Money Creation Done by Govt

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Hogeye's picture
Hogeye
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Money Creation Done by Govt
I have a problem with chapter eight. While it is factually correct, its framing seems to put primary culpability on the Federal Reserve Bank for "creating money out of thin air." Meanwhile, while admitting that the US government has no money, somehow borrowing and promising to repay with "money out of thin air" is portrayed as honest. Let me put the same facts into a different perspective.
The US government creates money out of thin air. It does this by writing IOUs called Treasury bonds promising to create money. The cashier of these IOUs, a monopoly controlled by government, is called the Federal Reserve Bank. Ostensibly "private," it is actually a shell corporation of the US government. Its director is appointed by the State. It follows the State's orders to create money, and in return its managers get in on the bottom floor of the fractional reserve banking scheme.
Basically, this framing puts the culpability primarily on the State rather than the State's central bank. It has the bonus that it is easier to understand than centering the explanation on the Fed. It is simply the modern version of clipping coins. Of course, fiat money inflation is a lot more dangerous than coin clipping, just as a nuclear bomb is a lot more dangerous than a spear.
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Re: Money Creation Done by Govt

Hogeye, I think you're almost there.  But the fault isn't on the Fed front men (as Chris says), or the government front men (as you're saying).  These are just the people we see on TV...the key is to look behind the TV screen.  The real fault is the oligarchs behind both the Fed front men and the government front men.  The Rothschilds, Rockefellers, Morgans, etc are indeed the private owners/controllers of the world's financial system.  The Fed is not public no matter how hard they try to hide the private owners...the Fed is a charade (it's not federal, nor does it have reserves).  They ensure their stooges are in place the Fed and at Treasury to continue doing their bidding, stealing money from all of us to pay those bastards interest on what should be our own public money.

 See the Money Masters video:   

http://video.google.com/videoplay?docid=-515319560256183936&ei=p3WgSZDNA...

And watch "Creature from Jekyll Island" 

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Re: Money Creation Done by Govt

Read The Web of Debt, The Shocking Truth About Our Money System and How We Can Break Free by Ellen Hodgson Brown. 

Brian 

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Re: Money Creation Done by Govt

Money As Debt is a good place to begin.  Easy to pick up, shorter than The Money Masters. 

http://video.google.com/videosearch?q=money+as+debt+47&hl=en&emb=1&aq=f#

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Re: Money Creation Done by Govt

Read the following link from bottom to top.  It was set up that way for ease of adding to it.  Very informative!

http://moneyaswealth.blogspot.com/

Jerryl

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Re: Money Creation Done by Govt

 Ao and Durango Kid:

Starting at the beginning.

(1) is false. Money evolved from the most liquid commodity with certain properties (high unit value, homogeneous, durable, stable supply.) But (1) is true if you are only talking about fiat money.

(2-4)True for fiat money, but not commodity money.

The way we can break free is by using and promoting hard money, e.g. silver rounds or ... See my article Walmart Can Save the World and discuss it in the thread I created here.

Strabes, I don't buy that conspiracy shit. Various banks compete with each other, e.g. Morgan vs. Rockefeller et. al. in US history. Governments are the baddies, and various special interests compete for the government gun.

 
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Re: Money Creation Done by Govt

Hogeye, 

1st, if only your view that various special interests compete for favor with government was true, we wouldn't be in the situation we're in. By the way, that notion was brilliantly penned by James Madison in Federalist #10--competing factions will prevent anyone from gaining power over the federal government.  He wrote that assuming bankers would not be given a monopoly over our money supply. In fact, he fought the 1st Bank because of that--he knew that a national bank would supersede all factions and become THE faction, thereby destroying a key underpinning of distributed power created by the Constitution and explained in Federalist 10 (Jefferson and others said the same). Unfortunately he was the guy sucked into agreeing to the 2nd Bank after the War of 1812 put the govt in too much debt and it needed to inflate its way out.  But that bank was wisely shut down as well--back then vigorous debate occurred about the bank (not today) and competing factions still reigned (especially the autonomy of the states and their representatives which had the real power to oppose such a damaging institution at the federal level...not today).  Unfortunately the Federal Reserve (which includes the Wall St cartel which owns the regional Feds) has had a monopoly far outlasting the 1st and 2nd banks and it has morphed our nation into the unconstitutional empire it is today as a result.  

Some rhetorical questions...

You think the Morgans and Rockefellers were competitors?  LOL.

Is it just random "special interests" that caused us to evolve from a federal republic with very little national power to a national empire trying to control the globe monetarily and militarily that's more corrupt than Rome (measured by the inconceivable amount of dollars stolen from the masses to pay rich financiers in NY)?  

Isn't it intriguing that one of the biggest debates in american history was over the idea of a national bank, but soon after the Fed was created we haven't heard it discussed by either establishment party at all?

You're suggesting that when both parties controlling our government appoint Wall St to run our economy and steal $12 trillion from us and give it to rich bankers, capital holders, investors that the government officials have the real power and they're the "baddies?"  Last I checked people who get paid have the power, and people who collect the money for them are just their servants.  I know Time magazine and pop media news hasn't put the pieces of the puzzle together for us...they're too busy hanging with the Wall St crowd in the Hamptons...but it's fairly easy for anyone to put the puzzle together themselves if they'd take the time to do so.  

I can't stand the woman or her sadistic desire to see us kill people around the world, but Ann Coulter apparently wrote an insightful piece about dating DC boys vs. Wall St men in one of her books.  DC males are momma's boys and yes-men.  Wall St males are dominant narcissists (which she's attracted to, which says a lot about her psychology).  Having worked in both, I agree with that characterization. Which type of personality do you think is in charge?

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Re: Money Creation Done by Govt

 Strabes> "If only your view that various special interests compete for favor with government was true, we wouldn't be in the situation we're in."

This is precisely why we are in this situation. Ruling elites rent special privileges to special interests. It's called rent-seeking by economists. Cf: "Public choice theory."

Your history of the first and second central banks in the US is right as far as it goes. In 1913 the Fed was founded to cartelize the banking industry. This was great for the ruling elite, and good for the favored big banking groups, but bad for most people.

Strabes> "You think the Morgans and Rockefellers were competitors?"

Yes. Of course, they both are part of the govt run Fed banking cartel. Even competitors cooperate when it is in their interest, i.e. to limit competition and startups, fix prices, etc. But the point is that cartels tend to be unsuccessful and don't last in relatively free markets - it's individually rational to defect. But when the government enforces the cartel e.g. with the ICC on early railroads, the FTC for general industry, and the Fed for banks, they can last a long time. Cf: Fed as Cartelization Device - Rothbard http://www.lewrockwell.com/rothbard/cartelization.pdf For a good example of competition between the House of Morgan and Rockefeller et. al. see The Separation of Commercial and Investment Banking: The Morgans vs. the Rockefellers http://mises.org/journals/qjae/pdf/qjae1_1_1.pdf

Strabes> "Is it just random "special interests" that caused us to evolve from a federal republic with very little national power to a national empire trying to control the globe monetarily and militarily that's more corrupt than Rome?"

No, it is an invisible hand process. I see it as emergent order (aka spontaneous order, aka cosmos) rather than planned order. During crises (war or monetary crises usually) the government ramps up power. After the crisis, power may be reduced some, but not to pre-crisis levels. Over time small govts become big. (Cf: Crisis and Leviathan by Robert Higgs.) There is also the problem of governments judging their own cases, i.e. the govt courts reinterpreting their constitution in favor of the State. Cf: The Anatomy of the State by Rothbard http://www.ozarkia.net/bill/anarchism/library/AnatomyState.html  I agree with some/many of the results conspiracy theorists see, but disagree that they were planned by some malevolent power. I see them as the result of incentives. If railroad or bankers or doctors want to limit competition, they have an incentive to form a cartel. When the cartels don't work in relatively free markets, they buy special favors from the State to enforce the cartels, i.e. make defection illegal. The rulers have an incentive to sell power, especially in a democracy where they will be gone by the time the bad effects hit the fan, and can use the time lag to say it's someone else's fault. (Cf: Democracy: The God that Failed by Hans-Hermann Hoppe)

Strabes> "Isn't it intriguing that one of the biggest debates in american history was over the idea of a national bank, but soon after the Fed was created we haven't heard it discussed by either establishment party at all?"

It's all one party: the Welfare-Warfare party, aka the War Party. The Dems and Reps are factions of the same party - two wings of the same vulture.

Strabes> "You're suggesting that when both parties controlling our government appoint Wall St to run our economy and steal $12 trillion from us and give it to rich bankers, capital holders, investors that the government officials have the real power and they're the 'baddies?'"

Yes. The ruling elites get well paid for dispensing favors, giving monopoly powers, etc. The State can take over any bank or firm it wants - it has the police and soldiers and the monopoly legal system. You need to ask, "Who has the gun?" Would the Illuminati/Trilateral/Bilderbergs/whatever have the power they do without the State? No.

To sum up: Libertarians (like me) and conspiracy theorists (like you) agree on many resulting phenomena, but they disagree in two areas.

1) Emergent order vs. planned order (cosmos vs. taxis as Hayek put it) - Libertarians see the phenomena as the result of incentives, i.e. an invisible hand process. Conspiracy theorists see the phenomena as the result of a plan.

2) Anti-statism vs. some inter-generation demonic group - Libertarians see the State (compulsory government) as the problem; conspiracy theorists blame a permanent evil private organization.

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Re: Money Creation Done by Govt

 Hogeye, I'm psyched to read your post...much of it I've said myself in other posts.  Almost every other discussion on this issue results in people replying "you're a lizard-believing conspiracy Icke follower!" which is pure intellectual laziness/arrogance. I'm quite pleased that wasn't the case with you.  I'm pleased to meet another solid libertarian who knows the economic theory underlying it.  I was a disciple of neo-classical econ, Austrian econ, public choice theory, and libertarian politics for 20 years.  In addition to Hayek, Hazlitt, von Mises, Smith, Friedman, etc, James Buchanan at UVA was my hero (the Nobel winner for founding public choice theory) because he gave me a theoretical basis (not just an ideological one) to support my anti-govt ideology and argue against bureaucrats.  

...until...I spent enough time in the military, govt, Wall St, and corporate exec circles long enough to realize the real world was quite different from the cleansed assumptions underlying all economic theory.  I still love the theory, but I now recognize what one of my undergrad professors said almost 20 years ago that "you'll eventually realize the way the world works is more repugnant than economic theory suggests, though theory has its place." 

 

Quote:

This is precisely why we are in this situation. Ruling elites rent special privileges to special interests. It's called rent-seeking by economists. Cf: "Public choice theory."

In 1913 the Fed was founded to cartelize the banking industry. This was great for the ruling elite, and good for the favored big banking groups, but bad for most people.

The ruling elites get well paid for dispensing favors, giving monopoly powers, etc. The State can take over any bank or firm it wants - it has the police and soldiers and the monopoly legal system. You need to ask, "Who has the gun?" Would the Illuminati/Trilateral/Bilderbergs/whatever have the power they do without the State? No.

These statements are where our fundamental disagreement is.  1) You bucket Wall St into the general collection of competing interests that curry favor with government.  I think it's the opposite now.  Wall St has become the Frankenstein the government should've never created and politicians now come to it for rent-seeking rather than the other way around.  The elected politicians are submissive to the Fed and the Treasury Sec (all ex Wall St CEO's or ex Fed guys).  It's far better to live high on the hog as part of the DC/Wall St club than being a low middle class representative from a home district.  2) You equate "government official" with "ruling elite."  If a government official with any real power ever opposed the Wall St interests' primary source of power, the Fed, we would see who the real elite is and who has the power.  3) Sure a lot of guns and lawyers work for government.  Lots of guns and lawyers work for other interests as well. Luckily in the US, the most guns are in the hands of individual citizens because the Founders knew the danger of tyranny/monarchy/the real ruling elite.  4) You imply there's a difference between bilderberg and "the state."  Bilderbergers are "the state"...a consortium of different states...it's composed of royal families, presidents, key congressmen and governors, prime ministers, key cabinet types, key bankers, EU commissioners.

Other thoughts in the interest of dialogue...

The definition of conspiracy theorist you're using (those who see plans behind the scene) is difficult to accept because it would include lawyers, cops, private investigators, journalists, criminals, business people, doctors, etc. because they are all compelled to investigate facts (well...journalists no longer do that) to figure out what's really going on in order to prosecute, arrest, make profit, diagnose, or whatever.  They aren't afforded the luxury of assuming away reality like economists to make their lives easy.  They collect facts to analyze the landscape, the incentives, the powers/actors behind the scenes that cause the phenomena we see.  That's what I'm trying to do.  I don't conjure an evil demon. I don't see lizard men. I don't see the anti-christ.  I let facts point me to high-probability hypotheses rather than relying on theory.  

You paint the picture of the Fed and the Wall St interests very well.  Extremely well!  But then you view them as simply one more faction competing for attention in DC.  Jefferson, Madison, Jackson, Lindberg had some opinions on that issue.  Why were the Founders so opposed to officially endorsing and cartelizing such a power (they considered it insidious and treacherous...does that make them conspiracy theorists?)?  They knew it would become THE faction controlling our government rather than just one of many factions.

re the Morgans and Rockefellers...JD and JP were not competitors.  They were aligned in opposition to the messiness of free competition and the annoyance of democracy.  What happened over the years with their descendants and firms of course involved a lot of competition. But on a strategic level, at the cartel level, they're aligned.  JD's grandson David has tirelessly worked at the big picture level rather than the micro level to align all the factions into one big faction just like JD did in the oil industry.  David has a distaste for competition and believes cooperation is the way to go.  The way to achieve that is to align financial interests so people become de facto partners rather than competitors.  Rather than fighting for a slice of the US pie, David has pushed for global monetary union and marketplace and this changes competitors into partners because there's far more financial upside in cooperating to achieve globalization than there is in winning an extra % of marketshare in the US against a competitor. CFR has aligned every powerful faction in the US.  Look at the member roster.  Old arch enemies like Morgan Stanley (used to be the Protestant bank) and Goldman Sachs (used to be the Jewish bank) are aligned strategically (though of course they compete for i-bank deals tactically). Every primary commercial and investment bank has members in CFR (though there's no difference between the 2 now).  Heck, even the old rivals JP Morgan and Chase Manhattan (Rockefeller) are merged into JPM Chase. Beyond the financial industry, do you know that every Sec State and Defense since WWII has been a CFR member?  Every major military supplier and media organization is in it as well. Most of the important politicians from both sides of the fence are in it.  What do you make of Wall St officially running our economy as Sec Treas since the 80's?  What do you make of the dramatic progress that has been made on CFR and Trilateral goals over the last 50 years? The facts speak for themselves.  Writing this off as a result of theoretical incentives is more of a leap of faith and glossing of the facts than simply pointing out the obvious progress these organizations have made.  

Based on your self-definition, it's not a conspiracy to believe in evil government, but it is conspiracy to suggest private interests have power.  Can you explain that view?  Why is it sort of labeled paranoia to believe in the power of private interests, but entirely reasonable to believe in the evil of govt?  My hypothesis as to why that's the case is because it's simple to claim govt is harmful because we see the big govt buildings and politicians.  It's this big leviathan "thing" out there to focus on.  Whereas it's far more difficult to trace the facts to see how private interests manipulate things.  

Your point #1:  I completely agree with you about incentives, but how do you separate those from having a plan?  How do incentives get created in the first place?  Again, this is an example of economists simplifying things too much.  Who is it that setup the system that rewards such tight collusion between Wall St and DC?  That took a lot of effort/plans over decades.  Why believe in incentives but then lampoon people who investigate the organizations who are planning, manipulating, and profiting from those incentives?  Just writing it off as "evil government" doesn't help.  Now we need good government to have any hope of breaking free of what's been created by these private interests running our bad government.

Your #2:  First, I said nothing about demons.  I simply follow the facts of how private interests are involved. You have to include both govt and private interests. Yes, you're right government is the problem.  But it's way more of a problem once that govt has been hijacked by the dominant faction that Madison, Jefferson opposed vehemently...the Wall St cartel that you so eloquently describe in your post and in your Walmart article.  

 

 

 

 

 

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Re: Money Creation Done by Govt

 It looks like we substantially agree on more then I suspected earlier.

Strabes> "1) You bucket Wall St into the general collection of competing interests that curry favor with government.  I think it's the opposite now."

I think it goes both ways. Wall Street curries favors from government, and the ruling elites curry favors from Wall Street. Or put the other way, both engage in rent-seeking. Our "disagreement" is mainly a matter of emphasis. And which emphasis is more useful depends on the context. If you're talking about campaign contributions, rulers (or ruler wannabes) want favors from Wall Street (and other special interests). If you're talking government contracts or favorable legislation, then Wall Street (and other special interests) want favors from rulers.

Strabes> "2) You equate "government official" with "ruling elite."  If a government official with any real power ever opposed the Wall St interests' primary source of power, the Fed, we would see who the real elite is and who has the power."

I do see a difference between petty officials and elite such as the president, cabinet, certain powerful committee members. The fact is, the president can close down any bank or financial institution he wants. Or bail them out. He has the guns. A president can e.g. prevent oil drilling or allow it, outlaw certain types of securities or favor them, even buy them through govt agencies (Fannie Mac & Freddie Mac.) Agency head, without passing any law, can enforce "spy on your customer" rules.

Strabes> "3) Sure a lot of guns and lawyers work for government.  Lots of guns and lawyers work for other interests as well."

The US government has more firepower with its massive military. It has militarized the police. The US has the highest incarceration rate in the world, despite private gun ownership. Military-style fully automatic weapons are outlawed even if they don't cross state lines.

Strabes> "4) You imply there's a difference between bilderberg and 'the state.'  Bilderbergers are 'the state.'"

I define a State as: an organization with a monopoly on the legal use of violence in a particular geographic area. (This is basically Max Weber's definition.) So I interpret you as saying: The Bilderbergers *control* the state (or states.) I doubt it. It looks more like an informal club of powerful political, banking, and industrial elites. I'm more worried about formal cartels of states, like the WTO, World Bank, and UN. But even if the Bilderberger club has a consensus policy and is somehow able to herd the elite cats, the thing that gives them power is the State.

I've been using "conspiracy theorist" to mean someone who sees old/ancient groups with strict agendas as controlling history. People who see e.g. Masons or Bilderbergers as such. I see special interests as diverse and opportunistic, and changing over time in policy and personnel. OTOH I am sympathetic, since even if wrong on particulars, they have the sense to question authority, the statist line, and "victor's history."

Strabes> "Your point #1:  I completely agree with you about incentives, but how do you separate those from having a plan?"

Conspiracy theorists are often right about proximate history. Yes, there is planning done and even conspiracies on this proximate level. But they don't seem to appreciate that on the ultimate history level, invisible hand processes (incentives) take precedence. There is an incentive for the biggest players (in banking, railroading, whatever) to collude to fix prices and limit competition. There is an incentive for ruling politicians for rent-seeking. This is the ultimate level. In the early 1900's certain specific people got together - planning and conspiring if you will - to pull off the Federal Reserve Act in 1913. This is the proximate level.

Rothbard (in The Federal Reserve as a Cartellization Device) quotes Edward Hurley of the FTC as saying in 1915 when arguing for the creation of the FTC, "Through a period of years the government has been gradually extending its machinery of helpfulness [sic] to different classes and groups upon whose prosperity depends in a large degree the prosperity of the country." He was speaking of what the ICC did for railroads and shippers, what the Dept. of Agriculture did for (big) farmers, and what the Federal Reserve Board did for bankers. I.e. cartelize it for the benefit of political elites and the major established players in the respective industries. Hurley wanted "" to do for general business that which these other agencies do for the groups to which I have referred." We probably agree on what happened here. I emphasize the ultimate cause - the incentives for cartelization. Conspiracy theorist seem to forget that part and only look at, e.g. Hurley and Woodrow Wilson and certain industrial bigwigs conspiring. From what you've said, you seem to be closer to my position, despite liking the "conspiracy theory" label.

Strabes> "Based on your self-definition, it's not a conspiracy to believe in evil government, but it is conspiracy to suggest private interests have power. Can you explain that view?"

Yes. The State is evil because of perverse institution incentives inherent to a monopoly of violence. This evaluation is base on institional analysis. There is no such commonality of private interests that makes them all intrinsically bad.

I agree that private interests have power and influence government. But the conspiracy theorists I know don't say, as you do, "private interests," a general term for the many diverse interests that vie for the government gun. They talk about some single-minded, often centuries old, group controlling it all. Frankly, from what you've said, I wouldn't call you a conspiracy theorist at all.

Strabes> "re the Morgans and Rockefellers...JD and JP were not competitors. They were aligned in opposition to the messiness of free competition and the annoyance of democracy."

I think there is a false dichotomy here. One can compete in some ways and cooperate in others. Business do that all the time. E.g. Restaurants, clothing stores, car lots, nightlife joints, etc. welcome others of their kind nearby so their part of town can be known as the place to buy food, clothing... Apple famously welcomed IBM to the personal computer business. Trade associations of competing firms are common. In short, growing the pie is cooperative and dividing the pie is competitive. The article on separating investment banking from commercial banking clearly shows that was an attack via govt by the better connected Rockefeller group against the Morgan group.

Strabes> "We need good government to have any hope of breaking free of what's been created by these private interests running our bad government."

Here is probably our most significant difference, if by "government" you mean the State (compulsory government.) By my institutional analysis, government will always be used to coerce and violate rights. If you get rid of the Masons, or the Bilderbergers or whatever, a new special interest group will simply take its place, whether Big Unions or Big Environment or the WTO or some other. OTOH if you eliminate the State, there is no legitimized monopoly of violence to capture. These various special interests have no more gun to speak of. Without the mystique of legitimacy of the State, they would be relatively harmless and some perhaps wither away entirely. Check out my Anarcho-capitalist FAQ.

 

And thanks a lot for your intelligent discussion. People like you make these forums worthwhile.

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Re: Money Creation Done by Govt

It's a delight to engage this dialogue.  Wish we were neighbors...we'd have some awesome coffeeshop conversation, could start a group focused on this stuff, and maybe make a difference somehow.  

Quote:

I define a State as: an organization with a monopoly on the legal use of violence in a particular geographic area. (This is basically Max Weber's definition.) So I interpret you as saying: The Bilderbergers *control* the state (or states.) I doubt it. It looks more like an informal club of powerful political, banking, and industrial elites. I'm more worried about formal cartels of states, like the WTO, World Bank, and UN. But even if the Bilderberger club has a consensus policy and is somehow able to herd the elite cats, the thing that gives them power is the State.

On the monopoly of force/guns issue: what if a billionaire is manipulating the government to engage its monopoly force in a way the billionaire wants?  For example, Bin Laden built an organization to attack the US for the purpose of sucking us into the middle east even deeper (and our oil/financial interests focus us there too).  So, yeah it's the govt's guns, but they're doing what the billionaire and financial interests want.  I don't disagree with you, but I think it's a very murky topic.  You mention that the president can takeover any company he wants with his guns.  Yep.  But the particular companies he would target and those he leaves alone would be determined by the financial interests aligned behind him.  

I agree with you about the WTO, World Bank, IMF, UN as well.  But what's the force behind getting those institutions created and empowered?  Based on the evidence, I suggest that Bilderberg was the key, and CFR in the US and similar orgs in other countries. They're the organizations that have been pushing for the transcendence of the nation-state and an integrated globe.  So here's an example of how planners/schemers/visionaries form and create "the state."  The state isn't a static thing out there, but a collection of interests defining our governmental structures.  I think it behooves us to understand those interests and what they're doing to change our version of "the state."

Quote:

From what you've said, you seem to be closer to my position, despite liking the "conspiracy theory" label....I wouldn't call you a conspiracy theorist at all....From what you've said, you seem to be closer to my position, despite liking the "conspiracy theory" label.

I think we've done this website a huge favor in this dialogue.  Had I just denied the label, it would've sounded defensive and people wouldn't be convinced.  Having gone through our densely packed discussion, you've come to the conclusion about me so I don't have to say it. Thank you.  I have thoroughly enjoyed discussing this because not only are you willing to engage it but also you're armed with significant history/theory/finance knowledge on the stuff we're talking about.  

I was accepting the label because it's what a collective opinion on this site has assigned me simply because I've laid out the successful efforts of private interests to manipulate and control things and I've pointed out how disturbing our government has become given its paranoid reaction to the "terror war" (homeland security insanity, TSA abuse, NSA wiretapping, Northcom, militarization of police, end of posse comitatus, etc etc etc).  Most americans don't tend to care about this.  I guess they think it's fine to be strip-searched via imaging machines at airports and assaulted by police at military checkpoints.  But a few visiting foreign friends said they won't be coming back given the fascism and paranoia they felt in this country.  I always find it useful to listen to an outsider's perspective on anything (my job, my relationships, my choice of clothes, even my country).

 

Quote:

government will always be used to coerce and violate rights

Completely agreed.  That's why I vociferously advocate a return to the federal republic established by the Constitution (would require the end of the Fed, breakup of Wall St, end of most federal agencies) where towns/states/people had the power and no powerful interests could hijack DC because DC was largely irrelevant to our lives.  Many of the states were corrupt, but corruption at lower levels is better than tyranny at the highest.  You're right that the existence of that federal republic is what gave the powerful interests an ability to capture DC in the first place and convert us into a national empire rather than a republic.  Hmm.  Must ponder this more.  I'm not sure I see how anarcho-capitalism is realistically achievable so I typically agree with the founders that a republic is the best version of a necessary evil.  Switzerland has been the longest living example of that.  But I'd be interested in learning more about anarcho-capitalism.  I can't help but think differentials in power would still exist and the most successful/monopolistic capitalist would become the ruling elite not much different than we have today (though i don't consider Wall St to be capitalists...they are financial monarchs who just want to collect a fee on all private transactions in their territory).  

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Re: Money Creation Done by Govt

Wow - I feel like I've just watched a great debate - with more to come, I hope!

Gentlemen (Hogeye and strabes) - my compliments.

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Re: Money Creation Done by Govt

This thread seems to me an appropriate place for this article:

http://www.texasobserver.org/article.php?aid=3031

Causes of the Crisis

James K. Galbraith | May 01, 2009 | Commentary

Editor’s note: These remarks were delivered to a meeting of the Texas Lyceum in Austin on April 3, at a debate between University of Texas professor James Galbraith, an Observer contributing writer, and former Majority Leader Richard Armey, chief instigator of the recent Astroturf “tea party" protests. Armey had begun his remarks by noting that his rule in life was “never trust anyone from Austin or Boston,” and proceeded to declare his allegiance to the “Austrian School” of economics, a libertarian view that regards public intervention in private markets as socialism.

It is of course a pleasure to be with you today. I was born in Boston, and I am proud of it. And I have lived 24 years in Austin—and I’m proud of that.

Leader Armey spoke to you of his admiration for Austrian economics. I can’t resist telling you that when the Vienna Economics Institute celebrated its centennial, many years ago, they invited, as their keynote speaker, my father [John Kenneth Galbraith]. The leading economists of the Austrian school—including von Hayek and von Haberler—returned for the occasion. And so my father took a moment to reflect on the economic triumphs of the Austrian Republic since the war, which, he said, “would not have been possible without the contribution of these men.” They nodded—briefly—until it dawned on them what he meant. They’d all left the country in the 1930s.

My own economics is American: genus Institutionalist; species: Galbraithian.

This is a panel on the crisis. Mr. Moderator, you ask what is the root cause? My reply is in three parts.

First, an idea. The idea that capitalism, for all its considerable virtues, is inherently self-stabilizing, that government and private business are adversaries rather than partners; the idea that freedom without responsibility is a viable business principle; the idea that regulation, in financial matters especially, can be dispensed with. We tried it, and we see the result.

Second, a person. It would not be right to blame any single person for these events, but if I had to choose one to name it would be a Texan, our own distinguished former Senator Phil Gramm. I’d cite specifically the repeal of the Glass-Steagall Act—the Gramm-Leach-Bliley Act—in 1999, after which it took less than a decade to reproduce all the pathologies that Glass-Steagall had been enacted to deal with in 1933. I’d also cite the Commodity Futures Modernization Act, slipped into an 11,000-page appropriations bill in December 2000 as Congress was adjourning following Bush v. Gore. This measure deregulated energy futures trading, enabling Enron and legitimating credit-default swaps, and creating a massive vector for the transmission of financial risk throughout the global system. When the Washington Post caught up with me at an airport in Parkersburg, West Virginia, a year ago to ask for a comment on Gramm’s role, I said very quickly that he was “the sorcerer’s apprentice of financial instability and disaster.” They put that on the front page. I do have to give Gramm some credit: When the Post called him up and read that to him, he said, “I deny it.”

Third, a policy. This was the abandonment of state responsibility for financial regulation: the regulation of mortgage originations, of underwriting, and of securitization. This abandonment was not subtle: The first head of the Office of Thrift Supervision in the George W. Bush administration came to a press conference on one occasion with a stack of copies of the Federal Register and a chainsaw. A chainsaw. The message was clear. And it led to the explosion of liars’ loans, neutron loans (which destroy people but leave buildings intact), and toxic waste. That these were terms of art in finance tells you what you need to know.

Subprime securities are inherently unsafe and should never have been permitted. They are based on loans to borrowers who cannot document their income and who may have bad credit histories, and they are collateralized by houses with fraudulently inflated appraisals, rated by agencies that did not examine the loan files. Writing in The Washington Post, Richard Cohen described one case, of Marvene Halterman of Avondale, Arizona:

At age 61, after 13 years of uninterrupted unemployment and at least as many of living on welfare, she got a mortgage. She got it even though at one time she had 23 people living in the house (576 square feet, one bath) and some ramshackle outbuildings. She got it for $103,000, an amount that far exceeded the value of the house. The place has since been condemned. ... Halterman’s house was never exactly a showcase—the city had once cited her for all the junk (clothes, tires, etc.) on her lawn. Nevertheless, a local financial institution with the cover-your-wallet name of Integrity Funding LLC gave her a mortgage, valuing the house at about twice what a nearby and comparable property sold for. ... Integrity Funding then sold the loan to Wells Fargo & Co., which sold it to HSBC Holdings PLC, which then packaged it with thousands of other risky mortgages and offered the indigestible porridge to investors. Standard & Poor’s and Moody’s Investors Service took a look at it all, as they are supposed to do, and pronounced it ‘triple-A.’”

The consequence of tolerating this and like behavior is a collapse of trust, a collapse of asset values, and a collapse of the financial system. That is what has happened, and what we have to deal with now.

Can “stimulus” get us out?

As a matter of economics, public spending substitutes for private spending. It provides jobs, motivates useful activity, staves off despair. But it is not self-sustaining in the absence of a viable private credit system. The idea that we will be on the road to full recovery and returning to high employment in a year or so therefore seems to me to be an illusion. And for this reason, the emphasis on short-term, “shovel-ready” projects in the expansion package, while understandable, was a mistake. As in the New Deal, we need both the Works Progress Administration, headed by Harry Hopkins, to provide employment, and the Public Works Administration, headed by Harold Ickes, to rebuild the country.

The desire for a return to normal is very powerful. It motivates both the ritual confidence of public officials and the dry numerical optimism of business economists, who always see prosperity just around the corner. The forecasts of these people, like those of official agencies such as the Congressional Budget Office, always see a turnaround within a year and a return to high employment within four or five years. In a strict sense, the belief is without foundation. Liquidation of excessive debt is now, and will remain for a time, the highest priority of American households. That is in part because for the moment they want to hold on to cash, and therefore they do not wish to borrow, and in part because with the collapse of house values, they no longer have collateral to borrow against. And so long as that is the case, there can be no strong recovery of private spending or business investment.

The risk we run, in public policy, is not inflation. It is lack of persistence, a premature reversal of direction, and of course the fear of large numbers. If deficits in the trillions and public debt in the tens of trillions scare you, this is not a line of work you should be in.

The ultimate goals of policy are not measured by deficits or debt. They are measured by the performance of the economy itself. Here Leader Armey and I agree. He spoke with approval, in his remarks, of the goals of 3 percent unemployment and 4 percent inflation embodied in the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978. Which, as a 24-year-old member of the staff of the House Banking Committee in 1976, I drafted.

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Hogeye
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Re: Money Creation Done by Govt

Since Strabes and I mostly agree with each other, I'd like to comment on the Galbraith article. (As noted, Strabes and I disagree mainly on emphasis, and on the somewhat esoteric anarchist/minarchist thing.)

James Galbraith spouts the standard court Keynesian crap.  After recalling a joke made by his father (Austrian economics has nothing to do with Austria, other than some founders coming from there) he makes his points.

1) "The idea that capitalism, for all its considerable virtues, is inherently self-stabilizing, that government and private business are adversaries rather than partners; the idea that freedom without responsibility is a viable business principle; the idea that regulation, in financial matters especially, can be dispensed with. We tried it, and we see the result."

Galbraith falls for a fallacy of equivocation here, shared by e.g. Naomi Klein and many other statist "liberals." (Cf: Disaster Statism: A Review of Naomi Klein's Book "The Shock Doctrine") This vulgar anti-capitalism consists of ignoring the differences between laissez faire, economic fascism, and "actually existing capitalism." These are three different concepts, of course. "Laissez faire" is capitalism without any State intervention whatsoever - an ideal. Economic fascism (aka corporatism) means State intervention in the economic system while keeping de jure private property. IOW government controls property, but leaves formal ownership in private hands. This is characterized by regulation and "business-government partnerships" (cartels like ICC, FDA, FTC, etc.) The third, "actually existing capitalism" as left libertarian folks call it, is more commonly known as a mixed economy. The mixed economy in the US is a combination of fascism, socialism, and laissez faire, with fascism predominant in most "command posts" of the economy such as banking, defense, legal systems, education, and so on. (State socialism involves government ownership, i.e. nationalization. Thus, for the Post Office the State uses socialist means, while for the banking system and drug industry it uses fascist means.)

With those definitions, we can unravel Galbraith's first point. Laissez faire is inherently self-stabilizing, but fascism is not. Since actually existing capitalism is dominated by fascist policy, it is unstable, resulting in boom-bust cycles and monetary debasement. Similarly, "government and private business are adversaries rather than partners" is only true for laissez faire. It is quite false for fascism - the opposite is the defining characteristic. "The idea that regulation, in financial matters especially, can be dispensed with" is true. That is laissez faire - unless of course everything is nationalized in which case it would be statist socialism. What Galbraith seems to mean is that the bad effects of US fascist policies can be mitigated by more fascism - more regulation. But this is the definition of insanity - doing the same thing thinking the result will be different. The part about "freedom without responsibility is a viable business principle" seems to be a strawman. No one really believes that.

Galbraith's second point, blaming a particular person, seems weak. Corporatism/fascism has been around a long time. In the US, Alexander Hamilton's central bank scheme, Henry Clay's "American System," Lincoln's massive subsidies to favored railroads, so-called "anti-trust" acts, the founding of the Fed in 1913, and FDR's New Deal are all examples. You can't blame those on Phil Graham. He is just one of many modern fascists.

Galbraith's third point about "the abandonment of state responsibility for financial regulation" simply ignores history. In particular, he ignores that State intervention has caused the very problems he seeks to remedy with more regulation. Why did banks make stupid loans? Why did people take out stupid loans? Did they suddenly become stupid in the last decade? No. The US used its agencies Fannie Mae and Freddie Mac to buy stupid loans. More than half of these "toxic" loans go through FF. Banks knew they could pawn off these bad investments on FF. Bottom line: The goverment subsidized the stupid loans! Furthermore, the government coerced financial institutions into making these loans with legislation like the Community Reinvestment Act, and forced banks to make such loans through regulatory pressure. When banks change operating procedures, they must get permission from the regulators. This first thing regulators ask is, "Do you 'reinvest' in your community, i.e. Do you give loans in the poor part of town where people can't afford to repay?"

Then there's the question of the sense in curing the problem of too many bad loans by "freeing up" credit so banks can make more bad loans. Talk about putting off the inevitable and mushrooming government power!

For many excellent articles about this, check out Mises.org's Bailout Reader.  It has a wealth of information and links.

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strabes
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Re: Money Creation Done by Govt

 Excellent post Hog.  I was about to write a quick response to Galbraith saying 1) he's clueless if he thinks we had a deregulated laissez-faire financial system, and 2) blaming Phil Graham, who I agree is a banking stooge, reveals Galbraith as a simplistic partisan who really has no idea the depth of the problem we're in.  But you said more, and you said it better than I.

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Re: Money Creation Done by Govt

I wish that Strabes and those who share his belief about the oligarchs behind the Fed would stay focused on the mechanics of the system.  Whether Strabes is correct in his belief is not relevant in the point I am making.  Even if Mother Teresa created our monetary system it is still flawed and must be replaced.  The general public does not want to believe in conspiracy theories and therefore will discount the real issue;  the problems the system itself causes.

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strabes
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Re: Money Creation Done by Govt

 newmonetary, as demonstrated in the above dialogue, I recommend dropping the term conspiracy theories and replacing it with "the facts."

I wish what you're saying were true.  The public loves conspiracies fed to it through the mass media.  The public could care less about the mechanics of the debt-based money system, the flaws in fractional reserve lending, the economics of financial engineering. That's why those things go on and on and nobody cares (there are plenty of books, journals, articles describing those things ad nauseum...why isn't the public reading them?). On the other hand, the public loves conspiracies...they're the only thing with the power to take people's attention from the stuff that really matters in their lives like the NCAA tournament and American Idol.  Conspiracies are what drive much of Hollywood production.  It's why shows about the mafia are so enticing. Newspapers/magazines who just report on a system don't sell, but one who puts a picture on the cover of the criminal or conspiracist behind it (whether it's fabricated or not) become top sellers like Time and Newsweek.  It's how the media gets people supporting any cause...paint it in terms of a conspiracy.  According to the media and therefore a huge portion of the public, there's a corporate conspiracy, a big-oil conspiracy, a right-wing conspiracy, an evil pharma company conspiracy, a terror conspiracy with a dude named Bin Laden who can kill you tonight in your bed while you're sleeping, etc etc. So people rally to support leaders who fan the flames of these conspiracies.  

How much do you want to wager that if Time, Newsweek, NYT, ABC, CBS, NBC put the pictures of Rockefeller and others behind the Fed system and Wall St cartel on their covers with the title "Meet The White Men Who Make You Work Harder Every Year For a Less Valuable Dollar" that public opinion would shift and real change would be possible?  But the media will never report on that conspiracy/facts...they'll just keep reporting the partially fabricated conspiracies above.  

 

 

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