Teach-in posting “Roots of the economic problem” @ UC Davis

Roots of the Problem Teach-in 11/28/2011   My instructor notes.

“What happened to the economy to create the lack of funding at UC? And what do we need to do?”

I. How many people have seen “Inside Job”? – See it!  http://www.sonyclassics.com/insidejob/

II. Why am I here giving a talk?

a. Collectively, the boomers and Gen-Xers have turned out to be perhaps the most selfish and spineless generation in American history. There is a crisis and we are still in it. It is much bigger than UC and chancellor Katehi, who is a tiny bit player. If you have seen Inside Job then you know that a gang of literal coke-heads has bumbled its way into control over the world’s financial system. They have the ear of the White House and of Congress. There is no greater threat to the country and the rest of the world than these guys. Your generation will either win this fight or go down. And my generation did it to you.

b. What will I cover?

I’ll start with how a bank works. Then I’ll back up to the roots of banking. We’ll touch on what money is versus value. We’ll talk about what kinds of money there are. I’ll go over how money was concentrated prior to banking. We will quickly bounce over physical money-lending (AKA loan-sharking), then get into modern banking. We will cover what happened and what we need to do about it.

III. How does a bank work?

a. We need to understand this or we cannot comprehend what the banksters are continuing to do to this nation.

b. Demonstration with volunteers. (See pages on site for banking explanation.)

IV. Let’s back up briefly. What are the roots of banking?

a. Value versus money (or price).

i. Value is what people pay for. It is their needs and wants.

ii. Money is the price system people use to pay for value.

1. If value increases, while money stays the same, we have deflation, rise in value of money. We have seen this in computing in the modern world. We have also seen this in food prices of the green revolution.

2. If value decreases, or the amount of value per person able to pay decreases, or the amount of money increases while value stays the same, then we have inflation.

b. What kinds of money are there?

i. Legacy money in the system from the past.

ii. Fiat money created by government declaration.

iii. Loans

c. When physical money ruled the earth, money was primarily collected by confiscation.

i. Armies would confiscate land, slaves, gold, silver, etc. Every empire did this. This is part of what created civilizations.

ii. Money was highly limited. Empires doled out control of money based on political considerations primarily. Loyalty and strength at arms were big considerations. Every empire did this. As long as they expanded and their foot-soldiers were motivated to fight, generally deflation was steady for the elite that won. There was a net positive rate of return on money. Plenty of property, and labor (slaves) going into the system to provide value for the money

iii. When the empires stopped expanding, there was always trouble. Depressions would happen, mass discontent, revolutions.

d. Money lending

i. Money-lending is the oldest financing transaction involving money.

ii. Money-lending is done with physical symbols of money in earliest times, where money was made of metal coins, rare shells, and other materials.

iii. In this transaction, a party, let us call her Jane, loans money to another party, whom we will call Jack. When Jane loans money to Jack she no longer has the physical money she loaned out, Jack has it. The hope is that Jack will pay Jane her principal back, together with interest. Sometimes Jack may have trouble paying Jane back.

iv. To compensate for the risk on her outstanding portfolio of loans, Jane needs to charge high interest.

v. This requirement for high interest raises the risk that loans will not be paid back.

vi. High interest also puts limits on the viability of enterprises within an economy dependent on money-lending.

vii. Here, there is no new money creation by lending.

viii. In some societies, the people would give donations or tithes to a central Temple. Loans would be made by the Temple. These were all physical transactions using gold, silver, bronze, or some other physical representation of money. Secular lenders also existed.

ix. Periodically, there would often be a “Jubilee” and all debts would be declared forgiven. This accomplished two things. It kept people from being crushed by debt. It also undermined the power of secular money-lenders because the Temple would always be replenished by tithes, but the secular lenders would not.

x. Similar things sometimes occurred in empires. Similarly, the rulers collected some sort of taxes, so their funds were replenished, but non-rulers were not.

e. Analogs (e.g. hawala system) have persisted into the present day.

i. Banking evolved from strongmen with the ability to store physical currency safely. Some could be trusted to keep money of others safe. Accounts were written down. This was a logical extension of accounts that had existed for millennia for grain stores and other inventories.

ii. Using letters between castles enabled money transfers without actually carrying the currency symbol from place to place. A letter could be sent instead, that named the beneficiary. Identical to “Letter of Credit” used today. They used signatures, names and seals to ensure credit went to the proper person.

iii. Because accounts were now written, the rule that money wasn’t money unless it was physical was broken. Certificates of various kinds were created.

f. Invention of banking

i. It could be said that banking started when a crooked vault operator decided to write letters of credit for loans not actually covered by what he had in his vault.

ii. Bankers like the Medicis who created currency redeemable for gold or silver could make more currency than they had in gold, and not tell anyone.

iii. They could buy and sell things of value on their own accounts.

iv. Early bankers could do lots of things.

g. These became systems that loaned part of the recorded value of vault storage, over time loaning greater and greater fractions of such deposits held in trust, giving some payment to depositors for use of their money. From these roots was developed our fairly well regulated reserve banking system.

h. What were the effects on society of the invention of banking?

i. It made it possible to motivate people by paying them with newly created money instead of enslaving them. Since this works better, over centuries, it allowed slavery to die back. When credit was not available, as in Germany in the 1930’s, or in the USSR post-revolution, slavery was re-invented to motivate labor.

ii. Money could be created by people who were not rulers. This influence cannot be underestimated. It made possible the rise of the merchant and commercial class. Their influence grew, and set the stage for today’s world.

iii. Instead of loyalty and prowess being rewarded, over time, more and more, skill, knowledge and intelligence were rewarded.

V. Modern banking

a. In the modern world, a bank operates based on core capital categorized as tier 1 and tier 2 ( “BIS-Basel II” 2006).

b. In this tier 1 and 2 capital is the money invested by stockholders or other investors along with other instruments.

c. Net earnings from the difference between the interest paid to depositors (or borrowed from another institution) and the interest paid by borrowers is accounted as primary profits for investors in the bank.

d. Tier 1 and 2 capital usually is greater than or equal to capital reserve requirements and is supposed to be secondary in position to the needs of demand depositors.

e. But, in modern banking, settlement of reserves can be done after making a loan. For practical purposes, banks can always loan to a creditworthy borrower. The central banks will make it happen. This complicates the picture from classic ideas about banking.

f. Central banks exert control of the money supply by setting reserve percentages and telling banks what loans they will accept.

VI. The global financial crisis (GFC) of 2008.

a. Loans were made with less and less requirements, “liar loans”.

b. Banks leveraged themselves into a still unclear valuation in loans.

c. They bundled them into sets. They created tranches (subsets) with varying interest rates. They insured the highest tranche and some of their loans loans with AIG.

d. They created synthetic capital which is still in discussion, so I won’t go into detail. But it may have created a brand new banking multiplier.

e. Then loans stopped being serviced. Enough stopped being serviced, that AIG couldn’t cover them. AIG had a model that said home loans had an incredibly low default rate. So banks were trusting AIG to be the reserves to cover losses. But AIG didn’t have them. AIG had paid the premiums to staff and out as earnings to shareholders.

f. One day, the house of cards had collapsed enough that banks found they had insufficient funds to do wire transfers and redemptions.

g. The US government decided to step in.

h. That is how the bailout started.

VII. The bailout

a. To stop a crash of the global banking system that would have brought our economy and that of Europe to a virtual halt – we had to bail them out. It was the least-bad thing to do.

b. So TARP was created. Troubled Asset Relief Program.

i. Paid to banks, AIG (an insurer) this money gave reserves enough to avert disaster.

ii. The president announced that this money would also make it possible for banks to make loans. And he cited the banking multiplier.

c. Since the end of 2008, we have given TARP $700 billion + $1.8 trillion to banks and AIG. (April 2011, NY Times)

d. The continuation of the bailout is the scam that is ongoing now. Banks have too much capital on their books now. They can’t make money on it because they have a lack of borrowers who have income and assets.

e. Of course this is true! Banking is demand driven. It does not have a multiplier unless there is demand.

VIII. Let’s quickly do the math.

a. 1.8 trillion if it had been spent? (Approximately $18 trillion)

b. $7.7 trillion? (Approximately $77 trillion)

 IX. This president has protected the banking scammers by:

a. Leaving the SEC in the gutted state it was under GW Bush. He has not attempted to restore its budget.

b. Failure to prosecute. DOJ has left them alone.

c. Pushing an agreement on states that lets the banks pay hundreds of millions and gives their officers clemency for massive felony fraud.

d. Essentially, this White House has implemented banana republic law in the USA.

X. What do we do?

a. It is essential to make banking the big issue of this presidential election. He is the executive. He has to do his job and prosecute his buddies. Even Ronald Reagan put Jackie Presser in prison after Jackie threw his union behind Reagan.

b. It is essential to make the name of Grover Norquist as disrespected as Joe McCarthy. He thought of his no-taxes idea when he was 12 years old. He hasn’t learned anything since and doesn’t care to. He has gotten rich destroying the country. Grover Norquist personifies the core of selfishness irresponsibility that is destroying the future of all of you.

XI. Other influences on the economy

a. Age demographics. Boomers ran prices up. Boomers are going to pull them down as they stop inflows and replace them with outflows. Basic supply and demand. But we could deal with that if we didn’t have the coke-heads running the world financial system.

b. Natural resource limits with high population

a. Global warming

b. Water

c. Food

Citation for NY Times figures Adding up the Government’s Total Bailout Tab (Post crisis.)


Also: Fed lent banks nearly $8 trillion during crisis, report shows ($7.7 trillion)


-Suggested reading:

Bill Black – “The Best Way to Rob a Bank Is to Own One”


Steve Keen – “Debunking Economics” http://debunkingeconomics.com/

-Suggested reading:
Bill Black – “The Best Way to Rob a Bank Is to Own One”  http://www.utexas.edu/utpress/books/blabes.html
Steve Keen – “Debunking Economics” http://debunkingeconomics.com/


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