It's not
surprising that there
are alot of allusions to FDR and The New Deal lately.
After all, there have also been alot of allusions to The Great
Depression. The two respective economic climates share
a common, dismal state. So the question is being asked,"Will FDR
inspire Obama?" The answer, I think, is "Yes", he
will. Not that this is necessarily a good thing. The
problem is, threatening economic realities cloud people's
judgement. Under these circumstances, people don't care very much
where the money comes from, as long as it comes. This is what
made The New Deal one of the most popular government programs
in our history. Likewise it is very much the impetus for the
excitement revolving around President Obama, along with a very
unpopular war effort which has contributed to the current
economic carnage. So now the government is expected to
ride in and save the day. The bottom line is that Obama's
popularity will be used to pass what would normally be very unpopular
bailout legislation through our Congress. Even
the massive increase in our national debt won't deter this.
Nor did it deter the New Deal.
Of course the
New Deal was
effective. How could the New Deal not be
effective? Throw money at something and it usually helps.
The Works Progress Administration, for example, and the millions of
jobs it created for citizens, including students and artists, surely
helped us through a tough period. But if the
government were to have mailed everyone hundred thousand
dollar stimulus checks, that would have helped too.
But neither of these represents a healthy, sustainable way to
stimulate the economy. There are better means to the
same end that don't have the long term
consequences. Anytime we have this kind
government expansion, we really have to look at more than
ostensible goals. We should be asking ourselves if
there might be any other interests involved which
are not being talked about, because anytime we hear that there is
new legislation meant to help the “forgotten man at the bottom of
the economic pyramid," we can be fairly certain that there are
much, much larger interests operating in the background.
AAA and NRA
Let's
consider the New
Deal's Agricultural Adjustment Act,
which ostensibly sought to help farmers by raising
food prices. Its means included surplus reduction
via crop and livestock destruction, increased regulation
and and direct payment to farmers not to grow. The
Secretary of Agriculture received exclusive power to license food
processors, greatly expanding the government's direct control
over the nation's farming. This benefited the large
farmers, but not the smaller ones;
Large
farms benefited from the AAA policy of reducing surpluses, having
"gross farm income increase by 50% during the first three years of the
New Deal".This was achieved because large landowners would
evict tenant farmers and sharecroppers in order to keep them from
farming their leased acreage; the landowner would then receive the
payment for not farming the land. Futhermore, those
same land owners, having forced out some of the competition, would then
use those displaced farmers as cheap farm labor. http://en.wikipedia.org/wiki/Agricultural_Adjustment_Act
There have to
be better ways
to help out farmers than destroying the fruits of their labor, and
paying them to be idle. Would it have been difficult to
enact policy that was supportive of the small and mid-sized,
often family run, farms that used superior, pastoral methods
instead of the scale obsessed industrial methods of the
behemoths? Wouldn't less emphasis on scale and more on quality
and nutrition have been just what the doctor ordered? Better
food produced in more appropriate quantities in a much more
diverse, competitive, efficient market. But the big boys
(the ones playing golf with their congressmen on
weekends?) weren't having any of it. The AAA was passed, and
the result was predictable: squeezing out the smaller
farmers and giving more market share to the heavily
subsidized giants. No surprises here.
Similarly, the passage of the NRA act in 1933 hurt small
business. It forced businesses to pay higher
wages and shortened the work week. This sounds great.
Everyone would like to work fewer hours and make better money - and
rightly so. But if markets were right to begin with (ie;
not dominated by a few, heavily subsidized giants) employers
would not have the upper hand in the first place. They would be
subject to market discipline just like everyone else. There would
be many employers of many different sizes. If employees
didn't like their employers, they could move on. There
would be competition for labor - as it should be - not just
competition for jobs. But a real market, where there's real
competition for labor, is precisely what the big fellas
don't want. So the Recovery Act passed, which
once again hurt the more vulnerable, smaller businesses
- the ones that couldn't afford to pay the higher wages and lose
man hours. Even Walter Lippmann, who earlier had supported The
New Deal, stated his concern about the effects of the National Recovery
Act was having on smaller businesses;
Social Security
- Fannie Mae - Securities Exchange Commission
And
NIRA was
later overturned by The Supreme Court in May,1935. It
should never have been enacted in the first place. Both
the Agricultural Adjustment Act and the National Industrial
Recovery Act helped big business, but hurt many others.
Again, no surprises. Don't the corporate giants with
the lobbying power usually get what they want? Why would we
expect the little ones to win out here? This damage was somewhat
immediate, at least in relation to the damage inflicted by other New
Deal spawn, like Fannie May, Social Security, and the
SEC. These items are of particular interest because they are
some of the very pillars of our financial system
today, and very much at the core of the financial destruction we
are currently witnessing, some 70 plus years later. Social
Security, for example, sought to provide more security to the
American family. Sounds great. But as Nobel Laureate
economist Milton Friedman says, Social Security redistributes
wealth from the poor to the wealthy, a familiar theme;
Workers must pay
12.4%, including a 6.2% employer contribution, on their wages below the
Social Security Wage Base ($102,000 in 2008), but no tax on income in
excess of this amount. Therefore, high earners pay a lower percentage
of their total income because of the income caps;
Furthermore,
Social Security
is anything but secure. Retirement benefits are paid from current
year tax revenues. Any surplus is invested in
government bonds backed by "the full faith and credit" of the US
government. But while the bonds are guaranteed, the retiree
benefit payments are not;
It is important to
note, however, that while the Treasury guarantees the interest and
principal payments it makes to the Social Security Trust Fund, the
benefit payments made from the Social Security Trust Fund to American
retirees have no guarantee at all. ( http://en.wikipedia.org/wiki/Social_Security_(United_States -
under "Trust Fund" )
The
problem is, the
government bonds are connected to government fiscal policy, which
these days tends heavily towards deficit spending;
Therefore, Social
Security's ability to make full payments once annual benefits exceed
revenues depends in part on the federal government's ability to make
good on the bonds that it has issued to the Social Security trust
funds. The federal government's ability to repay Social Security, in
turn, is contingent on fiscal policies taken today (which have tended
to increase deficits and the percent of the budget spent on interest
and principal payments) and in the future. (
http://en.wikipedia.org/wiki/Social_Security_(United_States -
under "Trust Fund" )
The
public's money has been
turned over to Social Security, which uses the money to pay current
benefits and invests the rest in government bonds. The
government revenue generated from the sale of the bonds
gets mixed into the government budget, and now is
inexorably intertwined with fiscal policies we probably don't
really want our Social Security money associated with.
The government conveniently gains access to another lump of
taxpayer dollars that they can use as they see fit, and don't even
necessarily have to pay it back. So what happens when the
expected 78 million baby boomers begin to be pensioners and
medical dependents of the US taxpayer? Keep in mind that he first
baby boomers turn 62 in 2008 - http://www.cbsnews.com/stories/2007/03/01/60minutes/main2528226_page2.shtml ,
and Social Security and Medicare, combined, are unfunded to the
tune of $53 trillion dollars. http://www.lao.ca.gov/RetireeHealth/RetSummary.aspx?id=348. Like
any good Ponzi scheme, the problems won't be too apparent until the
end, when millions get caught holding the bag.
Fannie Mae was
enacted in 1938, during the later part of the New Deal,
to facilitate liquidity in the mortgage market by
purchasing mortgages from mortgage originators,
repackaging the loans as mortgage-backed securities, and selling
them to investors in the secondary mortgage market. This would
supposedly ensure that funds were consistently available for
borrowers, and make mortgages more available to low-income
families. What it did was to help legitimize
a myriad of malinvestment with implicit government backing,
creating liquidity through the use of deriviatives, and being
exempt from the normal capital/asset ratios as well as state
and local taxes, and the perception of government backing.
The FNMA receives no
direct federal government aid. However, the corporation and the
securities it issues are widely believed to be implicitly backed by the
U.S. government. In 1996, the Congressional Budget Office wrote "there
have been no federal appropriations for cash payments or guarantee
subsidies. But in the place of federal funds the government provides
considerable unpriced benefits to the enterprises...
Government-sponsored enterprises are costly to the government and
taxpayers... the benefit is currently worth $6.5 billion annually.". Fannie Mae and Freddie Mac are allowed to hold less
capital than normal financial institutions: e.g., it is allowed to sell
mortgage-backed securities with only half as much capital backing them
up as would be required of other financial institutions. Specifically,
regulations exist through the FDIC Bank Holding Company Act that govern
the solvency of financial institutions. The regulations require normal
financial institutions to maintain a capital/asset ratio greater than
or equal to 3%. The GSEs, Fannie Mae and Freddie Mac,
are exempt from this capital/asset ratio requirement and can, and often
do, maintain a capital/asset ratio less than 3%. The additional
leverage allows for greater returns in good times, but put the
companies at greater risk in bad times, such as during the current
subprime mortgage crisis. FNMA is also exempt from state and local
taxes.
And
once again, that
"implicit government backing" wasn't guaranteed.
Fannie Mae receives
no direct government funding or backing; Fannie Mae securities carry no
government guarantee of being repaid. This is explicitly stated in the
law that authorizes GSEs, on the securities themselves, and in many
public communications issued by Fannie Mae.
The perception of
government guarantees has allowed Fannie Mae
and Freddie Mac to save billions in borrowing costs. Estimates by the
Congressional Budget Office and the Treasury Department put the figure
at about $2 billion per year. (http://en.wikipedia.org/wiki/Fannie_Mae -
under "No Actual Guarantees")
But when
the going gets
tough, as it has to whenever liquidity is created from disingenuous
means, it's taxpayers to the rescue, future taxpayers in
particular - anything to keep the party going:
The authority of the
U.S. Treasury to advance funds for the purpose of stabilizing Fannie
Mae, or Freddie Mac is limited only by the amount of debt that the
entire federal government is permitted by law to commit to. The July
30, 2008 law enabling expanded regulatory authority over Fannie Mae and
Freddie Mac increased the national debt ceiling US$ 800 billion,
to a total of US$ 10.7 Trillion in anticipation of the potential
need for the Treasury to have the flexibility to support the federal
home loan banks. (http://en.wikipedia.org/wiki/Fannie_Mae -
under "Conservatorship" )
And
finally, the
Securities Exchange Commission, which also came out of the of
the New Deal, provided an air of legitimacy to it all, giving
plenty of operating room to the Bernie Maddoff's of the investment
world. The SEC
"permitted companies to hire and
pay their own accountants. The result was that accounting firms were
essentially employees of the companies they audited, and like most
employees, they knew better than to bite the hands that fed them."
- (http://www.theatlantic.com/unbound/flashbks/corpcorrupt.htm)
You have to wonder how
twenty-eight of thirty savings-and-loans that failed in California in
1985 and 1986 could have received clean audits the year before they
went belly up. from"Cooked Books" (William Sternberg, January
1992),
What good is regulation if
the regulators are bought and paid for? Without a doubt,
there were competency/efficiency issues here as well, as there are in
many government programs. Either way, the end result is the
same: creating a false sense of security in an
industry that is plagued by one scandal after another.
Conclusions
The laying of 20th
century easy money foundations has been an insidious process,
where new means of creating extra liquidity have been
ever necessary to keep the party going. In 1913, the FED
came into being, greatly facilitating monetary expansion.(1)
During the 1930s, FDR rolled out the New Deal, including
the SEC, Social Security and
Fannie Mae, which made further contributions by providing a loose
lending environment along with an air of legitimacy and
security. In 1944 at the Bretton Woods Conference, the
US dollar became the world reserve currency (2), further expanding
the liquidity of the dollar and encouraging deficit spending in the
US. Later, in 1971, Nixon removed gold backing from the
dollar which had been established at Bretton Woods, making dollar
printing even easier.(3) Now banks not only had a "lender of last
resort" backing them up, but one that could print money out of thin air. In the 1980s and
1990s, derivatives came onto the scene, providing another explosion in
liquidity. Now banks not only had a central bank backing them up
that could create money with the stroke of a pen, but they could
now also have trillions in near worthless deriviatives on their
books, and get away with it.(4)
All this liquidity
has depended on our continually borrowing from foreigners and from
our own central bank. Other countries could never get
away with this. The only reason it is possible here is
the fact that the US dollar is still the world reserve currency.
Central banks around the world still hold (largely) US dollars as
reserves, creating demand for the dollar and dollar denominated
assets. It would be different if we were producing heavily to
offset what we import, creating genuine demand for dollars. But
we're not producing like we used to. We have become
largely a consumer economy. We import heavily, and rack it
all up to our national debt, passing the tab on to future
taxpayers. So what happens to a consumer economy when
it's currency ceases to be the world reserve currency? How much
debt can we rack up and still keep the dollar in good stead? How
much longer will central banks in the the new production
centers of the world (the BRICs and others) be willing to hold
debt-plagued dollars as reserves?
These obscene levels of
dollar liquidity have driven the entire global economy, and may be
said to have benefited everyone, but it was particularly
beneficial in the US, since we have been able to import more and
more while exporting less and less. And it has been much more
beneficial to current and past generations than it will be
to later generations who will have to pick up the tab.
Furthermore, it has been still more beneficial to the corporate
elite who dominate their industries. It has maintained a
comfortable gap between big business and everyone
else, who must continue to hold working class status,
though even the working class has somewhat of a pyramidal
structure. And we've seen this in Japan, where free market
reforms that we're supposed to stimulate the economy resulted in
widening the income gap and the number of "working poor" increased by
40% between 2004 and 2006. One could argue, based on the results
of much public policy, that maintaining class society is one
of the central objectives. Big business, which has the monetary
means to lobby and fashion public policy around their interests,
benefits immensely from such social stratification. How nice
to maintain a constant pool of labor with working class status. (Any
chance the open border policy in the US relates to this? Any
chance NAFTA related to this?) And the public and
private spheres working together toward this end is not at
all unusual. Their annual, closed to the public,
meetings (5) give some indication of just what we are up against
here. At a harvard speech in 1996, Noam Chomsky states
that of the top 100 transnationals in the world, all 100 have
benefited from "state intervention". Further, 20 of
them have been bailed out from calamity, ie; from total
collapse. According to Chomsky, it's "the Nanny
state" to protect the rich, "market discipline and tough love"
for everyone else. - http://www.youtube.com/watch?v=iVDPxVy7h38.
The fundamental cause
of the Great Depression was the monetary expansion after the
creation of the Federal Reserve in 1913,
ensuing, unsustainable and explosive growth in the
roaring 1920s, and of course the fact that the FED didn't take
action and provide more liquidity to the
credit markets as the crash of 1929 approached. Some
aspects of the New Deal contributed to the recovery by stimulating the
economy. But big business was favored while smaller businesses
suffered as a direct result. Other New Deal
programs played right into the easy
money system which brought about the Great
Depression in the first place, and which helped set the stage for
what we are experiencing today. Only today, our beloved FED is
being accomodative instead of choking off the money supply like they
did before the Great Depression. They have a few more
tools at their disposal today which have facilitated dollar liquidity,
like world reserve currency status and derivatives. So instead of
getting it over with and allowing the inevitable depression to run
its course, they are throwing more fuel on the fire, which will make
the inevitable that much worse when it comes. They are printing
money we don't have and running up our national debt, calling upon easy
money to save us from the horrors of easy money.
While social
programs can be
very good, they are not inherently so. They do
have to be properly funded. But long term implications fade
into the background during hard times. Paying off one credit
card with another, so to speak, gains
strategic traction. But daddy's little girl will never learn
to pay off her credit card if daddy is always there to pay it off
for her. And on that note, if history is any guide, it's not hard
to imagine where today's very accommodative FED and bailout milieu
are going to lead us, or who they'll benefit the most.
Obama has been brought to the fore to provide the
necessary crowd control to see this process through - to
mollify a people whose government and largest corporations, ie; the
crony establishment, have done irreparable damage to the economy.
"The provision of the
Constitution giving the war-making power to Congress, was dictated, as
I understand it, by the following reasons. Kings had always been
involving and impoverishing their people in wars, pretending generally,
if not always, that the good of the people was the object. This, our
Convention understood to be the most oppressive of all Kingly
oppressions; and they resolved to so frame the Constitution that no one
man should hold the power of bringing this oppression upon us. But your
view destroys the whole matter, and places our President where kings
have always stood."
"Of all the
enemies to public
liberty war is, perhaps, the most to be dreaded because it comprises
and develops the germ of every other. War is the parent of armies; from
these proceed debts and taxes … known instruments for bringing the many
under the domination of the few.… No nation could preserve its freedom
in the midst of continual warfare."
— James Madison, Political Observations, 1795
"There is no subtler,
no surer means of overturning the existing basis of society than to
debauch the currency. The process engages all the hidden forces of
economic law on the side of destruction, and does it in a manner which
not one man in a million can diagnose."
John
Maynard Keynes(The Economic
Consequences of the Peace, 1920, page 235)
Footnotes:
(1) The
creation of the central bank
greatly facilitated monetary expansion:
"A central banking system vastly
increases the ability of bankers to lend more money than they possess
in reserves. Absent central control, monetary expansion in a fractional
reserve system faces limits. If a bank, desiring to increase its
profits, expands too much, rival banks will call in its notes. If it
cannot meet its obligations, it will collapse. A central banking system
removes this obstacle." ( http://www.mises.org/misesreview_detail.aspx?control=216&sortorder=issue - 10th paragraph)
(2)
"Furthermore, the IMF insists
that the foreign exchange reserves maintained by other nations are held
in the form of dollars, so no matter how much debt the US accumulates,
its economy will not collapse." (http://en.wikipedia.org/wiki/United_Nations_Monetary_and_Financial_Conference -
under "International Clearing Union")
And
what happens when this
little rule gets rethought? Somebody has got some serious
debt restructuring to do.
(4) Derivatives
are sometimes compared to betting on a sporting event. (Try to
imagine what a wonderful development they were for those in the
loop!) For most of us, however,
these
instruments are ticking time bombs. Maybe that’s why Warren
Buffett calls them “financial
weapons of mass destruction.” These
instruments are highly complex,
unregulated and nearly impossible (by design) for credit
rating agencies to evaluate, allowing large financial institutions to
move debt off their books and avoid taxes by pooling their debt with other financial
institutions. In a nutshell, smoke and mirrors paint a
pretty picture, and create money outside the normal central bank
liquidity rules.