirement income – have soared as a result of debt leveraging.

What Mr. Bernanke misses – along with his neoclassical colleagues – is that the money that is spent bidding up prices is also debt. This means that it leaves a debt legacy. When banks “provide credit” by writing loans, what they are selling is debt.

The question their marketing departments ask is, how large is the market for debt? When I went to work for Chase Manhattan in 1967 as its balance-of-payments analyst, for example, I liaised with the marketing department to calculate how large the international debt market was – and how large a share of this market the bank could reasonably expect to get.

The bank quantified the debt market by measuring how large a surplus borrowers could squeeze out over and above basic break-even needs. For personal loans, the analogy was how much could a wage earner afford to pay the bank after meeting basic essentials (rent, food, transportation, taxes, etc.). For the real estate department, how much net rental income could a landlord pay out, after meeting fuel and other operating costs and taxes? The anticipated surplus revenue was capitalized into a loan. From the marketing department’s vantage point, banks aimed at absorbing the entire surplus as debt service.

Financial debt service is not spent on consumer goods. It is recycled into new loans, after paying dividends to stockholders and salaries and bonuses to its managers. Stockholders spend their money on buying other investments – more stocks and bonds. Managers buy trophies – yachts, trophy paintings, trophy cars, trophy apartments (whose main value is their location – the neighborhood where their land is situated), foreign travel and other luxury. None of this spending has much effect on the consumer price index, but it does affect asset prices.

This idea is lacking in neoclassical and monetarist theory. Once “money” (that is, debt) is spent, it has an effect on prices via supply and demand, and that is that. There is no dynamic over time of debt or wealth. Ever since Marxism pushed classical political economy to its logical conclusion in the late 19th century, economic orthodoxy has been traumatized from dealing about wealth and debt. So balance-sheet relationships are missing from the academic economics curriculum. That is why I stopped teaching economics in 1972, until the UMKC developed an alternative curriculum to the University of Chicago monetarism by focusing on debt creation and the recognition that bank loans create deposits, inverting the usual “Austrian” and other individualistic parallel universe theories.


Notes


[1] I elaborate the logic in greater detail in “Saving, Asset-Price Inflation, and Debt-Induced Deflation,” in L. Randall Wray and Matthew Forstater, eds., Money, Financial Instability and Stabilization Policy (Edward Elgar, 2006):104-24. And I explain how the recent expansion of credit and easing of lending terms fueled the real estate bubble in “The New Road to Serfdom: An illustrated guide to the coming real estate collapse,” Harpers, Vol. 312 (No. 1872), May 2006):39-46.

[2] I explain the workings of these plans in greater detail in Super Imperialism: The Economic Strategy of American Empire (1972; new ed., 2002), “Trends that can’t go on forever, won’t: financial bubbles, trade and exchange rates,” in Eckhard Hein, Torsten Niechoj, Peter Spahn and Achim Truger (eds.), Finance-led Capitalism? (Marburg: Metropolis-Verlag, 2008), and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy (1992, new ed. 2009).


Michael Hudson is a frequent contributor to Global Research. Global Research Articles by Michael Hudson