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Wednesday, October 01, 2008

Dennis Kucinich on the bailout

Dennis Kucnich sent me a link to this video, which he considers an excellent starter course on the financial crisis. (Actually, I haven't seen it yet. It's longish.)

(UPDATE: Okay, I started to watch. Yow! Within seconds, we got that infamous faked quote attribute to Nathan Meyer Rothschild, along with a yanked-out-of-context quote by Woodrow Wilson. I've discussed this crap before. Woodrow Wilson was condemning not the Federal Reserve (which he created and of which he always remained proud), but the free-for-all system that preceded it. Looks to me like Ol' Dennis is one of those who guys perpetually surprised to learn what banks around the world do. This is the area where the far right meets the far left.)

(UPDATE II: There are further fake quotes in the film, including one attributed to David Rockefeller that is so obviously concocted that one must question either the filmmakers' intelligence or their honesty. There's also quite a lot of loopy conspiracism, including the suggestion that Lincoln and Garfield were murdered by "international bankers" -- i.e., you know who.)

(UPDATE III: The man behind the movie, Paul Grignon, is an excellent landscape painter. Never trust an artist. Take it from me.)

I thought you folks might be interested to learn what ol' Dennis -- we're on a first-name basis, what with the two of us being infatuated with the same lady and all -- has to say about the bailout proposal, its failure, and its repercussions. I've added a link or two. Heeerrrre's Dennis:

* * *

Yesterday marked a day that will go down in history, when Congressional Democrats and Republicans alike took on full responsibility to protect the interests of taxpaying Americans, and defeated the deceptive bail out bill, defying the dictates of the Administration, the House Majority Leadership, the House Minority Leadership and the special interests on Wall Street.

Obviously Congress must consider quickly another course. There are immediate issues which demand attention and responsible action by the Congress so that the taxpayers, their assets, and their futures are protected.

We MUST do something to protect millions of Americans whose homes, bank deposits, investments, and pensions are at risk in a financial system that has become seriously corrupted. We are told that we must stabilize markets in order for the people to be protected. I think we need to protect peoples' homes, bank deposits, investments, and pensions, to order to stabilize the market.

We cannot delay taking action. But the action must benefit all Americans, not just a privileged few. Otherwise, more plans will fail, and the financial security of everyone will be at risk.

The $700 billion bailout would have added to our existing unbearable load of national debt, trade deficits, and the cost of paying for the war. It would have been a disaster for the American public and the government for decades and maybe even centuries to come.

To be sure, there are many different reasons why people voted against the bailout. The legislation did not regard in any meaningful way the plight of millions of Americans who are about to lose their homes. It did nothing to strengthen existing regulatory structures or impose new ones at the Securities and Exchange Commission and the Federal Reserve in order to protect investors. There were no direct protections for bank depositors. There was nothing to stop further speculation, which is what brought us into this mess in the first place.

This was a bailout for some firms (and investors) on Wall Street, with the idea that in doing so there would be certain, unspecified, general benefits to the economy.

This is a perfect time to open a broader discussion about our financial system, especially our monetary system. Such a discussion is like searching for a needle in a haystack, and then, upon finding it, discussing its qualities at great length. Let me briefly describe the haystack instead.

Here is a very quick explanation of the $700 billion bailout within the context of the mechanics of our monetary and banking system:

The taxpayers loan money to the banks. But the taxpayers do not have the money. So we have to borrow it from the banks to give it back to the banks. But the banks do not have the money to loan to the government. So they create it into existence (through a mechanism called fractional reserve) and then loan it to us, at interest, so we can then give it back to them.


This is the system. This is the standard mechanism used to expand the money supply on a daily basis not a special one designed only for the "$700 billion" transaction. People will explain this to you in many different ways, but this is what it comes down to.

The banks needed Congress' approval. Of course in this topsy turvy world, it is the banks which set the terms of the money they are borrowing from the taxpayers. And what do we get for this transaction? Long term debt enslavement of our country. We get to pay back to the banks trillions of dollars ($700 billion with compounded interest) and the banks give us their bad debt which they cull from everywhere in the world.

Who could turn down a deal like this? I did.

The globalization of the debt puts the United States in the position that in order to repay the money that we borrow from the banks (for the banks) we could be forced to accept International Monetary Fund dictates which involve cutting health, social security benefits and all other social spending in addition to reducing wages and exploiting our natural resources. This inevitably leads to a loss of economic, social and political freedom.

Under the failed $700 billion bailout plan, Wall Street's profits are Wall Street's profits and Wall Street's losses are the taxpayers' losses. Profits are capitalized. Losses are socialized.

We are at a teachable moment on matters of money and finance. In the coming days and weeks, I will share with you thoughts about what can be done to take us not just in a new direction, but in a new direction which is just.
Yes he he is roughly right, although most of Wall Street don't understand this point, let alone main street. I would argue with him on one thing. The existing securities regulation was plenty sufficient - with the exception of the Fed's ability to fully regulate the mortgage market. On everything else it wasn't a failure of legislation but rather of understanding. Everyone thought it ok.

A while ago the Fed were kind enough to give me a meeting with one of its Bush appointed governors. A very young man (well ok, younger than me!) with less of an economics resume than an investment banking resume. Morgan Stanley for anyone who cares enough to check. While in the meeting I took the opportunity to raise some of my concerns regarding the systemic risk to the system arising from securitisation and the corruption of the mortgage market.

He responded with the standard mantra - that markets spread risk to those best equipped to hold it. I told him that was rubbish in this case cos the risk really hadn't left the books of the investment banks due to the prime brokerage system. My argument was that the prime brokers (i-banks) were a weak link in the system and they would bring the whole thing down unless something was done. He thought I was a British idiot and politely ignored me.

There is a very technical explanation in monetary theory about why he was wrong. But the bottom line was that the problem wasn't the legal framework (with the exception I mentioned). The problem was that EVERYONE had drunk the coolaid. They all had MBA but very few of them understood the economic theory enough to realize why it wouldn't work.

I'm impressed that Kucinich understands the giant con that is fractional banking. However I just don't think you have the time to think up a better response before the whole thing blows up. I think thats one of the reasons why Paulson was pushing this horribly flawed plan. That and he cant imagine a world without Goldman Sachs.

There really isn't much time left to fix this before the markets detonate completely.

The only other recommendation I have is that I would ban MBAs. These courses are analogous to giving kids automatic weapons to play with. Its only a matter of time before something goes badly wrong.

Oh, and the money as debt video he sent is very good.

Very left wing, and there are some flaws in its argument but scarily, it is broadly correct as far as I can tell. I would recommend it to anyone as food for thought.
"Very left wing" ...?

No. As I said, this is the area where the far left meets the far right.

I don't think you've ever read anything by Gottfried Feder, have you? Name ring a bell?
No, I haven't. Should I?

Thanks for the comments on the veracity of the quotes. I hadn't bothered to check any of them when I first saw the film. I was too busy trying to work out whether the core argument about how banking works is correct. I think it is but I'm perfectly prepared to be corrected.

Just in case you are concerned about my sanity, I don't think I am either far left or far right but again, I am prepared to be corrected. I'm a little concerned that no one else is commenting. Am I the only moron who is interested in this kind of thing?

Actually, Harry, I should have thanked you for your insights, which I valued.

Sorry for coming across so smug there. Basically, I simply wanted to point out that the fractional reserve system is demonized by the far right as well as by elements of the far left. So we are entering very murky waters.

At any rate, a top-to-bottom restructuring of the world's economic system is impossible, especially in a crisis.
This comment has been removed by a blog administrator.
I guess the only point I was keen to really get across, and where I agree with Paul G, is that fractional banking is a privileged racket. It is immensely profitable, and can be viewed as very much as a license to literally print money. We have outsourced control of money supply to the banking system. As such we have the right to demand particular care and special controls on their business activities.

I hate the special rights that bankers get - God knows who wouldn't like to pay people with IOUs that you print yourself. BUT I don't have a better system. See Winston Churchill's comments on Democracy.

It is my understanding that suspending mark-to-market accounting would be disastrous. The failed plan included this:

10 (a) AUTHORITY.—The Securities and Exchange Com
11 mission shall have the authority under the securities laws
12 (as such term is defined in section 3(a)(47) of the Securi
13 ties Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to sus
14 pend, by rule, regulation, or order, the application of
15 Statement Number 157 of the Financial Accounting
16 Standards Board for any issuer (as such term is defined
17 in section 3(a)(8) of such Act) or with respect to any class
18 or category of transaction if the Commission determines
19 that is necessary or appropriate in the public interest and
20 is consistent with the protection of investors.

Ya, let's just value the junk at whatever we want.
A member of the US Congress sent you a link to a spurious video he presumably endorses? Why? He's not your representative.

In a perfect world Dennis and Sarah would 'debate' and converse mano a mano, both being communication majors in college, mayors, warriors against Big Energy, and beauty contest winners.

No, Abbey, you misunderstood. The comment was directed at the previous (deleted) commenter.
What comment are you talking about? How do you know I misunderstood? You're in LACA somewhere, Dennis represents people from Ohio, you say he sent you a link to a video you would flunk in any course it showed up in, and you say Dennis gives it credence; he's also Prolife like Sarah.

Thanks to Harry for this: "The only other recommendation I have is that I would ban MBAs." May we shut down Haa-vard's MBA program first, please?

They say the public will benefit from this because credit will be flowing again so people can keep their homes and get new ones.

The truth is the banks are just going to use the money to shore up their big profits and big exec salaries they are used to and when "Joe Public" tries to get a loan, he will still be glared at and told why he needs to pay a crummy interest rate or be told no.

Upper class who are invested in Wall Street will benefit (like the Bush fortune for example) but it won't help the average person.

150 million Americans combined can't even match the wealth of the richest 400 Americans.

If they really want to help the economy, pass a multi-trillion dollar bill and give about $100,000 to each of the 150 million average American families!! The banks would make out because people would pay their mortgage debt to stay in their homes, other people would be able to buy a home, some would invest this one-time windfall to try and make it last so the stock market would boom, many would buy new cars so the auto industry would boom, many would buy TVs and other consumer goods so businesses everywhere would boom which means production and jobs would increase dramatically, the travel industry would get busy, many would start their business they always wanted to, some could pay for the health care they always wanted/needed, and so on and so on.

Sure the value of the dollar would go to crap BUT, at the rate the G-men spend money nowadays, we are headed that way anyway. At least the economy would boom if you give the leg up directly to the public and people would be happy and have a roof over their head and a job.

I'm sure there are reasons why we provide so many other Countries with so much cash but why not tell them "Sorry, this year we have to spend our taxpayer cash on our taxpayers"

I realize I'm not as smart as many of the readers here (I can tell by the $100 words you guys throw around BUT it just seems so simple to me how to get an economy booming again :) It also seems like it is just the RIGHT thing to do instead of keeping those top 400 people ultra-rich off the backs of regular joe public who doesn't even own any stocks or have much cash in the bank.

Do you honestly think this $700 billion dollar fleecing of the public is going to stop at $700 billion?
Gee, only problem with what you've written is that you should not apologize for your vocabulary.

The major argument against just printing up a trillion bucks and giving it to the people is that it would create inflation. Well, it would. But maybe the housing market will achieve some sanity if house prices remain static while everything else goes up.
Bailouts are the price we pay for tax cuts. There is no free lunch, despite what Republicans say.
There'd be free lunch if we ate the Republicans. But then we'd end up puking ourselves to death.
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