Stiglitz: Bank Plan Destined to Fail, Doomed By White House/Wall Street Ties

Big name economists continue their attacks on the Obama bank rescue programs. Yesterday Willem Buiter, one of Europe’s most highly respected macroeconomists, continued his salvos, contending that the funding was woefully inadequate to recapitalize or otherwise prop up financial firms. The longer the US delays winding up sick banks, the more time wasted and good money thrown after bad.

Nobel prize winner Joseph Sitglitz issued even blunter criticism today (and it’s hard to be more caustic than Buiter), accusing the Administration of wanting to aid industry incumbents rather than fix the system.

The worst is that the dim of criticism has been rising, yet Team Obama seems insistent on sticking with Plan A. At the rate they are going, they will succeed in proving the current system is beyond repair, and have spent enough firepower so as to have closed off other options.

From Bloomberg:

The Obama administration’s plan to fix the U.S. banking system is destined to fail…“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said….

“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said….

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”…

He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”…

The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said.

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long run solution. It’s a solution that says let’s kick the can down the road a little bit.”

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

I give it six months before it becomes undeniable that the current system is hopelessly broken.

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  1. mmckinl

    “I give it six months before it becomes undeniable that the current system is hopelessly broken.”

    Yves … ever the optimist … : )

  2. landofopportunitv

    From a 2009 book co-authored by Clayton Christensen, a Harvard Business School professor who originated the canonical Model of Disruptive Innovation:

    “Regulations ultimately change in reaction to the innovators’ success in
    those markets.”

    In the absence of evidence that refutes the above, then, (some) efforts to
    change how banks are regulated should center on helping banking entrepreneurs.

    One way NC can help: urge President Obama and Congress to establish and fund a venture capital (VC) firm that will invest in innovative banks (e.g., start-ups).

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    solely by the CIA.

    Lots of related details are available at


  3. Bennett

    Well, we’ll see what happens. Last time I checked Roubini and DeLong and Thoma didn’t think this was such a guaranteed disaster.

    And Yves, maybe that 6 months comes…and politically impossible measures now become possible.

    – J. Cipollina

  4. Yves Smith

    J. Cipollina,

    I would discount DeLong, he has been consistently loyal to Summers and would not cross what he said. I do not know Thoma’s record of economic calls, but he says he is an optimist. Roubini I would normally take seriously, but he is now disagreeing with Meredith Whitney on the outllook for banks, and I’ve seen her work. It’s first rate. And one of her big messages in the change in credit card rules will lead banks to clamp down even further on consumers, which will result in further spending cuts. And then we have the commercial real estate losses starting to hit, and Leon Black (who has no reason to scare monger here) forecasts them at $2 trillion. And that isn’t factored into the stress tests, trust me.

    So tell me why we should be optimistic here?

  5. Yves Smith

    Also, for the record, my forecast was that it would take six months to realize the financial system was hopelessly broken, meaning we need root and branch reform, not band aids plus tons of liquidity.

  6. kackermann

    What’s needed is to think truly outside the box.

    Texas is making secessionist noises, and I think there may be a fit here.

    The bank’s bad assets and low-quality loans could be transfered to a subsidiary in Texas, along with our federal debt, and then a national referendum on Texas succession could be held.

    I think it has a sexy appeal to it.

    It also sends a clear warning to the world: we messed with Texas, so think what we will do you you. Keep it up, and just watch what happens to Utah.

  7. John Liberty

    I don’t understand why, if the banks are reporting large profits(PROFITS!) and banks are able to pay back TARP while maintaing capital ratios, there is ‘not enough money to recapitalize the banking system.’ Does it need to be recapitalized?

  8. Jim

    So the policy is to shield all the bondholders (except auto company bondholders) because the Administration believes we can’t take the unwinding/collapse of the health and life insurance industries. Also, by sheer amazing coincidence shielding many VIPs from taking bond losses. Wow what luck, eh?

    Buiter says we don’t have enough money. Stiglitz says it’s a recipie for a Japanese scenario (it is, and is meant to be). Yves says we’ll know in six months that this thing is broken (it is, and the Administration should level with the public, but that won’t necessarily lead to policy change, just honesty about the ‘Japan Forever’ aspect).

    Of the above, Buiter’s is the strongest criticism. The liquidity injections die off and the zombie banks fail anyway, taking the insurance sector with them.

    I have already asked ‘so what?’ a few times but have not seen this scenario played out. Somebody has to pay off the bonds in some form. Even as losses to insurers, it just means premium hikes or reneging on policy claims, right? I mean it doesn’t just go ‘poof’…

    The more attractive policy appears to be to start to sort out the bondholders who can afford the losses from those who cannot. Isolate the ultra-rich, Chinese, Arabs etc. and give them the haircut. Or else use the tax code to reimburse ordinary Americans after an across-the-board haircut.

    Isn’t it time we face up to the real issue which is preserving social decency and equity through progressive bond haircuts?

    –Jim in MN

  9. kpl

    “I give it six months before it becomes undeniable that the current system is hopelessly broken”

    Given that Fed has done a GOOD(?) JOB of prolonging this from Sep 2007 i.e. nearly for 18 months, 6 months seem to be a small period .. Fed might be able to come up with some more ideas which would ensure it is more long drawn out.

  10. Richard Kline

    To get real change at the top of a political system, said system has to really fail. Not just have a crisis, or a muddle through, but fail. It would be easier living through a muddle-through; indeed, we could have had an effective top-down reform in Autumn 07, even Autumn 08. But the same folks who created This Problem are fully in control of the problem response and their actions thus only aggravate their past mistakes using future obligations against the money of others. By Autumn 09, the top _will have_ failed, and the potential for top down reform without political changes diminishes strikingly in my view. For the good of the country, it would be a blessing if Bo Prez succeeded and we got effective reform. He has committed himself to failure, and I don't personally give a damn if he is branded as a failure by Autumn. It his failure is what it takes to get real change, than, as the man said, bring it on.

    Stiglitz has credibility. Buiter has credibility. Krugman has some credibility. Summers, Geithner, Bill Gross, Lloyd Blankfein, Barack Obama: NO CREDIBILITY! So the more and the longer those with credibility chip away at the institutional edifices occupied by hollow men, the sooner those institutions are evident in their void of competence, and hence of respect. It's the long, slow, pull of a two-man crosscut on a 200 foot redwood; finally, it falls. If there's any good news in all this it's that Congress seems to be slowly edging away from the policy program of Bo Prez. As Krugman mentioned yesterday, the constantly shifting narratives of the present Administration speaks to their complete inability to find one that gets their lead balloon in the air.

    And kackermann, oh please, don't go on with that nonsense. In the S & L bust-out, Texas led the way and was totally devastated. As a sovereign state, they would have done Argentina proud. How were they saved? A massive injection of Federal money and workout resolution, paid for by the rest of the country. To be perfectly blunt, those swell-headed Texans owe _the rest of us in this country_ some effort and a few dimes on the rebuild of the rest of the USA this time around. Secession is tinfoil-hat-talk by rubes, that's the kindest thing I can say for it.

  11. marsha donner

    I’ve asked this before on other topics..always towards the end…
    if the banks are showing a profit and they all will pass the stress test..why are they continuing to say they need gov’ money..1-2 trillion most often range??
    and, if the new improved accounting allows them to declare they are holding ‘legacy assets’ to maturity and hence great books now and into the future..why the need for PPIP at taxpayer risk.
    seems like double speak to me and no media heads asking this simple question or gov’t body wondering same aloud.
    what give..which is true and when will it come to open discussion?

    thanks, Michael

  12. Marlowe

    Reported profits were easy on AIG payouts and relaxed FASB rules. I commend Goldman in particular for being modest in their fraudulent, unaudited 1Q result. You know, what with their duty and everything.

  13. Benedict@Large

    I believe Sheila Bair’s specific term was “no net loss”, which is not the same as “no risk”. The word “net” is the key. Net compared to exactly what? Bair is clearly netting the program against a full nationalization.

    What is really surprizing then is that she is ONLY saying no loss. What happened to all those assets that were actually going to pay off? If there is only “no net loss” while there are individual profitable asset purchases, where is all that money disappearing to?

  14. M.G.

    Buy time and sell denial, that’s the usual strategy of ill-advised politicians. You can align all credentials you want but simple proposals never get enough attention. And the denial phase continues hoping that self-fulfilling prophecies of more optimist financial markets lead the economies to recovery and fixing of the system.

  15. Purple

    “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” Taken further – there is general problem with the Ivy-League oriented caste system in leadership. It’s ridiculous in its structure and thoroughly inbred in its thinking.

  16. MutantCapitalism

    Wall Street may be broken but it is still blowing up Main Street.
    Anyone see RealtyTrac foreclosure report for 1st quarter 2009?
    803,489 properties received foreclosure filings in the first quarter of 2009, according to this report, released today. If foreclosures continue at current rate that would be:
    3,213,956 foreclosures by year end
    8,928 per day, 372 an hour or 6+ foreclosures every single minute.
    Far too many of these foreclosures are due to mortgage servicing fraud perpetuated by subsidiary or contract servicers of Wall St. firms. Well, they have to manufacture these bogus defaults so credit default swaps pay out. It’s that simple.
    Washington may not want to wise up because they serve the money masters but Main Street has received a very painful and ugly lesson in predatory finance and will not be ignored any longer.

  17. Brick

    If the current bailouts will not work and the jury is out on whether earnings can outpace losses at banks then it must be fairly obvious that the Treasury will come up with a new bailout scheme. Since they cannot openly admit that any bailout has failed it must target an area of finance currently untouched by the treasury. Jamie Dimon’s comment in the conference call that banks make up less than 25 percent of financial firms comes to mind and the fact that the US treasury tends to follow European tried strategies perhaps gives us a clue.
    Next on the list will be trade credit insurance I believe which is being withdrawn and curtailed as under capitalized insurers reduce their risk. The solution rather than recapitalising the insurer or sharing the costs of insurance with the insurers is most likely to be to provide a last resort insurance along the French model. This would be very good news for the small supplier exposed to a big customer, however for big suppliers to small customers it removes a way of judging whether a small customer is solvent and you might find small customers having all their credit pulled as a result. There again we need more too big to fail firms don’t we.
    On the issue of conflicts of interest zero hedge’s look at TALF version 3 and how Christopher Hoeffel a key proponent of the new TALF ought to benefit out of it makes interesting reading.
    Perhaps we should be looking at Steve Rattner and the possibilities that he might be involved in pension fund kickbacks. Still there must be some without their finger in the pie if the outgoing FHLB chairman is anything to go by. In the mean time we wait for decision makers to come to the right conclusion that market prices whether for assets or insurance is probably right.

  18. Minh

    Now is mid April, add 6 month to it, that’s mid October.
    Til that time the US will have U3 at 11% and the money given to the banks are still parked in newly printed USTs for 0,01% !

    The real economy is sick and they’re playing deck chairs. And you think that can last for 6 months ? I’d give it most till mid August 09, by then they must try something else.

    All that they’re doing is pumping the numbers and hoping that somebody somewhere would believe them. They know that we know it, but for the sake of the current elites who lost all of their multi-generational savings in this REpression, pretend that this may work. Really pathetic.

    That’s 4 months or till U3==10%

  19. einniv

    I could be wrong but I’m pretty sure mmckinl was being sarcastic. Saying that it would take 6 months was giving the current system too much credit.

  20. DownSouth

    If some of the trillions of dollars being lavished upon banks at near 0% interest were making its way down to households and businesses at likewise very low interest rates, then there might be some hope for a temporary recovery. However, that doesn’t seem to be happening. Instead, banks are raising credit card interest rates and fees. Mortgage rates have come down, but how easy is it to qualify for a new mortgage? Likewise, what has happened to loans for commercial real estate and businesses? Has more and easily obtainable money become available at lower interest rates?

    How have the bank bailouts bettered the situation for businesses and households, either through improving their balance sheets or improving their cash flow by lowering interest expense?

    None of the trillions are trickling down.

  21. sagar

    This is the biggest crisis all the people alive today have ever seen and also the extent of the rescue program is unprecedented.

    What is Team-Obama exactly doing ?
    Pump in massive amount of funds in these toxic assets and do it without having any accountability or transparency.
    1. The assests are really cheap at the moment
    2. Help their friends in wall-street who provide the money for running and winning elections

    How to make the plan work?
    People have lost the hope in the system … just add oil to the fire
    by getting all the leading economists and traders to bash the government programs and make people believe that the programs are unfair,unjustified and ineffective. In short term it will create even more negativity and maybe more bailout funds or some mini-bubbles or mini-rallies as we are experiencing right now !
    and very slowly and discretly these economists will start making statements which would approve these programs partially and one day one of the mini-rallies will form the next big rally and very slowly the US govt will offload everything bought during this period with a huge margin.
    The end result, NULL fiscal deficit and govt liabilities which has mounted for quite a few years because of the wars and indiscriminate spending …

    Why is US govt playing this game ?
    Was there any other option … other than insider TRADING and market manupulation at the macro-economic level !

    who gains and who losses?
    gainers: US treasury, wall street, central banks and offcourse these economists who are bashing these plans!

    loosers: China, India and all the third world countries, retail investors in equity,real estate the world over …

    why no one would complain: because the looses are already done, jobs are already lost and when things improve in a few months/yrs no one would complain

  22. Moopheus

    “Mortgage rates have come down, but how easy is it to qualify for a new mortgage?”

    If you have good credit, a downpayment, and qualify for a GSE conforming loan, you can get a loan. If you don’t have good credit or downpayment money, or want to buy a very expensive house, why should it be easy? Isn’t that part of what got us here in the first place?

  23. DocG

    “The complete self-destruction of our monetary and financial systems would be a lot like the process by which cancer is usually treated through chemotherapy. The power of the oligarchs who have ruled us, both covertly and overtly, for so many years will, like the cancer cells, be destroyed. As with chemotherapy, which attacks both malignant and healthy cells alike, a great many innocent people will also be damaged in the same process. But, as with an effective cancer treatment, what is good for the organism as a whole can be nourished back to health — but only after what is harmful has been completely eliminated.”

  24. marxbites

    Look what the Maestro said back when he was a member of Ayn Rand’s circle, apparently before he valued American freedom over crimnal fame and fortune.


    An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

    In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

    Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

    The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

    What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

    In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

    Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

    A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

    When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.

    When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

    A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

    But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.

    When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates.

    The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market — triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

    With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

    Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

    In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

    This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

  25. marxbites

    Oops – to rephrase………..

    Look what the Maestro said back when he was a member of Ayn Rand’s circle, apparently before he valued crimnal fame and fortune higher than American’s economic freedoms, w/o which there is NO freedom.

  26. VG Chicago

    “The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.”The hyperinflation that is about to kick in will likely make those mortgages worthless. I wonder what will the banks do then? Will they demand another bailout… in gold bars?

    Vinny GOLDberg

  27. marxbites

    Now that I've read a few more previous posts, I failed to scan any mention of Ron Paul, and Austrian school economists, having been right about fiat and its ability to enrich the very few at the expense of all others.

    For anyone wanting an excellent deprogramming of the money power's inculcations via their financial control over govt, media and academe's disinformers, may I suggest the Ludwig von Mises Institute in Auburn at

    They have 7 TB's published online, including a vast mp3 library of scholarly lectures that cover economics and REAL history based on the theory that politicians are no less suseptible to corruption that we, and we all know Acton's adage about power's tendencies.

    Here's some of my favorites, including some from Mises to jump off from. Rothbard's "Wallstreet…." below was a real eye opener for me, and Griffin's "Creature…." is first class too. I hope they enlighten you as much as I have benefitted.

    The Creature from Jelyll Island a Second Look at the Federal Reserve by Ed Griffin

    Still Don't Believe In The New World Order?


    Wall Street, Banks, and American Foreign Policy

    Big Business and the Rise of American Statism

    The Great Depression, World War II, and American Prosperity, Part I (video)

  28. Sandi Rubinspan

    This blog has now entered an exclusive domain, the twilight zone. Hurrah !

    I have never heard this kind of doomsday crap, google swill.

    Welcome to Walmart, Plantation America where everyone wears a red bandana to signify their allegiance.

  29. Valentine Michael Smith

    The bailout flogging will continue until financial morale improves!

    — Proposed T-shirt/bumpersticker inspired by this sentence:

    “While the national economy struggles under the weight of a massive bank bailout effort…”

    From here:

    “It Is Damn Well Time to Shake Off the Bank Lobby – Posted by Zach Carter, Media Consortium April 17, 2009

    “The banking lobby maintains a stranglehold on any realm of U.S. public policy it can loot for a profit.

    “While the national economy struggles under the weight of a massive bank bailout effort, the banking lobby’s ability to influence public policy is more problematic than ever. The too-big-to-fail bankers may be dependent on U.S. taxpayers for their survival, but corporate lobbyists still have members of Congress, the Treasury Department and the Federal Reserve asking the banks’ permission to bring the Big Finance behemoths under control. …”

    Then the “revolving door comes into discussion:

    “In Mother Jones, Daniel Schulman and Jonathan Stein detail the ease with which important congressional staff switch careers and move into the banking sector. In recent years, dozens of key staffers for powerful Senators have left the political arena to work for as lobbyists for the financial sector, and policy gurus from both sides of the aisle are jumping ship for lucrative careers as influence peddlers on Wall Street.

    “ ‘Financial firms seeking big bucks and favorable terms from Congress and the White House are deploying Capitol Hill aides turned lobbyists to win favorable treatment from the congressional lawmakers,’ Schulman and Stein write. Many lawmakers, including Senate Banking Committee Chairman Chris Dodd, D-Conn., are refusing to disclose whether they’ve had contact with former staff who now work for Wall Street. Small surprise, then, that so many of the recent bailout packages have allowed failed bank CEOs to stay in power and saved their shareholders from bad investments in inept, even predatory, companies. . . . “

    I just wish this were tin-foil-hat stuff. We’re getting vivisected, wide awake and squirming; difference is, the more befuddled public isn’t awake yet to what’s being done to it. I still get email from friends who think of Obama as Our Friend in the White House.

  30. marxbites

    Marsha, great questions. The whole govt is the leisure/jetsets profitable play ground. They've tried hard to become our soaps and Hollywood-like personas, they sure have the cosmetic surgeries to prove it – we cant have the choreographed behind closed doors C-Span performances with and bags or turkey necks can we?

    The bankers run it all with their 10:1 ages old kiting trick of the shylocks, by printing paper receipts in excess of deposits.

    People, the market, once kept individual banks in line by runs if they perceived any dodgyness, just we discern all other market transactions we make. We deal with those we trust, and those we dont suffer until we do.

    With a FED that also charges $2.20 p&i for every new fiat dollar created, the debt can NEVER be paid. Banks skim the interbank discount vig as special privilege profit. It has printed away 95%+ of the dollars buying power, they themselves as first users of fresh counterfeit at full value. Once infused into an economy the lumpen see higher prices – as expressed in more dollars worth less chasing the same amount of goods.

    The usurious, private, partially european banker owned FED, is the complicit govts unltd credit card, that they never make the min payment on for spending more than they can tax. Baby's first breath is met with a debt of $70K min that will continue compounding for 18 yrs before they really start earning anything to be taxed at what rate? Its so immoral and the people so blind. The money powers are little less than thugs helping themselves to the worlds resources and cinching the noose on freedom. And hey, when the worlds currencies in chorus, are as worthless as Weimar Reichmarks – guess who has ALL the gold?

    Read Greensapns essay above – he really wasn't so bad once – before becoming dazzeled by power & $$$.

    The links are very explanatory as to how we reached this melange of banker coreographed socialist corporate fascism and their parastic bureaucrats and merchants of death.

    Ike tried to warn us. But as usual new wars & financial panics are engineered to elicit our false flagged patriotism to keep our eyes off the ball all to enrich a very elite few.

    I myself find it extremely suspect as to why the oval office, the majority of presidential cabinets and an increasing populating in Congress, of Council on Foreign Relations members (they all swear they're not CARD carrying members of, really, – (shout outs to Michelle & BO!, McCain, Kerry, Biden, Emmanuel, Clintons, Reagan's cabinet, yadda yadda) all the way back to Wilson.

    These crooks robbed our people and national status – they owe no allegiance but the the gold they've relieved the world of – the central banking cabal.

    The IMF, WB, BIS are the heroin that makes robbing third worlders with debt they cant pay the resource gravy game power plays.

    Bottom line – its a bankster/wallstreet elite crony rippoff from Geithner, to Paulson to Bush and the whole beltway – you can see the gleam $$$ in their eyes like sugar plums – what they can do for us with our own, and future generations money today, once its skimmed and first pays the govt overhead first, that is a poor return for dwindling protections of rights and property.

    The irony is that the private bank cartel Jefferson and Jackson both faught as financial tyranny of the people, were the same bankers that indebted KGIII – just what the revolution sought to nip in the bud here. But for that louse Hamilton!

    See Robert Higgs Q&A at CSpans video library, suffer the fool callers, but listen to his logic about freedom vs the unenumerated power of todays state vs just 100 yrs ago when it ate much less and all boats rose but for banker caused panics towards foisting another central bank.

  31. marxbites

    Valentine – search for the piece about Rahm-bo’s 14 mo. $320K Clinton apptd stint at Fannie.

    See the links between these creeps at an involuntary “facebook” of power elites – no matter what ganster you look at there ALWAYS links to Rockefellers CFR – most of the talking heads we see are too.

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