Debt, Denial, and Class Warfare

by Dr. James Glenn | April 24, 2009

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson 1802

"The last duty of a central banker is to tell the public the truth."
-- Alan Blinder, Vice Chairman of the Federal Reserve, on PBS’s Nightly Business Report in 1994.

“The trouble with the world is that the stupid are cocksure, and the intelligent are full of doubt."
--Bertrand Russell"

I’ve been thinking a lot about our founding fathers lately. What would they think of our current financial crisis? Most likely, they’d shrug their shoulders and say with an admonishing wag of the finger, “I told you so.”

Many of my readers, students, and acquaintances who have followed my humble musings for the last 6-7 years have asked me, often somewhat incredulously, how I knew gold would triple, deficits would balloon, housing collapse, oil push towards $150, and banks disintegrate, all in the span of five years? Some have called me a genius. Others prescient. Others were not so kind.

I, like Jefferson above, am merely a student of history, particularly financial history, and Austrian economics. You see, our founding fathers, Jefferson, Washington, and Madison among others, had seen the Bank of England at work in their lifetimes, and had several hundred years of fractional reserve banking history chicanery and obfuscation to enlighten their views before coming to America. They had seen the booms, busts, and asset and price inflation, created by excessive money supply and credit growth. They had witnessed first hand, the pernicious effects of ginned up growth, built on mountains of debt, masquerading as wealth creation for the benefit of the few, at the expense of the many. They witnessed first hand, the destruction of the working class at the hands of the corrupt, capricious, and greedy. They had seen the East Indian Tea Company, the predecessor to today’s multinational’s, destroy economies from China to Zanzibar. By Washington’s time there had already been two central banks created in North America. Both of them ended up as all central banks eventually must. They failed and went of business, victims of their own avarice, incompetence, and an unsustainable fiat money based, fractional reserve banking system run amok. The same model is in use today several hundred years after Jefferson’s incisive comment above. As Mark Twain said, “History doesn’t repeat exactly, but it rhymes.”

What we have witnessed in the last two years, the disintegration of a once vibrant economy, the collapse of a corrupt and incompetent banking system, the collapse of the largest housing bubble in the worlds history, the evisceration of the middle class, and the destruction of capitalism, has been brought to you care of the very same cast of characters that have paraded throughout history. These shylocks, charlatans, philistines, pitch men, and pontificators of esoteric economic systems have merely morphed and metastasized into a deadlier modern mutation, care of neo liberalism, and the IMF (Friedman’s “Chicago School of Economics”), supply side economics (Reagan), and Reagan/Greenspan’s trickle down economics, exponential use of securitization (Greenspan), and mass derivatives deployment (now over 500 trillion worldwide). The encouragement of their use through an unregulated, over the counter market, through an often secretive, opaque, and rapacious network of hedge funds, Fed member banks, and so called “investment banks” is an integral part of the disaster that has unfolded in the last three years brought to you by those mentioned above, as well as Paulson, Rubin, and Clinton.

Greenspan, the “Master of Disaster”, as I like to call him, testified monthly, in Congressional testimony, for over a decade before his very timely (coincidental?) departure, that “derivatives needed no regulation,” and that the industry, could, “self regulate.” My God, could that man come up with spectacular oxymorons or what? What else would you expect from the head pitchman and shill for the financial services community? Who stood to make trillions from their use, and disuse?

This disaster was sadly predictable for anyone with their eyes open, and their mind unfettered by the bubble propaganda pumped out daily by the likes of CNBC, Hannity, and Kudlow, through a quasi fascist, corporate dominated, and plutocrat controlled media, which pass for news outlets in our country. This collapse was called to a tee by myself, and many smarter men and women than me, years before the fact, i.e.; by many contributors to financialsense.com, Jim Sinclaire, Warren Buffet, George Soros, Jim Rogers, David Fleckenstein, and so many more………….All anyone had to do was remain skeptical, read a little history, and listen to the countervailing dogma at the time, duly disseminated by these lone voices in the wilderness.

Needless to say, it takes a lot of personal courage, and iron willed fortitude to stand up to the, “this bubble will last forever”, and the “this times it’s different,” crowd, particularly on paper, or in many cases, a national forum, where these patriots were often disparaged, and ridiculed as “crazy”, or “out of touch” by those who wanted to continue the housing charade for as long as possible, at all costs, and at the expense of their own personal ethics, and what was left of their integrity. Make no mistake; Greenspan knew EXACTLY what he was doing when he encouraged deregulation of the financial services industry, and no regulation of derivatives. Phil Graham and his lackeys knew EXACTLY what they were doing when he had Congress dismantle the Glass-Steagall Act in 1999, which had stood as an effective barrier to the worst, most egregious excesses of the crony capitalism, and rampant, rapacious speculation of the “roaring” 20s, for nearly 80 years. And Bush knew EXACTLY what he was doing when he had a Republican controlled Senate, Congress, and Executive Branch eviscerate every regulatory agency that stood in the way of their banking, brokerage, real estate, and insurance buddies.

This was a fait accompli from 1999 on, and with the greater leverage allowed financial institutions under the Gramm-Leach-Blyly Act of 1999, coupled with securitization, and the exotic new speculative vehicles known as “derivatives”, these minions of mayhem wasted no time in gorging themselves on the life’s blood of capitalism. Profits, mostly obscene profits. The rest is history as they say. What these men, and those like them have presided over, aided, and abetted, through outright fraud, deceit, and avarice, is nothing less than the near complete, intentional, destruction of our economy. To call their policies since Reagan misguided would be much too kind, and undeserved I might add. An understatement? LOL. How about criminal? Why are these people not in jail?

There is little satisfaction in being vindicated after these many years, or saying, “I told you so”, particularly when I see friends out of work, losing homes, and their life’s savings, and their self respect due to this recent turn of events. But….just this once, “I told you so.” As I said for a decade, “You cannot build a sustainable economy on debt and consumption.” Borrowing 15 trillion (if you include TARP, 2.5 Trillion new “loans” on the Feds balance sheet, and the wars) since Reagan, to create the illusion of prosperity, on a mountain of debt. It is still an illusion, and that mountain must collapse once no more debt can be generated due to debt service levels being maxed out. Eventually, it must, and will implode. So, here we are. The piper must be paid.

Now to the subject of denial. At the very center of the rot, is our very own Federal Reserve, which is not Federal, and of course, has no reserves, other than the ones it creates out of thin air, at taxpayer expense. Its evil step children, Wall Street, and Fed member banks, have come to form the deadliest commercial triad in our nations history. They stand as bulwarks for a corrupt, complacent, and bloated financial sector, that like a vampire, sucks the very life’s blood of our Democracy, while its victims, watch in horror, as their blood is drained, and their lives are extinguished. The Fed, the ultimate leech, has unfortunately become a tool of the status quo, rich, and venal. Were they ever anything else? Routinely, its monetary policy’s favor capital over labor (targeting wages instead of asset bubbles for instance), plutocrats over working people (asset bubbles designed to enrich those with access to credit), corporatists over communities (Greenspan encouraging corporate deregulation, outsourcing, and off shoring), and financial services over manufacturing (witness GMs difficulty in obtaining a measly 15 billion while the investment banks steal trillions). Most of the latter vote Democratic, while generally the former vote Republican. You think the destruction of unions and manufacturing hasn’t been very deliberate? Think again.

Whether intentional (I believe so), or just plain stupid, and misguided, their policies are generally those favoring the rich and corporatists, who often vote Republican, and frequently dine at the trough of Republican largess (in the good years anyway). That Greenspan presided over 20 years of Republican malfeasance, economic chicanery, and outrageous ineptitude, and just eight of enlightened Democratic rule (with the exception of NAFTA & Graham-Leech-Blyly), is hardly coincidental.

You would think that after what we’ve seen in the last three years that even the most ardent, bellicose, vociferous, right wing tool (Michael Savage anyone?) would concede, albeit with a smirk, that the thoroughly discredited policies of “deregulation as a panacea for everything that ails you, privatization, trickle down economics, anything goes capitalism, neo liberalism, i.e.; open markets, unregulated flow of capital, laissez faire capitalism, and tax breaks for the wealthiest among us…………that these totally discredited ideas…should be consigned permanently to the trashcan for worn out, dog eared, and discredited platitudes. You’d think that these misguided souls would be able to admit, just for once, how hugely, inexorably, and myopically wrong they have been. Like the little Dutch boy with one thumb in the dyke, and one up their rear, they still deny any culpability, continuing to tout the virtues of tax cuts for the wealthy, while trying their best to turn us into a banana republic. But don’t take my word for it. Read what the former chief economist at the IMF has to say:

Leading Economist Decries Power of Wall Street "Oligarchs"

Posted Apr 21, 2009 07:30am EDT by Henry Blodget in Investing, Recession, Banking
Related: ^DJI, ^GSPC, xlf

In a fascinating piece in the latest issue of The Atlantic, Simon Johnson, former chief economist at the International Monetary Fund, outlines what he sees as the alarming influence of Wall Street firms over the American economy. He expounds on his thesis in our interview, making several points:

America’s Crisis Resembles that of Emerging Markets: While at the IMF, Johnson saw so many financial crises that the core problem became old hat: In the free-wheeling growth years of an economic boom, the politicians and oligarchs of an emerging market like Russia or Argentina would get so close that eventually they would meld into a politico-industrial complex. As long as the boom lasted, this cozy relationship never bothered anyone--because everyone was getting rich. Fast forward to the latest market crisis--the one in the United States. The pattern is exactly the same, Simon Johnson says, with a mutually beneficial money-and-power corridor now running between Washington and the modern oligarchs Wall Street.

But There Are Key Differences: In the emerging markets, eventually, the bubble would burst. The banks and corporations would collapse, and suddenly it would be up to the government to seize and restructure the insolvent banks. In America, though, there will be no such defining collapse, nor a quick recovery, he argues. Instead, we face a “painful” L-shaped recovery, drawn out over 3-5 years.

Wall Street: “It’s Too Big, Too Powerful. It’s Dangerous” Simon argues that the U.S. should invoke anti-trust laws to break up Wall Street, whose power poses a material threat to the American economy.

Simon Johnson is a senior fellow at the Peterson Institute and a professor at MIT’s Sloan School of Management. He is a co-founder of the popular economics blog, BaselineScenario.

You have to hand it to the party of big business, they are an often clever, and disingenuous lot. Not only do they have the central bank and Wall Street in their pockets, but what is truly astounding is that they now have the ultra ignorant, and generally poor and middle class, stumping for the ultra rich! Incredible! Only in America, could the media, and Republican Party get away with this thinly veiled sop to the oligarchs in the form of national “tea party’s” protesting taxes It would be hilarious if it weren’t so very pathetic. Alas, the Republicans are grasping at anything, after being so thoroughly discredited, and generally despised. Who can blame them? With any luck they will be whistling in the wilderness for decades, for it will take at least that long for us to clean up their latest mess, which, as I’ve pointed out repeatedly, has been nearly 30 years in the making.

Sadly, what has to happen here is a day of reckoning for the people and institutions that have consistently compromised the greatest economy on earth, for their own gain. Many of those responsible, either explicitly (the crooks run rampant) or implicitly (the status quo that has benefited from their rule and continually voted them into power) are still in denial about their own culpability. My question to them is this, “How bad must things get before you admit to the policy failures, both foreign and domestic, of the last 30 years? Do you have to be gunned down in the streets by an angry mob before you get it? Is admitting you are wrong really so hard? Aren’t you men enough? Pathetic. A raped, and despoiled nation needs your answer.

Sorry, does this sound a little angry? I hope so. I am merely the infinitesimal tip of the proverbial iceberg. The existence and political use of class warfare as a tool to hasten social justice, and economic fairness, is continually decried by mouth pieces for the hard right ala Hannity and Limbaugh, as being crass, and well, totally unjustified. In their minds I suppose it has never exited. They lambast those who point out its ugly existence as unpatriotic, socialist, communist, or out of touch. Their tactics of disparaging and marginalizing those who are really in touch, are now as failed, as their party’s economic policies.

The vast majority of Americans, and Europeans, are all too familiar with class warfare. It is what brought our forefathers to these fabled shores. Most had lived as indentured servants, or serfs in Europe. They were desperately seeking to avoid class warfare. Needless to say, it didn’t work very well. Since that time it has become codified, and institutionalized in the canyons of Wall Street, the banking system, the legal system, and the educational system by the very same elites we were supposed to have defeated in 1776.

There is a dual system, a caste system if you will, at work in our country. Those with access to the levers of credit and capital, a good lawyer or accountant, and an advanced education generally can reap the benefits of an advanced, pluralistic, information age society, while those without this access, slip further and further behind. Add to this a central bank that continually favors capital over labor, and encourages a casino mentality via the asset bubbles it deliberately creates for its own benefit, and that of its major patrons, Wall Street, K. Street, and the Pentagon, and you have the makings of the disaster we have just witnessed in the last 3 years. The rampant speculation, easy money, low interest rates, and deficit spending of the last 3 decades have taken us from the world’s largest creditor nation, to its biggest debtor nation. Those on the right, now shrilly admonishing Obama’s budget for its deficit spending, have suddenly become pillars of fiscal rectitude. Where have they been while Bush tripled the national debt from 5 to 15 trillion in the last eight years? Where have they been? Those self serving, opportunistic, hypocritical miscreants. Where have they been?

Class warfare is very much alive, and doing very well, thank you very much. And guess who is losing the war? Obviously those that don’t own the majority of the country’s media outlets, or its major multinationals’, or most of its infrastructure are on the losing end of things these days. This has manifested in a steadily shrinking middle class, falling wages, and asset and consumer inflation. Those that still control the reigns of power mentioned above, albeit less firmly, assure us all is well, while they shovel trillions into mismanaged, inept, and fraudulent banks to save their buddy’s in financial services. These banks are dead men walking. They say we must do this. Bull. Let them fail. THAT my friends IS capitalism.

As I have said many times in prior articles, the country is held hostage by the financial services sector. They have a stranglehold on the throat of our nation. It is time for a paradigm shift that benefits all Americans, not the select few. If investing money in our own country for a change, and providing equal access to all is socialism, then call me a socialist. Some suggestions:

Break up the 20 largest banks, reorganize them, tightly regulate them, and shutter the ones that are insolvent. Allow the rest of the banks to either prove their solvency through accurate pricing of assets, or go out of business.
Nationalize the Federal Reserve, thus ending nearly a century of its tyranny over our economy. This would save the country 400 billion a year. Interest expense to them is now the fourth largest item in the nation’s budget.
Bring back Glass-Steagall and full regulation of the banking and financial services sector. Make it again the boring, stodgy, and financially conservative industry it should, and needs to be.
Encourage union membership to act as a counter balance to the corporatists, and banking elites mentioned above.
End securitization of any and all asset classes. Make those underwriting the asset, responsible for that asset until it changes hands, or matures.
Tightly regulate and monitor the derivatives market by creating an open, completely transparant exchange for them, with standardized pricing, quantities, maturities etc, similar to the futures market. Mark the asset to market at the end of every day so there is complete, and total pricing transparency.
Change the incentive structure in banking and Wall Street so that executives are not incented until the company’s financial metrics meet some pre determined benchmarks like an ROE of 15% per year, or earnings growth of 10% per year, for 3-5 years running. This would help eliminate the outrageous compensation packages to failed executives, who pump up short term gains in lieu of long term strategic planning.
Create an “arms length” relationship between the rating agencies and the companies they are supposed to be monitoring. These agencies have become little more than puppets of the industries they are supposed to be monitoring, and rating. The conflicts of interest created by the elimination of Glass-Steagall in 1999 has destroyed any remaining credibility that Wall Street has ever had, and that of those ostensibly “monitoring” them..
Insist on a return to the Fairness Doctrine under the FCC so that there is more than lip service paid to competing points of view, and broader ownership of what have become exceedingly concentrated media outlets. Like the largest banks, break up the largest.
Insist on campaign finance reform, and publicly funded elections. Ross Perot was dead on. Until we get the corporations out of our politics, nothing truly effective in the way of monitoring, regulating, or improving the institutions of Democracy and capitalism will happen. We must get the lobbyists and special interests out of government, period.

To my friends, and enemies on the right I say, Own your failures. Accept culpability instead of trying to shift the balance of the blame to those least responsible like the working poor, and work with us to change the country for the better. Slip on a conscience and see how it feels. For Gods sake, open your eyes. To my friends left and center I say, keep up the good fight! It is a war, and we can win it friends. You may call me a dreamer, but I’m not the only one………..Things can change as soon as you admit that they must. Good night friends. Jim

Hello: My name is James Glenn and I am delighted to be working with you all. I grew up in Washington DC, and attended American University where I obtained a BSBA in Finance with a minor in marketing. I have thirty years broad based experience in business development, brokerage, banking, commercial lending/underwriting, credit analysis, management, public relations, relationship selling, valuation and investment consulting and most recently, teaching. I have developed over the years exceptional researching, and writing ability, and superior spreadsheet and computer skills, and hope to bring some of these skill sets to bear in this course.

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