Monthly Archives: November 2011

Responses to MMP Blog #26: Sovereign Curreny in the Open Economy

Thanks for comments.I hope you all recognize that this was blog 26; half way through a year ofblogs—52 of them to be exact. Half way. A Job Well-Done I hope you all willagree. We are now half-educated. Half-wits, so to speak. It is all down-hillfrom here. We’ve done the hard lifting, now we apply what we’ve learned. Anway,on to the Q&A for the week.

Q1: What are pros and cons of having an open capitalaccount? If Central Bank wants to defent currency parity by hiking interestrates in an environment of free capital movements, is the supposed mechanismthat interest rate hikes should cause capital account inflows because privatesector starts to borrow more in foreign currency? What are limits to thisstrategy? Some eastern european countries have most of their private debtnominated in foreign currency, for example 90% of mortgages in some countries.What limitations this puts on domestic policy options? In the GFC they chose todefend their exchange rates, taking deflationary domestic policy decisionsinstead. Was it mistake to allow private sector to became indebted in foreigncurrencies?Does MMT recognize balance of payments accounting identity explainedhere:…,that Current Account + Capital Account + Change in Reserves = 0?

A: I’m generally skeptical of anything that is advertised as“free”, including “free” trade, “free” capital flows” or “free” markets moregenerally. There must be a catch. There is always a catch. So I have no problemwith those who argue that capital “flows” must be constrained. Of course. All“flows” need constraints. Unconstrained “flows” will lead to floods anddisasters. It is elementary, Dear Watson.

The Neoclassical view is that “free” flows are fine because“prices” will adjust. In the correct direction. This is faith-based economics,and it ain’t my religion. No, prices almost always run in the wrong direction,helping to fuel booms and busts. Any sovereign government that adopts “free”trade or capital “flows” on the belief that markets will be self-adjusting iseither a fool or worse, a stooge. They don’t. They won’t.

Denominating debt in a foreign currency is almost always amistake, and is fueled by the same Theoclassical religion that promotes “free”markets and capital “flows”. On one hand, it is hard to argue against theproposition that fools ought to be allowed to lose their money; but at the sametime it is easy to argue that government and institutions designed to operatein the public purpose should be restrained from parting with “taxpayermoney”.  Of course, it is not taxpayermoney, since every dollar came from the public sphere to begin with. Lettingthem fail is often the best option.

Finally, I neverargue with identities. They are true. And that is an important one.

Q2: A“anation cannot run a current account deficit unless someone wants to hold itsIOUs. We can even view the current account deficit as resulting from a rest ofworld desire to accumulate net savings in the form of claims on thecountry.” China, like Germany, wishes to be a net exporter.  Maybethey are crazy, but that is what they want and that is how they run theireconomic policy.  Is China reallyaccumulating dollars only because they have a desire toaccumulate dollars?  Or is it that if they were to sell their enormousquantities of dollars in the fx market rather than holding on to them theywould drive up the value of their own currency in terms of dollars, and theyfear that such an increase would affect their ability to continue running atrade surplus?  In fact, besides running a trade surplus, don’t theyintervene in fx markets specifically to prop up the dollar and to hold down thevalue of their own currency?  
I can see a strong motivation for holding dollars because they want to preventa rising Yuan, but I have yet to hear an explanation for why they wouldwant to hold dollars as their ultimate goal.  I think they hold dollarsonly to facilitate their trade policy.  Isthere a point where they will no longer need to do this?  If they becomethe largest economy in the world, for instance, might they want to divesttheir depreciating dollars, driving the dollar down even faster?

A: Certainly it is hard to explain Chinese accumulation ofdollar assets simply on the basis that they want dollar assets. It must also beremembered that China learned from the Asian Tiger experience: they pegged ratesto remove uncertainty. But the problem is that this committed them to makingpayments in a foreign currency—the US dollar. Eventually mkts doubted theirability to meet those commitments so all hell broke loose. So the Chinese learnedthat several trillion of dollar reserve assets is a good idea. Further, theyunderstand that export led growth is temporary; they will raise wages andreduce exports.

Q3: A ExpandIn a world without import/exportrestrictions and where every country had a floating currency, would there stillbe foreign trade “imbalances” or would exchange rates move so thatthe “imbalances” balance out? Why do certain countries decide to pegtheir currency against a foreign currency (e.g. US Dollars)? When is it beneficialto peg or not peg?

A: Answer to first question: NO! As discussed below, we’vegot a current account (deficit) that is offset by a current account surplus. Itis sustainable. Exchange rates do not move to balance trade. They must alsoplay a role in investment gooods and financial assets.

Q4:  “The reason is becausethose economists who had believed that exchange rates adjust to
eliminate current account surpluses and deficits had not taken into account thatan “imbalance” is not necessarily out of balance. As discussed previously, acountry can run a current account deficit so long as the rest of the world wantsto accumulate its IOUs.”  But why doesthe rest of the world want to accumulate our IOUs?  Isn’t it mostlycountries like China looking to accumulate foreign
reserves to defend their peg against the US?  It seems the players thatmatter haven’t yet adopted floating exchange rates, so I am not sure how fairit is to critique Milton’s hypothesis in this
light.  Your point is taken about the semantic usage about the words‘trade imbalance,’ although I imagine people like Milton also use it morebroadly in the sense that they believe deviations
from free trade practices result in ‘imbalances,’ or in other words, the differencein outcomes between a world with free trade and one without.

A: Uncle Milty knew almost nothing about money, banking, orinternational trade. He thought floating exchange rates would resolve trade“imbalances” through adjustment of exchange rates. No, they won’t. He ignores therole that currencies play in taking positions in assets. He thought money hasto do with “trade” or “exchange” but in reality that is a tiny slice of thepie. Most “transactions” are financial, and are tens or hundreds of times thevolume of “trade”. So, no, free trade and floating rates won’t balance tradeaccounts. Still macro balances do balance. It is just amazing. But not if yourealize there must be an identity.

Q 5: Maybe you could say something about the different typesof pegs — i.e. crawling pegs, currency board etc.

A: Will do. Later.

Q6: Are you going to get into more detail on the topic ofcapital controls? I’d be interested to learn more about the policy options andtheir implications in that regard.

A: Sure. Sovereign countries should never submit them to thecontrol by Wall St or London.

Q7: A 1 comment collapsed CollapseExpand“Inflation andcurrency depreciation are possible outcomes if government spends toomuch.”
Here we get into the different definitions of ‘inflation’. The main concern Ialways get when I put the ‘just let the currency float’ argument is that therewill be a ‘currency crisis’. In the UK that translates into a Sterling Crisisand is embedded in the domestic psyche much like Weimar is in Germany – due tothe 1976 ‘crisis’. The main argument is that the price of things will shoot up,ie we will have ‘inflation’ in the common sense. Really a reduction in thestandard of living in economic terms due to supply side inflation. What can adomestic government do to buffer the effects of a ‘currency crisis’?

A: Currency crises so faras I am aware ONLY affect countries that try to peg. The UK tried that, andfailed. Then they joined the floating world. No more currency crises. Now, canexchange rates flux on a floating system? You betcha. Will that be more painfulfor a country like Oz that exports its commodities? You betcha. Cowboy up, aswe say in America. It is better than the alternative: exchange rate crises anddefault. Look at the EMU.

Senator McCain’s Economist Warns: If you Criticize Banksters They will Prolong Recessions

By William K. Black

Steven J. Davis, Senator McCain’s chief economics advisor during his presidential campaign, has written a political hit piece on the man that defeated his candidate.  His co-authors were Scott R. Baker and Nicholas Bloom.  For the sake of brevity I will refer to the authors as “the authors” or “Davis.”  They published the piece in Bloomberg.  The article purports to be a straight scientific piece, but it is a partisan screed relying on faux statistics created by Davis to support his views.  Davis’ statistical methodology is not simply unscientific, it is embarrassingly bad.

Davis’ argument, long discredited by actual surveys of employers, is that unemployment is so high because employers refuse to hire because of Democratic policies.  As Paul Krugman has long noted, employers, when surveyed, have consistently and emphatically refuted this claim.  Given that the employers answering the surveys are disproportionately Republicans and opponents of regulation who have strong incentives to blame the regulations for their failure to hire, their failure to do so makes the survey results particularly compelling.  Davis’ statistical index provides no evidence of why employers are not hiring.  Indeed, it is inherently incapable of providing such evidence. 

Davis is a partisan Republican.  He is a theoclassical economist and a proud representative of the one percent.  He has worked for the Hoover Institution, AEI, and Michael Milken’s foundation (the infamous fraud whose crimes destroyed Drexel Burnham Lambert).  He is a professor at U. Chicago’s business school. 

Davis missed the developing crisis entirely, publishing an article about “the Great Moderation” in 2008 as the financial crisis was ripping across the world.  His ideological blinders are so complete that he cannot even consider the obvious – the crisis was brought on by the criminogenic environment produced by the three “de’s” – deregulation, desupervision, and de facto decriminalization plus perverse executive and professional compensation.  The economists George Akerlof and Paul Romer wrote an article about accounting control fraud entitled “Looting: the Economic Underworld of Bankruptcy for Profit.”  They concluded the article with this passage about the criminogenic environment produced by S&L deregulation in the 1980s.

“Neither the public nor economists foresaw that the [S&L] regulations of the 1980s were bound to produce looting.  Nor, unaware of the concept, could they have known how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself (1993: 60).”

The reason we have tragic levels of unemployment is the financial crisis, which was fully preventable had the anti-regulators put in place by Presidents Clinton and Bush simply understood the concepts of looting and criminogenic environments that we had made clear a quarter-century ago.  As I will show, Davis takes the remarkable position that we must not learn from our deregulatory mistakes and close the resulting regulatory black holes.    
Absent the restoration of effective financial regulation and prosecutions, and the removal of the perverse compensation systems (which also requires regulation), we will continue to suffer recurrent, intensifying financial crises and the severe unemployment they produce.  Effective financial regulation greatly reduces uncertainty by increasing transparency and by preventing Gresham’s dynamics.  George Akerlof explained to the profession 41 years ago in his famous article on markets for “lemons.”

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”  

Consider the grave “uncertainty” that would exist in a nation without effective police forces.  Somalia is a good example.  The police do not, and cannot, deal with sophisticated financial crimes.  The FBI’s white-collar crime specialists do not patrol a beat and look for crimes.  They sometimes act on anonymous tips or leads from other investigations, but overwhelmingly they depend on criminal referrals from the regulators.  Our principal function as regulators is to serve as the regulatory cops on the beat to prevent the Gresham’s dynamic by aggressively finding the frauds, putting them out of business, and providing the criminal referrals that make it possible to prosecute the elite frauds.  Absent effective regulators, honest firms often face extinction and their employees will lose their jobs.  

In Davis’ world, however, regulation is unnecessary and harmful.  The former U. Chicago professors, Frank Easterbrook and Daniel Fischel, wrote what remains the U. Chicago bible on accounting control fraud.  A generation of American lawyers has been taught this profession of faith from Easterbrook and Fischel’s 1991 treatise: “A rule against fraud is not an essential or even necessarily an important ingredient of securities markets….”  The Economic Structure of Corporate Law (1991).  Markets are self-correcting, bubbles are impossible, and economic crises are impossible.  This was the theoclassical profession of faith in a miraculous trinity.  Each of these dogmas has been repeatedly falsified by real life, but facts cannot trump blind faith.  Senator McCain’s was a member of the “Keating Five.”  Charles Keating, the most infamous S&L fraud, used the Senators to try to intimidate us into not taking any regulatory action against Lincoln Savings’ massive regulatory violation – a violation that led to billions of dollars in losses.  Neither McCain nor Davis learned any useful lesson from this scandal. 

Davis has mounted politically consistent attacks on the Democrats based on the high unemployment caused by the epidemic of accounting control fraud that hyper-inflated the bubble and drove the U.S. financial crisis.  On January 3, 2010 he published an op-ed with Gary Becker and Kevin Murphy in the Wall Street Journal blaming the Democrats for the high unemployment caused by the Great Recession.  This was their tag line:  “A recession is a terrible time to make major changes in the economic rules of the game.”

Consider the logic of that assertion.  The “economic rules of the game” have just led to an epidemic of accounting control fraud, a hyper-inflated bubble, a Great Recession, and severe unemployment and the theoclassical answer to the catastrophe that their faith-based policies have caused is – engrave those rules in bronze.  They literally call on us to repeat the mistakes of the past.  Theoclassical economists take their cue from the White Queen, who bragged to Alice that with practice she had learned to believe “as many as six impossible things before breakfast.” 

The authors acknowledged that the Great Recession had caused severe unemployment, but added the claim that it was the election of Democrats that prevented a prompt recovery.

“Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas.”

Obama’s economic team (Summers, Geithner, and Bernanke) was strongly neoclassical and economically conservative.  The authors then singled out any effort to deal with climate change as particularly undesirable.  Apparently it is now a violation of theoclassical principles to require manufacturers to internalize the cost of negative externalities.  That is contrary to economics and would lead to a poisoned world in which firms that spent money to restrict harmful emissions would be driven out of business by their competitors who avoided such expenses and obtained a decisive cost advantage.  This is another example of a Gresham’s dynamic in which bad ethics drives good ethics from the marketplace.  The authors ended by opposing allowing the Bush tax cuts for the wealthy to expire.  They presented no evidence in support of their partisan attack on Democrats and their ideological attack on “liberals.”

On July 15, 2011, Davis wrote an article entitled “Why Employers Are Slow to Fill Jobs.”  

Davis mentioned “policy uncertainty” as one of the contributors to the employers’ failure to hire workers in this article, but what he stressed was that the Great Recession so depressed private sector demand for goods and services that most employers felt little desire to hire additional workers because they could not sell additional output.  He noted that employers had reduced the intensity of their recruiting because they were in a buyer’s market in which they were deluged with applicants and could afford to hire only the most ideal candidates.  Even when Davis discussed uncertainty his primary emphasis was on economic uncertainty – the Great Recession.  He ended by blaming unemployment on the unemployed.  The long-term unemployed were spending fewer hours looking for jobs.  Davis called for ending unemployment benefits for the long-term unemployed.  The prospect of starving in a fortnight would concentrate their minds wonderfully.  (Yes, Davis’ last argument contradicts his earlier arguments, but this is faith-based callousness posing as science.)  His “summing up” paragraph has one clause referencing “uncertainty” as a purported tertiary contributor to the slow reduction in unemployment.  Again, Davis offered no support for this assertion.

Davis’ latest (October 5, 2011) partisan attack is entitled “Policy Uncertainty Is Choking Recovery.”  In five months, Davis’ tertiary, minor asserted contributor to the slow recovery has suddenly morphed into a monster that is the cause of the problem.  You might think that the survey results showing that businesses have repeatedly falsified this claim would pose a problem for this meme, but the authors hit on the obvious answer to inconvenient truths – they ignored them.  Lest you think that this was due to tight space limits placed on a Bloomberg op ed, check their academic paper, which, also ignores the actual surveys.  “Measuring Economic Policy Uncertainty” (October 10, 2011).   This begins to explain why their work is embarrassingly bad.

The partisan slanting of the article is also embarrassing, as is the failure to identify Davis’ role as McCain’s principal economics advisor.  Here is the authors’ thesis:

“But the persistence of policy uncertainty wasn’t inevitable. Rather, it reflects deliberate policy decisions, harmful rhetorical attacks on business and “millionaires,” failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship.”

Their thesis boils down to the claim that capitalists are wusses.  The reality is that politicians of both parties fall all over themselves saying nice things about business and that the criticisms are addressed to corporate criminals and the wealthy who pay what the vast bulk of Americans view as grossly inadequate taxes.  Moreover, according to the neoclassical economics canon these authors purport to believe raising taxes on the wealthy would be a valuable change that would reduce “fiscal imbalances.”  The authors, instead, assert that any increase in taxes on the wealthy destroys jobs.  By their logic, we should eliminate taxes on the wealthy.  By entitlement “reforms” they mean reducing Social Security benefits – that will do wonders for private sector demand and robust jobs growth. 

Indeed, the authors’ thesis is eerily reminiscent of Jon Stewart’s famous riff when Dick Cheney shot his elderly hunting companion in the face.  Stewart noted that Cheney was so powerful that the victim apologized to Cheney for being shot – by Cheney.  The authors want us to apologize to the elite financial frauds that became wealthy through the accounting control fraud epidemic that drove the crisis, the Great Recession, the great bulk of the federal budget deficit, the state and local government financial crisis, and severe unemployment.  It wasn’t enough that we bailed them out and gimmicked the accounting rules at their demand to ensure that “their” banks could continue to pay them massive bonuses even though they were in economic reality insolvent.  How dare we make “harmful rhetorical attacks” on the frauds!  We should all apologize immediately to the productive class.

Speaking of “rhetorical attacks,” consider this partisan assault by the authors:

“The Patient Protection and Affordable Care Act that President Barack Obama signed into law in March 2010 is another example. Rather than simple reforms aimed at efficiency improvements and cost savings, the law seeks to remake the U.S. health-care delivery system, dramatically expanding the role of government and imposing new burdens on businesses and individuals. Even in narrowly economic terms, the measure adds to the uncertainty facing households and businesses.

Moreover, its political durability is in doubt. The Democratic leadership in Congress opted to pursue the most radical plan that could muster the necessary 60 votes in the Senate and a thin majority in the House. As a result, the legislation failed to attract a single Republican vote in either chamber. That political strategy ensured the act would become the focus of future electoral battles and rollback efforts. “

The authors then go on to complain that the lawsuits challenging the constitutionality of the Act (which they do not note were brought by Republicans) add to uncertainty.  Whatever, the Act is, it is assuredly not “radical.”  It is modeled on a scheme created by a then conservative Republican Governor, Mitt Romney.    

In reality, the Obama administration made obsessive efforts to craft a bill with bipartisan support – substantially weakening an already weak bill and taking out, at the demand of Republican and “blue dog” Democrats, the central “cost savings” provision in the bill – the public option.  The “simple reform” that would vastly increase efficiency and cost savings – and boost the international competitiveness of U.S. firms – is single payer health care funded by the public rather than (largely) through tax-subsidized but still expensive private health insurance provided by employers.  The Republicans and “blue dog” Democrats promised to kill any such bill.  The authors’ dread “liberal Democrats” favored a bill that would produce superior health care at a far lower price in line with other developed nations.  The private health insurers promised to bury such a bill, so the Obama administration went for the ultra conservative alternative developed by Romney.  The authors’ partisan slant causes them to deliberately and comprehensively misstate the facts.

The authors then move to describing their uncertainty “index.”

“We constructed our index by combining three types of information: the frequency of newspaper articles that refer to economic uncertainty and the role of policy, the number of federal tax code provisions set to expire in coming years, and the extent of disagreement among forecasters about future inflation and government spending.” 

To which the obvious first question is:  why?  I begin my analysis with their tax provisions component.  They know that a historically unusual number of tax provisions are set to expire in coming years, so they know that when they use that component they will produce at index showing a surge in uncertainty. 

“Scheduled expirations of federal tax code provisions were rare before 2000 but have grown rapidly. More than 130 provisions are slated to expire in 2011 and 2012, in many cases setting the stage for new political battles.”

Davis wants to report high uncertainty to fit his priors that he has been asserting without any proof.  This is a hopelessly unsound means to produce an index.  Any of us could pick a variable that would “prove” our priors.  The psychological temptation to prove we are right (especially for theoclassical economists who have gotten everything important horribly wrong) is overwhelming.  The bad news is that the tax expirations are the least embarrassing aspect of their index.

An even more ludicrous component is: “the frequency of newspaper articles that refer to economic uncertainty and the role of policy.”  First, the authors know, because Davis has been a part of promoting this meme, that Republicans have organized a coordinated campaign to claim that “regulation” and “taxes” are causing the weak recovery from the recession.  To now use the publicity that one political party, and at least one of the framers of the index, is generating for partisan purposes as purported objective evidence of the harms of ending the regulatory black holes is so unprincipled as to be beneath contempt.  Indeed, the absurdity of this component is demonstrated by the fact that their effort to publicize their index in the form of a partisan op ed and a partisan academic paper has already had the effect of driving their index higher and “proving” their point.  Moreover, this is not a new Republican strategy.  They followed the same strategy of attacking regulation and regulators for years, but the coordinated attacks on regulation emanating from the right’s “think tanks” (funded by firms that wish to prevent effective regulation) have increased greatly since the passage of Sarbanes-Oxley.  Self-generated attacks on regulation become “policy uncertainty,” which becomes a purported empirical basis for preventing effective regulation.  The index provides an elegant solution to the Koch brothers’ policy goals.     

The authors’ third component is almost humorously bad:  “the extent of disagreement among forecasters about future inflation and government spending.”  We have a vastly more reliable means to judge the risks of future inflation in the U.S.  It is called the U.S. bond market.  It prices the risk of inflation continuously.  It already incorporates “government spending” because such spending can affect inflation.  The U.S. bond markets have consistently been telling us since the crisis became public knowledge that there is no material risk of inflation.  Why do the authors believe that “forecasters” are more reliable than bond markets?  Why do they believe that businesses are failing to hire because they are concerned that the inflation hawks have remained delusional in their claims that hyper-inflation is just around the corner?  What does any of this have to do with regulation?  If CEOs were worried about hyper-inflation because they remained in thrall to some inflation hawk analyst who had been proven grotesquely wrong in every forecast over the last five years, wouldn’t those CEOs be happy that the Bush tax cuts were set to expire?  Why do CEO’s base their decision to hire on the variance among analysts as to the size of the federal budget instead of the size of the federal budget deficit?  The authors do not address these issues in their formal paper or op ed.  

The authors then assigned arbitrary weights to their three components.  The news stories measure is weighted one-half, while the tax repeals and both forms of variance in forecasts (inflation and government spending) each receive an individual weight of one-sixth. 

The authors claim in their op ed (but not in their paper, which claims only “some suggestive evidence on causation”) that their index somehow establishes causality and confers the ability to quantify the jobs that would be created if the Republicans would stop their media campaign of blaming “radical” regulation for the slow recovery.  (Of course, the authors don’t phrase it that way, but given the extreme weight they gave to this single component of their index and the fact that the senior author of the paper is a Republican activist pushing this meme in the media, that is how circular and perverse “causality” is in their index.)

“So how much near-term improvement could we gain from a stable, certainty-enhancing policy regime? We estimate that restoring 2006 levels of policy uncertainty would yield an additional 2.5 million jobs over 18 months. Not a full solution to the jobs shortfall, but a big step in the right direction.”

They make no such claim in their paper.  “Yield” is a statement of causality.  Their study inherently cannot establish causality.  Further, as they admit, even they see at best only “some suggestive evidence on causation” – and they are being remarkably over-generous to themselves even in going that far for their study does not present any such “suggestive evidence.” 

They also do not explain how we could undo “uncertainty” – as “measured” under their index.  As long as the right generates attacks on regulation and claims that it causes uncertainty and those complaints are repeated by their array of web sites the index will “measure” high uncertainty.  We went through a remarkable period of radical deregulation, desupervision, and de facto decriminalization that created the criminogenic environments that produced three major crises in 25 years and one party is still demanding that we make the three “de’s” far worse.  Are we supposed to repeal Dodd-Frank?  Would the repeal increase or decrease “policy uncertainty”?  How are we supposed to prevent analysts from being hyper-inflation hawks?  Would making the tax laws longer remove uncertainty?  Congress could still change them at will.  The repeal as of a date certain was meant to reduce uncertainty. 

Every aspect of this index is farcical and a naked partisan weapon of attack on the regulations and prosecutions essential to preventing our recurrent, intensifying financial crises.  Theoclassical economists were the architects of these crises.  They were the great destroyers of jobs and wealth.  The claim that we can never undo their criminogenic designs and that any attempt to even criticize the elite frauds will lead to job losses is pure extortion.  Their index does not allow any statements about causality, and they know that the claims of causality and quantification that they made in their op ed are indefensible.  The direct surveys of employers do allow us to evaluate causality because they are statements (largely) against the political interests of the business people being surveyed.  Those surveys refute the argument. 

Restoring effective regulatory cops on the beat will increase transparency and reduce the Gresham’s dynamic that is the bane of honest firms.  Both effects reduce uncertainty and increase employment.  For example, there were far more aggressive regulatory and prosecutorial responses to the S&L debacle than the current crisis.  We convicted over 1,000 elites in cases designated by the Justice Department as “major” and we brought thousands of civil and enforcement actions against S&L executives.  We largely ended nonprime lending, particularly liar’s loans by S&Ls in 1990-1991.  We placed many hundreds of S&Ls and banks in receivership.  We consistently wiped out the shareholders and subordinated debt holders in those resolutions.  We greatly boosted capital requirements, got rid of junk accounting, and put formal requirements for prompt corrective action in place.  We rapidly sold the bad assets in our liquidating receiverships.  None of these things has been done in Bush and Obama administrations’ tepid response to the current crisis.  The recovery from the recession in the early 1990s was relatively rapid.  Our aggressive regulatory actions added greatly to certainty because our actions were consistent, added to transparency, and helped honest firms.  That result would be consistent with the authors’ purported theory (gratuitous uncertainty poses an undesirable risk that slows recovery), but not with their ideological blinders that cause them to see regulation as inherently adding to uncertainty.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @WilliamKBlack

Marshall Auerback on BNN: What’s Europe’s Next Step?

Marshall Auerback discusses the latest in Euro woes and the possibility of it spreading beyond the Eurozone.  In the first clip Marshall stresses the need for ECB intervention to calm the onset of a debt-deflation dynamic.  In the second, he follows up on the likelihood that the crisis will spread to sovereign currency nations like the US, where he explains that insolvency is not a threat.

For those that can’t make it to Kansas City for this event, we will attempt to stream it live here at New Economic Perspectives. { var scribd = document.createElement(“script”); scribd.type = “text/javascript”; scribd.async = true; scribd.src = “”; var s = document.getElementsByTagName(“script”)[0]; s.parentNode.insertBefore(scribd, s); })();

MMP Blog #26: Sovereign Currency and Government Policy in the Open Economy

Government policy and the open economy. A government deficit can contributeto a current account deficit if the budget deficit raises aggregate demand,resulting in rising imports. The government can even contribute directly to acurrent account deficit by purchasing foreign output. A current account deficitmeans the rest of the world is accumulating claims on the domestic privatesector and/or the government. This is recorded as a “capital inflow”. Exchangerate pressure might arise from a continual current account deficit.

While theusual assumption is that current account deficits lead more-or-less directly tocurrency depreciation, the evidence for this effect is not clear-cut. Still,that is the usual fear—so let us presume that such pressure does arise.

Implicationsof this depend on the currency regime. According to the well-known trilemma,government can choose only two out of the following three: independent domesticpolicy (usually described as an interest rate peg), fixed exchange rate, andfree capital flows. A country that floats its exchange rate can enjoy domesticpolicy independence and free capital flows. A country that pegs its exchangerate must choose to regulate capital flows or must abandon domestic policyindependence. If a country wants to be able to use domestic policy to achievefull employment (through, for example, interest rate policy and by runningbudget deficits), and if this results in a current account deficit, then itmust either control capital flows or it must drop its exchange rate peg.

Floatingthe exchange rate thus gives more policy space. Capital controls offer analternative method of protecting an exchange rate while pursuing domesticpolicy independence.

Obviously,such policies must be left up to the political process—but policy-makers shouldrecognize accounting identities and trilemmas. Most countries will not be ableto simultaneously pursue domestic full employment, a fixed exchange rate, andfree capital flows. The exception is a country that maintains a sustainedcurrent account surplus—such as several Asian nations. Because they have asteady inflow of foreign currency reserves, they are able to maintain anexchange rate peg even while pursuing domestic policy independence and (if theydesire) free capital flows.

Inpractice, many of the trade surplus nations have not freed their capitalmarkets. By controlling capital markets and running trade surpluses, they areable to accumulate a huge “cushion” of international reserves to protect theirfixed exchange rate. To some extent, this was a reaction to the exchange ratecrisis suffered by the “Asian Tigers”—when foreign exchange markets lostconfidence that they could maintain their pegs because their foreign currencyreserves were too small. The lesson learned was that massive reserves arenecessary to fend off speculators.

Do floating rates eliminate “imbalances”? In the global economy, every tradesurplus must be offset by a trade deficit. The counterpart to the accumulationof foreign currency reserves is accumulation of indebtedness by the currentaccount deficit nations. This can create what is called a deflationary bias tothe global economy. Countries desiring to maintain a trade surplus will keepdomestic demand in check in order to prevent rising wages and prices that couldmake their products less competitive in international markets.

At the sametime, countries with trade deficits might cut domestic demand to push downwages and prices in order to reduce imports and increase exports. With bothimporters and exporters attempting to keep demand low, the result isinsufficient demand globally to operate at full employment (of labor and plantand equipment). Even worse, such competitive pressure can produce tradewars—nations promoting their own exports and trying to keep out imports. Thisis the downside to international trade, and it is made worse to the extent thatnations try to peg exchange rates.

Someeconomists (notably, Milton Friedman) had argued in the 1960s that floatingexchange rates would eliminate trade “imbalances”—each nation’s exchange ratewould adjust to move it toward a current account balance. When the BrettonWoods system of fixed exchange rates collapsed in the early 1970s, much of thedeveloped world did move to floating rates—and yet current accounts did notmove to balance (indeed, “imbalances” increased).

The reasonis because those economists who had believed that exchange rates adjust toeliminate current account surpluses and deficits had not taken into accountthat an “imbalance” is not necessarily out of balance. As discussed previously,a country can run a current account deficit so long as the rest of the worldwants to accumulate its IOUs. The country’s capital account surplus “balances”its current account deficit.

It is thusmisleading to call a current account deficit an “imbalance”—by definition, itis “balanced” by the capital account flows. As discussed earlier, it “takes twoto tango”: a nation cannot run a current account deficit unless someone wantsto hold its IOUs. We can even view the current account deficit as resultingfrom a rest of world desire to accumulate net savings in the form of claims onthe country.

Currency regimes and policy space: conclusion.

Let usquickly review the connection between choice of exchange rate regime and thedegree of domestic policy independence accorded, from most to least:

                *Floating rate, sovereigncurrency àmost policy space; government can “afford” anything for sale in its owncurrency. No default risk in its own currency. Inflation and currencydepreciation are possible outcomes if government spends too much.

                *Managed float, sovereigncurrency àless policy space; government can “afford” anything for sale in its owncurrency, but must be wary of effects on its exchange rate since policy couldgenerate pressure that would move the currency outside the desired exchangerate range.

                *Pegged exchange rate, sovereigncurrency àleast policy space of these options; government can “afford” anything for salein its own currency, but must maintain sufficient foreign currency reserves tomaintain its peg. Depending on the circumstances, this can severely constraindomestic policy space. Loss of reserves can lead to an outright default on itscommitment to convert at the fixed exchange rate.

The detailsof government operations discussed throughout this part of the book apply inall three regimes: government spends by crediting bank accounts, taxes bydebiting them, and sells bonds to offer an interest earning alternative toreserves. Yet, ability to use these operations to achieve domestic policy goalsdiffer by exchange rate regime.

On a peggedcurrency, government can spend moreso long as someone is willing to sell something for the domestic currency, butit might not be willing to do sobecause of feared exchange rate effects (for example, due to loss of foreigncurrency reserves through imports).

To be sure,even a country that adopts a floating rate might constrain domestic policy toavoid currency pressures. But the government operating with a pegged exchangerate can actually be forced to default on that commitment, while the governmentwith a floating rate or a managed float cannot be forced to default.

Theconstraints are thus tighter on the pegged regime because anything thattriggers concern about its ability to convert at the pegged rate automaticallygenerates fear of default (they amount to the same thing). The fear can lead tocredit downgrades, raising interest rates and making it more costly to servicedebt. All externally-held government debt is effectively a claim on foreigncurrency reserves in the case of a convertible currency (where governmentpromises to convert at a fixed exchange rate). If concern about ability toconvert arises, then only 100% reserves against the debt guarantees there is nodefault risk. (Domestic claims on government might not have the sameimplication since government has some control over domestic residents—it could,for example, raise taxes and insist on payment only in the domestic currency.)

Next week: what happens if a country adopts aforeign currency? (Hint: look at the PIIGS!)

Responses to MMP Blog #25: Isn’t the Dollar so Special?

By L. Randall Wray

Thanks, Marty for the vote of confidence. Yes, the accounting is essential; it used to provide the foundation for both macro theory and also for “money and banking” but unfortunately it has nearly disappeared. Today’s macro texts begin with representative agents and silly little growth models. Almost all modern macro violates accounting identities—as Wynne Godley lamented.

On to the Q&A:

Q1: Maybe you could say something about Ireland. It appears to me that, were Ireland not in the Eurozone, it would be in a prime position to have its currency accepted abroad. It has a good export base; it has strong FDI and we’re particularly adept at collecting taxes. So, perhaps the best way for developing countries to have their currency accepted abroad (yes, Ireland was basically a developing country up until the 80s) is to focus policy on these variables. We in Ireland did it through education. We ensured that we had a very well educated workforce that attracted FDI.

 A: Yes, there’s got to be a reason. Typically it is because foreigners want to buy products, visit as tourists, or buy financial assets. The demand for the Oz Dollar expanded when global pension funds and other managed money decided to allocate a portion of their portfolios to Oz Dollars. Of course, the commodities boom also helped—the ROW wanted Oz’s commodities. I want to be realistic, however. Many countries in the world do not now produce goods and services the ROW wants, and their assets are deemed too risky even if interest rates were to be kept high. Unfortunately many nations then view the way to increase interest in their goods and assets is to “dollarize” (typically, pegging an exchange rate, or better yet adopting a currency board). But that won’t help. At best it adds default risk in place of currency risk (the country might not be able to keep the promise to convert to dollars, so even though the exchange rate is fixed, the country’s assets are risky). There is no easy answer to this. I would suggest that it is far better to look inward: develop one’s own capacity to produce (yes, education) and to consume its own products.

Q2: So developing countries that are using US Dollars – say Timor Leste (East Timor) – the current low, near zero interest rate (fed funds) would be a benefit for them since East Timor interest rate would be “market determined”. Is that correct?

A: Of course this is related to my previous answer. Default risk. If you look at the experience of Argentina (adopted a currency board), its interest rate remained about the same as its neighbor Brazil’s rate (did not dollarize), and that was much higher than the US Dollar interest rate. Why? Eliminating exchange rate risk was completely offset by adding on default risk as markets worried Argentina could not hold the peg. (I won’t go into it in detail, but the interest rate parity theorem holds reasonably well so that a nation’s interest rate must compensate for expected exchange rate movements. So to the base interest rate we add the risk premium and also expected exchange rate movements.)

Q3: Wray said: “Thus, it is almost always a mistake for government to issue foreign currency bonds. ” Q: This goes against the original sin hypothesis. Don’t you believe that hypothesis?

A: I believe in original sin: from birth you owe taxes. I do not know what “free trade” is, nor what a “complete financial market” would be. These are just religious terms that bear no relation to the real world. I repeat: it is almost always a mistake for a government to issue foreign currency debt. Let the private sector indebt itself if it wants, and then let it fail in the normal way if it cannot get foreign currency to service its debts. You do not want to be an Iceland or Ireland, bailing-out banks. Recommendation: read more MMT, less orthodox theoclassical nonsense.

Q4: If a country wants to peg their currency to the $US, then it is true they could use an accumulation of $US to buy their own currency in the FX market, propping up its value. But they don’t need a unilateral trade surplus with the US to do that. They could have their trade surplus overall with any other countries, and use any foreign currency to buy their own currency in the FX market. They wouldn’t necessarily have to sell anything in the US, and could have a trade deficit with the US, as long as they had a surplus overall. If they needed to depress their currency in the FX markets, they can simply create some and sell it on the FX market, and hold whatever other currency they want. It does not have to be $US. Secondly, how does accumulating dollar claims help them with insufficient domestic demand? A trade surplus helps with that, but it must, again, be a surplus overall and not any particular bilateral surplus.

A: Of course, it is correct to say that a country could peg its exchange rate, and accumulate euros to do so; thus it can run a trade surplus against Germany rather than the US. Good luck with that! The problem is that Germany is a modern mercantilist state that won’t run a trade deficit so it is hard to get claims on Germany; the EMU as a whole runs essentially balanced trade. Much easier to get dollars. And yes of course a nation can run trade surpluses even if it does not trade at all with the US. My answer here is much like my answer about taxes: you do not need to impose a US Dollar tax on every one of the 6 billion people in the world to ensure a global demand for dollars. The Chinese will export to anyone, and willingly accumulates Dollars even though few Chinese need to pay Dollar taxes. And increasingly there will be net exporters who do almost all their trade with China—accumulating foreign currency reserves. Why run net exports? Because domestic demand is too low to absorb the output. Of course there are additional reasons to export—including “learning by doing”.Q: Since oil is essential for the running of a modern economy, how does this petrodollar system effect the fiscal equation for the various governments? What does MMT show us about this relationship, or is it irrelevant?

A: Certainly it is relevant—oil exporters typically have current account surpluses thus accumulate financial assets denominated in foreign currencies. Much of that is in Dollars. That leads to the incorrect belief that OPEC “finances” US borrowing (budget deficit and trade deficit). Better to look at this as US “financing” OPEC asset accumulation.

Q: What was the cause of Argentina to default? Was it debt in foreign currency that caused inflation?

A: See above: adopted a currency board, that actually reduced inflation (strong dollar). The problem was solvency: yes, essentially the debt was in a foreign currency. Go to to see papers that Pavlina Tcherneva and I wrote on the crisis.

Q: MMT and post-keynesians in general say always that banks buy treasuries to have an interest, instead of leave reserves earning nothing (without consider interest on reserves paid by the BC).but, why there are primary dealers? I know that they buy the majority of treasuries issued. this affect reserves because primary dealers have the account in depository institutions. But they buy on behalf of banks or investors, or they buy and after they sell? And so, banks buy treasuries because of the following deficit spending (so this is the deficit that is a non earning stock of reserves) or they use excess reserves (eventually having an automatic overdraft if they haven’t excess reserves)?Thanks.

A: Yes the Fed and Treasury in the US adopted procedures requiring Treasury to sell bonds to private banks before it spends; so special banks buy them, credit Treasury’s deposit account, and then Treasury moves deposits to Fed to cut a check. If these special banks are short reserves, they can always borrow them. Once Treasury spends, banks have reserve credits they then use to buy the Treasuries from the special banks—or from the Fed if necessary.

Q: So if government wants lower rates on its debt, it can always use domestic monetary policy to achieve that goal. Unfortunately, this is not widely understoodI don’t think that is true. As far as I know that’s well understood but so are the potential effects of a lower interest rate on the exchange rate.A: Well, I’ve run across lots of people including policy makers who think markets set rates!

Q: It seems to me that the current system is set up so that net exporting nations always ‘win’ the international trade game and they do that by sucking liquidity out of the target nation – depressing the domestic economy because the domestic government is too scared to replace the liquidity with new liabilities.

A: They “win” the accounting game and “lose” the real game. Exports are a cost! This is a matter of not understanding what an economy is for. But I agree with you.

Q: why do “developing countries” have less demand for their currencies from foreigners? i feel like that is the central question that’s being avoided. what determines the demand for a currency? is it because expected (risk adjusted) profits are lower there then elsewhere? what could increase expected profits? what effect do local cost structures (of the sort Michael Hudson discusses here:… have on foreigner’s currency demand?

A: There are lots of risks, most of them probably are not economic. Obviously, political risk matters. In some cases, corruption. But I want to be clear: there is more corruption on Wall Street and in Washington than in the entire developing world taken together!

“Greedy Bastards”: A Review of Dylan Ratigan’s Views on the Financial Crisis

By William K. Black
(Cross-posted from Benzinga)

Dylan Ratigan, MSNBC’s financial expert, has writtena book about how markets have become perverse. It is an interesting example of how strange “competition” hasbecome.  One oddity presented itself onthe cover of the package in which the book arrived.  The cover proclaimed “Simon & Schuster: ACBS Company.”  The author works forNBC.  Only in America!

I was concerned by the title (“Greedy Bastards”).  I thinkthat greed is unlikely to have changed greatly over the last quarter century inwhich the U.S. has suffered three recurrent, intensifying financialcrises.  I don’t call people bastards,even the self-made ones, because my mother reacted poorly to Speaker Wrightreferring to me as the “red-headed SOB.” Ratigan’s view on these points turns out to be similar to mine.  He argues that the issue is not greed, butperverse incentives.  When CEOs haveincentives adverse to the public and their customers they tend to act on thoseincentives and harm the public and their customers.  This observation is one of those obvious butessential points so often overlooked.  ACEOs’ principal function is creating, monitoring, and adjusting thecorporation’s incentive structures. There is a massive business literature on this function and CEOsuniformly believe that incentive structures for officers and employees arecritical in shaping their behavior.

There is only one (disingenuous) exception to thisrule – when officers and employees act criminally because the CEO has createdperverse incentive structures.  Suddenly,the CEO is shocked that his officers and employees acted criminally in responseto the CEO’s incentive structures that encourage criminal conduct.  Ratigan focuses on precisely thisexception.  Anyone that has had themisfortune to listen to compulsory business ethics training by his or heremployer will have learned that the key is the “tone at the top” set by theCEO.  True, but that always ends the discussion.  No employee is going to be trained by hisemployer as to what to do when the tone at the top set by the CEO is pro-fraud.

As Ratigan demonstrates, our most elite financialCEOs typically created and maintained grotesquely perverse incentive structuresthat encouraged their officers and employees as well as “independent”professionals to act criminally in a manner that harmed customers, the public,and shareholders – but made the controlling officers wealthy.  Is there any CEO of a lender incapable ofunderstanding that the loan officers and brokers’ compensation depends onvolume and yield – not quality – the result will be catastrophic?  Is there any CEO of a lender incapable ofunderstanding that if the loan brokers’ fees depend as well on the reported debt-to-income andloan-to-value ratios and the broker is permitted to make liar’s loans theresult will be that the brokers will engage in endemic, severe inflation of theborrowers’ incomes and their homes’ appraised values?  Is there any reader that doubts that the CEOsintended to produce precisely what their perverse incentives were certain toproduce?  A CEO cannot send a memo to50,000 loan brokers instructing them to inflate appraisals and use liar’s loansto inflate the borrowers incomes’ but he can, and does, send the same messagethrough his compensation system.  None ofthese perverse incentives produces an unexpected result.

Ratigan gets right two of the three essentials tounderstand why we suffer recurrent, intensifying financial crises.  First, cheating has become the dominantstrategy in finance.  Second, cheating isdominant because finance CEOs create such intensely perverse incentives thatfraud becomes endemic.  The BusinessRoundtable (the largest100 U.S. corporations), had to react to the Enron erafrauds.  It chose as its spokesperson aCEO who embodied the best of American big business.  This was the response he gave to Business Week when their reporter askedwhy so many top corporations engaged in accounting control fraud:

“Don’t just say:”If you hit this revenue number, your bonus is going to be this.” Itsets up an incentive that’s overwhelming. You wave enough money in front ofpeople, and good people will do bad things.”

How did the CEO know about the “overwhelming” effectof creating incentives so perverse that they would routinely cause “good people[to] do bad things”?  He knew because hedirected and administered such a perverse compensation system.  An SEC complaint would soon identify thatcompensation system as driving accounting control fraud at his firm.  His name was Franklin Raines, CEO of FannieMae.

Ratigan can add tothe effectiveness of his explanation by adding a description of the thirdessential driving our perverse incentives. Accounting control fraud, as criminologists, economists, and (competent)financial regulators recognize is a “sure thing”.  See GeorgeAkerlof and Paul Romer, “Looting: the Economic Underworld of Bankruptcy forProfit” (1993).  It produces guaranteed,record (albeit fictional) short-term reported profits if one follows the fraud“recipe” for a lender, which produces guaranteed, extreme compensation for thecontrolling officers, and causes catastrophic losses.  It is trifecta of guaranteed results that causesCEOs to adopt the perverse incentives they know will cause their officers andemployees to follow the fraud recipe.  Itis the three “de’s” – deregulation, desupervision, and de facto decriminalization that allow the CEOs to put theseperverse incentives in place with impunity and produce the criminogenicenvironments that drive our recurrent, intensifying financial crises.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @WilliamKBlack

The Real Deception in Advertising: What the New York Times Doesn’t Say about the Economics of Training Elite Lawyers

By June Carbone 

In an article on the front page of the New York Times, David Segal writes that, surprise, surprise, law school faculties do not systematically train students for practice. The article is one of a series Segal has written about supposed law school excesses. Some describe genuinely questionable practices; this describes a complaint at least a century old. I’m sure Mr. Segal thinks of himself as a muckracker. What the article doesn’t acknowledge is that it also advances the agenda of the 1%.

Let me explain. The complaint about law school for over a century has been that they do not train students for practice. The only thing that is new today is that the most elite corporate clients are attempting to cut their legal bills by shifting the costs of the training to law schools – and ultimately therefore to the students. It is one thing to argue that the law schools of the future will need to pay more attention to practical training in order to compete with each other; this is almost certainly true. It is another thing to suggest that this is somehow a matter of consumer protection.

Continue reading

An Open Letter to the Winter Patriot

By Mitch Green

The following letter reflects my view on the subject of civil disobedience and does not necessarily mirror the general opinion of New Economic Perspectives.  I offer my opinion as an Army veteran, student of the economy, and critic of an ongoing effort to wage economic war on the vast majority the population.  If these words move you, I urge you to consider honestly the consequences if you decide to act.  

As the occupymovement continues to grow in defiance of the heavy-handed police actiondetermined to squelch it, a natural question emerges: What point will the militarybe summoned to contain the cascade of popular dissent?  And if our nation’s finest are brought intothis struggle to stand between the vested authority of the state and the ranksof those who petition them for a redress of grievance, what may we expect theoutcome to be?

If history isour guide then we know that story all too well. Behind a thin veil of red, white and blue stands a nation that has usedits military might to respond forcefully to any public contempt for the veryinstitutions which bind us in exclusion from the liberty those colorsevoke.  Just as a training collar keeps adog in check, a highly militarized police force responds mercilessly, sharply,and without hesitation with an array of chemical warfare and thuggish brutality.  And where they fail, divisions of soldiers standready to deliver a serious and painful lesson to all who demonstrate theirunwillingness to wait for democracy.

This has beenthe history of democracy in America.  Theink on the pages that chronicle the use of state violence towards an unrulycitizenry is dry.  We cannot rewrite them.  We read them in lament.  But for each new day history waits; at thedawn of each morning we are presented with the gift of creation.  The prevailing thought woven into the fabricof our society today, threaded through both patterns of conservative andliberal ideology, remains the recognition that something is very wrong with theworld.  Naturally, we form thequestion:  Can we do thingsdifferently?  Once we animate thatthought and present it to society as a question demanding an answer, we begin tosketch out our draft of the world in the pages of history.

I call upon mybrothers and sisters in the armed forces to ink their pens and help us writethese next few, and most important pages in the history of our social life.  Soon, it is quite likely that you will bemobilized to aid the police in their effort to contain or disperse what theirbosses see as an imminent threat to the sanctity of their authority.  As that day draws near, I remind you of thesefamiliar words:

I, (NAME), do solemnly swear (oraffirm) that I will support and defend the Constitution of the United Statesagainst all enemies, foreign and domestic; that I will bear true faith andallegiance to the same; and that I will obey the orders of the President of theUnited States and the orders of the officers appointed over me, according toregulations and the Uniform Code of Military Justice. So help me God.

Those that take this oath seriously are facedwith a terrible conflict.  You mustbattle internally between the affirmation that you will place your body betweenthe social contract embedded in the Constitution and those that seek itsdestruction, while maintaining your loyalty to the government you serve and theorders issued by its officers.  Sadly,society has placed a twin tax upon you by asking that you sacrifice both yourbody and your morality.  This tax hasbeen levied solely upon you overseas, and soon they’ll come to collectdomestically.  Your government in itsexpression of corporate interests relies upon your tenacity to endure, and yourrelentless willingness to sacrifice.  Andso you do. 

Now, more than ever we need your sacrifice.  But, I’m asking you to soldier in a differentway.  If called upon to deny the peopleof their first amendment right to peaceably assemble and petition theirgovernment for a redress of grievance, disregard the order.  Abstain from service.  Or if you are so bold, join us. Make no mistake: The consequences for suchdecisions are severe.  You will be prosecuted under the fullextent of the law.  But sacrifice is yourwatch word. 

Thomas Paine wrote in 1776:

These are the times that try men’s souls. Thesummer soldier and the sunshine patriot will, in this crisis, shrink from theservice of their country; but he that stands by it now, deservesthe love and thanks of man and woman. Tyranny, like hell, is not easily conquered;yet we have this consolation with us, that the harder the conflict, the moreglorious the triumph.

Today we are faced with a new revolution.  This time we are fighting to preserve ourdemocracy, rather than to establish a new one. And just as a grateful nation relied upon the Winter Soldier to deliverus from the colonial yoke of oppression, we ask that you aid us in our struggleto be free from the bonds of debt peonage and false representation.  In return we will stand in your defense asthe elite, who have gained so much from your service, attempt to strip you ofyour hard won honor.