A year ago the Obama administration assured the nation its $787 billion economic stimulus bill, and three-part bank bailout plan, together would generate an economic recovery from the current economic crisis. In disagreement, our prediction at the time was it would fail to generate any sustained economic recovery. The stimulus, it was argued, was not large enough in relation to the size of the U.S. economy, and its composition focused too heavily on business tax cuts, too little on immediate job creation, and did virtually nothing to stop home foreclosures. In addition, the bank bailout program would prove equally unsuccessful, failing to jump start bank lending in the U.S.
The Economy in 2009
While U.S. Gross Domestic Product, GDP, did turn positive in the second half of 2009, it is now almost certain that it will experience a relapse and significantly slowdown again in the first quarter of 2010. The $787 billion stimulus, composed roughly half in tax cuts that would have virtually no effect, in hindsight had only minimal impact in 2009 on the economy. That stimulus will begin to fade by mid-year 2010.
What produced the extremely modest, hesitant recovery in the second half of 2009 had more to do with special programs like the ‘first time homebuyers’ subsidy and ‘cash for clunkers’ added mid-year, and with technicalities involving inventory adjustments to GDP plus some manufacturing growth tied to U.S. exports growth and more robust recoveries occurring in China and elsewhere. But the ‘cash for clunkers’ program has been discontinued, resulting at year end 2009 in auto sales immediately retrenching once again; the first time homebuyers is soon scheduled to expire; and despite the latter program’s extension by Congress new home sales once again retreated in early 2010. To make matters worse, the inventory technicalities are no longer a major factor adding to GDP growth and China and Asia, once absorbing U.S. exports, have begun to tighten spending. The export push to manufacturing is now fading. The result is that in February the Index of U.S. Manufacturing in the U.S. once more reversed, falling from 58.4 to 56.5 (50.0 represents no growth). More than 2.5 million manufacturing jobs have been lost in 2008-2009, hardly representing a ‘recovery’. Nor can one assume other major sectors of the economy have recovered. The construction industry declined by $200 billion in 2009 and shows no sign of turnaround with new home sales and home prices falling once again. And the far more important Services Industry Index, ten times the size of manufacturing in terms of jobs (95 million vs. 11.5 million), has either continued to fall or remained flat throughout the past year despite the stimulus, the tax cuts, and the Federal Reserve pumping trillions into the banks. Finally, and most recently, in the last week of February appeared a renewed decline in consumer confidence, the rise once again in new jobless claims to 500,000 a month, (now 15% higher over last quarter), and the continuing surge in foreclosures (soon to surpass 7 million) and 20% plus in mortgages in negative equity (predicted to reach 10 million). Reflecting the new reality, even the stock market peaked on January 19, 2010 and has remained flat to falling since. In short, it all adds up to a scenario representing anything but a sustained economic recovery, and a scenario that in fact shows signs of a notable re-weakening.
Profits of some of the ‘big 19’ banks have indeed rise, but not due to the Obama administration’s early 2009 three part bailout program, which we predicted would fail to get banks to lend to U.S. businesses. The Obama administration maintained the bailout and programs (PIPP, TALF, and HASP) were necessary to get bank ‘credit flowing again’. But it hasn’t and lending has declined every month throughout 2009. Banks instead borrowed funds from the Federal Reserve at zero interest rates and loaned to hedge funds and others at double digit rates to speculate in foreign currency, offshore properties, commodities, and stock markets—or else themselves speculated in their own stocks or bet on foreign government bonds collapsing, as in the case of Greece and elsewhere. On the other hand, essentially nothing has been done to aid the 8000 small and regional banks, which are now failing by the hundreds, with another 702 on the FDIC’s ‘danger list’.
A year later it is now abundantly clear that the Obama administration’s programs never intended to generate an economic recovery. These programs—the original stimulus, the bank bailout programs, and special one time programs—all were designed to simply put a floor under the escalating economic collapse at the time. That is quite different than the government introducing to generate a true sustained economic recovery. Putting a temporary ‘floor’ under the collapse means the Obama strategy was designed simply to buy time to allow a market driven recovery to take hold, led by the banks renewing lending once again. But the banks didn’t lend, market forces have been unable to generate a sustained recovery, and except for the big banks, big multinational companies, and the stock markets, the U.S. economy has been simply ‘moving sideways’—neither collapsing further nor able to enter a sustained recovery.
It appears the Obama administration’s basic strategy of ‘put a floor under the collapse and hope and wait for the market to generate a recovery’ will continue into 2010. A paltry $15 billion so-called ‘jobs bill’, a good part of which is still business tax cuts that will have little effect, is mere tokenism at best. A similar criticism is appropriate for the recent ‘Reid bill’ (introduced by Democratic Senate leader Harry Reid) providing a mere $1.5 billion for foreclosures aid to five states. Moving through Congress is the more generous $145 billion to continue unemployment benefits and medical insurance subsidies for 6 million workers whose benefits and coverage expires in March. One can wholeheartedly support this latter legislation, but it nonetheless is a continuation of the ‘put a floor under the collapse’ strategy and does nothing to generate jobs or a sustained recovery.
In the preceding two issues of this series on Epic Recession, an explanation was offered why this scenario of a failed sustained recovery has occurred. The current crisis is an Epic Recession, it was argued, and thus quite unlike other ‘normal’ recessions in the post-1945 period in the U.S. Not only has the current crisis been significantly worse in a quantitative sense in terms of economic indicators, but it is fundamentally qualitatively different. As Part 1 of this three part series noted, the current crisis is driven by a set of unique characteristics quite different from ‘normal’ recessions that have occurred in the post-1945 period in the U.S. Unfortunately, Obama administration policy makers have yet to understand this, or else do and refuse to acknowledge the differences. They have approached the crisis as if it were a normal recession, perhaps somewhat worse in its dimensions, but ‘normal’ nonetheless. That explains at least in part why the current administration’s policies have failed to generate a sustained economic recovery. They are essentially policies appropriate for normal recessions, but not for an Epic Recession.
Theory and History
Epic Recessions are the consequence of major financial system implosions. The important question is what causes the extreme financial implosions that result in exceptionally severe credit crashes that bring the economy to its knees? And why then does the economy have such difficulty getting back up on its feet?
In theoretical terms, those financial busts are the consequence of prior speculative investing excesses, which drive debt and asset price inflation to dangerous levels. When the bust occurs, it produces greater than normal debt unwinding that leads to deflation and defaults. During the boom, speculative phase the financial system becomes more ‘fragile’ (i.e. sensitive to implosion) while the rest of the real economy becomes correspondingly more consumption fragile. Both forms of fragility—financial and consumption—fracture when the bust occurs, in turn exacerbating the debt-deflation-default processes that drive the economy in a downward spiral. However, the most fundamental, originating causes lie in what produces the shift to speculative investment, causing the fragility, and the subsequent downward spiral of debt-deflation and default? These forces are the consequence of escalating global income inequality, exploding global liquidity and the expanding ‘global money parade’ of speculators, their new shadow financial institutions, and new markets and financial instruments created for those markets (most notably derivatives). The global money parade, with more than $20 trillion on hand, drives the speculative boom, in the process creating a mountain of debt in the system. Following the bust, only part of the debt is ‘unwound’. Much of it remains, obstructing a return to normal lending, investing and household consumption. Policies designed for normal recessions do not address that mountain of debt overhang, and that is primarily the reason for their relative ineffectiveness in generating a sustained recovery.
To allow the ‘logjam’ of debt to be slowly ‘worked off’ only results in an extended period of relative economic stagnation, not sustained recovery. To simply transfer it from banks and businesses to the public balance sheet (U.S. deficit and debt) does nothing to remove it, but only shifts the crisis to the public sector. Putting a floor under the toxic economic waste may prevent a meltdown of the economy’s foundation and core, at least for a while, but does not remove the poisonous material from the economic building per se. The debt load workoff, in other words, must be accelerated and expunged, not simply shifted or transferred. That cannot be achieved piecemeal and incrementally. It must be done with major structural reforms, not normal fiscal-monetary policies.
In the past century in the U.S. there have been two actual historical cases remarkably similar to what has been occurring in today’s crisis—one we have chosen to call a ‘Type I’ and another a ‘Type II’ Epic Recession. The former occurred in the equally major 1907 financial collapse and years immediately following. Like today, the big banks were stabilized by massive government liquidity injections, while thousands of others were allowed to fail. Inestimable thousands of businesses failed. The unemployed rose to double digit levels. Wages and incomes stagnated. Recovery after 1907 followed a trajectory of brief, weak growth of 12-18 months, followed in turn by similar economic relapses, by growth, and by relapse once again. Only massive government spending injections with the onset of the First World War brought the stagnation to an end. The same thing occurred in the wake of the speculative boom and bust of the 1920s. Only this time the government failed to stem banking system collapses that followed the initial financial bust of 1929. Subsequent banking crises followed in 1930, 1931, 1932, and 1933. Debt-deflation-defaults processes worsened. Financial and consumption fragility deteriorated further and drove the processes to even greater extremes. 1929-1930 may have been a Type II Epic Recession event—i.e. one that was transformed into a bona fide depression.
Short of another financial-banking system implosion, which may originate anywhere globally given the now global nature of the capitalist financial system, the current economic crisis thus far shares many characteristics with a Type I Epic Recession. That is, a stubborn extended economic stagnation that may go on for years, with short, unsustained recoveries and brief, equally unsustained economic relapses. This can go on until massive fiscal spending in the form of major government public investment occurs and appropriate structural reforms take place. These structural reforms will almost certainly have to address the banking-financial system, the tax system, and the serious income mal-distribution problem today in the U.S. economy.
It is important to point out that it is not wars and war spending per se that end major contractions like Epic Recessions, or Epic Recessions that collapse into depressions. It is massive government public spending—which may take either the form of public investment projects or war goods spending—that succeed in breaking the logjam. In fact, it is highly unlikely that the intense capital-technology nature of today’s war goods can ever again play the role of generating sufficient jobs creation that is necessary for sustained recovery. Massive public investment is the key. And that will take major structural reforms in the U.S. economy to finance and implement. Stopping processes of deflation and default in the short run may help to immediately stabilize the crisis, i.e. put a floor under it. But it can only serve as a short term palliative. The more fundamental forces of financial and consumption fragility need to be addressed. And in the final analysis, it is the global money parade itself that must be tamed. For if that originating source of intensifying financial and economic crises remains untouched, the cycle eventually will most certainly repeat, and likely do so more frequently and virulently.
The Need for Programmatic Debate
As the above describes, the current Epic Recession has not run its full course. It is still very much with us. It has only shifted to a new form—i.e. a period of extended stagnation in lieu of continuing collapse. That stagnation may have short periods of ‘ups and downs’—i.e. brief and weak recoveries followed by similarly brief and weak declines. Stagnation need not refer to a perfectly ‘flat’ condition. However, it is also important to note that that stagnation could yet descend into a classic depression in the event of another major financial implosion so long as financial and consumption fragility remain as significant problem conditions in the economy.
There are no shortage of books, articles and analyses describing, in narrative form, the immediate aspects of the current economic crisis. But few have any theoretical analysis. And without such analysis it is impossible to predict the trajectory of the crisis and, thus in turn, solutions to it. Nor do nearly all descriptive-narrative accounts of the current crisis both to consider the events from a deep historical perspective. They do not see the parallels with the past, which can provide significant insights as to future trajectory. But just as deficient, are the failures of such accounts to provide much in the way of program and solutions for discussion and debate. The absence of programmatic discussion is a particular shortcoming amongst progressive elements on the ‘left’ in the U.S. In an attempt to fill this gap, this writer’s forthcoming book on Epic Recession concludes with a detailed offering of an alternative program to the current crisis. Unlike Obama’s program, it calls for a fundamental restructuring of the financial and tax systems, of income distribution by various measures, a refocusing of spending in a major way on job creation and foreclosure prevention, and addresses the problem of the global money parade of professional speculators, individual and institutional alike.
The following is a brief summary of some of the 28 major points set forth in the alternative program.
I. Job Creation and Housing Stabilization
There can be no sustained recovery so long as jobless numbers remain in excess of 20 million (today roughly at 22-23 million when properly calculated) and so long as housing foreclosures, defaults and delinquencies continue to rise and prices and equity net worth continue to fall. The housing problem is a problem not simply of foreclosures, etc. It is a problem of major consumption fragility, or excess debt that is a major logjam to the return of consumption levels, a sector constituting more than 70% of all economic activity. Consumption fragility is a function of excess debt and insufficient income both. Housing is the debt issue; jobs are the income side of the problem. Both must be resolved simultaneously. The Obama administration has sidestepped both simultaneously. The proposals that follow treat the jobs-housing problem as a consumption fragility problem.
Proposals 1 and 2: Reset Mortgage Rates and Mortgage Principle to 2002-2007
All loans issued between 2002-07 are included in this provision, not just those facing foreclosure or default. Resetting all loans, not just those at risk of default and foreclosure, is designed not only to reduce excess housing supply coming on market that is driving down housing prices and causing further financial institution write downs and losses, but to serve as a general economy-wide consumption enhancing measure as well. Boosting consumption in this manner provides a continued, long term consumption effect—unlike one time government spending stimulus which, once spent, has no further effect. This measure also has the further beneficial economic effect of avoiding the necessity of additional deficit creation. If it affected just 25 million of the 55 million residential mortgages outstanding and reduced mortgage rates by 2% on average, the result is more than $200 billion in ongoing consumption every year. The resets may also extend to small business property mortgages, where small business is defined as businesses with less than 50 employees and less than $1 million in annual net income.
Proposal 3: Create New Federal Agency: HSBLC (Federal Homeowner-Business Loan Corporation) to Administer Nationalized Residential Mortgage and Small Business Property Markets
A new federal housing agency, a ‘Home Owners-Small Business Loan Corp.’, or HSBLC, is proposed to provide direct lending to homeowners and small businesses. This is not simply a ‘Reconstruction Trust Corp’, as was created in the 1980s, designed to buy up mortgage assets. The proposal for a HSBLC is similar, but incorporates elements of a ‘Home Owners Loan Corporation’ concept that was introduced during the 1930s. The initial task of the HSBLC is to purchase existing mortgages in foreclosure, resetting rates and principal according to the aforementioned formulas. Thereafter, it would extend mortgage financing to all potential home financing in the future. The HSBLC is the primary agency administering a nationalized residential mortgage and small business property markets. The HSBLC would compensate current mortgage lenders not willing to participate in the interest rate and principal resets at a rate of 25% of their loan balance in the first year of the resets, and another 25% amortized over the remaining 30 years of the reset loans. Refusals to participate would result in the seizure of properties by the HSBLC (much as did the HOLC in the 1930s) and payment by the HSBLC on the above terms.
Proposal 4: 15% Homeowners Investment Tax Credit
All homeowners, with mortgages or having paid their mortgages in full, are eligible for a 15% homeowners investment tax credit on their annual tax returns. The credit would cover investment in items and categories such as home repair, home upgrades and expansion, and major maintenance and improvements, as well as purchases of major home consumer appliances like refrigerators, ovens, washer-dryers, etc. The purpose of the provision is to allow homeowners not participating in the resets, the HSBLC mortgage purchases, or new issues to benefit from housing related consumption measures.
Proposal 5: Moratorium on Residential Foreclosures and Small Business Property and Commercial & Industrial Business Loans.
A one year moratorium on residential and small business property foreclosures is proposed in order to prevent further consumption collapse estimated from 4-5 million new foreclosures projected to occur. The moratorium will allow necessary time for the organization of the HSBLC. The moratorium will apply to small businesses facing ‘chapter 7’ default, suspending default on C&I business loans incurred between 2002-2007 as well.
Proposals 6-9: $800 Billion for Job Creation and Retention
An effective alternative jobs program must carefully consider the composition of employment generation. The quickest way to retain and grow jobs is within existing industries and businesses, not primarily by creating new industries from scratch. Alternative industry infrastructure and energy jobs are part of the program but not its primary focus, due to long delay times in job creation for new emerging technologies and industries. A quick path to jobs creation is direct hiring by government, in particular state and local government and school districts. A third fast path is promoting hiring in those industries having shown in the past high job growth rates, and thus potential for high job growth, such as health care. The alternative job creation-retention program also targets jobs in the $50-$60K annual range on average, with workers receiving a pay level of $40K and benefits load of $10K. A profits margin test accompanies the program. Employers receive a margin or profit per worker no larger than $10k, or 20%. With these caveats in mind, job creation and retention program targets $300 billion for infrastructure jobs, $300 billion for public sector jobs, $100 billion for growth sector jobs like health care, and $100 billion for relocating manufacturing jobs back to the U.S.
Proposal 10: $200 billion for Social Safety Net (Unemployment Insurance, Medical Coverage, Food Stamps), Trade Job Loss Assistance, and Job Retraining.
Unemployment benefits coverage cost for one year is approximately $125 billion, with another $75 billion for full coverage for medical, food stamps, job retraining assistance.
II. Tax Restructuring and Programs Financing
Proposal 11: Offshore Tax Haven Asset Repatriation
The three decade long growing income inequality in the U.S. has provided an important basis for the diversion of trillions of dollars by wealthy investors and corporations to the 27 offshore tax havens, mostly island nations, which the IRS refers to as ‘special jurisdictions’. A conservative estimate in 2005 by the investment bank, Morgan Stanley, found that total holdings in offshore shelters had risen from $250 billion in the mid-1980s to $6 trillion by 2005. Other more recent estimates place the amount up to $11 trillion. With U.S. investors and corporations share of total world assets estimated at approximately $47 trillion out of a world total of $140 trillion in 2006, according to the business consulting firm, McKinsey & Co., it may be safely assumed that U.S. investors’ share of the $11 trillion held in the 27 offshore tax havens is likely around 34%. That translates into roughly $3.74 trillion at minimum.
Proposal 11 is that U.S. investors must repatriate no less than half that $3.74 trillion, or around $1.87 trillion within the next 12-18 months. This is not a proposal for expropriation, but merely repatriation. That means investors must withdraw and redeposit the $1.87 in U.S. financial institutions located in the U.S. Assuming a long run return on assets when repatriated to the U.S. of around 15%, the $1.87 trillion should yield annual revenue of around $280 billion, which thereafter would be taxed, per the proposal, at the new capital gains rate of 50% and yield the U.S. Treasury roughly $140 billion a year in new revenue.
Proposal 12: Foreign Profits Tax Recovery
In 2004 the estimated amount of shielded corporate funds in this area amounted to as much as $700 billion. Offshore corporate retained earnings are likely now in excess of $ 1 trillion. The return of those earnings reinvested in the U.S. economy would yield a tax revenue stream of at least $100 billion a year.
Proposal 13: Capital Incomes Tax Cuts Rollbacks
There are approximately 114 million taxpaying households in the U.S., and the wealthiest 1%, or 1.1 million have increased their share of IRS reported income from 8% in 1978 to more than 24% in 2007. This 24% share is equivalent to that which existed for the wealthiest 1% in 1928. No long term recovery is therefore possible without a basic re-restructuring of the tax system in the U.S., starting with capital incomes taxation. Proposal 13 rolls back tax cuts on capital incomes—i.e. capital gains, dividends, interest and rental incomes for business—to 1981 levels, not 1993. That is, back to that point at which the major tax restructuring began in the U.S. on behalf of earners of capital incomes at the expense of earners of wage incomes.
Proposal 14: Excess Speculative Profits Surtax
The alternative program provides for a 70% excess profits surtax on returns from speculative investments that exceed a reasonable long run average (10%-15%). The tax would extend to contracts on all forms of derivatives, including credit default swaps and other second and third generation financial derivatives products.
Proposal 15: Financial Transactions Tax
This means financial transactions covering traditional financial assets such as sales of stocks and bonds, commodities, as well as all securitized asset sales and other forms of financial derivatives assets. The alternative program proposes a 10% tax on all such financial transactions. (The excess speculative profits tax is an additional measure that applies thereafter to profits that may exceed a defined threshold limit, apart from the 10% financial transactions tax).
Proposal 16: Retroactive Windfall Taxes
Proposal 16 reaches back, retroactively, for five years to 2004, and re-captures taxes the oil-energy companies should have paid on earnings above the companies’ preceding ten year average. The retroactive windfall provision applies to other companies that reaped ‘rentier’ profits (i.e. excess profits directly at the expense of profitability of other companies and consumers) during the period since 2001. These would include, at minimum, dominant companies in industries like banking, insurance, and pharmaceuticals.
The retroactive windfall tax provision extends, in addition, to excess compensation received by individuals in these companies and industries, in particular CEOs and their senior management teams who have typically received excess compensation as a consequence of their companies’ excess ‘rentier’ profits position.
Proposal 17: Value Added Tax on Intermediate Goods
Intermediate goods are products and services sold by companies to companies, before the final product is sold at retail to consumers. The proposal is therefore not a tax on final, retail sales. The entire proceeds from the tax are allocated to fund proposal 21 that follows—i.e. to provide financing for a ‘national 401k retirement pool’. The level of the VAT on intermediate goods would vary by industry, as well as with the funding requirements of the national 401k retirement pool. An initial tax level of 2% is proposed.
Proposal 18: Payroll Tax on Incomes of Wealthiest 1% Households
With the collapse of defined benefit pension plans and the total failure of private 401k pensions to adequately provide for retirement, more than 70 million retirees in the next decade will experience inadequate levels of income to sustain a reasonable standard of living. That condition will severely exacerbate consumption fragility within the general economy, already in a dire state. Social security must not only be stabilized but expanded. Thus, proposal 18 provides extending the current payroll tax rate for social security from earned incomes with a ceiling of $107,000 today by adding a new provision that taxes all capital incomes of the wealthiest 1% households (with threshold earnings of $332,000 and above) at the current payroll tax rate.
Proposal 19: 10% Penalty Tariffs and Non-Compliance Fees
The alternative program consequently also includes penalty provisions as disincentives to resistance and non-compliance. For example, corporations that refuse to return foreign profits income to the U.S. for taxation will be levied a 10% tariff on all their goods sold in the U.S. until compliance occurs. Similarly, wealthy investors who refuse to repatriate their offshored sheltered earnings will have an unreimbursable 10% penalty levied on their remaining earnings or property in the U.S. for the first 90 days of noncompliance. The penalty fee may be increased further with continued non-compliance.
III. Long Term Income Restructuring and Consumption Fragility
Proposal 20: 80% Coverage Single Payer Health Care
There can be no long term solution to the healthcare crisis in America (measured as deteriorating coverage, rising costs, and declining quality of care for the majority) so long as the Insurance Companies remain a primary player in the system. Therefore, as an interim step toward a Universal Single Payer system, proposal 20 is an Interim Single Payer system initially for the 91 million households earning less than $160,000 per year. Households earning above $160,000 (households within the top 20% income distribution) would be exempt, but could participate for a fee that would scale up with their income level.
Proposal 21: National 401k Pool
Proposal 20 requires the US government to ‘nationalize’ the employer-provided and managed 401k plan system and create a single national 401k pool. Each participant in the pool would be able to make individual deposits to the pool and withdraw limited amounts from it annually, just as under present employer-managed 401ks. Each account within the pool would be 100% portable and immediately vested. Voluntary deposits by individuals into the pool in their own name would be matched by equivalent government contributions. Government matching contributions to the pool would be funded by means of the introduction of a 2% national value added tax on the sale of intermediate goods (i.e. a business to business sales tax) that all businesses with annual sales revenues of more than $1 million would be required to make. Government investing of the pooled funds would be restricted to public ownership-public works projects, or government loans to publicly beneficial joint government-business projects such as alternative energy, green technology, and the like.
Proposal 22: De-Privatizing the Student Loan Market
The student loan market returns to a completely de-privatized program where it will function according to its original objective of providing financing to students at cost, in the form of either grants or subsidized loans.
Proposal 23: Re-Unionization of the Private Sector Workforce
A long term program for restoring income to the bottom 80% households includes policies and measures to restore the unionization rate to at least the 22% level of 1980. The first step toward re-unionization must include reforms to level the playing field between workers, their unions, and management at the level of legal rights. This begins with implementation of the Employee Free Choice Act, or EFCA, which permits a more fair process for union organizing.
Proposal 24: Low & Contingent Wage Indexation
Contingent workers include those who are part time, especially involuntary part time, and the escalating numbers of workers transferred to various kinds of ‘temporary work’ status. Contingent workers receive on average only 70% of wages of permanent employed and 10% of benefits. Part time workers mostly receive no benefits and typically half time pay. These groups’ numbers have risen beyond 40 million and closer to 50 million, approaching one third of the workforce. The alternative program proposals the minimum wage be adjusted annually according to changes in inflation, much like social security payments to the retired are adjusted annually. The alternative program also proposes the introduction for the first time of legislated minima for wages and benefit levels for contingent labor.
Just as proposals 20-24 provide for economic restructuring that rebalanced incomes and thereby reduced consumption fragility, the following series of proposals provides for restructuring the financial and banking system in the U.S. in order to reduce financial fragility. These financial restructuring proposals focus on three areas of the financial system that require major changes: the consumer credit markets, the Federal Reserve, and what the ‘Global Money Parade’ of speculators that have been increasingly, and repeatedly, destabilizing the economic system in recent decades.
IV. Banking System Restructuring and Financial Fragility
Proposal 25: Nationalization of Consumer Credit Markets
Consumer credit markets are too critical and necessary for the functioning of the consumption side of the economy, to allow these markets to remain exposed to speculative investing. Residential mortgage, small business property mortgages, student and auto loans markets should be nationalized, walled off from speculative and profit-seeking banking activity and administered through a new structure of ‘utility banking’, as described in proposal 27 below. A new kind of Federal Reserve system should provide necessary liquidity directly to consumer credit markets, with the credit disbursed by a new network of local credit institutions administered through local government, regulated credit unions, or other non-profit institutional networks.
Proposal 26: Democratizing the Federal Reserve
It is necessary to permanently take critical consumer credit markets outside the private for-profit, sometimes regulated, banking system and run it based on a new concept of ‘utility banking’—i.e. banking conducted at cost on behalf of consumers and not for profit on behalf of private financial institutions. Providing cost-only loans through the Federal Reserve, functioning as a ‘lender of primary resort’, the Fed is restructured in a fundamentally new way that in effect democratizes it and how it operates. Two thirds of Fed Board of Governors would be elected at large by popular vote. Other proposals further democratize the Fed and its operations, and all its deliberations would be public record within 24 hours of meetings.
Proposal 27: Utility Banking vs. Casino Banking
There is a fundamental contradiction between the two principles of banking—banking as a utility and as a speculative profits center. The utility sector includes the now nationalized residential mortgage and small business property mortgage markets and consumer credit markets, especially for autos, student loans, and installment credit for big ticket consumer durables products. Utility banking means credit extended at cost and without a profit mark up in the key consumer credit markets. It means the creation of a new network of local financial institutions that take household deposits and issue interest payments equivalent to no more than the cost of credit. New local financial institutions in this system function on a non-profit basis. Their purpose is to provide the essential service of credit provisioning for consumer markets. They may be local government based, non-government local non-profits, or community credit-union like financial institutions.
Proposal 28: Taming the Global Money Parade
How to tame the global money parade and prevent it from creating and feeding speculative bubbles of greater frequency and severity in the future is one of the greatest challenges. Re-regulation will not suffice. To effectively tame the global money parade requires getting control over its sources of money capital creation as well as its multiple, multi-directional flows. But until the global money parade is routed at minimun from its secretive tax haven dens; until capital flows are taxed, monitored, regulated and controlled; and until the ever-rising edifice of speculation is prohibited in what is still becoming a growing ‘house of cards’ derivatives system—the financial instability and fragility in the global system will continue to grow.
A fuller detailed explanation of the preceding proposals is developed in this writer’s forthcoming book, EPIC RECESSION: PRELUDE TO GLOBAL DEPRESSION. The abbreviated listing of the proposals raises numerous points and leaves out essential detail. But it is presented here as an initial contribution to what is hoped will be a subsequent debate on how to address the continuing Epic Recession in the immediate term and, perhaps, reduce its likelihood of transitioning to a consequent classic global depression in the coming two to five years.