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Monday, October 10, 2011

From the Great Wall Street!!!

Nobel Prize Winning Economist Who Supports Wall Street Protests SLAMS the Federal Reserve

High-Level Economists Support the Protests

People may assume that Stiglitz supports the Federal Reserve because “liberals like printing money”.

Nobel Prize Winning Economist Dislikes the Fed

Joseph Stiglitz – former head economist at the World Bank and a nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is “corrupt” and undermines democracy.
Stiglitz said:
If we [i.e. the World Bank] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.
Stiglitz pointed out that – if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system – “it would have been a big signal that something is wrong.”
Stiglitz stressed that the Fed banks have clear conflicts of interest, since the banks are largely governed by a board of directors that includes officers of the very banks they’re supposed to be overseeing:
So, these are the guys who appointed the guy who bailed them out … Is that a conflict of interest?
They would say, ‘no conflict of interest, we were just doing our job. But you have to look at the conflicts of interest”…
The reason you talk about governance is because in a democracy you want people to have confidence … This is a structure that will undermine confidence in a democracy.
Stiglitz is not alone.

Many High-Level Economists Say “End the Fed”

Aren’t Criticisms of Wall Street and the Fed Inconsistent?

While it might at first seem confusing that Stiglitz could support the Wall Street protests and criticism of the Fed, these are really just two sides of the same coin.
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Do We Need Banks, Or Can We Cut Out the Middleman?

Banks Are So Big They Are Killing the Economy … and Own the Politicians

Virtually all independent economists and financial experts agree that the economy cannot stabilize or recover unless the giant, insolvent banks are broken up (and here and here). And the very size of the big banks is also warping our entire political system.
Politicians are wholly bought and paid for. As famed trend forecaster Gerald Celente writes in the current Trends Journal:
Politics today is little more than legalized prostitution. While a streetwalker gets busted for selling her body to a john, politicians get rewarded with campaign contributions for selling their souls to a corporation or lobbyist. With all of the whoring going on – the money exchanged and the pleasures lavished – the only
one actually getting screwed was John Q. Public.
But the chairman of the Department of Economics at George Mason University (Donald J. Boudreaux) says that calling politicians prostitutes is inaccurate – because it is being too nice. Specifically, Boudreaux says that it is more correct to call politicians “pimps”, since they are pimping out the American people to the financial giants.
So the state of banking and politics in America is grim, indeed. But do we really even need banks or politicians? Or can we cut out the middle man?
This post looks at whether we can use alternative financial arrangements to cut out the big banks as financial middleman. In a separate essay, we look at whether we can use Direct Democracy to cut out the corrupt political middleman.

We Don’t Need Banks

The big banks do very little traditional banking. Most of their business is from financial speculation. For example, less than 10% of Bank of America’s assets come from traditional banking deposits.
Time Magazine gave some historical perspective in 1993:
What would happen to the U.S. economy if all its commercial banks suddenly closed their doors? Throughout most of American history, the answer would have been a disaster of epic proportions, akin to the Depression wrought by the chain-reaction bank failures in the early 1930s. But [today] the startling answer is that a shutdown by banks might be far from cataclysmic.

Who really needs banks these days? Hardly anyone, it turns out. While banks once dominated business lending, today nearly 80% of all such loans come from nonbank lenders like life insurers, brokerage firms and finance companies. Banks used to be the only source of money in town. Now businesses and individuals can write checks on their insurance companies, get a loan from a pension fund, and deposit paychecks in a money-market account with a brokerage firm. “It is possible for banks to die and still have a vibrant economy,” says Edward Furash, a Washington banks consultant.
There was a time when banks were the obvious place to go if you needed a loan, whether as an individual or business. However, with the economic difficulties of the past few years, they have become increasingly reticent about handing over any of their cash, despite Government intervention.
Thankfully a new way of borrowing money has come to the fore — peer-to-peer lending — and it offers an opportunity for both borrowers and investors alike.
In 2007, Ode provided a great historical perspective of the issue:
Banks’ shortcomings have been recognized for centuries—and for centuries, groups of people have been organizing themselves to take advantage of alternatives. In the mid-19th century, a pair of German economists extended the growing idea of “co-operative societies” to credit. By 1864, a group of farmers had joined together to secure loans for livestock, seeds and farming equipment, forming one of the first credit unions, a co-operative, community-based banking model that still thrives.
More recently, in the last 30 years, the rise of microcredit has brought many small loans to people in poor countries and rural areas who had no access to traditional banks or could not present the kind of bona fides a bank requires. Microcredit has sparked a revolution in the international development community, proving the existence of plenty of credit-worthy people who are simply overlooked by traditional banks.
Combine the principles of microfinance and online social networking, and you get a new phenomenon: peer-to-peer lending, or social lending as it’s sometimes called. In the last two years, more than a dozen websites have been launched to connect borrowers and lenders—no banks required.
Peer-to-peer lending appeals to lots of people. Americans already lend more than $89 billion to friends and family every year, according to Federal Reserve estimates. Nearly 75 percent of Britons said they’d consider using a peer-to-peer website to borrow or lend, and some estimates suggest the global market for peer-to-peer lending will grow to more than $5 billion by 2010.
While cutting out the middleman may be instinctively attractive to many people, it can have an economic advantage too. Compared to credit cards, peer-to-peer lending offers borrowers really attractive interest rates—often half what they might expect to pay Visa or MasterCard.
And peer loans are often structured more fairly. A debt can be paid off in installments, unlike with credit cards, which can trap borrowers under debt that snowballs every month. For lenders too, these loans offer a higher rate of return than what they can earn on savings accounts. Interest is important, say small lenders.
It is that goal—getting capital to people who need it at reasonable rates—that creates a strong sense of purpose and community in social lending. The sites promote personal ties between lenders and borrowers. And with the global reach of the Internet, borrowers no longer need to know someone with money to secure a loan. By the same token, lenders often feel they’re helping a real person get through a bad patch or realize a dream.
Traditional bankers have a hard time seeing it that way. “They’re dumbfounded,” says George Hofheimer, chief research officer for the Filene Research Institute, a Wisconsin firm that studies consumer finance. “Why would anyone lend money to strangers?” The banking establishment, after all, considers itself expert at evaluating the risks involved in lending money. Social lenders concede that point. Lending is risky, and peer-to-peer sites often use the same tools—credit reports, income verification—to judge how stable a borrower is.
But banks also have a vested interest in remaining the middleman, and they’ve never been quick to adapt to change. Industry observers point to the success of the online bank ING Direct, which caught brick-and-mortar banks unprepared, and say peer-to-peer lenders may have a similar effect.
A lot of people are busy trying to figure out how to make banks better. There is anger about what has gone on and puzzlement about the apparent inability of anyone to start doing something about it. [W]e seem to be frozen in a technical discussion of bank separation, capital adequacy, product authorisation, remuneration and incentives, or taxation. All worthwhile subjects in their way, but guaranteed to keep the sans-culottes at home.
So let’s ask another question. Why do we need banks – what are they for?
Loosely speaking, banks [through the Federal Reserve system] make money. Banks are not the only entities that do this, but they are the ones whose purpose it is to do this.
The other thing that banks (but again, not only banks) do, is to record and execute monetary transactions. In return for transaction fees, they hold and manipulate the data relating to people’s accounts with them. We are all either debtors or creditors of banks and we need to have accounts at banks because the trust system that banks represent is the required medium for nearly all financial transactions. When I transfer a sum of money to you, I simply instruct my bank to initiate a sequence of entries in its books and those of your bank.
In 1976 F.A. Hayek published a short book called Denationalisation of Money. It can be downloaded free from the link. Hayek conceived the essay as a response to the endemic debasement of currency by states addicted to inflation. He argued that legal tender laws should be abolished and that private institutions should be allowed to issue currencies in their own name.
Hayek understood that technology existed or would soon exist to price and complete even small everyday transactions real-time in several currencies at once and he expected that data on bank capital and money issuance could be gathered and disseminated without trouble.
But back in 1976 there was no alternative technical model of how monetary transactions might be carried out, and so whilst Hayek foresaw a world without central banks, it was impossible to conceive of one without banks. Nevertheless, it’s an elegant and in some ways compelling idea that addresses the problem of monetary discipline where states or central banks may be unwilling or unable to exercise control and private credit creators have every incentive to issue as much of this publicly guaranteed money as they can.
Which brings us to Bitcoin. Launched a couple of years ago and still in its infancy, it calls itself a peer-to-peer virtual currency. This means that instead of a bank, the collective network of users maintains a complete encrypted record of bitcoin (“BTC”) transactions and how many BTC each user has. Payments involve a public-private key exchange so that only valid identities can participate and each BTC can only be transmitted once. Because both parties have the complete data set, no external trust system is required. It’s a mechanism that removes the need for us to transact through banks.
At a macro level, the total number of BTCs in issue will approach a known fixed limit at a geometrically reducing rate (as in Zeno’s paradox, never quite reaching it) and expansion of the money supply takes place through the collective computation of the network. The advantages are claimed to be resilience, safety, absence of transaction costs, decentralisation, international acceptance, and no debasement. Because no physical currency is involved, arbitrarily small decimal units of BTC are possible. If convenient, BTC units could be subdivided or consolidated merely by a network-agreed software change. The monetary authority is therefore the network of users and their machines, which once it has reached a reasonable size becomes hard for even a super-computer user to dominate.
Even if we no longer need banks to store and handle our money, the BTC system, like any other currency, allows credit creation through fractional reserve banking. The BTC money supply could therefore exceed the number of BTCs in issue. However, without a BTC central bank, the imprudent lender may well go bust. It will be interesting to see how regulators deal with mainstream banks that acquire significant assets and liabilities in BTC. They might outlaw the BTC operations of regulated entities, but could they really close down an unregulated global user network?
It remains to be seen whether this is an advance of democratic self-determination. At this stage I would be optimistic, especially if Bitcoin’s proof-of-concept encourages others to develop distinct, communicating architectures that would create not just a digital currency but a digital currency exchange. There are some fascinating possibilities here:
  1. We may soon not need banks to carry out monetary transactions or keep our money. The benefit in terms of near-zero transaction costs, nearly immediate confirmation of payment (are you still waiting 4 days for your cheque?), reduced credit risk, security and resilience would be immense.
  2. Credit creation becomes an activity not linked to the transaction-handling franchise. It is also no longer underwritten by taxpayers. Inflationary behaviour requires public consent – not the taxpayer or voter public but the public that uses the particular currency.
  3. Because all transactions are peer-to-peer, people can switch their currency holdings at will and costlessly. How much people trade, if at all, depends only their beliefs about the riskiness of the currencies on offer.
  4. If peer-to-peer currency becomes mainstream, governments will have to decide whether to accept it and put the banks out of business, or refuse it and drive it underground. Either way, the relation of state and citizen in economic management is likely to be radically changed.
[Subsequently, serious allegations have been raised about the reliability and stability of Bitcoin. The question of whether or not Bitcoin is a good system is beyond the scope of this post.]
Venture capitalist Michael Eisenberg wrote in 2009:
Why do we need banks at all? If it sounds crazy – a world without banks – it is not.
We have become so used to storing money in banks and talking to our banks that we have forgotten what they do. Simply put, banks borrow money from you, and lend it out to borrowers at a higher rate than they pay you in interest. That is it: Banks are lenders. They provide credit. Everything else is window dressing.
You think banks provide safety? Wrong. That is the government and FDIC…. So why do you go to a bank? Because your brain has been trained to believe that you can trust them. [WB: Is that why banks have such big, solid architecture ... to look solid and trustworthy?] Their brand means safety to you. You assume that their risk management is better than yours, and therefore will protect your money and enhance its value.
What if that assumption is wrong? What if we cannot trust banks to protect and enhance our assets? We would be left with one function for banks: lending money or providing credit. If we could replace that credit function, or if we believed that our own risk management was better than the bank’s, then we could do without banks (someone else will give you that free mousepad).
Technology and the internet is going to provide this.
Sound farfetched? It is not. In fact, the financial world has been evolving in this direction for a while. We just chose not to pay attention.
Today, you can open an E*Trade account and do all your brokerage online for less cost than going through a bank. You can transfer money using Paypal. You can trade currencies through endless online options from EasyForex and SaxoBank for experts to eToro for novices. Think you need advice on investments or consumption patterns and fees? Forget your banker and try Seeking Alpha or (full disclosure: Benchmarkcompanies).
Which brings us back to lending. There are numerous efforts around P2P lending from Zopa to Prosper (Benchmark company). There are other nascent efforts around commercial lending (which anyway the banks are not doing now). Essentially, startups can use the web to provide risk management tools and investment opportunities that disintermediate banks and thereby make credit available to borrowers.
One of the things that got banks in trouble with mortgages was that they were divorced from their borrowers. The FDIC has a long procedure around Know Your Customer regulations, but banks do not really know them or their customers’ creditworthiness. They were buying sliced and diced mortgage paper at a distance (which is why some community banks are in better shape – they really knew their customers).
Think ahead, and you can imagine a world where there are local social community lending tools that enable person to person or company to company lending where you can really know the borrower. Banks use technology for risk management and asset allocation. Why can’t we put those tools in consumers’ or business’ hands? Are banks really experts? Are they bigger experts than crowd-sourced wisdom on creditworthiness or risk management?
Here is the kicker: one of the other roles banks play is they intermediate between the government (Treasury) and consumers and businesses to keep liquidity flowing in a risk-managed way. In the age of the internet, why can’t consumers buy currencies directly from governments/central bank or currency trading platforms (answer: they already can) and access that liquidity directly? Businesses could as well. It is just a technology question. As always in creative destruction, it will happen from the bottom. Clunky tools like P2P lending will grow up and become full-fledged lending platforms with appropriate risk management that might disintermediate obsolete banks entirely.
[T]he banks have simply become a filter that robs consumers of 90% of their money.
And Reuters argues that prepaid cards can replace checking accounts:
Here’s a little bit of personal finance heresy: Maybe you don’t need a checking account at all.
“For basic monthly financial needs, there’s no difference between a checking account and a reloadable prepaid card,” said Michael Flores, the author of a study released Tuesday by the Network Branded Prepaid Card Association (NBPCA). “We see it as a financial products lifecycle. People in their 20s mainly need a transaction account.” Flores is president of Bretton Woods, Inc., the consulting company that performed the study. He said the average prepaid card holder is 27 years old.
Prepaid cards are reloadable cards similar to debit cards. They may be offered through banks or through independent companies. They are growing in popularity as many government benefits are being paid via prepaid card.
If we cut out the giant banks as financial middleman, we might have a much more efficient economy, pay less in interest, fees and penalties, and restore a functioning political system and the rule of law.
Posted in Business / Economics | Leave a comment

Do We Need Politicians, Or Can We Cut Out the Middleman?

American Politicians Are Bought and Paid For

Virtually all independent economists and financial experts agree that the economy cannot stabilize or recover unless the giant, insolvent banks are broken up (and here and here). And the very size of the big banks is also warping our entire political system.
Politicians are wholly bought and paid for. As famed trend forecaster Gerald Celente writes in the current Trends Journal:
Politics today is little more than legalized prostitution. While a streetwalker gets busted for selling her body to a john, politicians get rewarded with campaign contributions for selling their souls to a corporation or lobbyist. With all of the whoring going on – the money exchanged and the pleasures lavished – the only
one actually getting screwed was John Q. Public.
But the chairman of the Department of Economics at George Mason University (Donald J. Boudreaux) says that calling politicians prostitutes is inaccurate – because it is being too nice. Specifically, Boudreaux says that it is more correct to call politicians “pimps”, since they are pimping out the American people to the financial giants.
So the state of banking and politics in America is grim, indeed. But do we really even need banks or politicians? Or can we cut out the middle man?
This post looks at whether we can use Direct Democracy to cut out the corrupt political middleman. In a separate essay, we look at whether we can use alternative financial arrangements to cut out the big banks as financial middleman.

Do We Need Politicians … Or Can We Cut Out the Corrupt Middleman?

Gerald Celente writes in this month’s Trends Journal:
For some years we’ve been seeing the promising stirrings of a global Renaissance;
a “new order” that would reject the gross materialism, excessive consumerism and
glorified militarism that has dominated contemporary western societies. But each initiative undertaken to retrofit and change the failing system has had its momentum blocked or sabotaged by the entrenched agents of “no change.”
Therefore, I’ve come to the conclusion that the only solution is to take that control
from the handful of “them” – the power possessors and power brokers – and put the
power into the hands of the people. But how?
I propose … of Direct Democracy – a potentially globe-changing movement that would replace today’s “representative democracy.” Positive change will not and cannot occur until power is taken away from the power obsessed.
While, in 2011, no one would dream of reinstituting the divine right of kings, what
is passed off today as “Democracy” is little more than a structure to clandestinely
support an ersatz nobility that perpetuates that very divine right practice.
The Direct Democracy solution I propose will not only transfer power to the
public (for better or for worse!), it will make “we the people” fully responsible for
creating the future. The choice is stark. Either we take action to create our destiny, or
others will continue to create it for us … and judging by past performance, we’re not
going to like what they create.
Regardless of who is elected – Republican or Democrat – the only solution I can see at this time that could save America (and be applied worldwide) is to take the power out of the hands of politicians and put it into the hands of the people.
In Switzerland, where this is practiced, it is called “Direct Democracy.” The people vote on major issues that affect them locally and globally, and the elected officials (whether they agree or not) perform their duties as “public servants,” carrying out the will of the people.
The US and other nations that call themselves “democratic” have “representative democracy.” In theory, elected officials pledged to carry out (represent) the will of the people. But, in practice, at least in modern memory, most elected officials carry out the will of special interests whose “campaign contributions” (a.k.a. bribes and payoffs) assure their subservience. While most everybody knows this, it’s both tolerated and
accepted as political business as usual.
Given today’s dire socioeconomic and geopolitical conditions and our forecast for them to dramatically deteriorate, I believe that changing from a faux-representative democracy to Direct Democracy would be a giant step in the right direction. If the Swiss can do it successfully, why can’t anyone else?
WHERE TO START Understanding the tremendous power that social networking
played in galvanizing the revolutions of the “Arab Spring” and the uprisings and protests raging through Europe, I propose using the same model to bring about a Direct Democracy revolution.
It should never be forgotten that no law is immutable. Laws are made only to be superseded by new laws. No clearer example can be given than the wholesale raping of the Constitution by the Supreme Court and successive presidents. What better time to write a new one? If the Founding Fathers could pull it off with horses, sheer will and quill pens, surely 21st century revolutionaries can make Direct Democracy a reality with the strokes of a keyboard. Not only can the Internet serve as the galvanizing force
to bring about Direct Democracy, it can also be used as the 21st century ballot box.
“Voting online could be subject to hacking and fraud,” the entrenched parties will argue. But casting a vote online is no more susceptible to “irregularities” than casting a vote at the polling place … be it stuffing the ballot boxes or rigging the voting machines.
In fact, voting online, with full transparency, would prove more secure than any polling place run by party operatives. I say, “If you can bank online, buy online, gamble on line, you can vote online!” Going to vote should be easier than going
to the ATM. And if you don’t have your own computer, there’s always the polling place.
It is due time Thomas Jefferson’s vision that “… in due time the voice of the people will
be heard and their latent wisdom will prevail,” prevails.
Publisher’s Note: “Representative Democracy,” the form of government we adhere to in the West, is no more than a cruel sham, a bone thrown to the proles following the overthrow of the aristocracies of the 18th, 19th and early 20th centuries. The restive public was gulled into believing that, by voting for members of political parties pledged to represent their interests, their voices would be heard.
While attractive in principle, in practice, political parties come to represent the same very rich and very powerful interests that have ruled throughout history. Only the names and ranks have changed. No longer called Kings, Queens, Czars, Dukes and Barons, the new aristocracy is called the “too big to fail.”
Thinking people everywhere are recognizing that Direct Democracy can provide a blueprint for revolution in the New Millennium. Non-violent, intellectually and philosophically sound, emotionally empowering, and potentially inexorable … the greatest obstacle to Direct Democracy is to do nothing.
Celente also includes in his latest newsletter an article on direct democracy from Thomas H. Naylor. Naylor is Professor Emeritus of Economics at Duke University. For thirty years, he taught economics, management science, and computer science at Duke. As an international management consultant specializing in strategic management, Dr. Naylor has advised major corporations and governments in over thirty countries.
Naylor writes:
Taking note of the unsustainable, unfixable, gridlock nature of the US government and its inability to fix the American economy, Gerald Celente has proposed that the United States turn to Swiss-style Direct Democracy as an alternative way to resolve such divisive issues as the wars in Afghanistan and Iraq, the magnitude of the government’s budget deficit, how to finance health care, the size of the defense budget, and national immigration policy. He envisions this being carried out on the Internet.
Over the past 700 or so years Switzerland has developed a unique social and political structure, with a strong emphasis on federalism and Direct Democracy….
Switzerland has a coalition government with a rotating presidency, in which the president serves for only one year. Many Swiss do not know who of the seven Federal Councillors in the government is the president at any given time, since he or she is first among equals. In Switzerland a petition signed by 100,000 voters can force a nationwide vote on a proposed constitutional change and the signatures of only 50,000 voters can force a national referendum on any federal law passed by Parliament.
Among the high profile issues that have been resolved by Swiss national referendums
are women’s voting rights, abortion rights, creation of a new canton, abolition of the army, and Swiss membership in the League of Nations, United Nations, World Bank, IMF, and the European Union.
Most political scientists agree that the Swiss have taken the concept of democracy to levels heretofore unattainable any place else in the world. In his excellent book Direct Democracy in Switzerland (Transaction Publishers, 2002), Gregory Fossedal describes Switzerland as “a Direct Democracy, in which, to an extent, the people pass their own laws, judge the constitutionality of statutes, and even have written, in effect, their own constitution.” That’s a lot!
All of this is in stark contrast to the United States in which our government is owned, operated, and controlled by Wall Street, Corporate America, the Pentagon, and domestic and foreign lobbies. Whereas the primary role of Swiss Direct Democracy is to protect the Swiss people from the Swiss government, the US government is more concerned with protecting its powerful clients from the will of the American people. In Switzerland the people own their government. In the
United States the government owns us.
[Given how much larger the U.S. is than Switzerland, and our different politicial system, it would be challenging to institute Direct Democracy in the U.S.]
But the alternative is a nation whose government has lost its moral authority and is tightly controlled by a self-serving military/industrial/congressional complex accountable only to itself – a nation that has become unsustainable economically, militarily, socially, environmentally, and politically. The United States is so large that it may no longer be governable and has possibly become unfixable.
If there is a way out of our nation’s death spiral, Direct Democracy just might be one of our last remaining viable options. We could do a lot worse than emulate the Swiss.
If American politicians have become so corrupt that they are beyond redemption, maybe we should use Direct Democracy to cut out the middleman.
Posted in Politics / World News | 1 Comment