Web Letters: Goldman Sachs Socialism

I ran across the following from an article Greider wrote in the winter of 2002 in a piece devoted largely to Enron-related shenanigans. Under the current circumstances I thought it was worth resurrecting:

"The larger and far more dangerous conflict of interest lies in the convergence of government-insured commercial banks and the investment banks, because this marriage has the potential not only to burn investors but to shake the financial system and entire economy. If the newly created and top-heavy mega-banks get in trouble, their friends in power may arrange another cozy government bailout for those it deems 'too big to fail.' "

Vince Wade

Huntington Beach, CA

There's a simple way to stop the current Bush/Paulson "blank check" Wall Street bail-out proposal in its tracks. Pose the simple question: "How much will taxes need to be raised in order to pay for this bail-out?"

Bill Miller

Menlo Park, CA

The cheek and overwhelming arrogance embodied in this Bush toady, Secretary Paulson, are beyond the pale. The plan Paulson puts forward is simply, in the words of others and mine as well, the privatization of profits and socialization of losses to financial institutions that were allowed to become too big, too interconnected and too clearly and unashamedly corrupt under the doctrine of deregulation and "let the (almighty) market work," unfettered by regulation. These being the hew and cry of the Republicans and John McBush until seventy-two hours ago.

Section 8 of Mr. Paulson's ultimatum to Congress is beyond the pale. "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Horse hockey! Who in the blazes does Paulson think he is?

It is abundantly clear that the imperial presidency has set the tone for this strutting martinet of economic policy and others in the last eight miserable and barely tolerable years of the Bush administration. The whining mouse Professor Bernanke, chair of the Federal Reserve (yet another great idea of the financial market), singing in harmony with Paulson saying that the sky is falling. Well, hell's bells, who do they think is responsible for that situation. Hello! Republican laissez-faire economic policy since Reagan with help from Bill Clinton with his eulogy over "big government's grave--does NAFTA ring any bells? Ya think?

Enough is way more than enough!

If the people of the United States allow the doddering 72 year-old McBush and his Backwoods Barbie to take office by hook or by crook then the US will get what it richly deserves. More war on the battlefields of Iraq, Afghanistan, probably Iran and, of course, the war (the secret war that no one speaks about) of the wealthiest in America on the poor and the middle class that will continue undiminished.

Do not allow the Republican party and John McCain to disown their failed policies. Now is the very time to assign blame. I am tired of Republicans doing stand-ups and whining that now is the time for action, not for assessing blame for the shape that our economy and our nation are in. Elections are the very time to assess blame or to assess kudos, depending upon which is due and appropriate.

I say yet again, Enough is way more than enough!

Defeat the Paulson Manifesto. Defeat John McBush and Palin (or is it Palin/McBush?).

In case I failed to communicate it, Enough is way more than enough!

Michael Robbins

Winston-Salem, NC

In the Washington Post, Sebastian Mallaby wrote up a superior alternate plan to relieve this botched mess. Instead of buying the bad debts, the government should provide cash liquidity in return for issuing new shares in institutions. Leave managements to work their way out, subject to the "mercies" of the unhappy regular stockholders. When the crisis is past, this stock could then be sold off slowly, so as to make a proft while not depressing prices. Just about everyone would win. Rules to slow down foreclosures could be part of the mix.

The two "FM"s should be broken up and sold off. Private gain with public risk is a really bad idea.

John D. Froelich

Upper Darby, PA

The foremost principle to grasp in order to understand economics and finance is that value is the beginning and end in everything economic, and it exist only in the imagination of the mind. If there were no people on earth, nothing would have value. There is no such thing as intrinsic value. Physicists have yet to discover any attributes peculiar to value in the elements. The underlying problem of today's economic theories is the hidden, instinctive and automatic assumption that value is automatically inherent in assets.

Assets do not define value, but value defines assets. Assets are only carriers of value, and when value is ascribed to assets in the marketplace, it doesn't matter whether it is a gold nugget found by someone in a mountain stream or a piece of paper with George Washington's picture on it. What leads to "closed system" thinking is the notion that quantity of value is limited to the quantity of so-called "real" assets.

Another mistaken assumption is that labor is the source of value. Let's suggest we manufacture the antique electro-mechanical calculator, with input of a lot of labor. Will the marketplace be somehow automatically forced to ascribe value to electromechanical calculator because of his labor content? Of course not. So value is not inherent in labor

If value exists only in the imagination of mind, what are the limits? There are none, except to the extent the collective mind wants to ascribe value. Bring garbage to the marketplace and there is no value ascribed, thus no increase in the national net worth. The genius of free-market economy under the rule of law, with innovations in science and technology, is the constant stream of new and varied products and services brought to the marketplace to which collective mind ascribes value. The asset value of the United States is somewhere above 90 trillion and growing.

Now, you can make the intellectual leap that assets are merely carriers of value and we are ready to deal with our current economic and financial problems.

The problem with the capitalistic free market economy has always been the financial sector with its money supply problem based on fractional reserve banking (animal spirits affected by herd psychology too easily). It is the historical swings of credit expansion and contraction--the tail that wags the dog. The control of monetary policy through fractional reserve banking is a historical tradition that multiplies money during credit expansion but will annihilate money during credit contraction. There is no getting around the liquidity floods and droughts of the credit system (speculative bubbles from cheap credit). During the credit contraction phase both money and value disappears into thin air and leaves behind a lot of non-performing debt that can seriously threaten the financial system and subsequent economic performance.

The reliance of managing money supply on the credit system is becoming unmanageable. It is the old Model T, unsuitable for high-speed, technologically advanced economies (the more that is discovered and invented, the more that can be discovered and invented---with the rate of innovation rising, which is responsible for rising productivity). The money from credit expansion due to the recent housing bubble stimulated widespread global economic growth. But note this carefully: with very little inflation. What this means is that a higher rate of stimulative economic policies is possible than previously assumed, but you can't do it by causing bubbles with the credit system

You do it with created money---no, you don't borrow it, you literally create it, and use it as part of the national budget. This does not add to the deficit and it's no different than if the US treasury owned a mine with a shaft of solid gold, which it accesses, to use as part of the national budget. If if you're still uncomfortable with the idea, those dollars could be buried and then recovered through ritualistic mining, if that would make you feel better! Management of liquidity should be shifted away from traditional monetary policy to fiscal policy---nd no, this will not cause inflation, even though this greatly increases the base money supply. The fractional reserve credit system is correspondingly restricted in its ability to produce money by real interest rates in the upper level of historical range and increasing reserve requirements for financial institutions.

Money is created when the Federal Reserve credits the US treasury's accounts for the purchase of treasury instruments. This is not creating real debt, as if the Fed borrowed money from somewhere else to purchase these bonds. This is simply the ritualistic process of creating money out of thin air---tapping the vast pool of value in the imagination of mind to replace the money that vanished into thin air from the collapse of the housing bubble.

Real benefit from this approach is that the increased cash flow through structural deficits into the economy would replace debt on balance sheets and greatly inhibit speculative activities because of the higher cost of debt capital. At the same time it will relieve the private economy part the burden of the public sector. The private economy retains more money for investment and demand

Tight money/loose fiscal policy. It works. (Reaganomics). During the '80s the calamity howlers constantly invoked Reagan's twin deficits with the dark consequences of economic chaos. Instead, inflation came down, the economy recovered, the dollar rose and the stock market boomed. So much for conventional wisdom based on "closed system" thinking. It was precisely accurate only in the inverse position.

Jake Peachey

Scott City, KS

William Greider has captured the audacity of this financial "bailout" as only he can. However, this is much more than just a scam "bailout." The latest mass protests in Boston against the Bush/Paulson "corporate financial Empire's" demands on the people are lighting a fire that this empire will live to regret.

The news of mass protests from Boston is not a second Boston T(reasury) Party but a continuation of the "outrage" against Empire that started the original Boston Tea Party! This "outrage" in Boston is a new "shot heard round the world" against the complete political economic empire (like the political and economic British Empire) that allows the ruling-elite "corporate/financial Empire" to metastasize from the economic realm and take over the political realm.

We patriots need to now continue and culminate the American Revolution that allows America's world-changing concept of "democracy" to freely spread from the political realm to the whole of our indivisible political economy. "Free market democracy" is a myth--a lie that never existed and was made up by the ruling-elite's "corporatist Empire" to make their economic take-over of our waning political democracy sound more friendly than the truthful term: fascism.

What we're facing is a far bigger battle than just the fleecing of this supposed "bailout." What we are facing is the final showdown between the economic empire of ruling-elite financial royalists against the very concept of America's most innovative contribution to the world: democracy--versus the chance, with our courage, to finally complete the American Revolution against the rule of empire in all aspects of our lives and liberty.

Today we have the opportunity of finally achieving the successful completion of the American Revolution; where the triumph of real democracy, rather than empire, in how men govern themselves, addresses the inexorably combined power of our indivisible political economy.

The good news of this epic crisis is that the real American innovation of democracy will finally (after 232 years) be applied to both the realms of political and economic self-governance, rather than only to the political sphere--because empire, left alone in the economic sphere, has been perverting and trying to overthrow democracy since 1776.

This is not a choice between "free market democracy" (which is only a PR lie told by the "corporatist Empire" behind the facade of their two-party "Vichy" government) and the scare term of "socialism"--but rather the long-delayed, final battle of the American Revolution, between democratic self-governance in the unified political economy of our country, or an economic empire of their corporatist/fascist elite metastasizing from the economic realm to the political realm and the whole of our society.

Alan MacDonald

Sanford, ME

Great writing! But as we used to say in the old days,"Let's get the lead out" and do something ! I, for one, would gladly give the bastard bankers the money (they are all Republicans anyway) if they all promised never to utter their mantra phrase: "Keep government small and out of our lives." Oh, and the penalty for not upholding promise: Chop a finger off for each violation starting with the pinky finger.

Pinky-ring business would become but a quote in the history books.

Joel P. Ritz

North Hollywod, CA

This bailout is not just about giving $700 billion to the banking industry; more important, from their perspective, it's about borrowing 4700 billion from them, since they can no longer lend it to Joe Public.

The issue that needs to be discussed is whether a public banking system would be preferable to the current private banking system. Until this issue is given broad consideration, we the people will continue to play defense against the bankers. It is my strong opinion that if this conversation were to be given a full airing, their ability to control our lives will fall like a house of cards. One of the few writers to cover this subject is Ellen Brown.

Here are my thoughts on the subject;

Money is a medium of exchange and store of value. These work at cross purposes because as a medium of exchange, money functions as a public utility, while as a store of value, it is a form of private property. It is as private property that most people think of it, due to its historical origin as an accounting of assets, yet the reality is that modern monetary systems are fundamentally a medium of exchange and only as a function of that are they a store of value, as they have no real backing other than faith in the issuing institution and must be invested for the system to function and maintain value.

The monetary system, with its broad connectivity, is similar to a road system. You own your car, house, business, etc., but not the roads connecting them. That the money in your pocket is interchangeable with what is in others' pockets is what makes it a function of exchange. Money is not private property, since you cannot print what you want, as the government retains copyrights, but effectively leases it out to the private banking system. Its value is based entirely on public faith in the institution issuing it, so the taxpayer is ultimately responsible for guaranteeing its value. The result being private gains and public responsibility.

The problem with capitalism is that it has created a large surplus of capital. This encouraged ever more lax lending standards as a way to absorb savings and sustain further growth of the money supply. The effort to privatize Social Security is a good example of the disconnect between rhetoric and reality, since there is no place to invest this amount of additional personal savings, and would only be a boon to the brokers given the responsibility for handling it. We invest in our old age by investing in our parents' old age, so that our children might continue the practice. It is a clear example of investing in the larger community as a viable form of savings. Where would the money that the government borrows now be invested, if it wasn't being recycled back through the private sector? Wealth is a convective cycle of rising assets and precipitating benefits. Stopping this process only creates large storm clouds of marginally productive wealth hanging over a parched economy, much like we have now.

Currency did originate as a store of wealth, because it started as a accounting of specific assets, but political power also started as a projection of individual influence and evolved into monarchism before the inherent instability and corruption drove society to devise methods for making political power a public trust. It has come time to make economic power a public trust as well. Money lubricates the economy, rather than fuels it. Ideas, labor and resources are the real economic fuel.

If money were thought of as a public utility, it would have definite psychological effects. People might be less inclined to define their security in terms of the size of their bank account and start leaving natural wealth undisturbed and investing more effort in their communities and environment, rather than draining value out to put in a bank.

An effective financial system should have a currency loaned directly by the government, with the additional currency to pay these loans put into circulation by government payment for infrastructure. This would incorporate the banking system as a function of government at all levels. Small banking systems to serve at the county and town level, medium-sized ones at the state and local level and larger national institutions. These would feed their profits directly back into the levels of the community which produced them, and the various communities would be in competition to provide the best environment for people and business with these funds.

There are many aspects of the public sector which function quite well, from legislatures, courts, police, education, military, roads, etc. if they are managed effectively. It is not coincidence that private enterprise insists on privatizing only those aspects of community services from which they can derive a direct and substantial profit. Nobody thinks lots of regulatory detail will improve the situation, since the details are massaged best by those with an interest in them, so rather than trying to re-regulate the entire economy and society, just start with nationalizing a banking system that has to be bailed out anyway. Government might be slower than the private sector, but that might be more healthy, since its perspective is longer term.

As it is now, government debt is the basis of our economy, which serves to transfer wealth from taxpayers to bondholders. Do we really want our government foreclosed on?

John B. Merryman Jr.

Sparks, MD

Agreat article, well written and to the point. I wish all contributors to the The Nation and other political publications would speak as frankly and bluntly as does William Greider.

Wall Street, mortgage lenders and other participants caused this mess, it shoud be them who pay the consequences. If Paulsen and Bernacke are saying "taki it or leave it," I would not only tell them we leave it, I would also tell them where to stuff it.

Regardless of the reputation both these men have with Congress, one has to realize they both are there as surrogates of George Bush. Bush has cried "wolf" too many times!

Your solutions are very accurate. But why wait? Let us (the citizens) create an entity that will take the sinners to task, inpute capital in a distressed bank for preferred stock, install substantial and active oversight and regulations and leave the bank to cure the problems they have caused. This current $700 billion bailout, especially under the conditions demanded, is nothing short of preposterous mand creates another secondary mortgage buyer! The bankers will laugh all the way to the bank, theirs, not ours.

Richard J. Mullin

Marion, NC

The wording of section 8 of the Treasury plan for the bailout is interesting to me. I am involved in writing technical standards and specifications in which we utilize normative language. Such language involves the use of the words shall or must when a particular requirement is a mandatory part of the specification or standard. When something is optional the use of the words should or may is used. Any other language in the text is considered to be informative but not mandatory. Thus, if this logic is applied to section 8 that the "decisions...are non reviewable...and...may not be reviewed by any court of law," then these tenets would appear to be non-binding. It makes me wonder if the people who write these documents really know what they are doing.

Allen Gordon

Nederland, CO

I see the current situation as if we are at the end of another B movie where the techie from the bomb squad has to make a choice between cutting the red wire or the blue wire. If he guesses wrong, the heroes blow up.

Right now Congress is in that position. If they make the wrong choice by writing a blank check, the economy could explode into an unknown number of debt derivatives and the government fall down. Unending claims for these esoteric securities from outside the USA would demand payment for the faulty derivatives and the money would flow out of the country just like the oil money, the war money and the money borrowed from China.

On the positive side, if Congress establishes a cooling-off period, opts to deal with re-regulation and engages in supporting domestic mortgage work-outs, there is a reasonable chance of stabilizing the financial system. Congress needs to foster confidence in the financial services industry through a rational approach of the government to achieving economic stability.

In addition to military protection the American government should be protecting its own strength and viability from the remote possibility that some foreign ideologues would be pleased to see a weakened American government fall down, suffiently weakened to be unable to resist foreign hegemony. We fought communists that were dedicated to spreading their ideology around the world for years, and now that they are practicing capitalism we could be facing the "unregulated capitalism" enemy. People and corporations are circumventing our laws by going around our government and operating outside of the country with easy access to moving money in and out of the country.

The number of subprime mortgages grew from about 7 percent of total mortgages to about 50 percent in just a few years. Couple this with the known fact that just about everything financial is modeled and forecast, and it is hard to believe that this mess was an accident but easy to believe that there was no oversight at all.

Bill Hague

Hoboken, NJ

Here's a thought: instead of coughing up $700 billion to the nasty fellows who brought this about, why not spend the money to pay off those bad mortgages? Buy the mortgages and then give the homeowners clear title to the homes with the stipulation that when and if they sell the homes in question, they have to pay the taxpayers a hefty portion of the sale price. I realize that it would be rewarding people who have made stupid choices and that we wouldn't get back all of the money. But wouldn't that be better than rewarding the scoundrels on Wall Street investmen banks--and then still not getting the money back, which we probably won't?

Think of the economic stimulation that would occur if all of a sudden millions of homeowners no longer had to cough up house payments. That money would then be spent on goods and services, creating lots of commerce and jobs. And think of the votes that would come to the politician who managed to clear the mortgages of millions of homeowners.

John Clausen

Hendersonville, NC

I am on the same page as the author. While the general discussion of the negative impact of the bailout was useful, the best part of the article was the last paragraph's suggestions for stimulating the real economy through repairing the infrastructure, which would have a ripple effect that would help workers, business interests and their support elements. We know through historical experience that this type of stimulation works. The Wall Street bail out is a crap shoot and would not fix the real economy. We would still be in a Depression, but with less money to pull out of it. Any stimulus package must have a postive effect of the real economy.

Pervis James Casey

Riverside, CA

There is no reason why any American should trust Ben Bernanke, the Fed Chairman, and Henry Paulson, Secretary of the Treasury. Those two gentlemen intentionally lied to and misled the American public. Just few weeks ago they falsely claimed that accepting financial responsibility for Freddie Mac and Fannie Mae debt would be exclusively a psychological token of support to calm the jittery markets and that the taxpayers shouldn't expect to bear any cost.

A few days ago those two gentlemen testified in front of Congress that any delay in securing $700 billion to bail out Wall Street could create catastrophic consequences to our economy. Since there are no surprises in finances and one could use mathematical principles to determine the outcome of any implemented policy ten years in advance, it's obvious that Mr. Bernanke and Mr. Paulson joined Mr. Bush and Mr. Cheney in a competition for the most outrageous and deceiving statement of the century. One would have thought that the promise that the Iraqis would welcome our troops with flowers and that the occupation would pay for itself would be the unchallenged winner, but one should never underestimate the malice and deceptiveness of the political elite in Washington.

Corrupted politicians shouldn't be testifying in front of Congress but at Guantánamo Bay, as they are more harmful to our country than any inmate imprisoned over there. The question isn't how come that our system produced such individuals without any personal integrity; the question is how come the majority in the US Congress failed to impeach and charge the individuals who willfully undermined the economic foundation of the Union and harmed the national interests.

The voters should have on their minds that voting for the same parties would result in the same corrupted politicians and have the same consequences.

The aforementioned is an accurate analysis only if you didn't like what was happening to our country over a last couple of decades.

Otherwise, you have it your way.

Finally, here is a simple question. Who has the money in this country?

The government doesn't have it. The official federal debt is $10 trillion. The real one is up to $50 trillion if we include the obligations stemming from all under-funded entitlement programs like Social Security funds, Medicare and Medicaid.

The investment bankers don't have it, which is obvious from the current financial meltdown on the Wall Street.

The commercial bankers and the private investors don't have it, or they wouldn't miss this once-in-the-lifetime opportunity to buy at low, panic-selling prices and sell high later. If they had the money, we wouldn't need governmental intervention.

The people don't have it, for they file for bankruptcies at an alarming pace.

The question is, Where's the money?

Kenan Porobic

Charlotte, NC