One ingredient was financial intelligence. Madoff had buckets of it. Early in his career, he was the real deal, an actual innovator. He combined this with an amazing lack of conscience, for his scam was rooted most fundamentally in lying and stealing. The difference between him and all who came before was his grand scale, the grandest scale imaginable.The puzzle is not to explain business failures. Those are part of the normal course of life, and the sign of a healthy economy. The puzzle is to explain the “cluster of errors” that appears at the beginning of a recession. How could so many have been so wrong about so much at the same time? The business cycle is a system-wide failure, not merely the mistaken judgment of a few.So it is with Modoff’s scheme. The mystery isn’t how one person was able to fool a few. The scheme in which yesterday’s “investors” are paid off with the money of today’s victims is known in all places and probably all times – and it always goes belly up to the originator’s complete disgrace. It is a classic example of how moral laws are self-enforcing in the world of economics.The critical difference this time is that Madoff ran his scheme during an economic boom, a time when people’s normal sense of incredulity is put on the shelf. This is part of the grave cultural distortion introduced by funny money.
Money is the most widely demanded good in society, and the Fed is making new quantities of it not as a reflection of new real wealth, but purely as an administrative decree.There is a sense in which funny money literally drives everyone crazy, leading to what is sometimes called the “madness of crowds.With artificial stimulation from the credit machine, multitudes are willing to believe in something that cannot possibly be true. In Madoff’s case, it was that he could, even in falling markets, earn 15-20% a year without risk.Why not? Most everyone believed in some version of the myth. We believed that house prices would go up and up despite the reality that houses are physical things that deteriorate from the instant they are finished, just like cars or computers or anything else. Why did we believe this about houses? Again, you have to look to the fraudulent money system to see why.And we believed that we could all become millionaires by putting our money in the stocks of companies that weren’t actually earning money or paying dividends, companies whose wealth was entirely based on infusions of cash from the stock market which in turn were based on the belief that others would buy the stocks and so on. In other words, we believed that something out of nothing was possible, and anyone who didn’t believe it was a chump. It’s exactly what people believed during the other great inflations of history.What’s more, we believed that buying these stocks constituted not consumption, but savings for the future. In fact, people routinely attacked official savings data on grounds that they did not include what people were “saving” in terms of their stock market accounts. In a similar way, people were measuring our national wealth not in terms of accumulated capital, but rather through consumption data, as if granite kitchen counters in bigger houses were a measure of wealth instead of the opposite: the depletion of wealth.The left is big on attacking the salaries of investment bankers, and they were indeed outlandish. But these too represented not a unique problem, but more evidence of inflationary finance.
In a bubble economy, the money chases what is most fashionable, and financial services qualified. So the salaries were market. What was wildly distorted was the market itself.Now let’s talk about government finance during these years. The market tried to correct itself from 1999-2001, but the U.S. government wouldn’t tolerate it. Instead, it used every sign of downturn as an excuse to keep the illusion going, creating billions and billions in new dollars. The Fed drove interest rates lower and lower despite the non-existence of savings available to back them up.(Low interest rates in a sound money system are a reflection of accumulated capital and deferred consumption. When you see the Fed pushing them down during a boom, it is creating a dangerous mirage.)Did anyone stop and wonder where the government was getting all this money to pump up the system?
We are talking about human nature: the desire to believe in things that do not exist. The government was happy to fuel this sense because it gave the Fed, its connected industries, and the state more power and more money in the short term.
Madoff’s scheme played into the belief that wealth was not something to work for, but something to scheme for. It could be generated by playing your cards right, hooking into the right networks, and finding the right “investments.” The people with whom he dealt had, it turns out, some internal sense that there was something a little bit shady about the whole operation. But they dispensed with this sense when the fat checks arrived, and concluded that whatever was making this perpetual motion machine operate, it did work.But listen: the government right now is using the same tactic to convince you that it is saving you from the recession. The whole scheme partakes of the same sense of denying reality that characterized Madoff’s scheme. And I’m not just talking about Social Security, which is almost an exact replica of the Ponzi version, except that at least Charles Ponzi didn’t force people to give him money. I’m speaking of something broader. The entire financial system that is propped up by the Treasury and the Fed is based on the same idea: that something out of nothing is possible.
So they will jail Madoff. Wall Street would flog him if it could. He is disgraced for all of history. But meanwhile, the likes of Bush, Bernanke, Paulson, Obama, and all the rest are still riding high, even though their scheme is far larger and more egregious.Most of us like to believe that we wouldn’t have been tricked by Madoff. But are you being tricked by the elites who claim that they can conjure up a trillion dollars to stabilize our economy by clicking a few buttons on a computer screen? Most people are. Certainly the press seems to have bought it. Many people were outwitted by Madoff. Many more people are today being outwitted by the government and its central bank. And it will all end in disgrace and disaster, only on a far, far grander scale.
Wednesday, December 24, 2008
Tuesday, December 23, 2008
اسطورة الحذاء
مت إن أردت فلن يموت إباء مادام في وجه الظلوم حذاءُماذا تفيدك أمة مسلوبـة أفعالها يوم الوغــى آراءلحِّن أغاني النصر في الزمن الـذي هزَّ الخصورَ المائساتِ غنــاءُواصنع قرارك واترك القوم الأُلــى لا تدري ما صنعت بهم هيفـــــاءُ
هذا العدوُ أمام بيتكَ واقــفٌوبراحتيهِ الموتُ والأشـلاءُفاضرب بنعلكَ كل وجهِ منافق'فالمالكيّ' ونعل بوش سـواءُ
ماذا تفيدكَ حكمةٌ في عالـم قد قال: إن يهوده حكمـاءُفابدأ بما بدأ الإلهُ ولا تكـن متهيباً، فالخائفون بـلاءُواكتب على تلك الوجوهِ مذلـة فرجالُ ذاك البرلمانِ نسـاءُصوِّب مسدسك الحذائيّ الـذي جعل القرار يصوغه الشرفاءُ
إن أصبح الرؤساء ذيلَ عدونـاخاض الحروبَ مع العدى الدهماءُعبِّر، فأصعب حكمةٍ مملـوءةبالمكرمات يقولها البسطـاءُلله أنت، أكادُ أقسم أنهلجلال فعلك ثارت الجوزاءُ
كيف استطعت وحولك الجيش الذي بنفاقه قد ضجّت الغبــراءُ؟كيف استطعت وخلفك القلب الـذي ملأت جميع عروقه البغضـاءُ؟كيف استطعت وفوقك السيف الـذي ضُربت بحد حديده الدهماءُ؟
سبحان من أحياك حتى تنتشـيمما فعلت الشمس والأنواءُلك في الفداء قصيدة أبياتهــاموزونة ما قالها الشعـراءُ
في وجهك الشرقيُّ ألف مقالـةٍ وعلى جبينك خطبةٌ عصماءُولقد كتبتُ بحبر نعلك قصة في وجه 'بوش' فصولها سـوداءُولقد عرفتَ طريق من راموا العلا فهو الذي في جانبيه دماءُفسلكته والخائنون تربصوا ماذا ستبصر مقلةٌ عمياءُ؟
جاءتك أصواتُ النفاق بخيلهـاوبرجلها، يشدو بها الجبنـاءُلا يعلمون بأن صوتك آيـةللعالمين، وأنهم أوبـاءُلو صَحْتَ لاهتز البلاطُ بأسرهوتصدّعت جدرانه الملسـاءُأوَما رأيت الراية السوداء فيظهر الجبان تهزها النكباءُ؟أو ما لمحت يد الدعيّ تصدهـاشلت يمينك أيها الحرباءُلما وقفتَ كأن بحراً هـادراًفي ساعديك وفي جبينك ماءُلما نطقتَ كأن رعدا هائـلاًفوق الحروف وتحتهن سمـاءُلما رميتَ كأن من قد عُذبـواأحياهم الله القدير، فجاءواشيء تحطم في ضميرٍ مظلـمٍكبِّر فقد تتفتت الظلمـاءُ
علّمت دجلة أن فيها موسمـاً للموت تفنى عنده الأشيــــــاءُعاهد حذاءك لن يخونك عهده واتركهمُ ليعاهدوا من شاءواإن صار لون الحقد فينا أحمـراً ماذا تفيد دوائرٌ خضـراءُ؟لا لون في وجه العدو فروِّه بدمائه، فدماؤه حمراءقد كنت غضاً أيها النمر الـذي جعل المروءة تصطفيك الباءُ
ما خفت حولك ألف وغد نـاعموالناعمات تخيفها الأسمـــاءُ
لو ضُخّ بعض دماك في أوصالنا ما كان فوق عروشنا عمـــلاءُيا سيدا عبث الزمان بتاجـه اعتق خصومك، إنهن إمـــاءُ
واصنع حذاء النصر وارمِ به الذيتلهو به وبقلبه الأهــــــــــواءُلما انحنى ظهر الظلوم تنكّسـتمليون نفس باعها الأعــــداءُوسمعت تصفيق السماء كأنمافوق السماء تجمّع الشهـــداءُقف أنت في وجه الظلوم بفـردةٍبنية، فالقاذفات هـراءُوارشق بها وبخيطها الوجه الذيغلبت عليه ملامح بلهــاءُ
أفديك من رجل تقزّم عنـده الرؤساء والكبراء والأمـــراءُأفتَيْتَ بالنعل الشريف فلم نعــد نصغي لما قد قاله العلمــاءُأحييت خالد في النفوس فصار في أعماقنا تتحرّك الهيجـاءُما كنت قبل اليوم أعلم موقنـا أن الحذاء لمن أســـــــاء دواءُ
وبأن في جوف الحذاء مسدسـاًوبأن كل رصاصنا ضوضاءُ
هذا العدوُ أمام بيتكَ واقــفٌوبراحتيهِ الموتُ والأشـلاءُفاضرب بنعلكَ كل وجهِ منافق'فالمالكيّ' ونعل بوش سـواءُ
ماذا تفيدكَ حكمةٌ في عالـم قد قال: إن يهوده حكمـاءُفابدأ بما بدأ الإلهُ ولا تكـن متهيباً، فالخائفون بـلاءُواكتب على تلك الوجوهِ مذلـة فرجالُ ذاك البرلمانِ نسـاءُصوِّب مسدسك الحذائيّ الـذي جعل القرار يصوغه الشرفاءُ
إن أصبح الرؤساء ذيلَ عدونـاخاض الحروبَ مع العدى الدهماءُعبِّر، فأصعب حكمةٍ مملـوءةبالمكرمات يقولها البسطـاءُلله أنت، أكادُ أقسم أنهلجلال فعلك ثارت الجوزاءُ
كيف استطعت وحولك الجيش الذي بنفاقه قد ضجّت الغبــراءُ؟كيف استطعت وخلفك القلب الـذي ملأت جميع عروقه البغضـاءُ؟كيف استطعت وفوقك السيف الـذي ضُربت بحد حديده الدهماءُ؟
سبحان من أحياك حتى تنتشـيمما فعلت الشمس والأنواءُلك في الفداء قصيدة أبياتهــاموزونة ما قالها الشعـراءُ
في وجهك الشرقيُّ ألف مقالـةٍ وعلى جبينك خطبةٌ عصماءُولقد كتبتُ بحبر نعلك قصة في وجه 'بوش' فصولها سـوداءُولقد عرفتَ طريق من راموا العلا فهو الذي في جانبيه دماءُفسلكته والخائنون تربصوا ماذا ستبصر مقلةٌ عمياءُ؟
جاءتك أصواتُ النفاق بخيلهـاوبرجلها، يشدو بها الجبنـاءُلا يعلمون بأن صوتك آيـةللعالمين، وأنهم أوبـاءُلو صَحْتَ لاهتز البلاطُ بأسرهوتصدّعت جدرانه الملسـاءُأوَما رأيت الراية السوداء فيظهر الجبان تهزها النكباءُ؟أو ما لمحت يد الدعيّ تصدهـاشلت يمينك أيها الحرباءُلما وقفتَ كأن بحراً هـادراًفي ساعديك وفي جبينك ماءُلما نطقتَ كأن رعدا هائـلاًفوق الحروف وتحتهن سمـاءُلما رميتَ كأن من قد عُذبـواأحياهم الله القدير، فجاءواشيء تحطم في ضميرٍ مظلـمٍكبِّر فقد تتفتت الظلمـاءُ
علّمت دجلة أن فيها موسمـاً للموت تفنى عنده الأشيــــــاءُعاهد حذاءك لن يخونك عهده واتركهمُ ليعاهدوا من شاءواإن صار لون الحقد فينا أحمـراً ماذا تفيد دوائرٌ خضـراءُ؟لا لون في وجه العدو فروِّه بدمائه، فدماؤه حمراءقد كنت غضاً أيها النمر الـذي جعل المروءة تصطفيك الباءُ
ما خفت حولك ألف وغد نـاعموالناعمات تخيفها الأسمـــاءُ
لو ضُخّ بعض دماك في أوصالنا ما كان فوق عروشنا عمـــلاءُيا سيدا عبث الزمان بتاجـه اعتق خصومك، إنهن إمـــاءُ
واصنع حذاء النصر وارمِ به الذيتلهو به وبقلبه الأهــــــــــواءُلما انحنى ظهر الظلوم تنكّسـتمليون نفس باعها الأعــــداءُوسمعت تصفيق السماء كأنمافوق السماء تجمّع الشهـــداءُقف أنت في وجه الظلوم بفـردةٍبنية، فالقاذفات هـراءُوارشق بها وبخيطها الوجه الذيغلبت عليه ملامح بلهــاءُ
أفديك من رجل تقزّم عنـده الرؤساء والكبراء والأمـــراءُأفتَيْتَ بالنعل الشريف فلم نعــد نصغي لما قد قاله العلمــاءُأحييت خالد في النفوس فصار في أعماقنا تتحرّك الهيجـاءُما كنت قبل اليوم أعلم موقنـا أن الحذاء لمن أســـــــاء دواءُ
وبأن في جوف الحذاء مسدسـاًوبأن كل رصاصنا ضوضاءُ
ما كنت أعرف للحذاء فوائـداًحتى تصدّى للذين أسـاءوا
Thursday, December 18, 2008
Madoff The American Hero
The press...investors...regulators...they’re all howling for Bernie Madoff’s head. Of course, I wouldn’t mind if they lynched him. Still, he’s a hero to me. He’s the Rod Blogojevich of money – showing us how the system really works. He’s opened a window on the financial world...giving us all a remarkable and vivid lesson...in investing...in pyramid schemes...in the markets...and in Wall Street.
As a result of such eye-opening instruction, Bernie Madoff will save more investors more money than the SEC ever will. They’ll think twice before giving money to friends to invest for them... They raise their eyebrows and their doubts when someone promises them consistent high rates of returns.The feds are charging Madoff with running a $50 billion Ponzi scheme. Charles Ponzi took money from investors and then used their money to pay out profits to earlier investors. As long as the new money kept coming into the system, it worked like a charm. So what’s the difference between Madoff’s Ponzi scheme and the scheme run by Wall Street...in which all the investment houses, the rating agencies, the mortgage companies, Fannie Mae, Freddie Mac and the regulators themselves were complicit? As long as new money was coming into the system, who complained?
First, let’s look at what is happening on Wall Street now. Yesterday, the markets had a chance to connect the dots...to think more about what Ben Bernanke is up to...and what it will mean.You’ll recall that the Fed cut rates down to zero – effectively firing off all its monetary ammunition in one big salvo. Now, favored financial institutions – namely, the member banks of the Federal Reserve system – can borrow without paying any interest.That should get things moving, right? Well, not necessarily. Credit is frozen, not because it is too expensive...but merely because lenders are afraid they won’t get their money back. Asset prices are falling. So, the collateral that banks lent against is going down in price. Loans that looked solid six months seem dangerously leveraged today. It makes more sense just to hold onto the cash...at least it won’t declare bankruptcy or defraud you. And think about the people scammed by Bernie Madoff. How much are their loans worth? There are big names and little names on the list – including Japan’s Nomura Bank and France’s BNP Paribas. The big banks may be able to repay their debts. But what about the little fellows...the guys who put their entire net worth...perhaps a few million...with Madoff, in order to get his promised returns? That’s the problem with leverage. It works both coming and going. When an economy is growing...it acts like hot gas. Even a small amount quickly expands. But when a bubble springs a leak, the gas disappears. One man’s loss hits the balance sheets of businesses and bankers all over town. The whole system contracts. Suddenly, the whole thing is coming down like the Hindenburg. Which is exactly what is happening. Bloomberg reports that there is no sign of credit easing – despite the Fed’s efforts to give money away. Instead, everything is slowing down...shrinking...deflating:People aren’t buying new cars. So Chrysler says it will shut down its factories for a month. What began as a sleek Le Mans auto race becomes a demolition derby. Property prices in Detroit are getting wrecked. Suppliers to the auto-industry are being banged up. Unemployment in Michigan is rising to depression levels. People can’t even afford to buy the paper any more. The Detroit newspaper says that it will deliver only three times per week. There’s hardly a business or a household in the Detroit area that hasn’t been dented by the calamity. Meanwhile, California announced that it will put $3.8 billion worth of projects on hold. Goldman Sachs reports that its bonuses this year will be 80% lower than the year before. Bristol Myers says it will lay off 10% of its workforce; Yales’ endowment is down 25% and Mexico’s Cemex – one of the biggest suppliers of cement products in the world – says sales in this quarter are down 23%.And so it goes...day after day. Cutting back...reducing...downsizing....And you can imagine what this does to markets. Stocks shot up Tuesday on news of the rate cut. Wednesday, investors had time to reconsider; the Dow fell 100 points.
Now that Bernanke has run out of conventional weapons, investors are beginning to guess what happens next. In short: he’s gonna drop the big one. He’s going to go nuclear. He’s not going to stick with Keynes and Freidman, in other words; he’s gonna go Crazy.Yes, the Fed says it will now use “alternative” means of getting some juice in the economy. It will buy Treasury debt itself. This is what is known as “monetizing the debt,” or turning an increase in U.S. debt into an increase in the amount of currency in circulation. It’s a swell trick. If it works, Bernanke will be able to keep the rate of consumer price inflation above zero. He will probably try to get it well above zero – so as to encourage people to spend their money now, rather than wait for lower prices. The spending is supposed to be the magic that gets the consumer economy going again. We can look ahead and see that the Fed’s policy of going Crazy – effectively printing money – will be disastrous. I can guess, too, that gold will probably be the main – perhaps the only – beneficiary. The price of an ounce of gold rose $25 yesterday...putting it solidly in positive territory for the year. It could easily go over $2,000 before this crisis is over. But I don’t know exactly how...or when...it will happen. Right now, day after day, the dirty laundry from La Bubble Epoque is being unfolded...we never know what awful surprises we will find.
The latest reports say Madoff promised investors steady 13% returns. How could he do that? Of course, he couldn’t. Stocks have gone nowhere for the last 10 years. The average rate of return? Zero. Promising 13% was clearly a flim flam. But investors must have guessed that he was swindling his retail trading customers in order to deliver steady, above-market returns to his investment accounts. They may not have understood how it worked, but maybe they didn’t want to.
Nobody is as easy to scam as a scammer...and Madoff scammed them all. Bravo!Of course, Madoff should get the gallows; I don’t dispute it. But, often, there’s not a lot of distance between the hanged man and mob that is lynching him. The people who most want to see Bernie swing are the people who invested money with him. Most were very sophisticated investors. They knew perfectly well that there is no magic way to transform a zero-return market into a 13% return market. If they were to get 13%, they knew they had to take a big risk. In this case, the risk was that Bernie Madoff was lying. And what about the bubble economy itself? Wasn’t it nothing more than a giant pyramid scheme with a huge, huge risk attached? It promised speculators enormous profits, but how could it deliver? It paid out money from new participants to the old participants. Without new money and credit the thing would implode. As former Citigroup CEO, Chuck Prince, put it: as long as the music was playing, they had to dance. But didn’t they know the music would stop...leaving them in an awkward and embarrassing position? Wasn’t it as obvious to them as it was to us?And what about the investors? Weren’t they trying to get something for nothing out of the whole bubble economy? And the rating agencies? They must have known that sub-prime debt was dangerous. Even we knew it. Why did they give it Triple A ratings? And what about the SEC? It has thousands of smart analysts, accountants and investigators. How could they all be so stupid as to miss the biggest investment bubble in all history...right under their noses? And what about Alan Greenspan, who actually encouraged households to take out sub-prime mortgage loans?Weren’t they all in on the scam? Weren’t they all complicit? Bernie Madoff should hang. But SEC chairman Christopher Cox and former Fed chief Alan Greenspan should hang with him.
As a result of such eye-opening instruction, Bernie Madoff will save more investors more money than the SEC ever will. They’ll think twice before giving money to friends to invest for them... They raise their eyebrows and their doubts when someone promises them consistent high rates of returns.The feds are charging Madoff with running a $50 billion Ponzi scheme. Charles Ponzi took money from investors and then used their money to pay out profits to earlier investors. As long as the new money kept coming into the system, it worked like a charm. So what’s the difference between Madoff’s Ponzi scheme and the scheme run by Wall Street...in which all the investment houses, the rating agencies, the mortgage companies, Fannie Mae, Freddie Mac and the regulators themselves were complicit? As long as new money was coming into the system, who complained?
First, let’s look at what is happening on Wall Street now. Yesterday, the markets had a chance to connect the dots...to think more about what Ben Bernanke is up to...and what it will mean.You’ll recall that the Fed cut rates down to zero – effectively firing off all its monetary ammunition in one big salvo. Now, favored financial institutions – namely, the member banks of the Federal Reserve system – can borrow without paying any interest.That should get things moving, right? Well, not necessarily. Credit is frozen, not because it is too expensive...but merely because lenders are afraid they won’t get their money back. Asset prices are falling. So, the collateral that banks lent against is going down in price. Loans that looked solid six months seem dangerously leveraged today. It makes more sense just to hold onto the cash...at least it won’t declare bankruptcy or defraud you. And think about the people scammed by Bernie Madoff. How much are their loans worth? There are big names and little names on the list – including Japan’s Nomura Bank and France’s BNP Paribas. The big banks may be able to repay their debts. But what about the little fellows...the guys who put their entire net worth...perhaps a few million...with Madoff, in order to get his promised returns? That’s the problem with leverage. It works both coming and going. When an economy is growing...it acts like hot gas. Even a small amount quickly expands. But when a bubble springs a leak, the gas disappears. One man’s loss hits the balance sheets of businesses and bankers all over town. The whole system contracts. Suddenly, the whole thing is coming down like the Hindenburg. Which is exactly what is happening. Bloomberg reports that there is no sign of credit easing – despite the Fed’s efforts to give money away. Instead, everything is slowing down...shrinking...deflating:People aren’t buying new cars. So Chrysler says it will shut down its factories for a month. What began as a sleek Le Mans auto race becomes a demolition derby. Property prices in Detroit are getting wrecked. Suppliers to the auto-industry are being banged up. Unemployment in Michigan is rising to depression levels. People can’t even afford to buy the paper any more. The Detroit newspaper says that it will deliver only three times per week. There’s hardly a business or a household in the Detroit area that hasn’t been dented by the calamity. Meanwhile, California announced that it will put $3.8 billion worth of projects on hold. Goldman Sachs reports that its bonuses this year will be 80% lower than the year before. Bristol Myers says it will lay off 10% of its workforce; Yales’ endowment is down 25% and Mexico’s Cemex – one of the biggest suppliers of cement products in the world – says sales in this quarter are down 23%.And so it goes...day after day. Cutting back...reducing...downsizing....And you can imagine what this does to markets. Stocks shot up Tuesday on news of the rate cut. Wednesday, investors had time to reconsider; the Dow fell 100 points.
Now that Bernanke has run out of conventional weapons, investors are beginning to guess what happens next. In short: he’s gonna drop the big one. He’s going to go nuclear. He’s not going to stick with Keynes and Freidman, in other words; he’s gonna go Crazy.Yes, the Fed says it will now use “alternative” means of getting some juice in the economy. It will buy Treasury debt itself. This is what is known as “monetizing the debt,” or turning an increase in U.S. debt into an increase in the amount of currency in circulation. It’s a swell trick. If it works, Bernanke will be able to keep the rate of consumer price inflation above zero. He will probably try to get it well above zero – so as to encourage people to spend their money now, rather than wait for lower prices. The spending is supposed to be the magic that gets the consumer economy going again. We can look ahead and see that the Fed’s policy of going Crazy – effectively printing money – will be disastrous. I can guess, too, that gold will probably be the main – perhaps the only – beneficiary. The price of an ounce of gold rose $25 yesterday...putting it solidly in positive territory for the year. It could easily go over $2,000 before this crisis is over. But I don’t know exactly how...or when...it will happen. Right now, day after day, the dirty laundry from La Bubble Epoque is being unfolded...we never know what awful surprises we will find.
The latest reports say Madoff promised investors steady 13% returns. How could he do that? Of course, he couldn’t. Stocks have gone nowhere for the last 10 years. The average rate of return? Zero. Promising 13% was clearly a flim flam. But investors must have guessed that he was swindling his retail trading customers in order to deliver steady, above-market returns to his investment accounts. They may not have understood how it worked, but maybe they didn’t want to.
Nobody is as easy to scam as a scammer...and Madoff scammed them all. Bravo!Of course, Madoff should get the gallows; I don’t dispute it. But, often, there’s not a lot of distance between the hanged man and mob that is lynching him. The people who most want to see Bernie swing are the people who invested money with him. Most were very sophisticated investors. They knew perfectly well that there is no magic way to transform a zero-return market into a 13% return market. If they were to get 13%, they knew they had to take a big risk. In this case, the risk was that Bernie Madoff was lying. And what about the bubble economy itself? Wasn’t it nothing more than a giant pyramid scheme with a huge, huge risk attached? It promised speculators enormous profits, but how could it deliver? It paid out money from new participants to the old participants. Without new money and credit the thing would implode. As former Citigroup CEO, Chuck Prince, put it: as long as the music was playing, they had to dance. But didn’t they know the music would stop...leaving them in an awkward and embarrassing position? Wasn’t it as obvious to them as it was to us?And what about the investors? Weren’t they trying to get something for nothing out of the whole bubble economy? And the rating agencies? They must have known that sub-prime debt was dangerous. Even we knew it. Why did they give it Triple A ratings? And what about the SEC? It has thousands of smart analysts, accountants and investigators. How could they all be so stupid as to miss the biggest investment bubble in all history...right under their noses? And what about Alan Greenspan, who actually encouraged households to take out sub-prime mortgage loans?Weren’t they all in on the scam? Weren’t they all complicit? Bernie Madoff should hang. But SEC chairman Christopher Cox and former Fed chief Alan Greenspan should hang with him.
Tuesday, December 16, 2008
The Biggest Fraud Of All : U.S.Treasuries
In fact, given the hundreds of billions that Wall Street has fleeced investors for in cases of fraud that are astounding not only in dollar size, but in the duration they run for before they collapse under the weight of their bloated treasuries.
Enron, Tyco, and Worldcom are certainly the household corporate words for fraud on Wall Street. Combined, the estimated take from those three scams was a total of $121 billion in total damages.
But hedge funds are collapsing so fast that they number in the dozens every week, and fully one third of the $1.5 trillion asset class is expected to go up in smoke within the next 24 months, dwarfing the carnage of corporate fraud.
Now along comes Bernie Madoff.
Madoff's take of $50 billion demonstrates unequivocally that the entire investment industry is essentially one big confidence game, where appearances mean everything and substance is hard to come by. Listening to the petulant indignation emanating from the victims of that fraud who were "professional" investors elicits little sympathy from a public who watches helplessly as the Fed continues to pump taxpayer-backed dollars into the accounts of the biggest financial institutions. That wouldn't be so bad if we saw some of that cash making its way down into the broad economy, but so far there is absolutely zero evidence of that happening.
Madoff's fraud, improbable as it may seem, brings to mind another massive financial institution that, if the same standards of evaluation were to be applied as to Madoff, would most likely reveal another Ponzi scheme in progress.
A "Ponzi Scheme" is one where early investors are paid non-existent "profits" with the money brought in by new investors. Ponzi schemes always collapse when no more investors can be enticed into the scheme, and payouts stop. This is exactly what happened in the Madoff case, and unless I am very much mistaken, this is what is happening at the United States Treasury right now, with its accomplice, the United States Federal Reserve.
Technically, the Fed prints money when the Treasury issues it a check that it back with the sale of T-Bills. The treasury bills theoretically attract buyers because the revenue generated from taxes as a percentage of GDP are sufficient to justify the number of T-Bills in circulation. If the U.S. Economy was a corporation, T-Bills would be shares in the company, and all of the infrastructure and profit-generating businesses in the United States would be its assets, and the taxes generated across the whole operation would theoretically comprise the corporation's revenue.
In Bernie Madoff's case, the fan was hit with the proverbial excrement when he ran out of new investors, and some old investors wanted to withdraw $7 billion of their money. Bernie ran around Wall Street for a couple of weeks before he realized the jig was up, and he and his two sons concocted a strategy whereby they would turn him in, hopefully thwarting the boys being swept up in the inevitable incarcerations just on the horizon.
Now if Bernie was the United States Treasury, and his sons were the U.S. Federal Reserve, he could have simply called his boys and said, "Look boys…send over $7 billion right away, will ya?" The boys, being family, would have certainly wired the funds over to Bernie, and Bernie could go on his merry way, attracting a growing crowd of innocent (hah!) investors, and paying them off with his sons' printing press. In this case, investors would continue to pile in, and Bernie could keep writing checks to his sons and issuing shares to his victims, because at no point was anybody going to say "Whoa boys! Lets take a look at them books!"
And that's because if Bernie was the U.S. Treasury, and his sons the Fed, everybody who might want to take a peak at the balance sheets already pretty much knows what they'd find there: the ashes of the U.S. economy. Baffed out and beaten, repackaged and resold in a trillion different ways, such that there is no way the entire productivity and asset base of the United States now and for decades to come, could ever justify the trillions upon trillions of dollars worth of shares the massive Ponzi scheme that is the United States has put into circulation.
Nobody wants the illusion to end. Especially not its biggest shareholders - Japan, China and the U.K. For if their own treasuries are based substantially on the fragrant paper originated by the United States government, well then what does that say about the value of the bonds they issue to justify the quantity of their own currency in circulation?
When considered in this light, its no wonder the world's central banks act on a concerted basis to suppress the price of precious metals. For it the metals were allowed to trade freely against these currencies of falsely inflated value, then the market would quite likely demonstrate what it thinks about those currencies by trading them in for gold - a process now underway on the fringe where wise men looking through the fog of deception that is the media, are moving as nonchalantly as possible for the exits of U.S. investment
Enron, Tyco, and Worldcom are certainly the household corporate words for fraud on Wall Street. Combined, the estimated take from those three scams was a total of $121 billion in total damages.
But hedge funds are collapsing so fast that they number in the dozens every week, and fully one third of the $1.5 trillion asset class is expected to go up in smoke within the next 24 months, dwarfing the carnage of corporate fraud.
Now along comes Bernie Madoff.
Madoff's take of $50 billion demonstrates unequivocally that the entire investment industry is essentially one big confidence game, where appearances mean everything and substance is hard to come by. Listening to the petulant indignation emanating from the victims of that fraud who were "professional" investors elicits little sympathy from a public who watches helplessly as the Fed continues to pump taxpayer-backed dollars into the accounts of the biggest financial institutions. That wouldn't be so bad if we saw some of that cash making its way down into the broad economy, but so far there is absolutely zero evidence of that happening.
Madoff's fraud, improbable as it may seem, brings to mind another massive financial institution that, if the same standards of evaluation were to be applied as to Madoff, would most likely reveal another Ponzi scheme in progress.
A "Ponzi Scheme" is one where early investors are paid non-existent "profits" with the money brought in by new investors. Ponzi schemes always collapse when no more investors can be enticed into the scheme, and payouts stop. This is exactly what happened in the Madoff case, and unless I am very much mistaken, this is what is happening at the United States Treasury right now, with its accomplice, the United States Federal Reserve.
Technically, the Fed prints money when the Treasury issues it a check that it back with the sale of T-Bills. The treasury bills theoretically attract buyers because the revenue generated from taxes as a percentage of GDP are sufficient to justify the number of T-Bills in circulation. If the U.S. Economy was a corporation, T-Bills would be shares in the company, and all of the infrastructure and profit-generating businesses in the United States would be its assets, and the taxes generated across the whole operation would theoretically comprise the corporation's revenue.
In Bernie Madoff's case, the fan was hit with the proverbial excrement when he ran out of new investors, and some old investors wanted to withdraw $7 billion of their money. Bernie ran around Wall Street for a couple of weeks before he realized the jig was up, and he and his two sons concocted a strategy whereby they would turn him in, hopefully thwarting the boys being swept up in the inevitable incarcerations just on the horizon.
Now if Bernie was the United States Treasury, and his sons were the U.S. Federal Reserve, he could have simply called his boys and said, "Look boys…send over $7 billion right away, will ya?" The boys, being family, would have certainly wired the funds over to Bernie, and Bernie could go on his merry way, attracting a growing crowd of innocent (hah!) investors, and paying them off with his sons' printing press. In this case, investors would continue to pile in, and Bernie could keep writing checks to his sons and issuing shares to his victims, because at no point was anybody going to say "Whoa boys! Lets take a look at them books!"
And that's because if Bernie was the U.S. Treasury, and his sons the Fed, everybody who might want to take a peak at the balance sheets already pretty much knows what they'd find there: the ashes of the U.S. economy. Baffed out and beaten, repackaged and resold in a trillion different ways, such that there is no way the entire productivity and asset base of the United States now and for decades to come, could ever justify the trillions upon trillions of dollars worth of shares the massive Ponzi scheme that is the United States has put into circulation.
Nobody wants the illusion to end. Especially not its biggest shareholders - Japan, China and the U.K. For if their own treasuries are based substantially on the fragrant paper originated by the United States government, well then what does that say about the value of the bonds they issue to justify the quantity of their own currency in circulation?
When considered in this light, its no wonder the world's central banks act on a concerted basis to suppress the price of precious metals. For it the metals were allowed to trade freely against these currencies of falsely inflated value, then the market would quite likely demonstrate what it thinks about those currencies by trading them in for gold - a process now underway on the fringe where wise men looking through the fog of deception that is the media, are moving as nonchalantly as possible for the exits of U.S. investment
Monday, December 15, 2008
اضربه بالحذاء
اضربه اكرمت العراق بضربه.حتى الحذاء ابى يقبل خدهارجعتني للعز من بعد الغيابورفعت رأسي عاليا فوق السحاب.اضربه يا ابن الفرات،،اضربه يا ابن العرب.اضربه حتى نستريح.اضربه قد طال التعباضربه حتى يستفيق ابن البغيضهذا المغولي الشعوبي المريضهذا الذي بجنوده قتل النساءهذا الذي تلعنه اديان السماءهذا الذي لايستحق سوى الحذاء
Friday, November 14, 2008
نشاطركم العزاء by عبدالرحمن الشهيب
اخوتي الطلبة والطالبات أشاطركم العزاء في بداية العام الدراسي الجديد، عام من أعوام « احفظ وانجح» أعزيكم ونظامنا التعليمي لا يبارح التلقين والتكرار يفهم الشطار! معلومات مكررة ومقررات ثقيلة ومستقبل وظيفي مجهول! أعزيكم في مبانيكم المستأجرة! وهل أصلحت المكيفات المكسرة والصنابير المعطلة وهل لديكم ماء بارد يكفيكم! وأعزيك يا من كان فصلك في المقلط! ربما كنت أوفر حظاً ممن كان فصله في المطبخ.! لن أسألكم ما هي سنة صنع كمبيوتراتكم ولن أسألكم عن مساحة ملاعب مدرستكم لأني أتيت هنا لتقديم مراسم العزاء فقط!مطلوب من وزارة التربية والتعليم أن تستفيد من الطفرة الاقتصادية التي تعيشها المملكة حالياً وتبني كامل مدارسها بمبان نموذجية وأن لا ترتكب غلطة وزارة المعارف في الثمانينات حينما لم تستفد من فوائض الميزانية حينها فانتهت مدارسنا في مبان مستأجرة كحيانة. أعزي أولياء الأمور على أقساط المدارس الأهلية التي تقص الظهر وهي لا تختلف عن المدارس الحكومية إلا في حمامات نظيفة، ومقدرة ولي الأمر على مقابلة مدرس ابنه!
أعزي معلمينا ومعلماتنا السعوديين في المدارس الأهلية وما يعانونه من رواتب زهيدة وأعباء ثقيلة وسوء تعامل، وأعزي معلمة رياض الأطفال السعودية التي ستسلمها مشرفة الروضة (غير السعودية) فصلا من جدران فقط لتقوم بتأثيثه بميزانية باهظة من جيبها وهي بعد لم تستلم راتبها الزهيد والروضة استلمت 18 ألف ريال رسوما سنوية عن الطفل الواحد وقبول مع حب الخشوم! ووزارة العمل تكاد تطبق مقولة « لو أن خادمةً عثرت في العراق!» ووزارة التربية والتعليم وعدت في وقت سابق بأنها ستلحق بكل مدرسة ابتدائية للبنات روضة أطفال لأهمية هذه المرحلة ولكنها وعود طارت مع وعود أخرى، والسعوديون عموماً لا يأبهون لمرحلة الروضة مع أنها هي المرحلة التي تتشكل فيها أذهان أطفالهم. أعزي اخواننا واخواتنا الطلبة والطالبات الذين لم تقبلهم الجامعات السعودية وأقول لمديري الجامعات في المملكة لكم في مصر الشقيقة عبرة، مصر ذات السبعين مليون مواطن والستة ملايين عاطل، مازالت تقبل كل الطلاب المصريين حتى أصحاب معدلات 59% و60%..... هذه المعدلات التي أحس أن ثانوياتنا لم يعد يتخرج منها أحد بهذه النسب. لم يتحججوا في مصر الشقيقة بأن المقاعد شحيحة! ولم يتحججوا بأن خريجي الكليات النظرية هم سبب البطالة! هل كانت خريجة الـ 99% بحاجة إلى فزعة جريدة (اليوم) لكي تقبلها كلية الطب في جامعة الملك فيصل؟لي أصدقاء عملوا في إدارة جامعات محلية يقولون ان جامعاتنا تستوعب أعداد طلبة أكبر ولكن تعنت مسئولي الجامعات السعودية يحول دون قبول أعداد أكبر.
وجود أبنائنا في الجامعات في هذه السن الحرجة من 18إلى 22 سنة ضروري جداً ويحميهم من مغبات الانحراف في الإدمان أو الإرهاب، القهر والظلم الناتج من التبطح في القهاوي والملاحق قد يؤدي إلى مزالق كثيرة. أن يستطيع الشاب أن يرفع رأسه أمام ملاقيف المجالس ويجاوبهم حينما يسألونه أين يدرس فيخبرهم باسم جامعته بكل اعتزاز فهذا يحمي شبابنا وبلادنا من المهالك. أقول لمديري الجامعات في المملكة اقبلوا الطلبة والطالبات بأي معدلات لأن مقابل حيطان المنزل عاقبته وخيمة ولا تصدقوا أن خريجي الكليات النظرية هم سبب البطالة فالبطالة طالت خريجي جامعة الملك فهد للبترول والمعادن، سبب البطالة في المملكة هي عدم تطبيق سياسات الحد الأدنى للأجور المعمول بها في أوروبا وأمريكا وبدونها لن يكون هناك قضاء على البطالة في المملكة، وأبناؤنا لن يعملوا سفرجية شاءت وزارة العمل أم أبت.
الجامعة للتعلم وليست للوظيفة فقط والأرزاق بيد الله، دعوا أبناءنا وبناتنا يدرسون علم نفس فعلى الأقل يعالجون المرضى النفسيين الذين يملأون المجالس والمقاهي ودعوهم يدرسون الأدب فما قيمة أمة بلا أدب ودعوهم يدرسون التاريخ فالتاريخ وحده هو الذي يخبرنا كيف تنهار الأمم، المهم لا تجعلوا أبناءنا وبناتنا ينهارون وحدهم بين الحيطان ينهشهم الفراغ والقهر والموت، ثم لا نستطيع أن نقدم لهم سوى العزاء!
أعزي معلمينا ومعلماتنا السعوديين في المدارس الأهلية وما يعانونه من رواتب زهيدة وأعباء ثقيلة وسوء تعامل، وأعزي معلمة رياض الأطفال السعودية التي ستسلمها مشرفة الروضة (غير السعودية) فصلا من جدران فقط لتقوم بتأثيثه بميزانية باهظة من جيبها وهي بعد لم تستلم راتبها الزهيد والروضة استلمت 18 ألف ريال رسوما سنوية عن الطفل الواحد وقبول مع حب الخشوم! ووزارة العمل تكاد تطبق مقولة « لو أن خادمةً عثرت في العراق!» ووزارة التربية والتعليم وعدت في وقت سابق بأنها ستلحق بكل مدرسة ابتدائية للبنات روضة أطفال لأهمية هذه المرحلة ولكنها وعود طارت مع وعود أخرى، والسعوديون عموماً لا يأبهون لمرحلة الروضة مع أنها هي المرحلة التي تتشكل فيها أذهان أطفالهم. أعزي اخواننا واخواتنا الطلبة والطالبات الذين لم تقبلهم الجامعات السعودية وأقول لمديري الجامعات في المملكة لكم في مصر الشقيقة عبرة، مصر ذات السبعين مليون مواطن والستة ملايين عاطل، مازالت تقبل كل الطلاب المصريين حتى أصحاب معدلات 59% و60%..... هذه المعدلات التي أحس أن ثانوياتنا لم يعد يتخرج منها أحد بهذه النسب. لم يتحججوا في مصر الشقيقة بأن المقاعد شحيحة! ولم يتحججوا بأن خريجي الكليات النظرية هم سبب البطالة! هل كانت خريجة الـ 99% بحاجة إلى فزعة جريدة (اليوم) لكي تقبلها كلية الطب في جامعة الملك فيصل؟لي أصدقاء عملوا في إدارة جامعات محلية يقولون ان جامعاتنا تستوعب أعداد طلبة أكبر ولكن تعنت مسئولي الجامعات السعودية يحول دون قبول أعداد أكبر.
وجود أبنائنا في الجامعات في هذه السن الحرجة من 18إلى 22 سنة ضروري جداً ويحميهم من مغبات الانحراف في الإدمان أو الإرهاب، القهر والظلم الناتج من التبطح في القهاوي والملاحق قد يؤدي إلى مزالق كثيرة. أن يستطيع الشاب أن يرفع رأسه أمام ملاقيف المجالس ويجاوبهم حينما يسألونه أين يدرس فيخبرهم باسم جامعته بكل اعتزاز فهذا يحمي شبابنا وبلادنا من المهالك. أقول لمديري الجامعات في المملكة اقبلوا الطلبة والطالبات بأي معدلات لأن مقابل حيطان المنزل عاقبته وخيمة ولا تصدقوا أن خريجي الكليات النظرية هم سبب البطالة فالبطالة طالت خريجي جامعة الملك فهد للبترول والمعادن، سبب البطالة في المملكة هي عدم تطبيق سياسات الحد الأدنى للأجور المعمول بها في أوروبا وأمريكا وبدونها لن يكون هناك قضاء على البطالة في المملكة، وأبناؤنا لن يعملوا سفرجية شاءت وزارة العمل أم أبت.
الجامعة للتعلم وليست للوظيفة فقط والأرزاق بيد الله، دعوا أبناءنا وبناتنا يدرسون علم نفس فعلى الأقل يعالجون المرضى النفسيين الذين يملأون المجالس والمقاهي ودعوهم يدرسون الأدب فما قيمة أمة بلا أدب ودعوهم يدرسون التاريخ فالتاريخ وحده هو الذي يخبرنا كيف تنهار الأمم، المهم لا تجعلوا أبناءنا وبناتنا ينهارون وحدهم بين الحيطان ينهشهم الفراغ والقهر والموت، ثم لا نستطيع أن نقدم لهم سوى العزاء!
Tuesday, November 11, 2008
What Went Wrong ?
Finally there is a 100% consensus between economists, experts, journalists, and government officials that restoring interbank lending will restore the stability of the financial system and will reignite economic growth. Too bad, the consensus has gotten again all wrong. This is a pure myth and nothing can be further from the truth.
The grim reality is very different and already forgotten. The reality is that most markets for the majority of financial instruments have collapsed completely and reviving interbank lending will not resurrect any of those markets. In other words, resolving the problem of interbank lending will not help the economy in any way. It is like an air balloon that has deflated and we desperately need to reflate it again with helium, but we are told that even ordinary cold air will lift it off the ground; since the balloon is stubbornly stuck on the ground, we are told we simply need more air!
I offer little new here, but a precious history of how the tentacles of the Credit Crisis are reaching more and more segments of the financial markets. No amount of interbank lending will recover meaningfully most segments from the firm grip of those tentacles.
The Causes of the Financial Crisis
I do not attempt to explain the fundamental causes of the current Credit Crisis. No doubt that in coming decades tomes will be written on the subject. Nevertheless, the basics are simple – America borrowed and spent for decades driving its savings rate to nil, while printing trillions of dollars in attempt to sustain the (unsustainable) global imbalances caused by its own profligacy and saddling the rest of the world with trillions of bad debt.
The Trigger of the Financial Crisis
The trigger of the crisis can be attributed to the decreased confidence in the markets for mortgage-backed securities following the August 2007 collapse of two Bear Stearns' hedge funds that were heavily exposed to subprime mortgages. Resetting of teaser rates and adjustable-rate mortgages triggered an avalanche of defaults. Once default rates started rising, many institutional investors, both U.S. and global, began to realize that the MBS's and CDO's in their portfolios might not be worth what they initially thought. Investment banks, insurance companies, mutual funds, and hedge funds alike began recognizing losses related to their holdings of mortgage-backed securities. Confidence was shaken. Margin calls forced further liquidations of those mortgage-backed securities, but as few were standing ready to buy, prices dropped even further, invoking even more margin calls. It was a death-spiral. The resulting losses just went snowballing. As a result, the markets for those structured financial products froze up and liquidity suddenly dried up. The Credit Crisis reared its ugly head.
1. Subprime Mortgages
The first indicator signaling the Subprime Meltdown surfaced in February 2007 “when scores of mortgage originators went bust amid rising defaults and tightening lending standards” . In mid-June, a second significant sign of financial collapse became evident as two CDO-focused Bear Stearns hedge funds blew up. Those hedge funds were too big and distracted investors' attention from another smaller in proportions, but still significant bankruptcy - California based brokerage firm Brookstreet Securities. This was the early beginning of the crisis.
In the second week of July 2007, Moody's and Standard & Poor's announced downgrades on billions of bonds backed by subprime mortgages. Though the downgrades did not reveal the unsoundness of the bonds, it signaled the demise of the Ponzi mortgage investment market backed by inflated real estate.
In early August the looming Credit Crunch could already be felt. Several of Wall Street's biggest foreign customers announced enormous losses on their holdings of mortgage backed securities. Once the “teaser rates” began to reset, mortgage defaults spiked. Foreign investors realized that the bond collateral fell short of the bond principal, in banker-speak, the LTV exceeded 100%. Home equity vanished and mortgage payments shot up. Dwindling foreign lending was a sure sign of the impending crisis.
At the end of August many financial institutions began to sense the looming disaster. Calls for various government bailout schemes for homeowners were only meant to bail the lenders out. Amidst the unraveling of the subprime crisis, the Fed responded by aggressively cutting interest rates. However, tightening lending standards, widening credit spreads, and rising down payments exacerbated default rates and mounted further losses for the Leveraged Speculator Community, aka, hedge funds. A common sense of mistrust gripped the markets. Confidence evaporated, and so did liquidity. The subprime market was terminally ill – no amount of Fed cutting and liquidity injections could ever possibly revive it again! This market has been dead for more than year.
2. Jumbo Mortgages
With the meltdown of subprime mortgages, the tentacles of the Credit Crunch began to take firm hold of other sectors of the financial system. The next victim was the market for jumbo mortgages – mortgages of high denominations, technically above $417,000 at the time. Further tightening of lending standards and more realistic perceptions of the underlying risk of those mortgages basically froze the market for Jumbo MBS. The major force behind the inflating California and Florida real estate bubbles was inanimate. Now these markets were set for a spectacular bust; the government's attempt to resurrect the Jumbo market (by raising the limit to $730,000) miserably failed. This market has been comatose for well over a year and jumbo rates remain stubbornly high. No amount of liquidity or interbank lending will revive the Jumbo market any time soon!
3. Home Equity loans
With dying subprime and jumbo markets and tightening mortgage credit, something that for decades was believed impossible, suddenly became inevitable -- real estate prices began to fall. As a result, the tentacles of the credit crisis snatched another victim -- Home Equity Loans and Home Equity Lines of Credit (HELOCs). These loans, commonly referred to as “second mortgages”, allow homeowners to borrow against the value of their home equity to finance a range of expenditures, such as medical bills, home improvements, college tuitions, and well-deserved vacations. The market quickly degenerated with rapidly deteriorating LTV ratios and skyrocketing number of “underwater” mortgages. Consumers fell behind on those loans at the highest level in 15 years. No more refis for consumers who already extracted the last drop of equity. With real estate prices falling, there was equity no more, With equity gone, so were the home equity loans. We can safely say that home equity loans are now a thing of the past and no amount of government stimulus and interbank lending will revive this market for many years!
4. SIVs and Conduits
Structured investment vehicles (SIVs) played a crucial role in the historic expansion of credit. A brainchild of ingenious financial engineers, large investment banks created and sponsored these entities. They invested largely in ABSs and MBSs that were manufactured primarily by the same large investment banks. To finance these investments, they issued investment-grade commercial paper and structured notes to investors around the world. This scheme allowed large financial institutions to remove a major portion of their risk exposure off their balance sheets, while at the same time “consolidating” any profits that resulted from the SIV operations. To put it in simple terms, they kept the profits on the balance sheet, but kept the risk off the balance sheet. This was the ultimate game in finance – return without risk, converting junk into AAA, turning led into gold – this was the Magic of Wall Street, the Alchemy of Finance.
However, with SIVs and Conduits loaded up with subprime, it was only a matter of time before this alchemic dream would turn into an ugly nightmare. Rising defaults and falling real estate prices shook investors' confidence. A series of downgrades inflicted grave damages. Some very risk-averse investors reaped distressing losses. Many risk-averse pension funds and university endowments relied on the AAA ratings and treated the securities as higher-yielding alternatives to safe money-market instruments. Repricing of ABS and MBS resulted in major writedowns for those SIVs and magnified the losses of their leveraged investors. Yet another victim fell into the tentacles of the Credit Crisis. As Doug Noland has pointed out so well, “the collapse of structured investment vehicles has proven to be the ultimate failure of Wall Street Finance in its attempt on risk intermediation between highly risky mortgage-backed securities and perceived safe and liquid money market instruments”. Today, it is accepted that Alchemy doesn't work, and that SIVs were hoped to do just that -- convert led into gold. The reality is that no amount of interbank lending and liquidity injections will do that.
5. CDOs
Some of the most pervasive exposures of leveraged financial institutions have been related to CDOs backed by subprime debt. This was another creature of mad financial engineers that was destined to fall in the tentacles of the Credit Crisis. It was meant to pool dodgy debt that with proper slicing and dicing would magically turn into a AAA-asset; it turned led into gold.
The bulk of the colossal losses of large investment banks, brokerage firms, hedge funds, and other financial institutions have been related to write-downs of CDOs. Their demand stalled as some top-rated classes of mortgage-linked CDOs lost their entire value amid surging foreclosures. Series of CDO downgrades by credit rating agencies led to enormous losses for investors around the world. Top-rated CDO tranches were devalued in late October 2007 due to expectations of excessive future losses from jumbo mortgages, Alt-As and option ARMs. Following the collapse of the two Bear Stearns hedge funds that were heavily invested in subprime CDOs, the CDO market has suffered severe illiquidity and lack of confidence. In late January Merrill Lynch CEO John Thain asserted that “[The company is] not going to be in the CDO and structured-credit types of businesses”. Since then the market has been for all practical purposes dead. It is dead because the underlying assets (jumbo, Alt-A, option ARMs) were never creditworthy in first place. No amount of liquidity injections and interbank lending will make the underlying instruments more creditworthy than before, and therefore cannot resurrect this financial instrument.
6. Commercial Paper
The familiar notion of borrowing short and lending long has come into question since the Credit Crisis began. Thousands of financial institutions have previously met their demise as a result of a maturity gap. Most of the companies engaged in this business were issuing commercial paper backed by MBSs or CDOs. With the unfolding of the crisis, questions about the value of the underlying collateral became ever more pervasive and eroded confidence. As a result, the market for commercial paper (CP) has fallen into the tentacles of the Credit Crisis. The first to experience the difficulties were the investment banks, then the commercial banks, and later other financial institutions. The difficulties spread even to the best investment-grade industrial corporations. As of April 11, 2008 total outstanding commercial paper has contracted by 11.4%. This market is not dead, but on life support, as the Fed has directly intervened to monetize commercial paper. Indeed, this market desperately needs the life support by the Fed in order to stay alive. By monetizing CP, the Fed has become the Lender of Last Resort for major corporations.
7. Private-Label MBS
The market for private-label MBS, which has been central to the creation of easily-available cheap credit, has suffered from a severe liquidity seizure, falling into the tentacles of the Financial Crisis. By securitizing mortgage loans, Wall Street was able to provide endless amounts of credit to homebuyers and homeowners, which led to the inflation of a real estate bubble of extreme proportions. Escalating home prices, in turn, made it possible for mortgage lenders to extend even more credit to borrowers with questionable credit history, without having to worry about being repaid, On the way up, it was a well-oiled Ponzi scheme; on the way down – an unmitigated disaster. The scheme depended crucially on rising real estate prices; once the prices stagnated or began to fall, no amount of liquidity injections or interbank lending could potentially revive this market.
8. Leveraged Loans
The loan market for Private Equity and Leveraged Buyouts (LBOs) is not functioning. Those loans that finance Private Equity deals or LBOs are known as “leveraged loans”. The tentacle of the credit crisis has gripped this market too. As the real economy has suffered a serious slowdown and plunges into a recession, the rate of corporate bankruptcies has been soaring. As a result, in October 2007 some of the major banks, such as Bank of America, Citigroup and JP Morgan, had to write down $2.5 Billion in loans for LBOs. These losses prompted most of the big players to slash their LBO loans. Some estimates indicate that only the very best deal can possibly get any financing; the volume has fallen almost 10 times. With an economy in recession, no amount of liquidity injections and interbank lending can revive this market.
9. Alt-A Mortgages
The Alt-A mortgage sector has not escaped the tentacles of the credit crisis. In a manner quite similar to Subprime and Jumbo mortgages, this market has slowed to a trickle. However, with the nationalization of the GSEs, the government is attempting to revive this market by forcing the GSEs to purchase more of these mortgages. As the GSEs themselves are now “owned” and guaranteed by the Treasury, this is tantamount to the Treasury buying up Alt-A mortgages. Given that the Treasury itself is financed mostly through monetization of the Fed, the ultimate effect is that this market is supported, just like the commercial paper market, with the printing press. The economic interpretation is that of a classic government subsidy financed by an inflation tax – redistributive, inefficient, and replete with moral hazards that sets up the system for a spectacular blowup down the road.
10. Prime Mortgages
The next victim in the tentacles of the Credit Crisis became the prime mortgages. Already in deep trouble, the financial system damaged even its healthiest credit market instrument. Reacting to the defaults in subprime and Alt-A mortgages, investors were compelled to manage risk more carefully. Practically, all sorts of loans became inaccessible for any borrower. This dried the liquidity, further causing huge bankruptcies of the borrowers who cannot refinance their loans. The prime residential mortgage market has been revived with the spectacular “bankruptcy” and subsequent nationalization of the GSEs, backed directly by the Treasury and indirectly by the Fed.
11. Commercial Mortgages
The commercial mortgage market has been practically frozen for many months. As the debacle in subprime, jumbo, Alt-A, and prime mortgages has unfolded, investors turned their attention to commercial mortgages. Over time, it became clear that investing in commercial mortgages is fraught with risk. The first obvious risk was overvaluation. The second obvious risk was a decelerating economy. The evolution of the Credit Crisis introduced a well-forgotten type of risk – liquidity risk. Investors saddled with heavy losses from other mortgage instruments decided to withdraw and stay on the sidelines. This, coupled with shaken confidence was enough to choke this market. Risk premiums have skyrocketed as the perceived risks of commercial mortgages have realigned with reality. Recession has exposed the fundamental weaknesses of many projects. The private sector wants none of this market. The Credit Crisis has extended its tentacles to commercial mortgages. No amount of liquidity injections and interbank lending can revive this market; only a direct intervention by the Treasury can do the trick.
12. Auction-Rate Securities
An auction-rate security is technically a debt instrument, typically a municipal bond, with a long nominal maturity, for which the interest rate is regularly reset through an auction, usually on a weekly basis. One economic interpretation of this concept is that of a fund borrowing with low short-term interest rates and lending to long-term municipal bonds, passing on the low interest rate to the municipal borrower. The other economic interpretation is that illiquid municipal bonds are securitized and transformed into liquid securities that are regularly traded at auctions. As deleveraging tightened its vice grip on the credit market in February 2008, liquidity evaporated from the credit system and the auction-rate securities suddenly crashed out of the blue. It was another nail in the coffin of Wall Street Structured Finance and another victim in the tentacles of the Credit Crisis. This market has been dead for half a year and nothing short of extraordinary amount of liquidity coupled with government guarantees has the potential of reviving it.
13. Corporate Debt
The Credit Crisis has extended its tentacles to the corporate bond market. Credit spreads of investment-grade corporate bonds have been steadily rising and are much higher than even two months ago. Credit spreads for junk bonds have surged from 650 basis points at the end of September 2008 to 950 basis points at the beginning of November. Yes, credit is available to corporations, but the cost is becoming prohibitive. The tentacles have reached the corporate market and are beginning to strangulate it. Just like the market for auction-rate securities, this market desperately needs a torrent of liquidity to overcome the strangling tentacles. A Bloomberg story from October 31 tells the sorry tale of this market: “Corporate debt markets in the U.S. and Europe endured their worst month as the credit crisis spread beyond financial firms to industrial companies amid the prospect of a global recession. Corporate industrial bonds in October are set to post their steepest monthly loss on record, while the gaps between yields on those bonds and government debt soar by the most ever.”
14. Credit Default Swaps
The US monolines are on the verge of bankruptcy as more and more of the credit that they insure defaults. They initially encountered difficulties in the beginning of January 2008. Indices of corporate credit risk widened, showing that the tentacles of Credit Crisis have reached the corporate bond market. The price of credit protection soared.
The monolines staggered because some major insurers were downgraded as investors questioned their ability to perform. Investors' minds were suddenly preoccupied with another well-forgotten risk – counterparty risk. A vicious spiral gripped the monolines -- CDSs lost their attractiveness, resulting in less cash inflows for monolines, which in turn decreased their ability to provide adequate credit risk insurance, lowering in turn their ability to sell CDSs… And another victim fell prey into the tentacles of the Credit Crisis.
The CDS market has not collapsed completely. However, its imminent collapse will indirectly affect international finance. Inability to hedge with CDS will eventually destabilize the US financial system. Many corporate borrowers will be unable to borrow, which in turn will result in higher corporate defaults, and another vicious cycles will inevitably take hold of the financial system.
15. Letters of Credit
The tentacles of the Credit Crisis have recently taken another victim: Letters of Credit. A Bloomberg story from October 29 explains this ugly turn for the worse: the Credit Crisis spreads beyond the financial sector and into the real economy. Do you remember the good old days when Bernanke and Paulson assured us that the Credit Crisis is contained? Here is the Bloomberg story:
“Richard Burnett's lumber company had started loading wood onto ships heading for China. More was en route to the docks. It was all part of an order that would fill 100 40-foot cargo containers. Then Burnett got a call from his buyer at Shanghai VIVA Wood Products Co. The deal was dead. He told Burnett… he couldn't get a letter of credit to guarantee payment for at least six months. ‘It was like a spigot got cut off,' Burnett said… The inability of buyers in China and Vietnam to get letters of credit has cost his company as much as $4 million this year, a third of projected revenue, forcing him to lay off 15 of 35 employees, he said. Suppliers of oil, coal, grains and consumer products from Chicago to Mumbai are losing sales as the credit crisis spreads beyond financial institutions, and banks refuse financing or increase the fees for buyers.”
16. Credit Card Loans
In October 2008 another market has fallen into the tentacles of the Credit Crisis: the market for credit card loans. Credit card companies usually do not retain most of their credit card debt on their balance sheet; instead, they securitize it and sell it. The latest data from Dealogic indicates that the consumer-based securitization market has shrunk in October to $500 million from $50 billion previously. This means that the ability to securitize and sell consumer-based loans has fallen almost 100 times in one year. The implication is clear – credit card companies will be forced to cut consumers from credit card debt. This will bring the American consumer to his knees and means the end of the Consumer Economy. No wonder that in the last three months the media frequency of the word “Depression” has increased hundred-fold.
Going Forward
No amount of interbank lending and liquidity injections will revive most of the markets for various financial instruments. No amount of monetary and fiscal policy can resurrect genuine productive lending in the economy. The tentacles of the Credit Crisis have spread to every sector of the financial markets. The “Real Estate Economy” is dead; the “Financial Economy” is dead; the “Consumer Economy” is dying; and the “Service Economy” is dying. Enter the Depression Economy! Or shall I say, “Enter the Zimbabwe Economy”!?
The grim reality is very different and already forgotten. The reality is that most markets for the majority of financial instruments have collapsed completely and reviving interbank lending will not resurrect any of those markets. In other words, resolving the problem of interbank lending will not help the economy in any way. It is like an air balloon that has deflated and we desperately need to reflate it again with helium, but we are told that even ordinary cold air will lift it off the ground; since the balloon is stubbornly stuck on the ground, we are told we simply need more air!
I offer little new here, but a precious history of how the tentacles of the Credit Crisis are reaching more and more segments of the financial markets. No amount of interbank lending will recover meaningfully most segments from the firm grip of those tentacles.
The Causes of the Financial Crisis
I do not attempt to explain the fundamental causes of the current Credit Crisis. No doubt that in coming decades tomes will be written on the subject. Nevertheless, the basics are simple – America borrowed and spent for decades driving its savings rate to nil, while printing trillions of dollars in attempt to sustain the (unsustainable) global imbalances caused by its own profligacy and saddling the rest of the world with trillions of bad debt.
The Trigger of the Financial Crisis
The trigger of the crisis can be attributed to the decreased confidence in the markets for mortgage-backed securities following the August 2007 collapse of two Bear Stearns' hedge funds that were heavily exposed to subprime mortgages. Resetting of teaser rates and adjustable-rate mortgages triggered an avalanche of defaults. Once default rates started rising, many institutional investors, both U.S. and global, began to realize that the MBS's and CDO's in their portfolios might not be worth what they initially thought. Investment banks, insurance companies, mutual funds, and hedge funds alike began recognizing losses related to their holdings of mortgage-backed securities. Confidence was shaken. Margin calls forced further liquidations of those mortgage-backed securities, but as few were standing ready to buy, prices dropped even further, invoking even more margin calls. It was a death-spiral. The resulting losses just went snowballing. As a result, the markets for those structured financial products froze up and liquidity suddenly dried up. The Credit Crisis reared its ugly head.
1. Subprime Mortgages
The first indicator signaling the Subprime Meltdown surfaced in February 2007 “when scores of mortgage originators went bust amid rising defaults and tightening lending standards” . In mid-June, a second significant sign of financial collapse became evident as two CDO-focused Bear Stearns hedge funds blew up. Those hedge funds were too big and distracted investors' attention from another smaller in proportions, but still significant bankruptcy - California based brokerage firm Brookstreet Securities. This was the early beginning of the crisis.
In the second week of July 2007, Moody's and Standard & Poor's announced downgrades on billions of bonds backed by subprime mortgages. Though the downgrades did not reveal the unsoundness of the bonds, it signaled the demise of the Ponzi mortgage investment market backed by inflated real estate.
In early August the looming Credit Crunch could already be felt. Several of Wall Street's biggest foreign customers announced enormous losses on their holdings of mortgage backed securities. Once the “teaser rates” began to reset, mortgage defaults spiked. Foreign investors realized that the bond collateral fell short of the bond principal, in banker-speak, the LTV exceeded 100%. Home equity vanished and mortgage payments shot up. Dwindling foreign lending was a sure sign of the impending crisis.
At the end of August many financial institutions began to sense the looming disaster. Calls for various government bailout schemes for homeowners were only meant to bail the lenders out. Amidst the unraveling of the subprime crisis, the Fed responded by aggressively cutting interest rates. However, tightening lending standards, widening credit spreads, and rising down payments exacerbated default rates and mounted further losses for the Leveraged Speculator Community, aka, hedge funds. A common sense of mistrust gripped the markets. Confidence evaporated, and so did liquidity. The subprime market was terminally ill – no amount of Fed cutting and liquidity injections could ever possibly revive it again! This market has been dead for more than year.
2. Jumbo Mortgages
With the meltdown of subprime mortgages, the tentacles of the Credit Crunch began to take firm hold of other sectors of the financial system. The next victim was the market for jumbo mortgages – mortgages of high denominations, technically above $417,000 at the time. Further tightening of lending standards and more realistic perceptions of the underlying risk of those mortgages basically froze the market for Jumbo MBS. The major force behind the inflating California and Florida real estate bubbles was inanimate. Now these markets were set for a spectacular bust; the government's attempt to resurrect the Jumbo market (by raising the limit to $730,000) miserably failed. This market has been comatose for well over a year and jumbo rates remain stubbornly high. No amount of liquidity or interbank lending will revive the Jumbo market any time soon!
3. Home Equity loans
With dying subprime and jumbo markets and tightening mortgage credit, something that for decades was believed impossible, suddenly became inevitable -- real estate prices began to fall. As a result, the tentacles of the credit crisis snatched another victim -- Home Equity Loans and Home Equity Lines of Credit (HELOCs). These loans, commonly referred to as “second mortgages”, allow homeowners to borrow against the value of their home equity to finance a range of expenditures, such as medical bills, home improvements, college tuitions, and well-deserved vacations. The market quickly degenerated with rapidly deteriorating LTV ratios and skyrocketing number of “underwater” mortgages. Consumers fell behind on those loans at the highest level in 15 years. No more refis for consumers who already extracted the last drop of equity. With real estate prices falling, there was equity no more, With equity gone, so were the home equity loans. We can safely say that home equity loans are now a thing of the past and no amount of government stimulus and interbank lending will revive this market for many years!
4. SIVs and Conduits
Structured investment vehicles (SIVs) played a crucial role in the historic expansion of credit. A brainchild of ingenious financial engineers, large investment banks created and sponsored these entities. They invested largely in ABSs and MBSs that were manufactured primarily by the same large investment banks. To finance these investments, they issued investment-grade commercial paper and structured notes to investors around the world. This scheme allowed large financial institutions to remove a major portion of their risk exposure off their balance sheets, while at the same time “consolidating” any profits that resulted from the SIV operations. To put it in simple terms, they kept the profits on the balance sheet, but kept the risk off the balance sheet. This was the ultimate game in finance – return without risk, converting junk into AAA, turning led into gold – this was the Magic of Wall Street, the Alchemy of Finance.
However, with SIVs and Conduits loaded up with subprime, it was only a matter of time before this alchemic dream would turn into an ugly nightmare. Rising defaults and falling real estate prices shook investors' confidence. A series of downgrades inflicted grave damages. Some very risk-averse investors reaped distressing losses. Many risk-averse pension funds and university endowments relied on the AAA ratings and treated the securities as higher-yielding alternatives to safe money-market instruments. Repricing of ABS and MBS resulted in major writedowns for those SIVs and magnified the losses of their leveraged investors. Yet another victim fell into the tentacles of the Credit Crisis. As Doug Noland has pointed out so well, “the collapse of structured investment vehicles has proven to be the ultimate failure of Wall Street Finance in its attempt on risk intermediation between highly risky mortgage-backed securities and perceived safe and liquid money market instruments”. Today, it is accepted that Alchemy doesn't work, and that SIVs were hoped to do just that -- convert led into gold. The reality is that no amount of interbank lending and liquidity injections will do that.
5. CDOs
Some of the most pervasive exposures of leveraged financial institutions have been related to CDOs backed by subprime debt. This was another creature of mad financial engineers that was destined to fall in the tentacles of the Credit Crisis. It was meant to pool dodgy debt that with proper slicing and dicing would magically turn into a AAA-asset; it turned led into gold.
The bulk of the colossal losses of large investment banks, brokerage firms, hedge funds, and other financial institutions have been related to write-downs of CDOs. Their demand stalled as some top-rated classes of mortgage-linked CDOs lost their entire value amid surging foreclosures. Series of CDO downgrades by credit rating agencies led to enormous losses for investors around the world. Top-rated CDO tranches were devalued in late October 2007 due to expectations of excessive future losses from jumbo mortgages, Alt-As and option ARMs. Following the collapse of the two Bear Stearns hedge funds that were heavily invested in subprime CDOs, the CDO market has suffered severe illiquidity and lack of confidence. In late January Merrill Lynch CEO John Thain asserted that “[The company is] not going to be in the CDO and structured-credit types of businesses”. Since then the market has been for all practical purposes dead. It is dead because the underlying assets (jumbo, Alt-A, option ARMs) were never creditworthy in first place. No amount of liquidity injections and interbank lending will make the underlying instruments more creditworthy than before, and therefore cannot resurrect this financial instrument.
6. Commercial Paper
The familiar notion of borrowing short and lending long has come into question since the Credit Crisis began. Thousands of financial institutions have previously met their demise as a result of a maturity gap. Most of the companies engaged in this business were issuing commercial paper backed by MBSs or CDOs. With the unfolding of the crisis, questions about the value of the underlying collateral became ever more pervasive and eroded confidence. As a result, the market for commercial paper (CP) has fallen into the tentacles of the Credit Crisis. The first to experience the difficulties were the investment banks, then the commercial banks, and later other financial institutions. The difficulties spread even to the best investment-grade industrial corporations. As of April 11, 2008 total outstanding commercial paper has contracted by 11.4%. This market is not dead, but on life support, as the Fed has directly intervened to monetize commercial paper. Indeed, this market desperately needs the life support by the Fed in order to stay alive. By monetizing CP, the Fed has become the Lender of Last Resort for major corporations.
7. Private-Label MBS
The market for private-label MBS, which has been central to the creation of easily-available cheap credit, has suffered from a severe liquidity seizure, falling into the tentacles of the Financial Crisis. By securitizing mortgage loans, Wall Street was able to provide endless amounts of credit to homebuyers and homeowners, which led to the inflation of a real estate bubble of extreme proportions. Escalating home prices, in turn, made it possible for mortgage lenders to extend even more credit to borrowers with questionable credit history, without having to worry about being repaid, On the way up, it was a well-oiled Ponzi scheme; on the way down – an unmitigated disaster. The scheme depended crucially on rising real estate prices; once the prices stagnated or began to fall, no amount of liquidity injections or interbank lending could potentially revive this market.
8. Leveraged Loans
The loan market for Private Equity and Leveraged Buyouts (LBOs) is not functioning. Those loans that finance Private Equity deals or LBOs are known as “leveraged loans”. The tentacle of the credit crisis has gripped this market too. As the real economy has suffered a serious slowdown and plunges into a recession, the rate of corporate bankruptcies has been soaring. As a result, in October 2007 some of the major banks, such as Bank of America, Citigroup and JP Morgan, had to write down $2.5 Billion in loans for LBOs. These losses prompted most of the big players to slash their LBO loans. Some estimates indicate that only the very best deal can possibly get any financing; the volume has fallen almost 10 times. With an economy in recession, no amount of liquidity injections and interbank lending can revive this market.
9. Alt-A Mortgages
The Alt-A mortgage sector has not escaped the tentacles of the credit crisis. In a manner quite similar to Subprime and Jumbo mortgages, this market has slowed to a trickle. However, with the nationalization of the GSEs, the government is attempting to revive this market by forcing the GSEs to purchase more of these mortgages. As the GSEs themselves are now “owned” and guaranteed by the Treasury, this is tantamount to the Treasury buying up Alt-A mortgages. Given that the Treasury itself is financed mostly through monetization of the Fed, the ultimate effect is that this market is supported, just like the commercial paper market, with the printing press. The economic interpretation is that of a classic government subsidy financed by an inflation tax – redistributive, inefficient, and replete with moral hazards that sets up the system for a spectacular blowup down the road.
10. Prime Mortgages
The next victim in the tentacles of the Credit Crisis became the prime mortgages. Already in deep trouble, the financial system damaged even its healthiest credit market instrument. Reacting to the defaults in subprime and Alt-A mortgages, investors were compelled to manage risk more carefully. Practically, all sorts of loans became inaccessible for any borrower. This dried the liquidity, further causing huge bankruptcies of the borrowers who cannot refinance their loans. The prime residential mortgage market has been revived with the spectacular “bankruptcy” and subsequent nationalization of the GSEs, backed directly by the Treasury and indirectly by the Fed.
11. Commercial Mortgages
The commercial mortgage market has been practically frozen for many months. As the debacle in subprime, jumbo, Alt-A, and prime mortgages has unfolded, investors turned their attention to commercial mortgages. Over time, it became clear that investing in commercial mortgages is fraught with risk. The first obvious risk was overvaluation. The second obvious risk was a decelerating economy. The evolution of the Credit Crisis introduced a well-forgotten type of risk – liquidity risk. Investors saddled with heavy losses from other mortgage instruments decided to withdraw and stay on the sidelines. This, coupled with shaken confidence was enough to choke this market. Risk premiums have skyrocketed as the perceived risks of commercial mortgages have realigned with reality. Recession has exposed the fundamental weaknesses of many projects. The private sector wants none of this market. The Credit Crisis has extended its tentacles to commercial mortgages. No amount of liquidity injections and interbank lending can revive this market; only a direct intervention by the Treasury can do the trick.
12. Auction-Rate Securities
An auction-rate security is technically a debt instrument, typically a municipal bond, with a long nominal maturity, for which the interest rate is regularly reset through an auction, usually on a weekly basis. One economic interpretation of this concept is that of a fund borrowing with low short-term interest rates and lending to long-term municipal bonds, passing on the low interest rate to the municipal borrower. The other economic interpretation is that illiquid municipal bonds are securitized and transformed into liquid securities that are regularly traded at auctions. As deleveraging tightened its vice grip on the credit market in February 2008, liquidity evaporated from the credit system and the auction-rate securities suddenly crashed out of the blue. It was another nail in the coffin of Wall Street Structured Finance and another victim in the tentacles of the Credit Crisis. This market has been dead for half a year and nothing short of extraordinary amount of liquidity coupled with government guarantees has the potential of reviving it.
13. Corporate Debt
The Credit Crisis has extended its tentacles to the corporate bond market. Credit spreads of investment-grade corporate bonds have been steadily rising and are much higher than even two months ago. Credit spreads for junk bonds have surged from 650 basis points at the end of September 2008 to 950 basis points at the beginning of November. Yes, credit is available to corporations, but the cost is becoming prohibitive. The tentacles have reached the corporate market and are beginning to strangulate it. Just like the market for auction-rate securities, this market desperately needs a torrent of liquidity to overcome the strangling tentacles. A Bloomberg story from October 31 tells the sorry tale of this market: “Corporate debt markets in the U.S. and Europe endured their worst month as the credit crisis spread beyond financial firms to industrial companies amid the prospect of a global recession. Corporate industrial bonds in October are set to post their steepest monthly loss on record, while the gaps between yields on those bonds and government debt soar by the most ever.”
14. Credit Default Swaps
The US monolines are on the verge of bankruptcy as more and more of the credit that they insure defaults. They initially encountered difficulties in the beginning of January 2008. Indices of corporate credit risk widened, showing that the tentacles of Credit Crisis have reached the corporate bond market. The price of credit protection soared.
The monolines staggered because some major insurers were downgraded as investors questioned their ability to perform. Investors' minds were suddenly preoccupied with another well-forgotten risk – counterparty risk. A vicious spiral gripped the monolines -- CDSs lost their attractiveness, resulting in less cash inflows for monolines, which in turn decreased their ability to provide adequate credit risk insurance, lowering in turn their ability to sell CDSs… And another victim fell prey into the tentacles of the Credit Crisis.
The CDS market has not collapsed completely. However, its imminent collapse will indirectly affect international finance. Inability to hedge with CDS will eventually destabilize the US financial system. Many corporate borrowers will be unable to borrow, which in turn will result in higher corporate defaults, and another vicious cycles will inevitably take hold of the financial system.
15. Letters of Credit
The tentacles of the Credit Crisis have recently taken another victim: Letters of Credit. A Bloomberg story from October 29 explains this ugly turn for the worse: the Credit Crisis spreads beyond the financial sector and into the real economy. Do you remember the good old days when Bernanke and Paulson assured us that the Credit Crisis is contained? Here is the Bloomberg story:
“Richard Burnett's lumber company had started loading wood onto ships heading for China. More was en route to the docks. It was all part of an order that would fill 100 40-foot cargo containers. Then Burnett got a call from his buyer at Shanghai VIVA Wood Products Co. The deal was dead. He told Burnett… he couldn't get a letter of credit to guarantee payment for at least six months. ‘It was like a spigot got cut off,' Burnett said… The inability of buyers in China and Vietnam to get letters of credit has cost his company as much as $4 million this year, a third of projected revenue, forcing him to lay off 15 of 35 employees, he said. Suppliers of oil, coal, grains and consumer products from Chicago to Mumbai are losing sales as the credit crisis spreads beyond financial institutions, and banks refuse financing or increase the fees for buyers.”
16. Credit Card Loans
In October 2008 another market has fallen into the tentacles of the Credit Crisis: the market for credit card loans. Credit card companies usually do not retain most of their credit card debt on their balance sheet; instead, they securitize it and sell it. The latest data from Dealogic indicates that the consumer-based securitization market has shrunk in October to $500 million from $50 billion previously. This means that the ability to securitize and sell consumer-based loans has fallen almost 100 times in one year. The implication is clear – credit card companies will be forced to cut consumers from credit card debt. This will bring the American consumer to his knees and means the end of the Consumer Economy. No wonder that in the last three months the media frequency of the word “Depression” has increased hundred-fold.
Going Forward
No amount of interbank lending and liquidity injections will revive most of the markets for various financial instruments. No amount of monetary and fiscal policy can resurrect genuine productive lending in the economy. The tentacles of the Credit Crisis have spread to every sector of the financial markets. The “Real Estate Economy” is dead; the “Financial Economy” is dead; the “Consumer Economy” is dying; and the “Service Economy” is dying. Enter the Depression Economy! Or shall I say, “Enter the Zimbabwe Economy”!?
Major Achievements Of The American Empire
The failure of Bear Stearns
The failure of Lehman Brothers
The disguised failures of the Goldman Sachs and Morgan Stanley by converting to bank holding companies
Largest bank failures in US history (Washington Mutual, IndyMac)
Other banks merging and/or failing
The failure of Freddie Mac and Fannie Mae and their subsequent nationalization
The failure of AIG (yes, it is a failure otherwise the Government would not have had to step in and become essentially an 80% owner of the company)
Record foreclosures on residential properties
Record losses among many US companies
Rapidly rising personal bankruptcy filings
US Government bail out funding of $700 Billion
Federal Reserve’s creation of numerous “lending facilities”
Record depletion of reserves among the US banks
Direct tax payer funds being injected into the banks balance sheets
$150 Billion Stimulus bill and more to come
Rapidly increasing layoffs
Rising number of retail stores filing chapter 11 and others going out of business
Numerous mortgage companies closed up operations
Collapse of the credit system
Drastic declines in US home prices
The collapse of the economic systems of Iceland
The increasingly likelihood of entire nations becoming insolvent (Hungary, Argentina, Ukraine, etc)
Numerous Federal Reserve emergency rate cuts. And now an effective funds rate of near zero
The near bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler)
The failure of Lehman Brothers
The disguised failures of the Goldman Sachs and Morgan Stanley by converting to bank holding companies
Largest bank failures in US history (Washington Mutual, IndyMac)
Other banks merging and/or failing
The failure of Freddie Mac and Fannie Mae and their subsequent nationalization
The failure of AIG (yes, it is a failure otherwise the Government would not have had to step in and become essentially an 80% owner of the company)
Record foreclosures on residential properties
Record losses among many US companies
Rapidly rising personal bankruptcy filings
US Government bail out funding of $700 Billion
Federal Reserve’s creation of numerous “lending facilities”
Record depletion of reserves among the US banks
Direct tax payer funds being injected into the banks balance sheets
$150 Billion Stimulus bill and more to come
Rapidly increasing layoffs
Rising number of retail stores filing chapter 11 and others going out of business
Numerous mortgage companies closed up operations
Collapse of the credit system
Drastic declines in US home prices
The collapse of the economic systems of Iceland
The increasingly likelihood of entire nations becoming insolvent (Hungary, Argentina, Ukraine, etc)
Numerous Federal Reserve emergency rate cuts. And now an effective funds rate of near zero
The near bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler)
Sunday, November 9, 2008
The Bankers Behind The Economic Collapse
Most Serious Economic Crisis in Modern History
The October 2008 financial meltdown is not the result of a cyclical economic phenomenon. It is the deliberate result of US government policy instrumented through the Treasury and the US Federal Reserve Board.
This is the most serious economic crisis in World history.
The "bailout" proposed by the US Treasury does not constitute a "solution" to the crisis. In fact quite the opposite: it is the cause of further collapse. It triggers an unprecedented concentration of wealth, which in turn contributes to widening economic and social inequalities both within and between nations.
The levels of indebtedness have skyrocketed. Industrial corporations are driven into bankruptcy, taken over by the global financial institutions. Credit, namely the supply of loanable funds, which constitutes the lifeline of production and investment, is controlled by a handful of financial conglomerates.
With the "bailout", the public debt has spiraled. America is the most indebted country on earth. Prior to the "bailout", the US public debt was of the order of 10 trillion dollars. This US dollar denominated debt is composed of outstanding treasury bills and government bonds held by individuals, foreign governments, corporations and financial institutions.
"The Bailout": The US Administration is Financing its Own IndebtednessIronically, the Wall Street banks --which are the recipients of the bailout money-- are also the brokers and underwriters of the US public debt. Although the banks hold only a portion of the public debt, they transact and trade in US dollar denominated public debt instruments Worldwide.
In a bitter twist, the banks are the recipients of a 700+ billion dollar handout and at the same time they act as creditors of the US government. We are dealing with an absurd circular relationship: To finance the bailout, Washington must borrow from the banks, which are the recipients of the bailout.
The US administration is financing its own indebtedness. Federal, State and municipal governments are increasingly in a straightjacket, under the tight control of the global financial conglomerates. Increasingly, the creditors call the shots on government reform.
The bailout is conducive to the consolidation and a centralization of banking power, which in turn backlashes on real economic activity, leading to a string of bankruptcies and mass unemployment.
Will an Obama Administration Reverse the Tide?
The financial crisis is the outcome of a deregulated financial architecture.
Obama has stated unequivocally his resolve to address the policy failures of the Bush administration and "democratize" the US financial system. President-Elect Barack Obama says that he is committed to reversing the tide:
"Let us remember that if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers. In this country, we rise or fall as one nation, as one people." (President-elect Barack Obama, November 4, 2008, emphasis added)
The Democrats casually blame the Bush administration for the October financial meltdown.
Obama says that he will be introducing an entirely different policy agenda which responds to the interests of Main Street:
"Tomorrow, you can turn the page on policies that put the greed and irresponsibility of Wall Street before the hard work and sacrifice of men and women all across Main Street. Tomorrow you can choose policies that invest in our middle class and create new jobs and grow this economy so that everybody has a chance to succeed, from the CEO to the secretary and the janitor, from the factory owner to the men and women who work on the factory floor.( Barack Obama, election campaign, November 3, 2008, emphasis added)
Is Obama committed to "taming Wall Street" and "disarming financial markets"?
Ironically, it was under the Clinton administration that these policies of "greed and irresponsibility" were adopted.
The 1999 Financial Services Modernization Act (FSMA) was conducive to the the repeal of the Glass-Steagall Act of 1933. A pillar of President Roosevelt’s "New Deal", the Glass-Steagall Act was put in place in response to the climate of corruption, financial manipulation and "insider trading" which resulted in more than 5,000 bank failures in the years following the 1929 Wall Street crash.
Under the 1999 Financial Services Modernization Act, effective control over the entire US financial services industry (including insurance companies, pension funds, securities companies, etc.) had been transferred to a handful of financial conglomerates and their associated hedge funds.
The Engineers of Financial Disaster
Who are the architects of this debacle?
In a bitter irony, the engineers of financial disaster are now being considered by President-Elect Barack Obama's Transition Team for the position Treasury Secretary:
Lawrence Summers played a key role in lobbying Congress for the repeal of the Glass Steagall Act. His timely appointment by President Clinton in 1999 as Treasury Secretary spearheaded the adoption of the Financial Services Modernization Act in November 1999. Upon completing his mandate at the helm of the US Treasury, he became president of Harvard University (2001- 2006).
Paul Volker was chairman of the Federal Reserve Board in the l980s during the Reagan era. He played a central role in implementing the first stage of financial deregulation, which was conducive to mass bankruptcies, mergers and acquisitions, leading up to the 1987 financial crisis.
Timothy Geithner is CEO of the Federal Reserve Bank of New York, which is the most powerful private financial institution in America. He was also a former Clinton administration Treasury official. He has worked for Kissinger Associates and has also held a senior position at the IMF. The FRBNY plays a behind the scenes role in shaping financial policy. Geithner acts on behalf of powerful financiers, who are behind the FRBNY. He is also a member of the Council on Foreign Relations (CFR)
Jon Corzine is currently governor of New Jersey, former CEO of Goldman Sachs.
At the time of writing, Obama's favorite is Larry Summers, front-runner for the position of Treasury Secretary.
Harvard University Economics Professor Lawrence Summers served as Chief Economist for the World Bank (1991–1993). He contributed to shaping the macro-economic reforms imposed on numerous indebted developing countries. The social and economic impact of these reforms under the IMF-World Bank sponsored structural adjustment program (SAP) were devastating, resulting in mass poverty.
Larry Summer's stint at the World Bank coincided with the collapse of the Soviet Union and the imposition of the IMF-World Bank's deadly " economic medicine" on Eastern Europe, the former Soviet republics and the Balkans.
In 1993, Summers moved to the US Treasury. He initially held the position of Undersecretary of the Treasury for international affairs and later Deputy Secretary. In liaison with his former colleagues at the IMF and the World Bank, he played a key role in crafting the economic "shock treatment" reform packages imposed at the height of the 1997 Asian crisis on South Korea, Thailand and Indonesia.
The bailout agreements negotiated with these three countries were coordinated through Summers office at the Treasury in liaison with the Federal Reserve Bank of New York and the Washington based Bretton Woods institutions. Summers worked closely with IMF Deputy Managing Director Stanley Fischer, who was later appointed Governor of the Central Bank of Israel.
Larry Summers became Treasury Secretary in July 1999. He is a protégé of David Rockefeller. He was among the main architects of the infamous Financial Services Modernization Act, which provided legitimacy to inside trading and outright financial manipulation.
Summers is currently a Consultant to Goldman Sachs and managing director of a Hedge fund, the D.E. Shaw Group, As former Treasury Secretary and his contacts on Wall Street, Summers had valuable inside information on the movement of financial markets. Under the helm of Larry Summers and as a direct result of the financial meltdown, the D. E. Shaw Group made record profits. At the end of October 2008, at the height of the financial meltdown, the Shaw Group announced $7 billion in revenue, a 22 percent increase over the previous year, "with nearly three times more cash on hand than a year ago" .
Putting a Hedge Fund manager (with links to the Wall Street financial establishment) in charge of the Treasury is tantamount to putting the fox in charge of the chicken coop.
The Washington Consensus
Summers, Geithner, Corzine, Volker, Fischer, Phil Gramm, Bernanke, Hank Paulson, Rubin, not to mention Alan Greenspan, al al. are buddies, they play golf together; they have links to the Council on Foreign Relations and the Bilderberg; they act concurrently in accordance with the interests of Wall Street; they meet behind closed doors; they are on the same wave length; they are Democrats and Republicans.
While they may disagree on some issues, they are firmly committed to the Washington-Wall Street Consensus. They are utterly ruthless in their management of economic and financial processes. Their actions are profit driven. Outside of their narrow interest in the "efficiency" of "markets", they have little concern for "living human beings". How are people's lives affected by the deadly gamut of macro-economic and financial reforms, which is spearheading entire sectors of economic activity into bankruptcy.
The economic reasoning underlying neoliberal economic discourse is often cynical and contemptuous. In this regard, Lawrence Summers' economic discourse stands out. He is known among environmentalists for having proposed the dumping of toxic waste in Third World countries, because people in poor countries have shorter lives and the costs of labor are abysmally low, which essentially means that the market value of people in the Third World is much lower. According to summers, this makes it far more "cost effective" to export toxic materials to impoverished countries. A controversial 1991 World Bank memo signed by of Chief Economist Larry Summers reads as follows (excerpts, emphasis added):
DATE: December 12, 1991 TO: Distribution FR: Lawrence H. Summers Subject: GEP
"'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the Less Developed Countries? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality.... From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. [the demand increases when income levels increase]. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand.... "
Summers stance on the export of pollution to developing countries had a marked impact on US environmental policy:
In 1994, "virtually every country in the world broke with Mr. Summers' Harvard-trained "economic logic" ruminations about dumping rich countries' poisons on their poorer neighbors, and agreed to ban the export of hazardous wastes from OECD to non-OECD [developing] countries under the Basel Convention. Five years later, the United States is one of the few countries that has yet to ratify the Basel Convention or the Basel Convention's Ban Amendment on the export of hazardous wastes from OECD to non-OECD countries. (Jim Valette, Larry Summers' War Against the Earth,Counterpunch, undated)
The 1997 Asian Crisis: Dress Rehearsal for Things to Come
In the course of 1997, currency speculation instrumented by major financial institutions directed against Thailand, Indonesia and South Korea was conducive to the collapse of national currencies and the transfer of billions of dollars of central bank reserves into private financial hands. Several observers pointed to the deliberate manipulation of equity and currency markets by investment banks and brokerage firms.
While the Asian bailout agreements were formally negotiated with the IMF, the major Wall Street commercial banks (including Chase, Bank of America, Citigroup and J. P. Morgan) as well as the "big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were "consulted" on the clauses to be included in the Asian bail-out agreements.
The US Treasury in liaison with Wall Street and the Bretton Woods institutions played a central role in negotiating the bailout agreements. Both Larry Summers and Timothy Geithner, were actively involved on behalf of the US Treasury in the 1997 bailout of South Korea:
[In 1997] "Messrs. Summers and Geithner worked to persuade Mr. Rubin to support financial aid to South Korea. Mr. Rubin was wary of such a move, worrying that providing money to a country in dire straits might be a losing proposition..." (WSJ, November 8, 2008)
What happened in Korea under advice from Deputy Treasury Secretary Summers et al, had nothing to do with "financial aid".
The country was literally ransacked. Undersecretary of the Treasury David Lipton was sent to Seoul in early December 1997. Secret negotiations were initiated. Washington had demanded the firing of the Korean Finance Minister and the unconditional acceptance of the IMF "bailout".
A new finance minister, who happened to be former IMF and World Bank official, was appointed and immediately rushed off to Washington for "consultations" with his former IMF colleague Deputy Managing Director Stanley Fischer.
"The Korean Legislature had met in emergency sessions on December 23. The final decision concerning the 57 billion dollar deal took place the following day, on Christmas Eve December 24th, after office hours in New York. Wall Street’s top financiers, from Chase Manhattan, Bank America, Citicorp and J. P. Morgan had been called in for a meeting at the Federal Reserve Bank of New York. Also at the Christmas Eve venue, were representatives of the big five New York merchant banks including Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney. And at midnight on Christmas Eve, upon receiving the green light from the banks, the IMF was allowed to rush 10 billion dollars to Seoul to meet the avalanche of maturing short-term debts.
The coffers of Korea’s central Bank had been ransacked. Creditors and speculators were anxiously awaiting to collect the loot. The same institutions which had earlier speculated against the Korean won were cashing in on the IMF bailout money. It was a scam. (See Michel Chossudovsky, The Recolonization of Korea, subsequently published as a chapter in The Globalization of Poverty and the New World Order, Global Research, Montreal, 2003.)
"Strong economic medicine" is the prescription of the Washington Consensus. "Short term pain for long term gain" was the motto at the World Bank during Lawrence Summers term of as World Bank Chief Economist.
What we dealing with is an entire " old boys network" of officials and advisers at the Treasury, the Federal Reserve, the IMF, World Bank, the Washington Think Tanks, who are in permanent liaison with leading financiers on Wall Street.
Whoever is chosen by Obama's Transition team will belong to the Washington Consensus.
The 1999 Financial Services Modernization Act
What happened in October 1999 is crucial.
In the wake of lengthy negotiations behind closed doors, in the Wall Street boardrooms, in which Larry Summers played a central role, the regulatory restraints on Wall Street’s powerful banking conglomerates were revoked "with a stroke of the pen".
Larry Summers worked closely with Senator Phil Gramm (1985-2002),chairman of the Senate Banking committee, who was the legislative architect of the the Gramm-Leach-Bliley Financial Services Modernization Act, signed into law on November 12, 1999 . As Texas Senator, Phil Gramm was closely associated with Enron.
In December 2000 at the very end of the Clinton mandate, Gramm introduced a second piece of legislation, the so-called Gramm-Lugar Commodity Futures Modernization Act, which paved the way for the speculative onslaught in primary commodities including oil and food staples.
"The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century." (See David Corn, Foreclosure Phil, Mother Jones, July August 2008)
Phil Gramm was McCain's first choice for Secretary of the Treasury.
Under the FSMA new rules – ratified by the US Senate in October 1999 and approved by President Clinton – commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies could freely invest in each others businesses as well as fully integrate their financial operations.
A "global financial supermarket" had been created, setting the stage for a massive concentration of financial power. One of the key figures behind this project was Secretary of the Treasury Larry Summers, in liaison with David Rockefeller. Summers described the FSMA as "the legislative foundation of the financial system of the 21th century". That legislative foundation is among the main causes of the 2008 financial meltdown.
Financial Disarmament
There can be no meaningful solution to the crisis, unless there is a major reform in the financial architecture, implying inter alia the freezing of speculative trade and the "disarming of financial markets". The project of disarming financial markets was first proposed by John Maynard Keynes in the 1940s as a means to the establishment of a multipolar international monetary system. (See J.M. Keynes, Activities 1940-1944, Shaping the Post-War World: The Clearing Union, The Collected Writings of John Maynard Keynes, Royal Economic Society, Macmillan and Cambridge University Press, Vol. XXV, London 1980, p. 57).
Main Street versus Wall Street
Where are Obama's "Main Street appointees"? Namely individuals who respond to the interest of people across America. There are no labor or community leaders on Obama's list for key positions.
The President-elect is appointing the architects of financial deregulation.
Meaningful financial reform cannot be adopted by officials appointed by Wall Street and who act on behalf of Wall Street.
Those who set the financial system ablaze in 1999, have been called back to turn out the fire.
The proposed "solution" to the crisis under the "bailout" is the cause of further economic collapse.
There are no policy solutions on the horizon.
The banking conglomerates call the shots. They decide on the composition of the Obama Cabinet. They also decide on the agenda of the Washington Financial Summit (November 15, 2008) which is slated to lay the groundwork for the establishment of a new "global financial architecture".
The Wall Street blueprint has already been discussed behind closed doors: the hidden agenda is to establish a unipolar international monetary system, dominated by US financial power, which in turn would be protected and secured by US military superiority.
Neoliberal with a "Human Face"
There is no indication that Obama will break his ties to his Wall Street sponsors, who largely funded his election campaign.
Goldman Sachs, J. P. Morgan Chase, Citigroup, Bill Gates' Microsoft are among his main campaign contributors.
Warren Buffett, among the the world's richest individuals, not only supported Barak Obama's election campaign, he is a member of his transition team, which plays a key role deciding the composition of Obama's cabinet.
Unless there is a major upheaval in the system of political appointments to key positions, an alternative Obama economic agenda geared towards poverty alleviation and employment creation is highly unlikely.
What we are witnessing is continuity.
Obama provides a " human face" to the status quo. This human face serves to mislead Americans on the nature of the economic and political process.
The neoliberal economic reforms remain intact.
The substance of these reforms including the "bailout" of America's largest financial institutions ultimately destroys the real economy, while spearheading entire areas of manufacturing and the services economy into bankruptcy.
The October 2008 financial meltdown is not the result of a cyclical economic phenomenon. It is the deliberate result of US government policy instrumented through the Treasury and the US Federal Reserve Board.
This is the most serious economic crisis in World history.
The "bailout" proposed by the US Treasury does not constitute a "solution" to the crisis. In fact quite the opposite: it is the cause of further collapse. It triggers an unprecedented concentration of wealth, which in turn contributes to widening economic and social inequalities both within and between nations.
The levels of indebtedness have skyrocketed. Industrial corporations are driven into bankruptcy, taken over by the global financial institutions. Credit, namely the supply of loanable funds, which constitutes the lifeline of production and investment, is controlled by a handful of financial conglomerates.
With the "bailout", the public debt has spiraled. America is the most indebted country on earth. Prior to the "bailout", the US public debt was of the order of 10 trillion dollars. This US dollar denominated debt is composed of outstanding treasury bills and government bonds held by individuals, foreign governments, corporations and financial institutions.
"The Bailout": The US Administration is Financing its Own IndebtednessIronically, the Wall Street banks --which are the recipients of the bailout money-- are also the brokers and underwriters of the US public debt. Although the banks hold only a portion of the public debt, they transact and trade in US dollar denominated public debt instruments Worldwide.
In a bitter twist, the banks are the recipients of a 700+ billion dollar handout and at the same time they act as creditors of the US government. We are dealing with an absurd circular relationship: To finance the bailout, Washington must borrow from the banks, which are the recipients of the bailout.
The US administration is financing its own indebtedness. Federal, State and municipal governments are increasingly in a straightjacket, under the tight control of the global financial conglomerates. Increasingly, the creditors call the shots on government reform.
The bailout is conducive to the consolidation and a centralization of banking power, which in turn backlashes on real economic activity, leading to a string of bankruptcies and mass unemployment.
Will an Obama Administration Reverse the Tide?
The financial crisis is the outcome of a deregulated financial architecture.
Obama has stated unequivocally his resolve to address the policy failures of the Bush administration and "democratize" the US financial system. President-Elect Barack Obama says that he is committed to reversing the tide:
"Let us remember that if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers. In this country, we rise or fall as one nation, as one people." (President-elect Barack Obama, November 4, 2008, emphasis added)
The Democrats casually blame the Bush administration for the October financial meltdown.
Obama says that he will be introducing an entirely different policy agenda which responds to the interests of Main Street:
"Tomorrow, you can turn the page on policies that put the greed and irresponsibility of Wall Street before the hard work and sacrifice of men and women all across Main Street. Tomorrow you can choose policies that invest in our middle class and create new jobs and grow this economy so that everybody has a chance to succeed, from the CEO to the secretary and the janitor, from the factory owner to the men and women who work on the factory floor.( Barack Obama, election campaign, November 3, 2008, emphasis added)
Is Obama committed to "taming Wall Street" and "disarming financial markets"?
Ironically, it was under the Clinton administration that these policies of "greed and irresponsibility" were adopted.
The 1999 Financial Services Modernization Act (FSMA) was conducive to the the repeal of the Glass-Steagall Act of 1933. A pillar of President Roosevelt’s "New Deal", the Glass-Steagall Act was put in place in response to the climate of corruption, financial manipulation and "insider trading" which resulted in more than 5,000 bank failures in the years following the 1929 Wall Street crash.
Under the 1999 Financial Services Modernization Act, effective control over the entire US financial services industry (including insurance companies, pension funds, securities companies, etc.) had been transferred to a handful of financial conglomerates and their associated hedge funds.
The Engineers of Financial Disaster
Who are the architects of this debacle?
In a bitter irony, the engineers of financial disaster are now being considered by President-Elect Barack Obama's Transition Team for the position Treasury Secretary:
Lawrence Summers played a key role in lobbying Congress for the repeal of the Glass Steagall Act. His timely appointment by President Clinton in 1999 as Treasury Secretary spearheaded the adoption of the Financial Services Modernization Act in November 1999. Upon completing his mandate at the helm of the US Treasury, he became president of Harvard University (2001- 2006).
Paul Volker was chairman of the Federal Reserve Board in the l980s during the Reagan era. He played a central role in implementing the first stage of financial deregulation, which was conducive to mass bankruptcies, mergers and acquisitions, leading up to the 1987 financial crisis.
Timothy Geithner is CEO of the Federal Reserve Bank of New York, which is the most powerful private financial institution in America. He was also a former Clinton administration Treasury official. He has worked for Kissinger Associates and has also held a senior position at the IMF. The FRBNY plays a behind the scenes role in shaping financial policy. Geithner acts on behalf of powerful financiers, who are behind the FRBNY. He is also a member of the Council on Foreign Relations (CFR)
Jon Corzine is currently governor of New Jersey, former CEO of Goldman Sachs.
At the time of writing, Obama's favorite is Larry Summers, front-runner for the position of Treasury Secretary.
Harvard University Economics Professor Lawrence Summers served as Chief Economist for the World Bank (1991–1993). He contributed to shaping the macro-economic reforms imposed on numerous indebted developing countries. The social and economic impact of these reforms under the IMF-World Bank sponsored structural adjustment program (SAP) were devastating, resulting in mass poverty.
Larry Summer's stint at the World Bank coincided with the collapse of the Soviet Union and the imposition of the IMF-World Bank's deadly " economic medicine" on Eastern Europe, the former Soviet republics and the Balkans.
In 1993, Summers moved to the US Treasury. He initially held the position of Undersecretary of the Treasury for international affairs and later Deputy Secretary. In liaison with his former colleagues at the IMF and the World Bank, he played a key role in crafting the economic "shock treatment" reform packages imposed at the height of the 1997 Asian crisis on South Korea, Thailand and Indonesia.
The bailout agreements negotiated with these three countries were coordinated through Summers office at the Treasury in liaison with the Federal Reserve Bank of New York and the Washington based Bretton Woods institutions. Summers worked closely with IMF Deputy Managing Director Stanley Fischer, who was later appointed Governor of the Central Bank of Israel.
Larry Summers became Treasury Secretary in July 1999. He is a protégé of David Rockefeller. He was among the main architects of the infamous Financial Services Modernization Act, which provided legitimacy to inside trading and outright financial manipulation.
Summers is currently a Consultant to Goldman Sachs and managing director of a Hedge fund, the D.E. Shaw Group, As former Treasury Secretary and his contacts on Wall Street, Summers had valuable inside information on the movement of financial markets. Under the helm of Larry Summers and as a direct result of the financial meltdown, the D. E. Shaw Group made record profits. At the end of October 2008, at the height of the financial meltdown, the Shaw Group announced $7 billion in revenue, a 22 percent increase over the previous year, "with nearly three times more cash on hand than a year ago" .
Putting a Hedge Fund manager (with links to the Wall Street financial establishment) in charge of the Treasury is tantamount to putting the fox in charge of the chicken coop.
The Washington Consensus
Summers, Geithner, Corzine, Volker, Fischer, Phil Gramm, Bernanke, Hank Paulson, Rubin, not to mention Alan Greenspan, al al. are buddies, they play golf together; they have links to the Council on Foreign Relations and the Bilderberg; they act concurrently in accordance with the interests of Wall Street; they meet behind closed doors; they are on the same wave length; they are Democrats and Republicans.
While they may disagree on some issues, they are firmly committed to the Washington-Wall Street Consensus. They are utterly ruthless in their management of economic and financial processes. Their actions are profit driven. Outside of their narrow interest in the "efficiency" of "markets", they have little concern for "living human beings". How are people's lives affected by the deadly gamut of macro-economic and financial reforms, which is spearheading entire sectors of economic activity into bankruptcy.
The economic reasoning underlying neoliberal economic discourse is often cynical and contemptuous. In this regard, Lawrence Summers' economic discourse stands out. He is known among environmentalists for having proposed the dumping of toxic waste in Third World countries, because people in poor countries have shorter lives and the costs of labor are abysmally low, which essentially means that the market value of people in the Third World is much lower. According to summers, this makes it far more "cost effective" to export toxic materials to impoverished countries. A controversial 1991 World Bank memo signed by of Chief Economist Larry Summers reads as follows (excerpts, emphasis added):
DATE: December 12, 1991 TO: Distribution FR: Lawrence H. Summers Subject: GEP
"'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the Less Developed Countries? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality.... From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. [the demand increases when income levels increase]. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand.... "
Summers stance on the export of pollution to developing countries had a marked impact on US environmental policy:
In 1994, "virtually every country in the world broke with Mr. Summers' Harvard-trained "economic logic" ruminations about dumping rich countries' poisons on their poorer neighbors, and agreed to ban the export of hazardous wastes from OECD to non-OECD [developing] countries under the Basel Convention. Five years later, the United States is one of the few countries that has yet to ratify the Basel Convention or the Basel Convention's Ban Amendment on the export of hazardous wastes from OECD to non-OECD countries. (Jim Valette, Larry Summers' War Against the Earth,Counterpunch, undated)
The 1997 Asian Crisis: Dress Rehearsal for Things to Come
In the course of 1997, currency speculation instrumented by major financial institutions directed against Thailand, Indonesia and South Korea was conducive to the collapse of national currencies and the transfer of billions of dollars of central bank reserves into private financial hands. Several observers pointed to the deliberate manipulation of equity and currency markets by investment banks and brokerage firms.
While the Asian bailout agreements were formally negotiated with the IMF, the major Wall Street commercial banks (including Chase, Bank of America, Citigroup and J. P. Morgan) as well as the "big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were "consulted" on the clauses to be included in the Asian bail-out agreements.
The US Treasury in liaison with Wall Street and the Bretton Woods institutions played a central role in negotiating the bailout agreements. Both Larry Summers and Timothy Geithner, were actively involved on behalf of the US Treasury in the 1997 bailout of South Korea:
[In 1997] "Messrs. Summers and Geithner worked to persuade Mr. Rubin to support financial aid to South Korea. Mr. Rubin was wary of such a move, worrying that providing money to a country in dire straits might be a losing proposition..." (WSJ, November 8, 2008)
What happened in Korea under advice from Deputy Treasury Secretary Summers et al, had nothing to do with "financial aid".
The country was literally ransacked. Undersecretary of the Treasury David Lipton was sent to Seoul in early December 1997. Secret negotiations were initiated. Washington had demanded the firing of the Korean Finance Minister and the unconditional acceptance of the IMF "bailout".
A new finance minister, who happened to be former IMF and World Bank official, was appointed and immediately rushed off to Washington for "consultations" with his former IMF colleague Deputy Managing Director Stanley Fischer.
"The Korean Legislature had met in emergency sessions on December 23. The final decision concerning the 57 billion dollar deal took place the following day, on Christmas Eve December 24th, after office hours in New York. Wall Street’s top financiers, from Chase Manhattan, Bank America, Citicorp and J. P. Morgan had been called in for a meeting at the Federal Reserve Bank of New York. Also at the Christmas Eve venue, were representatives of the big five New York merchant banks including Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney. And at midnight on Christmas Eve, upon receiving the green light from the banks, the IMF was allowed to rush 10 billion dollars to Seoul to meet the avalanche of maturing short-term debts.
The coffers of Korea’s central Bank had been ransacked. Creditors and speculators were anxiously awaiting to collect the loot. The same institutions which had earlier speculated against the Korean won were cashing in on the IMF bailout money. It was a scam. (See Michel Chossudovsky, The Recolonization of Korea, subsequently published as a chapter in The Globalization of Poverty and the New World Order, Global Research, Montreal, 2003.)
"Strong economic medicine" is the prescription of the Washington Consensus. "Short term pain for long term gain" was the motto at the World Bank during Lawrence Summers term of as World Bank Chief Economist.
What we dealing with is an entire " old boys network" of officials and advisers at the Treasury, the Federal Reserve, the IMF, World Bank, the Washington Think Tanks, who are in permanent liaison with leading financiers on Wall Street.
Whoever is chosen by Obama's Transition team will belong to the Washington Consensus.
The 1999 Financial Services Modernization Act
What happened in October 1999 is crucial.
In the wake of lengthy negotiations behind closed doors, in the Wall Street boardrooms, in which Larry Summers played a central role, the regulatory restraints on Wall Street’s powerful banking conglomerates were revoked "with a stroke of the pen".
Larry Summers worked closely with Senator Phil Gramm (1985-2002),chairman of the Senate Banking committee, who was the legislative architect of the the Gramm-Leach-Bliley Financial Services Modernization Act, signed into law on November 12, 1999 . As Texas Senator, Phil Gramm was closely associated with Enron.
In December 2000 at the very end of the Clinton mandate, Gramm introduced a second piece of legislation, the so-called Gramm-Lugar Commodity Futures Modernization Act, which paved the way for the speculative onslaught in primary commodities including oil and food staples.
"The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century." (See David Corn, Foreclosure Phil, Mother Jones, July August 2008)
Phil Gramm was McCain's first choice for Secretary of the Treasury.
Under the FSMA new rules – ratified by the US Senate in October 1999 and approved by President Clinton – commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies could freely invest in each others businesses as well as fully integrate their financial operations.
A "global financial supermarket" had been created, setting the stage for a massive concentration of financial power. One of the key figures behind this project was Secretary of the Treasury Larry Summers, in liaison with David Rockefeller. Summers described the FSMA as "the legislative foundation of the financial system of the 21th century". That legislative foundation is among the main causes of the 2008 financial meltdown.
Financial Disarmament
There can be no meaningful solution to the crisis, unless there is a major reform in the financial architecture, implying inter alia the freezing of speculative trade and the "disarming of financial markets". The project of disarming financial markets was first proposed by John Maynard Keynes in the 1940s as a means to the establishment of a multipolar international monetary system. (See J.M. Keynes, Activities 1940-1944, Shaping the Post-War World: The Clearing Union, The Collected Writings of John Maynard Keynes, Royal Economic Society, Macmillan and Cambridge University Press, Vol. XXV, London 1980, p. 57).
Main Street versus Wall Street
Where are Obama's "Main Street appointees"? Namely individuals who respond to the interest of people across America. There are no labor or community leaders on Obama's list for key positions.
The President-elect is appointing the architects of financial deregulation.
Meaningful financial reform cannot be adopted by officials appointed by Wall Street and who act on behalf of Wall Street.
Those who set the financial system ablaze in 1999, have been called back to turn out the fire.
The proposed "solution" to the crisis under the "bailout" is the cause of further economic collapse.
There are no policy solutions on the horizon.
The banking conglomerates call the shots. They decide on the composition of the Obama Cabinet. They also decide on the agenda of the Washington Financial Summit (November 15, 2008) which is slated to lay the groundwork for the establishment of a new "global financial architecture".
The Wall Street blueprint has already been discussed behind closed doors: the hidden agenda is to establish a unipolar international monetary system, dominated by US financial power, which in turn would be protected and secured by US military superiority.
Neoliberal with a "Human Face"
There is no indication that Obama will break his ties to his Wall Street sponsors, who largely funded his election campaign.
Goldman Sachs, J. P. Morgan Chase, Citigroup, Bill Gates' Microsoft are among his main campaign contributors.
Warren Buffett, among the the world's richest individuals, not only supported Barak Obama's election campaign, he is a member of his transition team, which plays a key role deciding the composition of Obama's cabinet.
Unless there is a major upheaval in the system of political appointments to key positions, an alternative Obama economic agenda geared towards poverty alleviation and employment creation is highly unlikely.
What we are witnessing is continuity.
Obama provides a " human face" to the status quo. This human face serves to mislead Americans on the nature of the economic and political process.
The neoliberal economic reforms remain intact.
The substance of these reforms including the "bailout" of America's largest financial institutions ultimately destroys the real economy, while spearheading entire areas of manufacturing and the services economy into bankruptcy.
Tuesday, November 4, 2008
Slaves
يا شعبي حبيبي يا روحي يا بيبي يا حاطك في جيبي يا ابن الحلال يا شعبي يا شاطر يا جابر خواطر يا ساكن مقابر وصابر وعال يا واكل سمومك يا بايع هدومك يا حامل همومك وشايل جبال يا شعبي اللي نايم وسارح وهايم وفي الفقر عايم وحاله ده حال أحبك محشش مفرفش مطنش ودايخ مدروخ وآخر انسطال أحبك مكبر دماغك مخدر ممشي أمورك كده باتّكال وأحب اللي ينصب وأحب اللي يكدب وأحب اللي ينهب ويسرق تلال وأحب اللي شايف وعارف وخايف وبالع لسانه وكاتم ما قال وأحب اللي قافل عيونه المغفل وأحب البهايم وأحب البغال وأحب اللي راضي وأحب اللي فاضي وأحب اللي عايز يربي العيال وأحب اللي يائس وأحب اللي بائس وأحب اللي محبط وشايف محال وأحبك تسافر وتبعد تهاجر وتبعت فلوسك دولار أو ريال وأحبك تطبل تهلل تهبل عشان مطش كورة وفيلم ومقال وأحبك تأيد تعضض تمجد توافق تنافق وتلحس نعال تحضر نشادر تجمع كوادر تلمع تقمع تظبط مجال لكن لو تفكر تخطط تقرر تشغلي مخك وتفتح جدال وتبدأ تشاكل وتعمل مشاكل وتنكش مسائل وتسأل سؤال وعايز تنور وعايز تطور وتعمللي روحك مفرد رجال ساعتها حجيبك لا يمكن أسيبك وراح تبقى عبرة وتصبح مثال حبهدل جنابك وأذل اللي جابك وحيكون عذابك ده فوق الاحتمال وأمرمط سعادتك وأهزأ سيادتك وأخلي كرامتك في حالة هزال وتلبس قضية وتصبح رزية وباقي حياتك تعيش في انعزال حتقبل حَحبك، حترفض حَلِبّك، حتطلع حتنزل حجيبلك جمااااال
Sunday, November 2, 2008
A Must Read
أيا أيها الحر على من تعيبا............................وحالنا اليوم يلزمه الطبيبا لقد زاد الهوان عن الحدود..........................وأصبح الشرف وحيدا غريبا وأضحى البشر في ضياع.........................جياعا ينادون مكارم من يجيبا والملايين بين مشرد وتائه................................بحلم العودة بعيدا قريبا والجلاد على الأعناق قائم أبدا...................مقيما مستحلا للبلاد ومستطيبا فوالله سابقنا الأمم تهاويا..........................فسادا واستبدادا وتملقا عجيبا ووالله مارأت الأنام يوما.....................الضحية تنصب الجلاد الها وحبيبا فهنيئا لنا هكذا عار.......................................وطوبى لنا بهكذا مصيبة نحن أبناء شآم صرنا.................................مطية الكلام غائبا ومستغيبا وأضحى النفاق دما يسري.......................في العروق والأنفاس مستطيبا ماذا سنقول لتلك الهياكل...................من الجوعى واليتامى ظلما وتعذيبا أن انتظروا اليوم وغدا...............................وبعد غد زمنا طويلا رحيبا والحال هو الحال أيها الرجال......................فلاعتب على الظالم ولارقيبا وبينما نتأرجح شجبا واستنكارا.................يترنح الضعيف عويلا ونحيبا كفانا تملقا لجوقة اللئام ..................................وكفا البلاد سلبا ونهيبا وكفى الجيش الأبي مهازلا.....................ضعفا وخوفا شحاحيطا وقباقيبا وكفى الأعناق ضربا بالصرامي...............وكفى الأجساد السوط والقضيبا وكفا البلاد سلبا ونهبا..........................وتكبيبل أحرارها أغلالا وكلاليبا وكفا اليتامى طول انتظار...........................وكفى الحقائق تقلبا وتقليبا وكفانا وجوما بتعاقب الأيام...........................وكفاك وطني شاحبا كئيبا وكفانا الله شر اللئام ..........................وشر كل منافق مأجورا مستجيبا وكفانا وعودا بنصر قريب..................فلن تجدي الغربان صدحا عندليبا النصربزنود ومضرجات أياد...................واسترجاع الحق شامخا مهيبا فلن تجدي المستبد أبدا........................الا القوة اصلاحا وحزما وتأديبا كما لن ينفع مع الذئاب............................نفاق الثعالب تشذيبا وتهذيبا ولن يجدي الجوقة تمرغا..............بأحضان موسكو وواشنطن وتل أبيبا السن بالسن والبادئ أظلم .........................فكفانا كلاما ظلما وترغيبا لأن للبلاد أحرارا كبارا..........................لايأبهون تابعا ولاعبدا ربيبا أهل حكمة لايرهبون الفتن...................ولا حكم الطوائف مذهبا وتذهيبا شآم بلاد الكل لامكان فيها....................لمن يمعن بالعباد تفريقا وتغييبا فهبوا ياحماة الديار لمجدكم.........................وأرجعوا وطنا غاليا سليبا فلن ينفع مع الظالم أبدا.........................الحوار والدوار تزلفا وترغيبا لأن للثعالب فنونا ومخالبا........................تنهك الضعاف مكرا وألاعيبا ولن يزيد الصبر البلاد.....................الا الهوان مستشريا هدما وتخريبا فأبشروا أهل الشآم بحرية...................حمراء مدادها اخاء شبابا وشيبا لأن للبلاد رب يحميها................................مغيثا للضعيف قويا مجيبا آن أوان الحرية ياشآم...........................وآن أوان العدل حقا وتصويبا ولن ينفع المترنح السقوط ................ولن تنفع المواجع الأنين والتأليبا انما هي تذكرة عل وعسى...........................لكل ذي نخوة حكيما لبيبا فلاتمعنوا في الوطن نسيانا......................وفي الأمجاد شطبا وتشطيبا كفانا دسا للأعناق بالرمال....................وكفانا اختباءا خندقا وسراديبا وكفانا وقوفا على الأطلال...................ورسائل الشوق تباكيا ومكاتيبا يامن تركتم البلاد شبابا........................وعانقتم المنفى هرما ومشيبا أما آن رجوعكم أيها الرجال............لتعانقوا الشيبان والغلمان والشبيبا وتمسحوا غبار السنين والضياع.................وتعيدوا الذئاب الى الزريبة بلادنا وان جارت علينا عزيزة................فهل ينفع المحب المتيم تحبيبا وسترجع البسمة للشفاه يوما.....................بدموع نصر تغمر الأهاديبا وستعلو الأهازيج والزغاريد....................فرحا بعودة الحق خيرا وطيبا
ولكن السعودي لا بواكي له
بكى العالم ارتفاع أسعار البترول فبكينا معه وقدمنا نفطنا قربانا على مذبح المسئولية الدولية. وأتت الأزمة المالية فافتخرنا بحزمنا وحنكتنا فأبناء الوطن لا منازل لهم فتباع ولا قروض يخشى من عدم سدادها فقد حُجرت رواتبهم وارتُهنت عليها بعد أن فنت في سوق القمار السعودية. وبكت أمريكا شعبها وبنوكها فأبكت العالم معها فقدموا أموالهم وإعلامهم قربانا لإنقاذ بنوك أمريكا ومدخرات أبنائها، ولكن السعودي لا بواكي له.
بلادنا ديار الإسلام، ومعقل لا إله إلا الله فصدق بلا منازع قول الشاعر قــم للوطـــنْ.. وانثــر دماك لـه ثمـن *** واخلع فديتـــك كل أســـباب الوهــــنفــإذا قُتلــتَ فلســت أنــــــت بميــــت *** فانعـم بعيــش لا يبيــد مــع الــزمـــن
أوطن بلا موطن؟ وطني وطن يتبارى شيوخه وشبابه في تقديم نفوسهم رخيصة دون ذرة تراب من أرضه وهم لا يملكون شبرا منه. وطني قد أرهقت أبناءه ديون تلاشت في مقامرات الأسهم 'النقية'. وطني قد قُدم فيه الأجنبي بغير حق لتحقيق غايات ذاتية لقوم لم يحملوا ولن يحملوا قط إلا هم أنفسهم وهم تحقيق أهدافهم الوضيعة. وطني قد وُظف أبناءه بأجور تُعد جريمة استعباد عند الغرب الرأسمالي! فمن يبكي أبناء وطني؟ بكت أمريكا أبنائها الذين فقدوا منازلهم وأبكت العالم أجمعه معها حرصا على أن لا يفقد أبنائها مدخراتهم أوأعمالهم، ولكن السعودي لا بواكي له. وقفت أمريكا حازمة لم تلن ولم تتهاون أمام أطروحات استعباد أبنائها بأجور زهيدة كالتي نفرضها نحن لأبنائنا والتي عند التأمل لوجدنا أن العبد الرقيق في السابق كان أفضل حالا من حيث توفير إطعامه وإسكانه وعلاجه، فهل الآلفان والثلاثة من الريالات قادرة على الإطعام والإسكان و العلاج. في وطني نحن طرفان في الرأسمالية والاشتراكية نأخذ الأسوأ منهما، فاقتبسنا من دول الشيوعية التكتيم والتشكيك وانعدام الثقة وإعطاء المسئول مرتبة الربوبية فلا يُسأل عما يفعل وهم يسألون. واقتبسنا من فكر الرأسمالية الطبقية البغيضة وسحق الطبقة الوسطى. تشدق المتشدقون واشغلوا أبناء وطني في تنظير هذه الأزمة المالية العالمية بالأساطير والتدليس والتلبيس فأين هم عن إقطاعي الأراضي كيف ملكوها وبكم باعوها ولم لا تُأخذ زكاتها وقد أُخذت الزكاة من غُنيمات عجوز بدوية. أين نحن من الرأسمالية؟ نحن لنا فيها الصدر دون العالمين أو القبر. يا من أدعى الإحسان فأقرض الناس فوق جهدهم وطاقتهم بابتداع حيلة ظنا منه أنه يحتال بها على الله هلا ابتدعت حيلة وبحثت عن قول من هنا أو هناك فأرجعت للناس أموالهم التي أحرقتها سوق القمار بمباركة أهل الحيل الذين كان أكبر همهم أن يؤخذ تصديقهم لتنقية الأسهم وتصفيتها لتكون أسهم قمار خالصة لا شائبة فيها. بعد أن عمل على جلب الآلف المليارات لوطنه وبعد أن أسكن الفقير والضعيف، بكى قرينسبان أبناء وطنه يوم الجمعة الماضي وتحمل جزءا من المسئولية عن الأزمة الحالية وأما أبناء وطني فلا بواكي لهم. أين من غذى سوق القمار السعودية وناصر وروج لها ووعد وأخلف من المسئولين والإعلاميين على حد سواء؟ ألا يتقدم أحدهم منهم فيبكينا كما بكى قرينسبان أبناء وطنه ويعترف بشيء من المسئولية فيقترح خطة إنقاذ لنا قد تأخرت طويلا. هناك في معقل الرأسمالية لا توجد حواجز النفاق والتملق التي أعمت أبصار مسئولينا وأصمت أسماعهم فأحست الدولة بآلام أبنائها وسمعت أنينهم فبكت وأبكت العالم معها فتحملت كثير من ديون بنوكها وديون أبنائها على حد سواء فهل بُكي السعودي فتتحمل الدولة ولو إعادة التمويل لديونهم التي تحملوها بفوائد مركبة عالية (يعتبرها الغرب الرأسمالي جريمة ويعاقب عليها كجريمة الربا) فضلا على أنه يسعى في تخليص أبناءنا منها فتدخل لإعادة تمويلها بأسعار فوائد مخفضة! ولكن السعودي لا بواكي له. من أبنائنا من يهدم الوطن بتقريب الأجنبي وإبعاد الوطني. التاكسي رزق شريف لمن لا رزق له وملجأ للعاطل والمطرود من عمله إلى حين. باعد الله الجشع والطمع، في وطني تُطبق الرأسمالية في أقصى صورها فتحتكر قلة قليلة هذه الصناعة فتستولي على رزق الآلف من بُسطائنا ومساكيننا. في وطني مسئولون قد برعوا في التملق البغيض والنفاق الرخيص قد بعثهم الله بعد سبات طويل لعقود من الزمن في دهاليز كهوف النسيان فآثروا حثالة زرق العيون شقر الشعور على ابن الوطن خيانة للأمانة ولأبناء الوطن وجهلا منهم وحسدا. في روسيا ودول الاتحاد السوفيتي سابقا وأوربا الشرقية لا يستطيع القضاء إجبار المالك على الخروج من منزله ولا يسجنه إذا عجز عن سداد الدين ولا يُمكن البنك من الاستيلاء على المنزل المرهون! ويعيب الغرب الرأسمالي ضعف قوانين الرهن عند هذه الدول الاشتراكية (سابقا) وينصحهم بالحزم في تحصيل الديون ببيع البيوت. أين الغرب عن المتشدقين منا من الذين فاضت حكمتهم، فنادوا بالاعتبار من الأزمة المالية العالمية فاقترحوا زيادة الضمانات والتشديد على أبناء وطني في نظام الرهون! فماذا بعد الاستيلاء على راتب الأب وراتب الأم وعلى المنزل والأرض ثم السجن بعد ذلك؟ أساطين الرأسمالية تقف حيارى لا تحسن نطقا ولا تعبيرا. تذكرني هذه الأزمة بقصة تروى عن قوم غزو جيرانهم وعاد فريق منهم إلى ديارهم وتلقاهم البسطاء والعجائز والقُصر من قومهم يسألونهم الخبر حدثوهم بأساطير البطولات والملاحم. فسألتهم عجوز منهم كم قتلت منهم فأجابوها خمسة بتعظيم الصوت وتضخيمه فسألتهم العجوز مرة أخرى وكم قتلوا منكم فأجابوها خميسمية فقط بتصغير الرقم وتخفيض الصوت، فكبر القوم وهللوا واحتفلوا بالنصر المؤزر. خليلي ألا تبكياني ألتمس خليلا إذا أنزفت دمعا بكى ليا
بلادنا ديار الإسلام، ومعقل لا إله إلا الله فصدق بلا منازع قول الشاعر قــم للوطـــنْ.. وانثــر دماك لـه ثمـن *** واخلع فديتـــك كل أســـباب الوهــــنفــإذا قُتلــتَ فلســت أنــــــت بميــــت *** فانعـم بعيــش لا يبيــد مــع الــزمـــن
أوطن بلا موطن؟ وطني وطن يتبارى شيوخه وشبابه في تقديم نفوسهم رخيصة دون ذرة تراب من أرضه وهم لا يملكون شبرا منه. وطني قد أرهقت أبناءه ديون تلاشت في مقامرات الأسهم 'النقية'. وطني قد قُدم فيه الأجنبي بغير حق لتحقيق غايات ذاتية لقوم لم يحملوا ولن يحملوا قط إلا هم أنفسهم وهم تحقيق أهدافهم الوضيعة. وطني قد وُظف أبناءه بأجور تُعد جريمة استعباد عند الغرب الرأسمالي! فمن يبكي أبناء وطني؟ بكت أمريكا أبنائها الذين فقدوا منازلهم وأبكت العالم أجمعه معها حرصا على أن لا يفقد أبنائها مدخراتهم أوأعمالهم، ولكن السعودي لا بواكي له. وقفت أمريكا حازمة لم تلن ولم تتهاون أمام أطروحات استعباد أبنائها بأجور زهيدة كالتي نفرضها نحن لأبنائنا والتي عند التأمل لوجدنا أن العبد الرقيق في السابق كان أفضل حالا من حيث توفير إطعامه وإسكانه وعلاجه، فهل الآلفان والثلاثة من الريالات قادرة على الإطعام والإسكان و العلاج. في وطني نحن طرفان في الرأسمالية والاشتراكية نأخذ الأسوأ منهما، فاقتبسنا من دول الشيوعية التكتيم والتشكيك وانعدام الثقة وإعطاء المسئول مرتبة الربوبية فلا يُسأل عما يفعل وهم يسألون. واقتبسنا من فكر الرأسمالية الطبقية البغيضة وسحق الطبقة الوسطى. تشدق المتشدقون واشغلوا أبناء وطني في تنظير هذه الأزمة المالية العالمية بالأساطير والتدليس والتلبيس فأين هم عن إقطاعي الأراضي كيف ملكوها وبكم باعوها ولم لا تُأخذ زكاتها وقد أُخذت الزكاة من غُنيمات عجوز بدوية. أين نحن من الرأسمالية؟ نحن لنا فيها الصدر دون العالمين أو القبر. يا من أدعى الإحسان فأقرض الناس فوق جهدهم وطاقتهم بابتداع حيلة ظنا منه أنه يحتال بها على الله هلا ابتدعت حيلة وبحثت عن قول من هنا أو هناك فأرجعت للناس أموالهم التي أحرقتها سوق القمار بمباركة أهل الحيل الذين كان أكبر همهم أن يؤخذ تصديقهم لتنقية الأسهم وتصفيتها لتكون أسهم قمار خالصة لا شائبة فيها. بعد أن عمل على جلب الآلف المليارات لوطنه وبعد أن أسكن الفقير والضعيف، بكى قرينسبان أبناء وطنه يوم الجمعة الماضي وتحمل جزءا من المسئولية عن الأزمة الحالية وأما أبناء وطني فلا بواكي لهم. أين من غذى سوق القمار السعودية وناصر وروج لها ووعد وأخلف من المسئولين والإعلاميين على حد سواء؟ ألا يتقدم أحدهم منهم فيبكينا كما بكى قرينسبان أبناء وطنه ويعترف بشيء من المسئولية فيقترح خطة إنقاذ لنا قد تأخرت طويلا. هناك في معقل الرأسمالية لا توجد حواجز النفاق والتملق التي أعمت أبصار مسئولينا وأصمت أسماعهم فأحست الدولة بآلام أبنائها وسمعت أنينهم فبكت وأبكت العالم معها فتحملت كثير من ديون بنوكها وديون أبنائها على حد سواء فهل بُكي السعودي فتتحمل الدولة ولو إعادة التمويل لديونهم التي تحملوها بفوائد مركبة عالية (يعتبرها الغرب الرأسمالي جريمة ويعاقب عليها كجريمة الربا) فضلا على أنه يسعى في تخليص أبناءنا منها فتدخل لإعادة تمويلها بأسعار فوائد مخفضة! ولكن السعودي لا بواكي له. من أبنائنا من يهدم الوطن بتقريب الأجنبي وإبعاد الوطني. التاكسي رزق شريف لمن لا رزق له وملجأ للعاطل والمطرود من عمله إلى حين. باعد الله الجشع والطمع، في وطني تُطبق الرأسمالية في أقصى صورها فتحتكر قلة قليلة هذه الصناعة فتستولي على رزق الآلف من بُسطائنا ومساكيننا. في وطني مسئولون قد برعوا في التملق البغيض والنفاق الرخيص قد بعثهم الله بعد سبات طويل لعقود من الزمن في دهاليز كهوف النسيان فآثروا حثالة زرق العيون شقر الشعور على ابن الوطن خيانة للأمانة ولأبناء الوطن وجهلا منهم وحسدا. في روسيا ودول الاتحاد السوفيتي سابقا وأوربا الشرقية لا يستطيع القضاء إجبار المالك على الخروج من منزله ولا يسجنه إذا عجز عن سداد الدين ولا يُمكن البنك من الاستيلاء على المنزل المرهون! ويعيب الغرب الرأسمالي ضعف قوانين الرهن عند هذه الدول الاشتراكية (سابقا) وينصحهم بالحزم في تحصيل الديون ببيع البيوت. أين الغرب عن المتشدقين منا من الذين فاضت حكمتهم، فنادوا بالاعتبار من الأزمة المالية العالمية فاقترحوا زيادة الضمانات والتشديد على أبناء وطني في نظام الرهون! فماذا بعد الاستيلاء على راتب الأب وراتب الأم وعلى المنزل والأرض ثم السجن بعد ذلك؟ أساطين الرأسمالية تقف حيارى لا تحسن نطقا ولا تعبيرا. تذكرني هذه الأزمة بقصة تروى عن قوم غزو جيرانهم وعاد فريق منهم إلى ديارهم وتلقاهم البسطاء والعجائز والقُصر من قومهم يسألونهم الخبر حدثوهم بأساطير البطولات والملاحم. فسألتهم عجوز منهم كم قتلت منهم فأجابوها خمسة بتعظيم الصوت وتضخيمه فسألتهم العجوز مرة أخرى وكم قتلوا منكم فأجابوها خميسمية فقط بتصغير الرقم وتخفيض الصوت، فكبر القوم وهللوا واحتفلوا بالنصر المؤزر. خليلي ألا تبكياني ألتمس خليلا إذا أنزفت دمعا بكى ليا
Tuesday, October 14, 2008
Money Is The Root Of Our Demise
An irremediable structural flaw lies at the base of our civilization. I call it Separation, and it has generated all the converging crises -- economic, health, ecological, and political -- of our day. It manifests as separation from each other in the dissolution of community, separation from nature in the destruction of the environment, separation within our selves in the deterioration of health. Science is its deep ideology, technology is its accomplice, and money is its agent.
Money as we know it today is intimately related to our identity as discrete and separate selves, as well as to the destruction that our separation has wrought. A saying goes, "Money is the root of all evil." But why should it be? After all, the purpose of money is, at its most basic, simply to facilitate exchange; in other words, to connect human gifts with human needs. What power, what monstrous perversion, has turned money into the opposite: an agent of scarcity?
For indeed, we live in a world of fundamental abundance, a world where vast quantities of food, energy, and materials go to waste. Half the world starves while the other half wastes enough to feed the first half. In the Third World and our own ghettos, people lack food, shelter, and other basic necessities, but cannot afford to buy them. Other people would love to supply these necessities and do other meaningful work, but cannot because there is no money in it.
Money utterly fails to connect gifts and needs. We pour vast resources into wars, plastic junk, and innumerable other products that do not serve human needs or human happiness. Why? It is not difficult to trace it back to greed, to the love of money. Ultimately though, greed is a red herring, itself a symptom and not a cause of a deeper problem. To blame greed and to fight it by intensifying the program of self-control is to intensify the war against the self, which is just another expression of the war against nature and the war against the other that lies at the base of our civilization.
Amidst superabundance, even we in rich countries live in an omnipresent anxiety, craving "financial security" as we try to keep scarcity at bay. We make choices (even those having nothing to do with money) according to what we can "afford," and we commonly associate freedom with wealth. But when we pursue it, we find that the paradise of financial freedom is a mirage, receding as we approach it, and that the chase itself enslaves. The anxiety is always there, the scarcity always just one disaster away. Greed is simply a response to the perception of scarcity. Money, which has turned abundance into scarcity, precedes greed. But not money per se, only the kind of money we use today, the kind of money that is evaporating as we speak, money with a very special characteristic that ensures its eventual demise.
This characteristic appears, in different forms, in the other substructures of our civilization as well. By understanding it, we can clarify the "irremediable structural flaw" of our civilization itself; more importantly, we can design new systems of money to supplant the old and that bear the opposite characteristic. The results will be the opposite as well: abundance, not scarcity; generosity, not greed; and sustainability, not ruin.
The defining characteristic of money today is usury, better known as interest. It is usury that both generates today's endemic anxiety and drives the world-devouring engine of perpetual growth. To explain how, I will quote Bernard Leitaer's now-famous parable The Eleventh Round, from his book The Future of Money.
Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone's barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.
One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. "Poor people," he said, "so primitive." The farmer's wife overheard him and challenged the stranger, "Do you think you can do a better job handling chickens?" "Chickens, no," responded the stranger, "But there is a much better way to eliminate all that hassle." "Oh yes, how so?" asked the woman. "See that tree there?" the stranger replied. " Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I'll explain the better way."
And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. "Now you can trade and bargain with the rounds instead of the unwieldy chickens," he explained.
It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat.
"Oh, by the way," he added after every family had received their 10 rounds, "in a year's time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives." "But where will the 11th round come from?" asked the farmer with the six chickens. "You'll see," said the man with a reassuring smile.
Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.
So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants.
There are really only three ways this story can end: inflation, bankruptcy, or growth. The same choices face any economy based on usury. The villagers could procure another cowhide and make more currency; or one of each 11 families could go bankrupt, as Lietaer observes; or they could increase the number of chickens so that new "rounds" would have the same value as before. In a real economy, all three pressures operate simultaneously. The bankruptcy pressure drives a built-in insecurity, which in turn drives people and institutions to "make" more money through inflationary or productive means. Of these two choices, inflation is only a temporary solution (as we are discovering today). It can only push the grow-or-die imperative slightly into the future.
In other words, because of the money system, competition, insecurity, and greed are an inseparable part of our economy. They can never be eliminated as long as the necessities of life are denominated in usury-money. But this is only one reason why money destroys community. The other is related to the third pressure: perpetual growth.
As Lietaer's parable explains, because of interest, at any given time the amount of money owed is greater than the amount of money already existing. To make non-inflationary new money to keep the whole system going, we have to breed more chickens -- in other words, we have to create more "goods and services." The principal way of doing so is to begin selling something that was once free. It is to convert forests into timber, music into product, ideas into intellectual property, social reciprocity into paid services.
Would you like to get rich? Here is a business idea that, in one form or another, has worked spectacularly for thousands of years. Very simply, find anything that people do for themselves or each other for free. Then take it away from them: make it illegal, inconvenient, or otherwise unavailable. Then sell back to them what you have taken. Granted, usually no one does this consciously, but that has been the net effect of culture and technology over the last several thousand years.
Your 13th-century peasant ancestors rarely paid money for food, shelter, clothing, or entertainment (much less in a hunter-gatherer tribe). People were self-sufficient in all these things or, more likely, depended on elaborate gift networks, sharing, and reciprocity. Of these things is community built. Today, we pay strangers to meet most of our physical and cultural needs. You probably don't know the person who grew your food, wove your shirt, built your house, or sang the songs on your iPod. Abetted by technology, the commodification of formerly non-monetary goods and services has accelerated over the last few centuries, to the point today where very little is left outside the money realm. The vast commons, whether of land or of culture, has been cordoned off and sold -- all to keep pace with the exponential growth of money. This is the deep reason why we convert forests to timber, songs to intellectual property, and so on. It is why two-thirds of all American meals are now prepared outside the home. It is why herbal folk remedies have given way to pharmaceutical medicines, why child care has become a paid service, why drinking water is now the number one beverage sales growth category.
The imperative of perpetual growth implicit in interest is what drives the relentless conversion of life, world, and spirit into money. Completing the vicious circle, the more of life we convert into money, the more we need money to live. Usury, not money, is the proverbial root of all evil. Inducing competition and replacing personal relationships with paid services, it rends the fabric of community.
Community is closely linked to gift-giving; when anthropologists seek to understand a culture, they trace the flow of gifts. Unlike money transactions, in which no obligations linger after the transaction is completed, the giving of a gift creates a tie (which is the literal meaning of "obligation"). When gifts circulate, the community bonds. Lending money at interest is utterly contrary to the spirit of the gift. For one thing, a cardinal feature of an authentic gift is that we give it unconditionally. We may expect to be gifted in return, whether by the recipient or another member of the community, but we do not impose conditions on a true gift, or it is not really a gift.
More importantly, a universal characteristic of a gift is that it naturally increases as it circulates within a community, and that this increase must not be kept for oneself, but allowed to circulate with the gift. Interest amounts to keeping the increase on the gift for oneself, thereby withholding it from circulation in the community, weakening community for the benefit of the individual. It is no accident that many societies prohibited usury among themselves but allowed it in transactions with outsiders, who could not be trusted to recirculate a true gift back into the community. Hence the prohibition in Deuteronomy 23:20: "Unto a stranger you may lend upon usury, but unto thy brother thou shalt not lend upon usury."
The ramifications of this injunction when combined with Jesus' teaching that all men are brothers are obvious: interest is forbidden entirely. This was the position of the Catholic Church throughout the Middle Ages, and is still the rule in Islam today. However, starting with the merger of Church and state and accelerating with the rise of mercantilism in the late Middle Ages, pressure mounted to resolve the fundamental tension between Christian teaching and the requirements of commerce. The solution provided by Martin Luther and John Calvin was to separate moral and civil law, maintaining that the ways of Christ are not the ways of the world. Thus spirit became further separated from matter, and religion retreated another step toward worldly irrelevancy.
Abandoning the prohibition on interest was a key step in religion's complicity in the desacralizing of the world. After all, it is interest that drives the conversion of all that is sacred about the world -- its beauty, uniqueness, and living relationships -- into something profane. Why do we intuitively know money is profane? Because it is the one great exception to the irreducible uniqueness of all beings.
In my last Reality Sandwich essay, I described how each drop of water, even each electron, is unique and sacred. But not so each dollar. Money is by design standard, generic. Your dollar is the same as my dollar. Money today lacks even a unique serial number: It is bits in a computer, an abstraction of an abstraction of an abstraction. A forest is unique and sacred; not so the money from its clearcutting. Convert two distinct forests into money and they become the same. Applied to cultures, the same principle is fast creating a global monoculture where every service is a paid service.
When money mediates all our relationships, we too lose our uniqueness to become a standardized consumer of standardized goods and services, and a standardized functionary performing other services. No personal economic relationships are important, because we can always pay someone else to do it. No wonder, strive as we might, we find it so hard to create community. No wonder we feel so insecure, so replaceable. It is all because of the conversion, driven by usury, of the unique and sacred into the monetized and generic.
Because money is identified with Benthamite "utility" -- that is, the good -- this entire process is considered rational in traditional (neoclassical) economic theory. Quite simply, whenever anything is monetized, the world's "goodness" level rises. The same assumption appears in the euphemism "goods" to describe the products of industry. The very definition of a "good" is anything exchanged for money. In other words, Money = Good. Got that?
By definition, when we buy bottled water instead of tap water too polluted to drink, that is good. When we pay for day care instead of caring for our babies at home, that is good. When we buy a video game instead of playing outdoors, that is good.
In terms of conventional economics, it may actually be in an individual's rational self-interest to engage in activities that render the earth uninhabitable. This is potentially true even on the collective level: given the exponential nature of future cash flow discounting, it may be more in our "rational self-interest" to liquidate all natural capital right now -- cash in the earth -- than to preserve it for future generations. After all, the net present value of an eternal annual cash flow of one trillion dollars is only some twenty trillion dollars (at a 5% discount rate). Economically speaking, it would be more rational to destroy the planet in ten years while generating income of $100 trillion, than to settle for a sustainable level of $3 trillion a year forever.
If this seems like an outlandish fantasy, consider that it is exactly what we are doing today! According to the parameters we have established, we are making the insane but rational choice to incinerate our natural, social, cultural, and spiritual capital for financial profit. Amazingly, this end was foreseen thousands of years ago by the originator of the story of King Midas, whose touch turned everything to gold. Delighted at first with his gift, soon he had turned all his food, flowers, even his loved ones into cold, hard metal. Just like King Midas, we too are converting natural beauty, human relationships, and the basis of our very survival into money.
Yet despite this ancient warning, we continue to behave as if we could eat our money: David Korten once spoke of an East Asian minister who said his country's forests would be more valuable clearcut, with the money put in the bank to earn interest. Apparently, the effects of destroying the planet are of little concern to economists. William Nordhaus of Yale proclaims, "Agriculture, the part of the economy that is sensitive to climate change, accounts for just three percent of national output. That means there is no way to get a very large effect on the US economy." Oxford economist Wilfred Beckerman echoes him: "Even if net output of agriculture fell by 50 percent by the end of the next century, this is only a 1.5 per cent cut in GNP."
Must we, like King Midas, find ourselves marooned in a cold, comfortless, ugly, inhospitable world before we realize we cannot eat our money?
Because it builds exponentially, interest feeds a linearity that puts humankind outside of nature, which is bound by cycles. Subtly but inexorably, it drives the assumption that human beings exist apart from natural law. As well, interest drives a relentless anxiety by demanding always more, more, more, propelling the endless conversion of all wealth into financial capital. Part of this anxiety is encoded in the very word, "interest," which implies that self-interest too is bound up in ever-lasting increase.
Interest is a necessary counterpart to the mentality of externalization. Like interest, externalization involves a denial of nature's cyclicity by treating it as an infinite reservoir of resources and an infinite dumping ground for waste. Interest is also akin to fire, the foundation of modern technology. To keep it going requires the addition of ever more fuel, until the whole world is consumed, leaving but a pile of dollars or ash.
Money is a most peculiar kind of property, for unlike physical inventories of goods, "rust doth not corrode nor moths corrupt" it. Cash does not depreciate in value; on the contrary, in its modern, abstracted form of bits in a bank's computer, it grows in value as it earns interest. Thus it appears to violate a fundamental natural law: impermanence. Money does not require maintenance like a plot of farmland to maintain its productivity. It does not require constant rotation of stock like a store of grain to keep it fresh. No accident, then, was money's early and enduring association with gold, the metal most famously impervious to oxidation. Money perpetuates the fundamental illusion of independence from nature; financial wealth endures without constant interaction with the environment. Other forms of wealth are bothersome, because they require a continuing relationship with other people and the environment. But not money, which is now wholly abstract from physical commodities and thus abstract as well from natural laws of decay and change. Money as we know it is thus an integral component of the discrete and separate self.
It is a curious fact that most people are extremely unwilling to share their money. Even among relatives, sharing money is bound by strong taboos: I know countless poor families whose brothers, cousins, or uncles' families are very wealthy. And how many friendships have disintegrated, how many family members have shunned each other for years, over issues of money? Money, it seems, is inextricably wrapped up in the very essence of selfishness -- a clue to its deep association with self. Hence the intense sense of violation we feel upon getting "ripped off" (as if a part of our bodies were being removed) when from another perspective all that has happened is pieces of paper changing hands or bits turning on and off in a bank computer.
We do not usually share our money because we see it almost as part of our selves and the foundation of our biological security. Money is self. Meanwhile, conditioned by science and the origins of separation underlying it, we see other people as essentially just that, "other." Mixing these two realms invites confusion and conflict. The problem is, the more of life we convert to money, the more territory falls into one of these dichotomous realms, mine or yours, and the less common ground there is to share life and develop unguarded relationships. The conversion of life to money reduces everything to an economic transaction, leaving us the loneliest people ever to inhabit the planet. The propertization of the whole world means that everything is either mine, or someone else's. No longer is anything in common.
The violation we feel at being ripped off is much akin to the violation an indigenous hunter-gatherer must feel at witnessing the destruction of nature. When "I" is defined not as a discrete individual but through a web of relationships with people, earth, animals, and plants, then any harm to them violates ourselves as well. Even we moderns sometimes feel an echo of this violation when we see the bulldozers knocking down the trees to build a new shopping center. That is because our separation from the trees is illusory. The buried connectedness can be resisted through ideology, narcotized through distractions, or intimidated through the invocation of survival anxiety, but it can never die because it is germane to who we really are. The love of life that Edwin Wilson has named biophilia, and our natural empathy toward other human beings, is ultimately irrepressible because we are life and life is us.
The regime of separation has deadened us to the self-violation inherent in the despoliation of the planet and the degradation of its inhabitants. In an attempt to compensate for our lost sense of beingness, we transfer it to possessions and particularly to money, setting the stage for disaster. How? Because money (bearing interest) is an outright lie, encoding a false promise of imperishability and eternal growth. Identified with self, money and its associated "assets" suggest that if we stay in control of it, the self might be maintained forever, impervious to the rest of the cycle that follows growth: decay, death, and rebirth.
Obviously, there is a problem when something that does not decay but only grows, forever, exponentially, is linked to commodities which do not share this property. The only possible result is that these other commodities -- social, cultural, natural, and spiritual capital -- will eventually be exhausted in the frantic, hopeless attempt to redeem the ultimately fraudulent promise inherent in money with interest.
They are almost exhausted already. What more of community or of nature can we still commoditize, before the very basis of life and sanity crumbles? All of today's crises originate in the conversion of natural, social, cultural, and spiritual capital into money. Yet even usury is not the deepest root. It is not an accidental feature of our system that, if only someone had made a wiser choice, could be different. It is implicit in our Newtonian-Cartesian cosmology in which, by definition, more for me is less for you. As this cosmology rapidly becomes obsolete, we can glimpse an emerging new money system embodying a very different conception of self and world. Until we transition to it, there is no hope that the current conversion of social, cultural, natural, and spiritual capital into money will ever abate. Under an interest-based money system, it is inevitable that we will cash in the earth.
Our present monetary system generates a necessity for endless growth, embodies linear thinking, defies the cyclical patterns of nature, and drives the relentless conversion of all forms of wealth into currency. Furthermore, the concept of “interest” is the wellspring of our economy's ever-intensifying competition, systemic scarcity, and concentration of wealth. Interest is tied into how we see ourselves as separate, competing subjects seeking to gather more and more of the world within the boundaries of "mine." Today, however, the human identity is undergoing a profound metamorphosis. Part of this shift in our conception of self and world will be a new system of money consonant with the new human being.
Given the determining role of interest, the first alternative currency system to consider is one that structurally eliminates it. One such system, called Frei Geld or "free-money" was proposed in 1906 by Silvio Gesell in The Natural Economic Order. Gesell's free-money bears a form of negative interest called demurrage. Periodically, a stamp costing a tiny fraction of the currency's denomination must be affixed to it, in effect a "user fee" or a "maintenance cost"; another way to look at it is that the currency "goes bad" – depreciates in value – as it ages. (Of course, today this would be done electronically.)
If this sounds like a radical proposal that could never work, it may surprise you to learn that no less an authority than John Maynard Keynes praised the theoretical soundness of Gesell's ideas (with one critical caveat [1]). What's more, the system was actually tried out with great success, and is again in use today.
The best-known example was instituted in the town of Worgl, Austria, in 1932. To remain valid, each piece of this locally-issued currency required a monthly stamp costing 1% of its face value. This anti-hoarding measure spurred citizens to spend their money quickly, even to pay their taxes early. Instead of generating interest and growing, accumulation of wealth became a burden—much like possessions are a burden to the nomadic hunter-gatherer. Worgl's economy took off; the unemployment rate plummeted even as the rest of the country slipped into a deepening depression; public works were completed, and prosperity continued until the Worgl currency (and hundreds of imitators) were outlawed in 1933 at the behest of a threatened central bank.[2]
A similar story transpired in the United States. With national currency evaporating through an epidemic of bank failures, citizens and local governments created their own. By 1933, several hundred cities and even states were preparing to launch, or had already launched, "emergency currencies." [3] Many of these were stamp scrips like the Worgl currency. Despite the vigorous advocacy of prominent economist Irving Fisher, Roosevelt banned all emergency currencies when he launched the New Deal and declared a bank holiday in March, 1933, fearing the new currencies' decentralizing effects. [4]
Today we are at the brink of a similar crisis, and face a similar choice between shoring up the old world through an intensification of centralized control or letting go of control and stepping into the new. It is important to understand that the consequences of a demurrage-based currency system would be profound, encompassing economic, social, psychological, and spiritual dimensions. Money is so fundamental, so defining of our civilization, that it would be naive to hope for any authentic shift in the way we exist in the world that did not involve a fundamental shift in money as well.
Conceptually, demurrage works by freeing material goods which are subject to natural cyclic processes of renewal and decay from their linkage with a money that only grows, exponentially, over time. As established in Part 1 of this text, this dynamic is driving us toward ruin in the exhaustion of all social, cultural, natural, and spiritual wealth. Demurrage currency merely subjects money to the same laws as natural commodities, whose continuing value requires maintenance. Gesell writes:
Gold does not harmonize with the character of our goods. Gold and straw, gold and petrol, gold and guano, gold and bricks, gold and iron, gold and hides! Only a wild fancy, a monstrous hallucination, only the doctrine of "value" can bridge the gulf. Commodities in general, straw, petrol, guano and the rest can be safely exchanged only when everyone is indifferent as to whether he possesses money or goods, and that is possible only if money is afflicted with all the defects inherent in our products. That is obvious. Our goods rot, decay, break, rust, so only if money has equally disagreeable, loss-involving properties can it effect exchange rapidly, securely and cheaply. For such money can never, on any account, be preferred by anyone to goods.
Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money. [5]
In other words, demurrage redefines money as a medium of exchange instead of being a store of value. No longer is money an exception to the universal tendency in nature toward rust, mold, rot and decay—that is, toward the recycling of resources. No longer does money perpetuate a human realm separate from nature.
Gesell's phrase, "... a monstrous hallucination, the doctrine of 'value'..." hints at another effect of demurrage—it makes us question the notion of “value.” Value assigns to each object in the world a number. It associates an abstraction, changeless and independent, with that which always changes and that exists in relationship to all else. It is part of humanity's descent into representation, the reduction of the world into a data set. Demurrage reverses this thinking and removes an important boundary between the human realm and the natural realm. When money is no longer preferred to goods, we will lose the habit of defining a thing by how much it is worth.
Whereas interest promotes the discounting of future cash flows, demurrage encourages long-term thinking. In present-day accounting, a forest that has the capacity to generate one million dollars a year every year into the foreseeable future is considered more valuable if immediately cut down for a profit of 50 million dollars. (The net present value of the sustainable forest calculated at a discount rate of 5% is only $20 million.) This state of affairs results in the infamously short-sighted behavior of corporations that sacrifice (even their own) long-term well-being for the short-term results of the fiscal quarter. Such behavior is perfectly rational in an interest-based economy, but in a demurrage system, pure self-interest would dictate that the forest be preserved. No longer would greed motivate the robbing of the future for the benefit of the present. The exponential discounting of future cash flows implies the "cashing in" of the entire earth as opposed to an immediate wholesale “liquidation” of our remaining resources.
Whereas interest tends to concentrate wealth, demurrage promotes its distribution. In any economy with a specialization of labor beyond the family level, human beings need to perform exchanges in order to thrive. Both interest and demurrage represent a fee for the use of money, but the key difference is that in the former system, the fee accrues to those who already have money, while in the latter system it is levied upon them. Wealth comes with a high maintenance cost, thereby recreating the dynamics that governed hunter-gatherer attitudes toward accumulations of possessions.
Whereas security in an interest-based system comes from accumulating money, in a demurrage system it comes from having productive channels through which to direct it – that is, to become a nexus of the flow of wealth and not a point for its accumulation. In other words, it puts the focus on relationships, not on "having". The demurrage system accords with a different sense of self, affirmed not by enclosing more and more of the world within the confines of me and mine, but by developing and deepening relationships with others. It encourages reciprocation, sharing, and the rapid circulation of wealth.
In today's system, it is much better to have a thousand dollars than it is for ten people to owe you a hundred dollars. In a demurrage system the opposite is true. Since money decays with time, if I have some money I'm not using right now, I am happy to lend it to you, just as if I had more bread than I could eat, I would give you some. If I need some in the future, I can call in my obligations or create new ones with anyone within my network who has more money than he or she needs to meet immediate needs. As Gesell put it:
With the introduction of Free-Money, money has been reduced to the rank of umbrellas; friends and acquaintances assist each other mutually as a matter of course with loans of money. No one keeps, or can keep, reserves of money, since money is under compulsion to circulate. But just because no one can form reserves of money, no reserves are needed. For the circulation of money is regular and uninterrupted.[6]
No longer would money be a scarce commodity, hoarded and kept away from others; rather it would tend to circulate at the maximum possible "velocity". The issuer would ensure stable prices (P) according to the equation of exchange (MV=PQ) by regulating the amount of currency in circulation (M) to correspond to total real economic output (Q). The same result could be achieved by linking the currency to a basket of commodities whose level corresponds to overall economic activity, as proposed by Bernard Lietaer.
The dynamics of a demurrage-based currency system ensure a sufficient amount for all. This is in contradiction to today's economy in which a surfeit of material goods is coupled with their grossly unequal distribution. Hence the deeper contradiction in which, on the one hand, there are hundreds of millions of people who are unemployed or engaged in trivial, meaningless jobs, while on the other hand there is much important, meaningful work left undone—highlighting a disconnect between human creativity and human needs. "With Free-Money demand is inseparable from money, it is no longer a manifestation of the will of the possessors of money. Free-Money is not the instrument of demand, but demand itself, demand materialized and meeting, on an equal footing, supply, which always was, and remains, something material."[7]
When I look at the poverty of this world, the anxiety, the desperate and destructive pursuit of a fraudulent dream of security, I can hardly stifle a howl of protest. Not because it is unjust, though it is, but because it is so unnecessary! We live, after all, in a world of plenty, and we always have. The present money system and underneath it, the enclosure of the wild into the exclusively owned, has created artificial scarcity where none need exist. It is not food or any other necessity that is scarce; it is money, whose built-in scarcity induces the same in everything else.
In a highly specialized, technological society, most of us need to perform exchanges to live. To do so we need a medium of exchange – money. Some people, noting this inescapable fact, can see no alternative but to return to a primitive society, to undo the millennia-long course of civilization, which they quite understandably view as an enormous mistake. The scenario changes if money is used to recreate rather than destroy the social relations of a hunter-gatherer. In those societies, when a hunter killed a large animal, he or she would give away most of the meat, dividing it according to kinship status, personal affection, and need. As with demurrage money, it was much better to have lots of people "owe you one" than it was to have a big pile of rotting meat, or even of dried jerky that had to be transported or secured. Why would you even want to, when your community is as generous to you as you are to it? Security came from sharing. The good luck of your neighbor was your own good luck as well. If you came across an unexpected large source of wealth, you threw a huge party. As a member of the Pirahã tribe explained it when questioned about food storage: "I store meat in the belly of my brother."[8]
A negative-interest currency is a step toward the gift economies of yore that strengthen and define communities. Describing Lewis Hyde's theory of the gift, author Jessica Prentice writes, "Part of the sacred/erotic energy of gifts is that the receiver cannot accumulate them—either a gift needs to be passed on, or another gift needs to be given so that the gift-giving energy keeps moving. Gifts are about flow, and they are meant to circulate."[9] This is a perfect description of free-money, which like a gift collecting dust in the closet loses its value when kept unused. Free-money reverses the compulsion to constantly expand and fortify the accumulation of the private, the realm of me and mine. Just as interest shrinks the circle of self until we are left with the alienated, mercenary ego of modern civilization, demurrage, the opposite of interest, widens it to reunite us with community and all humanity, ending the artificial scarcity and competition of the Age of Usury.
Demurrage recreates, in the realm of money, the hunter-gatherer's disinclination toward food storage or other material accumulation. It resurrects the ancient hunter-gatherer mentality of abundance, in which sharing is easy and natural, in which there is no mad scramble to enclose the world. It promises a return in spirit to the "original affluent society" of Marshall Sahlins, but at a higher order of complexity. It is not a technological return to the Stone Age, as some primitivists envision after the collapse, but a spiritual return.
Consider the !Kung concept of wealth, explored in this exchange between anthropologist Richard Lee and a !Kung man, !Xoma:
I asked !Xoma, ‘What makes a man a //kaiha [rich man]—if he has many bags of //kai [beads and other valuables] in his hut?’
‘Holding //kai does not make you a //kaiha,’ replied !Xoma. ‘It is when someone makes many goods travel around that we might call him //kaiha.’
What !Xoma seemed to be saying was that it wasn't the number of your goods that constituted your wealth, it was the number of your friends. The wealthy person was measured by the frequency of his or her transactions and not by the inventory of goods on hand. [10]
Wealth in a demurrage system evolves into something akin to the model of the Pacific Northwest or Melanesia, in which a leader "acts as a shunting station for goods flowing reciprocally between his own and other like groups of society."[11] Status was not associated with the accumulation of money or possessions, but rather with a huge responsibility for generosity. Can you picture a society in which prestige, power, and leadership were accorded to those with the greatest inclination and capacity to give?
In a system where affluence comes from sharing, our focus is no longer on how to make a living. We focus instead on how to best give of our gifts. A corollary is that money and art are no longer at odds.
Imagine a life where you simply focus on your art, on your gifts, on being of service, in the serene knowledge that your needs will automatically be fulfilled as a matter of course--such an economy is possible. In it, competition is reduced to its proper domain: a yearning for excellence in all that we do. In it, productive work comes from a desire to create a more beautiful world, not to own it; to live and not just survive. We all know in our hearts such an economy is possible. We know it in our dreams, those we deny because we have to "make a living". Life becomes a grim business, a struggle. The Age of Usury presents us with an ineluctable pressure that we can resist but never escape: to make a living is to deny art, purpose, and beauty.
The locution "cannot afford to" reveals just how often money impedes our innate tendencies toward kindness, generosity, leisure, and creativity. Interest-money generates the greed that we mistake as human nature and perpetuates the illusion that security and wealth come from gathering more and more of the world unto the self, carving out a larger and larger exclusive province of "me" at the expense of every other living person, animal, plant, and ecosystem. As well it seems to directly contradict the teaching of karma, which says that what we do to the world, we do to ourselves. In our current money system, giving out to the world means less for me, not more! Free-money reverses this role and brings money into line with karma, reinforcing rather than denying its fundamental principle that by enriching the world we enrich ourselves.
When wealth is separate from accumulation but refers to a richness of relationships, each person's wealth makes everyone wealthier. Art will no longer be limited by what we can afford, for money will be art's ally not its enemy. Business will be the seeking of ways to bestow wealth upon others rather than the stripping of wealth from others. No longer, then, will our lives be full of cheap stuff. Work will no longer be bound to the search for money, but will seek out ways to best serve each other and the world, each according to our unique gifts and temperament. That will be, self-evidently, the way toward riches—both spiritual and financial, for no longer will the two be in conflict.
I would like to comment on the popular New Age idea of "prosperity programming," "opening to the flow of abundance," which is to say, becoming rich through the power of positive thinking. These ideas come from a valid source – the realization that the scarcity of our world is an artifact of our collective beliefs, and not the fundamental reality. However, they are inherently inconsistent with the money system we have today. One of the principles of prosperity programming is to let go of the guilt stemming from the belief that you can only be wealthy if another is poor; that more for me is less for you. The problem, illustrated in Part 1 of this essay, is that under today's money system it is true! More for me IS less for "you". The monetized realm grows at the expense of nature, culture, health, and spirit. The guilt we feel around money is quite justified. Certainly, we can create beautiful things, worthy organizations, noble causes with money, but on some level we are robbing Peter to pay Paul. Please understand that I am not suggesting that you not open to the flow of abundance. On the contrary, when enough people do this, the money system will change to conform to the new belief. Today's money system rests on a foundation of Separation. It is as much an effect as it is a cause of our perception that we are discrete and separate subjects in a universe that is Other. Opening to abundance can only happen when we let go of this identity and open to the richness of our true, connected being. This new identity wants no part of usury.
My dear reader, think about it: Is it really who you are to say, "I will lend you money -- but only if you give me even more in return"? When we need money to live, is that not a formula for slavery? Significantly, the forgiveness of debts for which Solon was famous was prompted in part by the indebted servitude of a growing proportion of the population. Today, young people feel enslaved to their college loans, householders to their mortgages, and entire Third World nations to their foreign debt. Interest is slavery. And since the condition of slavery demeans the slaveholder as much as the slave, in our hearts we want none of it.
The metamorphosis of the human sense of self, the transition from an Age of Separation to an Age of Reunion, is underway today, propelled by a convergence of crises that is rendering obsolete the old self, and the civilization that rests upon it. Each crisis springs from a different facet of separation; each facet of separation contains within it the seed of its own demise. Such is today's financial crisis, the culmination of a Ponzi scheme centuries in the making and based on the delusion that a finite planet can support exponential increase forever. Today, unless we find as yet undreamed of sources of natural and social capital to incinerate, that bubble is about to burst.
The longer we hang on, the harder we scramble to apply one technical fix after another to our tottering money system, the more severe the crisis and its subsequent dislocation will be. The eventual result, however, is assured: a new system of money will emerge that is aligned with the priorities of the connected, interdependent self: sustainability, beauty, and wholeness.
Demurrage-based currency is only part of this transition. Due to space considerations I have ignored key pieces of an economy of Reunion, such as full-cost accounting, JAK banking, local currencies, mutual credit currencies, the leasing economy, P2P economics, and industrial ecology. Yet demurrage is the key. An economy that emulates ecological principles cannot rest on a money system that requires exponential growth. The two are inimical. While usury still reigns, all the other pieces will remain marginal. Nonetheless, the efforts of visionaries such as E.F. Schumacher, Paul Hawken, Herman Daly, and countless others are not in vain. They have planted the seeds for a new kind of economy that will heal our ravaged earth.
Money in the Age of Reunion will be an agent for the development of social, cultural, natural, and spiritual capital, and not their consumption. It will be a mechanism for the sharing of wealth and not its accumulation. It will be a means for the creation of beauty, not its diminishment. It will be a barrier to greed and not an incentive. It will encourage joyful creative work, and not necessitate "jobs". It will reinforce the cyclical processes of nature, and not violate them. And it will accompany a shift in consciousness that we are beginning to experience today, a shift toward a connected self in love with the world. That, after all, is the true self, and that is what we will return to as the pretense of everlasting increase collapses.
Money as we know it today is intimately related to our identity as discrete and separate selves, as well as to the destruction that our separation has wrought. A saying goes, "Money is the root of all evil." But why should it be? After all, the purpose of money is, at its most basic, simply to facilitate exchange; in other words, to connect human gifts with human needs. What power, what monstrous perversion, has turned money into the opposite: an agent of scarcity?
For indeed, we live in a world of fundamental abundance, a world where vast quantities of food, energy, and materials go to waste. Half the world starves while the other half wastes enough to feed the first half. In the Third World and our own ghettos, people lack food, shelter, and other basic necessities, but cannot afford to buy them. Other people would love to supply these necessities and do other meaningful work, but cannot because there is no money in it.
Money utterly fails to connect gifts and needs. We pour vast resources into wars, plastic junk, and innumerable other products that do not serve human needs or human happiness. Why? It is not difficult to trace it back to greed, to the love of money. Ultimately though, greed is a red herring, itself a symptom and not a cause of a deeper problem. To blame greed and to fight it by intensifying the program of self-control is to intensify the war against the self, which is just another expression of the war against nature and the war against the other that lies at the base of our civilization.
Amidst superabundance, even we in rich countries live in an omnipresent anxiety, craving "financial security" as we try to keep scarcity at bay. We make choices (even those having nothing to do with money) according to what we can "afford," and we commonly associate freedom with wealth. But when we pursue it, we find that the paradise of financial freedom is a mirage, receding as we approach it, and that the chase itself enslaves. The anxiety is always there, the scarcity always just one disaster away. Greed is simply a response to the perception of scarcity. Money, which has turned abundance into scarcity, precedes greed. But not money per se, only the kind of money we use today, the kind of money that is evaporating as we speak, money with a very special characteristic that ensures its eventual demise.
This characteristic appears, in different forms, in the other substructures of our civilization as well. By understanding it, we can clarify the "irremediable structural flaw" of our civilization itself; more importantly, we can design new systems of money to supplant the old and that bear the opposite characteristic. The results will be the opposite as well: abundance, not scarcity; generosity, not greed; and sustainability, not ruin.
The defining characteristic of money today is usury, better known as interest. It is usury that both generates today's endemic anxiety and drives the world-devouring engine of perpetual growth. To explain how, I will quote Bernard Leitaer's now-famous parable The Eleventh Round, from his book The Future of Money.
Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone's barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.
One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. "Poor people," he said, "so primitive." The farmer's wife overheard him and challenged the stranger, "Do you think you can do a better job handling chickens?" "Chickens, no," responded the stranger, "But there is a much better way to eliminate all that hassle." "Oh yes, how so?" asked the woman. "See that tree there?" the stranger replied. " Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I'll explain the better way."
And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. "Now you can trade and bargain with the rounds instead of the unwieldy chickens," he explained.
It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat.
"Oh, by the way," he added after every family had received their 10 rounds, "in a year's time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives." "But where will the 11th round come from?" asked the farmer with the six chickens. "You'll see," said the man with a reassuring smile.
Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.
So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants.
There are really only three ways this story can end: inflation, bankruptcy, or growth. The same choices face any economy based on usury. The villagers could procure another cowhide and make more currency; or one of each 11 families could go bankrupt, as Lietaer observes; or they could increase the number of chickens so that new "rounds" would have the same value as before. In a real economy, all three pressures operate simultaneously. The bankruptcy pressure drives a built-in insecurity, which in turn drives people and institutions to "make" more money through inflationary or productive means. Of these two choices, inflation is only a temporary solution (as we are discovering today). It can only push the grow-or-die imperative slightly into the future.
In other words, because of the money system, competition, insecurity, and greed are an inseparable part of our economy. They can never be eliminated as long as the necessities of life are denominated in usury-money. But this is only one reason why money destroys community. The other is related to the third pressure: perpetual growth.
As Lietaer's parable explains, because of interest, at any given time the amount of money owed is greater than the amount of money already existing. To make non-inflationary new money to keep the whole system going, we have to breed more chickens -- in other words, we have to create more "goods and services." The principal way of doing so is to begin selling something that was once free. It is to convert forests into timber, music into product, ideas into intellectual property, social reciprocity into paid services.
Would you like to get rich? Here is a business idea that, in one form or another, has worked spectacularly for thousands of years. Very simply, find anything that people do for themselves or each other for free. Then take it away from them: make it illegal, inconvenient, or otherwise unavailable. Then sell back to them what you have taken. Granted, usually no one does this consciously, but that has been the net effect of culture and technology over the last several thousand years.
Your 13th-century peasant ancestors rarely paid money for food, shelter, clothing, or entertainment (much less in a hunter-gatherer tribe). People were self-sufficient in all these things or, more likely, depended on elaborate gift networks, sharing, and reciprocity. Of these things is community built. Today, we pay strangers to meet most of our physical and cultural needs. You probably don't know the person who grew your food, wove your shirt, built your house, or sang the songs on your iPod. Abetted by technology, the commodification of formerly non-monetary goods and services has accelerated over the last few centuries, to the point today where very little is left outside the money realm. The vast commons, whether of land or of culture, has been cordoned off and sold -- all to keep pace with the exponential growth of money. This is the deep reason why we convert forests to timber, songs to intellectual property, and so on. It is why two-thirds of all American meals are now prepared outside the home. It is why herbal folk remedies have given way to pharmaceutical medicines, why child care has become a paid service, why drinking water is now the number one beverage sales growth category.
The imperative of perpetual growth implicit in interest is what drives the relentless conversion of life, world, and spirit into money. Completing the vicious circle, the more of life we convert into money, the more we need money to live. Usury, not money, is the proverbial root of all evil. Inducing competition and replacing personal relationships with paid services, it rends the fabric of community.
Community is closely linked to gift-giving; when anthropologists seek to understand a culture, they trace the flow of gifts. Unlike money transactions, in which no obligations linger after the transaction is completed, the giving of a gift creates a tie (which is the literal meaning of "obligation"). When gifts circulate, the community bonds. Lending money at interest is utterly contrary to the spirit of the gift. For one thing, a cardinal feature of an authentic gift is that we give it unconditionally. We may expect to be gifted in return, whether by the recipient or another member of the community, but we do not impose conditions on a true gift, or it is not really a gift.
More importantly, a universal characteristic of a gift is that it naturally increases as it circulates within a community, and that this increase must not be kept for oneself, but allowed to circulate with the gift. Interest amounts to keeping the increase on the gift for oneself, thereby withholding it from circulation in the community, weakening community for the benefit of the individual. It is no accident that many societies prohibited usury among themselves but allowed it in transactions with outsiders, who could not be trusted to recirculate a true gift back into the community. Hence the prohibition in Deuteronomy 23:20: "Unto a stranger you may lend upon usury, but unto thy brother thou shalt not lend upon usury."
The ramifications of this injunction when combined with Jesus' teaching that all men are brothers are obvious: interest is forbidden entirely. This was the position of the Catholic Church throughout the Middle Ages, and is still the rule in Islam today. However, starting with the merger of Church and state and accelerating with the rise of mercantilism in the late Middle Ages, pressure mounted to resolve the fundamental tension between Christian teaching and the requirements of commerce. The solution provided by Martin Luther and John Calvin was to separate moral and civil law, maintaining that the ways of Christ are not the ways of the world. Thus spirit became further separated from matter, and religion retreated another step toward worldly irrelevancy.
Abandoning the prohibition on interest was a key step in religion's complicity in the desacralizing of the world. After all, it is interest that drives the conversion of all that is sacred about the world -- its beauty, uniqueness, and living relationships -- into something profane. Why do we intuitively know money is profane? Because it is the one great exception to the irreducible uniqueness of all beings.
In my last Reality Sandwich essay, I described how each drop of water, even each electron, is unique and sacred. But not so each dollar. Money is by design standard, generic. Your dollar is the same as my dollar. Money today lacks even a unique serial number: It is bits in a computer, an abstraction of an abstraction of an abstraction. A forest is unique and sacred; not so the money from its clearcutting. Convert two distinct forests into money and they become the same. Applied to cultures, the same principle is fast creating a global monoculture where every service is a paid service.
When money mediates all our relationships, we too lose our uniqueness to become a standardized consumer of standardized goods and services, and a standardized functionary performing other services. No personal economic relationships are important, because we can always pay someone else to do it. No wonder, strive as we might, we find it so hard to create community. No wonder we feel so insecure, so replaceable. It is all because of the conversion, driven by usury, of the unique and sacred into the monetized and generic.
Because money is identified with Benthamite "utility" -- that is, the good -- this entire process is considered rational in traditional (neoclassical) economic theory. Quite simply, whenever anything is monetized, the world's "goodness" level rises. The same assumption appears in the euphemism "goods" to describe the products of industry. The very definition of a "good" is anything exchanged for money. In other words, Money = Good. Got that?
By definition, when we buy bottled water instead of tap water too polluted to drink, that is good. When we pay for day care instead of caring for our babies at home, that is good. When we buy a video game instead of playing outdoors, that is good.
In terms of conventional economics, it may actually be in an individual's rational self-interest to engage in activities that render the earth uninhabitable. This is potentially true even on the collective level: given the exponential nature of future cash flow discounting, it may be more in our "rational self-interest" to liquidate all natural capital right now -- cash in the earth -- than to preserve it for future generations. After all, the net present value of an eternal annual cash flow of one trillion dollars is only some twenty trillion dollars (at a 5% discount rate). Economically speaking, it would be more rational to destroy the planet in ten years while generating income of $100 trillion, than to settle for a sustainable level of $3 trillion a year forever.
If this seems like an outlandish fantasy, consider that it is exactly what we are doing today! According to the parameters we have established, we are making the insane but rational choice to incinerate our natural, social, cultural, and spiritual capital for financial profit. Amazingly, this end was foreseen thousands of years ago by the originator of the story of King Midas, whose touch turned everything to gold. Delighted at first with his gift, soon he had turned all his food, flowers, even his loved ones into cold, hard metal. Just like King Midas, we too are converting natural beauty, human relationships, and the basis of our very survival into money.
Yet despite this ancient warning, we continue to behave as if we could eat our money: David Korten once spoke of an East Asian minister who said his country's forests would be more valuable clearcut, with the money put in the bank to earn interest. Apparently, the effects of destroying the planet are of little concern to economists. William Nordhaus of Yale proclaims, "Agriculture, the part of the economy that is sensitive to climate change, accounts for just three percent of national output. That means there is no way to get a very large effect on the US economy." Oxford economist Wilfred Beckerman echoes him: "Even if net output of agriculture fell by 50 percent by the end of the next century, this is only a 1.5 per cent cut in GNP."
Must we, like King Midas, find ourselves marooned in a cold, comfortless, ugly, inhospitable world before we realize we cannot eat our money?
Because it builds exponentially, interest feeds a linearity that puts humankind outside of nature, which is bound by cycles. Subtly but inexorably, it drives the assumption that human beings exist apart from natural law. As well, interest drives a relentless anxiety by demanding always more, more, more, propelling the endless conversion of all wealth into financial capital. Part of this anxiety is encoded in the very word, "interest," which implies that self-interest too is bound up in ever-lasting increase.
Interest is a necessary counterpart to the mentality of externalization. Like interest, externalization involves a denial of nature's cyclicity by treating it as an infinite reservoir of resources and an infinite dumping ground for waste. Interest is also akin to fire, the foundation of modern technology. To keep it going requires the addition of ever more fuel, until the whole world is consumed, leaving but a pile of dollars or ash.
Money is a most peculiar kind of property, for unlike physical inventories of goods, "rust doth not corrode nor moths corrupt" it. Cash does not depreciate in value; on the contrary, in its modern, abstracted form of bits in a bank's computer, it grows in value as it earns interest. Thus it appears to violate a fundamental natural law: impermanence. Money does not require maintenance like a plot of farmland to maintain its productivity. It does not require constant rotation of stock like a store of grain to keep it fresh. No accident, then, was money's early and enduring association with gold, the metal most famously impervious to oxidation. Money perpetuates the fundamental illusion of independence from nature; financial wealth endures without constant interaction with the environment. Other forms of wealth are bothersome, because they require a continuing relationship with other people and the environment. But not money, which is now wholly abstract from physical commodities and thus abstract as well from natural laws of decay and change. Money as we know it is thus an integral component of the discrete and separate self.
It is a curious fact that most people are extremely unwilling to share their money. Even among relatives, sharing money is bound by strong taboos: I know countless poor families whose brothers, cousins, or uncles' families are very wealthy. And how many friendships have disintegrated, how many family members have shunned each other for years, over issues of money? Money, it seems, is inextricably wrapped up in the very essence of selfishness -- a clue to its deep association with self. Hence the intense sense of violation we feel upon getting "ripped off" (as if a part of our bodies were being removed) when from another perspective all that has happened is pieces of paper changing hands or bits turning on and off in a bank computer.
We do not usually share our money because we see it almost as part of our selves and the foundation of our biological security. Money is self. Meanwhile, conditioned by science and the origins of separation underlying it, we see other people as essentially just that, "other." Mixing these two realms invites confusion and conflict. The problem is, the more of life we convert to money, the more territory falls into one of these dichotomous realms, mine or yours, and the less common ground there is to share life and develop unguarded relationships. The conversion of life to money reduces everything to an economic transaction, leaving us the loneliest people ever to inhabit the planet. The propertization of the whole world means that everything is either mine, or someone else's. No longer is anything in common.
The violation we feel at being ripped off is much akin to the violation an indigenous hunter-gatherer must feel at witnessing the destruction of nature. When "I" is defined not as a discrete individual but through a web of relationships with people, earth, animals, and plants, then any harm to them violates ourselves as well. Even we moderns sometimes feel an echo of this violation when we see the bulldozers knocking down the trees to build a new shopping center. That is because our separation from the trees is illusory. The buried connectedness can be resisted through ideology, narcotized through distractions, or intimidated through the invocation of survival anxiety, but it can never die because it is germane to who we really are. The love of life that Edwin Wilson has named biophilia, and our natural empathy toward other human beings, is ultimately irrepressible because we are life and life is us.
The regime of separation has deadened us to the self-violation inherent in the despoliation of the planet and the degradation of its inhabitants. In an attempt to compensate for our lost sense of beingness, we transfer it to possessions and particularly to money, setting the stage for disaster. How? Because money (bearing interest) is an outright lie, encoding a false promise of imperishability and eternal growth. Identified with self, money and its associated "assets" suggest that if we stay in control of it, the self might be maintained forever, impervious to the rest of the cycle that follows growth: decay, death, and rebirth.
Obviously, there is a problem when something that does not decay but only grows, forever, exponentially, is linked to commodities which do not share this property. The only possible result is that these other commodities -- social, cultural, natural, and spiritual capital -- will eventually be exhausted in the frantic, hopeless attempt to redeem the ultimately fraudulent promise inherent in money with interest.
They are almost exhausted already. What more of community or of nature can we still commoditize, before the very basis of life and sanity crumbles? All of today's crises originate in the conversion of natural, social, cultural, and spiritual capital into money. Yet even usury is not the deepest root. It is not an accidental feature of our system that, if only someone had made a wiser choice, could be different. It is implicit in our Newtonian-Cartesian cosmology in which, by definition, more for me is less for you. As this cosmology rapidly becomes obsolete, we can glimpse an emerging new money system embodying a very different conception of self and world. Until we transition to it, there is no hope that the current conversion of social, cultural, natural, and spiritual capital into money will ever abate. Under an interest-based money system, it is inevitable that we will cash in the earth.
Our present monetary system generates a necessity for endless growth, embodies linear thinking, defies the cyclical patterns of nature, and drives the relentless conversion of all forms of wealth into currency. Furthermore, the concept of “interest” is the wellspring of our economy's ever-intensifying competition, systemic scarcity, and concentration of wealth. Interest is tied into how we see ourselves as separate, competing subjects seeking to gather more and more of the world within the boundaries of "mine." Today, however, the human identity is undergoing a profound metamorphosis. Part of this shift in our conception of self and world will be a new system of money consonant with the new human being.
Given the determining role of interest, the first alternative currency system to consider is one that structurally eliminates it. One such system, called Frei Geld or "free-money" was proposed in 1906 by Silvio Gesell in The Natural Economic Order. Gesell's free-money bears a form of negative interest called demurrage. Periodically, a stamp costing a tiny fraction of the currency's denomination must be affixed to it, in effect a "user fee" or a "maintenance cost"; another way to look at it is that the currency "goes bad" – depreciates in value – as it ages. (Of course, today this would be done electronically.)
If this sounds like a radical proposal that could never work, it may surprise you to learn that no less an authority than John Maynard Keynes praised the theoretical soundness of Gesell's ideas (with one critical caveat [1]). What's more, the system was actually tried out with great success, and is again in use today.
The best-known example was instituted in the town of Worgl, Austria, in 1932. To remain valid, each piece of this locally-issued currency required a monthly stamp costing 1% of its face value. This anti-hoarding measure spurred citizens to spend their money quickly, even to pay their taxes early. Instead of generating interest and growing, accumulation of wealth became a burden—much like possessions are a burden to the nomadic hunter-gatherer. Worgl's economy took off; the unemployment rate plummeted even as the rest of the country slipped into a deepening depression; public works were completed, and prosperity continued until the Worgl currency (and hundreds of imitators) were outlawed in 1933 at the behest of a threatened central bank.[2]
A similar story transpired in the United States. With national currency evaporating through an epidemic of bank failures, citizens and local governments created their own. By 1933, several hundred cities and even states were preparing to launch, or had already launched, "emergency currencies." [3] Many of these were stamp scrips like the Worgl currency. Despite the vigorous advocacy of prominent economist Irving Fisher, Roosevelt banned all emergency currencies when he launched the New Deal and declared a bank holiday in March, 1933, fearing the new currencies' decentralizing effects. [4]
Today we are at the brink of a similar crisis, and face a similar choice between shoring up the old world through an intensification of centralized control or letting go of control and stepping into the new. It is important to understand that the consequences of a demurrage-based currency system would be profound, encompassing economic, social, psychological, and spiritual dimensions. Money is so fundamental, so defining of our civilization, that it would be naive to hope for any authentic shift in the way we exist in the world that did not involve a fundamental shift in money as well.
Conceptually, demurrage works by freeing material goods which are subject to natural cyclic processes of renewal and decay from their linkage with a money that only grows, exponentially, over time. As established in Part 1 of this text, this dynamic is driving us toward ruin in the exhaustion of all social, cultural, natural, and spiritual wealth. Demurrage currency merely subjects money to the same laws as natural commodities, whose continuing value requires maintenance. Gesell writes:
Gold does not harmonize with the character of our goods. Gold and straw, gold and petrol, gold and guano, gold and bricks, gold and iron, gold and hides! Only a wild fancy, a monstrous hallucination, only the doctrine of "value" can bridge the gulf. Commodities in general, straw, petrol, guano and the rest can be safely exchanged only when everyone is indifferent as to whether he possesses money or goods, and that is possible only if money is afflicted with all the defects inherent in our products. That is obvious. Our goods rot, decay, break, rust, so only if money has equally disagreeable, loss-involving properties can it effect exchange rapidly, securely and cheaply. For such money can never, on any account, be preferred by anyone to goods.
Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money. [5]
In other words, demurrage redefines money as a medium of exchange instead of being a store of value. No longer is money an exception to the universal tendency in nature toward rust, mold, rot and decay—that is, toward the recycling of resources. No longer does money perpetuate a human realm separate from nature.
Gesell's phrase, "... a monstrous hallucination, the doctrine of 'value'..." hints at another effect of demurrage—it makes us question the notion of “value.” Value assigns to each object in the world a number. It associates an abstraction, changeless and independent, with that which always changes and that exists in relationship to all else. It is part of humanity's descent into representation, the reduction of the world into a data set. Demurrage reverses this thinking and removes an important boundary between the human realm and the natural realm. When money is no longer preferred to goods, we will lose the habit of defining a thing by how much it is worth.
Whereas interest promotes the discounting of future cash flows, demurrage encourages long-term thinking. In present-day accounting, a forest that has the capacity to generate one million dollars a year every year into the foreseeable future is considered more valuable if immediately cut down for a profit of 50 million dollars. (The net present value of the sustainable forest calculated at a discount rate of 5% is only $20 million.) This state of affairs results in the infamously short-sighted behavior of corporations that sacrifice (even their own) long-term well-being for the short-term results of the fiscal quarter. Such behavior is perfectly rational in an interest-based economy, but in a demurrage system, pure self-interest would dictate that the forest be preserved. No longer would greed motivate the robbing of the future for the benefit of the present. The exponential discounting of future cash flows implies the "cashing in" of the entire earth as opposed to an immediate wholesale “liquidation” of our remaining resources.
Whereas interest tends to concentrate wealth, demurrage promotes its distribution. In any economy with a specialization of labor beyond the family level, human beings need to perform exchanges in order to thrive. Both interest and demurrage represent a fee for the use of money, but the key difference is that in the former system, the fee accrues to those who already have money, while in the latter system it is levied upon them. Wealth comes with a high maintenance cost, thereby recreating the dynamics that governed hunter-gatherer attitudes toward accumulations of possessions.
Whereas security in an interest-based system comes from accumulating money, in a demurrage system it comes from having productive channels through which to direct it – that is, to become a nexus of the flow of wealth and not a point for its accumulation. In other words, it puts the focus on relationships, not on "having". The demurrage system accords with a different sense of self, affirmed not by enclosing more and more of the world within the confines of me and mine, but by developing and deepening relationships with others. It encourages reciprocation, sharing, and the rapid circulation of wealth.
In today's system, it is much better to have a thousand dollars than it is for ten people to owe you a hundred dollars. In a demurrage system the opposite is true. Since money decays with time, if I have some money I'm not using right now, I am happy to lend it to you, just as if I had more bread than I could eat, I would give you some. If I need some in the future, I can call in my obligations or create new ones with anyone within my network who has more money than he or she needs to meet immediate needs. As Gesell put it:
With the introduction of Free-Money, money has been reduced to the rank of umbrellas; friends and acquaintances assist each other mutually as a matter of course with loans of money. No one keeps, or can keep, reserves of money, since money is under compulsion to circulate. But just because no one can form reserves of money, no reserves are needed. For the circulation of money is regular and uninterrupted.[6]
No longer would money be a scarce commodity, hoarded and kept away from others; rather it would tend to circulate at the maximum possible "velocity". The issuer would ensure stable prices (P) according to the equation of exchange (MV=PQ) by regulating the amount of currency in circulation (M) to correspond to total real economic output (Q). The same result could be achieved by linking the currency to a basket of commodities whose level corresponds to overall economic activity, as proposed by Bernard Lietaer.
The dynamics of a demurrage-based currency system ensure a sufficient amount for all. This is in contradiction to today's economy in which a surfeit of material goods is coupled with their grossly unequal distribution. Hence the deeper contradiction in which, on the one hand, there are hundreds of millions of people who are unemployed or engaged in trivial, meaningless jobs, while on the other hand there is much important, meaningful work left undone—highlighting a disconnect between human creativity and human needs. "With Free-Money demand is inseparable from money, it is no longer a manifestation of the will of the possessors of money. Free-Money is not the instrument of demand, but demand itself, demand materialized and meeting, on an equal footing, supply, which always was, and remains, something material."[7]
When I look at the poverty of this world, the anxiety, the desperate and destructive pursuit of a fraudulent dream of security, I can hardly stifle a howl of protest. Not because it is unjust, though it is, but because it is so unnecessary! We live, after all, in a world of plenty, and we always have. The present money system and underneath it, the enclosure of the wild into the exclusively owned, has created artificial scarcity where none need exist. It is not food or any other necessity that is scarce; it is money, whose built-in scarcity induces the same in everything else.
In a highly specialized, technological society, most of us need to perform exchanges to live. To do so we need a medium of exchange – money. Some people, noting this inescapable fact, can see no alternative but to return to a primitive society, to undo the millennia-long course of civilization, which they quite understandably view as an enormous mistake. The scenario changes if money is used to recreate rather than destroy the social relations of a hunter-gatherer. In those societies, when a hunter killed a large animal, he or she would give away most of the meat, dividing it according to kinship status, personal affection, and need. As with demurrage money, it was much better to have lots of people "owe you one" than it was to have a big pile of rotting meat, or even of dried jerky that had to be transported or secured. Why would you even want to, when your community is as generous to you as you are to it? Security came from sharing. The good luck of your neighbor was your own good luck as well. If you came across an unexpected large source of wealth, you threw a huge party. As a member of the Pirahã tribe explained it when questioned about food storage: "I store meat in the belly of my brother."[8]
A negative-interest currency is a step toward the gift economies of yore that strengthen and define communities. Describing Lewis Hyde's theory of the gift, author Jessica Prentice writes, "Part of the sacred/erotic energy of gifts is that the receiver cannot accumulate them—either a gift needs to be passed on, or another gift needs to be given so that the gift-giving energy keeps moving. Gifts are about flow, and they are meant to circulate."[9] This is a perfect description of free-money, which like a gift collecting dust in the closet loses its value when kept unused. Free-money reverses the compulsion to constantly expand and fortify the accumulation of the private, the realm of me and mine. Just as interest shrinks the circle of self until we are left with the alienated, mercenary ego of modern civilization, demurrage, the opposite of interest, widens it to reunite us with community and all humanity, ending the artificial scarcity and competition of the Age of Usury.
Demurrage recreates, in the realm of money, the hunter-gatherer's disinclination toward food storage or other material accumulation. It resurrects the ancient hunter-gatherer mentality of abundance, in which sharing is easy and natural, in which there is no mad scramble to enclose the world. It promises a return in spirit to the "original affluent society" of Marshall Sahlins, but at a higher order of complexity. It is not a technological return to the Stone Age, as some primitivists envision after the collapse, but a spiritual return.
Consider the !Kung concept of wealth, explored in this exchange between anthropologist Richard Lee and a !Kung man, !Xoma:
I asked !Xoma, ‘What makes a man a //kaiha [rich man]—if he has many bags of //kai [beads and other valuables] in his hut?’
‘Holding //kai does not make you a //kaiha,’ replied !Xoma. ‘It is when someone makes many goods travel around that we might call him //kaiha.’
What !Xoma seemed to be saying was that it wasn't the number of your goods that constituted your wealth, it was the number of your friends. The wealthy person was measured by the frequency of his or her transactions and not by the inventory of goods on hand. [10]
Wealth in a demurrage system evolves into something akin to the model of the Pacific Northwest or Melanesia, in which a leader "acts as a shunting station for goods flowing reciprocally between his own and other like groups of society."[11] Status was not associated with the accumulation of money or possessions, but rather with a huge responsibility for generosity. Can you picture a society in which prestige, power, and leadership were accorded to those with the greatest inclination and capacity to give?
In a system where affluence comes from sharing, our focus is no longer on how to make a living. We focus instead on how to best give of our gifts. A corollary is that money and art are no longer at odds.
Imagine a life where you simply focus on your art, on your gifts, on being of service, in the serene knowledge that your needs will automatically be fulfilled as a matter of course--such an economy is possible. In it, competition is reduced to its proper domain: a yearning for excellence in all that we do. In it, productive work comes from a desire to create a more beautiful world, not to own it; to live and not just survive. We all know in our hearts such an economy is possible. We know it in our dreams, those we deny because we have to "make a living". Life becomes a grim business, a struggle. The Age of Usury presents us with an ineluctable pressure that we can resist but never escape: to make a living is to deny art, purpose, and beauty.
The locution "cannot afford to" reveals just how often money impedes our innate tendencies toward kindness, generosity, leisure, and creativity. Interest-money generates the greed that we mistake as human nature and perpetuates the illusion that security and wealth come from gathering more and more of the world unto the self, carving out a larger and larger exclusive province of "me" at the expense of every other living person, animal, plant, and ecosystem. As well it seems to directly contradict the teaching of karma, which says that what we do to the world, we do to ourselves. In our current money system, giving out to the world means less for me, not more! Free-money reverses this role and brings money into line with karma, reinforcing rather than denying its fundamental principle that by enriching the world we enrich ourselves.
When wealth is separate from accumulation but refers to a richness of relationships, each person's wealth makes everyone wealthier. Art will no longer be limited by what we can afford, for money will be art's ally not its enemy. Business will be the seeking of ways to bestow wealth upon others rather than the stripping of wealth from others. No longer, then, will our lives be full of cheap stuff. Work will no longer be bound to the search for money, but will seek out ways to best serve each other and the world, each according to our unique gifts and temperament. That will be, self-evidently, the way toward riches—both spiritual and financial, for no longer will the two be in conflict.
I would like to comment on the popular New Age idea of "prosperity programming," "opening to the flow of abundance," which is to say, becoming rich through the power of positive thinking. These ideas come from a valid source – the realization that the scarcity of our world is an artifact of our collective beliefs, and not the fundamental reality. However, they are inherently inconsistent with the money system we have today. One of the principles of prosperity programming is to let go of the guilt stemming from the belief that you can only be wealthy if another is poor; that more for me is less for you. The problem, illustrated in Part 1 of this essay, is that under today's money system it is true! More for me IS less for "you". The monetized realm grows at the expense of nature, culture, health, and spirit. The guilt we feel around money is quite justified. Certainly, we can create beautiful things, worthy organizations, noble causes with money, but on some level we are robbing Peter to pay Paul. Please understand that I am not suggesting that you not open to the flow of abundance. On the contrary, when enough people do this, the money system will change to conform to the new belief. Today's money system rests on a foundation of Separation. It is as much an effect as it is a cause of our perception that we are discrete and separate subjects in a universe that is Other. Opening to abundance can only happen when we let go of this identity and open to the richness of our true, connected being. This new identity wants no part of usury.
My dear reader, think about it: Is it really who you are to say, "I will lend you money -- but only if you give me even more in return"? When we need money to live, is that not a formula for slavery? Significantly, the forgiveness of debts for which Solon was famous was prompted in part by the indebted servitude of a growing proportion of the population. Today, young people feel enslaved to their college loans, householders to their mortgages, and entire Third World nations to their foreign debt. Interest is slavery. And since the condition of slavery demeans the slaveholder as much as the slave, in our hearts we want none of it.
The metamorphosis of the human sense of self, the transition from an Age of Separation to an Age of Reunion, is underway today, propelled by a convergence of crises that is rendering obsolete the old self, and the civilization that rests upon it. Each crisis springs from a different facet of separation; each facet of separation contains within it the seed of its own demise. Such is today's financial crisis, the culmination of a Ponzi scheme centuries in the making and based on the delusion that a finite planet can support exponential increase forever. Today, unless we find as yet undreamed of sources of natural and social capital to incinerate, that bubble is about to burst.
The longer we hang on, the harder we scramble to apply one technical fix after another to our tottering money system, the more severe the crisis and its subsequent dislocation will be. The eventual result, however, is assured: a new system of money will emerge that is aligned with the priorities of the connected, interdependent self: sustainability, beauty, and wholeness.
Demurrage-based currency is only part of this transition. Due to space considerations I have ignored key pieces of an economy of Reunion, such as full-cost accounting, JAK banking, local currencies, mutual credit currencies, the leasing economy, P2P economics, and industrial ecology. Yet demurrage is the key. An economy that emulates ecological principles cannot rest on a money system that requires exponential growth. The two are inimical. While usury still reigns, all the other pieces will remain marginal. Nonetheless, the efforts of visionaries such as E.F. Schumacher, Paul Hawken, Herman Daly, and countless others are not in vain. They have planted the seeds for a new kind of economy that will heal our ravaged earth.
Money in the Age of Reunion will be an agent for the development of social, cultural, natural, and spiritual capital, and not their consumption. It will be a mechanism for the sharing of wealth and not its accumulation. It will be a means for the creation of beauty, not its diminishment. It will be a barrier to greed and not an incentive. It will encourage joyful creative work, and not necessitate "jobs". It will reinforce the cyclical processes of nature, and not violate them. And it will accompany a shift in consciousness that we are beginning to experience today, a shift toward a connected self in love with the world. That, after all, is the true self, and that is what we will return to as the pretense of everlasting increase collapses.
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