By now, most have seen the footage of students at UC Davis being pepper-sprayed. When this pepper-spray incident happened I was at a cafe a few blocks away. I had contemplated going to an Occupy protest somewhere that day, but I am almost phobic about crowds and demonstrations. I felt somewhat guilty because I know more than most about the details of the criminality of the gangsters ruling Wall Street. Those gangsters have the ear of the White House in our time. Our president is no economist, nor is he a banker. In the best interpretation of events, our president’s actions show him to be a willing dupe of men more cunning than himself, men with utter disregard for the entire globe if their positions are threatened.
As best I can gather from news and sources inside UC, Chancellor Katehi decided that students protesting because they wanted to be able to get an education, should be cleared away. But before clearing them, the police apparently decided the peaceful protesters should be treated to gratuitous sadism. After all, what could be more intolerable at a modern university than wanting to be able to afford an education? Such ideas are intolerable in 21st Century America! They must be put down, and the miscreants must be made to understand their place – at the bottom – under the boot. Quite literally, these students were put under the boot.
To be fair, I should say that not all the police appeared to be happy about what was going on. But not one stepped forward to say no. There was silence there at the back of the uncomfortable blue mob. Dissension? Maybe, it appears so from body language. No doubt there is argument behind closed doors. No doubt there is regret among some. I have known some of the members of the UC Davis PD and liked them. But paramilitary discipline kept them in line, obeying orders, as they are trained and paid to do.
The incident bespeaks feeble-mindedness at the top of UC Davis. But – let us not single out Chancellor Katehi for that. This feeble-mindedness infects us all. It infects every silent chancellor at every university on the globe. It infects most citizens going about their workdays. Most of us are sitting quietly, hunkered down with our lily-livered consciences, seeing the global financial tsunami suck the ocean out to sea. If we wonder at all, we sit thinking, “Let it not be me. Let it be the other guy who suffers.” Chancellor Katehi is, like every university Chancellor, paddling as hard as she can to keep her university’s budget afloat. She is “playing by the rules” that she knows. A few raise mild voices against cuts to NIH and NSF, knowing that today, in a university like UC Davis, their share of grant money is saving them.
But feeble-minded it is, lacking in the courage needed in this time when gangsters rule the earth with quiet words spoken in the Oval Office. It is feeble-minded because the whole thing is created by a lie. The lie is told daily, and almost every politician on earth has taken up the word. Cut. The justifying lie is told each day, “We don’t have the money.” I will explain exactly why that is a lie, but it isn’t a sound bite one-liner. Yes, it is bigger than “Just say no taxes.”
Let us review the situation briefly. A bubble was created by bankers who colluded with AIG under the auspices of an SEC gutted during the Bush years. They took out insurance policies (CDS) on loans that they knew were no good. We know this because when the assessment reports started coming back to the banks saying the loans were high risk, the bankers stopped getting assessments. Yes, they knew, and they did not inform. At the time, they were described as “Watermelons sold as they fell from a great height before they hit the sidewalk.”
In the end, when it collapsed, there was not enough money in real banking reserves to service routine commercial money transfers. The system was froze solid. So, the government stepped in with TARP. TARP was $700 billion allocated to pay up on the fraud that had taken place. The president announced that he had been advised that this money should best go to banks so that the banking multiplier could do its work. (Remember this. I will come back to it later.)
In years following the banks committed massive, systematized felony forgery. The financial system had sold, re-sold, packaged and re-packaged loans so much that the documents were nowhere to be found. Unable to foreclose without them, the banks lied, again. First, they lied by willfully telling buyers of their bundles of loans that they were, indeed, good. Then they simply manufactured the documents.
The current administration calmed bankers fears. This administration constructed a deal in which, for a relative pittance paid to states, the bankers would be absolved. States are in trouble now, with the economy down because of the global financial crisis the bankers caused. Starving for funds, most states have signed on.
Thus it is that in every case, when the gangster is big and runs a bank, he can do as he likes. But on the other end, there are no rights and no recourse. Individuals are held to the letter. Even loans that are current have been foreclosed on, taking advantage of language saying the home must be a primary residence. Those foreclosures are purely engaged by banks to turn a quick profit. People, this is literally banana republic law. That is how the law works in broken nations. The USA has arrived there. We need to pull our heads out of the sand and realize it. This is what it looks like.
However, there is more to consider that adds to the pile. You see, the New York Times reported on July 24, 2011 that the total bank bailout payments were now $2.5 trillion. And the USA has made commitments for $12.2 trillion. (Subtract from that roughly $10 billion in dividends and fees collected. Such a deal!) So, we have quietly, with barely a word breathed about it, given more to the banks than our yearly national budget. The rate works out to $1 trillion per year given away. And yet, banks aren’t lending. They have too much on deposit. Why is that? Because they don’t have enough creditworthy borrowers.
Now I must digress for a short time into explaining the banking multiplier, which some may already understand. A simple example with a 10% reserve uses two banks, Bank of Jack and Bank of Jill. There are two citizens, Zeke and Andy. Zeke has $100 that he deposits into the Bank of Jack. The Bank of Jack can now loan $90. Andy gets a loan, he takes his $90 and deposits it into the Bank of Jill. Now, the Bank of Jill can loan out $81. One can see that this process can continue. It is the now ancient magic that materializes money from nothing but promises. The formula for the limit on the classical money multiplier is 1/R where R is the reserve fraction. So in our example, the limit is 10 times. If the reserve was 5%, it would be 20 times.
I will note that this invention of banking allowed the slow minimization of chattel slavery and quite a bit else, but that is another long discussion. Suffice it to say that the banking multiplier underlies virtually every man-made item you can lay your eyes on. It was this that the president was referring to when he said we should give our bailout funds to the banks in order to get the economy going again.
There is a problem though, and the alert reader will spot it. The problem is that loans are demand driven. Loans require that there are borrowers who appear to have assets with positive net worth, and an income. But the funny thing about a recession/depression is that good borrowers get less numerous because they don’t have income and lose assets. Net worth tends to drop.
So what the president said about giving money to banks was in reality a laughable sophomoric error. Banks don’t push money into the economy. In today’s world this idea is even more ridiculous, because for all practical purposes, a bank can make a loan to a creditworthy borrower no matter what. Trust me on this. If you doubt it, consult Steve Keen’s excellent discussions. The boys advising the president know all this backwards and forwards.
Now, let us scratch our heads and ask another question. When the government spends money, where does it go? Answer: It goes into bank deposits. In other words, no matter what mechanism the government uses to disburse money, virtually all of it goes into banks. Corporations do not keep their money in a mattress. Thinking about this fact, a light should be dawning for those untutored in the Eleusinian Mysteries of banking. Spending the money on projects that have a positive return on investment (NIH/NSF is between 2X and 3x) creates millions of jobs and credit-worthy borrowers, huge demand for loans, and that makes the money multiplier work. It is this basic observation that is the basis for Keynes too-often-quoted statement that government can fix a down economy by paying people to dig holes and fill them up again. This is, technically, true. But that does not mean that it is the best use of money that government spends, or creates by fiat. Dear old Keynes said that to make a point, not intending it to be taken literally as advice. Thus, I discuss the need for positive ROI.
Let us now ask ourselves, what would be the difference if we had spent most of that $2.5 trillion instead of giving it to the banking fat-cats? Let us be generous to them and eliminate $700 billion in TARP money, presuming that this amount was necessary to give banks enough reserves to conduct routine deposit redemptions and transfers, etc. That still leaves $1.8 trillion that would have been spent domestically, above and beyond the current national budget. (Note, to work, this has to be domestic spending.) Most of the banking system operates at 5% reserve on average, which means that the banking multiplier limit is around 20X. So this bit of math is simple. We could have created $36 trillion more. To be quite conservative, let us cut that to 1/4th. This gives us $9 trillion more dollars that the domestic spending would have accomplished. If we just take $2 trillion of that as labor and assume that each job costs $100,000 per year, that divides out to 20 million good jobs. And that is highly conservative. There is lots of headroom to create another 20 million jobs.
It certainly does appear then that these guys, Paulson, Geithner, Blankfein and the rest of them, fibbed to the president. One can’t say they exactly lied about the existence of the banking multiplier. What they lied about was, they either said or implied that giving the money directly to the banks was the best way to kickstart loan activity. It is rather hard to believe that such men actually believed this was true. How could they? If they really did, their education was astonishingly lacking. I just do not believe it is possible.
I propose a thought experiment for my readers. Let us imagine that each of us was Blankfein or some other fat-cat. Imagine that we had run up a bubble and crashed our giant bank. Imagine that all our buddies who also run giant banks had done the same and the global banking system had frozen up. Imagine that we had the ear of a naive attorney who had become president. What would we recommend that he do? Would we be tempted to tell him to give us the money and thereby save our jobs, fortunes and positions? Or would we tell him to give banks the minimum to allow them to operate, but spend the rest, thereby dooming our careers, destroying our mighty fortunes and probably end with us in prison? You see, those deposits from government spending would have operated in the “free market” that the fat-cats love their shills to yell about. That would have meant banks run by sound operating principles would have survived, but unsound banks could have died. The gangsters banks would have broken up, sold off.
Then add this to the equation. If we advise the president to give us the money, then as everything else falls, we get relatively richer. This is an old zero-sum game of warlords. It is medieval thinking, and it generally results in a lot of death somewhere. If we get the money, we can acquire more for ourselves. Right now, there are murmurings about selling off public assets like National Parks and State Parks to finance government. And while regular coach fare passengers no longer get so much as a bag of peanuts, airlines are competing to offer more luxuries to first class passengers. Funny how that works. Thus does a nation fall into neo-feudalism. We are falling, right now.
And that brings me back to the hapless Chancellor Katehi, narrowly focused on her bailiwick. She may or may not understand the larger game that is determining the fate of her university. I doubt it. She is focused on her own bottom line and that of her organization. This is what we all do as functionaries.
Linda has done some very good things so far at UC Davis. Until now, she was a golden girl who applied herself with intelligence. People at UC Davis that I respect highly think very well of her new research director. What she (and every chancellor) needs to see, is that these occupy protesters are on the same side. Just like her students, who are protesting for an education, she is stuck in the vise created by the gangsters of Wall Street. She does not realize it, but those students are not a liability. They are an asset.
My advice to all chancellors out there is this. Ride the Tiger. This is a time when a generation will either find its voice and overthrow these silk-suited despots or be condemned to tiny lives. If today’s students are crushed by the fumbling hands that bumbled into greed fueled control after melting down the global economy, so will many chancellors. It is time. If you doubt what I say, read Bill Black. He prosecuted the last round of gangster bankers in the S&L crisis. Bill Black is out there, hands linked with the protesters. He knows the score. He knows how important this is.
If Linda Katehi thought this through and understood her situation clearly, she would pitch her own tent on the quad and sleep there with her students. I know she feels too old. Young people don’t realize how much harder it is later. But still, she should. She should get up and ride the tiger, knowing that it is the best shot of a generation.
If she understood, Chancellor Katehi would call on the rest of her students to rise up. She would ask them for help. She would counsel them to take to the streets with a loud voice. She would tell them that if they want a future for themselves and their children, they must defeat the gangsters of Wall Street and force this president to prosecute those smooth-talking gangsters who have become his buddies and financial backers.
If Chancellor Katehi said that to her students, she would be telling the truth. The situation is that stark. This is not a game for them. The time is now, before we are all brought too low and become vassals. Take a look at your budgets ladies and gentlemen. Take a serious look around. Bring Bill Black in to talk to your students and to you. Take this very seriously. It is time to mount up and ride the tiger.
Citation for NY Times figures Adding up the Government’s Total Bailout Tab