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And you’re wondering why the Economy isn’t Improving? Read the facts

By : Ziad K. Abdelnour| 21 July 2010
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“We have had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.”

I wish these words, spoken in 1936 by Franklin D. Roosevelt, were not as true today as then. Yet over the past eighteen months this nation has faced a financial crisis second only to the Great Depression. It is a crisis that in many ways was predictable and preventable – one that the smartest experts had seen on the horizon for years. In the end, like the market crash that fueled the Great Depression, the current financial crisis may have been inevitable, fueled by systemic flaws that require systematic repair.

By many accounts, we did not lack the ability to foresee the looming crisis. Rather, too many of us lost sight of the need to guard against it. We lacked some of the courage and commitments that FDR brought to the last century, commitments that might have made us question the sources of dizzying profits for a few and the decay of security and prosperity for the many.

We can continue on this course and attempt to endure the next crisis. Or now, in the breathing space between crises, we can think critically about the path ahead.

So what is really going wrong with the Obama Administration’s economic and fiscal policies at large?

In my personal opinion, our government hasn’t taken the necessary actions, and has instead been doing all of the wrong things.

Let’s recap.

Anna Schwartz, co-author of the leading book on the Great Depression, and someone who actually lived through it recently told the Wall Street Journal that this was not a liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach. Nobel economist Paul Krugman and leading economist James Galbraith agree. They say that the government’s attempts to prop up the price of toxic assets no one wants is not helpful.

The Bank for International Settlements – often described as a central bank for central banks (BIS) – slammed the easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”. BIS also cautioned that bailouts could harm the economy (as did Dino Kos, former head of the New York Fed’s open-market operations) . And BIS warned that the Fed and other central banks were simply transferring risk from private banks to governments, which could lead to a sovereign debt crisis.

Basically, virtually all leading independent economists have said that the too big to fail policy must be broken up (which we at Blackhawk have been saying for a couple of years now), or the economy won’t be able to recover. Instead, they have been allowed to get even bigger.

By the same token, while modern economic theory shows that debts do matter, the U.S. is spending on guns and butter like debts are a good thing and like if there is no tomorrow.

It is a fact that Nobel prize winning economist George Akerlof predicted in 1993 that credit default swaps would lead to a major crash, and that future crashes were guaranteed unless the government stopped letting big financial players loot by placing bets they could never pay off when things started to go wrong, and by continuing to bail out the gamblers.

Not only has the government rewarded the gamblers, bailed them out and let them engage in a new round of risky betting, but it hasn’t even reined in credit default swaps. And instead of trying to restore trust in our financial system – a prerequisite for any sustainable economic recovery – Summers, Geithner, Bernanke and their other cronies have tried to sweep the problems under the rug and con the public into believing that everything is okay and that no real reform is needed.

It is clear by now that the government’s entire strategy – as during the S&L crisis – is to cover up how bad things are and to keep people from getting the facts. Reminds me very much of the 1980’s where 7 out of the 8 giant, money center banks went bankrupt during the Latin American Crisis, and the government’s response was to cover up their insolvency.

I guess there has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . . Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.

The current craze in DC policy circles is to create a “systematic risk regulator” to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

Instead of striving to uncover the truth, it looks like Congress is seeking to conceal it and tell banksters they’re free to steal again.

And while stopping the rising tide of unemployment is key to reversing the financial crisis, the government hasn’t done much at all to staunch the loss of jobs either.

For example, the government has committed to give trillions to the financial services industry. President Obama’s stimulus bill was $787 billion, which is less than a tenth of the money pledged to the banks and the financial system. Of the $787 billion, little more than perhaps 10% has been spent as of this writing.

The Government Accountability Office says that the $787 billion stimulus package is not being used for stimulus. Instead, the states are in such dire financial straits that the stimulus money is instead being used to “cushion” state budgets, prevent teacher layoffs, make more Medicaid payments and head off other fiscal problems. So even the money which is actually earmarked to help the states stimulate their economies is not being used for that purpose.

Further, it seems that very little of the stimulus funds are actually going to high-value stimulus projects if any. The stimulus money reaching California for example is being used for projects that would have been built anyway, instead of on ways to change how Californians live. Case in point: Army latrines, not high-speed rail. And these are the types of projects with lasting effects on the economy? Get real….

Job creation is another question. A recent survey by the Associated General Contractors of America found that slightly more than one-third of the companies awarded stimulus projects planned to hire new employees. But about one-third of the companies that weren’t awarded stimulus projects also planned to hire new employees.

While the construction portion of the stimulus is having an impact, it is far from delivering its full promise and potential.

Further, it is unclear how many jobs will still be created through the Defense Department projects. Most of the construction jobs are awarded through multiple award contracts, in which the department guarantees a minimum amount of business to certain contractors, and lets only those contractors bid on projects. That means many of the contractors working on stimulus projects already have been busy at work on government projects, even the stimulus money which is being spent.

So why doesn’t the Obama Administration wake up for a change and start creating and nurturing a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts? It is clear that the problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labor demand.

It’s almost as if the Administration is opting for a rose-colored-glasses PR strategy rather than taking a hard-nose look at actual consumer and employment figures and their trends, and modifying its economic policies accordingly.

Even as many Americans still struggle to recover from the country’s worst economic downturn since the Great Depression, another crisis – one that will be even worse than the current one – is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.

The report warns that the country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.

“Risk-taking at banks,” the report cautions, “will soon be larger than ever.”

Without more stringent reforms, I fear that another crisis – a bigger crisis that weakens both our financial sector and our larger economy – is more than predictable, it is inevitable.

What else would you expect when our government leaders have shown little capacity to fix the flaws in our market system and when Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner, who oversaw policy as the bubble was inflating are still the same men now designing our ‘rescue.’

Have you ever wondered what will happen when the next shock hits? We may be nearing the stage where the answer will be – just as it was in the Great Depression – a calamitous global collapse.

Bottom Line:

Many elements of a healthy design of the domestic and international financial system have been developed, refined and were clearly understood by experts on finance and markets long before this crisis of out of control markets erupted in 2007-8.

The design of proper reforms is not too complex to understand. It is not beyond comprehension. The primary ingredients, are well understood. They are essential to the confidence and integrity of American capital markets. It is well beyond time to enact them and to enforce them.

Finance is a means to serve the economy and society. It is not an end in itself.

I hope this will serve as a “Finance 101 Course” to the millions of Americans – and the majority of our leaders in Washington DC – who don’t yet fully understand the economic implications of the Obama Administration’s programs. And the implications of enacting policies that treat us all like suckers in a cheap economic thriller.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. Johne848Johne848

    You made some really good points there. I checked on the internet for additional information about the issue and found most people will go along with your views on this site. edbgdceadefd

  2. Damian PalmaresDamian Palmares

    And to Mike…the reason they are not using the stimulus money to create jobs is because they are holding it for Obama’s re-election. How much money has been spent since the bill passed? I’ll have to go look but I think maybe 15% if that and all that’s done is cover shortfalls in state budgets.

  3. Damian PalmaresDamian Palmares

    And about China’s GDP growth, it’s not hard to grow at their rate when you pay your factory workers $3 an hour. I know they raised the minimum wage in a lot of provinces but I still think we screwed ourselves by investing so much overseas and losing so many jobs here in the US, which just prolongs the recession we have here. It will come back because we have the innovation, technology and research that China doesn’t have but hopefully we don’t lose our middle class in the process. They spend…well they did, until this recession hit.

  4. Damian PalmaresDamian Palmares

    Thank you for the article Ziad, as always. My question is to Ken…and I am just playing devil’s advocate for a second here….if you were to abolish fractional reserve banking, which is the way the system is set up now, where will the capital come from to actually do business?…write loans, etc…No bank that I am aware of has the ability to underwrite and hold the massive loans to corporations and business…their entire business model is based upon future profits, which is fine, except when irrational decisions have been made. So if Goldman were to reverse their holding status and others followed suit, perhaps…but do you think they would be able to grow, if they were required to keep ratios that high? They sit at around 10% now still, I mean I could see maybe 30% but still, don’t you think that it would stagnate growth? All start-ups need capital, corporations need capital just to keep up day-to-day operations. Who would step in and take their place? The Government? That’s one step away from becoming China and the only reason their economy is better than ours at the moment is because they pumped their money into infrastructure …mainly state-owned businesses…Sure Beijing is nice, but the majority of people that have money in China are maybe 10% of the population, the rest are dirt poor. At least we still have a middle class here in the U.S., even though it’s slowly going down.

  5. Mike ClarkeMike Clarke

    Well said, Ziad. The current administration is missing the point on job creation. That is what the economy needs. The biggest contributor to job growth is small business and startups, especially high tech. The administration seems to be trying to snuff that part of the economy by removing personal residence value from the the qualified angel investor calculation, removing ~ 30% of the current angel investors.

  6. Ken RhodesKen Rhodes

    The Monetary Reform Act This proposed law would require banks to increase their reserves on deposits from the current 10%, to 100%, over a one-year period. This would abolish fractional reserve banking (i.e. money creation by private banks) which depends upon fractional (i.e. partial) reserve lending. To provide the funds for this reserve increase, the US Treasury Department would be authorized to issue new United States Notes (and/or US Note accounts) sufficient in quantity to pay off the entire national debt (and replace all Federal Reserve Notes). The funds required to pay off the national debt are always closely equivalent to the amount of money the banks have created by engaging in fractional lending because the Fed creates 10% of the money the government needs to finance deficit spending (and uses that newly created money to buy US bonds on the open market), then the banks create the other 90% as loans (Money and Banking 101). Thus the national debt closely tracks the combined total of US Treasury debt held by the Fed (10%) and the amount of money created by private banks (90%). Because this two-part action (increasing bank reserves to 100% and paying off the entire national debt) adds no net increase to the money supply (the two actions cancel each other in net effect on the money supply), it would cause neither inflation nor deflation, but would result in monetary stability and the end of the boom-bust pattern of US economic activity caused by our current, inherently unstable system. Thus our entire national debt would be extinguished – thereby dramatically reducing or entirely eliminating the US budget deficit and the need for taxes to pay the $400+ billion interest per year on the national debt – and our economic system would be stabilized, while ending the terrible injustice of private banks being allowed to create over 90% of our money as loans on which they charge us interest. Wealth would cease to be concentrated in fewer and fewer hands as a result of private bank money creation. Thereafter, apart from a regular 3% annual increase (roughly matching population growth), only Congress would have the power to authorize changes in the US money supply – for public use -not private banks increasing only private bankers’ wealth.

  7. Ken RhodesKen Rhodes

    Nice article Ziad. The problems are easy to spot. The solution not so clear. Consider this… If the economic system is already warped by special interests and private monopolistic practices (such as the financial system in the US is and has been since the passage of the Federal Reserve Act of 1913 cabalizing the US banking industry and allowing their cabal to create money using fractional reserve banking) then we must inevitably find balance and justice restored to the free market system, in this case by abolishing the Fed and withdrawing from participation in the BIS/IMF/World Bank combination. Cutting spending to reduce the fiscal deficit results in less transitional unemployment than raising taxes to do so. In other words, the solutions proposed by the Bush and Obama administrations of massive government intervention in the markets will prolong unemployment compared to reducing government spending (Government spending diverts national resources away from productive industry). The BIS is responsible for this current recession/depression and with the US Fed has misused its control of great wealth and resulting influence radically to tilt the economic system in the favor of the major international banks and against all other economic sectors. This threatens to subject the political liberty of the entire world to BIS supra-governmental economic regulations since political liberty depends upon private control of private property. To quote Milton Friedman… “Any system which gives so much power and so much discretion to a few men, so that mistakes ‑‑ excusable or not ‑‑ can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic ‑‑ this is the key political argument against an independent central bank. . .To paraphrase Clemenceau: money is much too serious a matter to be left to the Central Bankers.” Enter the Monetary Reform Act. Step 1: Directs the Treasury Department to issue U.S. Notes (like Lincoln’s Greenbacks; can also be in electronic deposit format) to pay off the National debt. Step 2: Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt. These two relatively simple steps, which Congress has the power to enact, would extinguish the national debt, without inflation or deflation, and end the unjust practice of private banks creating money as loans (i.e., fractional reserve banking). Paying off the national debt would wipe out the $400+ billion annual interest payments and thereby balance the budget. This Act would stabilize the economy and end the boom-bust economic cycles caused by fractional reserve banking.

  8. Dave AshmanDave Ashman

    Another well prepared and presented analysis of US & global short-sightedness. Fear of a double dip depression is one of the reasons there are very few new employment projects. As above, so below. The greedy (brain dead) heads of the banking systems the Rothschilds family are basically controlled the world’s bankruptcy. Politician are merely controlling the bankruptcy managed via the IMF and World bank trustees again the Rothschild family & relations. Tax the people; more & more is their only purpose. War, sickness and tax are the only industries of these so-called super-rich. They are truly vampires of the invisible world. Water = Life Yes we Can Change 4 the Better Twitter @H2OTrust

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