Welcome back to the Conspiracy!

This is a special presentation featuring Gardner Goldsmith, one that delves into some fundamental and, necessarily technical material about economics, but one that will serve to last a long time for anyone interested in markets.

Check it out, as El G Grande explains why claims by politicians that consumers can become “irrational” and why claims by the same politicians that government can help “fix” markets are both false and misleading. He also explains what the terms Praxeology and Epistemology mean, which is key in understanding how to place free markets in their proper place among human history.

A great production for anyone interested in discovering the fundamentals of free markets and how they work better than government policies.

Visit us at www.libertyconspiracy.com!

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Last week I had the opportunity to bring up spending and transparency in two important hearings. On Wednesday I questioned Federal Reserve Chairman Ben Bernanke on some highly questionable uses of funds at the Federal Reserve, and on Thursday I asked Secretary of State Hillary Clinton about exorbitant spending at the State Department.

It is extremely important to continue bringing these issues up, especially in light of our difficult economic times, when so many are out of work, as I saw up close in my district at the Oceans of Opportunity Job Fair in Galveston two weeks ago. Those who are working live with the fear of losing their jobs as they struggle to pay bills. Meanwhile, Washington is talking of increasing their taxes, something voters were promised, clearly and adamantly, would not happen in this administration.

Government also struggles with money, but the struggle centers on how to get more of your money into government coffers. Rather than expanding the Federal budget in the face of economic downturn, we should be focusing on eliminating waste and being the very best stewards of public funds that we can possibly be. Most businesses have had to streamline and cut back in order to survive, and so it is only fair for our government to do the same.

Instead, the State Department is building a $1 billion embassy in London, the most expensive ever built. The plans even include surrounding it with a moat! I asked the Secretary of State about this massive expenditure, and she claimed the funds for this were coming from the sale of other properties. If money can be saved, then save it! Don’t spend it on such an extravagant structure overseas when people back home can’t find jobs or pay bills. Not only that, but the administration has committed to doubling foreign aid. That is one promise that is likely to be kept, despite our economic crisis.

I asked Chairman Bernanke about Federal Reserve agreements with foreign central banks and if he had had any conversations about bailing out Greece, which he flatly denied. However, he recently announced that the Federal Reserve will be looking into Goldman Sachs’ derivative agreements with Greece. Goldman Sachs, as we know, has “too big to fail” status with the Fed, so it is conceivable that any Greece-related catastrophic losses at Goldman Sachs will once again be passed on to taxpayers.

Perhaps most sinister are the revelations in Robert Auerbach’s book Deception and Abuse at the Fed that $5.5 billion was sent to Saddam Hussein in the 80’s — money that allowed Iraq to build up its military machine to fight Iran prior to the first Gulf War, the very machine turned against our brave men and women within just a few years! I agree with Bernanke’s characterization of this — it is indeed “bizarre” to think that Americans at the Federal Reserve could engage in this type of behavior, which a some have called “criminal.” However, Professor Auerbach served as a banking committee investigator, and as an economist at the Treasury Department and at the Federal Reserve. His claims are hardly without merit. In fact, they are solidly backed by court rulings and other evidence.

The lack of accountability and transparency in our leaders on government spending is appalling. We simply must keep pressing these issues and voicing our objections if we are ever to reverse our failed policies.

Last week marked the one year anniversary of the American Reinvestment and Recovery Act, or the stimulus bill, passing into law. While the debate over its success has been focused on whether or not it is stimulating the economy and on various questionable uses of funds, in my estimation this legislation is accomplishing exactly what it was intended to accomplish — grow the government.

Those of us concerned about the ever increasing level of government debt gasped at the astonishing $787 billion cost estimates for this bill. True to form it has actually cost 10 percent more at $862 billion. We heard over and over that government could not sit around and do nothing while people lost their jobs and houses. The administration claimed that unemployment would not go above 8 percent if the stimulus bill passed. Now, a year later, the government estimates that unemployment is over 10 percent. The real number is closer to 20 percent. It appears that those promises were total fabrications in order to close the deal.

In any case, the American people know that more government spending obviously equals more government. If the goal was to strengthen the private sector, Congress would have allowed businesses and individuals to keep more of their own money through meaningful tax cuts. Outrageously, the administration claims that they did “cut taxes” by reducing withholding, and that they have stimulated the private economy by increasing the amount of money in every worker’s paycheck. What they fail to mention is they did not change the total amount of taxes due. This means that all that money not withheld from paychecks will add up to a big unpleasant surprise when returns are filed this year. Many tax preparers are already seeing shocked taxpayers having to come up with big checks to the government when they normally expect a refund. Stimulus, indeed!

The administration also claims that thousands of jobs have been created or saved by this massive spending bill, but these are just more government jobs, and counterproductive in the long run. Funding for the public sector necessarily comes at the expense of an overtaxed private economy. But, it makes sense that government would seek to expand its payroll since every new bureaucrat becomes a likely advocate for big government, when an increasing number of Americans are demanding the opposite. But the more the burden, the closer the government parasite comes to killing its host.

Rather than learning the lessons of the past year, the administration is moving full-speed ahead to do even more economic damage. With the stimulus bill set as a precedent and victory declared, another “jobs” bill is in the works. And, in order to address the unavoidable issues of our massive deficit, the administration has named a bi-partisan commission to find ways to decrease it. Tax increases on the middle class are notoriously back “on the table,” exposing that campaign promise as another instance of merely saying what the people wanted to hear. If the obvious solution to our spending problems was seriously put forth, that is, getting back to the constitutional limitations of government, I would be shocked. More likely, this will be a tactic to increase taxes and spending in a way that passes the political buck.

["Obama Condom" photo by Justin Grimes; CC BY-SA 2.0]

In this new production, the Liberty Conspiracy looks at one of the most pressing (and eternally vexing) issues government presents: the destruction of your buying power through central banking and fiat currency inflation.

He offers a handy way to understand the organic creation of money as a means of exchange with its own value, and looks at how government destroys that creation by inventing counterfeit currency it calls money.

He also offers insights from people such as Ludwig von Mises and Henry Hazlitt, and considers what their analyses of things like Weimar Germany might tell people in the U.S. today. Check it out!

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Last week we were reminded that ours is not the only country suffering from severe economic turmoil. The Greek government is the latest to come close to default on their massive public debt. Greece has insufficient funds in their treasury to make even the minimum payments that are now coming due. Their debt level is about 120 percent of their gross domestic product and their public sector absorbs what amounts to 40 percent of GDP. Any talk of cutting costs and spending is met with violent protests from the many Greeks heavily dependent on government payments. Mounting fears of default have sent shockwaves through their creditors and all of the eurozone countries.

But there have been statements made by the European Central Bank to calm fears and give assurances that Greece will get the aid it needs. Details of agreements are not forthcoming.

Is it possible that our Federal Reserve has had some hand in bailing out Greece? The fact is, we don’t know, and current laws exempt agreements between the Fed and foreign central banks from disclosure or audit.

Greece is only the latest in a series of countries that have faced this type of crisis in recent memory. Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland. Several other countries (Spain, Portugal, Ireland, Latvia) are approaching crisis levels with public debt as well. Many have strong ties to Goldman Sachs and the case could easily be made that default could have serious implications for big U.S. banking cartels. Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the U.S. taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent. Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.

This global financial crisis is a predictable result of secretive central banking and unsound fiat currency. Governments are entirely committed to this system of fiat money and fractional reserve banking for obvious reasons: it enables them to do what they love most, namely, spend hoards of money with near impunity. Without the limitations of sound money, governments will spend without limit. They will spend money to hire their cronies, pay off special interests, give out favors, create dependence and generally distract from the terrible job they do at their chief mandate, which is to protect the liberties of the people. Fiat money is a blank check to government, which is very dangerous, and we are witnessing the death throes of the system as the bills come due and the underlying capital is squandered away.

Because of our globe-straddling empire and lingering reserve currency status, perhaps no one has a more vested interest in keeping this system cobbled together than our own government and the Federal Reserve. The agreements that Iceland and Dubai and Greece have negotiated can amount to little more than kicking the can down the road, as their overall spending habits remain largely intact, fiat currencies are still legal tender and more debt is issued on top of unsustainable debt. The American people have the right to know if they are going to be the ones holding the bag in the end because the Federal Reserve secretly put them on the hook for it. This knowledge would be a key factor in peacefully dismantling this immoral and unconstitutional system.

["500 Euros" photo by Luis Javier Modino Martinez]

Last week, the House approved another increase in the national debt ceiling. This means the government can borrow $1.9 trillion more to stay afloat and avoid default. It has been little more than a year since the last debt limit increase, and graphs showing the debt limit over time show a steep, almost vertical trend. It is not likely to be very long before this new ceiling is met and the government is back on the brink between default and borrowing us further into oblivion. Congressional leaders and the administration acknowledge that the debt limit will need to be increased again next year. They are crossing their fingers that the forecasts are correct and they will not need another increase sooner, even before the 2010 midterm elections.

Continually increasing the debt is one of the logical outcomes of Keynesianism, since more government spending is always their answer. It is claimed that government must not stop spending when the economy is so fragile. Government must act. Yet, when times are good, government also increases in size and scope, because we can afford it, it is claimed. There is never a good time to rein in government spending according to Keynesian economists and the proponents of big government.

Free market Austrian economists on the other hand know that times are bad because of the size and scope of government. The economy is fragile because of the overwhelming stranglehold of bureaucracy and taxation of Washington. Any jobs Washington might create through these endless spending programs are paid for through more taxation and debt put on the productive sectors of the economy. Just as insidious is the hidden tax of inflation caused by the Fed and its ever-expanding credit bubble. When the Fed steps in with its solutions, it only devalues the dollars in everyone’s pocket while encouraging more reckless waste on Wall Street. All of this leads to a worsening economy, not an improved one.

And so the downward spiral continues. The worse things get, the more politicians want to spend. The more they spend, the heavier the debt load becomes and the more we have to spend just to maintain our interest payments. As our debt load becomes unsustainable, the alarm of our creditors increases. It is becoming so serious that our credit rating, as a nation, could be downgraded. If this happens, interest on the national debt will increase even more, leading to even higher taxes on Americans and inevitably, price inflation.

Still, Washington is full of talk of more regulation, more taxation and more spending. The Senate is still struggling to pass a massive regulatory increase on the financial sector, even as the stock market suffers more shockwaves. Pay-as-you-go rules give the appearance of fiscal responsibility, but in truth these rules are only used as a justification to raise taxes. Spending programs like healthcare reform, increased military spending, and a recent doubling of destructive foreign aid are viewed by Washington as necessary and reasonable, instead of foolishness we absolutely cannot afford.

The people understand this, which is why there is so much anger directed at politicians. Washington needs to change its thinking and adopt some common sense priorities. The Constitution gives some excellent limitations that would get us back on the right path if we would simply abide by them. The framers of the Constitution understood that only the ingenuity of the American people, free from government interference, could get us through hard times, yet Washington seems bent only on prolonging the agony.

["$100,000,000,000,000" photo by Adam Selwood; CC BY 2.0]

Jersey Shore? Fuhgeddaboudit. Jersey City is the gem of reality TV. Shore is MTV. Jersey City is FBI. Like, how real is that? Killer videos of pols talking trash and passing cash have been unspooling in federal court in Newark at the trial of Jersey City Deputy Mayor Leona Beldini. Beldini was busted last summer in an FBI sweep that corralled dozens of Jersey pols. It was one of the largest corruption roundups in Jersey’s thick history of roundups. The majority of the busted were from Hudson County, parent entity of Jersey City, second largest city in the state. Twelve public servants have pleaded guilty; Leona Beldini is first to stand trial. Charges? Bribe taking, attempted extortion, and conspiracy to commit extortion. MTV’s Jersey Shore has hot munchkin Snooki, but Jersey City has the far classier — albeit far older — Beldini. Back in the day, Beldini was burlesque queen “Hope Diamond.” “The Gem of Exotics.”

In the here and now, Deputy Mayor Beldini is a prominent Realtor, past president of the Hudson County Board of Realtors. Until suspended as deputy mayor (an appointed position) Beldini was Jersey City Mayor Jerramiah Healy’s liaison to various development-related municipal agencies. Beldini also headed the board of the quasi public Jersey City Economic Development Corporation, which among other things, administers the city’s Urban Enterprise Zone projects. One third of Jersey City is Urban Enterprise Zone. Development projects in The Zone are eligible for a wide array of tax exemptions and utility breaks.

Mayor Jerramiah Healy hasn’t been indicted but he appears in FBI videos featuring Beldini. (There are other tapes, starring other pols.) As does former Jersey City Housing Authority Commissioner, Vice President of the Board of Education, and Hudson County Affirmative Action Officer Edward Cheatam. (Yup, Ed wore 3 hats.) Also appearing: the late Jack Shaw, a well worn political consultant. Cheatam has pleaded guilty to conspiring with Beldini and others “to accept corrupt cash payments” in return for “official influence.”* Consultant Jack Shaw died of a Valium overdose a few days after being busted.

Mayor Jerry Healy is Jersey City’s version of Jersey Shore’s bod-flaunting JWOWW. JHOWW-come-he-keeps-getting-elected and Beldini go back decades. A Healy son has a license in Beldini’s real estate office and Beldini and the Healys are neighbors in Jersey City. They have summer homes a block from each other in Bradley Beach at the — where else — Jersey shore. In 1999, when Healy was Chief Judge of Jersey City Municipal Court, cops visited his vacation crib. Neighbors were bitching about party hearties. Healy wrestled with the cops on his porch. In the nude. (Though one neighbor said he was clutching a towel when the fracas began.) Healy pleaded guilty to a minor disorderly conduct charge.

In 2004, mayoral candidate Jerry Healy was seen — and photographed — passed out naked on his front porch in Jersey City. The nudie pic, which was posted on the Internet by an opponent, might have discouraged a less determined electorate. But Healy swept to victory.

In 2006, Mayor Healy was back for a rematch with the Bradley Beach cops. (This time he was clothed.) Two officers rassled him to the ground outside his sister’s bar and gave him a few shots of pepper spray. The shots chased a good deal of beer. Healy was convicted on disorderly conduct charges in 2007. The same year he was made chairman of the Hudson County Democratic Organization, a monster political machine that’s been somewhat weakened by a decade of corruption indictments and flaccid leadership.

By the Spring of 2009, Jerramiah Healy was on the mayoral campaign trail again, with Leona Beldini as campaign treasurer. Things were looking good. New York City Mayor Mike “The Situation” Bloomberg was set to toss a $1,000-a-head fundraiser for Healy at his NYC townhouse. (The Situation and his deputy mayor, Kevin Sheekey, have Jersey City roots. Sheekey’s family goes way back with the Healy family.) Another big bux event was scheduled at the Beacon, an elegant condo fortress in one of Jersey City’s poorest nabes. Plus, a new developer in town was spreading cash around.

Developer David Esenbach wanted to build a high-rise luxury condo project of 750 units on land next to a site contaminated with chromium in an inner city neighborhood. Esenbach was confident the units could be marketed for half-a-mil each. But he worried the city’s planning, zoning, and overall development process might be too slow and cumbersome.

Esenbach conveyed his concern to Mayor Jerry Healy, Deputy Mayor Leona Beldini, Housing Commissioner Ed Cheatam, and political consultant Jack Shaw in meetings at Healy’s favorite luncheonette (City Hall is so impersonal) and other eateries. The foursome assured Esenbach that Jersey City was developer-friendly. Healy touted “a planning department let’s put it that way, that’s receptive.”** Beldini and Cheatam praised the director of the Division of Zoning Enforcement. “Tony’s Good” opined Cheatam. “He’s good” echoed Beldini. “Tony’s good. Tony’s been good for a long time” said Cheatam.

Despite the real estate slump, Beldini seemed to think Esenbach’s projected price of half-a-mil each for his condos was on target. Saying “with what’s happening, the inner city is the place to invest.” Esenbach granted Beldini exclusive dibs on marketing the condos. Beldini touted her ability to “cut through red tape” and cited her position at the Economic Development Corporation and as the mayor’s liaison to the Parking Authority. (Parking being a huge issue in large scale development projects.) She also tried pitching a “shovel ready” former sausage factory for a potential condo project but Esenbach didn’t bite. He’d already passed on a macaroni factory pitched by Cheatam.

(In ye old days, Jersey City produced something other than oleaginous pols and real estate capers.)

As the meetings progressed Esenbach made “donations” totaling $20 thousand. (A slice of what he was laying out at other meetings with Shaw, Cheatam, and myriad other officials.) Leona Beldini didn’t handle the cash but was enthusiastic about the transfer. Saying $10 thousand was for “J” (Jack Shaw) and the “Jersey City Democratic Committee”. She delineated how the money would be broken down into “different funds” (to beat legal limits on contributions) in order to “funnel it back into the mayor . . . which everybody does.” Esenbach said he’d “do him (Shaw) another 10 for Healy” and would “do more before election.” “Beautiful” replied Beldini.

Mayor Healy didn’t handle the cash. Cheatam and Shaw did the blunt talk. Esenbach did the taping.

Oh nooo! Developer David Esenbach didn’t exist. He was really developer Solomon Dwek, serial Ponzi schemer. In 2006, Dwek was nailed by the Feds for bank fraud after kiting tens of millions in bad checks. Apres bust, Dwek turned informant. Dwek was a natural for the job of Sting Boy. At Beldini’s trial, he admitted bribing countless public servants re development deals for some 10 years in Jersey and New York. He’d laundered the bribes through his family’s Yeshiva in Monmouth County. Dwek’s gift of grifter gab served him well with Healy, Beldini, Cheatam, and Shaw. On the FBI tapes the Fab Four echo each other’s lines and finish each other’s sentences like folks in a very old marriage. Dwek picked up their dialog and fed it back. Riffing on the slippery chit chat.

As for visuals, the tapes are cinema verite as shot from under a shirt. A herky jerky chest level camera catches Mayor Healy fist-pumping pepper onto potato salad. His tie hangs unknotted as if he’s starting to strip. His face looks red even in black and white. On one tape Leona Beldini describes the upcoming Healy fund raiser at the Beacon as an “elegant affair” with “carving stations” and “champagne.” The guests would be swell as well. “We want people who’ll look good.” One wonders — was Healy invited?

Political consultant Jack Shaw lends a touch of Banquo to the vids. As said, he died of a Valium overdose a few days after being busted. Accident? Only his shadow knows. His shadow hangs over the FBI’s case in Hudson County. After his arrest, Shaw allegedly agreed to cooperate with the Feds. His input would have been invaluable. It was Shaw who introduced Esenbach/Dwek to many of the indicted or suspect pols and it was Shaw who collected $40,000 from Dwek as an alleged bribe for the biggest fish in the batch — Joseph V. Doria, state commissioner of the Department of Community Affairs (DCA). As DCA head, Joe Doria chaired the New Jersey Redevelopment Authority, the Housing and Mortgage Finance Agency, and the Council on Affordable Housing. Doria, a Hudson County machine man elevated to state power by former Governor Jon Corzine, admits meeting with Shaw and Dwek but denies taking bribes. Doria resigned as DCA head last summer, after his offices were raided by the FBI. He has not been indicted.

Jack Shaw cut his corruption teeth in Cook County, Illinois. He told Solomon Dwek that of all the places he knew, Hudson County was the most like Cook County. When the state’s attorney in Cook investigated Shaw in the late 70s, he emigrated to Hudson County. (He was invited in.) In Hudson, Shaw was jack of all trades. Among other things, he served as campaign manager and advisor to ex Hudson County Executive Robert Janiszewski. In 2002, Janiszewski pleaded guilty to extorting bribes from developers. Until his arrest became public knowledge, he wore a wire for the Feds. There went another batch . . .

Jack Shaw had his ups and downs. He riled a few cronies by allegedly embezzling from them to support a cocaine habit. The State Commission of Investigation said scathing things about how Shaw and a buddy ran the Hudson County chapter of the Society for the Prevention of Cruelty to Animals. But in Hudson County, tomorrow is always another day. As the new millennium glided along, Shaw was guiding New York developer George Filopoulos of Metrovest Equities through the shoals of Jersey City’s development process. The result? The Beacon. An elegant condo fortress in one of Jersey City’s poorest nabes. FHA mortgages available! By the buy, Jack Shaw’s girlfriend was/is property manager for the Beacon. Money that Dwek gave Shaw flowed back to Mayor Jerry Healy’s campaign through her checkbook.

Even after death, Jack Shaw is a go-to guy. Leona Beldini’s attorney claims Jack was the real grafter. Cheatam? How ’bout that name? Solomon Dwek is a deceitful rat, Beldini an honest public servant. So pure she didn’t need to take the stand in her own defense. She just sat next to her attorney, shining . . .

As this is being written, the jury is out onU.S. v. Leona Beldini. In the FBI tapes, Deputy Mayor Beldini kept her hands clear of Dwek’s cash. Quid pro quo was at tongue’s length. Perhaps the jury will say “not proven.” But whether Beldini is convicted or not, the Feds deserve some sort of media award. Jersey City is a Reality TV classic. Its images are forever.

*Ex-Hudson County Official Admits Conspiring with Numerous Others to Extort Cash in Return for Official Influence, USDOJ, U.S. Attorney, District of New Jersey, 09/18/09

**Unless otherwise noted, all quotes are from the following transcripts of videos and audio tapes played during the U.S. v. Leona Beldini trial, and published in the Newark Star-Ledger:

• Dwek, Cheatam, Shaw body recording transcript 2, March 11, 2009
• Jersey City diner hidden camera video: Mayor Healy, Beldini meet with Dwek, March 13, 2009
• FBI informant, Jersey City deputy mayor Beldini discuss campaign donations, March 24, 2009

Carola Von Hoffmannstahl-Solomonoff
Mondo QT

Send comments or confidential tips to:

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["Jersey City, New Jersey" photo by Oquendo; CC BY 2.0]

Join us as we hand over the production reins to Conspirator Tarrin Lupo, who delves into the government policies that drive people to work in black markets, and how it happens all around us — to the detriment of gubment, and the betterment of free people.

Check it out!

Be Seeing You!

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Last week politicians in Washington made a few things clear about how they really feel about the state of the union. First, they are beginning to hear the growing discontent with the size and scope of government and the broken promises that keep piling up. Certain events in Massachusetts recently made that statement loud, clear and unavoidable. In the face of those events, the powers that be made the determination that some populist rhetoric was in order, and the idea of a spending freeze in Washington was proposed, albeit with several caveats. These caveats to the proposed spending freeze ensure that we are not at any real risk of actually doing anything about spending.

First of all is timing. It wouldn’t go into effect until 2011, which allows plenty of time to increase spending levels quite a bit before they are frozen. If the administration really understood and cared about our spending problems they would not freeze spending a year from now, but cut spending immediately and significantly. But, spending cuts almost never happen in Washington, and they are not likely now or a year from now — if the politicians have anything to say about it.

The second caveat is the huge areas of the budget that are shielded from this freeze. The entire State Department budget is exempt, as are all entitlements, all military industrial spending and almost all foreign aid. Fully 7/8 of federal spending is excluded from this freeze, and some areas to be frozen were actually set to decrease, which means a freeze actually guarantees a higher level of spending.

Especially insulting is the idea that in spite of our own fiscal problems at home, taxpayer dollars will continue to be sent overseas in the form of foreign aid where it often does more harm than good. When need is demonstrated to Americans and they can afford it, they can be counted on for a tremendous outpouring of private, voluntary charity to worthy aid organizations, as we recently saw in Haiti. By contrast, government-to-government aid is taken from the poor by force and too often enriches the corrupt. It is counterproductive and wasteful. But the idea of eliminating, freezing, or reducing foreign aid is not up for serious debate any time soon.

The third caveat is what is included in the freeze that would make it politically impossible to pass Congress, for example air traffic controllers’ salaries, education, farm subsidies and national parks.

I do not necessarily want a cut in spending in this country — I just want to change who does the spending. The spending should be done by the people who earn the money, if they choose, and on what they choose, without any government interference. That is what makes the economy work. Politicians should stick to the very limited roles given them by the constitution instead of allocating such a sizeable portion of our capital and intervening through regulations and tax policy. But because politicians have disregarded the constitution, and the people have no idea what rule they will break next, there is already a very real spending freeze underway in this economy, by the people. If government would stick only to what it was authorized to do, and leave the rest to the people, most of these problems would resolve themselves.

["These Taxes are Killing Me Too" photo by Chris Fitz; CC BY 2.0]

By a 70-30 vote, the Senate confirmed embattled Federal Reserve chairman Ben Bernanke for a second term Wednesday afternoon.

The vote followed a 77-23 cloture vote to end debate on Bernanke’s confirmation.

Bernanke has received praise for preventing the economic crisis from becoming even worse than it might otherwise have been, as well as criticism for failing to stop it from happening in the first place.

Speaking on the Senate floor after the vote, Maria Cantwell (D-Wash.) said she voted against Bernanke because he did not feel the same sense of “urgency” to help Main Street as Wall Street and called on the Fed, Treasury and President Obama to provide capital to small businesses and community banks, as well as increased “transparency and predictability” to prevent another bubble from forming.

The Fed decided today to hold interest rates steady at 0 to 0.25 percent, citing signs of economic recovery, but stating it expects to hold interest rates low for “an extended period.”

Senators voting against confirming Bernanke were: Begich (D-Ak.), Boxer (D-Calif.), Burning (R-Ky.), Brownback (R-Kan.), Cantwell (D-Wash.), Cornyn (R-Texas), Crapo (R-Idaho), DeMint (R-S.C.), Dorgan (D-N.D.), Ensign (R-Nev.), Feingold (D-Wis.), Franken (D-Minn.), Grassley (R-Iowa), Harkin (D-Iowa), Hutchison (R-Texas), Inhofe (R-Okla.), Kaufman (D-Del.), LeMeiux (R-Fla.), McCain (R-Ariz.), Merkley (D-Ore.), Risch (R-Idaho), Roberts (R-Kan.), Sanders (I-Vt.), Sessions (R-Ala.), Shelby (R-Ala.), Specter (D-Pa.), Thune (R-S.D.), Vitter (R-La.), Whitehouse (D-R.I.), Wicker (R-Miss.)

["Ben Bernanke Dollar" photo by Gage Skidmore; CC BY-SA 2.0]

The U.S. Bureau of Labor Statistics announced last week that for the first time, the number of government employees in unions exceeded the number in the private sector, which fell to a new low of 7.2 percent, down from 7.6 percent in 2008. At the same time the number of government employees in unions rose from 36.8 percent to 37.4 percent.

But private sector union membership has been on a slow and steady decline for decades. While union leaders decry the numbers, saying that good union jobs are disappearing, the reality behind unions is much more complex. To an extent, they have become a victim of their own success.

The AFL-CIO, the largest union federation in the U.S., claims on its Web site that unions help “build stronger workplaces” and “give workers a voice on the job about safety, security, pay, benefits — and about the best ways to get the work done.” Further, it says, unions “represent working families before lawmakers, and make sure politicians never forget that working families voted them into office.”

All of that, it turns out, is somewhere between misleading and blatantly untrue.

“They artificially increase wages in unionized industries, limit employment opportunities, depress wages in nonunion jobs, lower rates of return on investment in unionized firms, and slow the growth of productivity,” writes James A. Dorn, professor of economics at Towson University and editor of theCato Journal. “Unions politicize labor markets and have used the threat of violence to protect their wage premiums. In addition to using their monopoly power to secure higher than market wages, unions spend huge sums of money to maintain their power and limit competition.”

In its first issue of 2010,Cato Journal asks, Are unions good for America? The answer may surprise you, especially if you are a member of a union.

(Before going on I should disclose that I once paid union dues to the United Food and Commercial Workers when I worked at a grocery store.)

In 232 short pages of hard-hitting analysis, (but don’t do what I did and read it all in one sitting) Cato exposes some of the myths behind labor unions that practically everyone believes. Here are a few of them.

Myth: Unions work to ensure a level playing field for employees.

Fact: Unions advocate for laws which tilt the playing field in ways that are unfair to both employers and employees. Those laws often impair economic growth and innovation, as well as destroy the freedom to contract, according to Randall G. Holcombe and James D. Gwartney, economics professors at Florida State University. Over time, these labor laws actually cause a shift in employment from union jobs to nonunion jobs. In fact, research shows that the growth of labor unions during the Great Depression actually increased unemployment. Unions are still destroying jobs today.

“In the short run, because labor law has given to unions an advantage in the bargaining process, union contracts have had the effect of increasing the wages and benefits of union workers,” they wrote. “In the long run, the higher cost of union labor brought on by those union contracts has resulted in a steady decline in private sector unionism, and has eroded U.S. manufacturing in unionized industries — most visibly, the railroad and auto industries.”

Myth: Unions bargain on behalf of their members to get employees the wages and benefits they deserve.

Fact: Unions “bargain” with the guns of government in hand, to get employees more wages and benefits than they deserve, with a little for themselves on the side. By crawling in bed with government to pass laws which benefited the unions at the expense of employers — and, in the long run, employees — union leaders have drained American businesses dry. The long, slow decline of private sector unions reflects the economic destruction they left in their wake as they searched for fresh blood to leech. And today they’ve found the biggest source yet, the government.

Armand Thieblot, an economic consultant who has written books on union corruption and violence, writes:

When Samuel Gompers, then head of the American Federation of Labor, was asked in the early 1920s what unions wanted, he famously replied, “More.” At the time, everyone correctly understood that unions’ targets were the capitalists from whom additional wages and benefits would be wrested by force, and also that if unions were successful, capitalists would have to be content with “Less,” thus, just a transfer of economic rents within the system from one factor to another.

By the 1980s and 1990s, however, when unorganized capitalists had become thin on the ground and those already organized had mostly been rendered uncompetitive by past concession to union demands, unions’ new guiding trope became “More government.” To achieve it, unions became mordantly political. In economic terms, after unions had absorbed all of the readily available economic rents from their capitalist opponents, they have turned to seeking rents from new sources beyond the system — from the polity at large (from taxpayers), using government as the intermediary.

Myth: Project labor agreements reduce project costs and delays and are good for construction workers as a whole.

Fact: Project labor agreements increase costs and only help union workers. PLAs are agreements between construction project owners and unions that contractors on the project must use union labor, even if they otherwise would not. David G. Tuerck, economics professor and chair at Suffolk University, cites numerous examples of how nonunion workers were harmed when they worked under PLAs, “first by forcing them to pay twice for benefits already offered their workers and second by forcing pay cuts on their workers.” Then, unions use veiled threats to “labor peace” to intimidate project owners into accepting PLAs for “job stability.” Further, PLAs increased costs for every project studied which used them, sometimes as much as 20 percent.

“PLAs are motivated by a desire on the part of the construction unions to shore up the declining union wage premium against technological changes and other changes that make traditional union work rules and job designations obsolescent,” Tuerck writes. “Now the PLA has evolved into an instrument that the unions employ in tandem with the prevailing wage laws in order to reduce the competitive advantage of nonunion contractors.”

Myth: Prevailing wage laws are good for competition, improve safety and quality, and help train new workers.

Fact: Prevailing wage laws stifle competition, have no effect on job safety and quality, and do nothing to help train new workers. The Davis-Bacon Act of 1931, signed into law by President Herbert Hoover, mandates that on federal construction projects, workers be paid the so-called “prevailing wage” for similar local workers. In practice, the wage is set far higher than the actual prevailing wage, closely mirroring union pay scales. This virtually locks out nonunion construction workers from federal contracts.

George C. Leef, director of the Pope Center for Higher Education Policy, finds that all of the arguments for prevailing wage laws fail to stand up to even the slightest scrutiny. Worse, the Davis-Bacon Act was racially motivated: “The hearings and debate on the legislation revealed some ugly racial overtones with comments on how ‘cheap colored labor’ was driving down wages of white workers.” Robert Bacon originally proposed the bill because he was upset that a construction firm from outside his district, employing black workers, built a veterans’ hospital in his district.

Myth: Organized labor has worked to promote racial equality.

Fact: Unions have used racial discrimination as a tool to enrich themselves, and continue to do so today. In 2008, Richard Trumka, who is now the president of the AFL-CIO, said, “We know, better than anyone else, how racism is used to divide working people.” He should, because the unions have been doing it for their entire existence, and still are, as Paul Moreno, history professor at Hillsdale College, illustrates. It isn’t — and probably never was — the employers oppressing the black, or the Chinese, or the Hispanic people. Most employers, as it turns out, really are color blind, as Martin Luther King, Jr., noted in 1957: “With the growth of industry the folkways of white supremacy will necessarily pass away. Moreover, southerners are learning to be good businessmen, and as such realize that bigotry is costly and bad for business.”

As racism goes, unions made the KKK look like amateurs. Big Labor lobbied for, and got, special laws to make them completely immune for whatever they did — all the way up to outright murder. InUnited States v. Enmons, in 1973, the Supreme Court held that unions were immune from prosecution under the Hobbs Act if their violent acts were in furtherance of a “valid union objective.”

Moreno concludes:

The problem of racial discrimination in organized labor in America was less solved than it was outgrown. The story of racial discrimination in the American labor movement confirms the view that unions act as cartels that attempt to limit the supply of labor and raise its price. An easily identified and culturally disfavored minority group provided a convenient category for exclusion. But most unions were unable to succeed without state power, and by the time that they acquired such power, blacks had already fought their way into the industrial workforce. Discrimination within, rather than exclusion from, unions then became the chief problem — one that spawned the policy of “affirmative action.” Finally, the macroeconomic costs of unions decimated the ranks of private sector unions.

And Trumka? He talked a good game about ending racism in organized labor, but whether anything will change remains to be seen.

Myth: Unions help preserve manufacturing jobs.

Fact: Unions were a contributing factor in the decline of American manufacturing, especially in the automobile industry. Detroit makes a great example. At the start of the 20th century, Detroit was a boom town and its manufacturing jobs were paying 33 percent above the national average. Union organizers brought their message of capitalist greed and exploitation to already highly paid auto workers, where it largely fell on deaf ears. Until the Great Depression, when union organizers used a variety of underhanded tactics to force automakers, steel plants and other manufacturers to unionize.

(Interestingly, Henry Ford at the time threatened to break up his company rather than submit to union demands; he finally gave in when his wife threatened to leave him.)

Stephen J.K. Walters, economics professor at Loyola, explains what happened next. Companies, squeezed hard and struggling to survive, would move their operations out of Detroit and other cities, and later, out of the country entirely.

In sum, at the onset of World War II most of America’s great industrial firms — which, thanks to agglomeration economies were concentrated in cities throughout the East and upper Midwest — now faced labor cartels. These cartels needed some time to consolidate their power, so increases in employers’ wage costs would be significant but gradual. Further, WWII and its aftermath, during which time America’s industrial rivals’ productive capacity suffered heavy damage that would be restored only slowly, insulated the unions and firms to some degree and for some time from the most severe competitive consequences of monopolistic and opportunistic prices for labor. But the employers started to adapt immediately in ways that standard economic theory would predict — and that would ultimately help create what became known as America’s Rust Belt. Union actions, clearly, were not the only reason that industrial cities would decapitalize, depopulate, and become poorer in the second half of the 20th century, but they merit inclusion on the list.

If you’ve lost a manufacturing job any time in the last 50 years, thank your union boss for destroying your job, with a one-finger salute.

Myth: Teachers’ unions work to increase the quality of children’s education.

Fact: Teachers’ unions work to increase their membership rolls and their political power, at the expense of your children’s education. While collective bargaining has done little to increase the salaries of union public school teachers over nonunion public school teachers, these unions perform a different service for their members: preventing them from having to educate children. Andrew J. Coulson, director of the Center for Educational Freedom at the Cato Institute, explains that teachers’ unions strongly oppose government reforms which would improve the quality of K-12 education, such as charter schools, vouchers, and property tax credits.

The NEA and AFT spend large sums on political lobbying so that public school districts maintain their monopoly control of more than half a trillion dollars in annual U.S. K-12 education spending. That monopoly, in turn, offers a more than 40 percent average compensation premium over the private sector, along with greater job security. And since both the U.S. and international research indicate that achievement and efficiency are generally higher in private sector — and particularly competitive market — education systems, the public school monopoly imposes an enormous cost on American children and taxpayers. We are paying dearly for the union label, but mainly due to union lobbying to preserve the government school monopoly rather than to collective bargaining. (Emphasis in original)

Myth: Public sector unions work for the general prosperity of their members and all Americans.

Fact: Public sector unions dramatically increase the cost of government to unsustainable levels. The cost of employee wages and benefits accounts for half of the $2.2 trillion that state and local governments spent in 2008, and that number is set to grow dramatically as employees retire and generous pension packages kick in. Though, calling them generous is an understatement.

Moreover, according to Chris Edwards, director of tax policy studies at the Cato Institute, those pension obligations are grossly underfunded, which will make the fiscal crisis even more acute this decade.

The upshot of all this is that policymakers will need to make large budget reforms in the years ahead. They will to need to deliver public services more efficiently, to privatize services when feasible, to cut staffing levels, and to terminate low-value programs. Policymakers often hesitate in making such reforms, but the high level of unionization in many state workforces will make reforms even harder to achieve. During labor negotiations, for example, public officials often succumb to pressure to make short-term concessions that end up damaging public finances in the long run.

Businesses can and do mitigate the inefficiencies of a unionized workplace, but governments are much more constrained and have less incentive to do so, driving up taxpayer costs even further. And public sector unions use their large war chests to buy influence and protection. “So the problem with public sector unions is not just that they block compensation reforms, but that use their privileged status to control broader policy debates.”

Myth: Right-to-work laws harm employees and prevent employers from freely contracting with unions.

Fact: Right-to-work laws improve the economy, and employers freely contracting with unions is prohibited by the Wagner Act. That Act forces employers to bargain with unions “in good faith,” which is interpreted to mean that employers must capitulate to virtually every demand of the unions or be accused of acting in bad faith. This is hardly freedom of contract. Right-to-work laws mitigate, but do not entirely fix, this problem.

I have some experience with this, since I once worked in a non-right-to-work state and was forced to join the union. I would rather have negotiated my own terms; I’d likely have gotten a better deal. It seems many Americans agree, as millions of them have moved from non-right-to-work states to right-to-work states in the last decade, a migration that shows no signs of stopping. Richard Vedder, economics professor at Ohio University, found that both predictive models and real world evidence show that right-to-work states experience more economic growth than non-right-to-work states.

Myth: Labor unions support trade liberalization because it lowers the prices of goods that workers buy.

Fact: This used to be true, but today’s labor unions oppose trade liberalization. They believe that increasing globalization has directly led to the decline of their unions, and thus their power. This isn’t exactly true, according to Daniel Griswold, director of the Center for Trade Policy Studies at the Cato Institute. “Although the evidence is lacking to implicate globalization as a whole, two aspects of the trend have been found to have significant negative effects on labor unions: inward foreign direct investment (FDI), and ’social integration’ across borders.”

When foreign companies invest in the U.S., companies here realize that they can also invest in other countries. “The correlation of FDI and declining rates of union density suggests that ‘many workers feel greater insecurity from seeing capital mobility in their sectors, even if not in their own particular firms,’ Slaughter (2007: 344–45) concluded.”

And social globalization, “the spread of ideas, information, images and people,” a natural result of advances in communications and transportation, “reinforces what Dresher and Gaston (2007: 176) call a ‘growing normative orientation towards individuals rather than collectivism [which] makes collective organization more difficult.’ Adding to the trends are rising levels of immigration and perceptions of younger workers who view unions as old-fashioned and anachronistic institutions.”

In competitive product markets, the drag that unions impose on firm performance can be debilitating to the firm and its workers over time. As described above, firms facing vigorous competition are not able to pass along higher costs to consumers without risk of losing significant market share. Newly unionized firms in such markets face the cruel choice of passing along higher labor costs to consumers, thus losing market share to more cost-efficient competitors, or eating the higher costs in the form of lower profits and less reinvestment in physical and intellectual capital. Either choice will result over time in an erosion of the unionized firm’s market share.

Myth: Paying workers higher wages will reduce unemployment and stimulate the economy.

Fact: The “high-wage doctrine” increases unemployment and drags down the economy. This doctrine originated with a 1921 report that Hoover commissioned while he was Secretary of Commerce dealing with what was, in retrospect, a minor recession. In addition to recommending higher wages, the report also said that government spending (now known as the stimulus package) can help the country recover from a recession. Neither is true, of course, and the report might have been completely forgotten had Hoover not become President. He put his disastrous ideas into practice, and the rest, as they say, is history.

Worse, proponents of these theories, which John Maynard Keynes gleefully signed on to, are more concerned with theories than facts, according to Lowell E. Gallaway, economics professor at Ohio University. That’s just a polite way of saying they’re full of crap. Galloway writes:

In the intellectual world, the high-wage doctrine continues to have its appeal. Prior to his appointment as chairman of the Federal Reserve Board, Ben Bernanke, collaborating with Martin Parkinson, noted: “Maybe Herbert Hoover and Henry Ford were right. Higher real wages may have paid for themselves in the broader sense that their positive effect on aggregate demand compensated for their tendency to raise costs” (Bernanke and Parkinson 1989: 214). More recently, Paul Krugman reiterated this view in a New York Times oped (3 May 2009), arguing, “Many workers are accepting pay cuts in order to save jobs.” He then asks, “What’s wrong with that?” His answer refers to what he calls “one of those paradoxes that plague our economy right now . . . workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.” This is simply a reprise of Klein’s (1947) views. Never mind the existence of more than a century of empirical evidence to the contrary. Krugman’s concern is not with the empirical problem, but with the theoretical connection between wage rates and employment. The high-wage doctrine still lives. In all probability, this persistent adherence to an incorrect doctrine once again will prove to be detrimental to the U.S. economy, just as it was in the 1930s.

Myth: Unions currently operate in a free market.

Fact: Unions are heavily dependent on the government to provide them unfair leverage over employers and control over their members. It is possible for unions to exist and provide valuable services to their members in a market free of government-sponsored violence and control, but those services would likely have to be geared toward helping employees improve themselves, rather than extracting undeserved compensation from employers.

Charles W. Baird, professor emeritus of economics at California State University, East Bay, examines what constitutes a free market, how existing labor laws destroy freedom, and what a union might look like in a true free market. It won’t happen any time soon, though, he says: “It is politically impossible, at this time in America, to repeal the Norris-LaGuardia Act and the National Labor Relations Act and replace them with any sort of free-market union law. Nevertheless, it is worthwhile to prepare the ground now for doing so in some future, more enlightened time.”

If you’re wondering why you’re out of a job, why Detroit is a wasteland, and why the economy is on the verge of collapse, don’t be so quick to blame Wall Street: Some of the blame belongs to the labor unions.

["AFL-CIO building, Washington, D.C." photo by Derek Blackadder; CC BY-SA 2.0]

Much has been made recently about the supposed economic recovery. A few blips in a few statistics and many believe our troubles are all over. Of course, they have to redefine recovery as “jobless” to account for the lack of improvement on Main Street. But the banks have money, Wall Street is chugging along, and the administration would like to get on with other agendas.

They have even set up a commission to investigate the crisis as if it were all in the past.

The truth is that Americans are still losing jobs, the Fed is still inflating, and more regulations are in the works that will prevent jobs and productivity from coming back. We are on this trajectory for the long haul. The claim has been made many times that this administration has only had a year to clean up the mess of the last administration. I wish they would at least get started! Instead of reversing course, they are maintaining Bush’s policies full speed ahead. They are even keeping the Bush-appointee in charge of the Federal Reserve! They are not even making token efforts at change in economic policy. And for all the talk of transparency, we hear that some powerful senators will do all they can to block a simple audit of the powerful and secretive Federal Reserve.

We have been on a disastrous course for a long time. The money supply has doubled in the last year, our debt is unsustainable, the value of the dollar is going to continue its drop, and those Americans who understand where we are headed feel helpless and held hostage by foolish policy makers in Washington. When the bills finally come due and the dollar stops working we are in for some real social, economic and political chaos. That is, unless we take some major steps now to allow for a peaceful transition in the future. These steps are laid out in my legislation to legalize competing currencies.

First of all, no one should be compelled by law to operate in Federal Reserve notes if they prefer an alternative. We should repeal legal tender laws and allow Americans to conduct transactions in constitutional money. Only gold and silver can constitutionally be legal tender, not paper money. Instead, it is illegal to conduct business using gold and silver instead of Federal Reserve notes. Simply legalizing the Constitution should be a no-brainer to anyone who took an oath of office. Consequently, private mints should be allowed to mint gold and silver coins. They would be subject to fraud and counterfeit laws, of course, and people would be free to use their coins or stay with Federal Reserve notes, as they see fit. Finally, we should abolish taxes on gold and silver, which puts precious metals at a competitive disadvantage to paper money.

The Federal Reserve is a government-sanctioned banking cartel that has held far too much power for far too long and is in the end stages of running the dollar into the ground, and our economy along with it. The very least Congress can do, if they are not willing to abolish the Fed, and perhaps not even conduct a serious audit of it, is to allow citizens the freedom to defend themselves from being completely wiped out by their monopoly power.

["Gold and Silver" photo by Velo Steve; CC BY-SA 2.0]

As we start the new year 2010, the establishment politicians, economists and Wall Street are trying to convince themselves that we have turned the corner and economic growth has once again begun. The predictions that conditions are getting back to normal come from those who never saw the crisis coming and don’t have the vaguest notion what caused it. Some of them concede that it could be a jobless recovery. That will establish a new definition for a recovery.

Official unemployment is at 10% but even the government knows that if everyone is counted, including those individuals that are too discouraged to even be looking for work, the unemployment rate is 17%. Free-market economists claim the actual unemployment rate is closer to 22%.

There’s reason to believe that the correction is just barely started and has a long way to run. If the financial bubble came from excess credit created by the Federal Reserve, doubling the money supply can hardly be a solution. It wouldn’t make much sense for a doctor taking care of a very sick patient from severe infection to deliberately give the patient another infection. Yet that’s what the PhD doctors are doing to our very sick economy. It can’t work. It will make the economy much sicker. If our leaders don’t wake up soon, the economy will be brought to its knees. Great danger lies ahead.

In foreign policy, it’s always crucial that the motives of those who would do us harm are understood. Denial of the truth and accepting more politically palatable excuses will guarantee that threats to our safety will continue as we pursue a seriously flawed involvement overseas.

It’s the same in economic policy. If there’s denial or ignorance of the real cause of financial bubbles and the inevitable corrections that must follow, the economy cannot be reenergized.

We should have learned the lesson from the Depression of the 1930s that it was a predictable result from the Federal Reserves orchestrated excesses of the 1920s. Instead, the new-born Keynesian economists who took charge made certain that the correction would not be a one or two year affair as were the previous corrections in our history. The aggressive intervention by Hoover and Roosevelt, the Republicans and the Democrats, turned a short recession into the Great Depression, which lasted until the end of World War II.

The real tragedy was that the interpretation of the 1930s institutionalized bad economic theories. Unfortunately, and erroneously, the Depression was blamed on the gold standard, free markets and a lack of regulations. Though monetary policy was analyzed, its importance was 100% misinterpreted. The low interest rates and excess credit of the 1920s, driven by Federal Reserve policy, was not considered a factor in producing the stock market bubble and the mal-investment.

Instead, the 1930s analysts and even later analysis by Milton Freidman and the monetarists, along with academic “scholars” like Bernanke, came to an opposite conclusion: the Fed was at fault but only because it was too tight, arguing that massive monetary inflation was the only answer to the slumping economy.

And now we are witnessing a grand experiment by the very person who for years claimed special knowledge regarding the Depression. Chairman Bernanke is in the midst of trying to solve the problem of massive monetary inflation and excessively low interest rates instituted by his predecessor, Alan Greenspan, by implementing even more inflation at historic rates. The sad part is the answer to his very risky experiment with the wealth of our country and the health of our economy will take years to analyze. The conclusions will be just as flawed as they were in the aftermath of the Great Depression by an intellectual and political community that had totally rejected commodity money and the principle of free market with the current understanding in Washington.

One hope, though, is that free-market thinking and Austrian economic theories will have greater influence in the next decade or two, since their influence is now on a dramatic upswing. But there are a lot of hurdles to overcome.

In the 1930s, in an effort to find the true cause of the crisis, Congress ordered an official investigation. It became known as the “Pecora Investigation” named after Ferdinand Pecora, the aggressive chief council of the hearings. It received a lot of public attention and brought about many major changes but, tragically, every conclusion made and new policies implemented caused the depression to worsen and legitimized bad economic theories that continue to haunt us to this day.

The Federal Reserve was not blamed except for not printing enough money fast enough. Artificially low interest rates and mal-investment, the main source of the grossly distorted economy and bubble of the 1920s were exonerated. Not enough regulations were blamed, thus the Glass-Steagall Act and the Securities Act of 1933 were passed and deepened the depression. Separating commercial and investment banking and the newly created SEC were to have solved all future problems — as long as the Fed was free from any restraint in its money creation operation to serve big-government spenders and members of the banking cartel.

Since the flaws in the monetary and economic system were not corrected but made worse after the Depression, it was to be expected that periodic booms and busts would persist. The longer these cycles could be papered over with new money and credit, the greater would be the distortions and debt that would one day have to undergo a major correction.

That correction is now in its early stages. Since the dollar was the reserve currency of the world and totally fiat since 1971, without any linkage to gold, the financial bubble became worldwide. This bubble that burst in 2008 was the largest in history. During the formation of the bubble, the U.S. as the issuer of the world currency received undeserved benefits. We essentially became the counterfeiter of the world and no one called us on it. Even today, the trust in the dollar that persists has buffeted the pain of the correction for us. This unique setup was a prime cause for our balance of payment deficits and the huge foreign debt we owe — the largest in the history of the world. The discord in the world financial system is telling us that it’s time for us to pay for our profligate spending and massive foreign indebtedness. We have lived, as a nation, far beyond our means and the message is, for the foreseeable future, that we will be forced to live beneath our means as this debt is paid.

The inflation optimists are excited about current signs of economic growth and have even announced the end of the recession. It is conceivable that a reprieve can be achieved and the penalty that our economy must endure delayed. A reprieve must not be confused with a pardon; one is a temporary delay, the other an exemption. The payback for our excesses is certain to come.

Massively increasing debt and monetary inflation can slow the crash and change some government statistics encouraging the optimists. But real job growth and return of prosperity will remain elusive. The odds of us once again becoming an exporter of manufactured goods, like steel, cars, and textiles, are remote.

Ironically, a reprieve may well restore some confidence and motivate some spending and investment. But instead of restoring long-term growth, it may well act perversely by precipitating price inflation and higher interest rates. Since today’s interest rates are artificially set, much of our investing is unproductively misdirected.

Current enthusiasm in the stock market is once again a reflection of the message that low interest rates send. Thus too, the government’s stimulus package has helped to sustain the bond bubble, which in time must be deflated in order to get back to sound economic growth. All of this activity poses a threat to the dollar.

Governments are very powerful, and when in partnership with the monetary authorities that can inflate the currency at will, big government thrives. Welfare demands and senseless wars can be financed for long periods of time through inflation, as long as trust in the currency lasts. Trust, though ultimately controlled by facts, can be misleading, since currency values can gain benefit from a country that has a strong military and wealth and a reasonably healthy economy. Eventually, markets and reality overwhelm, and illusions about a currency’s worth become a reality.

Today, reality is setting in and the first of three major events has begun. The worldwide financial system, built on a foundation of paper, has received the shock waves of an impending collapse.

The wild speculation and the derivatives market, the stock market bubble, the insurmountable debt — public and private — and the massive mal-investments have been shattered.

The only solution so far offered worldwide, but led by the United States has been to “print money” faster, keep interest rates low at practically zero percent, and remove all stops for controlling deficits. These are the very policies that caused the disequilibrium, and doing more of the same, but only faster, can hardly help our economy. The addiction to easy credit and deficit defies a wise political solution. Politicians are incapable of delivering the message of frugality, common sense, and sound money.

We can expect that the course we are on to continue and accelerate, since the first event, the collapse of the financial system, is still in its early stage.

The housing crisis is far from over; the commercial property crisis has not yet gotten much attention, and the financial obligations of the government are growing exponentially. And none of this forces the slightest pause in the expanding of welfare growth. The number of regulations, which are indeed a tax, are exploding though the market was already suffering from regulatory excesses. There’s a consensus in Washington that “wise” regulations can compensate for all the mistakes made by the Federal Reserve, the Executive Branch, and Congress. This fallacy has been around a long time and will be difficult to overcome.

The pessimism of the middle class continues to get worse despite the prognostication of Wall Street and the Administration. Most Americans know that the standard of living and real wages have not gone up for the past 10 years. If you’re not a shrewd stock trader and instead invested in stocks 10 years ago and held on, in real terms you would have lost 20% of your savings. The middle class is poorer also because house prices have crashed and many have lost their homes. On top of this, all we hear about is the trillions of dollars of debt and entitlement obligations that have been racked up for future taxpayers to pay. When it is revealed that the insider friends of the Fed and Congress get billions of dollars in bailout at the expense of the middle class, it’s no wonder the people are taking to the streets and directing their hostilities toward both Republicans and Democrats in Washington. Many would agree it is well-earned anger and properly directed.

This anger and frustration will certainly grow as the consequences of the collapse of the financial system become more severe. The concerted effort to prevent the correction the market demands, guarantees a prolonged agonizing crisis. Every effort to reverse the tide will depend on spending, higher deficits, increased taxes and money creation. This effort is now providing another grand bubble: the dollar/bond bubble.

The next event will be a dollar crisis. A full-blown dollar crisis will be worse than our current financial crisis The extent of a dollar crisis depends on whether or not the Washington politicians wake up and change their ways — a dubious hope.

More likely, the insanity will continue until some not yet known event will undermine the confidence of the dollar worldwide. Signs of less desire by foreigners to hold our dollars are already present. I’m certain our Treasury and Federal Reserve are pulling out all stops to prevent a massive run on the dollar. At present the “orderly” retreat from the dollar is working. But it won’t last.

China is quite active in investing in natural resources around the world, including Iran. While we live in the dark ages and believe only our military presence and military threats can protect our access to oil, China is actually spending some of their savings investing in their future access to energy and other precious metals and minerals.

But the orderly retreat from the dollar won’t last forever. Since 1973, shortly after the breakdown of the Bretton Woods Agreement, the dollar has lost 32% of its value against a Federal Reserve basket of currencies. But that doesn’t tell the real story, since that is a measurement against all other currencies, and they are fiat currencies as well. This gave the dollar an artificial benefit from its position of power in great wealth and military prowess. The dollar in relationship to gold, however, is down 97% since 1971, and 82% as measured by the CPI. The dollar, mismanaged by the Fed, has not been a benefit to the savers who sought to responsibly take care of themselves. They’ve been cheated by a rotten system and are just beginning to understand exactly how the Federal Reserve has been responsible for the swindle.

It is impossible to predict the time when confidence will be lost, but it can come quickly. Resorting to buying other paper currencies will not be of much help. When the dollar crashes, most likely the purchasing power of all currencies — since all countries hold dollars as a reserve — will go down as well.

This means that dollars and other currencies will go into buying consumer items, precious metals and other physical properties. Consumer prices will soar, as well as interest rates. The central bank will lose control; and the more they inflate, the worse the confidence becomes. The interest rates will respond to these efforts by rising sharply.

If the Fed tries to reverse the run on the dollar, interest rates will also soar, and the pain on the American citizens will be of such proportion that political chaos will result. Either scenario leads to political and social chaos — the third event, and the most dangerous.

With no ability of the federal government to fund its commitments, international or domestic, major changes will occur in our system. The social unrest will elicit cries for government to exert unusual force to head off a complete breakdown of law and order. The ultimate trap will be set for a system of government claiming to protect a free society. If more power and police authority are not given to the federal government, it will be argued that only anarchy will result. If more government policing power is given, it will mean a lethal threat to civil liberties. Already we have permitted the notion that a single person, the Attorney General or President, can decide who is an “enemy combatant,” thus denying that individual the right to habeus corpus, permitting indefinite detentions without charges made. This attitude toward civil liberties has changed significantly since the fear built around 9/11.

Yes, I know declaring one an “enemy combatant” is reserved for the radical Muslims engaged in terrorism against the United States. To be reassured by this reasoning is quite dangerous and naïve. Logic should not lead us to equate suspects with terrorists, and include American citizens, and yet this has already been set by precedent. Under difficult circumstances, our political leaders will not be hesitant to use these powers to maintain order. Tragically, the people may even demand it.

We are rapidly moving toward a dangerous time in our history. Society as we know it is vulnerable to political and social chaos.

This impending crisis comes as a consequence of our flawed foreign and domestic economic policies, a silly notion about money, ignorance about Central Banking, ignoring the onerous power and mischief of our out-of-control intelligence agencies, our unsustainable welfare state, and a willingness to sacrifice privacy and civil liberties in an attempt to achieve safety and security from an inept government. Dangerous times indeed!

What can be done about it? Must we wait for the inevitable and expect to restore our liberties in a street fight against the overwhelming power of the state? Not a good option!

The only way that we can prevent blood from running in the streets is to offer a better idea of the proper role of government in a society that desires first and foremost — liberty.

And that is impossible without a firm commitment by our thought leaders to the ideas of freedom, the source of all creative energy and prosperity. An all-powerful state is the threat to that ideal.

The prevailing attitude of the people-as it once was in early America-must be that of liberty and self reliance, rather than the nanny state and dependency relying on government force to mold all private choices.

If this is understood, a smooth-although not painless-transition to a free society is achievable. Ignoring this option will be very destructive to everything that is dear to the hearts of most Americans.

What is it that we must do? We must immediately:

• Balance the budget by reducing spending
• Change our foreign policy to that of non-intervention
• A full audit and more supervision of the Federal Reserve leading to abolishing the Federal Reserve
• Legalize competition to the Federal Reserve with competing currencies
• Regain respect for civil liberties and privacy while reining in the CIA
• Wean ourselves off the dependence of wealth transfers by government
• Abolish crony capitalism — no subsidies, no bailouts, no regulatory or tax privileges to protect the powerful elite especially the military industrial complex
• Eliminate the income tax, inheritance tax and taxes on savings and dividends.

None of this can happen without the restoration of Congress to its dominant position of the three Branches of Government as was originally intended by the Constitution. The Executive and Judicial must be reined in, and Congress must assert its prerogatives over all legislation curtailing all unconstitutional agendae through budgetary controls.

Signs abound that angry Americans are now more ready than ever before for a change in direction that is indeed real. If this program were improvised — even suddenly and dramatically — the adjustment, though significant and to a degree somewhat painful, would be much shorter and of minor consequence compared to the chaos and poverty that will result if we refuse to change our gluttonous appetite for a free lunch.

Last week, the Financial Crisis Inquiry Commission kicked off their first round of hearings on the causes of the economic meltdown on Wall Street. The commission is being compared to the the Pecora Commission launched in 1932 to investigate the causes of the Great Depression. The Pecora commission is beloved by those who believe the solution to every problem is more laws because it was used to justify a number of new laws, including Glass-Steagall. Of course, none of those laws addressed the real causes of the Great Depression. It was the introduction of unsound monetary policy and central economic planning pursued by the Federal Reserve that really threw everything off balance. The Fed was founded in 1913 to stabilize the economy and prevent a recurrence of the short-lived Panic of 1907, but instead it promptly produced the Great Depression which lasted more than 15 years.

The Pecora Commission was stacked with big government sympathizers who blamed the free market and the gold standard without question, and without any consideration of government interference in the economy. This panel is no different. Never will they contemplate how government steered us into this crisis, and what perverse incentives can be removed or repealed so that the market will function more smoothly. Never will they discuss how investment should come from savings, not debt. Never will it occur to them that fiat money, artificially low interest rates and the whole Federal Reserve System might be unwise and unstable, not to mention unconstitutional. The answer will always be more government regulation and oversight. It is predictable that this government panel will eventually come to the firm conclusion that government needs to be bigger, and that the market is just too free.

How sad is this when exactly the opposite is true?

It is big government that gives out tax breaks to engineer behavior, often creating large pockets of malinvestments. It is government that created the FDIC and the Fed as lender of last resort which all encourages moral hazard. It is big government that gives bureaucrats the ability to bail out cronies with taxpayer dollars while screaming that the economic sky is falling if they don’t. It is big government that every year adds new layers to the already labyrinthine regulatory code that smaller businesses can’t keep up with while simultaneously preventing new businesses from emerging. It is big government that misdirects economic productivity into bankrupt businesses that they consider to be too big to fail.

If this panel was serious about understanding the root of the problem, as they claim to be, they would have people testify who understand the crisis and saw it coming. To my knowledge, none of them have received a phone call. The problem is those people would say too many things the government panel would find inconvenient. They would point fingers at too many of the state’s anointed. They would recommend getting government out of the way of the free market and getting back to simply protecting contracts and punishing fraud. But the biggest fraud is perpetrated by the Federal Reserve. No one on this panel takes that viewpoint seriously. Instead, they will be asking people who are still scratching their heads at how they could have missed the housing bubble what new regulations they can put in place to prevent future bubbles. Thus, I don’t expect much real wisdom to come out of this current investigation.

["The Federal Reserve, New York" photo by eflon; CC BY 2.0]

The headline, long as it is, pretty much says it all. A few months ago, El G Grande spotted the attempt by the members of the pop media to depict TARP as a success, bringing a PROFIT to the federal gubment. This was not the case, and only NOW are we seeing reports that the TARP theft is not paying off.

Duh. No kidding.

But here, Gard moves to remind people like Judd Gregg, the Senator who said TARP would make a profit, that he was wrong, and we knew it last year! Check this out! Tell as many people as you can! Be Seeing You!