I feel the need to preface my remarks on solutions to the current economic climate in the United States and which we see beginning to be spread worldwide with the views expressed in "Beckoning Frontiers" (New York, Alfred A. Knopf, 1951), the memoirs of Marriner S. Eccles, who was the Chairman of the Federal Reserve Board under Franklin Delano Roosevelt from November 1934 to February of 1948. This information forms the basis for my insight into potential solutions.
"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery."
"Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
"That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.
"The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.
"Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.
"This then, was my reading of what brought on the depression."
What is it that our government must do to protect and care for the public, its lifestyle, its assets and its economy? What is it that the government even can do to promote the public welfare and insure domestic tranquility? Dare the public allow this lame duck government to take any action?
Well, dare we? The Bush Administration has a history of generating extreme hyperbole in order to scare Congress and the public into accepting his proposals, such as: 1- invading Afghanistan and removing the Taliban in order to target Osama bin Laden, 2- suspending the search for bin Laden to redirect American military designs against Iraq, 3- passage of The Patriot Act, 4- ratcheted-up hostility with Iran, and now, 5- the Wall Street/Banking Industry bailout. He always seems in a hurry when he wants something, such a big hurry that no one has time to figure out what he's really up to. Yet, in a real disaster, like after Hurricane Katrina, all he did was to drag his and the government's feet.
No, every one of the above listed actions, expedited at Bush's insistence (because “our way of life” depended upon our immediate action), inured to the benefit of Bush, the corporate cronies of Bush and members of his Administration, and Bush's and the neocon's political, economic and foreign agendas. In this light, knowing the history of the Administration to frighten others into accepting the neocon agenda without proper debate and consideration, one wonders at the wisdom in accepting his sudden predictions of economic disaster. It is even entirely possible that a crisis has been invented as a means of trying to prompt the public to back McCain in the election. However, taking the collapsing credit climate as real and Bush as being honest in this instance, that places the whole economic system built upon American Capitalism as being at risk for collapse in the same way Soviet Communism collapsed 20 years ago. Every politician in this country has a personal stake in maintaining, not just Capitalism, but the current state of it, including preserving the current manner and degree in which wealth is distributed. Their positions of economic privilege, social status and political power all depend on keeping everything about the economy, including the positions, wealth and status of their corporate benefactors, just as it is. Consequently, the only ideas which will arise from those politicians will incorporate funding bailouts for the corporations, banks and/or industries whose poor decisions and unethical business practices fueled the greed which gave rise to the economic upheaval facing everyone today.
Before engaging upon an analysis of what can or should be done, one must first arrive at a comprehensive overview of what the problems facing the economy are, how they arose, how they will impact individuals, and what kinds of impacts we can accept versus what kind of impacts remain intolerable.
What happened? Like the lead up to The Great Depression, money was loose, credit easy, investments pervasive throughout the social strata. The finance industry was largely unregulated. The middle class appeared drunk off its growing affluence. People who really didn't have enough discretionary income lodged too great a percentage of their savings into stocks and bonds. Banks and businesses fueled their ever-growing market shares and ever-rising profit margins with deficit spending and a network of loans.
Prior to the market collapse in 1929, the banking sector found itself poised on a precipice of worry. Credit began to tighten because banks had accumulated too many questionable items in their portfolios. The Germans could not meet their payments to the Allies for WWI reparations. When the Germans defaulted on their debts, the Allies found their ability to pay their international debts infringed upon. Banks' incomes shrank as debtors took out new loans just to make the payments on old debts. Even into 1930, credit continued to be available, though its availability increasingly shrank.
One can see the mortgage industry crisis plays a role in the contemporary economic decline in the same way the German inability to promptly pay war reparations in the ‘20s assisted in the failure of banks in the ‘30s. However, the real nature of the problem goes much deeper. The real nature of the economic crisis lies in three areas no politician wants to raise or address. Those areas are deficit spending by governments, un-tempered government spending in the military-industrial complex, and the heavy expenditures arising from international, military conflicts.
Deficit spending is the blank check every politician writes when entering political office. Deficit spending fuels whimsy, whim, science and art, corporate bloat, influence, greed, pollution, corruption and war. Deficit spending binds future taxpayers to an agreement to make payments on loans they did not take out and from which never derived any benefit. As such, it is taxation without representation and a form of involuntary servitude. Deficit spending eats away at any real wealth which might be accumulated in the payment of interest on the principle and the constant pressure of a principle which never seems to go away because, at best, all the governments can do is meet the payment due for the interest on the debts.
The size of the contemporary global economy is astronomically huge. Even the size of the American economy is larger than one can concretely fathom. The modest amount of loan failures arising from immoral and unethical mortgage lending practices, which practices were not industry wide by any remote stretch of the imagination, do not total enough bad debt to undermine either American or world financial institutions. Even by factoring in the degree of bad consumer credit card debt, one cannot arrive at a sufficient amount of debt to send the American banks into industry-wide failure.
The kind of scope necessary to send the banking industry reeling can be revealed by the size of the American national debt. The United States has been borrowing from China since initiating the war in Iraq. The Bush administered American government never saw fit to pay for the war as it was prosecuted. We've gone into debt to the tune of about $500 billion to China at a time when we have spent only about $100 billion more than that on the war. By investing America's heritage and collective estate in producing instruments of killing and the actual killing of others in foreign lands as well as focusing so much of our economy on the illusory financial growth based on paper and services (interest, capital gains, banking, lending, and other service oriented, non-product producing businesses and industries) but never focused on products, we have, as a culture, built Reagan's shining example to the world of affluence and opportunity upon a foundation of quicksand.
The real crisis facing our financial community lies with too many lenders feeling the crunch from consumer defaults in a climate of fear based on the worry that the American government will not be able to continue to make its payments on its overwhelming debt. Simultaneously, the weakening American economy results in a weakened value of the dollar. The dollar is under daily attack by Iran, Venezuela and other oil producing nations through oil price fluctuations (no doubt in response to American treatment of these nations in world affairs).
So, what can the government do? The American economy keeps sliding because the American public is under-employed and underpaid. Consequently, the traditional consumer has such a reduced ability to spend that corporations' incomes dwindle. As business profits shrink, corporations' abilities to pay their business loans suffer, resulting in two consequences: prices for goods and services increase at the same times jobs are cutback, in other words, stagflation, otherwise known by the near impossibility of economic inflation amid an economic recession.
Governments have tended to throw money at such a situation, reducing interest rates and/or infusing additional cash into the economy. However, low interest rates and easy credit fueled this mess. Watering down the economy with additional cash at this moment would only serve to further deflate the value of the dollar. In the present instance, politicians want to throw money at the very people who created the problems and hope they will fix the mess. How very unlikely a result that promises to be.
Politicians are very aware of the need to keep credit fluid. The availability of cash fuels their election campaigns, pays their salaries, and sends them around the world on first class excursions. The availability of cash (primarily on credit) funds investments in local economies, and pays for the instruments of war politicians find so necessary to wield. Additionally, lobbyists and corporate officers are certain to share reminders to those politicians concerning who funds their campaigns, inferring whose needs must be promoted. These influences along with the desire to be re-elected and fear of the likely world war which would result from a collapse of the world's finances, are the reasons why politicians want to fund a bailout of the financial district.
But, remember what Marriner S. Eccles said when you listen to politicians talk about bailing out Wall Street. He determined from reflection upon the events leading up to and during The Great Depression, "Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929." This is the lesson of history which the present needs to understand so a contemporary plan can be put into action and a crisis averted.
Marriner Eccles is calling to us from his grave, begging us not to hand out billions of dollars to corporations because that didn’t work in his day and it won’t work in ours. No, he’s begging us to give the money to the consumer so the consumer can consume. Through consumption of real products, businesses will find solvency, and the businesses who do find solvency will be the ones who deserve to succeed and prosper on into the future. Those businesses will then be able to hire additional personnel to meet the market needs of the demand for product. It is demand for product which fuels economies, not the superfluous fat of a bloated supply.
In the meantime, to assist the recovery, the government can do what FDR did, that is put Americans to work pursuing public works projects which address real national needs. The government can also proactively assist recovery by investing in the product producing businesses of tomorrow, providing them with the means to develop assembly lines and mass-production facilities for those products of tomorrow based on sound, ecological models. That will put people to work, again increasing the consumers’ ability to consume. Only by efficiently putting the capital in the hands of the consumers can the government avert what Eccles so wisely termed the American economy’s “underconsumption” as being the real problem during the Great Depression, and which threatens us again in 2009 and beyond.
There is a secondary stimulus which the government must not be afraid to broach. The entire world must admit that the whole concept of a continually growing economy in concert with the growth of individual wealth threaten to destroy our climate, and any economy that might exist right along with it. However, as we transition from the contemporary conditions to a new world, we must recognize the need to also convert our energy sources as we fit our lifestyles into nature rather than attempting to dominate nature.
Consequently, the government should employ the nation in a meaningful way. The government should employ people in public works projects, rebuilding the nation’s cities into living communities, incorporating the concepts of Arcosanti developed by Paolo Soleri as well as the latest in solar paneling, indoor paneling to recycle indoor light and incorporating the most effective batteries. People do not need to live on the electrical grid, and are wasting thousands of dollars per year on electric bills.
The government could stimulate the economy of the future, for instance, by paying to retrofit all our buildings with the best solar panels available. The factories needed to mass produce them together with the installation force necessary to accomplish the retrofitting will create a huge new economy, infuse the public with discretionary income which can be allocated to purchasing other products - all at the same time as we cut our energy consumption, reduce the cost of living and actually do something to begin averting the worst effects climate change could bring. What I am suggesting is for today’s government to utilize the ideas behind FDR programs like the TVA and Hoover Dam, and apply them in a much grander scale, nationally. Yes, there is a degree of socialism involved in this approach. It's the only way through the economic mine field we face. However, another step should also be incorporated. That is to deflate the prices for goods and services while increasing the employment rate. Again, deflating the costs places greater opportunity for consumers to consume. Making sure there are enough employed consumers is the key to increasing corporate profits in a manageable manner, one that can be sustained.
Raising the Federal insurance on bank deposits from $100,000 to $250,000 is straight out of the S&L bailout. That led to the governmental indifference for carrying through with oversight of financial industry regulations. The consequence was even more massive S&L failures in the ‘80s. We've agreed to this in the new Wall Street bailout. Given the sudden consolidation of banks currently occurring as so many fail and have their assets purchased by other banks, when Treasury Secretary Henry Paulson fails to fully investigate and enforce regulations due to reduced concern given the rise in insurance, nearly every bank in the country left will fail, just like during The Great Depression. Meanwhile, the solvent banks left will possess monopolies on the market and will be able to dictate all future economic conditions. Nothing would be less wise for the American economy.
Economies should be brought into more localized units, something which must occur because shipping of products all over the world cannot continue unabated without exacerbating the effects of climate change. These kinds of alterations in lifestyle must be made anyway, in the long run, and the sooner we agree to initiate the changes, the longer all our planet's resources will last. At the same time, we can employ the vast majority of people in the country in conversion projects, retrofitting, building new, modern, ecologically oriented communities, and through the process of producing locally for local consumption, now at a time when people need employment so desperately. In this way, poverty, hunger and homelessness can be averted. It is through this multifaceted approach to wise investment and prudent public works, and reorganizing the economy to shine as a model for all other nations as we all move towards the future and sustainability rather than cling to the past and certain Climate Change induced doom which the government not only must make and ought to feel morally obligated to make, but which history's lesson from The Great Depression educates us as being the only rational choice. In the present instance, give the public the bailout money, stop wasting exorbitant sums and precious human life in the war, and use tax income to employ the nation in industries which will survive long into the future as we all invest in our own mutual survival, a harmonious world thriving into the tomorrow’s world.