Blago the Terrible and other stories

Blago the Terrible and other stories“I got this thing, and it’s (bleeping) golden. … You just don’t give it away for nothing,” (Illinois Governor Rod Blagojevich) said, according to a criminal complaint filed by U.S. Attorney Patrick Fitzgerald.“Then he (Obama) just laid out an economic analysis (for his 2004 US Senate campaign). It becomes about money, because he knew that if people knew his story they would view him as a better candidate than anybody else he thought might be in the field. And so he said, ‘Therefore, if you raise five million dollars, I have a fifty-per-cent chance of winning. If you raise seven million dollars, I have a seventy-per-cent chance of winning. If you raise ten million dollars, I guarantee victory.” (New Yorker, July 21, 2008)Blagojevich is correct: the bleeping Senate-seat appointment is worth quite a bit more than any of the recorded or suspected offers for it. Even shaving Obama's $10 million down to $9 million, Jesse Jackson Jr.'s alleged offer of $1 million for the last two years of Obama's Senate term is a clear savings to plutocrat investors in politicians of $2 million in the middle of a bad recession. Later, the incumbent advantage might be worth as much as $3 or $4 million more. It just makes sense.Blagojevich's comment on the situation should go down as the first entry into Poor Rod's Political Almanack. It's a bit of a cliche. Many politicians have built their philosophy of public service around it. But, the old truths are the best truths, and people cannot be reminded too often of the essential proverbs.Rumors, speculation, leaks and now tapped phone messages and whatever else may come from a glacier-speed investigation by Fitzgerald, indicate there were a number of contenders for the position. Obama's official position has been straightforward: it is the governor's decision. According to Fitgerald, the situation was turning into a political crime spree. The delicate legal issue of who solicited whom will no doubt be properly sorted out by the ponderous prosecutor at some point during Obama's first term. Blagojevich's problem, machine guy that he is, turns out to be a failure to fully understand Illinois politics and the phenomenon of "perfuming the ticket" with a clean guy at the top, in this case the president-elect. Obama falls in the line of Illinois politicians like Adlai Stevenson and Paul Simon.So, Blagojevich's next entry in his Almanack should be: Don't (bleep) with a genuine perfumed political phenomenon.Meanwhile, however, a quieter, far more lethal story of corruption is wending its way thither and yon. Here's the latest Wall Street Journal version of it:12-13-08Wall Street Journal The Key Numbers Behind the Bailouts ArticleAnother day, another bailout....JON HILSENRATHhttp://online.wsj.com/article/SB122913781231803849.htmlKeeping score on government bailouts has become a nettlesome task. Using the most expansive counting possible, the U.S. has pledged to spend, invest or loan as much as $10 trillion to backstop or bailout banks, money-market funds, depositors and many others. Yet the final tab is likely to be much, much smaller.Participants in Government Investment PlanSee a list of participating companies in the bank-share purchase program.Consider the Federal Reserve's pledge to backstop a $1.3 trillion piece of the commercial-paper market by buying this short-term corporate debt itself. So far it has invested $312 billion in the program; Fed officials expect to get all that back with interest. It is only taking the paper of high-rated companies and has different forms of security.Do you count the $1.3 trillion market it has pledged to backstop, the $312 billion it has thus far invested, or nothing at all because it expects to get its money back? Defining the parameters of a count is also tricky. Do you count the $168 billion fiscal stimulus package that had come and gone before the September blowup in financial markets?Here's a quick guide to some very big numbers behind the bailouts:FEDERAL RESERVE: Since early August 2007, the Fed's balance sheet has grown from $851 billion to $2.245 trillion as it has created rescue programs such as the commercial-paper facility. In addition, it has drawn down its stockpile of safe Treasury securities from $791 billion to $476 billion to finance programs and lent out $185 billion of Treasury securities to Wall Street firms in exchange for riskier securities.In all, the central bank has already committed about $1.9 trillion to support financial markets through programs including commercial-paper lending, rescues of Bear Stearns and American International Group Inc., lending to banks, as well as other steps. The number could grow as programs are implemented in the weeks ahead.Though the Fed has written down $2 billion on loans to Bear Stearns, Fed officials consider its programs to be well-secured. It is also earning interest and fees.Since the collapse of Lehman Brothers, the Fed has turned over $6.6 billion in earnings to the Treasury, according to estimates by Louis Crandall, an economist with Wrightson ICAP LLC, a bond-market research firm. That's down a bit from $7.8 billion during the same stretch last year.In short, the Fed is potentially sitting on more risk and earning what look like modest returns to go with it.TREASURY: The Treasury has so far committed $335 billion of its Troubled Asset Relief Program for a variety of efforts -- pumping capital into banks, bailing out AIG and Citigroup Inc. and developing a program with the Fed to support consumer lending. Separately, it has invested $14 billion in Freddie Mac, the mortgage-finance firm that was effectively nationalized by the government in September, and purchased $49 billion in mortgage-backed securities to support Freddie and Fannie Mae, the other mortgage firm under government stewardship.All together, that's $398 billion invested by the Treasury so far. The Treasury is also sure to tap another $350 billion available to the TARP through funds approved by Congress in October. It expects to get it all back with interest. But that is no sure thing.HUD: The Department of Housing and Urban Development has pledged to commit $300 billion to help homeowners avoid foreclosure. The program, called Hope for Homeowners, allows banks to move borrowers into government-insured loans if lenders agree to write down a portion of the principal. The program has gone through revisions since it was launched in October and so far it has used very little of the money.BROADER PLEDGES: Adding together rescue money already explicitly committed by the Treasury and Fed brings the dollars spent, loaned or invested to date to $2.3 trillion, a number that is sure to grow and doesn't count fiscal stimulus.The numbers get much larger when one considers the size of some markets the government has pledged to support. The Treasury has a program to backstop $3 trillion worth of money-market mutual funds. (It hasn't had to tap any funds so far to honor that commitment and has reaped about $800 million in fees on it.)The Federal Deposit Insurance Corp. is in line to guarantee as much as $700 billion worth of bank debt, according to FDIC estimates. It has also substantially expanded bank-deposit insurance. The Fed is standing behind $1.3 trillion in commercial paper. Various agencies are helping Citigroup to backstop $306 billion in investments.It's anybody's guess what will ultimately be gained or lost. If the economy stabilizes, it could be a big money winner for taxpayers. If the recession deepens and the markets don't heal, the losses one day could get very large.Now, that's a nice, terribly restrained Wall Street version of current economic events. One sees the seeking journalist on a beach on Martha's Vineyard, spiffed out in a Land's End oxford sans cravat in an LL Bean blazer, hunkering along in a wind trying to come up with a lede. But, since we are talking of a Genuine Midwestern Political Phenomenon for our next president, let us consult Ellen Brown, who seems to be channeling an old and trustworthy friend in mythical times, Dorothy of Kansas, for a version of economic events in which we might have more confidence, being just ordinary folk and all:December 2008 Yesmagazine.comSustainable Government: Banking for a "New" New Deal...Ellen Brownhttp://www.yesmagazine.org/article.asp?id=3162"This isn't about big government or small government. It's about building a smarter government that focuses on what works."- Barack Obama, November 26, 2008As our 44th President prepares to enter the Oval Office, bank lending has seized up, some of the nation's largest banks are on life support, and the big three automakers are bankrupt. Housing continues to crash, and so does the economy.Little wonder that Obama is being compared to Franklin D. Roosevelt, who entered the White House in similar financial straits in 1932. Even before taking office, Obama has started his version of the "fireside chats" (updated from radio to online video) given by Roosevelt nearly weekly to reassure the public. He said on November 22 that he plans to create 2.5 million new jobs by 2011 and kick-start the economy by building roads and bridges, modernizing schools, and creating technology and infrastructure for renewable energy. These are excellent ideas, but what will they be funded with-more government debt?Obama has pledged to honor the commitments of the outgoing administration to rescue financial markets, on the theory that if we don't, our credit system could freeze up completely. But as noted by Barry Ritholtz in a December 2 article, the bailout has already cost more than the New Deal, the Marshall Plan, the Louisiana Purchase, the moonshot, the savings and loan bailout, the Korean War, the Iraq war, the Vietnam war, and NASA's lifetime budget combined. 1 Increasing the debt burden could break the back of the taxpayers and plunge the nation itself into bankruptcy.How can the new President resolve these enormous funding challenges? Thomas Jefferson realized two centuries ago that there is a way to finance government without taxes or debt. Unfortunately, he came to that realization only after he had left the White House, and he was unable to put it into action. With any luck, Obama will discover this funding solution early in his upcoming term, before the country is declared bankrupt and abandoned by its creditors.The Key to a Solution: Understanding Money and CreditJefferson realized too late that the Founding Fathers had been misled. He wrote to Treasury Secretary Gallatin in 1815:"The treasury, lacking confidence in the country, delivered itself bound hand and foot to bold and bankrupt adventurers and bankers pretending to have money, whom it could have crushed at any moment."He wrote to John Eppes in 1813:"Although we have so foolishly allowed the field of circulating medium to be filched from us by private individuals, I think we may recover it . The states should be asked to transfer the right of issuing paper money to Congress, in perpetuity."It had long been held to be the sovereign right of governments to create the national money supply, something the colonies had done successfully for a hundred years before the Revolution. So why did the new government hand over the money-creating power to private bankers merely "pretending to have money"? Why are we still, 200 years later, groveling before private banks that are admittedly bankrupt themselves? The answer may simply be that, then as now, legislators along with most other people have not understood how money creation works. Only about 3% of the U.S. money supply now consists of "hard" currency-coins (issued by the government) and dollar bills (issued by the private Federal Reserve and lent to the government). All of the rest exists merely on computer screens or in paper accounts, and this money is all created by banks when they make loans. Contrary to popular belief, banks do not lend their own money or their depositors' money. They merely "monetize" the borrower's promise to repay. Many creditable authorities have attested to this fact. Here are a few:"[W]hen a bank makes a loan, it simply adds to the borrower's deposit account in the bank by the amount of the loan. The money is not taken from anyone else's deposit; it was not previously paid in to the bank by anyone. It's new money, created by the bank for the use of the borrower."- Robert B. Anderson, Secretary of the Treasury under President Eisenhower"Banks create money. That is what they are for. The manufacturing process to make money consists of making an entry in a book. That is all. Each and every time a Bank makes a loan. new Bank credit is created-brand new money."- Graham Towers, Governor of the Bank of Canada from 1935 to 1955"Of course, [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount]."- The Chicago Federal Reserve, Modern Money Mechanics (last updated 1992) Not only are banks merely pretending to have the money they lend to us, but today they are shamelessly demanding that we bail them out of their own imprudent gambling debts so they can continue to lend us money they don't have. According to the Comptroller of the Currency, the books of U.S. banks now carry over $180 trillion in a form of speculative wager known as derivatives. Particularly at issue today are betting arrangements called credit default swaps (CDS), which have been sold by banks as insurance against loan defaults. The problem is that CDS are just private bets, and there is no insurance commissioner insuring that the "protection sellers" have the money to pay the "protection buyers" if they lose. As loans have gone into default, the elaborate gambling scheme built on them has teetered near collapse, threatening to take the banking system down with it. Now the players are demanding that the government underwrite their bets with taxpayer funds, on the theory that if the banking system collapses the public will have no credit and no money. That is the theory, but it misconstrues the nature of money and credit. If a private bank can create money simply by writing credit into a deposit account, so can the federal government. The Constitution says "Congress shall have the power to coin money," and that is all it says about who has the power to create money. It does not say Congress can delegate to private banks the right to create 97% of the national money supply in the form of loans. Nothing backs our money except "the full faith and credit of the United States." The government could and should have its own system of public banks with the authority to issue the credit of the nation directly.Buyouts, not BailoutsAccumulating a network of publicly-owned banks would be a simple matter today. As banks became insolvent, instead of trying to bail them out, the government could just put them into bankruptcy and take them over. Insolvent banks are dealt with by the FDIC, which is authorized to proceed in one of three ways. It can order a payout, in which the bank is liquidated and ceases to exist. It can arrange for a purchase and assumption, in which another bank buys the failed bank and assumes its liabilities. Or it can take the bridge bank option, in which the FDIC replaces the board of directors and provides the capital to get it running again in exchange for an equity stake in the bank. An "equity stake" means an ownership interest: the bank's stock becomes the property of the government. 2 Nationalization is an option routinely pursued in Europe for bankrupt banks. As William Engdahl observed in a September 30 article, citing economist Nouriel Roubini for authority:"[I]n almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990's, nationalize the troubled banks [and] take over their management and assets . In the Swedish case, the Government held the assets, mostly real estate, for several years until the economy again improved at which point they could sell them onto the market . In the Swedish case the end cost to taxpayers was estimated to have been almost nil. The state never did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of securitization and speculation abuses."3As in any corporate acquisition, business in the banks nationalized by the government could carry on as before. Not much would need to change beyond the names on the stock certificates. The banks would just be under new management. They could advance loans as accounting entries, just as they do now. The difference would be that interest on advances of credit, rather than going into private vaults for private profit, would go into the coffers of the government. The "full faith and credit of the United States" would become an asset of the United States. Instead of paying half a trillion dollars annually in interest, the U.S. could be receiving interest on its credit, replacing or eliminating the need to tax its citizens.3 Ways to Fund the "New" New DealThere are three ways government could fund itself without either going into debt to private lenders or taxing the people: (1) the federal government could set up its own federally-owned lending facility; (2) the states could set up state-owned lending facilities; or (3) the federal government could issue currency directly, to be spent into the economy on public projects. Viable precedent exists for each of these alternatives:1. The Federal Bank OptionThe federal government could issue credit through its own lending facility, leveraging "reserves" into many times their face value in loans just as banks do now. Franklin Roosevelt funded his New Deal through the Reconstruction Finance Corporation (RFC), a government-owned lending institution. However, the RFC borrowed the money before lending it. 4 A debt-free alternative would be for a government-owned bank to issue the money simply as "credit," without having to borrow it first. This was done by the state-owned central banks of Australia and New Zealand in the 1930s, allowing them to avoid the worldwide depression of that era. 5 In the informative booklet "Modern Money Mechanics," the Chicago Federal Reserve confirms that under the fractional reserve system in use today, one dollar in reserves is routinely fanned by private banks into ten dollars in new loans. 6 Following that accepted protocol, the government could fan the $700 billion already earmarked to unfreeze credit markets into $7 trillion in low-interest loans.Apparently, that is how Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are planning to generate the $7 trillion they say they are now prepared to advance to rescue the financial system: they will just leverage the $700 billion bailout money through the banking system into $7 trillion in new loans. 7 But the Federal Reserve is a privately-owned banking corporation, and the recipients of its largesse have not been revealed. 8 The $700 billion in seed money belongs to the taxpayers. The taxpayers should be getting the benefit of it, not a propped-up private banking system that uses taxpayer money for the "reserves" to create ten times that sum in "credit" that is then lent back to the taxpayers at interest.Seven trillion dollars in government-issued credit could furnish all the money needed to fund Obama's New Deal with a few trillion to spare. Among other worthy recipients of this low-interest credit would be state and local governments. Many state and municipal governments are going bankrupt through no fault of their own, just because interest rates shot up when the monoline insurers lost their triple-A ratings gambling in the derivatives market. 92. The State Bank OptionWhile states are waiting for the federal government to step in, they could charter their own state-owned banks that issue low-interest credit on the fractional reserve model. Article I, Section 10, of the Constitution says that states shall not "emit bills of credit," which has been interpreted to mean they cannot issue their own paper currency. But there is no rule against a state owning or chartering a bank that issues ten times its deposit base in loans, using standard fractional reserve principles.Precedent for this approach is found in the Bank of North Dakota (BND), the nation's only state-owned bank. BND was formed in 1919 to encourage and promote agriculture, commerce and industry in North Dakota. Its primary deposit base is the State of North Dakota, and state law requires that all state funds and funds of state institutions be deposited with the bank. The bank's earnings belong to the state, and their use is at the discretion of the state legislature. As an agent of the state, BND can make subsidized loans to spur economic and agricultural development, and it is more lenient than other banks in pressing foreclosures. Under a program called Ag PACE (Agriculture Partnership in Assisting Community Expansion), the interest on loans made by BND and local lenders may be reduced to as low as 1 percent. 10 North Dakota remains fiscally sound at a time when other state governments swim in red ink, and its educational system is particularly strong. While disruptions in capital markets have hampered student loan operations elsewhere, BND continues to operate a robust student loan business and is one of the nation's leading banks in the number of student loans issued. 11 North Dakota's fiscal track record is particularly impressive considering that its economy consists largely of isolated farms in an inhospitable climate. Ready low-interest credit from its own state-owned bank may help explain this unusual success.3. Government-issued CurrencyA third option for creating a self-sustaining government would be for Congress to simply create the money it needs on a printing press or with accounting entries, then spend this money directly into the economy. The usual objection to that alternative is that it would be highly inflationary, but if the money were spent on productive endeavors that increased the supply of goods and services-public transportation, low-cost housing, alternative energy development and the like-supply and demand would rise together and price inflation would not result. The American colonial governments issued their own money all through the eighteenth century. According to Benjamin Franklin, it was this original funding scheme that was responsible for the remarkable abundance in the colonies at a time when England was suffering the depression conditions of the Industrial Revolution. After the American Revolution, private bankers got control of the money supply, but Abraham Lincoln followed the colonial model and authorized government-issued Greenbacks during the Civil War. Not only did this allow the North to win the war without plunging it into debt to the bankers, but it funded a period of unprecedented expansion and productivity for the country.Obama would do well to consider these funding solutions for his "smarter" government. He has been quick to assemble his advisers and form policy, but a fast start down the wrong road could do more harm than good. The bailout scheme of the current administration is serving merely to keep a failed banking system alive by draining assets away from the productive economy. The conventional wisdom is that we must continue down the path we are on, because the alternative means frightening, radical change. Financing a new New Deal without putting the country further into insolvency, however, would not be a radical departure from tradition but would represent a return to our roots, to the uniquely American monetary policy advocated by our venerable forebears Benjamin Franklin, Thomas Jefferson and Abraham Lincoln.--------------------------------------------------------------------------------Ellen Brown, J.D., wrote this article in December, 2008, for Path to a New Economy, a collection of online articles for YES! Magazine, on economic and financial solutions. Ellen developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her eleven books include the bestselling Nature's Pharmacy, co-authored with Dr. Lynne Walker, and Forbidden Medicine. Her websites are www.webofdebt.com and www.ellenbrown.com.