World Financial Crisis – How we got here and what must be done to save civilization

October 2008

Part One –  How the current economic crisis came about.

In the opinion of the vast majority of world economic experts and leaders the global economy is sliding into a crisis that could exceed even the 1929 crash and ensuing great depression of the 1930s. For the average citizen this is already to painfully obvious. If the world is to avoid catastrophic global economic meltdown and all the social-political chaos that means, then it is necessary do things in a totally different way than what created this havoc.

The Debt System

The past and current economic system is based on charging interest for lending money. That is what banks and financial institutions do. But first of all what is money and where does it come from. Money is said to be a medium of exchange. What does that mean? It means that there is a universal social agreement that currency represents the value of natural resources and the products of human labor. This universal social agreement is enforced by cultural, economic, political, legal, and military institutions. In other words money is in age old institutionalized cultural habit.

In its proper use money serves a useful function. It speeds up the exchange of goods and services by allowing people to trade goods and services in a faster more fluid way than one to one barter allows.

Who creates currency? Money is issued by some cultural institution usually a national government or a central bank. That institution and the people who control it therefore control the money supply. To whom is that money issuing institution accountable? This is the most fundamental question of social justice. If the money issuing and lending institutions are accountable to the general human population that is to the people in an enforceable way, then social harmony and functional civilization is possible. If money issuing and money lending is controlled by a small self serving minority, regardless of what it calls itself, then that controlling minority becomes parasitical on the body politic and a culturally pathological condition sets in. When parasites get out of control they kill the host and themselves. In socioeconomic terms this means the debasement of culture and the destruction of civilization through poverty, environmental degradation, slavery, and war.

Whoever controls the money supply has the ability to stimulate or restrict commerce and thereby control the price of goods and services. This is done by controlling the volume of currency available and by manipulating interest rates on loans. This means that when money is plentiful prices go up and when money is scarce prices go down. By making credit easily available there is more competition to buy the same commodities, goods, and services and prices go up. When the money supply is restricted there is more competition to sell commodities goods and services and prices go down. This is called the law of supply and demand.

Whoever controls the money supply can and usually does use this principle to increase the money supply thereby creating more debt and inflated prices (the bubble effect). Then by contracting the money supply prices are deflated so that those who control the money supply can buy up tangible assets cheap there by concentrating real wealth consisting of ownership of tangible assets (land, buildings, commodities, industrial infrastructure, etc) in their own hands. This is the classical tactic of class warfare used by a rich oligarchy to concentrate more and more real wealth that is tangible physical assets in fewer and fewer hands thereby enslaving the population. It does not matter whether such an oligarchy calls itself a politburo in the former communist Soviet Union or the central bank of a western so called democracy. As long as a small minority in positions of power dictates economic policy to the masses and the general population has no say so in economic policy it amounts to enslavement. Names don’t matter only how an economic power structure functions defines what it is. I call this the functional definition. That is a thing is what it does. Without economic democracy there is no real political democracy because economic power will always buy political influence.

The constitution of the United States of America states that congress shall have the right to coin and print money. The US constitution does not give this authority to any other agency but only to congress made up of the elected representatives of the people. This was intended by the founding fathers to keep the issuance of currency under the control of the general citizenry. The founding fathers understood that giving the authority to print money to any private bank or institution that did not represent the will of the people was a recipe for economic and eventually political tyranny. There are numerous warnings made by George Washington, Thomas Jefferson, Andrew Jackson and many other founders of our nation warned that giving money issuing authority to any private bank or agency would eventually destroy the republic. Andrew Jackson for instance based his entire presidency on defeating a central bank

The Federal Reserve System

In 1913 the Federal Reserve was created. The name Federal Reserve fraudulently implies that this institution is an agency of and accountable to the US government. But that is not so. The Federal Reserve is a private bank made op of a consortium of 10 regional private banks. The Federal Reserve System was conceived by a secretive meeting of bankers that took place on Jackal Island off the coast of South Carolina. These bankers wrote the bill that was then rammed through congress in what many historians consider to be an illegal way when congress was in Christmas recess. President Woodrow Wilson who signed the bill later rued the day he ever did so.

The Federal Reserve was given the authority not only to print US currency but also the privilege to charge the US government and therefore the tax payer interest on it. That means that by simply printing currency that is essentially creating money out of nothing the Federal Reserve private bank has been given the privilege of charging the US government and therefore the American public exorbitant interest for merely printing money. That makes the wealth of the nation and ultimately the tangible property of the American people subservient to an entity that creates no real goods and services in return. This amounts to institutionalized theft from the American people. In other words the Federal Reserve System is the greatest rip off scam in history.

Keep in mind that the board members and chairman of the Federal Reserve are not elected by or directly accountable to the people. It is essentially a totally authoritarian, undemocratic system. In fact the Federal Reserve has never officially been audited, which essentially amounts to a license for its controllers to cook the books any way they want to.

What does the Federal Reserve do with the money it prints? It loans it for interest to the US treasury or to other private banks and financial institutions. The interest accrued on these loans over time accumulates more and more wealth in the hands of the Federal Reserve and its controllers. Remember that the Federal Reserve creates the money it lends merely by running a printing press or by making entries in a computer. It does no practical work (creates no useful tangible products) to rightfully deserve this wealth. Thus it becomes a parasite, a cancer on the real productivity of the people.

By making plentiful or restricting money supply central banks, which in the case of the United States means the Federal Reserve can engineer credit bubbles, stock market crashes, run away inflation, etc as staged events to concentrate wealth in the hands of a small global elite super class? It is important to understand that central banks all over the world are run by the same people. Behind the scenes the families who run global financial institutions stage economic and political events to amass economic and therefore political power. The Rothschild banks of Europe loaned money to both sides of military buildups. This provoked wars, thereby enabling the Rothschild banks to make huge profits off arms manufacturing and national governments desperate to win. This happened in the American civil war and world wars 1 and 2 as examples.

Fractional Reserve Lending

Banks have other methods of making a profit without producing tangible goods and services of equal value. Foremost among these is fractional reserve lending. Fractional reserve lending is based on Banks lending more money out in return for interest than there is money in the bank from depositors putting there money in the bank. How is this possible? If all the people who put their money in a bank withdrew their money at the same time the bank could not back up the loans it issued and would have to default and go out of business. To avoid such default banks rely on the principle that their depositors will not all withdraw their money at the same time thus always leaving the bank with a reserve of money to back up the loans they issue and pay other banks, central banks, insurance companies, stock market investors, and governments they borrow money from.

This works most of the time, but in times of economic panic the public looses confidence in the safety of their bank deposits and everyone withdraws their money from the bank at the same time. This is called a run on the bank. The bank then has no fluid available cash with which to pay its financial obligations and must default and go out of business. When this happens the depositors that still have money in the bank lose their money because the insolvent bank can no longer pay them back. If this happens to too many banks at the same time the general economic system breaks down and a recession or depression ensues. In many countries the government guarantees bank deposits up to a certain amount of money to preserve the stability of the banking system and public confidence in it. That means that if an insolvent bank can not pay back its depositors the government will pay back the depositors. In the United States this is called the FDIC or Federal Deposit Insurance Corporation. The FDIC is a government fund that guarantees deposits in US banks up to $100,000 per bank account. This is meant to preserve stability in the financial system, but what if the government itself becomes insolvent.

Where does the government get its money from? Remember that the bailout of the banking system, weather in the US or other countries uses government money. So where do governments get their money from. There are 3 possible sources. These are taxes, bonds (such as US treasury notes), or print the money. When the government borrows money it issues bonds that are sold to private investors, financial institutions and companies which can be domestic or foreign or the governments and central banks of other countries. These loans made to a government must be paid back with interest or the government loses its credit standing and can no longer borrow money. All of the massive multi billion multi trillion bailout money being appropriated by governments all over the world and not only in the US has to come from one of these three sources or a combination of them.

What if the government taxes the public to raise the money? In the United States for instance the taxpayers who are already unable to pay their mortgages and are falling behind on credit card debt, student loans etc will not be able to pay for these massive bailouts. Consumers in the general public who buy products and services are what keep the economy going. If the consumers are so heavily taxed that they have no money left to buy products and services the economy will be driven even further into recession and depression and the tax base will shrink as well. So this is a counterproductive way to try to stimulate the economy. It is like a man trying to lift himself off the ground by his own boot straps.
What if the US government tries to borrow the money? In the past the US corporations and the US government have been regarded by foreigners, foreign companies, and even foreign governments as a safe, stable and profitable place to invest money, but this confidence in the US financial system is now rapidly eroding. The United States not too long ago used to be the biggest creditor nation in the world, but now the US is the biggest debtor nation in the world. How did this happen? Over the last 2 or 3 decades US corporations have outsourced most of their industry and industrial jobs. We are far less than we used to be a nation that produces real products that have tangible intrinsic value. We have destroyed our industrial base and allowed the industrial infrastructure of the country to deteriorate and become outmoded.

Why has such a self destructive policy been permitted? The capitalist system is based on competition where corporations vie to produce and sell products as cheaply as possible so as to beat the competition. This means using the cheapest slave labor possible and paying the least possible for clean up and environmental protection. Under the current global economic system corporations are almost forced to do this regardless of any moral scruples as to the human and environmental degradation caused by such practices. In a dog eat dog world if they don’t their competition will. Thus economic expediency overrules any concern for the long range consequences of such practices.

It is important to understand that at the top level global financial institutions are controlled by a global economic elite or super class. These people are internationalists and have no loyalty to the United States or any other nation for that matter. To them companies and entire nations and their populations are merely peaces in an economic, political chess game. They use their financial power to manipulate governments and buy and if necessary assassinate politicians where and as needed. They have a cold and Machiavellian mindset and will trample on anything that gets in the way of their megalomania. If it serves their ends to economically undermine and destroy the United States to consolidate global power and institute their goal of global tyranny they have no compunction about doing it. Until this is generally understood and countered humanity will continue to be victimized. They are masters of divide and conquer. They engineer conflicts as a means of amassing wealth and power.

Even before the current economic crisis over the last few years it has been difficult, in fact well neigh impossible for engineers living in the US to find decent well paying jobs commensurate with their education, skill, and experience because the industries and the jobs that go with them have been sent overseas. What incentive is this for American young people to seek a good education in science or engineering? Our economy has become dependent on service sector jobs (sales, marketing, financial industries etc. Even jobs that can’t be outsourced like construction and farm labor have been taken over by cheap labor from Mexico and other countries mostly based on illegal immigration. This has also driven down wages for the American worker.

At the same time foreign companies and governments who were making money on outsourced American industries were investing heavily in the US stock market, banks financial institutions and US treasury notes. American workers who make up the middle class were losing good paying jobs to outsourcing and illegal immigration at the same time the banking industry was being flooded with foreign capital. This made bank loans, mortgages, credit cards, and stock market or other speculative investments using borrowed money easily available. This made it possible for Americans to go deeply into debt at the same time their real earning ability was being eroded. Obviously this was a state of affairs that could not go on indefinitely.

The housing industry was especially driven by easy credit and easily available mortgages, driving up real-estate prices to unprecedented levels. Consumers could borrow money based on the collateral of the increasing monetary value of their homes and other real-estate. Thus the real-estate bubble and credit bubble was created.

As the earning ability of the American middle class was being eroded more and more Americans could not keep up with their mortgage payments and other debt based financial obligations, resulting in an increasing percentage of the American public defaulting on their mortgages and loans. This started happening in an obviously apparent way in the late summer and fall of 2007 with the so called sub prime mortgage crisis.

The situation was made even worse because Wall Street investment companies and the US banking industry were rapidly developing so called sophisticated, but little understood (by the average US or foreign investor) financial instruments. In times past local banks would exercise great caution in determining the credit worthiness of anyone they issued a mortgage to. They knew that if the person they issued a mortgage to had insufficient earning ability and or an unreliable credit history there was a high likelihood that such a person would not make good on their mortgage payments and the bank would be stuck with a bad loan, thereby loosing money. This acted as a natural built in constraint on irresponsible lending practices. Then Wall Street and big financial institutions came up with the bright idea of buying up mortgages from local banks and packaging many mortgages in bundles to be used as collateral for loans made to these institutions by investors, very often foreign investors. This is somewhat analogous to taking all the parts of a butchered animal that would not make polite dinner table conversation, and putting it through a meat grinder and selling it as sausage. There was also less motivation for small local financial institutions to exercise due scrutiny in issuing mortgages because they knew that they could sell the mortgages to big financial institutions to be sliced and diced into packaged bundles. Then the motivation for a local banker merely became how to make a good commission by selling a mortgage.

Very often these packaged collateralized financial instruments were sold and re sold many times, making it unclear who was ultimately responsible for making good on mortgages that went bad. This methodology worked as long as the housing bubble was still expanding, but as soon as the housing market began to contract such packaged collateral became more and more worthless. Once investors, especially foreign investors were burnt in this way they began to lose faith in the credit worthiness of US financial institutions and even the US government itself. The same principle that applies to an individual person applies to a corporation, bank or government. As soon as you’re credit reputation becomes bad it is difficult or impossible to borrow money. That eliminates or at least severely damages option 2 (borrowing money for the US government.

Inflation

That leaves option 3 for the government to create money by printing it. In the current US system the Federal Reserve prints the money and charges the government interest on it so a few obscenely wealthy families that control the Federal Reserve and its central bank counterparts in other countries can get even richer at the expense of the rest of the human race.

Money generated by simply printing it is not based on real productivity in creating goods and services that have real intrinsic usefulness and value. That means that a bigger volume of money is chasing the same amount of goods and services As a result the money has less and less purchasing power to buy a limited finite amount of land, food, cars, medical care, etc, etc. This is called inflation. As more and more money is issued by a government without increasing real productivity the money becomes less and less valuable in terms of real purchasing power and therefore less and less valuable compared to other currencies. As the currency becomes increasingly worthless the global market place loses confidence in the future value of the currency and financial-governmental institutions based on it. This is one of the chief mechanisms by which great nations and empires throughout history have destroyed themselves and unless we mend our ways very soon the United States will suffer the same fate.

Gold Backed Versus Fiat Currencies

Until 1973 when the United States went off the gold standard, US currency was backed by gold at the rate of 1 ounce of gold is worth $32. Until 1973 The US had one of the most valuable reliable stable currencies in the world. If a currency is redeemable in Gold or Silver you are supposed to be legally entitled to take paper money to the bank and exchange it for a specified amount of gold or silver whenever you chose to. In that system paper money is just a convenience to avoid having to physically carry around gold and silver. Gold and silver can also be stamped into coins. Precious metals are precious because there is a small limited quantity of them in the world. For this reason precious metals maintain their real buying power as related to real goods and services. In other words you can’t make gold and silver with a printing press. With a gold pegged currency you can only issue as much currency as you have physical precious metals to back it up. If this policy is adhered to it restricts inflation of the currency by a central bank or government.

Fiat money is currency that is not redeemable in precious metals. Its value is taken on faith based on the decree of the central issuing authority (that is government or central bank), hence the word fiat or by official decree. Because fiat currency is not based on anything physically tangible it can easily be inflated by a central bank or government.

The Economic Black Hole

Over the last few years the Worlds banking and economic industry has become vastly more complicated and convoluted. Multi lairs of debt have been created where central banks lend money to other banks who lend money to still other banks and so on who ultimately lend it to businesses or the average citizen in the form of business loans, individual loans, mortgages, credit cards, car loans, student loans etc. The situation is made even more complicated by new esoteric financial instruments invented by the Wall Street elite such as credit default swaps and derivatives. These are a kind of insurance or gambling depending on how you want to look at it. In this system a corporation or financial institution (lets call it company A) entering into a contract with another corporation (company B) makes a separate contract with a third financial entity (company C) that should the company B they are doing business with default on their financial obligation to company A then company C they have a derivatives contract with will pay company B’s debt to company A. For this privilege company A makes payments to company C. Over the last 5 years derivatives and hedge funds that deal in these kinds of contracts have become a huge financial industry, doubling and tripling in size. It is estimated that the total derivative contract obligations world wide exceeds a thousand trillion dollars. This astronomical sum is many, many times greater than the world’s yearly economic production and greater than the market value of all the worlds’ tangible assets or physical property. When the global economy goes into melt down mode more and more financial institutions default on their loans and an escalating number of derivative obligations must be paid. The hedge funds and other financial institutions issuing these derivative guarantees to insure against defaults have often themselves borrowed money to finance their operations. The multiple layers of leveraging or debt financing in the global financial industry has made the global economy extremely vulnerable to catastrophic meltdown.

Such an economic meltdown happened through what is called the domino effect. When a row of dominos is set up on end when the first domino is knocked over it knocks over the one next to it which knocks over the next one near it and so on until the whole row is knocked down. It financial terms this means that when a corporation is unable to pay its financial obligations to another corporation, the company that is not paid is unable to pay other businesses it owes money to who are in turn unable to pay their creditors and so on and on until a huge number of businesses become insolvent and the overall economy collapses. Once the domino effect gets out of control there is no stopping it. That is what is happening to the world economy today.

More than ever before in known history we have a global economy. Manufactured items especially in the electronics industry depend on parts, supplies, and raw materials produced all over the world. It is commonplace for investors in one country to invest in foreign industries and even loan money to foreign governments. Therefore when an economic crisis happens the contagion spreads world wide and becomes a global phenomena.

There currently exists no international system of economic governance and regulation designed to protect the human rights and economic stability of the people of the world and adequate to rein in abuse of the natural environment as well as the global economic system. In fact a small global elite of super wealthy families manipulates this system for their own selfish aggrandizement. Their ultimate objective is to set up a global fascist state under their control to enslave the world population. They engineer crisis situations so as to amass wealth in their hands and offer so called solutions to the problems they created to begin with, that serve their own agenda.

While a system of world government and economic regulation is needed it must be a democratic and just system fully accountable to the people and not a perverted system subservient to a small powerful international cabal. Humanity is far from achieving this goal.

It is important to understand that the vast and complicated global financial industry consisting of banks, insurance companies, stock markets, brokerage houses, hedge funds, etc does not create actual tangible goods and services. It is a super structure of financial ownership, speculation, and control that consumes an enormous amount of the world’s financial resources in a debt system without directly contributing to real productivity. The amount of debt owed world wide by governments, corporations, states, municipalities, and individuals in a complicated web of interdependent financial obligations is now so huge that it exceeds the market value of all the worlds’ real physical wealth or tangible property assets. When the global economic system implodes the global debt burden can never be paid, at least not under the rules and procedures of the existing world financial system. This is the economic black hole effect. As long as the chain of interdependent debt keeps circulating there is a state of relative normalcy. When there is a sufficiently large breakdown of debt payments anywhere in the system whether it happens unintentionally, or is deliberately engineered, the domino effect sets in and a global chain reaction of defaults takes place. As of October 2008 the time of writing this essay the process of global economic meltdown is already in its beginning stages.

In response to this huge crisis governments and central banks world wide are desperately trying to rescue banks, stock markets and financial institutions by creating liquidity that is by lending money to and bailing out banks, insurance companies, and major corporations. This is like trying to put out a fire by poring gasoline on it. It only increases taxes, inflates currencies, and creates more debt. Economic growth can not be stimulated in this way. It is not possible to make a plant grow by watering the leaves and branches. To make the plant grow it is necessary to water the roots. In economic terms the roots of the plant are like the farms, small businesses, and real manufacturing that are the real source of wealth. Very little of the multi trillion bail out funds being provided by the Federal Reserve System and being legislated by congress will trickle down to the average citizens whose productivity is the real source of wealth. Most of this money will be used to prop up insolvent, corrupt financial institutions and in the process create even more debt for the average citizens. It will concentrate even more money in the hands of the financial industry sector without providing funding for farming, manufacturing, construction, medical services, education, infrastructure (highways, bridges, schools, hospitals, etc) and the jobs that these create. If bailout money were given directly to these basic industries real economic growth would be stimulated. The top down so called trickle down method, through a complicated network of banks and financial institutions, each of which takes its cut and skims money off the funding made available through bailouts only exacerbates the economic crisis.

Today the federal government and Wall Street are acting like two penniless bums on a street corner with their pocket linings hanging out promising to pay each others debts. How can insolvent institutions bail out other insolvent institutions? This can not and will not work. What is needed is bottom up economic stimulation where actual job creating small businesses and basic industries are funded by the government to stimulate the economy through real productivity that creates real wealth. The out of control top down banking-financial industry has become a cancer on the global economy to the point that it is killing the host. The present system is not free enterprise, it is financial tyranny.

Stock and commodity markets have become gambling casinos where, speculators and financial institutions seek profit through manipulation and financial slight of hand rather than by investing long term in basic productive industries that serve the real needs of the people and create real prosperity.
The basic security of the people meaning that the human population is adequately fed, housed, clothed, as well as provided medical care, communication, transportation, education and employment is a primary requirement fore a functional economic and political social structure. If these fundamental requirements are not met a pathological cultural condition ensues. This basic security is the foundation of all other social and cultural superstructures. No society can be prosperous if the requirements for basic security are not met. Regardless of how privileged a person may be he can not be happy or healthy if he lives in a society that is dysfunctional. The more dysfunctional the society the more everybody suffers regardless of their social position or status. Any successful attempt to create stable economic development must take care of these basic requirements.

Coming Soon

Part 2
What is the solution?
How can a functional sustainable economic political system be organized?


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