Thinking Outside of the Box to Fix the Money Function in the US Economy

16 01 2011

I’m involved in various grass-roots initiatives around complementary currencies, local-investment mechanisms, a national credit system, and a State Bank for Oregon. The common objective of all these is to allow economic exchange, including putting people to work and investing in new enterprises. These have been stopped recently because of a lack of US dollars (the credit freeze). A bigger theme to which I am also fully committed is to create institutions that prevent concentration of economic power in this country and in the world.

Consequently, I am listening to a lot analysis and solutions that economists and other thinkers have put forth on these issues. As those of you who are like me and following this focus, you know that there is a fervor of activity and suggestions happening right now.

The exciting thing today is that there is a widespread willingness among people to entertain major changes to the architecture of banking and the money-creation function (i.e. the Fed) in the US economy. The band-aids and bail-outs have taken place. Now, it is onto getting real about lasting reform. The willingness to re-design our money institutions is a very profound development, and one that promises to deliver a qualitatively different kind of economy in the future.

There are three developments that are exciting to me right now:

  1. First are the proposals that are actually making it to Congress. In December, Dennis Kucinich put forth a bill to abolish the Federal Reserve. The US Treasury Department, in his bill, would take on the money-creation function for the country. When money was created by the Treasury, there would be no interest charge on it as there is today when the Fed buys government bonds to create money and when banks simply lend out as loans with interest the newly created money. Debt money, as this particular design of money is often called, has a built-in requirement for the economy to continuously grow which is bad for the environment. Just like a Ponzi scheme, ever higher levels of GDP must be attained in order to meet the debt service on the money created at earlier periods. Also last year, Ron Paul introduced a bill that requires the Federal Reserve to be audited so that its balance sheet and income statement is fully transparent to the American people.
  2. Second area of interest to me are the assessments by more conventional economists of the financial reform that is taking place. Prominent here is Paul Volcker who advocates separating banks into two wholly separate types of companies: one that takes deposits and makes loans; another type that invests and speculates on its own account. Along with Volcker is Simon Johnson, at MIT and former IMF Chief Economist, who is loudly calling for size limits on banks. Banks should never become so large that should they fail, the whole economy fails. Volcker and Johnson are certainly right about these important architecture issues.
  3. The third and most exciting area to me is the work of Bernard Lietaer and Robert Ulanowicz. Lietaer is an economist, Ulanowicz is a theoretical ecologist. In the past two years, they have come out with papers that show how the design of the money-creation function in an economy contributes to the systemic performance of the economy. With a good design of money, the economy can be resilient to shocks. With a bad design, it will collapse.  Their main point is that an economy needs more than one currency. It needs multiple complementary currencies: a national currency, local currencies, currencies for education, for resource management, for international trade, and potentially many other sector-oriented currencies. Multiple currencies create the diversity that is needed to give a system resilience. While the efficiency of a single currency is sacrificed, the ability to bounce back from shocks and to act in a counter-cyclic fashion is what is gained from using multiple currencies.

What is most satisfying and “break thru” in Lietaer and Ulanowicz’ thought is their framework, primarily Ulanowicz’, on how to measure the sustainability of a system. They claim that it is a balance between the two poles of efficiency on one hand, and resiliency on the other. A system should not be completely one or the other. It needs to be a careful blend in order to operate in the optimal “window of viability.”

A really eye-opening and well written paper on this is here:

A system is composed of agents and connections between the agents. When the system is efficient, this means it moves energy, material and information through it quickly. But to do this, only a few agents and by only a few connections will be needed. Efficiency, therefore, necessitates a reduction in diversity and connectivity. On the other hand, with lots of agents and every agent connected to the other, there are a lot of behavioral options for the system to take in any circumstance. But too many options can be stagnative. In other words, too much diversity and interconnection will lead to stagnation.

Lietaer and Ulanowicz’ framework for evaluating systems sustainability is ideal for designing monetary systems. More importantly, however, it gives us a framework for understanding and dealing with concentration in the economy. If poorly designed money systems, such as a debt currency, fractional reserve banking, and a monopoly on the money-creation function (characteristics of the US dollar and all world currencies) are to blame for at least part of the inequality of incomes and wealth in our country, then fixing the money architecture will go a long way in making a better society to live in. And furthermore, by adding “resiliency” to the framework of evaluating an economic system, we will get away from the mono-centric value of “efficiency” as the sole measure of performance. This too will help produce a new quality in our standards of living.

Capitalism Gone Bad in the Rogue Valley

27 09 2010

Yesterday’s Opinion Piece in the Meford Mail Tribune was right on target, if not sad, in its take on the situation of one of the area’s largest employers, Harry and David.

Purchased a few years ago in a private-equity leveraged buyout, the company was saddled with a $20 million-per-year interest payment. Ever since, it has been in the red.

A new chairman and CEO, appointed by the syndicate, lives in Atlanta and is hell bent on laying off folks, and apparently, turning much of the H&D orchards into tract homes.

We in this county have unwittingly become poster children of capitalism gone bad. The practices of Heyer and the Wasserstein syndicate are extractive, predatory and anti-democratic pure and simple, made possible by an era of cheap and free-to-roam money credit. They are lining their pockets while extracting and destroying value here in Jackson County. The situation is unfair and should be stopped. The fact that it is technically legal burns me to no end, and only underscores how upside down are the current laws regarding capital and ownership. The employees of H&D as well as all the residents of Jackson County are the victims of financial sleight-of-hand that, at present, is draining our county of assets and denying us of self determination regarding land, livelihood and lifestyle here in the Rogue Valley.

There are alternatives. We can create cooperatively owned ventures like the Grange Coop, the Medford Food Coop and the Rogue Valley Credit Union. We can use and encourage local banks to be more proactive in investing in their local community. We can use local investment mechanisms such as the Jefferson Grapevine, Community Resiliency Fund and micro-finance to back local entrepreneurs. We can create local and regional mutual funds, like Leslie Christian of Upstart 21 of Portland, where locals buy shares, and the fund buys local, privately held companies, thus keeping them locally owned. We can structure the ownership of a company, like is done in China and other countries, with two categories of shares: one for locals only and have controlling votes, and another for non local “foreigners” with no voting privileges. We can convert local companies into employee-share owner plans (ESOPS). As local business owners, we can band together in associations and marketing non-profits such as THRIVE to promote the local commercial class. Instead of playing victim and patsy to global predatory capitalists like Heyer, Wasserstein and company, we can take our own steps to local ownership, which is the right move to economic self-determination and democracy.

Paul Volcker, “Not one shred of evidence…”

10 01 2010

From The Times December 9, 2009

One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.

Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.

As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

Mr Volcker’s broadside punctured a slightly cosy atmosphere among bankers and regulators, assembled in a Sussex country house hotel to consider reform measures, at the Future of Finance Initiative, a conference organised by The Wall Street Journal.

Another chilling contribution came from Sir Deryck Maughan, a partner in Kohlberg Kravis Roberts, the private equity firm, who in the 1990s was head of Salomon Brothers, the investment bank.

He warned delegates that many of the flawed mathematical techniques that underpinned banks’ risk management approaches were still being used, saying that the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors”.

Sir Deryck also questioned whether it was right that taxpayers should continue to underwrite many of those risks: “There’s something wrong about large proprietary risks being taken at the risk of taxpayers. The asymmetry will not hold. I’m not sure we’ve thought about that.”

Earlier Baroness Vadera, adviser to the G20 — and an adviser to Gordon Brown during the banking crisis — had warned the world’s most senior bankers that continental lenders had yet to acknowledge the scale of their losses and bad debts. She said: “It’s not the UK banks that have to come clean, but some of the continental banks still have issues.”

She added that, contrary to City assumptions, the supposedly hardline French and German governments were more relaxed about leverage and liquidity constraints than Britain and America.

The former UBS banker said that she continued to have nightmares about how close the British banking system came to collapse last year.

She also warned bankers that the G20 process was “like herding cats” and that one of the main problems with the group of the world’s wealthiest nations was that they did not want to give up national sovereignty and co-ordinate their behaviour.

Meanwhile, George Soros argued that CDS should be banned. The billionaire investor likened the widely traded securities to buying life assurance and then giving someone a licence to shoot the insured person.

“They really are a toxic market,” he said. “Credit default swaps give you a chance to bear-raid bonds. And bear raids certainly can work.”

Alan Greenspan’s Mea Culpa

10 01 2010

On October 23, 2008, Alan Greenspan admits to Congress that his belief in free markets was mistaken.

Rep. HENRY WAXMAN (D), California: [October 23, 2008] You have been a staunch advocate for letting markets regulate themselves. And my question for you is simple. Were you wrong?

ALAN GREENSPAN: Yes. I found a flaw, but I’ve been very distressed by that fact.

Rep. HENRY WAXMAN: You found a flaw in the reality.

ALAN GREENSPAN: Flaw flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

Rep. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right.

ALAN GREENSPAN: Precisely. No, that’s precisely the reason I was shocked because I’ve been going for 40 years or more with very considerable evidence that it was working exceptionally well.

RON SUSKIND: You see Greenspan at the hearing table after the collapse, and you see a crushed man, really.

ROGER LOWENSTEIN: He said that the premise that you could trust the markets to regulate themselves was misplaced.

JOSEPH STIGLITZ: After almost two decades of public service, he realizes that the economic philosophy that he had pushed so hard, resisting regulation of derivatives he realized that there were some fundamental flaws in that whole philosophy.

JOE NOCERA: It was a pretty incredible moment that after a lifetime of faith in a certain way the world worked, that Greenspan would say, “I was wrong.”

ROGER LOWENSTEIN: It struck me as someone admitting that the core belief that had animated, you know, basically, a 20-year, 18-year career as Fed chief was wrong. It’s stunning, but it doesn’t undo the damage.

BARNEY FRANK:  That was a very important moment … comparable I think to [Secretary of Defense under Kennedy and Johnson] Robert McNamara’s confession of error with regard to the Vietnam War, because what Greenspan was saying was not simply that “I called that one wrong; this one I was off by X,” or “I miscalculated.” He was saying: “My fundamental approach was wrong. I thought that the market would be self-correcting. In my view, what happened was not supposed to be able to happen.” And that is very important, very profound, and will have a big effect, because as we go forward for the rest of this year, we are going to be adopting regulation now, which people like Alan Greenspan used to resist. Greenspan’s acknowledgement that the market is not as self-correcting as he thought is now going to be a very important piece of that argument. …

From the PBS Frontline documentary, The Warning:



Simon Johnson’s Clarion Call

27 03 2009

Just like IMF interventions in Russia, Thailand & Indonesia a decade ago, genuine financial reform in the USA requires standing down the oligarchs.

While there has been much good critique of the bank bailout by leading American economists (see this recent Financial Times article for a summary of Krugman, Stiglitz, Sachs and Reich), I’ve been following Simon Johnson, an economist at MIT and formerly Chief Economist at the IMF. He has a wonderful blog on the bail out.  And just now he has pre-released a full article on his prognosis that will appear in Atlantic Magazine. The article is long, but if you want one of the better insights into what we are up against, read this: 

Here is a veteran economist with real experience in being lender of last resort to governments and central banks. He has had experience standing down Russian, Thai, Indonesian governments and their private-sector cronies who’ve gotten over their heads with financial excess.

Johnson lays out not only the technical issues of what needs to be done here in the US (including an FDIC-style reorganization and a break up so that no institution ever gets ‘too big to fail’). But he also addresses the bigger more difficult issue of dealing with the oligarchs who are in bed with the government regulators and in the end pose the biggest challenge to genuine reform. Wall Street and Washington have grown into a cliquish, club of elites. If this doesn’t get cleaned out, we are in deep do do.

Both of his two possible scenarios for how the crisis resolves, spelled out in the last couple of paragraphs, are dismal and sad. Either we muddle along making ineffective deal-by-deal reforms as we’ve been doing, and like Japan, go into prolonged stagnation where the US treasury/American taxpayer gets looted by the oligarchs. Or, we have a global collapse that’s worse than the Depression, and the US economy falls on both knees, rest of the world destitute.

Johnson prefers that latter scenario as he believes this will concentrate minds and force people to make the right, albeit, difficult decisions that ultimately will clean up the mess.

Not pretty, but real, even if depressing and depressed.