by Dr Constantin Gurdgiev

Here is a new insight into recessions dynamics. This time from the IMF (see link here)…

What Happens During Recessions, Crunches and Busts? by Stijn Claessens, M. Ayhan Kose, and Marco E. Terrones (IMF WP/08/274) looks at “the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007.”

Data set covers 122 recessions, 112 (28) credit contractions (crunches), 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts).

The authors “find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions... Episodes of credit crunches, house price and equity price busts last much longer than recessions do [4 quarters on average]. For example, a credit crunch episode typically lasts two-and-a-half years and is associated with nearly a 20% decline in credit. A housing bust tends to persist even longer—four-and-a-half years with a 30% fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities drops by half.“  Link to article with tables

Internet activist John Gilmore famously said, “The Internet interprets censorship as damage and routes around it.” A key event of the Internet age was the invention of Napster, the direct online music-sharing program that helped erode the business model of the global music industry. This capability of the Internet to route around middlemen is becoming more apparent. A reader of the Financial Times in December won £10,000 for identifying peer-to-peer lending through the Internet as the “next big investment idea.”

How such a directly connected financial system could work is a question that has interested me for almost a decade.

At a recent conference in Tehran on the current financial crisis, one of my fellow speakers observed that “it is not possible to solve 21st century problems with 20th century solutions.” I agree. The emergent partnership-based enterprise model, however, has evolved in response to the challenges of this direct Internet connectivity.

Finance consists of three things: credit, which facilitates trade and enables the creation of productive assets; investment, which consists of financial claims over productive assets such as secured debt (e.g., mortgage loans); and equity, which is an ownership interest in a corporation, and typically exists in the form of shares.

Credit and investment may be achieved without the intermediation of banks. Since bank capital will be further depleted as the credit crunch spreads into the productive economy, peer-to-peer finance offers a solution from an entirely unexpected direction.

Direct Credit

Trade sellers have extended credit to trade buyers for thousands of years. As trade has developed nationally, regionally, and globally, one of the key enabling factors has been credit intermediation by banks. This intermediation protects sellers by taking on the credit risk of buyers and enables trade to flow by providing liquidity to sellers.

It is possible to dispense with a credit intermediary and provide such a framework of trust through the use of an agreement—a guarantee society—whereby sellers and buyers collectively provide a mutual guarantee. This mutual guarantee may then be supported by provisions made by both seller and buyer into a default fund in the hands of a neutral custodian.

A service provider could then set guarantee limits, operate the accounting system, and deal with defaults in return for a fee. The crucial advantage for banks of such a guarantee-society credit-enterprise model is that they would no longer have to put capital at risk by creating credit based upon it.

Direct Investment

When we distinguish the public sector from the private sector, we are actually distinguishing between enterprises and assets that are owned by the state and those which are owned by that specific enterprise model known as the joint stock limited liability corporation.

In recent years, media attention has focused on developments and events in the field of credit. The emergence of new generations of alternative investment vehicles—such as income trusts, real estate investment trusts, exchange traded funds, and hedge funds constituted as limited partnerships—has passed relatively unnoticed.

In particular, there has been an explosion in the United States of the use of the simple and flexible new partnership-based Limited Liability Company. In Britain and elsewhere, an even simpler form—the Limited Liability Partnership—is emerging at a phenomenal rate for purposes never intended by legislation introduced with the intention of limiting the liability of partners in professional partnerships.

Such partnership-based entities may be used as framework agreements—not organizations—which bring together investors with users of investment in a capital partnership. In this way, it is possible to create new revenue- and production-sharing mechanisms for direct investment in productive assets of all types, and particularly in real property and in energy assets through what I call “unitization.”

Unitization

Let’s consider how this might be used to refinance a portfolio of distressed mortgages. The properties are transferred to a neutral custodian, and an affordable rental is agreed upon. That rental is then index-linked. The resulting Rental Pool is divided into proportional units which are allocated between investors and a suitable management consortium.

For the “co-owner” occupier, this is a new form of rent-to-buy, since any amount paid in excess of rental will buy units. For the “co-owner” investor, units provide a reasonable, index-linked, secure revenue stream, ideal for risk-averse long-term investors such as pension funds. For banks, this is an optimal form of refinancing through a “Debt/Equity Swap.”

Similarly, we may finance a wind turbine simply by creating units redeemable in, say, 10 kilowatt hours of energy and selling these to investors. In the United Kingdom, the sale of between 30 and 40 percent of production finances the turbine, and with a few percent of production to a manager, the balance is pure surplus.

Direct peer-to-peer investment gives rise to shares, but not as we know them. Once again, we see a role for banks as service providers, appraising investments, advising investors, and providing liquidity—all classic investment banking roles. As with direct peer-to-peer credit there is again no need for banks to risk capital by creating credit based upon it.

The enabling factor for a new generation of peer-to-peer finance is a new generation of networked partnership-based framework agreements and entities. The work of visionaries like David Johnson of New York Law School and Oliver Goodenough at the Vermont Law School in creating the new Vermont Virtual LLC is a major advance in this direction.

Outcomes

A generic clearing-union network of direct financing will enable a simple but radical new approach to global economies. It could enable systemic fiscal reform based upon taxation of privilege rather than earned income, and it also offers new solutions for financing public assets. Most exciting of all, it enables a new networked generation of global markets, and even the potential for a “New Settlement”—a Bretton Woods II—establishing a new global architecture for world trade.

Chris Cook was formerly director of the International Petroleum Exchange, and is now a strategic market consultant, commentator, and enterprise architect. He is currently developing new partnership-based enterprise models and financial products based upon their application to Internet market networks.

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SUMMARY and INTRODUCTION

1. The objective is to get proposals for monetary reform – national and international – included in the Agenda for the G20 meeting on 2nd April 2009.

2. The fall-back purpose is that, even if G20 governments do not agree to discuss these questions in April, active pursuit of that objective now will help to increase already growing support for monetary reform. Then, having taken off, it could snowball through the internet and other channels into a powerful, longer-term international campaign.

3. The reforms to be proposed to G20 governments are as follows.
(1) National monetary reform will genuinely nationalise national currencies, by
(a) transferring to nationalised central banks responsibility for creating debt-free the whole of the public money supply; and
(b) prohibiting anyone else, including commercial banks, from creating bank-account money out of thin air – just as forging metal coins and counterfeiting paper banknotes are already criminal offences.

(2) International monetary reform will introduce a genuinely international debt-free currency,
(a) created by a new international monetary authority,
(b) to provide a more efficient, more stable and fairer basis for international exchanges in the global economy,
(c) co-existing with national and euro currencies,
(d) but no longer relying on any of them as international currencies.

Both these reforms will create money free of debt, not as debt – as it is created now. The national reform will transfer the function of creating money from a particular sectional interest (banking) to a national monetary authority (the central bank) serving the public interest. The international reform will transfer it from one particular national interest (the USA creating dollars) to a genuinely international currency issued by an international monetary authority serving the global interest. These reforms are not only right for the longer term. Actions taken to deal with the present crisis will be more effective if designed as stepping stones to these reforms.

A brief explanation follows. For fuller explanation see paragraphs 12-20 and 21- 27.
Note: G20 (Group of Twenty) member countries are Canada, France, Germany, Italy, Japan, UK, USA, Russia, Argentina, Australia, Brazil, China, India, Mexico, Saudi Arabia, South Africa, South Korea, Turkey, and Indonesia (+ EU and World Bank and IMF representation). For more about the April meeting see www.g20.utoronto.ca/g20plans/index.html   and www.londonsummit.gov.uk/en

BRIEF EXPLANATION

4. A large number of banking booms and slumps have happened in the past twenty years in various parts of the world. They are always more damaging to the many people who suffer from them than to the top bankers, regulators and politicians who are responsible for them. The present one is the most damaging since the Great Crash of 1929 and the following Great Depression in the 1930s.

5. As always, the responses of governments are now focusing on symptoms only, not on the underlying causes – like builders trying to stop a house continually slipping downhill by repeated expensive repairs to the roof and upper floors, not realising that the foundations are unsound.

6. Money is the foundation of national and international financial systems. The way money is created and issued, by whom, and in what form (as debt or debt-free, in one currency or another) largely determines how a financial system works.

7. The ways money is created today for national economies and the international economy lead inevitably to frequent, highly damaging booms and busts. Even in normal times, they result in a skewed money system that generates incentives for almost everyone in the world to make money in socially, environmentally, and economically damaging ways.

8.  Most people will benefit from monetary reform. Very many non-governmental organisations (NGOs) should therefore support it. They include those concerned with social issues (poverty, welfare, social injustice, health, human rights, etc), environmental issues (climate change, energy supply and use, water, food and agriculture, etc); the problems of ‘developing’ countries; and general, economic and public policy issues (world future prospects; local and community economic development; ethical investing, trading and consuming; corporate social responsibility; etc).

9. The national and international proposals outlined here share similar features. Both will create money debt-free, not as debt – as it is created now. The national reform will transfer the function of creating it from a particular sectional interest (banking) to a national monetary authority (the central bank) serving the public interest. The international reform will transfer it from one particular national interest (the USA creating dollars) to a genuinely international currency issued by an international monetary authority serving the global interest – not, as may well happen, to a small group of competing countries supplying “reserve” currencies. These reforms are not only right for the longer term. Actions taken to deal with the present crisis will be more effective if designed as stepping stones to these reforms. An example is what is now being described as “quantitative easing”.

10. An important point to be noted, although it is not directly relevant to the G20 meeting, is that monetary reform in the shape of decentralised monetary development within nations also needs to be encouraged. It will involve the further spread of alternative community currencies and regional currencies like Time Dollars, LETS, Chiemgauers and others already existing in many countries. They can provide a basis for new community institutions like local banks, credit unions, and investment funds, leading to greater local economic and social self-reliance. These desirable developments for the longer term could also provide a partial domestic response to crises like the present one.

11. Decentralised community currencies do not need to be co-ordinated internationally. But, it must be accepted that, if the present national and international money system continues to function as it does, it will continue to make most people too dependent on getting enough of their national currency to provide them with a livelihood, to allow them to commit themselves to decentralised alternative currencies instead. The G20 should therefore be asked to concentrate on the straightforward, widely understandable reforms of the currently dominant national and international money systems as proposed above. As well as relieving us all of the damaging effects of the present arrangements, those reforms will open the way to more decentralised patterns of financial and economic life for the future.

NATIONAL MONETARY REFORM

12. The monetary reforms introduced in different countries will no doubt be adapted in detail to suit differences in their political and economic environment. Taking the UK situation as fairly typical, less than 5% of the public money supply is now created and issued as banknotes and coins by agencies of the state. Commercial banks create most of the remaining 95% out of thin air simply by writing it in the form of bank-account money into their customers’ accounts as loans to be spent into circulation.  It is often still called “credit” as if distinct from money – to avoid mentioning the fact that commercial banks create most of the public money supply.

13. If the present arrangement was not the status quo and we were starting from scratch, nobody would seriously suggest that the same businesses should combine the two conflicting functions:
•    putting 95% of the public money supply into circulation efficiently and fairly on behalf of society as a whole, and
•    competing for private profit in the market for lending and borrowing.
It would be obvious that to mix the two would reduce the efficiency and reliability of both.

14. In practice, crises of financial stability do inevitably result from combining them. The reason was famously expressed from the commercial bankers’ point of view by the outgoing Chief Executive Officer of Citibank in 2007. Shortly before receiving his multi-million dollar ‘golden parachute’ to compensate for being ‘chucked out’ of his crisis-stricken bank, Chuck Prince explained that, “As long as the music is playing, you’ve got to get up and dance”. Once the herd starts stampeding, it’s better for bankers to be wrong with the herd than right but alone.

Separating The Two Functions

15. A basic monetary reform consisting of two complementary measures will separate the two functions.
(1) It will transfer to nationalised central banks the responsibility for creating, not just banknotes as now, but also the major component of the supply of public money that consists of bank-account money now mainly held and transmitted electronically.
(2) It will prohibit anyone else, including commercial banks, from creating bank-account money out of thin air – just as forging metal coins and counterfeiting paper banknotes are criminal offences.

16. These complementary measures will genuinely nationalise the national money supply but not the commercial banks. After the reform, when the present crisis is stabilised, the commercial banks that have been nationalised can be denationalised, and can compete freely in the profit-making market for borrowing and lending already existing money.

17. The first of the two measures will make an agency of the public responsible for directly creating and maintaining the public money supply in the public interest. The second will lead to a more competitive market for facilitating loans between lenders and borrowers than today. Losing their present privilege of creating the money they lend will bring the commercial banks into line with ordinary private-sector businesses that are not given their main materials as a free gift. It will encourage them to provide more services to customers more efficiently than now, and also make it easier to attract new entrants into the payment services industry.

Nationalising the National Money Supply

18. Transferring responsibility for creating all new bank-account money to the central bank will catch up with what happened to banknotes under the Bank Charter Act of 1844. That Act recognised that, having originated as notes of credit from private banks and merchants, and having developed into means of payment over several centuries, banknotes had turned into money. Consequently, it transferred the right to issue them to the Bank of England. So, similarly today almost everyone knows that the money in our current bank accounts (“sight deposits”) is no longer just “credit” but is money instantly available for spending just as banknotes are. Responsibility for creating it should have been transferred to the central bank many years ago.

19. The proposal for the UK is that an operationally independent central bank should continue to implement monetary policy objectives published by the elected government. But it will no longer do so indirectly by managing interest rates to influence the amount of new money created by banks as loans. It will itself decide at intervals how much new money needs to be added to the money supply. It will then create it and transmit it debt-free as public revenue to the government. The government will then put it into circulation by spending it on public purposes with other public revenue, according to the democratic legislature’s normal budgeting procedures. Only in any exceptional monetary crises that still arise, will the central bank help to decide how the money it creates should be spent. It should continue to be operationally independent, in order to minimise the possibility of elected government politicians ordering it to create unnecessarily large additions to the money supply to help them politically, for example, to win a forthcoming election.

20.  In the UK it has been objected that, if introduced by one country only, the proposed monetary reform would damage the economy: being deprived of the subsidy they get from creating money as loans would put UK banks at a competitive disadvantage against competitors from other countries, and “would lead to the migration from the City of London of the largest collection of banks in the world”. Economic commentators are now suggesting that, in fact, a dominating financial sector is a disadvantage to an economy. Nonetheless, if possible, it would be helpful to nullify this objection by introducing national monetary reform simultaneously in at least a few of the most economically influential countries, such as USA, UK, Japan, the Eurozone, and possibly Russia and China. That is why national monetary reform should be on the agenda for the G20 meeting.

INTERNATIONAL MONETARY REFORM

21.  The proposal is to promote the establishment of a genuinely international debt-free currency, co-existing with national and regional (like the euro) currencies, to provide a more efficient and more stable basis for international exchanges in the global economy.

22. The new currency would be issued by a world monetary authority, with operational independence to implement the monetary objectives published by the United Nations and accountable to it. It would issue the new currency as a new source of public revenue for UN expenditure on global public purposes – peace-keeping and climate change, for example – and possibly also for per capita distribution to UN member nations.

23. The background is that by 1995 the Independent Commission on Global Governance was already saying that the international monetary system should be more genuinely international and less dependent on private capital markets: “the US has had the unique luxury of being able to borrow in its own currency abroad and then devalue its repayment obligations”, and “the international monetary system’s dependence on private capital markets exposes it to the risk of a collapse of confidence in the system as a whole”.

24. Since then the dollar’s dominance has been increasingly criticised. By 2002 the world was estimated to be paying the US well over $400bn a year for using the dollar as the main global currency. A Pentagon spokesman justified this as a fee to the US global policeman for maintaining world order. Critics have seen it as the US making poorer countries pay for its over-consumption of global resources. World trade was described as “a game in which only the US can produce dollars, while everyone else produces things for dollars to buy”.

25.  More recently practical threats to the dollar’s international position have grown. Iran has threatened to switch its oil trading into euros. Russia’s President, Dmitri Medvedev, announced in February 2008 that the rouble will become a regional reserve currency. It was suggested that, if China eventually replaced the US as the world’s main superpower, the yuan would replace the dollar as the world’s dominant international currency.
26. In 2007/8 the BRICs group of countries – Brazil, Russia, India and China – and other ‘emerging’ countries were flexing their muscles. India and China caused the collapse of the recent seven-year world trade negotiations in Geneva, to protect their peasant populations.  In May 2008, ministers from India and other BRICs countries demanded an international monetary system founded on the rule of law and multilateral diplomacy in “a more democratic, fair and stable world where emerging markets have a greater role and the dominant powers are contained by the same rules as everybody else.” On 28 January 2009 Russian Prime Minister Vladimir Putin warned the Davos World Economic Forum that the world should not rely on the dollar as its only “reserve” currency, and  emphasised the Russian rouble’s claim to become a reserve currency: “Excessive dependence on what is essentially the only reserve currency is dangerous for the world economy; therefore it would be expedient to encourage an objective process for the emergence of several strong regional currencies in the future.”

27. So it is possible that, failing steps to introduce a genuinely international currency, monetary chaos could follow a further decline in the dollar’s supremacy coupled with the effects of the present global banking crisis. The world’s people, and the world’s businesses, could end up in a disorganised global economy dependent on private sector investment in a variety of competing ‘reserve’ currencies including the dollar, euro, yen, yuan, rouble and pound.

REASONS FOR HOPE

28. The emergence of the G20 as successor to the G7/G8 as the top-level world forum on international economy and finance reflects an encouraging move towards global economic and financial democracy. Its new members, and perhaps even some of the old G7/8, may be ready to support an Agenda for April that reflects that fact.

29. President Obama’s emergence on the international stage is also encouraging, in spite of all the problems he faces. Steeped in the American historical tradition, he will know that Thomas Jefferson and Abraham Lincoln were among the various founding fathers who outspokenly opposed giving power to banks to create money.

ACTION SUGGESTED

30. People in all the G20 countries should act urgently,
•    to mobilise pressure on their governments by early March to include national and international monetary reform in their April agenda, and
•    to achieve widespread media coverage in their countries of the arguments for those reforms.
That can be done through many channels.

31. They include writing and other ways of communicating:
•    to the politicians who represent us in our legislature;
•    to the press and broadcasting media;
•    to NGOs that support our concerns with development, social justice, environment, ethical economics, or any of the numerous other causes that suffer from how the present money system works;
•    to other people able to do any of these things themselves, and
•    by speaking at meetings about those concerns.

32. If, in order to disseminate the contents of this paper as widely and effectively as possible, you find it helpful to do so without attributing them to the author, please go ahead.

James Robertson

www.jamesrobertson.com

4 February 2009

Is this administrations bank policy Bush-3 or Clinton-5 or Reagan 8?
After (1) threatening for eight years that the prospect of a trillion-dollar deficit spread over a generation or so is sufficient reason to stiff Social Security recipients and abolish debts to the nation’s retirees, and (2) after the Bush administration provided $8 trillion over the past three months in cash-for-trash swaps of good Treasury bonds for Wall Street junk derivatives, the Obama Administration is now speaking of (3) some $2 to $4 trillion more to be given in just the next week or so.

Not a single Republican Congressman went along, just as Rep. Boehmer refused to support the Bush bailout on that fatal Friday when Mr. McCain and Mr. Obama debated each other over marginal issues not touching on the giveaway, which both candidates passionately supported. The Party of Wealth sees the political handwriting on the wall, for which the Party of Labor seems happy to take all responsibility. And indeed, only the Party of Labor could get away with such a giveaway. At least one hopes that they would have screamed like hell if they were a minority party and the Republicans tried to push through a plan like this. I suppose that the moral is that being in a minority provides an opportunity to grandstand for god policy. If I thought the Republicans were serious rather than merely engaging in rhetorical posturing, I would like to see more bipartisanship here. But it all seems to be mere play-acting. The key will be to watch the campaign contributions flow for an index of how well this will pay off for the Democrats and how seriously Wall Street believes the Republican opposition to be!

The upshot is that traditional rhetorical language has been turned inside-out. After spending a lifetime denouncing socialism as inherently unfair, Wall Street is now doing a hideous parody as if socialism for the rich were not an oxymoron in the first place. And the banks certainly are not being nationalized. Giving away the largest sum of spendable securities in history without direct managerial power that goes with real ownership is not nationalization. Ask Lenin. As for socializing the losses, this is a euphemism for rewarding Wall Street for financially predatory and hence anti-social behavior. Another oxymoron.

The aim is to give away of between $2 and $4 trillion more for an aggregator bank, a bad bank to buy Wall Street’s junk mortgages and default swaps and thus to rescue banks from negative equity leaving the government’s bad bank with the losses. Presumably, the bad loans will be made way above current market prices (zero, for loans that won’t be paid). How on earth does one compromise between mark to market (what the market pays for loans and swaps without any value) and the trillions and trillions of dollars that banks have pumped into these bad loans? One would think that an either/or condition such as this wouldn’t lend itself to compromise. So it looks like Rep. Dennis Kucinich’s oversight committee is going to have a field day interrogating Treasury officials in years to come over how America created a brand new financial oligarchy. (How many readers of this can say ‘primitive accumulation’?)

Now that the details of the new, larger but definitely not improved bank have been leaked out in time for Wall Street’s Davos attendees to celebrate, we may ask whether, financially speaking, the Obama Administration should best be thought of as Bush-3 or indeed, whether it is still on a pro-creditor trend that may better be traced as Clinton-5, or perhaps even Reagan-8. Since 1980 the financial sector has made a sustained money grab at the expense of labor and taxpayers. More accurately, it has been a debt grab, on the opposite side of the balance sheet from assets.

Backed by Mr. Summers, Boris Yeltsin’s Harvard Boys transferred trillions of dollars of Russian mineral wealth and public enterprises into the hands of kleptocrats. That was an asset transfer, pure and simple. In 1997, to be sure, the IMF gave Russia a loan that immediately disappeared into the kleptocrats bank accounts, to be paid out of subsequent oil-export proceeds. But assets were the name of the game. Todays U.S. giveaway has a new twist. It is analogous to the watered stocks and bonds that railroad magnates and Wall Street emperors of finance gave themselves and their political mouthpieces, simply adding the interest coupons and dividends onto the prices charged the public as if they were real costs. Today’s version ‘watered Treasury bonds’ are being created on the public sector’s balance sheet. Taxpayers must pay bear the interest charges on $2 to $4 trillion of new Treasury bonds printed and swapped for trash, that is, bad loans. Paying interest on these new bonds will leave less for the infrastructure investment that Mr. Obama rightly says we need.

The Bush-Obama bailout’s small print already has given Wall Street a decade’s tax-free status by letting it count its financial losses against its tax liability. So not only has there been a great fiscal debt giveaway, there has been a tax shift off finance. The fiscal squeeze has forced states and localities to announce plans to sell off roads and airports, land and other public assets to the financial sector in order to cover their looming budget deficits (which localities are not allowed to run under present legislation). No federal funding has been granted to finance the cities as their tax receipts plunge. There has been a token amount to relieve some low-income families saddled with junk mortgages. But this does not involve actually giving them spendable money. Their role is to be trotted out like widows and orphans used to be, as justification to bail out banks for their bad gambles on currency, interest rates and bond derivative gambles. To Wall Street, insolvent debtors in the real economy are merely passive vehicles to get a book-credit of mortgage relief that the government will turn over in their name to their bankers to make these institutions whole.

Whole, and then some! In New York, Mr. Cuomo just reported (January 29) that $18.4 billion in Wall Street bonuses, paid for out of the government giveaway. And that’s just for New York State.

This is called ‘saving the economy.’ That is as much an oxymoron as ‘socializing the losses.’ Socializing the losses would mean wiping the mortgages and other bank loans of debtors off the books. These giveaways are to keep the debts on the books with the government buying them to make the creditors whole. The problem is that a quarter of U.S. real estate has fallen into Negative Equity. Its debts are not being bailed out, but are to be kept on the books. The economy’s toxic waste therefore remains. But a matching volume of new waste is being created and given to a few hundred families. No wonder the stock market soared by 200 points on Wednesday, led by bank stocks!

In the seemingly frenetic ten days since Mr. Obama took office, it is beginning to look as if his good political decisions regarding Guantanamo, Iraq, employee rights to sue for employer wrongdoing are sugar coating for the giveaway to Wall Street, a quid pro quo to avert opposition from his Democratic Party constituency. To accuse Mr. Obama of a crass giveaway would seem at first glance to contradict the basically decent thrust of his actions so far or would, if one did not take into account his appointments of Larry Summers at the White House and the conspicuous leadership role in the bailout played by Barney Frank in the House and Chuck Schumer in the Senate. The administration’s solution has been placed in its hands by financial lobbyists using in part the money that the Treasury has given to Wall Street.

The solution is to bail out the banks while leaving the real economy even more highly indebted. All this talk about more credit being needed, all this begging of banks to lend more and then extract yet more interest from the economy, leads it even deeper into the debt hole. The Obama administration hopes that the banks will lend it out to Americans. But this would mean that borrowers are to take on yet more debt enough to start re-inflating house prices and making homes yet more unaffordable, requiring buyers to take on yet larger mortgages. Larger mortgages at rising prices are supposed to help the banks rebuild their balance sheets to earn enough to compensate for their gambling losses. The problem is that new loans do not help families pay their debts. It loads them down with yet more debt obligations. And homeowners whose mortgages already exceed the market price of their property are not going to be able to borrow more in any case.

Presumably the government will absorb their negative equity after their own credit ratings are wrecked for life, but not those of the bankers who have made the bad loans. So we are seeing one of the most unfair double standards in history. It will make the economy worse off, because today’s looming depression is caused by debt deflation. Families, businesses and government having to spend more wage income, profits and tax revenues on debt service instead of buying goods and services. So why is the solution to this debt overhead held to be yet more debt? Is there not something crazy here?

How many families would like a give-back on every bad investment they’ve ever made? It’s like a parent coming to a child who has just broken a toy, saying ‘That’s all right. We’ll just go out and buy you a new one.’ This from the apostles of responsibility for poverty, for mortgage debtors owing more than they can afford to pay, for people who get sick and can’t afford medical care, and for states and cities now left high and dry by the fiscal wipe-out that the Bush-Obama cleanup has foisted onto the economy. No do-over for anyone but the hundreds of billionaires who have just been endowed with enough free money to become America’s ruling elite for the rest of the 21st century. (The Internal Revenue Service just announced that the wealthiest 400 families earned over $150 million each last year, on which they paid an average 17% tax rate.)

There is a simple way to think about what has happened and why it won’t help the economy, but will hurt it. Suppose the new $4 trillion bad bank works. The government shell will give away Treasury bonds for bad bank loans and derivatives gambles, without the government ‘marking to market’ on the prices it pays. So much for the pretense that giving Wall Street credit is ‘free market’ policy. The alternative to ‘free markets’ (that is, markets free for predatory lending and a predatory tax shift off finance and property) does not turn out to be ‘socialism’ at all, even ‘socialism for the rich.’ It is naked kleptocracy, an oligarchic ‘primitive accumulation’ akin to William the Conqueror’s seizure of the English Commons except that it is done by insider dealing rather than by overt military force as for instance had to be applied in Chile for Gen. Pinochet’s ‘labor capitalism’ giveaway to the Chicago Boys.

The tragedy of all this is that it would take only $1 trillion or so to solve the bad-loan problem fro the homeowner’s side of the balance sheet. Or, the government could simply to let ‘the market’ work its magic and wipe out the bad loans and the bad debts that are their counterpart. This could best be done in the context of renewed debtor-oriented bankruptcy laws. But that obviously is not what the government aims to solve. It simply wants to make creditors whole creditors who are, after all, the largest political campaign contributors and lobbyists these days.

When families owe debts they cannot pay, they are now liable for life. When banks make bad loans, bad bets on derivative insurance or owe money to winners to these trades beyond their ability to pay, they merely do what A.I.G., Citibank and Countrywide/Bank of America have done turn their losses over to the government’s bad bank.

There can be no thought that banks are being nationalized (much less socialized) as long as the pro-creditor bankruptcy law for which the credit-card banks lobbied so hard is kept on the books. That should be the litmus test for all this.

The present economic crisis is that it was not necessary technologically, politically or fiscally. Governments at the state, local and federal levels are strapped for funds but only because the natural source of taxation, land rent and monopoly rent and the user fees from public enterprise have been financialized. Back in 1930, property taxes financed three-quarters of state and local budgets. Today they supply only about a sixth. This shrinkage has not been passed on to homeowners and renters or commercial users. Prices for homes and office buildings are set by the marketplace. The property price inflation has been fueled by junk-mortgage credit, with the rising rental value pledged to bankers as mortgage interest. The financial sector thus has replaced government as recipient of the economic surplus leaving the public sector starved of cash. Populist ‘anti-tax’ campaigns thus end up serving the mortgage bankers. The home owners serve only as passive vehicles by which the financial sector ends up with money previously destined for the public tax collector.

The financial sector also has replaced the government as economic planner. The legal monopoly of credit creation turns out to have given Wall Street the key to resource allocation.

It didn’t have to be this way. Bank credit is created freely. Governments could create it as simply on the computer keyboard as banks do it. The U.S. Treasury did thus during America’s Civil War when it issued greenback credit. That experience inspired half a century of bank efforts at public relations to accuse governments of being reckless. Only private banks, it was claimed, could issue prudent and responsible credit.

Now that that myth has been broken for good, isn’t it time to think about the alternative financial and fiscal policy that this myth was crafted to exclude from polite discussion? We don’t need a ‘bad bank.’ We already have many on Wall Street and they should be transformed with a new set of lending and investment rules, not restored in a way that will let them earn yet more tax-free gains by loading the economy down with yet more debt.

We don’t need the junk economics that led the banking system to create junk mortgages and the junk mathematics that Wall Street used to create junk ‘credit default swaps’ and other derivatives that have now gone bad. These ARE bad and shouldn’t be shifted onto the ‘good’government balance sheet.

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, www.michael-hudson.com and his email mh@michael-hudson.com

Capital Partnerships as a debt free solution to the property crisis.

Video link: Chris Cook: Capital Partnerhsips