Monthly Archives: November 2011

Germany puts the EU through the Wood Chipper – and Theocrats Cheer

By William K. Black

Those of you who have seen the film Fargo have the wood chipper scene indelibly seared into your memory.  (If you have not seen Fargo please remedy this deficiency promptly.)  I return to the scene at the end of this piece.

Walter Russell Mead, a recovering liberal, has crafted a crude ode to purported German national character and insult to purported French national character.  The defective purported national character of the French is leavened with equally crude stereotypes of the purported superior religious character of Huguenots and Jews.  It is all set within a broader, cruder attack on purported ethnic “Latin” character.  Mead’s piece ran in opinion pages of the Wall Street Journal, which embraces these prejudices and considers them the height of intellect.

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MMP Blog #25: Currency Solvency and the Special Case of the US Dollar

In recent blogs we’ve been looking at sovereign government issues of bonds. We have argued that this is not really a “borrowing” operation, but rather bond issues offer a (higher) interest-earning alternative than do reserve deposits at the central bank. We also have argued that it makes little practical difference whether the government bonds are held domestically or by foreigners.
However, it is true that in a floating currency regime, it is conceivable that foreigners who hold reserves or government bonds could decide to “run” out of them, impacting the exchange rate. By the same token, countries that want to run net exports with, say, the US, are interested in accumulating Dollar claims—often because their domestic demand is too low to absorb potential output and often because they want to peg their currencies to the Dollar. For that reason, a “run” is unlikely.
This then leads to the objection that the US is surely a special case. Yes, it can run budget deficits that help to fuel current account deficits without worry about government or national insolvency precisely because the rest of the world wants Dollars. But, surely, that cannot be true of any other nation. Today, the US Dollar is the international reserve currency—making the US special. Let us examine this argument.
Isn’t the US special? Yes and no. Accounting identities are identities; they are true for all nations. If a nation runs a current account deficit, by identity there must be a demand for its assets (real or financial) by someone with foreign currency.(A foreigner could either demand the nation’s currency for “direct investment” that includes buying property or plant and equipment,or the foreigner could demand financial assets denominated in that currency.) If that demand for assets declines, then the current account deficit must also decline.
There is little doubt that US dollar-denominated assets are highly desirable around the globe; to a lesser degree, the financial assets denominated in UK Pounds, Japanese Yen, European Euros, and Canadian and Australian dollars are also highly desired. This makes it easier for these nations to run current account deficits by issuing domestic-currency-denominated liabilities. They are thus “special.”
Many developing nations will not find a foreign demand for their domestic currency liabilities. Indeed, some nations could be so constrained that they must issue liabilities denominated in one of these more highly desired currencies in order to import. This can lead to many problems and constraints—for example, once such a nation has issued debt denominated in a foreign currency, it must earn or borrow foreign currency to service that debt. These problems are important and not easily resolved.
If there is no foreign demand for IOUs (government currency or bonds, as well as private financial assets) issued in the currency of a developing nation, then its foreign trade becomes something close to barter: it can obtain foreign produce only to the extent that it can sell something abroad. This could include domestic real assets (real capital or real estate) or, more likely, produced goods and services (perhaps commodities, for example). It could either run a balanced current account (in which case revenues from its exports are available to finance its imports) or its current account deficit could be matched by foreign direct investment.
Alternatively, it can issue foreign currency denominated debt to finance a current account deficit. The problem with that option is that the nation must then generate revenues in the foreign currency in order to service that debt. This is possible if today’s imports allow the country to increase its productive capacity to the point that it can export more in the future—servicing the debt out of foreign currency earned on net exports. However, if such a nation runs a continuous current account deficit without enhancing its ability to export, it will almost certainly run into debt service problems.
The US, of course,does run a persistent trade deficit. This is somewhat offset by a positive flow of net profits and interest (US investments abroad earn more than foreign investments in the US). But the two main reasons why the US can run persistent current account deficits are: a)virtually all its foreign-held debt is in Dollars; and b) external demand for Dollar-denominated assets is high—for a variety of reasons.
The first of these implies that servicing the debt is done in Dollars—easier for indebted American households, firms, and governments to obtain. The second implies that foreigners are willing to export to the US to obtain Dollar-denominated assets, meaning that a trade deficit is sustainable so long as the rest of the world wants Dollar assets.
What about government that “borrows” in foreign currency? What about nations that issue foreign currency denominated assets? Returning to a nation that does issue debt denominated in a foreign currency, what happens if the debtors cannot obtain the foreign currency they need to service the debt?
We have thus far left to the side questions about who is typically issuing foreign currency denominated debt. If it is a firm or household, then failure to earn the foreign currency needed to service the debt can lead to default and bankruptcy. This would be handled in the courts(typically, when debt is issued it is subject to the jurisdiction of a particular court) and by itself poses no insurmountable problem. If the debt is too large, bankruptcy results and the debt must be written-off.
Sometimes, however,governments intervene to protect domestic debtors by taking over the debts. (Ireland is a good example.) Alternatively, governments sometimes issue foreign currency debt directly. In either case,default by government on foreign currency debt is usually more difficult—both because bankruptcy by sovereign government is a legally problematic issue and because sovereign default is apolitically charged issue.
In practice,sovereign default (especially on foreign currency debt) is not uncommon, often chosen as the lower cost alternative to continuing to service debt. Sovereign governments typically choose when to default—they almost always could have continued to service debt (for example, by imposing austerity to increase exports, or by turning to international lenders). Apparently, they decide that the benefits of default outweigh the costs. However, this can lead to political repercussions. Still, history is littered with government defaults on foreign currency debt.
Governments sometimes issue foreign currency debt on the belief that this will lower borrowing costs—since interest rates in, say, the US Dollar,are lower than those in the domestic currency. However, foreign currency debt carries default risk—and if markets price that into interest rates, there may be no advantage. Still, it is not uncommon for governments to try to play the interest differentials, issuing debt in a foreign currency that has a lower interest rate.Unfortunately, this can be a mirage—markets recognise the higher default risk in foreign currency, eliminating any advantage.
Further, as discussed in earlier blogs, for a sovereign government, the domestic interest rate (at least the short term interest rate in the domestic money of account) is a policy variable. If the government is spending domestically in its own currency, it can choose to leave reserves in the banking system or it can offer bonds. In other words, it does not have to pay high domestic interest rates if it does not want to, for it can instead let banks hold low (or zero) interest rate reserves. This option is available to any currency issuing government—so long as its spending is domestic.
As discussed earlier, government will be limited to purchasing what is for sale in its currency—and if it is constrained in its ability to impose and collect taxes then the domestic demand for its currency will be similarly limited. So we do not want to imply that government spending is not constrained—even in a sovereign country that issues its own currency.
But if a national government issues foreign currency denominated IOUs, the interest rate it pays is “market determined” in the sense that markets will take the base interest rate in the foreign currency and add a mark-up to take care of the risk of default on the foreign currency obligations. It is likely that the borrowing costs in foreign currency will turn out to be higher than what government would pay in its own currency to get domestic (and foreign) holders to accept the government’s IOUs.
This is usually not understood because the domestic currency interest rate on government debt is a policy variable—usually set by the central bank—but policy makers believe they must raise domestic rising interest rates when the budget deficit rises. This is done to fight inflation pressures or downward pressure on exchange rates that policy-makers believe to follow on from budget deficits. In truth—as discussed above—if a country tries to peg its exchange rate, then a budget deficit could put pressure on the exchange rate. So, there is some justification for attempting to counteract budget deficits with tighter monetary policy (higher domestic interest rates).
But the point is that government sets the domestic interest rate on overnight funds,which then closely governs the interest rate on short-term government bonds. 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 understood—hence—governments issue foreign currency denominated debt and then take on risk of default because they actually must get hold of foreign currency to service the debt. Thus, it is almost always a mistake for government to issue foreign currency bonds.
Conclusion on US exceptionality. So, yes, the US (and other developed nations to varying degrees) is special, but all is not hopeless for the nations that are “less special.” To the extent that the domestic population must pay taxes in the government’s currency, the government will be able to spend its own currency into circulation. And where the foreign demand for domestic currency assets is limited, there still is the possibility of nongovernment borrowing in foreign currency to promote economic development that will increase the ability to export.
There is also the possibility of international aid in the form of foreign currency. Many developing nations also receive foreign currency through remittances (workers in foreign countries sending foreign currency home). And, finally, foreign direct investment provides an additional source of foreign currency.
Next week, we will turn to impacts of government policy in an open economy: trade deficits and exchange rate effects.

Marshall Auerback: ECB Must Act as Lender of Last Resort

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Some Modest Proposals for Reforming the U.S. Financial and Tax System

OnNovember 3, 2011, Alan Minsky interviewed me on KPFK’s program, “Building aPowerful Movement in the United States” in preparation for an Occupy L.A.teach-in. To clarify my points I have edited and expanded my answers from theinterview transcript.
AlanMinsky: I amjoined now by Michael Hudson. He is a distinguished research professor ofeconomics at the University of Missouri-Kansas City, and also is president ofthe Institute for the Study of Long Term Economic Trends. Welcome to the show,Michael.

MichaelHudson: Thankyou very much.

AlanMinsky: MichaelHudson is scheduled to address Occupy L.A. as part of a teach-in that includesWilliam Black and Robert Scheer, who will be moderating the panel that Michaelwill be on this weekend. Michael, I’m familiar with your work and I know thatyou are a big-picture economic thinker. This is definitely a movement that isasking the big questions about how the global economy and the national economyshould be re-organized. What would you say to the movement at large about howbest to organize a high-tech modern industrial economy in a way that wouldproduce more social and economic justice?
Americais being radicalized by coming to realize how radical Wall Street’s power grabis

MichaelHudson: TheOccupy Wall Street movement has many similarities with what used to be calledthe Great Awakening periods in America. Such periods always begin by realizinghow serious the problem is. So diagnosis is the most important tactic.Diagnosing the problem mobilizes power for a solution. Otherwise, solutionswill seem to come out of thin air and people won’t understand why they areneeded, or even the problems that solutions are intended to cure.

Thebasic problem today is that nearly everyone is in debt. This is the problem inEurope too. There are Occupy Berlin meetings, the Greek and Icelandic protest,Spain’s “Indignant” demonstrations and similar ones throughout the world.

Whendebts reach today’s proportions, a basic economic principle is at work: Debtsthat can’t be paid; won’t be. The question is, just how are they not going to be paid? People with student loans arenot permitted to declare bankruptcy to get a fresh start. The government orcollection agencies dock their salaries and go after whatever property they have.Many people’s revenue over and above basic needs is earmarked to pay thebankers. Typical American wage earners pay about 40 percent of their wages onhousing whose price is bid up by easy mortgage credit, and another 10 to 15percent for credit cards and other debt service. FICA takes over 13 percent,and federal, local and sales taxes another 15 percent or so. All this leavesonly about a quarter of many peoples’ paychecks available for spending on goodsand services. This is what is causing today’s debt deflation. And Wall Streetis supporting it, because it extracts income from the bottom 99% to pay the top1%.

Halfa century ago most economists imagined that the problem would be people savingtoo much as they got richer. Saving meant non-spending. But the problem hasturned out to be just the opposite: debt. Overall salaries have not risen indecades, so many people have borrowed just to break even. Instead of an era offree choice, very little of their income is available for discretionaryspending. It is earmarked to pay the financial, insurance and real estatesectors, not the “real” production and consumption economy. And now repaymenttime has arrived. People are squeezed. So when America’s saving rate recentlyrose from zero to 3 percent of national income, it takes the form of peoplepaying down the debts.

Manypeople thought that the way to get rich faster was to borrow money to buy homesand stocks they expected to rise in price. But this has left the economyfinancially strapped. People are feeling depressed. The tendency is to blamethemselves. I think that the Occupy Wall Street movement, at least here in NewYork, is like what has occurred in Greece and also in the Arab Spring. Peopleare coming together, and at first they may simply watch what’s going on. Onlookersmay come by to see what it’s all about. But then they think, “Wait a minute!Other people are having the same problem I’m having. Maybe it is not really myfault.”

Sothey begin to see that all these other people who have a similar problem in notbeing able to pay their debts, they realize that they have been financially crippledby the banks. It is not that they have done something wrong or are sore losers,as Herman Cain says. Something radically wrong with the system.

Fiftyyears ago an old socialist told me that revolutions happen when people just gettired of being afraid. In today’s case the revolution may grow nearer whenpeople get over being depressed and stop blaming themselves. They come to thinkthat we are all in this together – and if this is the case, there must besomething wrong with the way the economy is organized.

Gradually,observers of Occupy Wall Street begin to feel stronger. There is positive peerpressure to reinforce their self-confidence. What they intuitively feel is thatthe Reagan-Clinton-Bush-Obama presidencies have squeezed their lives. Theeconomy has become untracked.

What’sbasically wrong is that the financial system is running the government. Foryears, Republicans and Democrats both have said that a strong government, carefulregulation and progressive taxation is the road to serfdom. The politicians andneoliberal economists who write their patter talk say, “Let’s take planning outof the hands of government and put it in the ‘free market.’” But every marketis planned by someone or other. If governments step aside, then planning passesinto the hands of the bankers, because of their key role in allocating credit.

Theproblem is that they have not created credit to finance industrial investmentand employment. They have lent for speculation on asset price inflation usingdebt leveraging to bid up housing prices, stock and bond prices, and foreignexchange rates. They have convinced borrowers that they can get rich on risinghousing prices. But this merely makes new homebuyers go deeper into debt to buya home. And when banks say that rising stock and bond prices are good for theeconomy, this price rise lowers the dividend or interest yield. This means thatpension funds and individuals have to save much more for retirement. Instead ofimproving their life, it makes them work harder and borrow more just to stay inplace.

Thebanking system’s alternative to “the road to serfdom” thus turns out to be a roadto debt peonage. This financial engineering turns out to be worse thangovernment planning. The banks have taken over the Federal Reserve and Treasuryand put their lobbyists in charge – men such as Tim Geithner and the others withties to Rubinomics dating from the Clinton administration, and especially toGoldman Sachs and other giant Wall Street firms. 
Sothe first thing to realize is something that is characteristic of all great reformmovements. Voters are not yet supporting a radical position to restructure thewhole system. But at least they are coming to see that small marginal reformswon’t work, or are simply trick promises, like President Obama’s promise thatbanks would renegotiate mortgages for homes in negative equity as part of the quid pro quo for the bailouts theyreceived from Treasury Secretary Geithner. There’s been no quid pro quo, merely talk.
Peoplesee that law enforcement is missing when it comes to the banks and Wall Street.So simply restoring the criminal justice system would be progress. It used tobe that if you ran a fraud, if you cheated people, if you lied on your incometax and falsified statistics, then you would be sent to jail. But the Obamaadministration has appointed Eric Holder to represent Wall Street. He has notthrown any bankers in jail, recognizing that they are the major campaigncontributors of the party, after all.
Whatis easiest for most people to accept is the idea of restoring the way theeconomy used to be more in balance – back when people earned income by beingproductive rather than getting rich by transferring other peoples’ savings andpublic giveaways into their own pockets. But what I sensed in New York wasanger not only at this economic problem, but the fact that the political systemis broken. There is no one to vote for as an alternative to pro-bankcandidates. So what began as anger has become a gathering awareness that Mr.Obama was simply fooling voters instead of leading the change he promised.That’s what politicians do, of course. But people hoped that he might bedifferent. That was the gullibility he played on. He has turned into thenightmare they thought they were voting against.
Movingto the right of the Republicans, he started his administration by appointingthe Simpson-Bowles Commission staffed by opponents of Social Security. Herecently followed that up by appointing the Congressional Super-committee ofTwelve to come out with an even more anti-Social Security, anti-Medicaid and anti-minorityposition that the Republicans could get away with. If they would have tried topass such a right-wing policy, the Democratic Congress would have refused topass it. But they don’t know how to deal with a Democratic president whoappoints Wall Street lobbyists to his cabinet and acts like Margaret Thatchersaying that There Is No Alternative (TINA) to making Social Securityrecipients, labor and minorities pay for Wall Street’s bad gambles and banklosses. He has helped Wall Street capture the government – on behalf of the 1%.
Theman whom Mr. Obama asked to be his mentor when he joined the Senate was Joe Lieberman.He evidently gave Obama expert advice about how to raise funds from thefinancial class by delivering his liberal constituency to his Wall Streetcampaign contributors. So the problem is not that President Obama is wellmeaning but inept – an idealist who just can’t fight the vested interests andinsiders. He’s thrown in his lot with them. In fact, he really seems to believethe right-wing, pro-Wall Street ideology – that the economy can’t functionwithout a financial system that guarantees “savers” (the top 1%) against loss,even when the bottom 99% have to pay more and more.
Andon a personal level, Mr. Obama knows that his fund raising comes mainly fromWall Street, and the only way to get this money is to sell out hisconstituency. You’ve got to give him enough credit to recognize this obviousfact.
Theupshot is that we now have a political nightmare. Yet Mr. Obama still seems tobe the best that the Democrats can offer! This is why I think the protestors aresaying they are not going to let the Democrats jump in front of the parade totry and mobilize support for their party. Like the Irish say: “Fool me once,shame on you. Fool me twice, shame on me.” They realize that the financialsystem is broken and that neither party is trying to do much about it. So thepolitical system has to be changed as well as the economic system.
Supposeyou were going to design a society from scratch. Would you create what we havenow? Or would you start, for instance, by reforming the most egregiousdistortions of campaign finance? As matters stand, Goldman Sachs has been ableto buy the right to name who is going to be Treasury Secretary. They selectedGeithner, who gave them $29 billion from A.I.G. just before he was appointed.It’s like that all down the line – in both parties. Every Democratic congressionalcommittee chairman has to pay to the Party a $150,000 to buy the chairmanship. Thismeans that the campaign donors get to determine who gets committee chairmanships.This is oligarchy, not democracy. So the system is geared to favor whoever cangrab the most money. Wall Street does it by financial siphoning and assetstripping. Politicians do it by getting money from the beneficiaries – the 1%.
Oncepeople realize that they’re being screwed, that’s a pre-revolutionarysituation. It’s a situation where they can get a lot of sympathy and support,precisely by not doing what The New York Times and the other paperssay they should do: come up with someneat solutions. They don’t have to propose a solution because right now thereisn’t one – without changing the system with many, many changes. So many thatit’s like a new Constitution. Politics as well as the economy need to berestructured. What’s developing now is how to think about the economic andpolitical problems that are bothering people. It is not radical to realize thatthe economy isn’t working. That is the first stage to realizing that a realalternative is needed. We’ve been under a radical right-wing attack – and needto respond in kind. The next half-year probably will be spent trying to spellout what the best structure would be.
Thereis no way to clean up the mess that the Democratic Party has become sincepolitics moved into Wall Street’s pockets. The Republicans also have become aparty of lobbyists. So it looks like there is no solution within the existentsystem. This is a revolutionary, radical situation. The longer that the OWSgroups can spend on diagnosing the problem and explaining how far wrong thesystem has gone, the longer the demonstrators can gain support by showing thatthey share the feelings everybody has these days – a feeling of beingvictimized. This is what is creating a raw material that has to potential toflower into political activism, perhaps by spring or summer next year.
Themost important message is that all this impoverishment and indebtedness isunnecessary. There is no inherent economic reason for things to be this way. Itis not really the way that “markets” need to work. There are many kinds ofmarkets, with many different sets of rules. So the important task is to explainto people how many possibilities there are to make things better. And of course,this is what frightens politicians, Wall Street lobbyists and the other membersof the pro-oligarchic army of financial raiders.
AlanMinsky: Well,let me ask you this – and of course, it is something of an intellectualspeculative game. Let’s say that it’s January 2013, and the radical progressivecandidate X, Dennis Kucinich or Bernie Sanders, is miraculously electedpresident, and Michael Hudson is the chief economic advisor. What would you do,given the opportunity with a favorable congress, to transform the Americaneconomy in ways that would produce policies you think would at least start tohelp break the grip that the financial sector has had in devastating theeconomy in terms of its performance for average households?
RestoreAmerica’s past prosperity and rescue the future from the financial grabbers

MichaelHudson: Thereare two stages to any kind of a transformation. The first stage is simply to startre-applying the laws and the taxes that the Bush and Obama administrations havestopped applying. You don’t want Wall Street to be able to put its industrylobbyists in charge of making policy. So the first task is to get rid ofGeithner, Holder and the similar pro-financial administrators whom Obama hasappointed to his cabinet and in key regulatory positions. This kind of clean-uprequires election reform – and that requires a reversal of the Supreme Court’srecent Citizens United ruling that enables a financial oligarchy to lock in itscontrol of American politics.
Oneof the first things that is needed – and only a President could do it – wouldbe to demand a new Supreme Court. This is what Roosevelt threatened, and itworked. You make them an offer they can’t refuse. If this can be done only byexpanding the number of court justices, then you nominate ones who are notradicals on the right – judges who will reverse the 19th-centuryruling that corporations are the same as people and indeed have even morerights (and certainly more campaign money) than people have. You then move to cleanup the corruption of the legal system that has protected financial crooks insteadof sending them to jail. Financial fraud has effectively been decriminalized,at least by Wall Street’s largest campaign contributors.
Butthis is really Bill Black’s area. I’m only going to talk about financial andtax reforms here, because they are the easiest to understand and ultimately themost immediate task.
Preventmonopoly price gouging. Bring bank charges in line with the real cost of doingbusiness.
Whatis needed today is more than just going back to the past ideals. After all, thegood old class warfare was not so rosy either. But at least the Progressive Erahad a program to subordinate finance to serve industry and the rest of theeconomy. The problem is that its reformers never really had a chance to carryout the ideas that classical economists outlined.
Theclassical idea of a free market economy was radical in its way – precisely bybeing natural and thus getting rid of unnatural warping by special privilegesfor absentee landlords and banks. This led logically to socialism, which is whythe history of economic thought has been dropped – indeed, excluded – fromtoday’s academic curriculum. What is needed is to complete the direction ofchange that World War I interrupted and that the Cold War further untracked.After 1945 you didn’t hear anything any more about what John Maynard Keynescalled for at the end of his General Theory in 1936: “euthanasia of the rentier.” But this was the great fightfor many centuries of European reform, and it even was the path along whichindustrial capitalism was expected to evolve. So let me begin with what wasdiscussed back in the 1930s, trying to recover the Progressive Era reforms.
Settingup a more fair banking and financial system requires changing the taxfavoritism as well, which I will discuss below. There are a number of good proposalsfor reform. One of the easiest and least radical is set up a public option forbanking. Instead of relying on Bank of America or Citibank for credit cards,the government would set up a bank and offer credit cards, check clearing andbank transfers at cost.
Theidea throughout the nineteenth century was to create this kind of publicoption. There was a Post Office bank, and that could still be elaborated toprovide banking services at cost or at a subsidized price. After all, in Russiaand Japan the post office banks are the largest of all!
Thelogic for a public banking option is the same as for governments providing freeroads: The aim is to minimize the cost of living and doing business. On mywebsite,, I have posted an article just published in the American Journal of Economics and Sociologyon Simon Patten. He was the first professor of economics at the Wharton BusinessSchool. He spelled out the logic of public infrastructure as a “fourth” factorof production (alongside, labor, capital and land). Its productivity is to bemeasured not by how much profit it makes, but by how much it lowers theeconomy’s price structure.
Providinga public option would limit the ability of banks to charge monopoly prices forcredit cards and loans. It also would not engage in the kind of gambling thathas made today’s financial system so unstable and put depositors’ money atrisk. Ideally, I would like to see banks act more like the old savings banksand S&Ls. In fact, the most radical regulatory proposal I would like to seeis the Chicago Plan promoted in the 1930s by the free marketer Herbert Simon. Thisis what Dennis Kucinich recently proposed in his National Emergency EmploymentDefense Act of 2011 (NEED).
Thismay seem radical at first glance, but how else are you going to stop the banksfrom their mad computerized gambling, political lobbying and creating creditfor corporate raiders to borrow and pay their financial backers by emptying outpension funds and cutting back long-term investment, research and development?
Theguiding idea is to take away the banks’ privilege of creating credit electronicallyon their computer keyboards. You make banks do what textbooks say they aresupposed to do: take deposits and lend them out in a productive way. If thereare not enough deposits in the economy, the Treasury can create money on itsown computer keyboards and supply it to the banks to lend out. But you wouldrewrite the banking laws so that normal banks are not able to gamble or playthe computerized speculative games they are playing today.
Theobvious way to do this is to reinstate the Glass-Steagall Act so that theycan’t gamble with insured deposits. This way, speculators would bear the burdenif they lost, not be in a position to demand “taxpayer liability” bythreatening to collapse the normal vanilla banking system. AbolishingGlass-Steagall opened the way for Wall Street to organize a protection racketby mixing up peoples’ deposits with bad gambles and with the growth of debtsway beyond the ability to be paid.
Tosum up, the idea is to shape markets so as to steer the banks to lend foractual capital formation and to finance home ownership without credit inflationthat simply bids up prices for homes as well as for other real estate, stocks,and bonds.
Taxreform needs to back up and reinforce financial reform

Today’seconomic problem is systemic. This is what makes any solution so inherentlyradical. In changing part of the economic system, you have to adjusteverything, just as when a doctor operates on a human body. Financial reformrequires tax reform, because much of the financial problem stems from the tax shiftoff real estate and finance onto labor and industry. Taxes are the business ofCongress, not the President or his advisors, but I assume that  your question really concerns what I thinkthe economy needs.

Themost obvious fiscal task that most people understand – and support – is to restorethe progressive tax system that existed before 1980, and especially before theClinton and Bush tax cuts. It used to be that the rich paid taxes. Now theydon’t. But the key isn’t just income-tax rates as such. What needs to berecognized is the kind of taxes thatshould be levied – or how to shift them back off labor onto property where theywere before the 1980s. You need to restore the land taxes to collect the “freelunch” that is not really “free” if it is pledged to pay the banks in the formof mortgage interest.
Overthe past few decades the tax system has been warped more and more by banklobbyists to promote debt financing. Debt is their “product,” after all. Asmatters now stand, earnings and dividends on equity financing must pay muchhigher tax rates than cash flow financed with debt. This distortion needs to bereversed. It not only taxes the top 1% at a much lower rate than the bottom99%, but it also encourages them to make money by lending to the bottom 99%. The result is that the bottom 99% have becomeincreasingly indebted to the top 1%. The enormous bank debt attached to realestate does not reflect rising rents as much as it reflects the tax cuts onproperty. Wall Street lobbyists have backed Congressional leaders who haveshifted taxes onto consumers via sales taxes and income taxes, as well as FICApayroll withholding. This ploy treats Social Security and Medicare as “userfees” rather than paying them out of the overall budget – and financed out ofprogressive taxation on the top 1%. If wage earners pay more in FICA, you canbe sure that the wealthy get a tax cut.
Thisanti-progressive tax shift is largely responsible for the richest 1% doublingtheir share of income. It also has led to the 99% having to pay banks what theyused to pay the tax collector. They pay interest rather than taxes. If I wereeconomic advisor, I would explain just how this works – which is what I alreadytry to do on my website. In a nutshell, the tax shifts since World War II haveleft more and more of the land’s site value to be capitalized into interestpayments on bank loans. So the banks have ended up with what used to be takenby landowners. There is no inherent need for this. It doesn’t help the economy;it merely inflates a real estate bubble. Economic growth and employment wouldbe much stronger if income tax rates were lowered for most people. Propertyowners and speculators would pay. There would be less free lunch and more“earned” income.
TheObama Administration has proposed the worse of both worlds – getting rid of thetax deductibility of interest for homeowners. This would squeeze them, withoutscaling down the bank debts that have absorbed the cuts in property taxes. SoMr. Obama is sponsoring yet another anti-consumer proposal to make the bottom99% pay for government – while using government funds to subsidize the banksand bail out their bad bets.
Whatneeds to be done is to remove the tax deductibility of interest for investorsin general. This tax favoritism is a subsidy for debt financing – and the mainproblem that the U.S. economy faces today is over-indebtedness. A good policywould aim at lowering the debt overhead. Debt leveraging should be discouraged,not encouraged.
Speculatorshave borrowed largely to make capital gains. They originally were taxed asnormal income in the 1913 income tax. The logic was that capital gains build upa person’s savings, just as earning an income does. But the financial and realestate interests fought back, and today there is only a tiny tax on capitalgains – a tax that sellers don’t have to pay if they plow their money intoanother property or investment to make yet moregains! So when Wall Street firms, hedge funds, and other speculators avoidpaying normal taxes by saying that they don’t “earn” money but simply makecapital gains, this is where a large part of today’s economic inequality lies.
Iwould tax these asset-price gains (mainly land prices) either at the fullincome-tax rate or even higher. The wealthy 1% make their gains in this way,claiming that they don’t really “earn” income, so they shouldn’t have to paytaxes as if they are wages or profits. But that’s precisely the problem: Whywould you want to subsidize not earningincome, but merely making money by speculating – and then demanding that thegovernment bail you out if you make a capital loss when your speculations gobad, on the logic that you have tied up most peoples’ normal bank deposits inthese gambles? This is what exists today. And it is why people think the systemis so unfair. Most of the super-rich families have made their fortunes byinsider dealing and financial extraction, not by being productive. They are not“job creators” these days. They have become job destroyers by demanding austerityto squeeze out more money from a shrinking economy to pay themselves.
Manypeople – especially homeowners – are sucked into thinking that low capitalgains taxes make them rich, and that high property prices leave them with lessto spend. But this turns out not to be the case once the process works its waythrough the economy. These workings need to be more widely explained.
Formany years families got rich as the price of their home rose. But they also gotmuch deeper in debt. The real estate bubble was debt-financed. A property isworth whatever a bank will lend against it. The end result of “easy lending”and tax distortions to favor interest-bearing debt is that most families own asmaller and smaller proportion of their homes’ value – and have to pay risingmortgage debt service. This doesn’t really make them better off. The job of apresident or economic advisor should be to explain how this game works, sopeople can get off the debt treadmill. The economy will shrink if it doesn’tlower its debt overhead.
Iwould close down tax avoidance in offshore banking centers by treating offshoredeposits by Americans as “earned but hoarded” income and tax it at 90%. Yourestore the rates of the Eisenhower administration when the country had themost rapid debt growth that it had. You reinstate criminal penalties forfinancial fraud and tax evasion by misrepresentation. But the tax avoiders areasking the Obama administration to do just the opposite: to declare a “taxholiday” to “induce” them bring this offshore money home – by not taxing it atall! This kind of giveaway should be blocked. Tax avoiders among the top 1%should be penalized, not rewarded.
TheBush-Obama administration has promoted “neoliberal” tax and financial policiesthat have reversed a century of Progressive Era reforms. The past 30 years havesuffered a radical transformation of tax policy and financial policy. So ittakes an equally deep response to undo their distortions and put the Americaneconomy back on track. The guiding idea is simply to restore normalcy. TheProgressive Era that emerged from classical economics understood the economicbenefits of taxing unearned wealth (“rent extraction”) at the top of theeconomic pyramid, provide basic infrastructure services at cost rather thancreating fiefdoms for privatizers to install tollbooths and make their gainstax-exempt. Radical neoliberalism has reversed this. It has vastly multipliedthe debts owed by the bottom 99% to the top 1%.
Thisis leading to debt peonage and what really is neo-feudalism. We are seeing akind of financial warfare that is as grabbing as the old-style militaryconquests. The aim is the same: the land, basic infrastructure, and use of thegovernment to extract tribute.
Afinancial Clean Slate
Torestore the kind of normalcy that made America rich, most important long-termpolicy would be to recognize what is going to be inevitable for every economy. Debtsneed to be written down – and the politically easiest way to cut through thetangle is to write them off altogether. That would free the bottom 99% fromtheir debt bondage to the top 1%. It would be a Clean Slate, starting over –and trying to do things right this time around. The creditors have not used thebanking system to make America more productive and richer. They have used it asa vehicle to reduce the population to debt serfdom.
Adebt write-down sounds radical and unworkable, but it’s been done since WorldWar II with great success. It is the program the Allies carried out in theGerman economy in that country’s 1947 currency reform. This was the policy thatcreated Germany’s Economic Miracle. And America could experience a similarmiracle.
Anyeconomy would benefit from cancelling the bad debts that have been built up.Keeping them on the books will handcuff the economy and cause debt deflation bydiverting income to pay debt service rather than to spend on goods andservices. We are going into a new economic depression – not just a “GreatRecession” – because most spending is now on finance, insurance and realestate, not on goods and basic services. So markets are shrinking, andunemployment is rising. That is what will happen if debts are not written down.
Thiscan be done either by a Clean Slate across the board, or it can be done moreselectively, by applying what’s been New York State law since before the Revolution,going back to when New York was still a colony. I’m referring to the law of fraudulent conveyance. Thislaw says that if a creditor lends to a borrower without having any idea how thedebtor can pay in the normal course of business, without losing property, theloan is deemed to be fraudulent and declared null and void.
Applyingthis law to defaulting homeowners would free the homes that are in negativeequity throughout the country. It would undo the fraudulent loans that bankshave made, the trick loans with exploding interest rates, balloon mortgages andso forth. It also would free debt-strapped companies from being forced to selloff their parts to make their corporate raiders rich.
Asan associated law, pension funds should be first in line in any bankruptcy, notat the end of the line as they now are. Current practice lets companies replacedefined-benefit programs with defined contribution programs – where all that employeesknow is how much is taken out of their paychecks each month, not what they willbe receiving when they retire. Only the managers have protected their pensionswith special contracts and golden parachutes. This is the reverse of whatpension plans were supposed to do.
EmployeeStock Option Plans (ESOPs) also are being looted. This is what has recentlyhappened at the Chicago Tribune by Sam Zell, who borrowed money and repaid itby looting the Tribune’s ESOP. A fraudulent conveyance law applied at thenationwide level would stop this. People like Zell are looters, and so are thebankers behind him. This is the class warfare that is being waged today. Andthe war is being won by the 1% – while pushing the American economy intodepression.
Aspart of the rules to define what constitutes “fraudulent” or irresponsiblelending, mortgage debt service should be reduced to the rate that FDIC headSheila Bair recommended: 32 percent. The problem with debt write-downs, ofcourse, is that when you cancel a debt, you also cancel some party’s savings onthe other side of the balance sheet. In this case, the banks would have to giveup their claims. But this is what used to happen in financial crashes. Whendebts go bad, so do the loans. So the government is radical in saying thatAmerica’s debts will be kept on the book, but it will create new public debt togive to Wall Street for its own debts that have gone bad as a result of itsreckless lending.
Thebanks obviously would prefer to bankrupt millions of homeowners than to takeeven a penny’s loss. Their fight to make the government pay for their bad debts– while keeping the debts of the bottom 99% on the books – explains why therichest 1% of Americans have doubled their share of income and the returns towealth in the last thirty years. That’s inequitable. Their accumulation offinancial savings has not taken the form of tangible capital investment infactories or other enterprises to employ labor. It’s looted labor’s savings andgot employees so deep into debt that they’re “one paycheck away fromhomelessness.” They’re afraid to go on strike, because they would miss amortgage payment or an electric utility payment, and their credit-card interestrates would jump to 29 percent. They’re even afraid to complain about workingconditions today, because they’re afraid of getting fired.
Thiswasn’t formerly the case. It is the result of “financial engineering” thatshould be reversed. There’s no reason to treat the savings that the top 1% havegot in this predatory way as being sacrosanct. Their gain – their increase infinancial wealth, in bonds, savings and ownership of bank loans – equals thedebts that have been imposed on the bottom 99%. This is the basic equation thatneeds to be more widely understood. It is not an equilibrium equation. Atleast, it won’t be political equilibrium when people start to push back.
Weare seeing a financial grab for special privilege and for political power touse the government to subsidize the top 1% at the expense of the bottom 99%, byscaling back social spending, Social Security, Medicare, Medicaid and federalrevenue sharing with the states. The Treasury and Federal Reserve have printednew debt to give to Wall Street – some $13 trillion and still counting sinceLehman Brothers went under in September 2008. Tim Geithner and Hank Paulsonused the crisis as an opportunity to give enormous U.S. debt to Wall Street.That’s more radical than reversing this to restore the economy’s financialstructure to the way it used to be. If you don’t restore it, you’ve replacedeconomic democracy with financial oligarchy.
Theway to reverse this power grab is to reverse the giveaways by cancelling thebad debts that have been loaded onto the economy. That is the only way torestore balance and prevent the polarization that has occurred. The problem isthat savings by the top 1% have been used in a parasitic, extractive manner. Ithas been lent to the bottom 99 percent to get them deeper and deeper into debt.So they “owe their soul to the company store,” as the song Sixteen Tons put it.“You get a day older, and deeper in debt.”
Thegovernment itself has become more indebted, most recently by the $13 trillionin new debt printed and given to the banks to make sure that no financialgambler need surfer a loss. At the same time the Obama administration did this,it claimed that a generation in the future, the Social Security system may be$1 trillion in deficit. And that, Mr. Obama says, would cause a crisis – andnot leave enough to continue subsidizing his leading campaign contributors. Soin view of this new debt creation – while moving debts to consumers and SocialSecurity contributors to the bottom  ofthe list – if you are going to reverse the bad-debt polarization that we’vereached today, it is necessary to do more than simply reinstate progressivetaxation and shift the tax system so that you collect predatory unearned income– what the classical economists call economic rent. The burdensome debts needto be written off.
Thisprobably will take half a year to get most people to realize and accept theidea is to reconstitute the system by lending for productive purposes, notspeculation and rent-seeking opportunities. You want to stop the banks fromlobbying for monopolies to create a market for leveraged buy-outs of theseopportunities – and of course also for real estate speculation and outrightgambling.
WallStreet has orchestrated and lobbied for a rentieralliance whose wealth is growing at the expense of the economy at large. It isextractive, not productive. But this fact is concealed by the national incomeand product accounts reporting financial and other FIRE sector takings as“earnings” rather than as a transfer payment from the economy at large – from the 99% – to the 1% of Americanswho have got rich by making money off finance, monopolies and absentee realestate rent-seeking.
Itis not really radical to resist Wall Street’s financial attack on America.Resistance is natural – and so is a reversal of the savings they have built upby indebting the rest of the economy to themselves. They have taken their moneyand run, stashing it offshore in tax-avoidance islands, in Switzerland, Britainand other havens. Shame on the political hacks who defend this and who attackOccupy Wall Street simply for resisting the financial sector’s own radicalpower grab and shifted taxes off themselves onto the bottom 99%.
Privatizationis an asset grab masquerading as full employment policy

AlanMinsky: I haveone final question for you. Would you support programs that are put forwardsimilar to what Randy Wray, an associate of yours, suggests in terms ofgovernment employment projects to guarantee full employment?

MichaelHudson: Yes, ofcourse I approve. In fact, it was I who introduced Randy, Pavlina Tchernova andothers to Dennis Kucinich’s staff to help write his full-employment proposalalong these lines. My first caveat is to warn against letting the Obamaadministration turn these projects into a military giveaway. I think Randy andI are in agreement with that.
Mysecond caveat is to prevent this full-employment program from creating a laterprivatization giveaway to Wall Street – that is, infrastructure that thegovernment will sell off to the ruling party’s major campaign contributors forpennies on the dollar. This is what Public/Private Partnerships have become, aspioneered in England under Margaret Thatcher and Tony Blair. Wall Street isrubbing its metaphoric hands and saying, “That’s a great idea! Let thegovernment pay for infrastructure and spend a billion dollars on a bridge – andthen sell it to us for a dollar.” The “us” may not be the banks themselves, buttheir customers, who will borrow the money and pay the banks an underwritingcommission as well as interest on the money they use to buy what the governmentis privatizing.
Thepretense is that privatization is more efficient. But privatizers add oninterest and financial fees, high executive salaries and bonuses, and turn theroads into toll roads and other infrastructure into neofeudal fiefdoms tocharge monopolistic access fees for people to use. This is what has happened inChicago when it sold off its sidewalks to let bankers finance parking meters inexchange for a loan. Chicago needed this loan because the financial lobbyistsdemanded that it cut taxes on commercial real estate and on the rich. So thefinancial sector first creates a problem by loading the economy down with debt,and then “solves” it by demanding privatization sell-offs under distressconditions.
Thisis happening not only in America, but in Greece and other countries under theinsistence of Europe’s bank lobbying organization, the European Central Bank.That’s why there are riots in Athens. So the financial war against society isnot only being waged here, but throughout the world.
Toanswer your question about how best to promote full employment, the aim shouldbe to invest public money in a way that the Republicans and Democrats cannot laterturn around and privatize the capital investment at a giveaway price. So I amall on favor of public infrastructure spending as long as you have safeguardsagainst the financial fraud and giveaways to insiders of the sort that that thecurrent administration is sponsoring. The privatizers and their banks would liketo install tollbooths on new bridges and get a free ride to turn America into atollbooth economy. But that’s really another story.

AlanMinsky: MichaelHudson, I want to thank you for joining us on KPFK.

Michael Hudson
:Thanks a lot, Alan.

What the eurozone needs is functional finance

By Fadhel Kaboub.
(Also featured in the Financial Times)

Sir, The eurozone’s obsession with “sound finance” is the root cause of today’s sovereign debt crisis. Austerity measures are not only incapable of solving the sovereign debt problem, but also a major obstacle to increasing aggregate demand in the eurozone. The Maastricht treaty’s “no bail-out, no exit, no default” clauses essentially amount to a joint economic suicide pact for the eurozone countries.

The eurozone needs a functional finance approach to economic policy, which requires that the European Central Bank, as the monopoly issuer of the currency, acts as a lender of last resort to allow the expansion of aggregate demand through government spending. The ECB’s refusal to use its firepower is what is driving eurozone bond yields to unsustainable levels. The ECB can easily purchase Italian debt to lower yields, but such action would constitute a violation of Article 123 of the European Union treaty. Unfortunately, the likelihood of a swift political solution to amend the EU treaty is highly improbable. Therefore, the most likely and least painful scenario for Italy (Greece, Portugal, Spain etc) is an exit from the eurozone combined with partial default and devaluation of a new national currency.It has been fascinating to watch the entire world turned upside down during the past few weeks over the eurozone’s self-inflicted economic pain – the same pain that so many developing countries have suffered under the Washington consensus austerity measures and sound finance principles.

The takeaway lesson is that financial sovereignty and adequate policy co-ordination between fiscal and monetary authorities are the prerequisites for economic prosperity. In the end, what matters is not the level of the deficit or the national debt, but rather their effects on employment, price stability and economic growth.

Dr. Fadhel Kaboub, Assistant Professor of Economics, Denison University, Granville, OH, US

Response to MMP Blog #24: Foreign Holdings of Government Blogs

Thanks for comments. I’ll return to posting the questionsand my responses this week.
Q1: What about the Chinese or others buying US assets withthe dollars they have credited to their accounts.  They could have controlof US corporations which wouldn’t sit well with the US electorate.
A: I recall the exact same “yellow peril” arguments in the1980s when the Japanese were “buying up” Hawaii and NYC. Look, once they buy USassets they are subject to US laws. If we don’t like what they are doing with“their” property, we change the laws. In truth, is it worse to be subject tothe whims of a convicted criminal like Michael Milken engaged in LBOs thatenable him to downsize workers and strip off assets; or to a Japanese orChinese firm that has a long-term interest in producing autos in Georgia? Iguess it is a toss-up. In any case, most of the Chinese “dollars” are safelylocked up at the Fed, either in the form of reserves or US Treasuries. They getno obvious advantage from that ownership except whatever advantages TreasurySecretary Geithner wants to give to them.
Q2: What do you make of the idea that a weaker dollar would be good for oureconomy because it’d make it less attractive to export American jobs andpossibly bring some back? Would the positive effects of this offset thenegative effects of more expensive oil and imports?
A: Estimates of trade benefits of dollar depreciation arealmost certainly overstated. First, many of our trading partners “peg” to thedollar—depreciation has no effect at all on them. Second, those that don’t peg arewilling to take lower profits (hold dollar prices steady) to keep market share(this has been the Japanese strategy). Third, exports are a cost, imports abenefit so trying to maximize a trade surplus is a net cost maximizingstrategy; ergo: just plain dumb. Fourth, forget those old, 19thcentury factory jobs. They ain’t coming back, and good riddance. Today low wageworkers in developing nations will take them; tomorrow they’ll all be done byrobots who don’t mind hard work for zip wages. Alternative: create good payingjobs in good working conditions right here in the good ol’ US of A.
Q3: When foreign central banks purchase U.S. dollars, howdoes the accounting go from their perspective? Do they mark up U.S. dollars onthe asset side of their balance sheets and issued money on the liability side?Does this lead to increase of reserves in the domestic banking system, and theyhave to issue equivalent amount of bonds to accomodate this? So export ledgrowth, with undervalued exchange rate would still lead to increase in publicdebt even when government’s budget was balanced? And if foreign central bankshold foreign money on the asset side of their balance sheets and domesticcurrency on their liability, aren’t they exposed to huge losses if exchangerates change?
A: Not sure I got all of this, but let’s give it a go.Typical case: a country (say, China) exports goods to the US. Its exportersearn dollars but need RMB (to pay workers, buy raw materials, service debt).Their bank credits their deposit account with RMB, central bank of Chinacredits the bank’s reserves in RMB. So the dollar reserves end up at Bank ofChina (asset of Bank of China, liability of Fed). Bank of China says “hey,these suckers earn zero interest; I want Treasuries” so Fed debits theirreserves and credits Bank of China with Treasuries. Impact in the US: some USbank’s reserves are debited, Bank of China’s reserves credited. No change oftotal reserves until Bank of China buys Treasuries. At that point the reservesdisappear, Fed’s liability to China reduced, Treasury’s liability to Chinaincreased. No necessary impact on the dollar/RMB exchange rate since theexports sold and imports bought were voluntary, and China only exported becauseshe wanted dollars (reserves, then Treasuries). The next question always is:but what if China decides to run out of the dollar and dumps Treasuries? Ok, ifthat happened there could be depreciation pressure on the dollar; in which caseChina loses since its dollar assets decline in value relative to RMB.Fortunately, China is not as dumb as those posing the scenario. It will not runout of dollars in part because it does not want dollar depreciation.
Q4: This discussion gets to the heart of another question Ihave regarding the MMT proposition that tax liability is the main reason usersvalue a fiat currency. As there are considerably more dollars held abroad as ahedge against currency runs and also as banking reserves to underpin intltrade, it would seem that foreigners value the dollar and yet have no taxliability to the US government. How does this square with the MMT claim? Thisalso brings to mind another nagging suspicion that MMT focuses too much onnominal values and not on the real value of the supply of goods and servicesthat underpin the currency. My guess is that Chinese sovereign funds will seekdiversification out of dollar reserves by exchanging them fordollar-denominated real assets.  Barron’shad an article this week that suggests the Chinese govt. will also promote intltrading in yuan to compete with the dollar.  I could see how exchangemarkets with competing currency bloc issuers could provide the constraints onpolicy abuse of fiat currency values – a collapsing exchange rate is a highlyvisible market indicator.
A: Ok: 1. At the extreme, if we impose a $2 trillion taxonly on Bill Gates, you can be sure that others will take dollars because poorBill will work hard for us to pay his tax in dollars. This is a red herring. Wedo not need to tax all 6 billion people in the world to ensure a global demandfor dollars. Tax about 300 million relatively wealthy Americans and you can besure dollars will be demanded outside the US. Because Americans want them topay taxes. Ever hear of the “margin”? Here is one place it works. Tax on themargin and you drive a currency. 2. MMT focuses too much on nominal? Hey, MMTis “modern money theory”. Money. So yes, it is focusing on money. Nominal. Wecould focus instead on the aesthetic value of nose jobs. Then we would call itmodern nose jobs theory: MNJT. In any case, like it or not, we live in amonetary economy. Monetary production economy. Capitalist economy. Choose yourterms. Money matters. 3. Barron’s? Give me a break. That is your source ofanalysis? Read more MMP, less Barron’s. More seriously: China will become thebiggest economy in the world within 5 years. Its currency will likely replacethe dollar in 50. Maybe sooner. Don’t hold your breath.
Q5: To what extent do foreign countries other than Chinahold US dollars as a way to protect their own currencies? Even if not directlypegged to the dollar, don’t many hold dollars to support their currencies in fxmarkets? If China suddenly desired to hold fewer dollars and started to dumptheir US bonds, wouldn’t the weakening of the dollar that might result causeall those other countries to buy more dollars to build back adequate reserves?And wouldn’t that demand tend to support the dollar’s value? In effect won’tevery country that uses dollars to protect its own currency automatically actto protect the value of the dollar as well? If the dollar were to be suddenlydevalued for whatever reason, is their any other stable currency that couldplausibly be used instead by countries that now use US dollars to protect theirown? I can’t imagine Euros or Yuan being very attractive …
A: So many questions, so little time. However, much of thisanswered above. Yes, many hold dollars to enable them to manage or peg theircurrencies. Holdings increased after the Asian Tigers’ crisis, when nationscame to realize you need an unassailable reserve if you are going to peg. Chinalearned it well. Does it increase demand for dollars. As Sarah would say, “youbetcha”. Does devaluation lead to capital losses? Yep. Is there any alternativenow? Nope. You can’t get safe euro debts in sufficient quantity. Oh, sure youcan buy the debts of PIIGS. Go ahead, they need your help. Germany is a netexporter and the model of fiscal rectitude, so you can’t get their euro debt.So euro is a no-go. RMB? No way. Ditto. It is a better Germany than Germany is.Japanese Yen? Exporter. As an exporter it creates sufficient domestic saving toabsorb its large government debt. TINA: there is no alternative to the dollar.Today.
Q6: Okay, I’ve been waiting for these posts for some time. Idon’t know how much of the below question you will deal with in next weekspost, so maybe its best if you ignore the parts of the questions that will bedealt with. (1) You mention Japanese domestic saving. Can we just confirm onceand for all that the high rates of domestic saving in Japan are the result oflarge government deficits and little of this ‘leaking’ abroad due to theirrunning current account surpluses? And can we surmise from this that Japanesesavings rates are largely determined BY the government deficits? — hence, it’sthe deficits that ’cause’ the savings and not the savings that ‘allow’ thedeficits. Sorry, I know I’ve been pressing this point for  while on here.But I’d like it ‘in stone’, as it were. (2) In what way does what you say abovetie into the Hudson/Varoufakis ‘dollar hegemony’ argument? I.e. the argumentthat the US occupies a ‘special position’ due to its post-war status thatallows it to have its currency accepted by others to an extent that no othersovereign can? The kicker here would be that, if there is truth to thisargument the US might not like the prospect of currency devaluations not justfrom the perspective of Wall Street, but also for geopolitical and military(read: imperial) reasons.
A: Thanks for the patience! Japanese gov’t deficits +current account surpluses = large domestic savings. By identity. Yes. Yen forYen. Causation goes from spending to income to saving; or from injections toleakages, in the normal Keynesian way. Some in US would like dollardepreciation (exporters); some would like appreciation (tourists, and yourstruly). The US is special. It has more nukes than anyone else and has shown theworld it is willing to use military might. That was not post-war, it was war. That’sreal hegemony, not merely dollar hegemony. Nuclear hegemony will trump currencyhegemony, I think.
Q6a: Question (1a) — well stated! Let me try to summarize– and add a third alternative: Which view is “best”? * Conventionalview — loanable funds: “private savings allow governmentdeficits” * Philip’s suggestion: “government deficits’cause’ private saving”, or alternatively “private saving isdetermined by government deficits” * Keynes/Godley view ( understood by Hugo): Increased private saving constitutes a demand leakage,since private spending decreases. Private saving decisions thereby ‘lead’ thegovernment into deficit. Because if the government does not go into deficit (toaccomodate for the private saving intentions) the economy will slow down (dueto the decreased private spending). So: “private saving behaviour’leads’ government deficits” or alternatively “governmentdeficits ‘allow’ private saving” Philip, is that a reasonable way toformulate your question (1a)? (Question (1b) would then be the question on whyso few foreigners hold Japanese bonds — is it due to Japanese current accountsurpluses?)

A: Always takes two to tango. By construction, modern government budgetaryoutcome is accommodative—taxes fall and spending rises in downturn. Thedownturn, in turn, can be thought of as resulting from inadequate aggregatedemand which leads to a reluctance to spend. That in turn results from apreference for saving and especially in liquid form. Ergo: private sector wantsto net save in government IOUs, so won’t spend, so a deficit results to satisfythe saving desire. To be sure, causation is always complex but that is a roughand ready explanation.

 Q7: Pretty much.Randy has said many times before that government spending = private savingdollar for dollar. I just want to know if he thinks the case of Japan is aconcrete example of this. Its just a very concrete argument to make against the’Japan is because of high savings’ types. “No,” you’d respond,”Their savings are DUE TO high deficits coupled with trade surpluses! Thegovernment bonds just mop this up. Hence the perpetually low interestrates.”
A: Both. Japan has an inadequate safety net in conjunctionwith 2 decades of recession. Perfectly rational to save. That generates lowgrowth and hence budget deficit. However, since the saving cannot occur unlessthe budget deficit occurs (and trade surplus) it makes sense to say thedeficits allow the desired saving to be realized.
Q8: Could the government be compelled to raise taxes, afterissuing so much bonds, paying so much interest, that bond holders becomenervous and suddenly rush to buy actual stuff (mines power plants, whatever)before inflation and currency depreciation occur ? As the US dollar shift awayfrom international reserve currency status, isn’t a harsh inflation to beexpected ? How to deal with it? When governments lended to banks in 2008, werethey compelled to do so because the massive losses demanded reserves to payright away (or go bankrupt) to an amount exceeding what central banks had intheir balance sheet ? Have we figures saying just that ? Otherwise why wouldgovernments act as Lender of Last Resort and humiliating central banks whopretended to be the ultimate guarantee of the monetary system ? (Yep I was theguy sending an e-mail entitled Lender of Penultimate Resort, I hope I”m nottoo pressing 😀 )

A: In a sovereign country, taxes create a demand for thecurrency and they drain income and thus reduce demand, which can be useful ifthere is inflation pressure. Obviously that is not the problem in recent years.So, no, there is no reason to raise taxes after the bail-out. The US dollar isnot shifting away from international reserve status. Have you been watchingEuroland? There will be a huge euro bond sell-off and a run into US Treasuries.Buy them now before Europe gets all of them. Why did the Fed bail-out WallStreet? Because Bob and Hank and Timmy came from Wall Street to save GovernmentSachs. Not sure it is humiliating, but it certainly is a scandal. Worst inhuman history.
Q9: As far as exchange rates go, context matters.Switzerland is actually rather unhappy about the fact that the CHF rose so muchrelative to EUR in the recent crisis, to the point where their central bankdecided to put a limit on how high the CHF can go. They want to protect theirtourism and export industries. Similarly, it seems to me that a depreciation ofthe USD wouldn’t necessarily be bad for the US. At least, I often read UScommentators complain about the perceived de-industrialization of the US comparedto the rest of the world. A falling USD could certainly help make production inthe US more attractive again, couldn’t it?
A: Again, depends on which American you are. Estimates ofpositive trade effects are almost certainly overstated for the US. For acountry like Italy, depreciation could have a nontrivial effect within Europe.Of course, it cannot do that until it leaves the euro and returns to the Lira. Noone is going to peg to an Italian Lira. So depreciation does increase exports.Given that most countries constrain demand, exporting is a lot like payingpeople to dig holes. It provides jobs devoted to waste. Exports mean youproduce things you don’t get to consume. Pure waste—might as well just dig theholes, unless workers prefer making Fiats they don’t get to drive. The US wouldbe far better off if it exported nothing, imported loads of stuff, and operatedat full employment. Not digging holes but rather doing useful and fun stuff.

Beyond Zuccotti Park

By Mitch Green

Yesterday, under the cover of darkness, Bloomberg ordered the eviction of Occupy Wall Street from their encampment at Zuccotti Park.  Despite an injunction to block the action, the city went forward with its plans to clear the space of occupiers.  The legal showdown between OWS and Bloomberg’s New York culminated in Judge Michael Stallman’s ruling that tents will no longer be permitted in the park overnight, effectively ending the ongoing occupation at this location.

While many view the eviction as emblematic of the modern police state and its imperative to suppress dissent, others see the city and Brookfield Properties as relatively tolerant.  Apparently NYC landlords have little patience for those that challenge the sanctity of their property, making John Zuccotti and Brookfield seem quite charitable.

Continue reading

European Debt Crisis

Roundtable Discussion


Special Post-Program Workshop for Teachers:
Teaching Applications for the Secondary Classroom


Roundtable Panelists
John Keating
Associate Professor, Department of Economics, KU

Stephanie Kelton
Associate Professor, Department of Economics, University of Missouri-Kansas City

Robert Rohrschneider
Sir Robert Worcester Distinguished Professor in Public Opinion and Survey Research, Department of Political Science, KU
Victor Bailey
Charles W. Battey Distinguished Professor of Modern British History, Department of History, and Director, Hall Center for the Humanities, KU

Roundtable Discussion

Thursday, Nov. 17, 3:30-4:30
Alderson Auditorium, Kansas Union


Teacher Workshop

4:30-5:30, Curry Room, Kansas Union
 Participate in a discussion of the Roundtable and receive
free teaching materials and refreshments.
Sponsored by the KU Center for Economic Education


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Eurpean Debt Crisis Roundtable
Sponsored by: 

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Best Satire of Faux Austrian Economics Ever

Someone has created a fabulous, richly detailedparody of Austrian economics.  They callit The Daily Bell and claim that itsperspective reflects Austrian economics. In reality, it satirizes faux Austrian economics’ sycophancy towardelite white-collar criminals. 
I was delighted to learn that they used my recentcolumn: The Virgin Crisis: Systematically Ignoring Fraud as a Systemic Risk as the vehicle for their send-up.
The send-up captures precisely faux Austrianeconomists’ disdainful response to adverse data – they ignore it. 
The article hits its peak in capturing the servileapologies that Austrian economists offer in defense of the elite white-collarcriminals who make a mockery of Austrian claims of “free markets.”  The satirist emphasizes the Austrians’hypocrisy (they love police enforcing a “rule of law” and “property rights”against blue-collar folks), by calling the FBI the “Stasi” (the East German’ssecret police) when they enforce the rule of law and property rights againstelite white-collar criminals.  Thesatirist then mocks the Austrians by picturing them as eager to prevent theimprisonment of elite white-collar felons. Faux Austrian economists’ heroes have always been elite felons.  The author of the satire ridicules theJustice Department’s (DOJ) abject failure to investigate, much less prosecute,the elite felons of finance that drove our ongoing crisis.  He skewers DOJ for going AWOL during thiscrisis by employing over-the-top mockery. The author states that DOJ is so effective in prosecuting the elite white-collarcriminals that drove this crisis and sanctions them so viciously that they havecreated an ever-expandinggulag of slave-laborers.”  One man’s“Club Fed” is a faux Austrian’s “gulag.” The reality, of course, is that no Wall Street bankster inhabits thisnon-existent white-collar gulag.  Thatgap between reality and the hysterical claims of tortured banksters is whatmakes the passage hilarious.
The authorof the satire of Austrian economics uses the nom de plume of Anthony Wile, which is a fabulous insiderjoke.  The real Anthony Wile was theinfamous subject of an SEC action for securities fraud.  What a brilliant conceit – assuming the nameof a man identified by the SEC as one of the perpetrators of a crudewhite-collar fraud to advance the proposition that only fascists wouldprosecute elite white-collar frauds. Here are the lowlights of what the SEC investigation of the real AnthonyWile and his colleagues found:


Litigation Release No. 21696 / October 15, 2010

Securities and Exchange Commission v. Brian N. Lines, Scott G.S. Lines, LOM (Holdings) Ltd., Lines Overseas Management Ltd., LOM Capital Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Cayman) Ltd., LOM Securities (Bahamas) Ltd., Anthony W. Wile, Wayne E. Wile, Robert J. Chapman, William Todd Peever, Phillip James Curtis, and Ryan G. Leeds, 1:07-CV-11387 (DLC) (S.D.N.Y., filed Dec. 19, 2007)

Court Enters Final Judgments against Brian N. Lines, Scott G.S. Lines, Anthony W. Wile, Wayne E. Wew (formerly Wayne E. Wile), Lines Overseas Management Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Bahamas) Ltd., LOM Securities (Cayman) Ltd., and LOM Capital Ltd. in Market Manipulation Case

The Securities and Exchange Commission today announced that the Honorable Denise Cote of the United States District Court for the Southern District of New York entered judgments of permanent injunction and other relief against Brian N. Lines, Scott G.S. Lines, Anthony W. Wile, Wayne E. Wew, Lines Overseas Management Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Bahamas) Ltd., LOM Securities (Cayman) Ltd., and LOM Capital Ltd. on October 15, 2010. (The LOM companies collectively are referred to hereinafter as the “LOM Entities”). All of the foregoing defendants, with the exception of LOM Securities (Bahamas) Ltd. and LOM Securities (Cayman) Ltd., were enjoined by the Court from violating certain of the antifraud provisions of the federal securities laws, as described below. The Court also ordered broad ancillary relief against the defendants, including as to certain defendants, disgorgement, civil money penalties, and compliance with undertakings to not trade in penny stocks quoted on certain U.S.-based electronic quotation services and, for the LOM Entities, to not maintain accounts for U.S.-resident customers. Brian and Scott Lines and the LOM Entities were ordered to disgorge over $1.9 million in profits and prejudgment interest and pay civil penalties totalling $600,000.

Without admitting or denying the Commission’s allegations, the defendants consented to the entry of the judgments against them. These judgments resolve the Commission’s claims against these defendants in a civil action that was filed on December 19, 2007, in which the Commission alleged that that these defendants had participated in a fraudulent scheme to manipulate the stock price of Sedona Software Solutions, Inc. (“SSSI”), and, except for Wile and Wew, also had participated in a second stock manipulation scheme involving SHEP Technologies, Inc. (“SHEP”) f/k/a Inside Holdings Inc. (“IHI”).

In addition to entering permanent injunctions, the Court ordered Brian and Scott Lines, who are brothers and during the relevant time were the controlling persons of the LOM Entities, to pay, jointly and severally with the LOM Entities, disgorgement of $1,277,403, prejudgment interest of $654,918. The Court also imposed civil penalties in the following amounts: $450,000 for the LOM Entities, $100,000 for Brian Lines; and $50,000 for Scott Lines. In addition to entering permanent injunctions against Anthony Wile and Wayne Wew, the Court ordered Wile to pay a civil penalty in the amount of $35,000, and Wew to disgorge approximately $8000 and pay a $10,000 civil penalty.
In its Complaint in the civil action, the Commission alleged that, in early 2002, Brian and Scott Lines assisted two LOM customers, defendants William Todd Peever and Phillip James Curtis, to secretly acquire a publicly-traded OTCBB shell company named Inside Holdings, Inc. (“IHI”). Peever and Curtis then arranged for a reverse merger of IHI with SHEP Ltd., a private company that purportedly owned certain intellectual property. Peever and Curtis paid three touters to publish a series of highly positive reports recommending investments in the newly-merged entity, SHEP Technologies, Inc. The Commission’s complaint alleged, in pertinent part, that during the first half of 2003, Peever, Curtis, and the Lines brothers sold over three million SHEP shares into this artificially-stimulated demand in an unregistered distribution of SHEP stock. As part of the alleged scheme, the Lines brothers, Peever, and Curtis failed to file required reports regarding their beneficial ownership of IHI and SHEP stock, and Brian Lines caused several false reports to be filed with the Commission in order to conceal that Peever and Curtis, among others, owned substantial positions in, and had been selling, SHEP stock.

As further alleged in the Commission’s Complaint, in late 2002, Anthony Wile and another individual formed Renaissance Mining Corporation (“Renaissance”) and thereafter engaged in substantial promotional activities that created the misleading impression that Renaissance had acquired three Central American gold mines and was the “Leading Gold Producer in Latin America.” In fact, Renaissance had only executed a non-binding Letter of Intent to acquire those mines and lacked the funding necessary to consummate the acquisition. The Complaint further alleges that Wile acted in concert with the Lines brothers, who acquired a publicly-traded shell, Sedona Software Solutions, Inc., using LOM accounts in the names of nominees to disguise their ownership of the Sedona shell, as part of a plan to merge Sedona with Renaissance.

The Complaint alleges that, in early 2003, Wile and his associate primed the market for Renaissance/Sedona by disseminating materially false and misleading information that misrepresented the ownership of the gold mines and created the impression that the Renaissance/Sedona merger had been completed. Wile and his associate also arranged for the Renaissance/Sedona offering to be touted to prospective investors by Robert Chapman, the publisher of an on-line investment newsletter, and three other newsletter writers, all of whom purchased Renaissance shares for nominal sums. Through this deceptive promotional campaign, Wile and his associate informed the market that there would be an opportunity to invest in Renaissance by acquiring Sedona stock at approximately $10 per share beginning on January 21, 2003.

According to the Complaint’s allegations, on that date, Wile orchestrated a pre-arranged manipulative trade between his uncle, defendant Wayne E. Wile (who subsequently changed his name to Wayne Wew), and Brian Lines to artificially drive up the price of Sedona stock from $.03 per share to over $9.00 per share and stimulate trading in the stock. The Complaint alleged that Scott Lines solicited investors, including at least one LOM customer in the United States, to purchase Renaissance stock in anticipation of the merger between Renaissance and Sedona, without disclosing that he and Brian Lines owned the Sedona shell corporation. The Complaint further alleged that, after Renaissance and Sedona had announced their pending merger, the Lines brothers sold 143,000 shares of Sedona stock in an unregistered distribution to numerous public investors at between $8.95 and $9.45 per share, reaping over $1 million in illegal profits. On January 29, 2003, the Commission suspended trading in Sedona’s stock.

Final judgments were entered by the Court against each defendant and provide the following relief, respectively:

(i) Brian Lines is permanently enjoined from violating the antifraud, securities offering registration, and securities ownership disclosure provisions of the federal securities laws, Sections 5 and 17(a) of the Securities Act of 1933 (“Securities Act”) and Sections 13(d) and 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 13d-1, 13d-2, and 16a-3 thereunder; (2) ordered to pay disgorgement, jointly and severally with Scott Lines and the LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $100,000; and (4) ordered to comply with an undertaking to not trade for a period of three years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File;
(ii) Scott Lines is permanently enjoined from violating the antifraud, broker-dealer registration, securities offering registration, and securities ownership disclosure provisions, Sections 5 and 17(a)(2) and (3) of the Securities Act and Sections 13(d), 15(a), and 16(a) of the Exchange Act and Rules 13d-1, 13d-2, and 16a-3 thereunder; (2) ordered to pay disgorgement, jointly and severally with Brian Lines and the LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $50,000; and (4) ordered to comply with an undertaking not to trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File;
(iii) Lines Overseas Management Ltd. is permanently enjoined from violating the antifraud, securities offering registration, and securities ownership disclosure provisions, Sections 5 and 17(a)(2) and (3) of the Securities Act, and Section 13(d) of the Exchange Act and Rules 13d-1, 13d-2, and 16a-3 thereunder; (2) ordered to pay disgorgement, jointly and severally with Brian Lines, Scott Lines and the other settling LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $450,000, jointly and severally with the other settling LOM Entities; and (4) ordered to comply with an undertaking to: (a) not trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File; (b) not accept or maintain any account for or on behalf of any United States customer for a period of two years; and (c) hire an independent consultant for two years to monitor compliance with these undertakings;
(iv) LOM Capital Ltd. and LOM Securities (Bermuda) Ltd. are permanently enjoined from violating the antifraud and securities offering registration provisions, Sections 5 and 17(a)(2) and (3) of the Securities Act and, in addition, LOM Securities (Bermuda) is permanently enjoined from violating the broker-dealer registration provision, Section 15(a) of the Exchange Act; (2) ordered to pay disgorgement, jointly and severally with Brian Lines, Scott Lines and the other settling LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $450,000, jointly and severally with the other settling LOM Entities; and (4) ordered to comply with an undertaking to: (a) not trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File; (b) not accept or maintain any account for or on behalf of any United States customer for a period of two years; and (c) hire an independent consultant for two years to monitor compliance with these undertakings;
(v) LOM Securities (Bahamas) Ltd. and LOM Securities (Cayman) Ltd. are permanently enjoined from violating the securities offering registration provision, Section 5 of the Securities Act; (2) ordered to pay disgorgement, jointly and severally with Brian Lines, Scott Lines and the other settling LOM Entities, in the amount of $1,277,403, plus prejudgment interest thereon in the amount of $654,918; (3) ordered to pay a civil penalty in the amount of $450,000, jointly and severally among the settling LOM Entities; and (4) ordered to comply with an undertaking to: (a) not trade for a period of two years in penny stocks that are quoted or displayed on the OTC Bulletin Board Montage, Pink Sheets, or the ArcaEdge Electronic Limit Order File; (b) not accept or maintain any account for or on behalf of any United States customer for a period of two years; and (c) hire an independent consultant for two years to monitor compliance with these undertakings;
(vi) Anthony Wile is permanently enjoined from violating the antifraud and securities offering registration provisions, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 5 and 17(a) of the Securities Act; (2) ordered to pay a civil penalty in the amount of $35,000; (3) barred from serving as an officer or director of a public company for a period of five years; and (4) barred from participating in an offering of penny stock for a period of three years;
(vii) Wayne Wew (formerly Wayne E. Wile) is permanently enjoined from violating the antifraud provisions, Sections 17(a)(2) and (3) of the Securities Act; (2) ordered to pay disgorgement in the amount of $5,422, plus prejudgment interest thereon in the amount of $2,608; and (3) ordered to pay a civil penalty in the amount of $10,000.

As part of a global settlement with the LOM Entities, Brian Lines, and Scott Lines, the Commission agreed to dismiss with prejudice the pending civil enforcement action against LOM Holdings Ltd., which is the parent holding company for the LOM Entities.
The Court previously had entered permanent injunctive relief against defendants Peever, Curtis, and Chapman. The Commission’s claims for monetary relief against those defendants remain pending before the Court.

For additional information, please see Litigation Releases Nos. 20407 (Dec. 17, 2007); 20733 (Sept. 22, 2008); and 21577 (June 28, 2010).”
The faux Austrian satirical web site uses thispathetic episode as another opportunity for humor when it presents a faux bioof the not-as-wily-as-he-thought Wile: 
“He has put thisknowledge to good use, working with top mining executives and ventureentrepreneurs to generate some of the most successful business efforts of the2000s.” 
There is a similar gem prominently featured on theweb site: the admonition that the key to a successful society is “personalaccountability.”  What a perfectaccompaniment to an article demanding that the elites who grew wealthy throughfraud not be prosecuted.  The satiristhas a great gift for irony.
Prior variants of Wile’s website contained thisdefense of Wile.
(accessed 11/13/2011)
“In 2000, Wile experienced a brief role as the CEO of astart-up junior mining company that became the subject of a civil attack by theSEC. Wile and others fought for more than seven years at greatpersonal and financial expense before eventually settling the case withoutadmitting any wrongdoing. The assets of the company in question weresubsequently purchased by a New York Stock Exchange listed company and theproperties have now produced more gold than was initially suggested. Hundredsof investors lost literally tens of millions in deserved future profits becausethe SEC accused the company of over-promising a merger that was actually takingplace. Perhaps this experience adds to Wile’s fervor to expose the power eliteand their societal manipulations.”
 [Perhaps? This is supposed to be Wile’s web site. Why is Wile guessing at the source of Wile’s “fervor?”  For that matter, why is Wile referring tohimself as “Wile” rather than “I?”  Whyaren’t Wile’s actions (as found by the SEC staff’s investigation) nasty“societal manipulations?”  Why isn’t Wilepart of the “power elite?”  Note that theSEC’s characteristic failure to actually litigate its cases or get admissionsof the facts means that Wile gets to pose as the victim of some kind of evilconspiracy.  The Department of Justice,equally characteristically, failed to prosecute despite SEC staff investigationfindings that should have led to felony charges.  Some gulag!]
It is time for a word about real Austrianeconomists.  They hate elite frauds andwant them prosecuted vigorously.  Ludwigvon Mises and Friederich Hayek are the two most famous Austrian economists.
Hayek, F.A.  The Road to Serfdom
“To create conditionsin which competition will be as effective as possible, to prevent fraud anddeception, to break up monopolies— these tasks provide a wide and unquestionedfield for state activity.”
The Constitution of Liberty
“There remains,however, one other kind of harmful action that is generally thought desirableto prevent and which at first might seem distinct.  This is fraud and deception.  Yet, though it would be straining the meaningof words to call them ‘coercion,’ on examination it appears that the reasonswhy we want to prevent them are the same as those applying to coercion.  Deception, like coercion, is a form ofmanipulating the data on which a person counts, in order to make him do whatdeceiver wants him to do.  Where it issuccessful, the deceived becomes in the same manner the unwilling tool, servinganother man’s ends without advancing his own. Though we have no single word to cover both, all we have said ofcoercion applies equally to fraud and deception.
With this correction,it seems that freedom demands no more than that coercion and violence, fraudand deception, be prevented, except for the use of coercion by government forthe sole purpose of enforcing known rules intended to ensure the bestconditions under which the individual may give his activities a coherent, rationalpattern.”  
“Liberty not only means that the individual has boththe opportunity and the burden of choice; it also means that he must bear theconsequences of his actions….  Libertyand responsibility are inseparable.”
Mises, L.
“Governmentought to protect the individuals within the country against the violent andfraudulent attacks of gangsters, and it should defend the country againstforeign enemies.”
The faux Austrian website and the faux (or real, whocan tell) Wile piles layer upon layer of satire.  The website contains articles that make theterm “bizarre” deeply inadequate.  One ofthe site’s favorite motifs is that an international conspiracy of the topbankers that caused the ongoing global crisis is using the Occupy Wall Street(OWS) movement to demand that the fraudulent bop bankers that caused the crisisbe prosecuted.  The dastardly OWS personcarrying the water for this conspiracy of international bank elites is DavidDeGraw.
“[T]hereis an Anglo-American power elite trying to establish a world government. Wecannot necessarily explain WHY anyone would want to do such a thing. Butapparently someone does. Actually more than a “someone” – a handfulof impossibly wealth banking families, located mainly in the one-square-mileCity of London.
These families – and one family in particular – apparentlyhave control of a worldwide central banking apparatus. With the ability toprint money-from-nothing around the world, the Rothschilds have amassed afortune that may be in excess of US$300 trillion. (Nobody really knows.)”
This too is a wonderful satiric technique.  I particularly like the “Nobody really knows”parenthetical as a modifier for a (gigantic) number that has already been madea non-number by the use of the word “may” (with a lead-in sentence renderedimpotent by the use of “apparently”).  Atrue Austrian-school economist, however, would never admit that central bankscould create over $300 trillion in money (over 15 times the GDP of the U.S.)without producing even material inflation over the last 30 years.  So, where do the Rothschilds invest ordeposit their over $300 trillion?  Giventhe fact that the Austrian school considers even massive income disparities irrelevant,it must be a very good thing for the world (from an Austrian perspective) thatthe Rothschilds have created such a massive increase in societal wealth withoutproducing anything that even approached hyper-inflation.    
David DeGraw must be the most skilled operative inthe world if the Rothschilds have chosen him to run their “false flag”operation that recruited the OWS as their secret ally.  Indeed, the Rothschilds are so clever thatthey doubtless picked DeGraw as their operative because he has been apersistent critic of central banks (the devils incarnate in this satire), thenpicked me because I am a persistent critic of central banks and want us toprosecute the elite banksters that drove the crisis.  Why?  Wecan’t explain WHY.   
I learned that the Rothschilds hate and wish todestroy the largest banks.  The largestbanks, however, are the central banks leading supporters.  Why? We can’t explain WHY.  All of thiswould be confusing if the blog had any pretense to rationality or reality.
The web site and interviews on the web with whoeverplays Mr. Wile are so loopy, with such vibrant excursions into multipleTwilight Zones that it is hard to pick a favorite satirical delusion.  In an hour of bemused perusing I learned thatOsama bin Laden had been dead for years (the raid on his compound in Pakistanwas a fake), it is likely that we used military force in Libya because theywere about to mint a gold coin that would become their national currency, theWorld Trade Center towers were blown up by the U.S., and hyper-inflation isabout to go global any minute. 
I grew up largely in Dearborn, Michigan (home ofFord Motor Company).  Henry Ford wasinfamous for distributing The Protocolsof the Learned Elders of Zion (the Czarist forgery exposing the Jewishconspiracy to rule the world), so I found that reading the Rothschild rant waslike noshing on comfort food. 
Sorry, have to cut this short, but I just received acall from the City of London.  Mr.Rothschild may be calling (nobody really knows).  And if nobody really knows, it could be true.  Why? We don’t know WHY. 

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

Fed Under Fire