Daily Archives: December 30, 2011

President Obama Negotiates our Formal Surrender to Crony Capitalism – and the Nation Yawns

Posted on December 30, 2011 by admin | 1 comment

By William K. Black

On December 13, 2011, the Wall Street Journal published an article entitled “Banks in Pushfor Pact.” It was an obscure article buried in the real estatesection. The article contained thisclause: “Under the proposal, banks wouldbe released from legal claims tied to servicing delinquent mortgages as well ascertain mortgage-origination practices….” Opponents of this proposed amnesty for mortgage-origination fraud havecharged repeatedly that the federal government and Tom Miller, the AttorneyGeneral of Iowa, who is leading the settlement negotiations, support theamnesty. Previously, Miller’s keylieutenant, but not the Obama administration, angrily denounced thecharge.

TheFour Levels of Control Fraud Involving Mortgages

Home lenders, particularly those making liar’s loans,typically committed endemic “accounting control fraud” on multiple levels. Control fraud occurs when the personscontrolling a seemingly legitimate entity use it as a “weapon” to defraud. Accounting is the “weapon of choice” forfinancial control frauds. Mortgagefrauds can be grouped into four levels, each of them exceptionallywidespread: loan origination fraud bythe lenders and their agents, the fraudulent sale of fraudulent mortgages, thefraudulent pooling and sale of collateralized debt obligations (CDOs) in whichthe underlying was largely fraudulent mortgages, and foreclosure fraud.

LoanOrigination Fraud

The classic economics article describing such frauds isGeorge Akerlof and Paul Romer’s “Looting: the Economic Underworld of Bankruptcyfor Profit” (1993). The recipe” foraccounting control fraud by a lender (or purchaser) has four ingredients.

Extreme growth by making (or purchasing)
Loans of extremely poor quality at a premium yield
While employing extreme leverage, and
Providing grossly inadequate allowances for loan and lease losses (ALLL)

Origination fraud involved a series of mutually supportivefrauds: inflating the borrower’s income, inflating the appraised value of thehome, providing grossly inadequate allowances for loan and lease losses (ALLL),and failing to recognize losses on fraudulent loans held in portfolio. It was also common for federally insuredlenders to file false reports with and make false statements to theregulators. Lenders that made liar’sloans were “accounting control frauds.” Their CEOs cause them to create perverse incentives to suborn thesupposedly independent experts to provide opinions that inflate values andunderstate risk in order to aid and abet the underlying accounting fraud. These perverse incentives create a“Gresham’s” dynamic in which bad ethics drives good ethics out of themarketplace. The result is “echo” fraudepidemics. Each of these fraudsconstitutes a federal felony. Most ofthe frauds I have described are also felonies under state law. Collectively, there were millions oforigination frauds with a total dollar amount of fraudulent originations wellin excess of $1 trillion.

TheFraudulent Sale of Fraudulent Loans

The second level of fraud is the fraudulent sale by thelenders of the fraudulent loans. Thisform of fraud required endemic false “reps and warranties.” Roughly 90 percent of liar’s loans were sold,so this second level of fraud also constitutes millions of federal and statefelonies and roughly $1 trillion in fraudulent sales.

TheFrauds involved in Pooling Fraudulent Loans to Create and Sell Fraudulent CDOs

The third level of fraud is the sale of collateralized debtobligations (CDOs) “backed” by fraudulent liar’s loans through falsedisclosures. This level of fraudconstitutes tens of thousands of federal felonies and roughly $1 trillion infraudulent sales.

ForeclosureFraud

The fourth level of fraud is foreclosure fraud. The best known of these frauds involved thecommission of hundreds of thousands of felonies through the filing of falseaffidavits to secure foreclosures (inaptly called “robo signing”).

MassiveForeclosure Fraud Generated the Global Settlement Discussions

It was this last level of fraud that prompted the settlementdiscussions. What one must keepconstantly in mind when dealing with lenders that are control frauds is thatthey and their senior officers will be represented by the best criminal defenselawyers. America still does many thingssuperbly, and we do lawyers really well. The fraudulent officers who control banks engaged in control fraud willspend bank funds like water for their defense lawyers. The old joke is that when one is dealt lemonsone should make lemonade. In law school,however, we consider that the “C minus” answer. When dealt lemons; the best lawyers seek to make Dom Perignon.

Consider the setting – you represent a systemicallydangerous institution (SDI) that was the beneficiary of a federal bailout. Your client has made hundreds of thousands offraudulent liar’s loans and fraudulently sold the great bulk of them. If your client is held responsible for thesefrauds it will have to reveal that it is massively insolvent and facereceivership. Your client is also one ofthe largest mortgage loan servicers in the world. A small law firm representing a borrower hastaken the deposition of one of your client’s key employees who signed theaffidavits necessary to support roughly ten thousand foreclosures a month – andadmitted that the key statements she has made in each of those affidavits isfalse. The somnolent federal governmenthad finally been forced to admit that the banks have engaged in endemic foreclosurefraud. The states are alsoinvolved. This would be a nightmarescenario for any normal client. For anSDI, however, it was an opportunity.

L’audace,encore l’audace, toujours l’audace!

(Audacity,more audacity, always audacity: the white collar defense lawyer’s creed)

One of the secrets to being an extraordinarily effectiveelite criminal is also true of their lawyers – audacity. Elite white-collar criminals can frequently getaway with grotesque criminal conduct if they use their exceptional advantagesprovided by wealth, privilege, and seeming legitimacy. Even within the ranks of elite white-collarcriminals, however, the CEOs who control SDIs – particularly during a financialcrisis that they caused – are unique in their power to commit crimes withimpunity. They hold the national, evenglobal, economy hostage. TreasurySecretary Geithner has made this strategy simple by displaying the “StockholmSyndrome.” He has fallen in love withthe criminals that are holding our economy hostage. Geithner claims that the fraudulent SDIs areso fragile that they would collapse if they were even investigated seriouslyfor fraud. He conveniently ignores thefact that the primary reason for the SDIs’ fragility is that their CEOs lootedthe banks.

They can also use “their” bank to buy the modern equivalentof indulgences for even the most destructive frauds. There are two non-exclusive means of buyingindulgences. The most obvious means ispolitical contributions. The financeindustry is the leading funder of both political parties. The less obvious means of buying immunity arises from thedysfunctional nature of DOJ policies for (not) prosecuting major firms forserious felonies and the ability of the CEO to use corporate funds to purchasepersonal immunity from criminal prosecutions. Five facts about the criminal defense of large firms must be keptprominently in mind when considering the defense of banksters. First, the CEO will gladly trade off billionsof dollars in payments by the bank and its liability insurers in order tosecure immunity from criminal charges against the CEO and the senior officerswho could implicate the CEO.

Second, the Department of Justice (DOJ) has essentiallyceased to prosecute large firms for serious felonies. DOJ was so traumatized by the consequences ofprosecuting Arthur Andersen that it has decided to allow large firms to enterinto “deferred prosecution” agreements (in which prosecution is, in reality,perpetually deferred). Arthur Andersenhad entered into two deferred prosecution agreements, and DOJ offered it athird, when AA refused the agreement and went to trial.

Third, while I have referred to the firm as the “client” andthe firm and its insurers typically pay for the attorney fees and fines, it isthe CEO that can hire and fire outside counsel. Outside counsel, therefore, are chosen by fraudulent CEOs because theyare willing to aid and abet the CEO in looting the real client (the firm). This is a classic example of the fraudulentbank CEO deliberately creating a Gresham’s dynamic in which the least ethicalmembers of the “independent” profession drive the most ethical out of lucrativerepresentations. In criminology jargon,control frauds are criminogenic. Fraudulent CEOs use their ability to make compensation for officers,employees, and independent professionals perverse in order to createenvironments that cause widespread frauds that aid and abet the lender’s fraudscheme. To put it in plainer, biblicalEnglish: fraud begets fraud.

Fourth, the settlement payments are typically deductiblefrom taxes. This means that thedefendant’s actual burden of paying the fine is much smaller than the announcedamount of the fine.

Fifth, defense counsel typically promise to pay some portionof the fines to the victims of the fraud. This is a brilliant tactic. Itmakes the government attorneys feel good about the settlement and it allowsthem to bash opponents of the settlement as blocking relief for the victims. The tactic, of course, is cynical and dishonest. The weak settlement is what prevents a fargreater recovery for the victims of the fraud. The government does not have to wait for a settlement to aid the victimsof foreclosure fraud.

Settlement discussions by counsel for control frauds withthe government and shareholders are all about exceptionally able and zealouslegal representation of the CEO at the expense of the client, its shareholders,and the public. Only vigorous regulatorsand prosecutors can protect the firm, shareholders, and public from looting bythese CEOs and the allies they generate.

TheProposed Deal: The $1 Trillion Lagniappe

The obvious deal that criminal defense counsel for banksalways seek is to trade a showy amount of fines for de facto or even formal immunity for the CEO and other seniorofficers who led the frauds and became wealthy through the frauds. Here, the defense counsel were far moreaudacious – they are demanding immunity not only from prosecution, but even frominvestigation, and they are demanding immunity for crimes they committed thathave never been investigated by the state and local prosecutors. The foreclosure fraud cases, while enormous,are by far the least of the banksters’ worries. The potential loss exposure from the foreclosure fraud is measured inthe tens of billions of dollars. Thepotential loss exposure from fraudulent home loan originations is in thetrillions of dollars – and a trillion is a thousand billion. The banks’ CEOs are demanding, for a puny $25billion, a release from liability for foreclosure fraud. That is obscene on multiple levels. Even President Obama concedes that the bankstreat such fines as a mere “cost of doing business” (by which he means the“small tax on the wealth obtained by elites through doing fraudulentbusiness”). The senior officers involvedin the fraud should be imprisoned. Giving them immunity, allowing them to keep their bonuses “earned”through fraud, and keeping them in leadership roles are all despicable actsthat should be anathema to every prosecutor.

But what came next went beyond scandal as usual. The banks then demanded a lagniappe – a little something extra,for free, in a New Orleans restaurant – they wanted immunity for loanorigination fraud. The slight differenceis that this lagniappe is worthtrillions of dollars to the frauds. Itsickens me to inform the reader that the Obama administration is eager toprovide the frauds with this lagniappe. The Department of Housing and UrbanDevelopment (HUD), led by Secretary Shaun Donovan, is actively pushing thisscandalous deal, with strong support in the background from Treasury SecretaryGeithner. The silence of AttorneyGeneral Holder, and President Obama, on this travesty is exceptional.

Worse, the banks are seeking immunity even frominvestigation of the over trillion dollars in mortgage origination fraud – andthe Obama and Bush administrations’ supposed “investigations” of mortgageorigination fraud by the large lenders that made the mass of liar’s loans areall unworthy of the word “investigations.” It would take roughly 100 investigators, working for years, to do aserious investigation of any of the largest liar’s loan lenders. There has never been, remotely, such aninvestigation by the federal government of the any large liar’s loan lender. The Obama administration is reported tosupport the fraudulent financial CEOs’ dearest dream – de facto immunity even from investigation of over a trilliondollars in fraudulent liar’s loans origination.

The Republican Party and its candidates for the Party’spresidential nomination are not criticizing Obama’s proposed formal surrenderto crony capitalism. They only wish theywere in complete power and could cash in even more heavily on the tidal bore ofcampaign contributions flowing out of the finance industry.

Miller,and everyone involved, knows there was endemic origination fraud

Miller no longer denies that he has joined theadministration in favoring the banks’ most cherished dream – amnesty fororiginating a trillion dollars in fraudulent home loans. Indeed, the settlement is designed toprevent even investigations of themortgage origination fraud.

I confess that I am so naïve that I would have believed itimpossible that any federal or state governmental entity would enter into suchan abject surrender to crony capitalism. Once I learned that they were seriously contemplating such a travesty Icould not believe that Miller would support it. I believed his lieutenant’s (Mr. Madigan’s) denunciation of criticism ofthe proposed amnesty. (I have reviewedMadigan’s comments in preparing this piece and I see that they were artfullycrafted to be disingenuous.)
The testimony of Thomas J. Miller, Attorney General of Iowa, at a 2007Federal Reserve Board hearing shows that he knows that the lenders engaged inmassive origination fraud.

Over the lastseveral years, the subprime market has created a race to the bottom in whichunethical actors have been handsomely rewarded for their misdeeds and ethicalactors have lost market share…. The market incentives rewarded irresponsiblelending and made it more difficult for responsible lenders to compete. Strongregulations will create an even playing field in which ethical actors are nolonger punished.

Despite thewell documented performance struggles of 2006 vintage loans, originatorscontinued to use products with the same characteristics in 2007.

[M]anyoriginators … invent … non-existent occupations or income sources, or simplyinflat[e] income totals to support loan applications. A review of 100 statedincome loans by one lender found that a shocking 90% of the applicationsoverstated income by 5% or more and almost 60% overstated income by more than50%. Importantly, our investigations have found that most stated income fraudoccurs at the suggestion and direction of the loan originator, not theconsumer.

Miller, T. 2007. “Comments to the Federal Reserve Board ofGovernors on Adopting Regulations to Prohibit Unfair and Deceptive Acts andPractices under the Home Ownership and Equity Protection Act (HOEPA).” (August14). Miller was correct. We know that it was overwhelmingly lenders andtheir agents that put the lies in “liar’s” loans. We know that 90 percent of liar’s loans werefraudulent. We know that the industrymassively increased the number of liar’s loans after warnings that the loanswere endemically fraudulent. The growthrate of liar’s loans was so rapid (over 500% from 2003-2006) that thesefraudulent loans caused the housing bubble to hyper-inflate. We know that no government entity ever causedany entity to make or purchase (and that includes Fannie and Freddie) liar’sloans. Indeed, the government repeatedlywarned of the dangers of liar’s loans. We know that by 2006 roughly one-third of all home loans made that yearwere liar’s loans – which means there were millionsof fraudulent loans made annually and, collectively, trillions of dollars in fraudulently originated home loans.

Whatmust be done

Our economy and our democracy cannot succeed under cronycapitalism. Please join me in writing toCongress, the administration, your state attorney general, the media, and anycourt that must approve this proposed settlement. It is a disgrace. President Obama is, of course, correct thatsome actions can be illegal but exceptionally unethical and damaging. He is about to take precisely such an actionin derogation of his oath of office to defend and protect the constitution ofthe United States of America. Thefraudulent CEOs of the banks that became wealthy by causing the financialcrisis and the Great Recession are treating us as fools who will give trilliondollar plus gifts to the least deserving, most arrogant, and least ethicalelites. Have we fallen so low as apeople that we will allow this to happen?

Please join me in supporting the Attorney Generals of NewYork, Delaware, and California who have opposed this settlement.

As for President Obama, I hope that he will make this NewYear’s resolution: “I resolve to honormy oath of office and faithfully execute the laws of the United States anddefend its constitution, which is premised on justice and the rule of law. No person, no matter how elite, is above thatlaw. I have today asked Messrs.Bernanke, Geithner, and Donovan for their resignations because oftheir support for bailing out the elite banks and granting de facto amnesty to fraudulent financial CEOs. I, and my new Attorney General and newSecretary of the Treasury, have mutually resolved to make the vigorousprosecution of the elite financial frauds that drove the ongoing crisis ourmission. ”

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Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part Six

Posted on December 30, 2011 by Dan Kervick | 1 comment

By Dan Kervick

I will conclude by proposing six social tasks for the risinggeneration – six challenging tasks whose successful pursuit will help usachieve a more just, equal and democratic society. It is my view that the resulting society willnot only be fairer and more decent. It will also be more economically productive,and will better promote human happiness and flourishing by more effectively distributingthe goods and services we produce. Most of us will be happier in such a societyas well, because the practices of democratic equality do a better job satisfyingthe human desires for cooperation, solidarity, trust, stability and fellowshipthat are the foundation of the social life for which human beings are naturallyframed.

Extreme laissez faire capitalism of the kind extolled offand on over the past two centuries, and increasingly preached by economists,financiers and conservative thinkers over the past four decades, is a perversedistortion of human nature, foisted upon us by cold and demented thinkers captivatedby inhuman notions of efficiency and domination. In theend, it is a system that reduces each human being to an object whose value isnothing beyond what it is worth in the market. We need to restore a social balance, inwhich private property, entrepreneurialism and commercial activity do notdominate our lives and set all the rules for our existence, but function withina democratic social order framed by a politically coherent and effectivecommitment to the public good. In ademocratic social order there exists an activist public sector controlling asubstantial store of social goods, and channeling democratic energies andintelligence into the ambitious perfection of such goods.

The six proposed tasks are not intended to be in any way exhaustive. They all pertain to the economic sphere oflife alone. But the realization of agenuinely democratic society will require efforts that transcend the economicsphere. We need to rejuvenate thedemocratic spirit in America, educate ourselves and our fellow citizens on theunfulfilled potentialities of democratic existence, recapture the salvageableinstitutions of our threatened but still existing democracy, and further expandthe institutions and habits of democratic practice. Thereis much to be done, but the prospect of doing it is exciting.

Task One: Full Employment

The first task is to employ all of our people and endunemployment as we know it. We mustcommit our societies to the goal of full employment, and build an economicorder in which a job is always provided by either a public or private sector enterprisefor everyone willing and able to work. We must be willing to invest continually in human development in order toprovide everyone with the skills and knowledge they need to contributemeaningful work to our productive activities, and participate meaningfully asfellow citizens in our democratic society.

Unemployment should not be regarded as some sort of inescapablecurse visited upon us by the mysterious providence of the invisible hand andthe hard tutelage of the business cycle. It is not an essential economic medicine or purgative that we arerequired to swallow for the sake of our long-term economic health. It is asocial choice that we have made. And it is a bad social choice. Yes,private sector enterprises rise and fall, and their employment needs areconstantly shifting. But we have itwithin our power to organize the public sector to absorb workers who have beenreleased from their private sector employment, and employ them immediately inuseful public enterprises. Then asprivate sector activity picks up and generates a demand for more workers, wecan release public sector workers back into the private sector economy. Human needs and desires always far exceedour capacity to satisfy those needs and desires, and that means that there isalways plenty of work to be done.

The system of persistent unemployment we have now is a badsocial choice, but it is the social choice many plutocratic power-brokers prefer. So long as mercenary private wealth ispermitted to call the shots in our economy, many of those at the top will findit preferable to dispose of unwanted human beings and their labor byjettisoning surplus workers from the active economy from time to time, just to putthem on a low cost dole. Thealternative – in which a democratic government is permitted to exercise its organizationalpower and pool social resources in order to employ the unemployed – is a threatto the power and wealth of plutocrats. By preserving a permanent pool of unemployedworkers, the plutocracy ensures a permanent buyers’ market for labor, keepingwages down and worker bargaining power at a minimum. This allows the owners of private sectorenterprises, working together with their most well-paid executive employees, tosteer a greater portion of the revenues of the enterprise into the hands of theowners and top executives. A fullemployment economy, on the other hand, would restore bargaining power to workers,and permit those workers to retain a greater share of the firm’s revenues aswages.

The plutocracy also wishes to preserve the myth that ifthere is work that could be done, but that some private sector firm is notperforming already, then it must be unprofitable work that is just not worthdoing. But that’s an error. For one thing an immense amount of the goodsin this world are owned by the public at large or by nobody at all. Private capital will be invested only when itcan bring about improvements in someone’s private property, the property ofthose who are investing their own capital or investing capital they haveborrowed from others. This usuallygenerates a surplus that can then be sold on the market. That’s the only way the investor can profitfrom those improvements and productive processes, and that means that privatecapital has no interest in investing in those things from which no privateindividual or firm profits. But thepublic owns or draws value from a great many goods that lie outside this sphereof profitable private investment. It canadd substantial, usable value to the world by organizing public investment inthese goods.

Look around and ask whether or not there is valuable work tobe done. Of course there is. There is always far more work to be done thanthere are people to do it. Human beingsare mortal and limited, and when we succeed in achieving something new, thatonly frees us up to move on to something else that we were not able even tobegin to address before. When we failto employ ourselves in doing that work because of our ideological commitmentsto an existing system of private enterprise, we stupidly deprive ourselves ofthe productive efforts of many unemployed people who are willing to work. The existence of needless mass unemployment withinthe present system only shows that the existing system is incomplete and inefficient,and that it is not the full answer to the satisfaction of human needs.

Adam Smith, a much more moderate and reasonable man than issometimes painted by the crazed disciples of laissez faire who have adoptedSmith as their patron, also recognized that the system of private enterprise isnot sufficient to satisfy all social needs. He recognized the need for public employment, because he recognized thatthere are ends we can pursue that, “though they may be in the highest degreeadvantageous to a great society, are, however, of such a nature that the profitcould never repay the expense to any individual or small number of individuals.”

We always possess the capacity to do what we need to do inorder to employ the unemployed. Themonetary system should never stand in our way. Since the public’s money is only a tool, and since these monetary toolscan be produced and wielded by a democratic society in whatever quantities areneeded to pursue public purposes, it is absurd to argue one cannot afford togenerate real value in the world because of a lack of money. As wecreate additional real value in the world, we can concurrently create theadditional money we need to measure that additional value, to efficientlymanage the entry of that added value into the existing economy, and to paythose who produced the additional value. Since the process adds new goods and services to the economy, ratherthan simply creating more money to chase existing goods and services, theadditional money we bring into existence in this way does not exert significantinflationary pressures and destabilize prices.

Unemployment has tremendous social and individualcosts. It leads to the loss of skillsand capacity over time as a changing economy moves further and further ahead ofthe workers who have been jettisoned from it. These abandoned workers are then increasingly transformed into a burdenon others. Unemployment also leads topsychological depression, shame and humiliation, and creates invidious social castedistinctions between the employed and the unemployed. Our current social practice of deferringall employment decisions to private sector entities, and permitting massiveunemployment for long periods of time, is not just unnecessary. It is cruel, barbaric and stupid.

It is notable that during the current economic crisis, thenational government in the United States decided early on to turn itsattentions away from employment and toward the plutocratic agenda of public debtreduction. The government was willing totolerate official unemployment standing between 9% and 10%. That, of course, is only the misleading official number. That this national policy direction of forcedand recession-intensifying austerity was partly set by a Democratic administration, which rammed a deficit and debt reductionagenda down the throat of the national debate by appointing a “DeficitReduction Commission” headed by committed conservative deficit hawks from bothparties, is an indication of just how deeply both major national parties are nowembroiled in the game of protecting the interests of the wealthy and neglectingthe interests of tens of millions of desperate Americans.

So the young Americans who take on this first task ofemploying all of our people can expect to face a broad and bipartisan front ofresistance from politicians in the employ of private corporations and financialinterests. There are, to be sure, goodpeople in government as well. But theyare in the minority, and will need the kind of support that only a massmovement can provide.

Task Two: Public Investment in Our Future

The second task is actually an extension of the first task,and further develops the insight from Adam Smith quoted from the previoussection. The private sector does a goodjob with the day-to-day management of, and innovation in, productive processesthat make new goods and useful technologies and services available tomarkets. Entrepreneurs who want to develop these newproducts, or make old products in a better and more efficient way, can very often work out the means of creatinga viable and sustainable business operation around their production, and can thusattract the private sector financing they need to build those businesses andmarket the products. We all benefit from much of thisentrepreneurial creativity and industriousness. But we need to recognize that many of the largerscale investments a society needs to carry out in order to sustain progress andbuild prosperity do not just happen by themselves through the hubbub of entrepreneurialinnovation. They often possess a scale, scopeand degree of organizational thoughtfulness and planning that cannot or shouldnot be carried out by private sector business enterprise.

Even if some of these major national-scale infrastructureprojects can be carried out byprivate sector corporations commanding massive supplies of private capital, itmight not always be a wise social decision to allow those corporations toassume those responsibilities. Note that what Smith said is that some highlyadvantageous social ends cannot be carried out in a way that brings profit tosome small number ofindividuals. But of course, if we allow largeoligopolistic private corporations to acquire ownership and control ofeverything that is important to us, then those corporations might be able toprofit by investing in the satisfaction of large social needs. Yet any enterprise with the power andcapital and political muscle to build, say, an entire national infrastructurefor electric car use, or a national electrical grid or a system of mass educationmaintaining national standards, will possess too much power to place in corporatehands. Allowing such vast quantities of economicpower to flow into oligopolistic or monopolistic corporations is likely tobestow on those corporations the power to dominate politically the democraticcommunities they have been chartered to serve.

Note that there is an inherent tension between the corporateform of organization and the organization of a democratic society. Corporate decision-making structures are indeedthe very antithesis of democracy: They arehierarchical, secretive, and profoundly undemocratic command systems. It isarguable that we need to permit such institutions to exist on smallerscales. Or perhaps we don’t. Butin any case, if hierarchical corporations as we know them must exist, limitingthe degree and scope of corporate power is in itself an essential publicpurpose for a democracy.

Vigilant preservation of those limits requires thatdemocratic communities at the national, state and local level deliberate in anopen and rational way on the future shape of their communities and on their desiredway of life. They should atempt toachieve a broad consensus on those desired forms of life, and then retainsufficient control over real decision-making power so that they can carry outthe plans that will determine the long-term shape of their community’s future. Democraticcommunities must also seek to retain ownership of substantial amounts of publicland and infrastructure within their communities. In the end, the world is governed by thosewho own it. Building a decent and justfuture requires substantial public command of resources and a commitment todemocratically organized public investment of those resources.

But it is not enough to invest in physical infrastructurealone. We also need to invest in ourpeople. We are still making do with an antiquatededucation system in which we devote a great many resources to educating ouryouth, but then leave our citizens on their own for the rest of their lives to providefor any desirable remaining education. We should consider the possibility that such a system is no longerviable in an era in which technological and intellectual changes are constantand rapid, and in which fewer people are employed in types of work that do notrequire the continual improvement of knowledge and knowledge-based skills. Weshould consider moving to a system in which people are given periodic paidfurloughs from work, say every five years, to return to school for six monthsfor additional publicly-delivered education. There is no reason at all that a public education needs to bepigeonholed as a purely K-12 system. 21^stcentury people require educational services spread across the lifespan.

We need to reaffirm community responsibility for most formsof education. Although some forms ofeducation might be of benefit only to the individual who receives theeducation, most forms of education benefit all of us directly or indirectly. A prosperous and enlightened democratic communitywill develop the talents and unexpressed capacities of its citizens, and distributethese human development costs widely. And the more equal our society becomes, themore those human development costs pay off for all of us. In a society organized to preserve broadsocial and economic equality, the benefits of higher education aren’t allpoured into generating extravagant incomes for the privileged class of highearners who happen to have received that education, and who profit from itindividually, but are directed back into the community as the educatedcontribute the value of their enhanced skills and knowledge to generallybeneficial production and activity.

These enhanced education programs can be integrated with thefull employment commitments discussed in the first task. For all of our people – at certain stages oftheir lives, at least – we should regard teaching or learning, or both, as thatperson’s job. There are many usefulthings we can pay the unemployed to do, but among those things are the jobs ofteaching others the things that these unemployed people already know, and of learningsomething from someone else so that new knowledge can be brought back into theworld of productive activity to create value that couldn’t have been createdbefore. Those people for whom theprivate sector is not providing employment represent a large treasure trove ofunutilized skill and knowledge. We needto create the institutional frameworks in which those skills can passed ontoothers, while new skills are acquired at the same time, and in which thesecitizen educators and learners are then able to draw an income to support theirparticipation in this vital area of public investment.

In thinking about the needs for public investment in ourphysical infrastructure and our people, we should never allow ourselves to be overwhelmedand dazzled by the complex instrumentalities of money and monetary tools. The only thing that ever stands between ourdesires for the world we want and the realization of that world is theexistence of real resources. If theresources exist, we can always create whatever additional monetary tools andfinancial instruments are needed to command those resources and organize theirallocation. We can adjust our monetarypolicies to give democratic communities the monetary powers they need to betterdirect their communities’ resources into the channels in which they desire themto flow. And besides additionalmonetary policy tools, there remain the traditional tools of taxation. Private sector systems for distributingincome are sometimes wasteful and crude in the aggregate, and do not adequatelyreflect social needs and values that are not manifested in the marketplace bypurely self-seeking customers. Toadvance such values, the public sometimes needs to take surplus savings thatexist in wasteful and unnecessary abundance on the monetary scorecards of themost fortunate individuals, and direct those savings toward publicpurposes. Critics sometimes claimredistributive taxation of this kind is a mere zero-sum shift of productive economicactivity in one sector of the economy to productive activity in anothersector. But that is not true. In some cases it is a positive net shift ofidle low-productivity savings into highly productive activity.

Task Three: PublicStewardship of the Financial Sector

The third task is to reassert public authority over thefinancial sector of our economy. The late economist Hyman Minksy persuasively arguedthat financial instability is not just an anomalous blip of temporary dysfunctionin generally stable and self-regulating financial markets. Rather, Minsky said, a tendency toward financialinstability is inherent in the normal functioning of a capitalist economy. Periods of financial stability, in fact, lieat the roots of instability. Robustsystems of finance naturally evolve into systems characterized by higher andhigher degrees of risky, speculative lending, and ultimately higher degrees ofwhat Minsky called “Ponzi lending”. Stability is itself destabilizing. Preventing instability therefore calls for regulation, since a systemthat is inherently prone to instability does not regulate itself.

Few people these days are in need of further convincing thatfinancial professionals are not always the sober and steady managers of moneyand investment funds that their defenders sometimes like to present themselvesas being, or that they effectively regulate themselves through the disciplineof market forces. The US financialsector blew up a bubble of overleveraged and toxic debt based on liar loans andrunaway home prices leading up to the crash of 2007 and 2008, a bubble inflatedby a combination irrational exuberance, irresponsible management and outrightfraud. The banks and shadow banks crashedour economy into the ground.

Human beings come in many varieties. But there will probably always be among usthose who seek to steal, defraud, scam, swindle, manipulate, chisel, plunderand exploit. The quantitative mazes andfine print of financial transactions and contracts provide fertile ground forsuch activity. The financial world isfull of very clever people who devise increasingly clever ways of insertingtaps into our society’s massive flows of money and siphoning off some of theflow for themselves. It is essentiallymoney for nothing, but it can generate huge short-term rewards for some of thelucky investors, and huge compensation packages and bonus for the cleverengineers of the leaky ductwork of money streams. Sometimes the complex movements of money andvalue are so mathematically complicated that even relatively sophisticatedpeople who have had millions and billions stolen from them can’t even say forsure if they have been robbed, or if they just made bad decisions in purchasinglegitimate services. To imagine thatthese dens of greedy money pillagers can be self-regulating if left to theirown devices, and that market competition generates all the information that isnecessary to enable investors and savers to make prudent decisions with thefunds for which they are responsible, is naïve in the extreme. And ina modern economy, we are all entangled in the maze of money. Even the most frugal, modest and cautiouspeople are dependent on the behavior of the guild of financial engineers. So in the end, not only do the schemers andscammers exploit individuals. Theirdestabilizing pyramids of monetary liabilities collapse and destroy wholeeconomies.

The University of Missouri, Kansas City economist andregulator William K. Black has commented on the “three dees” – deregulation, desupervision, and de factodecriminalization – that helped bring our financial system to the ground:

Deregulation occurswhen one reduces, removes, or blocks rules or laws or authorizes entities toengage in new, unregulated activities. Desupervision occurs when the rulesremain in place but they are not enforced or are enforced more ineffectively.De facto decriminalization means that enforcement of the criminal laws becomesuncommon in the relevant industries. These three regulatory concepts are ofteninterrelated. The three “des” can produce intensely criminogenic environmentsthat produce epidemics of accounting control fraud. In finance, the centraltask of financial regulators is to serve as the regulatory “cops on the beat.”When firms gain a competitive advantage by committing fraud, “private marketdiscipline” becomes perverse and creates a “Gresham’s” dynamic that can causeunethical firms and officials to drive their honest competitors out of themarketplace. The combination of the three “des” was so criminogenic that itgenerated an unprecedented level of accounting control fraud, which in turnproduced unprecedented levels of “echo” fraud epidemics. The combination drovethe crisis in the U.S. and several other nations.

I will leave it to people like Black and other experiencedfinancial sector sleuths and regulators to recommend the specific regulatorypolicies that are needed to bend the financial sector back toward the publicpurposes it is supposed to serve, and to make sure large and risky financialventures are not allowed to escape the regulatory watchdogs – perhaps by movinginto the “shadow banking” sector. But Ido want to suggest one specific item. We should take a close look at creating public options for banking:not-for-profit, public savings and lending institutions that provide low-cost,low-risk alternatives to private sector banks, and that can be used whenappropriate to administer and subsidize programs of local public investmentthrough the targeted issuance of low interest loans – and perhaps sometimeseven negative interest loans.

Task Four: Reorganize Monetary Policy

The topic of banking naturally leads us into the fourthtask: the reorganization of monetary policy. Under our present system, a quasi-independent and weakly accountable centralbank is supposed to be responsible for all aspects of monetary policy, whileCongress and the Executive Branch handle the fiscal policy operations of taxingand spending. The system has been withus so long that it is difficult for many people to conceive of alternatives. Butsuch alternatives can and should be considered.

The division between fiscal and monetary policy is actuallysomewhat artificial. It is an analyticaldistinction useful for understanding different dimensions of macroeconomicpolicy. But in practical terms it isdifficult to separate fiscal operations from monetary operations, and the factthat they are institutionally separated in our current governmental frameworkkeeps economic policy makers from acting in as coherent and efficient a manneras they could. The institutionalseparation between monetary and fiscal policy also creates needless confusionin the mind of the public, and manufactures pseudo-problems from the needlesslycomplicated manner in which Treasury spending is partially funded by Fed purchasesof Treasury bonds through private intermediaries. This puts relatively meaningless debt ongovernment books, leading to public fears of budget crises, bond vigilantes andinsolvency. The austerity mongers, doomsayers and enemiesof progressive government then call out this debt in their endless attempts to manipulatepublic fears and crush public sector activism. These prophets of public penury arecontributors to the plutocratic effort to subordinate democratic governments tocorporate rule.

We have already discussed how this situation can bechanged. Fiscal policy need not rely tosuch a high degree on the issuance of debt to the private sector. Instead, we should enact monetary reformsthat provide for the direct crediting of Treasury Department accounts by anamount to be determined each year, as economic conditions warrant anddemand. We can expand deficits throughpurely monetary means when necessary. Noadded debt; no additional taxes – just money directly created by the sovereignmonetary power of the United States government and the American people. But this is not a reform the Fed can enacton its own. Only Congress can legislatethese changes. Activists need to takethe case for monetary reform directly to Congress.

There are certain public purposes that are always bestserved by the public sector, no matter what else is happening in the economy. Butthere are other public needs which arise cyclically, and some which are entirelyunpredictable. In a deep recession ordepression, government needs to expand its spending dramatically. The most efficient and least confusing way todo this is through direct monetary operations: clean, unconfusing moneycreation without the complex dance of bond sales mediated by private sectordealers and auctions.

Elitists and ant-democratic central bank enthusiasts haveusually argued that these kinds of reforms would put too much monetary policypower directly in the hands of a democratic rabble, and that reckless populistpoliticians wielding this kind of power would inevitably destroy our economyand spawn hyperinflationary chaos by succumbing over and over to theirresistible allure of free money. Bunk. These pessimistic warningsare only a stale replay of similar charges that have been levied againstdemocratic government in generation after generation. Elitists and aristocrats in every era have always said that democracies can’thandle anything important: they can’t handle civilian control of the military;they can’t handle religious and political liberty; they can’t handle theselection of leaders; they can’t handle the legislation of laws; they can’thandle the writing of a budget and the management of public finances. They have always been wrong. Democraticcountries around the world perform these tasks routinely, and the consequenceof the rise of democratic government over the past century, and the defeat ofaristocratic and authoritarian alternatives, has been a spectacular surge inglobal prosperity.

So now the question is the reform of monetary policy, and theelitists are wrong again. Decisionsabout the orderly creation, destruction and employment of the public’s money areno less amenable to routine democratic debate and thoughtful legislative decisionsthan are any other economic decisions carried out by a legislature. Despite the political ups and downs,democracies generally do a perfectly creditable job managing the publicfinances and the public treasury. Monetarypolicy is a matter of public policy and should be debated and carried out viathe political process just like any other public policy in a democracy. We will surely make bad decisions from timeto time, just as we do in other areas. But over the long run, democracy will do a much better job with monetarypolicy than do secretive central bankers, who answer mainly to the plutocraticelite, and who during a crisis quickly sacrifice the public interest to thoseelite interests.

Task Five: Promote Equality

The fifth task is to take significant and deliberate stepsto promote equality of economic condition. Economic inequality rots the foundation of a democratic society.

For too long we have been told, or tried to tell ourselves,that democracy can coexist with profound inequalities in wealth and income, andthat we can erect a wall of institutional structure that will protectdemocratic institutions from the encroachments of plutocrats. We have been told, or tried to tellourselves, that even in a world in which a single wealthy person can buy morethan can be purchased by a million of his poorer fellow citizens, that unpleasantfact does not keep us from adhering to a rigorous principle of one person, onevote. We have been told, or tried totell ourselves, that even a society with gross inequalities in wealth cansustain a system of genuine equality of opportunity.

These are absurd and preposterously naïve views. And it is a real mystery how any significantnumber of mature and worldly people could ever have been induced to believethem.

The things in the world that we call “wealth” consist of allof those things that are produced either by nature or by human effort, that canbe transferred from some persons to other persons, and that people desire topossess either individually or collectively. Wealth consists in the objects of human desire, and the value of theseobjects is measured in the end by the degree to which people desire them. Those who control wealth thus control theobjects of desire; and those who control the objects of desire control people, sincepeople are beings filled with desire. Inother words, wealth equals power.

No system has ever been devised, or could be devised, inwhich a few participants in society are permitted to control most of theultimate sources of human power, in far greater amounts than other people, butin which that privileged few does not succeed in exercising the power theypossess to seek their preferred ends in the political sphere. Those who are permitted to own the lion’sshare of wealth will always own the lion’s share of decision-making power. Since democracy consists in the equaldistribution of decision-making power throughout the whole body of aself-governing people, no real democracy is possible in the presence of grossinequality of wealth. Inegalitariandemocracy is a delusional doctrine; as unrealistic as the dream of a harmonioussymphony orchestra consisting of 99 dog whistles and one tuba.

Similarly, no system can be devised in which people possessanything approaching a real equality of opportunity unless that system at leaststrives to create something approaching a real equality of condition. Opportunity in life depends on the resourceswith which one begins life. Butinequalities of wealth and condition are passed on from one generation to thenext, in one way or another, both among individuals and withincommunities. Unless we take steps tolimit the grossly unequal accumulation of resources throughout a lifetime, wecannot prevent gross inequalities in the resources with which people in thenext generation begin their lives.

There are many things we can do to promote a more equalsociety: We can restore income balancethrough redistributive taxation and much higher marginal tax rates; we canprevent those inequalities from arising in the first place by enacting maximumwage laws or wage ratio laws; we can restore the bargaining power of workersthrough a national full employment program and a revitalization of organizedlabor; we can reform corporate governance so that companies are chartered to existprimarily to provide incomes for the people who work and produce in them everyday, not for the absent and invisible owners who do nothing but buy and sellpieces of those corporations; and we could reform inheritance laws to preventinequalities arising in one generation from being propagated and multiplied inthe next.

Task Six: Public Stewardship of the Environment and OurCommon Wealth

The final task is to affirm and secure public stewardship overthings of inestimable value that profit-seeking commercial enterprises arealways threatening to ravage, exploit and destroy.

We have discussed a great many things that pertain to thegoods we produce and exchange, the things of value that we make out of whatalready exists, and whose production and distribution is organized through themedium of money. But it is important toremember that the most supremely valuable things in life were made either by noliving human being or by no humanbeing at all, living or dead. The sublimities of the natural world; thebeloved natural human habitants in which we make our homes and feel ourselves athome; the marvelous and diverse fellow creatures with whom we share our world;the ancient and powerful seas, mountains, forests and winds; and theinnumerable products of human art, industry and intellect that have been passeddown to us from earlier generations of earnest and optimistic human beings, andthat are now the common inheritance of every one of us – these things comprisethe all-too-frequently ignored foundation of value in a meaningful humanexistence. They usually cost us littleor nothing to acquire; but the cost of destroying them is immeasurable.

The pursuit of the good requires not just the creativeproduction of new forms of value from the resources we possess; but thepreservation of those sources of great value that already exist. These springs of value speak to us andcomfort us in voices that transcend the capacities of our very finite andpredominantly instrumental everyday intelligence, and they are the ground thatbrings forth and nurtures all of the myriad objects of everyday use. These fundamental goods are as irreplaceableas they are beloved. Human commerce hascontributed greatly to the improvement of our life on Earth. But the commercial life and its exigenciescan also reduce us to a mean, blinkered and mercenary relationship with thethings and beings that surround us. Commerce thoroughly unleashed, commerce that is not directed by wise anddeliberate stewardship and foresight, can result in the thoughtless destructionof what is great in the manic production of what is merely transientlyuseful. The primordial goods belong toall of us, the great democratic community of humanity. Part of the task of democratic reform, then,must be to preserve for ourselves and our fellow citizens what is sublime andgreat. We must ensure the equal andsustained access for all human beingsto the common inheritance of allhuman beings.

Thisis the sixth and final part of the essay. Previous installments are available here: One, Two, Three, Four Five