Bush, chris Whalen, Clint Eastwood, CNBC, Democratic party, Federal Reserve, National Debt, Nelson Aldrich, Obama, Outlaw Josey Wales, Reagan, Republican party, Ron Paul, super rich, tax rates, Top marginal rates, Wall Street
“Now remember, when things look bad and it looks like you’re not gonna make it, then you gotta get mean. I mean plumb, mad-dog mean. ‘Cause if you lose your head and you give up then you neither live nor win. That’s just the way it is.” – Josey Wales – Outlaw Josey Wales
To hell with them fellas. Buzzards gotta eat, same as worms. – Josey Wales – Outlaw Josey Wales
There is a war underway in this country. The working middle class that built this country from the ground up are being systematically eliminated by a small cabal of super rich powerful elite. The middle class was much like Josey Wales, a peaceful Missouri farmer just working his land trying to make an honest living. Then a band of lawless thugs come along and kill his wife and son and burn down his farmhouse. A man can only take so much before he gets mean and vengeful. The rich and powerful, the corrupt Wall Street bankers, the banker controlled Federal Reserve and the bought off politicians in Washington D.C. have been pillaging the middle class for decades.
They’ve killed the middle class and in 2008 they essentially burned down the worldwide financial system. Somehow, they convinced the American public the war was over. A small band of super wealthy individuals on the boulevard of greed, Wall Street, and in the putrid swamp of Washington D.C. blackmailed the American middle class taxpayers by threatening to bring down the financial system unless they were handed $700 billion, saved from bankruptcy by the Federal Reserve buying $1.2 trillion of toxic mortgage debt, and provided free money by their sugar daddy at the Federal Reserve. The politicians then absconded with another $800 billion of taxpayer funds and handed it out to their corporate political cronies in the name of shovel ready projects and adding 3 million new jobs.
At the end of the Civil War, the Confederate guerrillas that Josey Wales had joined agree to lay down their arms with a promise of freedom. Instead the Union thugs began to mow them down with a Gatling gun. This is perfect symbolism for what the ruling elite have perpetrated in the last three years. Within months of nearly destroying the worldwide financial system, the Wall Street desperados were paying themselves hundreds of billions in bonuses for a job well done plundering and sacking the American middle class taxpayer. They certainly earned the bonuses, considering they could borrow from the Fed at 0% and earn 2.5% on Treasuries or pile into stocks and commodities, knowing Uncle Ben would guarantee profits with QE2.
Jim Grant, in early 2009, described the excessive response by those in power to a crisis caused by them:
“To try to exorcise the Great Depression, President Herbert Hoover deployed fiscal and monetary stimulus equivalent to 8.3% of gross domestic product. To banish the demons of 2008-9, successive administrations have spent, or encouraged to printed, the equivalent to 28.9% of GDP. A macroeconomist from Mars, judging by these data alone, would never guess how much more severe was that depression than this recession. The decline in real GDP from August 1929 to March 1933 amounted to 27%; that from December 2007 to date, just 1.8%… so for a slump 1/15 as severe as the Depression, our 21st-century economy doctors administered a course of treatment more than three times as costly.”
Ultimately, GDP fell 3.1% between the 3rd quarter of 2008 and the 3rd quarter of 2009. The government response has amounted to throwing $7 trillion ($4.2 trillion increase in national debt, $700 billion of TARP bailouts, $200 billion of losses taken by Fannie Mae & Freddie Mac, $100 billion of losses taken by the FDIC, and the Federal Reserve increasing their balance sheet by $1.8 trillion) of your tax dollars at the problem. As a side benefit, they have thrown senior citizens under the bus by paying them 0% on their savings, not providing a cost of living increase to their social security for two years, and hitting them over the head with 10% levels of inflation on food and energy.
At this point it looks bad for the working middle class and it looks like they aren’t going to make it through the next banker made financial crisis. The middle class just wants the chance for a new beginning. They want jobs. They know the country has been hijacked by the banking corporatocracy, supported by the corrupt political class in D.C. It is time for the middle class to channel their inner Josey Wales and get plumb mad-dog mean. It is not time to lose your head and give up. The middle class are being pursued by Wall Street bounty hunters and government crooks trying to finish them off. It is time to make a stand and fight. It is essential that we know our enemies and how they achieved their power. It all began in 1913 with the creation of the Federal Reserve and the implementation of the personal income tax. I’ve previously detailed how the baby boom generation contributed to our fiscal plight in Part One – For a Few Dollars More, how the actions of the Federal Reserve’s over the last few decades have impoverished the middle class and placed the country at the brink of collapse in Part Two – Fistful of Dollars and addressed the nefarious creation of a central bank in Part Three – The Good, the Bad, and the Ugly.
How to Buy a Tax Break
“There’s another old saying, Senator: Don’t piss down my back and tell me it’s raining.” – Fletcher – Outlaw Josey Wales
When the Federal government spends more each year than it collects in tax revenues, it has three choices: It can raise taxes, print money, or borrow money. While these actions may benefit politicians, all three options are bad for average Americans. – Ron Paul
The Senator pissing down the backs of Americans while telling us it was raining was named Nelson Aldrich, from Rhode Island. He was a Republican lackey of J.P. Morgan who was the driving force behind the creation of the Federal Reserve and the passage of the Sixteenth Amendment, creating the personal income tax. His daughter married John D. Rockefeller, Jr. and his son became the Chairman of Chase National Bank. I wonder how beholden he was to the banker class. A decade before 1913 Aldrich had declared an income tax as communistic. He was right. Karl Marx published his Communist Manifesto in 1848. It included ten planks. Two of the ten planks were as follows:
- A heavy progressive or graduated income tax.
- Centralization of credit in the hands of the State by means of a national bank with State capital and an exclusive monopoly.
The United States had tinkered with an income tax during the Civil War and the 1890’s, but the Supreme Court declared it unconstitutional. Until 1913, the Federal government was restrained from overspending because it was completely reliant on tariffs and duties to generate revenue. Without the ability to print money and tax its citizens, politicians could not roll out new programs and fight foreign wars of choice.The Sixteenth Amendment changed the game forever.
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Politicians pulled the old bait and switch on the American people. The initial tax rates of 1% to 7% were low. That did not last long. By 1918, the top marginal rate was 77%, as Woodrow Wilson needed to fund his war of choice. The top tax rate reached 92% during the Eisenhower Administration and today rates are still 500% to 1,000% higher than they were in 1913. The government is addicted to tax revenue. In 2009, they absconded with $1.2 trillion in taxes from American individuals. Does anyone think the bloated government bureaucracy spends these funds more efficiently or for a more beneficial purpose than its citizens could have? The income tax distorts financial planning and business investment, and it encourages tax avoidance and evasion.
|Partial History of
U.S. Federal Income Tax Rates
|2003-2009||6 brackets||10%||35%||Tax Foundation|
The average American thinks income taxes are essential because politicians tell them so. The only discussion is about what the rates should be. But, the country grew tremendously between 1789 and 1913 without a personal income tax. Income taxes do not benefit the average American, they drain wealth from the citizens and hand it to politicians who then use them to bribe constituents for votes with handouts and fund foreign wars of choice. The IRS tax code has progressively been utilized by the rich and influential class to skew it in favor of those with the most lobbyists. Politicians get elected by promising benefits to the masses while being funded by rich people and big corporations. A tax code of 60,000 pages, with over 600 IRS tax forms, and filled with tax breaks for influential constituents (farmers, oil companies, homeowners, foreign corporations, etc.) is not designed to benefit the average American. The tax code is used to pay off those who “contribute” to the politicians that control the tax code.
Congress frequently holds hearings on tax simplification so members can denounce the tax code’s complexity. Congressional experts and impartial think tanks provide useful simplification ideas. When the TV cameras are turned off, Congress swiftly ignores them and votes for more special interest breaks for their biggest contributors. The storyline that is pounded into the minds of all Americans is that 50% of the population pays no taxes and the rich pay an inordinate amount of taxes. The Republicans and Democrats fight a battle of false talking points to confuse and obscure the truth.
The Republican mantra since the Reagan era has been to cut taxes and allow the “free market” to work its magic. They have succeeded in convincing a vast swath of Americans that lowering the highest tax rates have benefitted the masses. This is completely untrue. An unfunded tax cut today is just a tax increase on future generations. Democrats went along with tax cuts as long as the Republicans went along with spending increases. The Democrats hit the jackpot, with a supposedly fiscal conservative president signing a Medicare D bill that added trillions of unfunded liabilities to our national balance sheet. The Republicans are on cloud 9, as a supposedly liberal anti-war president has increased war spending to $1 trillion per year while ramping up our foreign wars of choice. Everyone gets what they want in Washington D.C. This is called bi-partisanship.
The Big Lie
As the chart above shows, at least before Reagan the top marginal rates were kept high to pay for the social programs instituted by Congress and the wars of choice fought by our Presidents. After 1980, in some sort of warped Twilight Zone episode, politicians across the land convinced themselves and the masses they could have lower taxes, more entitlement goodies, never ending war, and an unlimited heaping of material goods, with no adverse consequences. Well, it was a lie.
- The GDP in 1981 was $3.1 trillion, today it is $14.7 trillion.
- The National Debt in 1981 was $907 billion, today it is $14.4 trillion.
- The amount of annual Federal income tax revenue in 1981 was $347 billion, today it is $1.1 trillion.
- The amount of annual Federal spending in 1981 was $678 billion; today it is $3.8 trillion.
- Total consumer debt in 1981 totaled $353 billion, today it is $2.4 trillion.
- Total mortgage debt outstanding grew from $1.5 trillion in 1981 to $14.6 trillion by 2008.
- Median household income was $17,710 in 1980 and is now $49,777.
These facts reveal an empire spiraling out of control, delusional and living on borrowed time with borrowed money. The output of the country has grown by 474% in the last 30 years, while the National Debt has grown by 1,588%. Those two facts alone paint a picture of eventual collapse. The lesson of allowing politicians and bankers unfettered access to unlimited amounts of fiat currency backed by nothing but a hollow promise to pay is clear, in the divergence of income tax revenue and spending. The dramatic slashing of top marginal rates from 70%, which had been in place for a fifty year period when the U.S. economy boomed, was supposed to invigorate the economy and unleash the free market spirit of our entrepreneurs. A funny thing happened on the way to prosperity for all. Federal income tax revenue has only grown by 317% in the thirty years since the Reagan Revolution. The CPI has grown by 289% over this same time frame. Therefore, tax revenue is essentially flat with 1980 on an inflation adjusted basis. This wouldn’t be a problem, except that the politicians we elected ramped up spending by 560% over these same thirty years. Federal spending has grown at almost twice the rate of income tax revenue. Bug meet windshield. I guess this is called supply side economics.
Politicians of both parties have promised the American public they could have low taxes, unlimited social welfare benefits, a house that always appreciated in price, electronic gadgets galore, and the true American dream of getting something for nothing. And it was all made possible by your friendly Wall Street banker and their friends at the Federal Reserve. The data above already paints a dire picture for the American Empire, but the next ten years will finish the job. GDP is stagnant as Federal government spending props up the teetering edifice of economic activity. The National Debt will reach $20 trillion by 2015 and is on course to reach at least $25 trillion by 2019. Both the Republican and Democratic “plans” to “reduce” the deficit are a joke. They don’t reduce anything. They add to the debt.
The citizens of this country should be outraged by such fiscal irresponsibility, and marching on Washington D.C. with pitchforks and torches. But, there is no outrage across the countryside. This is because the vast majority of Americans followed the example of their beloved government leaders and lived far beyond their means in a delusional attempt to borrow their way to material prosperity. The median household income has risen by 281% since 1981, less than inflation over the same time frame. The median household is taking home less than they did in 1981 on an inflation adjusted basis. The McMansions, BMWs, computers, 52 inch HDTVs, and 15 other essential electronic gadgets that represent the current American Dream were financed. Consumer debt, used to buy (rent) luxury automobiles and essentials like 4 TVs and 3 computers, grew by 680%, more than twice the rate of median household income. Mortgage debt grew by an astounding 973% in the last thirty years.
The last thirty years have been a faux American Dream. The madness of crowds has been replaced by the sober reality that the material goods purchased with debt steadily depreciate day by day, while the debt stays firmly in place. Who benefitted and who lost during these thirty years of delusion? There is only one beneficiary from the issuance of trillions in debt – Wall Street bankers. The ten biggest banks in the country hold more than 50% of the mortgage debt and 80% of the credit card debt in the U.S. The poor never had much, and they still don’t. Politicians have averted riots and social unrest by pouring trillions into welfare, social security disability, SNAP programs, earned income credits, and hundreds of other transfer payment bribes to the poor. The middle class has borne the brunt of the banker plundering and pillaging.
The Super Rich Storyline
There are three storylines that are pounded home repeatedly by the mainstream media and the Republican Party ideologues.
- More than 50% of Americans don’t pay any taxes.
- The top 1% pays 38% of all the Federal income taxes.
- Increasing the highest tax rate above 35% would destroy jobs and kill small business owners.
The misinformation spewed forth by the super rich, who control the media, politicians, and media message, to disguise their continued looting of the American middle class, is unrelenting. There are 117 million households in the United States with a median household income of $48,000. Data from the Tax Foundation shows that in 2008, the average income for the bottom half of taxpayers was $15,300. The first $9,350 of income is exempt from taxes for singles and $18,700 for married couples. Politicians of both parties also provided credits for children, earned income credits, mortgage tax deductions, property tax deductions, and a myriad of other tax goodie payoffs for votes. When half the households in the country make less than $48,000 per year in income, of course they won’t be paying any Federal income taxes. There are approximately 151 million Americans earning income. Almost 73 million, or 48%, make less than $25,000. As Wall Street enriched billionaires are interviewed by millionaire journalists on CNBC, scorning those who don’t pay their fair share of taxes, they outsource the blue collar jobs of those on the lower income scale to China and India. Without good paying jobs, the middle class uses debt to maintain their American dream, further enriching the billionaire class in a circle of death.
This chart reveals the true nature of who controls our country. It is a battle between a few thousand of the richest people in America versus the other 150 million. The facts are the middle class and poor pay a much higher percentage of their income in taxes than the rich. The Social Security tax cuts off at $106,800. Therefore, the median household pays 6.2% of their income, while the rich household making $5 million per year pays .13% of their income. This applies to sales taxes, property taxes, state taxes, local taxes and the thousand other taxes and fees charged on utility bills, etc. William Domhoff notes that the top 1% who make $1.3 million per year only pay 30.9% of their income in taxes, while those making $141,000 per year pay 31.5% of their income in taxes. I guess their tax lawyers aren’t as well paid. Even those making $34,000 pay 27% of their income in taxes.
Source: Citizens for Tax Justice
The top 1% does pay 38% of the Federal income tax because they have a 23.5% share of the national income. The last time the top 1% reached this level of income was in 1928, just before the Great Stock Market Crash and the Great Depression. During the glory years of the American Empire, between 1946 and 1971, the top 1% of households’ share of the national income ranged between 8% and 13%. With the era of unbridled greed and debt that began in the 1980s, the inequitable distribution of wealth has risen to new heights. This level of pillaging by those in control of the finance sector of the economy, supported by their mouthpieces in Congress, and championed by their controlled media pundits, has reached a level that will eventually lead to revolution.
The biggest lie pushed forth by the powerful super rich in this country is related to the top marginal tax rate, which is currently 35%. The Republican agenda includes a further cut in the top rate to 25%. It is sold to the American public as a good thing for them. It has nothing to do with them. The 35% rate applies to only taxable income over $379,000. Of the 151 million Americans earning a living, this rate would apply to about 200,000 people. The top marginal tax rates during the glory years of the American Empire (1946 – 1971) were between 70% and 90%. These rates only applied to taxable income above $400,000, when the average income was less than $10,000 per year. These were the best years for the American middle class.
The IRS issues an annual report on the 400 highest income tax payers. In 1961, there were 398 taxpayers who made $1 million or more. Today there are over 78,000 taxpayers who make more than $1 million. The loopholes written into the tax code over decades by lobbyists paid for by the super rich, plus much lower tax rates on the largest sources of income of the wealthy (capital gains taxed at 15%), explain why the average federal income tax rate on the 400 richest people in America was 18.11% in 2008, according to the IRS, down from 26.38% when this data were first calculated in 1992. Among the top 400, 7.5% had an average tax rate of less than 10%, 25% paid between 10% and 15%, and 28% paid between 15% and 20%. The average American’s share of their income going to federal taxes increased from 13.1% in 1961 to 22.5% in 2008. William Domhoff explains how the super rich have paid off Congress to rig the system in their favor:
“According to another analysis by Johnston (2010a), the average income of the top 400 tripled during the Clinton Administration and doubled during the first seven years of the Bush Administration. So by 2007, the top 400 averaged $344.8 million per person, up 31% from an average of $263.3 million just one year earlier. How are these huge gains possible for the top 400? It’s due to cuts in the tax rates on capital gains and dividends, which were down to a mere 15% in 2007 thanks to the tax cuts proposed by the Bush Administration and passed by Congress in 2003. Since almost 75% of the income for the top 400 comes from capital gains and dividends, it’s not hard to see why tax cuts on income sources available to only a tiny percent of Americans mattered greatly for the high-earning few. Overall, the effective tax rate on high incomes fell by 7% during the Clinton presidency and 6% in the Bush era, so the top 400 had a tax rate of 20% or less in 2007, far lower than the marginal tax rate of 35% that the highest income earners (over $372,650) supposedly pay.” – Wealth, Income, and Power – William Domhoff
As an added bonus, hedge fund managers like John Paulson, who made $9 billion over two years, paid no income taxes on his windfall. In 2007, Republicans and a key Democrat, Sen. Charles Schumer of New York, fought to keep the tax rate on hedge fund managers at 15%, arguing that the profits from hedge funds should be considered capital gains. Schumer, the ultra-liberal champion of the poor, knows who butters his bread – Wall Street. But it gets better. As long as they leave their money, known as “carried interest,” in the hedge fund, their taxes are deferred. They pay taxes only when they cash out, which could be decades from now. These upstanding citizens access their jackpot winnings by borrowing against the carried interest, often at rates as low as 2%. I’m sure every youngster in America dreams of becoming a hedge fund manager so they can use system risking leverage to make bets on derivatives, reap billions in profits, pay no taxes, and produce no value for the country. The new American Dream.
It is plain to see by anyone without an ideological agenda that a few thousand corrupt individuals have managed to gain control of the American economic system. The introduction of the personal income tax and creation of the Federal Reserve in 1913 have provided the means for the few to dominate the many. Over the last century, a rich super class has created their wealth through issuing debt to the masses, writing the tax code in their favor through their captive politician protectors, using their own private bank to issue trillions in fiat currency and create inflation, and used their control of the mass media to convince the average American that this was beneficial. Chris Whalen in his brilliant economic history of the United States – Inflated – How Money & Debt Built the American Dream sums up what has happened:
“Once the two functions, controlling the amount of currency in circulation, and second the government’s fiscal operations, are housed under the same roof, inflation and a decrease in the value of money are the inevitable result. It is always easier to borrow than to raise taxes. Politicians who have access to the printing press will invariably use it.”
The small cabal of banking elite committed the crime of the century between 2001 and 2008. They used their power over the Federal Reserve and political class to reap hundreds of billions in ill-begotten profits and crashed the worldwide economic system in 2008. They then held the country hostage as they extorted trillions more in bailouts from the taxpayers. As a reward for their chutzpah, they have paid themselves billions in bonuses. While 44 million people try to make ends meet with food stamps, these criminals continue to pillage the countryside attempting to steal the remainder of middle class wealth. As the middle class sinks further into despair, anger is building. The political class has tried to pay off the poor with entitlement payments, but it is the middle class that will revolt when their hope for a better life is destroyed by the moneyed class. With debt in the system expanding at hyper-speed, the American Empire will not decline with a whimper but with a bang. All previous Fourth Turning’s in U.S. history have resulted in tremendous bloodshed. The next ten years will follow this pattern. I’ll address the coming revolution against the criminal banking element in the last part of this five part series – Unforgiven.
Read this article from Chris Whalen carefully. The Wall Street banks are free to steal your money. The legislative, judicial and executive branches of the United States government agree that this is OK. Goldman Sachs, Jon Corzine and a myriad of other sociopathic predators have already gotten away with it. Not one banker has gone to jail for the greatest control fraud in the history of mankind. On some future weekend your owners are going to pull the plug and steal all your money, and do it legally because they write and interpret the laws as they deem fit. Get your money out of the Wall Street banks ASAP.
How Congress Helps the TBTF Banks Steal Your Money with Impunity
Submitted by rcwhalenon 08/20/2012 22:08 -0400
Well I won’t back down, no I won’t back down
You could stand me up at the gates of hell
But I won’t back down
Gonna stand my ground, won’t be turned around
And I’ll keep this world from draggin’ me down
Gonna stand my ground and I won’t back down
There is a very important article on Jesse’s Cafe Americain blogspot, “Warren Pollock and Ann Barnhardt On the Increased Risk to Customers In the US Financial System,” that illustrates how the US bankruptcy laws now enable theft brazen theft of customer funds by the largest banks. I have written about this issue in the past on ZH, but Pollock and Barnhart really do a nice job of presenting the issue.
My friend and mentor Walker Todd of AIER, who worked as a legal counsel at the Federal Reserve Banks of New York and Cleveland, states the situation succinctly:
“Basically, there is a new 7th Circuit opinion saying that there is no reason to impose a constructive trust on a lender’s takings of customers’ funds from client commodity firms that were used (inappropriately) to secure the firms’ borrowings, as long as the lender can say that it did not know WITH CERTAINTY that customers’ funds were being repledged. Negligence and misappropriation (vs. knowing criminal intent) are now a sufficient excuse for letting the lender keep the money and go to the head of the line for distributions in bankruptcies of the client commodity firms. Spread the word.”
Walker goes on to say that this decision does rise to the level of “what were they thinking’ when the Powers That Be think that somehow this is saving or strengthening the financial system. He refers to the now infamous 2005 bankruptcy reform legislation, where the banks made themselves senior to the very customers and savers they are supposed to protect. Pollock summarizes the situation nicely in the article:
“The way I read it was that basically you no longer have property rights. If you have your money in any (US) financial institution, you now have no property rights because in a crisis situation a bankruptcy judge now has the right to say that all of this speculation (by the banks and brokers) takes precedence over your savings.”
Another veteran attorney that I have quoted often in past articles about creditor rights comments thusly:
“This decision is just further incentive to steal. And if you do it in Fl., state attorneys say they will not prosecute theft when conducted without the use of violence. So, unless the broker threatens to injure customers that do not turnover money, in Fl., it’s freedom to steal.”
I won’t go over all of the fine post from Jesse’s Cafe Americain, but here are a couple of basic recommendation to readers of ZH and investors generally about the custody of customer funds:
First, no customer should EVER use a broker-dealer as custodian, either for securities or cash. The 2005 bankruptcy reform legislation and the Seventh Circuit decision make clear that customers of a broker dealer have no legal protection from the predatory behavior of the large banks that clear for these firms.
Second, no customer should maintain funds in a depository about the FDIC insured limit if that bank has a broker dealer subsidiary. Based on my reading of the Seventh Circuit decision, it is entirely possible for a bank to place a broker dealer affiliate into bankruptcy and then raid the customer accounts to protect the bank. Keep in mind that the Seventh Circuit is simply interpreting the law as changed by the lobbyists for the TBTF banks.
Third, everyone in the financial markets needs to start pressing members of Congress to repeal the 2005 bankruptcy reform laws in its entirety. The bankruptcy reform legislation passed during Bush II is one of the most hideous laws ever passed by the national congress. And this travesty was supported and encouraged by the Fed and other regulators, proof again that the zombie banks are calling all of the shots in Washington.
The liberal notion of “regulation” begun in the 1930s has become a bad joke. This legal decision shows that the only way we can regain control of the US politically is to see the largest banks broken up. Unfortunately, neither of the political candidates for the presidency is likely to do anything of the kind. At the end of the day, the only alternative for people who will not live as slaves to the big banks may be to seek the peaceful overthrow of the government of the United States, at least as it currently exists today. Shall we start the revolution now? Or wait for the big banks to take everything that we have and more?
Posted on 12th June 2012 by Administrator in Economy
Jesse and Chris Whalen. Two of the truth tellers about Wall Street malfeasence, corruption, greed, and criminality.
“Of all forms of tyranny the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of plutocracy.”
John Pierpont Morgan
Chris Whalen makes some interesting observations and cuts to the heart of the matter, although he sometimes falls into the morality of the income statement.
The reactions of the CNBC spokesmodels and Andrew Ross Sorkin are worth watching.
Still I give them credit for having these sorts of discussions at CNBC, as compared to Bloomberg TV which has become an extended, often arrogantly frivolous, informercial for the one percent. At least the print Bloomberg maintains some journalistic standards.
It is interesting that the argument keeps coming back to the defense that Wall Street firms ‘write off big losses all the time.’
It is not so much the size of the balance sheet, but rather the leverage and risks that are stacked against those assets, and the likely outcomes of cascading losses in a deeply intertwined financial system.
The bank has come far from when its founder, J. P. Morgan, did business with a person based on their integrity and character, and not on the size of their balance sheet or cleverness of their accountants, lawyers, and attorneys.
Asked: “Is not commercial credit based primarily upon money or property?”
“No sir,” replied Morgan. “The first thing is character.”
“Before money or property?”
“Before money or anything else. Money cannot buy it…Because a man I do not trust could not get money from me on all the bonds in Christendom.”
John Pierpont Morgan
We do not know if Jamie Dimon will tell the whole truth his testimony, but there is little doubt in my mind that he will at least partially hide behind the CEO defense, claiming ignorance of the situation which he helped to create and from which he profited enormously. He may apologize for it, but he will not own it. And it was his doing in order to circumvent the impending Volcker Rule, of this I have barely a doubt.
It seems that JPM was mispresenting and mispricing their risks, egregiously to the point of making false statements to the press, the public, and probably the regulators, and they were doing so with public funds and government guaranteed deposits in the pursuit of outsized income for their traders and management. And it may involve regulatory capture and accounting misrepresentations executed by offshoring portions of their trade book, and perhaps fraud.
There seems to be a pattern of behaviour here, of a firm taking very large positions in the markets and rationalizing them as ‘hedges’ in order to take undisclosed risks for short term profits and therby presenting systemic risk.
This is precisely the genre of problems that led to the collapse of Lehman Brothers.
We ought not to forget that JPM was also sitting on over $600 million in stolen MF Global customer money for many months, and quietly returned it over a weekend not so long ago.
And that they have claimed that ‘hedging’ is the rationale for their enormously large and leveraged short positions in the silver market, although I doubt that the truth of that will ever be allowed to come to light with any consequence.
Have we learned nothing?
When a people declare that ‘greed is good’ is their overweening motto and principle of action, then they have already forsaken their liberty, and ensured themselves and their children nothing more than a miserable and despicable decline.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.
There is no other way to get our economy back to normalcy. The Wall Street banks must be broken up just like AT&T. The competition created by the AT&T breakup benefited the American people greatly. Monopolies and oligopolies do not benefit the people.
The bad debt that saturates our system must be purged. The write-off of this bad debt in conjunction with breaking up the Wall Street banking cartel would result in a sharp economic contraction, but it would be short lived. An economy freed from the shackles of Wall Street greed, Federal Reserve interest rate manipulation and government control over our economic system would be able to grow. Saving and investment would make sense.
Chris Whalen, Bill Black, Jesse, John Hussman, and a few other honest souls have been right on this issue for years. Their voices will not be heard. We are destined to become Greece before change happens.
Return to Normalcy: The False Argument of “Austerity” vs. Growth
May 21, 2012
F.A. Hayek, 1978
In this issue of The Institutional Risk Analyst, we feature a comment by IRA co-founder Christopher Whalen that was originally written at the request of ForeignAffairs.com, but was killed just prior to publication. Their loss, our gain. Enjoy.
Return to Normalcy: The False Argument of “Austerity” vs. Growth
To rescue Europe, to reinvigorate the United States, and to set the global economy on a sustainable path toward expansion, the current debate offers a so-called “choice”: either slash government spending or spend your way to growth. In Europe, German Chancellor Angela Merkel is one of the most prominent proponents of fiscal restraint — in part because Germany is picking up the tab for the continent’s debt crisis. And in the United States, economist and New York Times columnist Paul Krugman (who’s just come out with a new book on this subject) is the fullest-throated supporter of more government spending.
But framing the discussion between austerity and stimulus is a canard that has enveloped economists, commentators, and policymakers in a collective delusion. There is no more “normal.” Significant economic growth — akin to the rates seen in the developing world since World War II and particularly since the 1980s — is something of the past. Over the past three decades, the United States’ growing economy was a function of falling interest rates and increasing fiscal deficits. Both tendencies fueled global commerce. But depending on your view of inflation, the intrinsic growth possible in the major economies going forward is likely to be nominal, at best. Existing debt, unfavorable demographics, and lacking political will to raise taxes will keep G-20 economies from returning to the happy days of economic growth above the expansion of working age populations.
The key question facing the global community is how to manage the transition to a less robust, but also less volatile period of growth without sliding into another world war. A true solution will have to involve not only governments reducing public debt, but also restructuring insolvent industries to fuel real, sustainable growth.
When the political leaders of the G-20 nations such as Merkel and U.S. President Barack Obama say they cannot dismantle large banks or reduce national debt levels that are choking consumption and job growth — most say that doing so would introduce “systemic risk” into the economy — what the political class is really saying is that they do not want to risk their careers by championing policies that will inconvenience their sponsors in the business community. But the recent elections in France and elsewhere in Europe prove that voters think otherwise. In fact, the EU, and the United States for that matter, are only beginning to see the full public reaction to the crisis. As in the 1930s, it may take a decade for Americans to get angry enough to force major political changes.
Indeed, to give Merkel her due, the key obstacle to global growth today is excessive government spending and public debt. But the United States, and, in fact, the majority of G-20 nations, have ruled out broad debt reduction and financial restructuring of insolvent banking systems. Spain is a prime example. Put another way, G-20 leaders are telling their citizens to prepare for a new era of reduced expectations with no accountability. Large banks in the United States openly facilitate fraud against investors, as with Lehman Brothers, the case of Bernie Madoff and the recent implosion of financial firm MF Global. But consequences — especially criminal — are minimal. Through a financial lens, one could call this a policy of “extend and pretend.” But over time, there will be toxic political consequences. What’s ironic, and most damning, is that nearly all of the lessons of the 2008 crash have been forgotten. More, the refusal to restructure and reduce debt in the United States and the EU will almost assure low growth and further instability in the global financial markets.
Over the past 80 years, the leaders of the industrial nations have bought into a narrative that says economic growth can be managed with levers such as fiscal and monetary policy — but there is no need, so the thinking goes, for constraints on public debt or even rates of inflation. This narrative goes back to the economic template the United States set for the world after World War II. Under the Bretton Woods framework, the world equated the dollar with gold, allowing U.S. policymakers to expand the global economy upon a sea of fiat paper dollars. But as “managed stability,” fueled by U.S. monetary emissions, is now falling by the wayside, G-20 leaders need to develop a new means of attacking joblessness and deflation. To start, we must build a new narrative free of neo-Keynesian fantasies about consumer purchasing power trumping true wealth creation.
Keynes of course was no apologist for public debt. But when former National Economic Council Director Lawrence Summers talks about the horrors of austerity and the need for more fiscal stimulus, debt reduction is tacked on — when it is mentioned at all — as an afterthought. More often, more debt is the solution. Inflation is an assumed but unspoken part of the pro-stimulus agenda. But these same liberals refuse to accept that the marginal increase in GDP per a given amount of new public debt is now just about zero.
Or take Krugman arguing in The New York Review of Books: “The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending.” But is this really true? Spending increases are never temporary and such a strategy will lead to an economic dead end, with rising inflation for consumers and no appreciable job creation. Alex Pollock at American Enterprise Institute argues a debt that cannot be paid must default, but the “neo-Keynesian” socialist tendency led by Krugman and Summers cannot imagine a world without lots of public debt. Without big government and big debt, the political left in the U.S. and much of the G-20 has no future. If you understand that FDR’s New Deal and World War II enfranchised the Democratic Party after decades of GOP hegemony (with near total business support), the prospect of fiscal cuts spells political doom for the children of the New Deal. This is precisely the strategy of American conservatives, to starve Washington to death by limiting tax revenues and forcing fiscal crises.
The best way forward is to first manage public expectations over future economic growth instead of promising miraculous salvation from austerity. In the absence of war and new frontiers, the real economy in most parts of the world typically grows in low to mid-single digits of GDP annually. While there are situations where growth can be higher, overall one can make the case that the true baseline for real growth in any real economy is somewhere in mid- to low-single digits. Going forward, something else has to happen, something more radical: break up the big banks and renew the fight against financial fraud. In the United States, Obama has given Wall Street a pass on the worst financial fraud since the 1920s and has hurt investor confidence and left the public outraged. But his inaction with respect to the economy is the president’s greatest fault.
Governments of industrialized nations must restructure many of the G-20 economies — such as Spain, Greece, the United Kingdom and even the United States. A combination of public debt reduction and restructuring in the U.S. banking and housing sectors will help to improve new credit creation and stimulate growth. For the past four years, the Obama Administration has studiously done precious little about housing and fraud on Wall Street, so it’s no surprise that business and investor confidence is lagging. Contrary to the Krugman model of increased public sector spending and defending the large banks, the United States needs to rebuild private markets and restore private credit creation to create real jobs.
So it is ironic that the proponents of breaking up the big banks, such as Dallas Fed President Richard Fisher and former FDIC Chairman Sheila Bair, are actually taking a far more populist and progressive stance than the defenders of American liberalism. Going back to the activist principals of President Theodore Roosevelt, dismantling large, monopolistic banks and reducing excessive debts is the one true way to create new economic growth.
The big banks of 2012 are just as toxic as the great trusts of a century ago, yet liberals such as Krugman openly defend them. For one thing, the top four “too big to fail” banks have monopoly control over the U.S. mortgage market. This cartel denies more than half of US home owners their legal right to prepay high cost mortgages and refinance, thereby blocking Fed efforts to boost consumer activity. Breaking up the top four banks would have enormous benefits to competition in the US mortgage sector.
But entrenched political elites in all of the G-20 nations see their personal and political doom facing them in any earnest restructuring effort. In France, the issue of “austerity” dictated by Germany already is leading to political change. Spain and other nations will follow in rejecting German fiscal dictates and reducing debt. In the United States, public anger against Obama and Washington over the actions of Wall Street is rising. But the biggest threat to Obama is the fact that the US economy is worse off today — more debt, lower home prices, fewer jobs — than in 2008. In November all incumbents will face tough challenges. And come 2013, a new, even angrier Congress is hardly going to be in a mood for compromise regardless of who occupies the White House.
When a political leader talks effectively about ways to pursue less volatile economic growth in a framework of limits on public spending and debt, such an individual will find a large and eager audience. The supposed debate between austerity and stimulus is false in economic terms, politically duplicitous, and, when one considers basic arithmetic, unsustainable. More debt and inflation is not a solution. The first politician to stand up and say just that in an intelligible way gets to set the course for the G-20 industrial nations over the next century.
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