We have reached the midpoint of our 12-part series on ways to improve the economy using targeted investments, no increase in the national debt, no austerity and no net reduction in tax revenues…what we believe to be essential criteria for economic sustainability and thus plans with a reasonable chance of passing Congress…plans that Congress should pass.
In introducing this Solution #6, it is tempting to begin by citing the various fiscal crises that are swirling about, and then point out that we are on the wrong road exclusively if we spend all our time focusing on the fiscal tyranny of the urgent when what is most important is monetary reform for the long term. We continue to hold our view that the root cause of recessions is monetary, not fiscal, and that recessions end primarily when malfunctions in the system of money and banking work themselves out. We then, however, have to respond to the too-comfortable who say we really don’t have any problems except those that might be caused by extreme maladroitness in handling our fiscal issues…again, a challenge to our challenge to focus on the important and do something. It is true that some economic measures are improving, and there has been a run-up in the stock market. But there have always been monthly up’s and down’s in economic measures and occasional run-up’s in the stock market, no less so just before crises and recessions than in durable recoveries.
It is not our goal to give short-term prognostications concerning the economy, but to advocate an approach of being more strategic in formulating policy. We are under clouds that have all the appearance of storm cells, with some rays of light penetrating through. We can choose the attitude of a pessimist or an optimist. Consider the man who was told to cheer up, things could be worse. “So I cheered up”, he recounts, “And sure enough, things got worse.” Here’s the point: if we give any credence at all to the patterns of history, it will only be a matter of time – how much time is subject to debate - before we face another economic crisis and the 20th major recession since 1913. That is inevitable, unless and until we significantly reform our system of money and banking. Whether we choose to cheer up or not, whether a new crisis will befall us within months or after a few good years, would it not be wise to work while we can on reforming our system of money and banking to better weather the next storm? Could that not, in fact, give us new tools to bring about a full and complete recovery from the Great Recession, and something to provide new assurance to those looking down the road as they consider our financial future and thrash out our current fiscal conundrums?
Future cycles are inevitable, but there do seem to be some things that are not just cyclical but permanently changing. In the face of still-remaining concern over still-increasing debt, will Congress or perhaps a future administration be as inclined to sponsor another major, TARP-style bail-out of the big banks? Will we be able to keep so freely borrowing money from China, now that its industrial hiccups and the very scary story of its “ghost cities” show it may be in for major financial problems of its own? Will the undeniable trend toward the abandonment of the US dollar as the international trade reserve currency of choice continue? Will our climate change calamities continue to get worse? Will Europe be unable and unwilling to do as much as in the past to lend a hand to faltering economies? Will the sea-change politics of the Middle East yield non-functioning governments and economies for years to come? Will some war or catastrophic act of terrorism occur? Will the Fed be willing to go the extra mile and 20 more that it is recently has, considering its already-expressed intention to start backing away from policies that have resulted in artificially low interest rates and extraordinary “quantitative easing”? Will there come a time when the Fed, under pressure, will no longer consider I.O.U.’s that can always be recycled, but some doubt can ever be paid in un-inflated dollars (US Treasuries), and junk bonds (as some of the mortgage-backed securities are or could be in a renewed crisis), and various and sundry things the banks are now calling “securities”, to be sufficiently sound reserves or to constitute adequate reserves? The precise set of tactics we patched together to cope with the Great Recession may not always be available, and already there are signs that international monetary organizations including those to which the US is a party are devising alternate plans that would put public and private depositors at risk in the next crisis.
The world was shocked when bank depositors in Cypress were called upon to take a “haircut” – to forfeit some of their deposits – under the theory that their deposits actually belonged to failing banks and could be used to bail out the banks. Yet, this wasn’t something devised by the Greek government or devised just for a crisis confined to Cypress. The International Monetary Fund, the European Union and the European Central Bank not only approved but mandated the confiscation of depositor funds to “bail in” the two bankrupt banks in Cypress. The strategy was based on a global model that goes back to a directive from the Financial and Stability Board (an arm of the Bank for International Settlements) dated October, 2011, endorsed at the G20 Summit in December, 2011.i In 2009, the G20 nations agreed to be regulated by the Financial Stability Board, and “bail in” policies have now
been established for the US, the UK, New Zealand, Australia and Canada, among other countries.
The term “bail in” is described in the article cited above as “a quantum leap beyond a ‘bail out’”. The passage continues: “When governments are no longer willing to use taxpayer money to bail out banks that have gambled away their capital, the banks are now being instructed to ‘recapitalize’ themselves by confiscating the funds of their creditors, turning debt into equity, or stock, and the ‘creditors’ include the depositors who put their money in the bank thinking it was a secure place to store their savings. Rather than banks being put into bankruptcy to salvage the deposits of their customers, the customers will be put into bankruptcy to save the banks.”
The obvious question is, if we are part of organizations that impose this strategy on banking systems abroad, might not the same thing happen here? One might point out that we have the FDIC to insure deposits, but only up to a certain level often exceeded by individuals and organizations including NGO’s and state and local governmental entities. As of 6/30/2011, the FDIC deposit insurance fund had a balance of only $3.9 billion to provide loss protection on $6.54 trillion of insured deposits. That means $10,000 in deposits was protected by only $6 in FDIC reserves. The FDIC could borrow from the Treasury, but the Dodd-Frank Act (sec 716) now bans taxpayer bail-out’s of most speculated derivatives activities, which may well be the trigger of a 2008-style collapse.ii
So the question has been raised, is our FDIC insurance fund adequate to cover another system-wide banking crisis? In Europe, the national insurance funds were not. The European Free Trade Association ruled in the case of Iceland that the insurance funds were not intended to cover that sort of system collapse.iii In a climate of true crisis, when sovereign insolvency might be at issue in the eyes of some, might a future Congress take the same position? After all, have we not had those who called into question, via their challenges to raising the debt ceiling, the foundational assumption that Congress would pay the debt occasioned by its own appropriations? Do we not have even now, in both parties, a willingness to go down to the wire in terms of shutting down the government, as we have done a number of times now? If depositor funds are to be protected, what period of uncertainty might there be and by what means would the crisis be dealt with? The truth is, we are still in uncharted territory, as we have been since 2008, however much cheering up we may do…we really don’t know what might happen in the event of major crisis propelled not only by reckless bank activity, but also by possible catastrophic world and national events such as those that routinely fill the news.
Here we cannot resist commenting on those who might say our thinking is “outside the box” and thus “radical”, despite our repeated calls for a return from relatively recent experimentalist conventions to proven orthodoxies. Is it the mind of the radical that is so concerned with a banking system with reserves sufficient to endure realistic scenarios, or is it more accurately the mind of true conservatism in the realm of money?
As support for the claim that it is our recent banking practices that have become radical and in need of reining in…not us Progressives…let’s consider some examples. We certainly had a supply of them in the 2008 banking crisis, when the banks got caught not only on the back side of reckless mortgage lending and syndication, but also in credit default swaps, derivatives and other forms of assets and stocks previously forbidden by the New Deal era Glass-Steagall Act. These were re-allowed by the 1999 Graham-Leach-Bliley Act, which repealed portions of Glass-Steagall. The banks’ use of this new-found freedom led, within less than a decade, to the 2008 crisis. To what extent have the big banks reformed since?
A most interesting account has been furnished in an article titled, “The Leveraged Buyout of America”, by Ellen Brown.iv In it, she refers to two hyperlinked articles by Colin Lokey and one by Bill Frezza with the descriptive title, “Too Big to Fail Banks Gamble With Bernanke Bucks”. In going through this material, the mechanics can be seen by which the big banks have, as a thank-you for bailing them out, used the funds accessible on account of unusually low lending rates in recent years as collateral for borrowing through repurchase agreements (to avoid blatant illegality) to raise short-term capital for use in purchasing derivatives, corporate bonds and stocks, referred to in the main article as bringing about a $700+ trillion speculative derivative bubble. Brown writes, “If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper hypothecation, this pledged collateral gets pyramided, creating a ticking time bomb….”
The above article also cites a letter to Federal Reserve Chairman Ben Bernanke dated June 27, 2013, from US Representative Alan Grayson and three co-signers which expressed concern about the expansion of large banks into what have traditionally been non-financial commercial spheres. The letter stated, “We are concerned about how large banks have recently expanded their business into such fields as electric power generation, oil refining and production, owning and operating of public assets such as ports and airports, and even uranium mining.” The letter expressed concerns that, “These financial service companies have become global merchants that seek to extract rent from any commercial of financial business activity within their reach.”
In the same article, Ms. Brown notes, “It seems like there is a significant macro-economic risk in having a massive entity like, say, JP Morgan, both issuing credit cards and mortgages, managing municipal bond offerings, selling gasoline and electric power, running large oil tankers, trading derivatives, and owning and operating airports, in multiple countries.” We would add, in particular, a concern for control of commodity markets; a concern that, as seen 2008, the finances of very complex operations are difficult to monitor and regulate; and a concern, also as seen in 2008, that the inter-relatedness of operations by financial service companies makes it difficult to intervene to “save the financial system” in emergencies, indeed to segregate out and protect the interests of bank depositors.
To the maxim, “buy low, sell high”, a noted Real Estate professor added, “and use other people’s money.” If we have a situation emerging where the big banks can use tax payer’s money and depositors’ money to get involved in high-risk, short term investments and we are insuring them against any downside, are we on the right path?
We would actually like to see the banks invest in things like power plants, but not as part of a whole raft of investments outside the banking sphere, and not at the expense of reduced lending. Let’s focus on power plants, for a moment, as that is certainly one of the more sensible investments mentioned when it comes to institutional stability.
During the 1950’s, when the Eisenhower Administration was pursuing its Atoms For Peace program, the government explored several alternatives for the engineering of nuclear power plants. One was a Thorium reactor, which did not generate highly radioactive waste materials and was not a source for enriched uranium (for weapons). However, the administration chose the uranium model precisely because of the concerns of the Cold War and because it had the benefit of providing enriched uranium for nuclear weapons.
Somehow, the Atoms For Peace idea got a little muddled in the context of a two-superpower world. Nevertheless, we have the example of the French shouldering on to help develop uranium reactors in Iraq. Some time later, the Israelis perceived a need to un-develop them, and part of the rationale for the US invading Iraq was the suspected nuclear component of “weapons of mass destruction.”
Today we tell countries around the world they cannot have the benefit of Atoms For Peace held out to them not too many years ago by our country …that developing nuclear power carries with it the risk of economic sanctions, sabotage (as not verbally threatened but demonstrated in Iran), or military attacks by the United States or its allies. Paradoxically, there are risks to our national security from climate change, not to mention those involving conflicts over oil and coal and economic crises involving multiple nations – risks not insignificant when stacked up against the risks of nuclear proliferation. How long will saber-rattling without using the saber (present policy, it would seem) work in a world in which urbanization and industrialization are proliferating, the cleaner fossil fuels running out in areas less endowed with them than we are, and nuclear technology is proliferating?
Recent literature suggests that the Thorium reactor remains a viable alternative. Many believe nuclear fusion may not be that far away if we, globally, give the research effort a concentrated push.
Consider the cost of defense against nuclear war or terrorism, the costs of climate change disasters, the need for clean power in the US as periodically emphasized by brown-out and black-out scares, and the potential for greater prosperity for the US if a fulfillment of Atoms For Peace promotes economic development throughout the world. Shouldn’t investments in nuclear research (at least to bring us up to par with Europe) qualify as a national priority? Shouldn’t available funding to build a bevy of new plants be something we should plan for?
Some things governments do best. Our government could partner with European governments and others throughout the world in an effort to conduct appropriate nuclear research, and could raise the funding to do so without increasing government debt. For one thing, we could do so by simply printing money. No one has yet explained why we couldn’t print a limited quantity of US Notes or “Greenbacks”, just as the (Republican) Lincoln Administration did, and put them to good use now while we are still recovering from the recession rather than in an over-heated stage of the economy. (It should be noted that the Greenback-based Chicago Plan, proposed during the 1930’s, had the active backing of 235 economists and 157 universities and today is eliciting renewed interest at the highest levels).v Of course, if we do enter an over-heated stage of the economy, the classic solution (and a reason we are supporters of the Federal Reserve System) is to increase required reserves – money going into the pot we propose to create). Since no one has given a reason why Greenbacks could not be used, we assume silence is an acknowledgment that they can. But there are other strategies as well.
In our May issue our guest contributor (Michael Kirsch) described how the historic Bank of the United States converted government debt from the revolutionary war into shares in investments in economic development, and how new investors were attracted as subscribers to the Bank. During the Second World War, the government had no trouble selling war bonds, as people believed the cause was linked to their own survival (and because the Federal Reserve bought so many of them). If we created an investment vehicle for which outstanding Treasury notes could be traded in, we could afford even to guarantee returns on the new security when used as a replacement because we would only be replacing a guarantee already in effect. So instead of paying off or re-cycling a certain number of outstanding T-bill’s, we could use that money to fund two things: research and operations, as we already have a need for new plants using existing technology that the government is in a position to expedite. A good start-up is one that has promise; a great start-up is one that has promise and a positive cash flow.
Dr. Armen Papazian has proposed the use of “public capitalization notes” as part of a transition from a debt-based financial system to an asset-based financial system. His thoughtful article is relevant, here, and included via hyperlink in our bibliography.vi
Where would the banks come in? The renewed Atoms For Peace project (a Republican initiative, conservative readers note) should be among a limited class of investments of national importance worthy of special treatment by the government including possible co-investment and return-of-principal guarantees. This limited class may include others, such as revenue-generating infrastructure investments and the NAWAPA initiative of the Kennedy administration to bring not an oil pipeline (which shows it can be done, if the Romans hadn’t) but a water distribution system from the northwestern US and Canada – areas where there are great excesses of fresh water – into the dangerously parched western states.vii
What do these investment types have in common? Once financed and in operation, power plants generate (so to speak) consistent income little affected by recessions. Infrastructural investments such as toll roads and bridges generate income through and beyond recessions, though slightly affected by recessions. There are many parts of the country where water can be sold consistently, and at a good price. These kinds of assets can bring stability inthe form of ongoing income through periods of economic crisis, and could be pledged or sold on the world market to raise major infusions of cash to meet the kinds of financial crises we are not prepared to meet now.
There has been much discussion of bank reserves being too low. We think the focus should be on not only quantity of reserves, but quality of reserves. The Federal Reserve Act of 1913 provided for reserves so that in the event the government had to nationalize the Fed it would acquire assets to balance its obligations. What kind of asset for the government is a bunch of Treasury notes only evidencing its existing debt? What is the real value of some of the other securities held by the Federal Reserve, and those we have described above in the ownership of bank holding companies but not necessarily in their banking arms, if and when the economy goes really sour?
Taking a step back from it all, the big banks are dependent on “we, the people”… which includes the banks and the other third of the Federal Reserve Board of Governors…establishing a sound, long-term direction for the economy. They are dependent on the services of government which have included bailing them out. Is it not a fair quid pro quo that they be required to participate in the establishment of reserves a small amount of which need consist of programs for economic development that are of critical national interest and of a type that will provide for increasing stability in our financial system through the provision of consistent income?
FOOTNOTES AND BIBLIOGRAPHY
i http://www.opednews.com/articles/Think-Your-Money-is-Safe-i-by-Ellen-Brown-130706-145.html - Page 1
ii Ibid, Page 1
iii Ibid, Page 1
iv http://www.counterpunch.org/2013/08/27/the-leveraged-buyout-of-america/
Article by Ellen Brown with hyperlinks to articles noted by Colin Lokey and Bill Fezza. Upon opening this hyperlink, scroll down slightly to the “Leveraged Buyout” article.
v http://www.monetary.org/wp-content/uploads/2012/08/ChicagoPlanRevisited.pdf
Article by Jaromir Benes and Michael Kumhof, IMF working paper, 2012. This article contains an excellent synopsis and evaluation of The Chicago Plan. (We have tried and trust this file from the web site of the American Monetary Institute)
vi http://www.keipr.com/sitebuildercontent/sitebuilderfiles/aptcsaskispapazianfinal1111.pdf
Article by Dr. Armen Papazian: “A Product That Can Save A System: Public Capitalization Notes”
Paper presented at The Sorbonne of Paris, October, 2011. (We have tried and trust this file).
vii http://larouchepac.com/node/27962
The Kennedy-era NAWAPA plan for distributing water through the parched West is much too important and too timely to be ignored, and tireless work in pursuit of it by a contemporary staff member of this organization (Michael Kirsch) who contributed our May article on the Bank of the United States is to be commended.
In introducing this Solution #6, it is tempting to begin by citing the various fiscal crises that are swirling about, and then point out that we are on the wrong road exclusively if we spend all our time focusing on the fiscal tyranny of the urgent when what is most important is monetary reform for the long term. We continue to hold our view that the root cause of recessions is monetary, not fiscal, and that recessions end primarily when malfunctions in the system of money and banking work themselves out. We then, however, have to respond to the too-comfortable who say we really don’t have any problems except those that might be caused by extreme maladroitness in handling our fiscal issues…again, a challenge to our challenge to focus on the important and do something. It is true that some economic measures are improving, and there has been a run-up in the stock market. But there have always been monthly up’s and down’s in economic measures and occasional run-up’s in the stock market, no less so just before crises and recessions than in durable recoveries.
It is not our goal to give short-term prognostications concerning the economy, but to advocate an approach of being more strategic in formulating policy. We are under clouds that have all the appearance of storm cells, with some rays of light penetrating through. We can choose the attitude of a pessimist or an optimist. Consider the man who was told to cheer up, things could be worse. “So I cheered up”, he recounts, “And sure enough, things got worse.” Here’s the point: if we give any credence at all to the patterns of history, it will only be a matter of time – how much time is subject to debate - before we face another economic crisis and the 20th major recession since 1913. That is inevitable, unless and until we significantly reform our system of money and banking. Whether we choose to cheer up or not, whether a new crisis will befall us within months or after a few good years, would it not be wise to work while we can on reforming our system of money and banking to better weather the next storm? Could that not, in fact, give us new tools to bring about a full and complete recovery from the Great Recession, and something to provide new assurance to those looking down the road as they consider our financial future and thrash out our current fiscal conundrums?
Future cycles are inevitable, but there do seem to be some things that are not just cyclical but permanently changing. In the face of still-remaining concern over still-increasing debt, will Congress or perhaps a future administration be as inclined to sponsor another major, TARP-style bail-out of the big banks? Will we be able to keep so freely borrowing money from China, now that its industrial hiccups and the very scary story of its “ghost cities” show it may be in for major financial problems of its own? Will the undeniable trend toward the abandonment of the US dollar as the international trade reserve currency of choice continue? Will our climate change calamities continue to get worse? Will Europe be unable and unwilling to do as much as in the past to lend a hand to faltering economies? Will the sea-change politics of the Middle East yield non-functioning governments and economies for years to come? Will some war or catastrophic act of terrorism occur? Will the Fed be willing to go the extra mile and 20 more that it is recently has, considering its already-expressed intention to start backing away from policies that have resulted in artificially low interest rates and extraordinary “quantitative easing”? Will there come a time when the Fed, under pressure, will no longer consider I.O.U.’s that can always be recycled, but some doubt can ever be paid in un-inflated dollars (US Treasuries), and junk bonds (as some of the mortgage-backed securities are or could be in a renewed crisis), and various and sundry things the banks are now calling “securities”, to be sufficiently sound reserves or to constitute adequate reserves? The precise set of tactics we patched together to cope with the Great Recession may not always be available, and already there are signs that international monetary organizations including those to which the US is a party are devising alternate plans that would put public and private depositors at risk in the next crisis.
The world was shocked when bank depositors in Cypress were called upon to take a “haircut” – to forfeit some of their deposits – under the theory that their deposits actually belonged to failing banks and could be used to bail out the banks. Yet, this wasn’t something devised by the Greek government or devised just for a crisis confined to Cypress. The International Monetary Fund, the European Union and the European Central Bank not only approved but mandated the confiscation of depositor funds to “bail in” the two bankrupt banks in Cypress. The strategy was based on a global model that goes back to a directive from the Financial and Stability Board (an arm of the Bank for International Settlements) dated October, 2011, endorsed at the G20 Summit in December, 2011.i In 2009, the G20 nations agreed to be regulated by the Financial Stability Board, and “bail in” policies have now
been established for the US, the UK, New Zealand, Australia and Canada, among other countries.
The term “bail in” is described in the article cited above as “a quantum leap beyond a ‘bail out’”. The passage continues: “When governments are no longer willing to use taxpayer money to bail out banks that have gambled away their capital, the banks are now being instructed to ‘recapitalize’ themselves by confiscating the funds of their creditors, turning debt into equity, or stock, and the ‘creditors’ include the depositors who put their money in the bank thinking it was a secure place to store their savings. Rather than banks being put into bankruptcy to salvage the deposits of their customers, the customers will be put into bankruptcy to save the banks.”
The obvious question is, if we are part of organizations that impose this strategy on banking systems abroad, might not the same thing happen here? One might point out that we have the FDIC to insure deposits, but only up to a certain level often exceeded by individuals and organizations including NGO’s and state and local governmental entities. As of 6/30/2011, the FDIC deposit insurance fund had a balance of only $3.9 billion to provide loss protection on $6.54 trillion of insured deposits. That means $10,000 in deposits was protected by only $6 in FDIC reserves. The FDIC could borrow from the Treasury, but the Dodd-Frank Act (sec 716) now bans taxpayer bail-out’s of most speculated derivatives activities, which may well be the trigger of a 2008-style collapse.ii
So the question has been raised, is our FDIC insurance fund adequate to cover another system-wide banking crisis? In Europe, the national insurance funds were not. The European Free Trade Association ruled in the case of Iceland that the insurance funds were not intended to cover that sort of system collapse.iii In a climate of true crisis, when sovereign insolvency might be at issue in the eyes of some, might a future Congress take the same position? After all, have we not had those who called into question, via their challenges to raising the debt ceiling, the foundational assumption that Congress would pay the debt occasioned by its own appropriations? Do we not have even now, in both parties, a willingness to go down to the wire in terms of shutting down the government, as we have done a number of times now? If depositor funds are to be protected, what period of uncertainty might there be and by what means would the crisis be dealt with? The truth is, we are still in uncharted territory, as we have been since 2008, however much cheering up we may do…we really don’t know what might happen in the event of major crisis propelled not only by reckless bank activity, but also by possible catastrophic world and national events such as those that routinely fill the news.
Here we cannot resist commenting on those who might say our thinking is “outside the box” and thus “radical”, despite our repeated calls for a return from relatively recent experimentalist conventions to proven orthodoxies. Is it the mind of the radical that is so concerned with a banking system with reserves sufficient to endure realistic scenarios, or is it more accurately the mind of true conservatism in the realm of money?
As support for the claim that it is our recent banking practices that have become radical and in need of reining in…not us Progressives…let’s consider some examples. We certainly had a supply of them in the 2008 banking crisis, when the banks got caught not only on the back side of reckless mortgage lending and syndication, but also in credit default swaps, derivatives and other forms of assets and stocks previously forbidden by the New Deal era Glass-Steagall Act. These were re-allowed by the 1999 Graham-Leach-Bliley Act, which repealed portions of Glass-Steagall. The banks’ use of this new-found freedom led, within less than a decade, to the 2008 crisis. To what extent have the big banks reformed since?
A most interesting account has been furnished in an article titled, “The Leveraged Buyout of America”, by Ellen Brown.iv In it, she refers to two hyperlinked articles by Colin Lokey and one by Bill Frezza with the descriptive title, “Too Big to Fail Banks Gamble With Bernanke Bucks”. In going through this material, the mechanics can be seen by which the big banks have, as a thank-you for bailing them out, used the funds accessible on account of unusually low lending rates in recent years as collateral for borrowing through repurchase agreements (to avoid blatant illegality) to raise short-term capital for use in purchasing derivatives, corporate bonds and stocks, referred to in the main article as bringing about a $700+ trillion speculative derivative bubble. Brown writes, “If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper hypothecation, this pledged collateral gets pyramided, creating a ticking time bomb….”
The above article also cites a letter to Federal Reserve Chairman Ben Bernanke dated June 27, 2013, from US Representative Alan Grayson and three co-signers which expressed concern about the expansion of large banks into what have traditionally been non-financial commercial spheres. The letter stated, “We are concerned about how large banks have recently expanded their business into such fields as electric power generation, oil refining and production, owning and operating of public assets such as ports and airports, and even uranium mining.” The letter expressed concerns that, “These financial service companies have become global merchants that seek to extract rent from any commercial of financial business activity within their reach.”
In the same article, Ms. Brown notes, “It seems like there is a significant macro-economic risk in having a massive entity like, say, JP Morgan, both issuing credit cards and mortgages, managing municipal bond offerings, selling gasoline and electric power, running large oil tankers, trading derivatives, and owning and operating airports, in multiple countries.” We would add, in particular, a concern for control of commodity markets; a concern that, as seen 2008, the finances of very complex operations are difficult to monitor and regulate; and a concern, also as seen in 2008, that the inter-relatedness of operations by financial service companies makes it difficult to intervene to “save the financial system” in emergencies, indeed to segregate out and protect the interests of bank depositors.
To the maxim, “buy low, sell high”, a noted Real Estate professor added, “and use other people’s money.” If we have a situation emerging where the big banks can use tax payer’s money and depositors’ money to get involved in high-risk, short term investments and we are insuring them against any downside, are we on the right path?
We would actually like to see the banks invest in things like power plants, but not as part of a whole raft of investments outside the banking sphere, and not at the expense of reduced lending. Let’s focus on power plants, for a moment, as that is certainly one of the more sensible investments mentioned when it comes to institutional stability.
During the 1950’s, when the Eisenhower Administration was pursuing its Atoms For Peace program, the government explored several alternatives for the engineering of nuclear power plants. One was a Thorium reactor, which did not generate highly radioactive waste materials and was not a source for enriched uranium (for weapons). However, the administration chose the uranium model precisely because of the concerns of the Cold War and because it had the benefit of providing enriched uranium for nuclear weapons.
Somehow, the Atoms For Peace idea got a little muddled in the context of a two-superpower world. Nevertheless, we have the example of the French shouldering on to help develop uranium reactors in Iraq. Some time later, the Israelis perceived a need to un-develop them, and part of the rationale for the US invading Iraq was the suspected nuclear component of “weapons of mass destruction.”
Today we tell countries around the world they cannot have the benefit of Atoms For Peace held out to them not too many years ago by our country …that developing nuclear power carries with it the risk of economic sanctions, sabotage (as not verbally threatened but demonstrated in Iran), or military attacks by the United States or its allies. Paradoxically, there are risks to our national security from climate change, not to mention those involving conflicts over oil and coal and economic crises involving multiple nations – risks not insignificant when stacked up against the risks of nuclear proliferation. How long will saber-rattling without using the saber (present policy, it would seem) work in a world in which urbanization and industrialization are proliferating, the cleaner fossil fuels running out in areas less endowed with them than we are, and nuclear technology is proliferating?
Recent literature suggests that the Thorium reactor remains a viable alternative. Many believe nuclear fusion may not be that far away if we, globally, give the research effort a concentrated push.
Consider the cost of defense against nuclear war or terrorism, the costs of climate change disasters, the need for clean power in the US as periodically emphasized by brown-out and black-out scares, and the potential for greater prosperity for the US if a fulfillment of Atoms For Peace promotes economic development throughout the world. Shouldn’t investments in nuclear research (at least to bring us up to par with Europe) qualify as a national priority? Shouldn’t available funding to build a bevy of new plants be something we should plan for?
Some things governments do best. Our government could partner with European governments and others throughout the world in an effort to conduct appropriate nuclear research, and could raise the funding to do so without increasing government debt. For one thing, we could do so by simply printing money. No one has yet explained why we couldn’t print a limited quantity of US Notes or “Greenbacks”, just as the (Republican) Lincoln Administration did, and put them to good use now while we are still recovering from the recession rather than in an over-heated stage of the economy. (It should be noted that the Greenback-based Chicago Plan, proposed during the 1930’s, had the active backing of 235 economists and 157 universities and today is eliciting renewed interest at the highest levels).v Of course, if we do enter an over-heated stage of the economy, the classic solution (and a reason we are supporters of the Federal Reserve System) is to increase required reserves – money going into the pot we propose to create). Since no one has given a reason why Greenbacks could not be used, we assume silence is an acknowledgment that they can. But there are other strategies as well.
In our May issue our guest contributor (Michael Kirsch) described how the historic Bank of the United States converted government debt from the revolutionary war into shares in investments in economic development, and how new investors were attracted as subscribers to the Bank. During the Second World War, the government had no trouble selling war bonds, as people believed the cause was linked to their own survival (and because the Federal Reserve bought so many of them). If we created an investment vehicle for which outstanding Treasury notes could be traded in, we could afford even to guarantee returns on the new security when used as a replacement because we would only be replacing a guarantee already in effect. So instead of paying off or re-cycling a certain number of outstanding T-bill’s, we could use that money to fund two things: research and operations, as we already have a need for new plants using existing technology that the government is in a position to expedite. A good start-up is one that has promise; a great start-up is one that has promise and a positive cash flow.
Dr. Armen Papazian has proposed the use of “public capitalization notes” as part of a transition from a debt-based financial system to an asset-based financial system. His thoughtful article is relevant, here, and included via hyperlink in our bibliography.vi
Where would the banks come in? The renewed Atoms For Peace project (a Republican initiative, conservative readers note) should be among a limited class of investments of national importance worthy of special treatment by the government including possible co-investment and return-of-principal guarantees. This limited class may include others, such as revenue-generating infrastructure investments and the NAWAPA initiative of the Kennedy administration to bring not an oil pipeline (which shows it can be done, if the Romans hadn’t) but a water distribution system from the northwestern US and Canada – areas where there are great excesses of fresh water – into the dangerously parched western states.vii
What do these investment types have in common? Once financed and in operation, power plants generate (so to speak) consistent income little affected by recessions. Infrastructural investments such as toll roads and bridges generate income through and beyond recessions, though slightly affected by recessions. There are many parts of the country where water can be sold consistently, and at a good price. These kinds of assets can bring stability inthe form of ongoing income through periods of economic crisis, and could be pledged or sold on the world market to raise major infusions of cash to meet the kinds of financial crises we are not prepared to meet now.
There has been much discussion of bank reserves being too low. We think the focus should be on not only quantity of reserves, but quality of reserves. The Federal Reserve Act of 1913 provided for reserves so that in the event the government had to nationalize the Fed it would acquire assets to balance its obligations. What kind of asset for the government is a bunch of Treasury notes only evidencing its existing debt? What is the real value of some of the other securities held by the Federal Reserve, and those we have described above in the ownership of bank holding companies but not necessarily in their banking arms, if and when the economy goes really sour?
Taking a step back from it all, the big banks are dependent on “we, the people”… which includes the banks and the other third of the Federal Reserve Board of Governors…establishing a sound, long-term direction for the economy. They are dependent on the services of government which have included bailing them out. Is it not a fair quid pro quo that they be required to participate in the establishment of reserves a small amount of which need consist of programs for economic development that are of critical national interest and of a type that will provide for increasing stability in our financial system through the provision of consistent income?
FOOTNOTES AND BIBLIOGRAPHY
i http://www.opednews.com/articles/Think-Your-Money-is-Safe-i-by-Ellen-Brown-130706-145.html - Page 1
ii Ibid, Page 1
iii Ibid, Page 1
iv http://www.counterpunch.org/2013/08/27/the-leveraged-buyout-of-america/
Article by Ellen Brown with hyperlinks to articles noted by Colin Lokey and Bill Fezza. Upon opening this hyperlink, scroll down slightly to the “Leveraged Buyout” article.
v http://www.monetary.org/wp-content/uploads/2012/08/ChicagoPlanRevisited.pdf
Article by Jaromir Benes and Michael Kumhof, IMF working paper, 2012. This article contains an excellent synopsis and evaluation of The Chicago Plan. (We have tried and trust this file from the web site of the American Monetary Institute)
vi http://www.keipr.com/sitebuildercontent/sitebuilderfiles/aptcsaskispapazianfinal1111.pdf
Article by Dr. Armen Papazian: “A Product That Can Save A System: Public Capitalization Notes”
Paper presented at The Sorbonne of Paris, October, 2011. (We have tried and trust this file).
vii http://larouchepac.com/node/27962
The Kennedy-era NAWAPA plan for distributing water through the parched West is much too important and too timely to be ignored, and tireless work in pursuit of it by a contemporary staff member of this organization (Michael Kirsch) who contributed our May article on the Bank of the United States is to be commended.
