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ISIS Report 12/12/11

“Shut Down Wall Street!”

The money and banking system that has brought the world’s economy to its knees should be allowed to collapse in favour of an alternative that serves people and planet Dr. Mae-Wan Ho

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Developed world teetering on the brink

Suddenly the whole of the developed world is teetering on the brink of financial collapse from mountains of public debt. The United States tops the list with national debt over $15 trillion - exceeding 100 % of the country’s Gross Domestic Product – and still growing [1]. European government debts totalled €9.3 trillion in 2010, or 75.7 % of the Eurozone GDP [2], and the very survival of the euro is in doubt [3].  Mervyn King, Governor of the Bank of England, said [4] the world is facing the worst financial crisis since at least the 1930s “if not ever”, after putting £75 billion of newly created money into the UK economy to stave off a new credit crisis and recession.

The Occupy movement

While austerity measures and cuts in public spending are making life even harder for ordinary people, many of whom have lost homes, businesses, and jobs, successive massive bailouts of financial institutions and banks have ensured their rapid return to profitability and big bonuses.

So when the Canadian activist group Adbusters occupied New York’s Wall Street financial district on 17 September 2011, it inspired the Occupy protest movement that spread like wild fire across the world (see Box 1). The protestors are against social and economic inequality, greed, corruption, and high unemployment, especially among the young.

Box 1

Occupy Wall Street (OWS) [5, 6]

OWS is an on-going series of demonstrations started by Canadian activist group Adbusters on 17 September 2011 in New York’s Wall Street financial district.  The protestors were against economic inequality, high unemployment, greed, corruption, and the undue influence of corporations, especially the financial services sector, on government. The protesters' slogan “We are the 99%” refer to the growing disparity between the wealthiest 1% and the rest of the population. OWS has rapidly grown into an international protest movement directed against economic and social inequality. By 9 October, Occupy protests had taken place or were going on in more than 95 cities across 82 countries, including Hong Kong in China, and London, Bristol, Birmingham, Glasgow and Edinburgh in the UK.  Within the US, over 600 communities had taken part.  

Unfortunately, few of our political leaders and policy-makers know how to respond to the protestors’ grievances, let alone how to deal with the financial crisis. They lurch from one emergency meeting to another, between injections of more electronically created money into the economy, through central banks buying financial assets from commercial banks and other private businesses, euphemistically referred to as “quantitative easing” [7].

Mending the broken system simply won’t do

Injecting more money into the corrupt and unaccountable financial institutions that have brought the world’s economy to its knees would not solve the problem, and is very likely to make matters worse, as a damning report indicates [8].

The 2008 financial crash led to prompt action from the US Treasury Department in a $700 billion bailout. But an audit ordered by US Congress documented Federal Reserve Commitments of $12.3 trillion in additional emergency funding, in the form of low or no interest loans and the purchase or guarantee of distressed securities. The total US bailout was $13 trillion. Similar government bailouts were handed over in Europe; UK’s support for the banks totalled £850 billion by December 2009, when the Royal Bank of Scotland was demanding another £1.5 billion in bonuses [9].

So too, in the US, Wall Street took the bailout money, reported record profits, and rewarded it­self with record bonuses [8]. On 26 April 2011, the Standard & Poor index of 500 corporations hit 1 347.24, the highest since 17 June 2008, just months before the financial meltdown. The massive Wall Street bailout that further enriched the very richest had beggared Main Street real economy and ordinary people; and for good measure, saddled the nation with a mountain of public debt.

As of May 2011 13.9 million Americans were registered unemployed and an additional 800 000 had given up looking for work. More than 656 000 were homeless in 2009; and home foreclosures continued. In May 2011, banks and lenders held 872 000 foreclosed homes and another million were in the foreclosure process. More than 50 million people in the US are food-insecure.

Wall Street is to blame

In the aftermath of the 2008 financial crash, Nobel Laureate economist Paul Krugman wrote in the New York Times [10]: “I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good.” 

‘Securitization’, the repackaging of loans to be sold on as assets, was singled out for attack.

“Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.”

Securitization amounted to little more than theft; it also increased the risk for banks, and in the process, made the economy more and more vulnerable. The failures of Bear Stearns, Lehman, all, were down to the fundamental failure of securitization, said Krugman.

David Korten, prominent critic of globalisation, best-selling author and currently new economy guru (see below) is in no doubt as to the cause of the financial collapse [8]. It is the “direct and inevitable consequence of the social engineering experiment conducted by Wall Street interests that allowed Wall Street financial institutions to consolidate their control of the creation and allocation of money beyond the reach of public accountability.” Instead of money funding investment to produce things of real value, it funds financial games designed solely to enrich Wall Street, with dire consequences.

Toxic money

I met David Korten in the early 2000s after we shared a platform at a conference and found ourselves sitting next to each other on an airplane heading home, and an intense discussion on money took place. I remember telling him how money created in the financial market that’s totally decoupled from real goods and services is just like toxic entropy created in an unhealthy living system [11, 12]. So it is an eye-opener to discover just how much toxic money has been created in the process of securitizing debt after the great deregulation of the financial market in the 1970s and 1980s.

Economists generally regard money as a neutral medium of exchange, a measure of worth, and a store of value. In ancient times, people bartered material objects and services directly. As commerce grew, certificates redeemable in gold or silver became popular. Nowadays, money is a number stored in a computer hard drive, and has value only because people accept it in exchange for goods and services of real value.

The problem starts precisely at the moment that money is created, as is now generally agreed among new economy experts on both sides of the Atlantic. While the central bank – Federal Reserve in the US and Bank of England in the UK - is ostensibly entrusted with the power to create money, the money so created - held in the banks as reserve and circulates in the economy as banknotes and coins - accounts for only a tiny fraction of the total money supply.

The far greater proportion of the money in circulation is electronic, and is created by the commercial banks practically without limit or control. And it is created when the bank makes a loan to an individual or a company in a new deposit account, as documented in a new report from UK’s New Economic Foundation [13]. In other words, the money is created out of debt that banks give to people or companies taking out a loan. You might think that banks take deposits from people with extra money to save, which is then loaned out to others, but banks don’t even have to wait for anyone to make a deposit. They can give a loan to whosoever and whenever they feel confident enough. As explained earlier, these debts are then securitized and sold on as ‘assets’, multiplying the debt and money generated. On average, just prior to the 2008 crash, banks in the UK had £1.25 in central bank money (reserve) for every £100 of customer’s money, and it is not atypical.

As Korten says of Wall Street: it has become very good at financial games and creative accounting to inflate its financial assets without having to produce anything of real value [8]. At the same time, it promotes public policies that depress wages to make money increasingly scarce for the people who produce real goods and services, many of whom are strug­gling to make ends meet, and easily lured into borrowing against their homes and credit cards, locking them into spiraling debts with hidden fees and usuri­ous interest rates. Wall Street institutions thus lionize a bigger and bigger share of the money in circulation that entitles them to an ever growing claim on society’s real goods, services, and material assets.

It is the toxic money created by and for Wall Street that poisons the real economy. This toxic money has a direct link to real world entropy in several respects. The process of creation involves exploiting people and the natural resources of our planet at unsustainable (entropic) rates. In addition, exploited people are themselves all too often forced into unsustainable exploitation of natural resources. And finally, the excess money fuels excessive, entropic consumption and wastes [11, 12], diametrically opposed to the circular economy of nature that we need to recover and reinstate (see [14] Food Futures Now: *Organic *Sustainable *Fossil Fuel Free, ISIS publication).   

It has not always been like this. A proven model that works for people is a system of community banks, mutual savings and loans, and credit unions put in place as the result of the Great Depression in the decade preceding World War II [8]; when banking laws strictly limited bank size, functions, and interest rates.

That system was dismantled starting in the 1970s with a Supreme Court decision allowing banks to solicit custom­ers across state lines and to charge whatever in­terest rates were allowed by the state in which the bank was physically located. The Depository Institutions Deregulation and Monetary Control Act of 1980 abolished caps on mortgage interest rates. The Alterna­tive Mortgage Transactions Parity Act of 1982 paved the way to adjustable rates, balloon payments, and interest-only loans that played a major role in the 2008 financial collapse.

Korten commented [8]: “The Wall Street-engineered system redesign shifted the focus of the money/banking/finance system from investment in real wealth cre­ation to a focus on using money to make money through unproductive speculation, arbitrage, usury, deception, and market manipulation. As community banks were bought up and consoli­dated into larger regional and national banks, banks began to transfer mortgage lending risks to investors in bond markets through mecha­nisms that eliminated the incentive for them to assure the creditworthiness of borrowers.”

Which New Economy?

The New Economy Working Group (NEWGroup), a coalition of civil society organisations focussed on the New Economy and co-chaired by Korten (see Box 2) are not sorry to see the current money and banking system collapse. Indeed, their clarion call is:  “Shut down Wall Street!”

I hasten to add that they are not rabid revolutionaries advocating a violent overthrow of the ruling regime. On the contrary, they see their role as pointing the way to a smooth yet radical social transition.

Box 2

New Economy Working Group (NEWGroup) & David Korten

The NEWGroup describes itself as [15] “a virtual policy think tank and communications resource for the growing number of civil society groups concerned with economic justice, environmental sustainability, and peace that are forming alliances and coalitions under a New Economy banner.” It is co-chaired by David Korten and John Cavanagh.

Korten is co-founder and chair of Yes! Magazine, founder and president of the Living Economies Forum, and founding board member of the Business Alliance for Local Living Economies (all partners of NEWGroup). He has MBA and Ph.D. degrees from Stanford Business School; served as a captain in the US Air Force, a Harvard Business School professor, a Ford Foundation project specialist, and Asia regional adviser on development management to US Agency for International Development. A prominent critic of globalisation and the dominant financial and banking system, his books include: When Corporations Rule the World (1995, 2001); The Great Turning: From Empire to Earth Community (2006), and Agenda for a New Economy: From Phantom Wealth to Real Wealth – A Declaration of Independence from Wall Street (2009, 2010).

NEWGroup’s report entitled, How to Liberate America from Wall Street Rule [8] should be read by all our political leaders. It is a step by step guide on how to dismantle the current money and banking system –Wall Street- accountable to no one except the very rich and powerful running the system, and replace it with one that serves the real economy – Main Street – and is accountable to local communities and responsive to their needs.           

A six part agenda

The action plan comes in a simple 6 part agenda [8] for the US that is directly transferable to Europe and elsewhere.

1. Reverse banking consolidation and build a national system of community-based, community-accountable institutions. Break up the megabanks and implement tax and regulatory policies that favour community-based financial institutions, in particular, cooperatives or ownership by non-profit organisations devoted to building community wealth

2. Create a State Partnership Bank in each of the 50 states to serve as a depository for state financial assets and partners with community development financial institutions on loans to local homes, industry, and commerce.

3. Restructure the US Federal Reserve to limit its responsibility to managing the money supply, subject to federal oversight and public accountability and require all newly created money to be applied to funding public infrastructure.

4. Create a Federal Recovery and Reconstruction Bank to finance critical green infrastructure projects designated by Congress. It would be funded with the money that the Federal Reserve creates when it determines a need to expand the money supply; instead of introducing it through Wall Street Banks, as currently done.

5. Rewrite international trade and investment rules to secure national ownership, self-reliance and self-determination (in a reversal of economic globalisation). Bring interna­tional rules into alignment with the foundational assumptions of trade theory that the ownership of productive assets belongs to citizens of the country in which they are located and that trade between nations is balanced. Hold corporations operating in multiple countries accountable for compliance with the laws of each country of operation.

6. Implement appropriate regulatory and fiscal measures to secure the integrity of financial markets and the money/banking system. Such measures properly favour productive investment and render financial speculation and other unproductive financial games illegal and unprofitable. (This would include the Tobin tax on financial transactions for example, that is part of the EU treaty agreed to deal with Eurozone crisis on 9 December 2011, but vetoed by UK [16].)