Monday, March 16, 2009

Jake's Word Re: The Real Economy & the Zero Solution

[A response to The Real Economy & the Zero Solution, reposted below.]

You've been on a roll lately and I've been so tied up with various projects all I have had time to do is read the essays. This essay is exceptional even for your high level of engagement, erudition and intelligence. The first paragraph is a shining example of how well you write. It kicks open the doors so that there is no way to ignore what is coming. The Zero Solution demands a response from people who are widely and deeply studied in economics (though not so much that they can't see the forest for the trees). The conversion of debt to credit sounds Hamiltonian to my ears and I think it might just work. I'm going to send this on to several people, including my nephew, with whom I was discussing economics a few days ago. He's a supporter of the Austrian School, which is a form of laissez-faire (which works as long as we are talking about a real and not a virtual economy and as long as there is transparency and rigid penalty for abuse of the system).

This essay affirms what your political essays always affirm, that we are more than consumers, more than taxpayers, we are citizens. As such we are obligated to participate in government to the extent provided (even demanded) by the constitution and our history as a democratic republic (demos and res publica - of, by, and for the people, all of them).

Keep it coming. I'm listening.




By Jack Random

“Looking backwards and with hindsight…if I’d have known exactly the forces that were coming, what actions could we have taken …to avoid this situation? And I just simply have not been able to come up with anything…that would have made a difference to the situation that we faced.”

Alan Schwartz, Former Chief Executive of Bear Stearns

Alan Schwartz is either delusional or a bald faced liar. Under his leadership a once powerful and respected institution of finance leveraged its diminishing wealth on a mountain of worthless mortgage based assets, covered their trail with accounting tricks and took risks with other people’s money that not even a compulsive gambler would take on his last dime.

When Bear Stearns collapsed a lot of real people took the hit but Schwartz escaped with his personal fortune intact. He was insulated from harm and a government that preferred to look the other way rather than perform their duty to regulate financial practices in the interest of stockholders and the public at large.

This week in what can only be characterized as the essence of audacity, the very same bankers who led the way to financial ruin and then lined up to receive their share of the public dole cried foul over the conditions imposed on them by a wary government.

Reminiscent of a scene in Mel Brooks’ Blazing Saddles, where a black sheriff holds a gun to his head and threatens to shoot unless the crowd lets him escape, the bankers threatened to give the money back unless the government loosens its restrictions.

The conditions these bankers found unbearable included limits on executive bonuses, the purchase of luxury jets, a moratorium on foreclosures and evictions, mortgage modifications and restructured home loans.

Like a spoiled child who cannot have his pudding until he eats his vegetables, the bankers protest too much. Some announced their intention to return the money at the earliest convenience. Let them do so without delay. Any bank or financier who took government money unnecessarily on the pretense of imminent collapse is already guilty of betraying the public trust.

Any institution that actually believes trillions of dollars of public money should be handed over without strict conditions of accountability and oversight should be summarily denied funding on the basis of gross professional incompetence.

The numbers we have been hearing to describe the state of our economy (a rise in the stock market notwithstanding) are mind bending and unimaginable to the point of unreal. The stock market decline represented a staggering loss of $23 trillion in net worth and home values have lost a stunning eleven trillion. These are truly unreal amounts of money and they begin to put a new light on trillion dollar bailouts and stimulus plans. The amounts of money being floated around distort our quaint notions of economy beyond belief. It is doubtful that home values ever exceeded eleven trillion in real value at any given time so what are we to make of these numbers?

A clue is revealed by noted flat world and global free trade advocate Thomas Friedman in the New York Times: “Our heart – our banking system that pumps blood to our industrial muscles – is clogged and functioning far below capacity.”

While offering up an easy metaphor, Friedman reveals that in his conceptualization the heart, the core, the center of our economy is not industry, not the worker driven enterprises that construct homes, build bridges and invent useful products, but the bankers and financiers that spin numbers and create illusions of wealth.

The flaw is in the design. The heart of any healthy economy should be the industries – mechanical, chemical and technological – that create products of intrinsic value. The heart of any functioning economy should never be the money changers – the brokers and schemers and middle men who devise systems of finance that shield debts and create value where none in fact exists. Yet that is exactly what we have done.

We have placed our economy in the hands of individuals who worked tirelessly to export the real economy to nations that do not recognize labor rights and therefore do not pay living wages and erected in its place an artificial economy of formulae and financial derivatives that inevitably drifted away from its foundation.

These individuals are not substantially different in principle or moral grounding than Bernie Madoff or Ken Lay and his gang of thieves at Enron. The former defrauded innocent individual investors while the latter defrauded the west coast and transferred the wealth to Texas oil and gas industries. The executives of Bear Sterns, Lehman Brothers, Merrill Lynch, Morgan Stanley and American International Group defrauded all of us on a scale that makes Enron look like a two-bit hustler.

The leaders of the new economy were the designers and creators of the global free trade exploitation scheme and they were convinced that they could spin a virtual economy that would ascend forever and never be dependent on this year’s crops or production quotas or the financial well being of the very consumers that sustain the whole. Like Madoff, they believed they could run their Ponzi scheme to the end of time.

In a word, they were wrong.

The difficulty we now confront is that the collapse of their artificial economy has sent shock waves through the real world. It has released a poison that quickly spread to every corner of the globe. It is a tidal wave of toxicity that lays waste to everything it touches.

We have empowered the crooks and schemers by investing in them not only our retirement funds but also our faith and while it would serve justice to send them to jail or banish them to permanent unemployment it would do little to remedy the harm.

The remedy lies in recognizing the artificial nature of the economic beast they created to maximize profit at our expense. For while they have done great harm in eroding the savings and wages of the working consumers, the real economy remains capable of employing its people in useful enterprise and reestablishing the balance between a working middle class and the nonproductive elite.

Once we recognize that the model of economics they have handed us is by no means synonymous with the real world economy, a new world of possibilities opens up. We can essentially solve the problem of insolvent home ownership by hitting the reset button. By government decree, we can calculate the difference between mortgage values and home values and zero them out.

I call it the zero solution and it would work because it benefits all parties. It benefits the homeowner who has behaved responsibly, kept up with payments, yet watched depreciating home values threaten long-term security. It benefits homeowners who are the victims of unscrupulous loans and their own admittedly irrational dreams. Finally, it benefits the bankers and mortgage holders by converting bad debt to good.

Though the implications would have to be studied, preferably by a team of experts without a vested or ideological interest, and the details worked out, variations of the zero solution could be applied to personal and national-international debt as well, converting debt to credits by means of a central debt conversion fund.

It is admittedly a radical solution and one that could only be applied in extreme emergencies such as the crisis we face today. When we have survived the current crisis, it is imperative that we take all measures to ensure that the new and emerging economy is tied directly to the real economy, that it is calibrated to benefit workers as well as the financial elite, that it is transparent and subject to rigorous regulation, and that the working and consuming middle class is at its heart and core.

To some extent we all share responsibility for this crisis. We placed our faith in institutions that were solely motivated by the profit margin. We gave them free reign by protecting them from government oversight. What they did is what we should have expected them to do: They gamed the system and made off like bandits.

To a large extent we are paying the price of forgetting the lessons of the past. Whenever bankers and moneychangers are allowed to run wild, they inevitably drive the economy over a cliff. If we are to spare future generations the same fate, we must take those lessons to heart, including breaking up the monopolies and merger manias that have created monsters “too big to fail.”

The road ahead will be hard. The financial monsters will fight meaningful reform every step of the way and the Supreme Court is their corner. Nevertheless, we must work tirelessly to right the balance, to elect officials that represent the people over the money interests, and to pry the real economy out the hands of greed and avarice.

That is the road ahead. To get there, we must survive.


[This chronicle posted on the National Free Press -- World Edition.]


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