Socialism in the US - The Real Radicals

There is a slogan floating around the internet announcing that "The time is now to stop calling the Democrats the "Democratic Party" and start calling them what they really are, the Socialist Party"

Let's think about that, and the assumption that socialism is inherently not American.  Let's start with a definition of "socialism."  Such as:

"Socialism is an economic system characterised [sic] by social ownership of the means of production and co-operative management of the economy....'Social ownership' may refer to cooperative enterprises, common ownership, state ownership...."  http://en.wikipedia.org/wiki/Socialism

Then I'd say something like, "Historically, we in America have understood that some things are best left to private enterprise, such as industry and many service businesses; and that some things are best left to socialist enterprise, like the post office and the military, as well as  municipal services such as police and fire safety, schools, trash collection, water distribution.  

"We've also traditionally believed services such as higher education can be served by both public and private non-profit institutions.

"And many services and activities have been traditionally allocated to the two systems acting cooperatively, such as road construction, which done by private enterprise on behalf and for the benefit of the public, and paid for and administered by public funds.

"Our hospital systems used to be the same, involving both public sector and the private sector.

"The idea that everything should be done, and that everything is best done, by private enterprise is a very modern and very radical idea advocated by powerful and yet extreme elements in our political system."

"True conservatives seek to retain the blended systems which have served our country so well over the centuries.  The radicals who insist on privatizing governmental services have a heavy burden of proof - and the evidence of the last 30-40 years does not support their radical ideas."

"When the only people who benefit from pure capitalism are the capitalists, then it is hard to argue that such an extreme form of economic organization is successful, from the point of view of "we, all of the people."

Rewarding Risk Takers

Conservatives argue that most of the wealth produced in our country should go to the investors - after all, they are the ones who have "taken the risk."

What about the workers.  No risk?

A worker risks his entire livelihood on whether the managers will screw up.  And whether the managers will decide to ship the jobs overseas or to some other state that cuts 'em a tax deal.  On whether the managers will decide they don't like his haircut or sexual orientation or type of car he drives and fire him.

A worker risks his livelihood on whether a venture capitalist will invade and and gut his pension and milk the company of its assets and toss it, shriveled and gutted into the gutters lining the "free market" abattoir. 

The idea that the capitalists deserve most of the wealth produced in our nation because they are the one's who "take risks" ignores the cold bright light of waking reality.

Some History of The Fed

"Get rid of the Fed" some guy on youtube screams.

Let's look at history. Modern commercial banking developed pretty much in tandem with the industrial revolution.

In the industrialized nations, under the "free markets" practices which were followed, there were rounds of systemic banking crashes roughly every 15 years. (Krugman argues every 5, but it depends on what you consider as included as a systemic crash.)

The Fed was formed in the early 1900s, primarily as a clearing bank - helping banks in one area of the country clear checks deposited with them which are drawn on banks in other areas.

In the early 1930s, following the crash of 29, the Fed was given expanded powers to regulate banks. Their central mission was to support "the safety and soundness of the banking system." (When I worked on the legal aspects of banking projects involving new products or variations of old products - one key part of every submission to the Fed in support of the products was an analysis of how the new product and how we would handle it conformed to safety and soundness principles..)

Through this role of the Fed, American commercial banking was stabilized, and the periodic and regular rounds of crashes were eliminated. We had a stable banking system from the 30s to 2008. (BTW: in case your thinking about the S&L crisis: The S&L crisis didn't involve fed regulated banks - S&Ls were not and are not commercial banks - and the S&L crisis arose from congress giving S&Ls vastly expanded powers with no increase in regulatory oversight.)

In the mid 80s, Reagan appointed libertarian Alan Greenspan to head the Fed. Greenspan was and remains a libertarian who is opposed to government regulatory power. (He was a personal friend of and was mentored by Ayn Rand.)

Greenspan did not see his job as using a regulatory structure to assure bank system safety and soundness. He believed the banks would self-regulate, acting wisely to protect their own interests. (He did admit after 2008 that his belief was a mistake.) He reduced regulations and regulatory compliance. He actually saw his job as supporting the banks in whatever they wanted to do - not to pursue safety and soundness goals.

For up to 80 years the Fed provided us with the most stable banking system I have ever read about or experienced.

The "Libertarianized Fed" is the disaster - get rid of the libertarian influences and let the fed get back to promoting safety and soundness - and get away from supporting them whatever they do.

Getting rid of the Fed is essentially what Greenspan did - with disastrous consequences.

The Fed Audit Doesn't Say

The audit of the Fed is out, and there are some people screaming -becasue they don't understand the basics of banking.

I wrote this on FB in response to one who claimed "not one dollar of the 16 trillion was repaid.

?>>money not repaid

That is one thing he got completely wrong. I think, but don't know, because he doesn't actually give sufficient details, that he read the "outstanding balance" figures of 0 as meaning the debt were forgiven, or somehow not repaid.

The report is clear, though, that money's lent were repaid. Do a word search in the report [http://www.scribd.com/doc/60553686/GAO-Fed-Investigation] for "repaid" and see the many specifications that monies were repaid. The youtube guy is just whacko on this point. (and it isn't the only thing he is whacko about.

And yeah, the interest rate charged thew banks sucks - as I said, there are many serious problems with the fed - largely, IMO, the result of Greenspan's running it.

But the guy who did the video is still an idiot

He mentions Table 8: as I suspected, the guy doesn't understand the concept of revolving credits. The lead-in to table 8 explains it, to a certain degree: 

"Table 8 aggregates total dollar transaction amounts by adding the total dollar amount of all loans butdoes not adjust these amounts to reflect differences across programs inthe term over which loans were outstanding. For example, an overnightPDCF loan of $10 billion that was renewed daily at the same level for 30business days would result in an aggregate amount borrowed of $300billion although the institution, in effect, borrowed only $10 billion over 30 days." See page 130

Under a revolving credit, a loan is made in a certain amount, repaid, remade, repaid, remade, etc.

If you have extended a $10 revolving line of credit to me, and I have drawn it down, repaid it the next day, drawn it down again, repaid it, 10 times - have I borrowed $10? (the maximum amount of the risk at any one time) or have I borrowed $100?

What if I borrowed that $10 for the full 10 days, instead of cleaning it up daily? You wouldn't say I've borrowed $100 dollars, right?

Requiring the periodic cleanup (in my example, and in the audit reports explanation, daily) is actually more restrictive and safer from the lender's point of view than letting run for a longer term.

Paul 'Pheidippides' Ryan

The man we can all believe in....

9 Trillion Lost By the Fed (Bogus)

Once again, the 2010 video clip of the Federal Reserve Auditor General is making the rounds over on the right and among the easily alarmed - the clip which supposedly says there is $9 trillion missing” from the Federal Reserve.  (See, e.g., http://www.youtube.com/watch?v=GYNVNhB-m0o -  I picked this one because the uploader amuses us with is paranoia about her lapel pin, inter alia.)


At one point in the clip,  Rep. Alan Grayson asks about the “$9 trillion in Off-balance sheet transactions” - see, e.g., at 3min 45sec.)


A lot of people freak when they hear that exchange and seem to think Grayson is referring to “missing money” or sneaky accounting tricks.  (A few seconds later, he does ask about some supposedly missing money, but he is no longer referring to the off-balance sheet accounts. That the Inspector General bobbles the question adds to the impression some people have that there is something sneaky going on.  Nope, just a missed opportunity.*) 


"Off-balance sheet" accounts are transactions which simply do not fit on a balance sheet. The term does not mean "missing money" or “losses.”  And it does not mean those accounts aren't being tracked and reported.**


An example of an “off-balance sheet" transaction: 


Suppose that today, Dollars are trading 1:1 against Doubloons.  I think Dollars are going to go up against Doubloons in the next month, you think they are going to go down.   We place our bets by agreeing that in one month, I'll deliver 1,000 Doubloons to you and you'll deliver 1,000 Dollars to me.  (Most foreign exchange contracts are simply to deal with potential exchange rate shifts when one is dealing internationally and aren't simply bets.)


If I'm right, and dollars go up, in a month I can perform by buying those 1,000 Doubloons with less than the $1,000 I'm going to receive from you. Say the exchange rate has shifted so that I can buy those 1,000 Doubloons for $950 I've made $50, you've lost $50. 


But how should that transaction be recorded on our balance sheets as of Day 1?  


A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.


So what is the value of that foreign exchange contract?


Is the value $1,000?  Nope. even if  you fail and go out of business before then, I won't lose a thing.


Is the value zero since today they have the same value?


Is it $50?  (Remember, until the settlement date, neither of us knows what the rate will be on the delivery date.)


It simply makes no sense to put that sort of transaction on a balance sheet.  That DOES NOT mean the transaction is not accounted for in our books and records - it just means it isn't in the balance sheet, it is being kept track of in other ways.  (Actually, such transactions are “on the balance sheet" in footnotes, but not included in the balance calculation because there is no exact figure which can be given.)


Furthermore, one of the features of an off-balance sheet transaction is that in the real world, the amount at risk (one way of measuring value) is nowhere near the face amount of the transaction. That adds to the rationale for keeping such transactions “Off-balance sheet” since including them would mislead people.  (Just as the fact that people are mislead when they think “Off-balance sheet” means “lost” or sneaky.




And that is why off-balance sheet accounts are typically such large numbers - the real risk is a minuscule fraction of the face amount.


= = = =
* Just before that exchange, the Inspector General explains that her only jurisdiction is over the Board of Governors of the Federal Reserve, not over the Federal Reserve Banks.  Despite that, Grayson persists in asking her about reviews of the Federal Reserve Banks.  I think she is still trying to figure out how to got him to understand that he is asking the wrong person when asked about the off-balance sheet accounts.


** FWIW, I learned this stuff when I was legal counsel to several areas  of a major bank which dealt with "off-balance sheet accounts" (including the foreign exchange trading desk).  I too originally though "off-balance sheet" meant or at least implied something tricky and I didn’t understand that it refers to transactions that are being accounted for in other ways.  It doesn't mean anything tricky.

Small Business and Regulations

The GOP loves to talk about “crushing regulatory burdens” on small businesses and they claim their policies will make it easier for entrepreneurs to start businesses and “create jobs.” 


"Crushing regulatory burden?"  "Crushing?"


I have never heard a conservative mention (and possibly many don’t even know) that many, if not most, business regulations exempt small businesses.  


And the GOP leaders ignore that many regulations protect small businesses from the giant businesses' practices. In fighting regulations, are they really on the side of small businesses?  When is the last time a small business contributed enough to them to get their attention?


It seems to me that if the GOP and right wingers really wanted to unleash the pent-up entrepreneurial power in America and help them create jobs, they would support a national health care system - think of how many people with great ideas are unable to start businesses because the need health insurance and the cost of it for a new business is prohibitive.

Or maybe they'd fight against the tax schemes that allow huge mega-retailers to invade our towns and push small businesses out - aka "crushing" small business people.


(Regarding regulations: I practiced law doing regulatory compliance from the 70s to the 90s and I later lobbied on behalf of small businesses for a particular trade.)