Bill Totten's Weblog

Wednesday, December 31, 2008

Grass-roots banking

While Wall Street was in meltdown, Sigrid Rausing found an alternative model of lending thriving in Queens, New York.

by Sigrid Rausing

New Statesman (October 16 2008)

On the morning of Friday 10 October, as even the mainstream US media were speculating about the possibility of the end of capitalism as we know it, I went to visit Grameen Bank in Queens, New York. Founded by Professor Muhammad Yunus, who invented microcredit in Bangladesh in 1976, Grameen is often thought of as a bank for the developing world. But 36.5 million people in America live below the poverty line. Up to 28 million have no bank account. Many are immigrants. They rely on payday loans or cheque cashiers, and short-term loans - some legal, some not - with annual average interest rates reaching 300 or even 400 per cent. They, too, need "Banking for the Unbanked", as Grameen's slogan puts it. The Queens branch, its first in America, opened last November and made its first loan in January.

The office is on a peaceful street in a mainly Bangladeshi area of Jackson Heights. Ritu Chattree, vice-president of finance and development, formerly of Insead and J P Morgan, opens the door to a shabby, steep staircase with a torn patterned carpet. Upstairs is a single room with six worn desks, some photos and hand-drawn maps of Brooklyn and Queens on the walls.

All the staff are out visiting clients, apart from Shah Newaz from Bangladesh, who runs the office. He gives me instant coffee with sweet powdered creamer. The contrast is beguiling - the runaway success of the bank, its Nobel Peace Prize-winning founder, the great and the good on the leadership council; and this tatty, tiny office. The ethos of providing financial services to the poor permeates the room. That day, in the context of the collapse of Bear Stearns and Lehman Brothers, this form of grass-roots banking seems not only ethical but also solidly safe: its payback rate, so far, is over 99 per cent.

Grameen Bank started 34 years ago, in Bangladesh, when Professor Yunus lent $27 to a group of 42 women. That was the beginning of the microcredit movement, which has spread to most of the developing world, not least through Grameen, whose model has been replicated in more than a hundred countries. The core principles are simple: the poor need credit, not aid. They need loans, given with respect and received with dignity, within the context of supportive groups, and in close contact with Grameen staff. Loans are given to women because evidence shows that they put the money to better use. The sums lent are carefully considered: the right amount is empowering; too little, or, interestingly, too much, is thought to be damaging.

There are four aspects to the client relationship: the loan, the savings account through the Citibank partnership, five days of financial literacy training (important for the many clients who did not previously have bank accounts) and a partnership with Experian, which establishes credit ratings for Grameen clients.

Initially it was difficult to reach the target group in New York. Leafleting proved ineffective, and Shah found it a culture shock to work with such atomised and individualistic communities where suspicions of Mafia connections or moneylender abuse were widespread. He speaks of Americans with the thoughtful concern of NGO workers worldwide, who always mirror the societies they work in. This, more than anything, strikes me as the essence of Grameen America. Shah is not only talking about the poor, he is talking about Americans, and the nature of America, just as westerners in Bangladesh talk about Bangladeshis.

The culture shock may be mutual. American women may wonder why a bank based on an explicitly woman-oriented theory of change is so lacking in feminist language. According to its leaflets, Grameen America anticipates its clients using their loans for purposes such as selling beauty salon products, clothing and jewellery, bakery goods, handicrafts and flower arrangements. There are many things that women's borrowing groups might do, and specifically suggesting the most traditionally female crafts strikes a surprisingly conservative note.

Grameen will open six more branches in the city over the next two years, as well as a mix of urban and rural branches in the rest of America. It is hoping to reach between 18,000 and 20,000 people within the next five years.

This is a fraction of the millions of people below the poverty line in the US, but the model is easily scaleable. Perhaps a part of that $700 billion bailout ought to have gone not to Wall Street, but to a community bank providing small loans and a personal financial service to the poor.

Two days after my visit, the tatty Stars and Stripes flags on Fifth Avenue barely move in the humid heat. We are trapped by the Hispanic Columbus Day parade, led by eight young women marching with replica guns. Countless cops with real guns are lined up, obsessively controlling movement across the street. Election tension is palpable. Never before have I felt a sense of so much being at stake in this country. I don't know if Grameen's arrival in the US is a sign of hope, or a sign of the end of the American era. Perhaps, on reflection, it could be both.

Bill Totten

Tuesday, December 30, 2008

Forecast for 2009

Clusterfuck Nation

by Jim Kunstler

Comment on current events by the author of
The Long Emergency (2005) (December 28 2008)


There are two realities "out there" now competing for verification among those who think about national affairs and make things happen. The dominant one (let's call it the Status Quo) is that our problems of finance and economy will self-correct and allow the project of a "consumer" economy to resume in "growth" mode. This view includes the idea that technology will rescue us from our fossil fuel predicament - through "innovation", through the discovery of new techno rescue remedy fuels, and via "drill, baby, drill" policy. This view assumes an orderly transition through the current "rough patch" into a vibrant re-energized era of "green" Happy Motoring and resumed Blue Light Special shopping.

The minority reality (let's call it The Long Emergency) says that it is necessary to make radically new arrangements for daily life and rather soon. It says that a campaign to sustain the unsustainable will amount to a tragic squandering of our dwindling resources. It says that the "consumer" era of economics is over, that suburbia will lose its value, that the automobile will be a diminishing presence in daily life, that the major systems we've come to rely on will founder, and that the transition between where we are now and where we are going is apt to be tumultuous.

My own view is obviously the one called The Long Emergency.

Since the change it proposes is so severe, it naturally generates exactly the kind of cognitive dissonance that paradoxically reinforces the Status Quo view, especially the deep wishes associated with saving all the familiar, comfortable trappings of life as we have known it. The dialectic between the two realities can't be sorted out between the stupid and the bright, or even the altruistic and the selfish. The various tech industries are full of MIT-certified, high-achiever Status Quo techno-triumphalists who are convinced that electric cars or diesel-flavored algae excreta will save suburbia, the three thousand mile Caesar salad, and the theme park vacation. The environmental movement, especially at the elite levels found in places like Aspen, is full of Harvard graduates who believe that all the drive-in espresso stations in America can be run on a combination of solar and wind power. I quarrel with these people incessantly. It seems especially tragic to me that some of the brightest people I meet are bent on mounting the tragic campaign to sustain the unsustainable in one way or another. But I have long maintained that life is essentially tragic in the sense that history won't care if we succeed or fail at carrying on the project of civilization.

While the public supposedly voted for "change" this fall, I maintain that they underestimate the changes really at hand. I voted for "change" myself in pulling the lever for Barack Obama. I regard him as a figure of intelligence and sensibility, but I'm far from convinced that he really sees the kind of change we are in for, and I fret about the measures he'll promote to rescue the Status Quo when he moves into the White House a few weeks from now.

Where We Are Now

Without reviewing all the vertiginous particulars of the year now ending, suffice it to say that the US economy fell on its ass and that the "global economy" did a face-plant as well. The American banking sector imploded spectacularly to the degree that investment banking actually went extinct - as if a meteor landed on the corner of Madison Avenue and 51st Street. The response by our government was to shovel "loans" onto the loading dock of every organization that pretended to be something like a bank, while "bailing out" an ever-longer line of corporate claimants with a pitiable song-and-dance. The oil markets went on a roller coaster ride. The housing bubble collapse grew to avalanche velocity (taking out whole colonies of realtors, mortgage brokers, and construction contractors in its path), the commercial real estate sector developed hemorrhagic fever, retail drove off a cliff on Christmas Eve, the stock market fell in the toilet, jobs and incomes went up in a vapor, and tens of millions of ordinary citizens addicted to revolving credit found themselves in a life-and-death struggle for the means of existence. None of this is over yet.

The Year Ahead

Much of what has been lost in 2008 will not be recovered: enterprises, personal fortunes, chattels, reputations.

I expect a period of euphoria to mark the early weeks, perhaps months, of the Obama team. It will be a relief to have a president who speaks English correctly and has experienced something like real life prior to politics. Restoring credibility and legitimacy in leadership will be a big deal. If nothing else, we may recover a collective sense of consequence from a president who tells the truth, even the harsh truth. The age when it was enough to claim that "mistakes were made" might be over. A sign of this sort of change may be the commencement of prosecutions for misdeeds in banking and securities that are now destroying the entire system of deployable capital. A good place to start will be an investigation of Henry Paulson for insider trading stemming from Goldman Sachs's shorting of its own issued mortgage-backed securities when Mr Paulson was the company's CEO. Beyond his case, there should be enough work at Attorney General Eric Holder's office to employ a line of law school graduates stretching from Brattle Street to the planet Mars. It will be salutary for the nation to see those who engineered the banking collapse come to greater grief than the mere surrender of their Gulfstream jets and Hamptons villas. By the way, being allergic to conspiracy theories, I don't believe for a minute that there is some kind of shadow elite of "Bilderburgers" standing in the background to protect these grifters - and I also believe the reason these paranoid notions persist is because it is otherwise hard to account for the extravagant irresponsibility of the Bush circle and its servelings.

Apart from "cleaning up Dodge", so to speak, and from issues of collective character-and conscience-in-office, I worry that the avalanche of troubles already ongoing will overwhelm Mr Obama and his people. It's also well worth worrying whether they will pursue policies similar in kind to the ones pursued by Bush, namely throwing money at everything and anything, and it sure looks like they are planning to do just that. I am especially concerned about an "infrastructure stimulus" project aimed at highway improvement at the expense of public transit. This would be the epitome of a campaign to sustain the unsustainable. We need to begin planning right away for a transition away from automobiles, not in order to be good socialists but because Happy Motoring is at the core of our unsustainability trap. The car system is going to fail in manifold ways whether we like it or not, and it will fail due to circumstances already underway. For one thing, it will cease to be democratic as the remnants of the middle class find it impossible to get car loans, or pay for fuel, or insurance, and that will set in motion a very impressive politics-of-grievance setting apart those who are still able to enjoy motoring and those who have been foreclosed from it. Contrary to what you might make of the the current situation in the oil markets, we are in for a heap of trouble with both the price and supply of petroleum (more on this below). And there is no chance in hell that any techno rescue remedy to keep all the cars running by other means will materialize.

A consensus in the blogoshpere says that the stock markets will rebound strongly during the first Obama months. This is possible just on the basis of pure "animal spirits", but the Obama Bounce will occur against a background of continued dismal business and financial news. It will appear to defy that news. By May of 2009, the stock markets will resume crashing with the ultimate destination of a Dow 4000 before the end of the year. Meanwhile, jobs will vanish by the millions and companies will go bankrupt by the thousands, especially in the so-called service sector, and in all the suppliers of such, along with the landlords in all the malls and strip malls. The desolation will mount quickly and will be obvious in the empty storefronts and trash-filled parking lagoons. In the event, two things will become increasingly clear to the nation: that the consumer economy is dead, and that there is no more available credit of the kind that Americans are in the habit of enjoying.

We'll turn around early in 2009 and discover that we are a much poorer nation than we thought because from now on credit will be extremely hard to get for anyone for anything. The businesses that survive will have to keep going on the basis of accounts receivable. This is the area where the crash of giants will be heard. I've been saying since publication of The Long Emergency that comprehensive downscaling in all our activities, from farming to business to schooling to governance, will be the categorical imperative of the years ahead. Giant enterprises requiring giant loans to get from quarter to quarter will tend to not make it. Borrowing from the future will become a practical impossibility as past bad debts from previous borrowings continue to unwind, cease performing, and get written off. This argument implies that the federal government will tend to flounder just as General Motors, Citicorp, Target Stores and other gigantic enterprises will tend to flounder. It would be sad to see a President Obama so hamstrung and helpless, and it is largely why I see his role as largely symbolic - as a reassuring presence encouraging the distressed public to bravely bear their hardships, and to be kind and helpful among their neighbors.

Households, like businesses, will have to pay as they go from earned income. The house as ATM is over. Credit cards are maxed out and credit ceilings are lowering like the ceiling in "The Pit and the Pendulum", preparing to slice-and-dice the old "normal" of family life in America. Bankruptcy will be the new Nascar. A lot of families will lose everything. They will sift and disperse into the housing owned by other family members - parents, siblings - and a strange new not-altogether comfortable kind of togetherness will become common. Over time, a lot of people will go looking for casual work "under-the-table" (and probably low-paying). To some degree, these workers will begin to look and act like a new servant class, and before too long they may be absorbed into the households of people who employ them. There will be plenty of room for them there.

Counties, municipalities, and states will join in the bankruptcy fiesta. It would be reasonable to expect collapsing services as a result. This would be a situation fraught with danger - of rising crime, of public health emergencies as water systems are not kept up and sewage treatment becomes unaffordable. I don't imagine the federal government stepping into every Podunk or Metropolis from sea to shining sea and propping up these services. People will have to cope with danger and deprivation.

2009 may be the point where we begin to understand what kinds of places will be more hospitable to human society further ahead. I maintain that our giant urban metroplexes have way overshot their sustainable scale and will contract severely. With all the economic hardship, we ought to expect a lot of demographic churning, people leaving hopeless places and moving on to something more promising. I believe we will see them move to smaller towns and smaller cities. The reorganization of the rural landscape into smaller-scaled farms has not begun to occur - though 2009 might be very hard on agribusiness, given the shortage of capital and if oil begins to march up in price by late winter. Eventually, the rural landscape will require the labor of many more people than is currently the case. Whatever else happens, 2009 will surely see a massive return to home gardening as budgets become strained to the extreme. As the New Urbanist Andres Duany said recently, "Gardening is the new Golf!"

The Oil Scene

Many were stunned this year to witness the parabolic rise and fall of oil prices up to nearly $150 and then back around $36 by Christmas time. Quite a ride. I said in The Long Emergency that volatility would be the hallmark of post peak oil because it was obvious that advanced economies could not absorb super high prices and would crash in response; that at some point after crashing, these economies would respond to the new lower oil price, resume their cheap oil habits, and build to another price rise ... and crash again ... in a declension of ever-lower industrial activity.

What I probably didn't realize at the time was how destructive this cycling between low-high-and-low oil prices would actually be in the first instance of it, and what a toll it would take right off the bat. We can see now that our first journey through the cycle took out the most fragile of the complex systems we depend on: capital finance. As a result, a huge amount of capital (say $14 trillion) has evaporated out of the system, never to be seen again (and never to be deployed for productive purposes). It will be harder for the USA to rebound from the grievous injury to this crucial part of the overall system, and Europe has foundered similarly - though the European nations are not burdened to the same degree by the awful liabilities of suburbia.

Even if these advanced economies - throw in Japan too - remain moribund, the price and supply prospects for oil look ominous. My own guess is that the price of oil has overshot on the low end just as it overshot on the high end, and that, when all is said and done, we'll still see an upwardly trending price line over the long haul. The plunge, which began right after the $147 peak in July 2008, was as much the result of banks, hedge funds, and individuals dumping oil investments and positions to raise cash as it was a matter of the markets predicting a sharp fall-off in economic activity (and supposedly oil consumption). The truth is that demand destruction for oil in the USA has been surprising mild compared to the drop in price. Jim Hansen's Master Resource Report {1} says that gasoline consumption dropped from 9.29 million barrels a day in 2007 to 8.99 million barrels a day for 2008. That's not much of a fall-off, especially compared to the price drop.

As Julian Darley of the Post Carbon Institute put it recently: "There won't be any energy bail-out". And, as many other people have noted, the recent plunge in oil prices strongly implies future supply destruction, since so many planned oil projects have been suspended or cancelled because they are economic losers at $40-a-barrel (or even $70). Even projects well underway, such as Canadian tar sand production, have been scaled back or shut down because they don't make sense at current prices. Some of these other newer projects will now never get underway - they have missed their window of opportunity with so much capital leaving the system - and so the hope of offsetting very-near-future depletions in old giant oil fields looks dimmer and dimmer.

Those depletions are very serious. For instance, Mexico's super-giant Cantarell oil field, the second-largest ever discovered after Saudi Arabia's Ghawar field, has shown a thirty percent depletion rate in the past year alone. (Pemex had forecast a fifteen percent rate entering the year.) Cantarell provides over sixty percent of Mexico's total production, and Mexico is America's third largest source of imports - just after Saudi Arabia (#2) and Canada (#1). Obviously, Mexico soon will lose its ability to export oil, and as that occurs, America is going to feel more than pinch - more like a two-by-four upside the head. In short, remorseless depletion is underway and we are less likely now than even a year ago, to make up for it.

At some point, then, demand, even if slightly lower, will catch up with declining supply. My prediction for 2009 is that we will see two things occur, possibly at the same time: a resumption of rising prices, and spot shortages. I say this because the global economic fiasco is sure to produce geopolitical friction, and inasmuch as America has to import almost three-quarters of the oil we use, the prospect for trouble is great.

The tragic part of all this, of course, is that the temporary plunge in oil prices has prompted an incurious American public to assume, once again, that the global oil predicament is some kind of a fraud. Given the flood tide of fraud they have been subject to in banking and investment matters, I suppose you can't blame them from thinking that everything is some kind of a scam. Given feeble car sales this season, there are reports that an increasing percentage of those sold now are are trucks and SUVs.

Though I give Boone Pickens high marks for stepping up to the leadership plate, I'm not altogether on board with his energy proposal for swapping natural gas for gasoline in motor fuels while we swap out wind power for natural gas in electric power generation. I don't believe that the ballyhooed shale-gas-plays of the last few years will prove-out long-term, as some huckster's claim. They are expensive to drill and run, and they all tend to deplete very quickly - around one year. I'm not convinced we have the capital or the resources even to come up with the steel necessary to drill for it. Anyway, the last thing we need is a way to prolong our car-dependency.

In the meantime, there are still those who hope (as described above) that various systems will insure the continuation of Happy Motoring. This is an idle hope, and 2009 will be very sobering for those who imagine that hybrid cars, or electric cars, or "air" cars, or natural gas cars, or any other kind of car technology will save the day. Even if President Obama mounts an "infrastructure stimulus" program, it will not keep up with all the necessary routine road repair that our highway system requires. The extreme financial hardship faced by localities and states insures that they will have to postpone a lot of expensive highway maintenance - even if the federal government fixes a big bunch of bridges and tunnels - and so we face the interesting prospect that our roadway systems will enter their own deadly zone of systemic failure even before the whole car issue is settled.

I am waiting to see whether Mr Obama will undertake a restoration of passenger railroad service. I've said enough about this in the past, but it's worth reiterating that a failure to get comprehensive passenger rail service going will be a sign of how fundamentally unserious we are as a nation.

The Specter of Inflation

This is the "other shoe" that a lot of people are waiting to drop. Right now we are caught up in a compressive debt deflation as mortgages stop "performing" and loans of all kinds are welshed on. Since money is loaned into existence, and a great many loans are not being repaid, then a lot of money is going out of existence. That's what I mean when I say that capital is leaving the system. At the same time, the Federal Reserve has made good on its promise to drop money from helicopters if necessary to prevent an implosion of the banking system (as all that older money goes out of existence), and so it's now a question as to when the amount of new money will exceed the disappeared old money. (Of course when I say money, I mean "money", because we are dealing here in a shadow realm of assumed value.) In any case, there is bound to be a lag period between the time that the Fed's money is dropped from the choppers and the time it actually filters through the banks and other recipients to the so-called "real economy" of people who buy and sell real things. The credible estimates I hear run between six and eighteen months.

I'll only venture to guess that we could see the start of serious inflation sometime in 2009. To some extent, all currencies are now free-falling together, some at slightly faster rates than others, but the situation of the US dollar is so grotesquely dire, and our structural imbalances so monumental, that it is hard to imagine that our currency will not win the international race to the bottom. Gold resumed its movement upward against the dollar a week before Christmas, and that may be an early sign. The government - and anyone badly in debt - benefits much more from inflation than deflation, so every effort will be made to avert the latter. The trouble lies in the government's dumb incapacity to control dangerous things that it sets in motion, so that an inflationary campaign to avoid compressive deflation can so easily lead to a fiasco of super or hyper inflation - the kind that kills governments and turns societies into murderous monsters. I'll forecast the that the US dollar is worth forty percent of its current value by next Christmas.


Well, now, who the hell knows what's in store. Aside from a few bombs here and there, and pirates skulking around the horn of Africa, the world scene was miraculously free of major incidents in 2008 - perhaps the worst being a toss up between the September Mumbai bombings and the fiasco in Georgia, where the US prompted Georgia President Mikheil Saakashvili to send troops into the South Ossetia region and the move was answered by overwhelming force from neighboring Russia, leaving the US looking feckless and retarded for our troubles. But otherwise, there wasn't a whole lot of action out there.

Until the last few days of the year, that is. I'm sure the ever-growing cohort of American anti-semites who send me emails will be tickled when I assert that the Hamas rocket attacks against Israel of recent days guaranteed a sharp response from Israel - and now, of course, Hamas is playing the crybaby card: "... what'd we do to deserve this...?" Well, you fucking fired a bunch rockets into Israel. Did you ever hear of cause-and-effect? This matter requires no further elucidation, except that it seems to suggest a ramping back up of hostilities. I wonder if it is the beginning of a new coordinated offensive by Islamic extremism aimed at taking advantage of the West's current economic plight (and the West's probable aversion to anything that will complicate its desired recovery). We'll know in a month or so, I think, since any coordinated campaign (if such a thing were possible) might well be aimed at confounding the new American president.

The other hot corner of the world right now is the India-Pakistan border where the sixty-year-old rivalry, which has already produced three wars, looks to be gearing up for yet another round. I'm not the first one to say that Pakistan is an extremely dangerous regional player, being an economic basket case, possessing a score or so of nuclear bombs, harboring more Islamic fundamentalist maniacs than any other place in the world, and having a government held together with duct tape and twine. The caper in Mumbai last September could well have been construed as an act of war, but somehow India kept its head. Who knows where this is going ...

So far I have only described what is already obviously going on. Add to this the likelihood that Iran is closer to achieving membership in the atomic weapon club. They've been spinning their centrifuges all year and nobody has done anything about it. My guess is that neither the US nor Israel will attempt to take out their facilities in the year ahead. If Iran used a nuclear device against Israel, or anybody else, they would be asking to become, in turn, the world's largest ashtray. End of story. A different story, though, is how Iran might behave if and when the US Military presence in Iraq is reduced. I can imagine Iran doing anything possible surreptitiously to gain control over Iraq's southern oil regions around Basra, but even the Iraqi Shia don't like the Iranian Shia that much. Anyway, iran's economy has suffered hugely from the fall in oil prices. That nation may be in for more internal trouble than they have seen in thirty years since the Shah was tossed out by the minions of Ayatollah Khomeini.

There's been a lot of sentiment the past year that as the US and the Europe fall into economic disarray, China would emerge as the great new hegemonic superpower. While it's come a long way in a quarter-century, China's internal problems are still enormous and worsening. They're in trouble with water, food imports, mass unemployment, and energy. They have locked in some oil contracts around the world, but they are still susceptible to vagaries in the oil markets and Black Swan events. As the US consumer economy falls into a coma, and the shipping containers from China to WalMart get sparser, the Chinese government will face the wrath of millions of unemployed workers. I believe they will struggle through 2009, perhaps growing more surly as the US dollar inflates and their holdings of treasury bills begins to look more like a swindle.

Russia may be suffering economically for the moment due to the crash of oil prices, but they are energy resource-rich - at least for the next couple of decades - and if they don't like the current price, they can keep more of their oil in the ground until the price looks more attractive. I think Mr Putin has the confidence of the Russian people and will survive the current malaise.

Japan remains a riddle wrapped in toasted nori. They're beggaring their own factory workers to stay solvent. Their banking sector has been zombified for a generation. They import 95 percent of the energy they use. Do they have a plan? One can imagine them sliding in resignation back to something like the sixteenth century, giving up the whole industrial circus as more trouble than it's worth, just as they once gave up on firearms.

The over-arching geopolitical theme of 2009 will be the end of robust globalism as we've known it for some time. Reduced trade, competition for energy resources, sore feelings over debts and currencies will drive the nations inward or, at least, direct their energies toward their own regions. Note to Tom Friedman: the world turned out to be round after all.


The big theme for 2009 economically will be contraction. The end of the cheap energy era will announce itself as the end of conventional "growth" and the shrinking back of activity, wealth, and populations. Contraction will come as a great shock to a world of conventionally programmed economists. They will toil and sweat to account for it, and they will probably be wrong. Unfortunately, this contraction will do its work in unpleasant ways, driving down standards of living, shearing away hopes and expectations for a particular life of comfort, and introducing disorder to so many of the systems we have depended on for so long. People will starve, lose their homes, lose incomes and status, and lose the security of living in peaceful societies. It will become clear that the Long Emergency is underway.

My hope for the year, at least for my own society, is that we will transition away from being a nation of complacent, distracted, over-fed clowns, to become a purposeful and responsible people willing to put their shoulders to the wheel to get some things done. My motto for the new year: "no more crybabies!"

Link {1}:

My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

Bill Totten

Monday, December 29, 2008

Innovating Our Way to Financial Crisis

by Paul Krugman, Op-Ed Columnist

The New York Times (December 03 2007)

The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance.

How bad is it? Well, I've never seen financial insiders this spooked - not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified - because they've suddenly realized that they don't understand the complex financial system they created.

Before I get to that, however, let's talk about what's happening right now.

Credit - lending between market players - is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about "liquidity", is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets - like the London market, in which banks lend to each other - have risen even as interest rates on US government debt, which is still considered safe, have plunged.

"What we are witnessing", says Bill Gross of the bond manager Pimco, "is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August".

The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction - and that will mean a recession, possibly a nasty one.

Behind the disappearance of liquidity lies a collapse of trust: market players don't want to lend to each other, because they're not sure they'll be repaid.

In a direct sense, this collapse of trust has been caused by the bursting of the housing bubble. The run-up of home prices made even less sense than the dot-com bubble - I mean, there wasn't even a glamorous new technology to justify claims that old rules no longer applied - but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.

Thus, "super-senior" claims against subprime mortgages - that is, investments that have first dibs on whatever mortgage payments borrowers make, and were therefore supposed to pay off in full even if a sizable fraction of these borrowers defaulted on their debts - have lost a third of their market value since July.

But what has really undermined trust is the fact that nobody knows where the financial toxic waste is buried. Citigroup wasn't supposed to have tens of billions of dollars in subprime exposure; it did. Florida's Local Government Investment Pool, which acts as a bank for the state's school districts, was supposed to be risk-free; it wasn't (and now schools don't have the money to pay teachers).

How did things get so opaque? The answer is "financial innovation" - two words that should, from now on, strike fear into investors' hearts.

Okay, to be fair, some kinds of financial innovation are good. I don't want to go back to the days when checking accounts didn't pay interest and you couldn't withdraw cash on weekends.

But the innovations of recent years - the alphabet soup of CDOs and SIVs, RMBS and ABCP - were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead - aside from making their creators a lot of money, which they didn't have to repay when it all went bust - was to spread confusion, luring investors into taking on more risk than they realized.

Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation - but added, "I don't think we'd want it the other way around". Is that your final answer, Mr Secretary?

Now, Mr Paulson's new proposal to help borrowers renegotiate their mortgage payments and avoid foreclosure sounds in principle like a good idea (although we have yet to hear any details). Realistically, however, it won't make more than a small dent in the subprime problem.

The bottom line is that policy makers left the financial industry free to innovate - and what it did was to innovate itself, and the rest of us, into a big, nasty mess.

Copyright 2007 The New York Times Company

Bill Totten

History's Arrow

by John Michael Greer

The Archdruid Report (December 24 2008)

Druid perspectives on nature, culture, and the future of industrial society

One of the advantages of being a Druid is that you get to open your holiday presents four days early. Last Sunday's winter solstice was pleasant, with a scattering of snow on the ground outside and candles burning indoors as we celebrated the rebirth of the sun. As one hinge of the year's cycle, the solstice is a good time to ponder the shape of time: on the small scale, with hopes for the year to come and memories of the one now passing; the middle scale, as I think back on past holidays and the uncertain number that still lie ahead; and the large scale, with which this blog is mostly concerned. In keeping with that seasonal theme, I want to talk a bit about history on the large scale, and the ideas our culture uses to frame the idea of history.

One of the things that has interested me most about the reactions to the ideas about the shape of the future I've presented here on The Archdruid Report is the extent to which so many of them presuppose one particular way of thinking about history. Like the character in one of Moliere's plays who was astonished to find that he had been speaking prose all his life, a great many people these days have embraced a distinctive philosophy of history, but seem never quite to have noticed that fact.

This is hardly a new thing. One of the ironies of the history of ideas is the way that so many cultural themes, surfacing first in avant-garde intellectual circles, are dismissed out of hand by the grandparents of those who will one day treat them as obvious facts. Modern nationalism, to cite one example out of many, began with the romantic visions of a few European poets, spilled out into the world largely through music and the arts, and turned into a massive political force that shredded the political maps of four continents. To some extent, this is the intellectuals' revenge on an unreflective society: the men of affairs who treat the arts as amenities and dismiss philosophy as worthless abstraction spend their workdays unknowingly mouthing the words of dead philosophers and acting out the poems they never read on the stage of current events.

The way of thinking about history I have in mind today has followed the same trajectory. Karl Popper, who devoted much of his career to critiquing it, called it historicism. This is the belief that history as a whole moves inevitably in a single direction that can be known in advance by human beings. Exactly what that single direction is supposed to be varies from one historicist to another; choose any point along the spectrum of cultural politics, and you can find a version of historicism that treats the popular ideals and moral concerns common to that viewpoint as the linchpin of the historical process. The details differ; the basic assumption remains the same.

That same assumption has also spread to infect nearly every contemporary discussion of change over time. After my post "Taking Evolution Seriously" appeared a few weeks back, for example, one of my longtime readers forwarded me comments from a discussion on an email list, whose members took me to task in no uncertain terms for my discussion on the evolutionary process. When I said that no organism is "more evolved" than any other and that evolution has no particular direction or goal, they insisted, I was simply wrong; evolution progresses in the direction of increased complexity over time, one person claimed, and another suggested that I would be better informed if I read more of the writings of the late Stephen Jay Gould.

Now I have no objection to reading more of Gould's work, as I've already enjoyed many of his books. For that matter, I've read a fair amount of evolutionary theory, beginning with Darwin and continuing through some of the most recent theorists, and also took college courses in evolutionary ecology and several related branches of environmental science. One thing this taught me is that attempts are always being made to stuff evolution into a historicist straitjacket. Another thing I learned is that these attempts are rejected by the great majority of evolutionary biologists, because the evidence simply doesn't fit.

Some evolutionary lineages have moved from more simple to more complex forms over time, but others have gone in the other direction, and the vast majority of living things on Earth today belong to phyla that have not added any noticeable complexity since the Paleozoic. Nor has the Earth's biosphere as a whole become more complex; the entire Cenozoic era - the 65 million years between the last dinosaurs and us - has been less biologically rich than the Mesozoic era that preceded it, and the global cooling of the last fifteen million years or so has seen a decrease in the world's biological complexity, as ecosystems have adapted to the more rigorous conditions that have spread over much of the world.

The facts on the ground, then, simply don't support any claim that evolution moves toward greater complexity. No other version of historicism fares any better when applied to evolution, either. Yet ninety-nine times out of a hundred, when you hear people outside of a university biology department talking about evolution, what they have in mind is a linear process leading in a particular direction. They are, in other words, talking historicism.

Trace these ideas back along their own evolutionary lineage and a fascinating history emerges. The founder of the current of thought that gave rise to today's historicism was an Italian monk named Joachim of Flores, who lived from 1145 to 1202 and spent most of the latter half of his life writing abstruse books on theology. Most Christian theologians before his time accepted Augustine of Hippo's famous distinction between the City of God and the City of Man, and assigned all secular history to the latter category, one more transitory irrelevance to be set aside by the soul in search of salvation. Joachim's innovation was the claim that the plan of salvation works through secular history. He argued that all human history, secular as well as sacred, was divided into three ages, the age of Law under the Old Testament, the age of Love under the New, and the age of Liberty that was about to begin.

Some of his theories were formally condemned by church councils, but his core theory proved unstoppable. Every generation of church reformers from the thirteenth century to the eighteenth seized on his ideas and claimed that their own arrival marked the coming of the age of Liberty; every generation of church conservatives stood Joachim on his head, insisted that the three ages marked the progressive loss of divine guidance, and portrayed the arrival of the latest crop of reformers as Satan's final offensive. As secular thought elbowed theology aside, in turn, Joachim's notion of history as the working out of a divine plan got reworked into secular theories of humanity's grand destiny.

Notable among these was the theory argued by the Marquis de Condorcet in Sketch for a Historical Picture of the Progress of the Human Spirit in 1794. A rich historical irony surrounds this work; Condorcet had been a strong supporter of the French Revolution, and hoped that the end of the monarchy would usher in a republic of reason; instead, he was condemned to death by the new government and wrote his Sketch while he was on the run from the guillotine. He nonetheless described human history as an inevitable rise from barbarism to a future of reason and progress in which all of human life would undergo endless improvement.

Condorcet's faith in perpetual progress found many listeners, but a more influential voice was already waiting in the wings: Georg Wilhelm Friedrich Hegel, who managed the rare feat of becoming both the most influential and the most unreadable philosopher of modern times. In his Philosophy of History, which was published shortly after his death in 1831, he argued that history was the process by which human freedom (which, for him, was not quite the freedom of the individual; he idolized Napoleon and the government of Prussia) was maximized in time. In Hegel's mind, Joachim's threefold rhythm of history was reworked into the three phases of thesis, antithesis, and synthesis, by which every opposition was resolved into a higher unity.

Hegel's view of history became enormously influential, less through his own work - I challenge any of my readers to plow through the Philosophy of History and come out the other side with anything but a headache - than through the writings of those influenced by him. Political radicals at both ends of the spectrum jumped on Hegel's ideas; on the left, Karl Marx used Hegelian ideas as the foundation for his philosophy of class warfare and Communist revolution; on the right, Giovanni Gentile, the pet philosopher of Mussolini's Fascist regime, was a rigorous Hegelian. For that matter, Francis Fukuyama, who played a role much like Gentile's for the neoconservative movement, drew his theory of an end to history from Hegel.

Still, the spread of Hegel's ideas isn't limited to the radical fringes, or even to those who know who Hegel was. I think most people who have been following the issue of peak oil for more than a few months have noticed, when the subject comes up for discussion in public, one of the most common responses is "Oh, they'll think of something". Ask the person who says this to explain, and odds are you'll be told that every time the world runs out of some resource, "they" find something new, and the result is more progress. This is Hegel reframed in terms of economics; shortage is the thesis, ingenuity the antithesis, and progress the synthesis; the insistence that the process is inevitable puts the icing on the Hegelian cake. More generally, the logic of historicism governs the entire narrative: history's arrow points in the direction of progress, and so whatever happens, the result will be more progress.

Examples could be added by the page, but I hope the point has been made. Still, it's crucial to realize just how deeply historicism has become entrenched in all modern thinking. If, dear reader, you think yourself untouched by it, I encourage you to try a thought experiment. The average species, paleontologists tell us, lasts around ten million years. Imagine that by some means - a visit from a time machine, say, that leaves you holding a history of humanity written by an intelligent species descended from chipmunks - you find out that this is how long we have. We won't achieve godhood, or reach the stars, or destroy the planet, or enter Utopia; instead, the nine million years we've got left will be like recorded history so far. Civilizations will rise and fall; our species will create great art and literature, interpret the universe in various ways, explore many modes of living on the Earth; finally, millions of years from now, it will slowly lose the struggle for survival, dwindle to small populations in isolated areas, and go extinct.

If that turns out to be humanity's future, would you be satisfied with it? Or would you feel that some goal has been missed, some destiny betrayed? If the latter, what makes you think that?

Now of course it may be a waste of breath to contend with ideas as pervasive and deeply rooted as historicism, but the effort has to be made, if only because historicism has a dismally bad track record as a basis for prophecy. Name a historicist belief system that's been around more than a few years, right back to Joachim of Flores himself, and you'll find a trail of failed predictions of the imminent arrival of the goal of history. (Joachim himself apparently believed that the age of Liberty would arrive in 1260; no such luck.) If we are to have any useful sense of the future ahead of us, historicist belief systems are among the worst sources of guidance available to us.

Fortunately there are other choices. In next week's post, I plan on talking about some of those. In the meantime, best holiday wishes to all my readers - whatever holidays you celebrate at this time of year.

´╗┐John Michael Greer has been active in the alternative spirituality movement for more than 25 years, and is the author of a dozen books, including The Druidry Handbook (2006) and The Long Descent (2008). He lives in Ashland, Oregon.

Bill Totten

Sunday, December 28, 2008

Notes on "It's Your Money"

by William Hixson (1997)

Creating money is immensely profitably to a government or a banking system.

As of year-end 1994 the legal tender created by the US government (GCM or government created money) totalled $418.5 billion. It is made up of three components: $354.5 billion of currency held by the public, and $64 billion of bank vault cash and other bank reserves. However, only the $354.5 billion counts as part of the money supply since the $64 billion sits idle in the vaults. It's sole purpose is to back up bank-created money (BCM). The amount of BCM was not less than $2874.4 billion. Thus in 1994 BCM accounted for about 89 percent of the total money supply.

Government money creation worked with great success in various colonies before the War of Independence.

In 1973 the Fed (The Federal Reserve, the US central bank) held 18.9 percent of the federal debt. Had the Fed held 18.9 percent of the debt in 1993 instead of a measly 6.5 percent the government would have saved something like $50 billion annually in interest.

Our whole banking system I have ever abhorred, I continue to abhor, and I shall die abhorring. -- John Adams, Second President of the United States

Almost all bank deposits owe their origin to bank loans. It may seem it ought to be the other way about - that bank loans would owe their origin to banks deposits. But this is not so. -- The Federal Reserve System (Board of Governors, 1939)

All bank deposits consist either of money created by the Fed and spent buying government securities or of money created by banks themselves. -- College textbook

In 1994 the ratio of loans to reserves was 43.5 to 1.

Illiquidity is a constant condition of all banks at all times. That is to say, they never have on hand or readily available anywhere near enough legal tender to satisfy the demand if any large fraction of their depositors request cash. A bank is declared to be "insolvent" only if it has on its books so many bad loans that it could never raise enough cash to pay off all its depositors.

If banks were banned from creating money they would still be needed to perform their other services.

Between 1929 and 1933 over 10,800 banks (about 38 percent of all banks in the USA in 1929) had to close their doors.

By the time of the crash of 1929 the reserve ratio was 1:13. After the crash bankers were so "given religion" that even as late as 1940 it was almost 1:3, or about $30 in reserves for every $100 in deposits. Then it began to creep up: 1:8 in 1950, 1:11 in 1960, 1:15 in 1970, 1:31 in 1980, and 1:39 in 1990.

The more highly leveraged a bank is, that is, the higher the reserve ratio, the greater the profits from a given investment, and the higher the risk of insolvency.

Business loans must be backed by eight percent in capital but loans to government require no capital backing. This encourages banks to turn their backs on businesses and invest heavily in government bonds.

The most persistent fallacy about banking is that banks are intermediators between lenders and borrowers. In fact the cardinal function of banks is not intermediation but money-creation.

The total deposits of the banking system considered as a whole remain unchanged over short periods because the deposit of many checks will increase the deposits of the banks in which they are deposited by exactly the same amount as they will decrease the deposits of the banks on which they are drawn.

What banks loan "for the most part" is money they create - non-preexisting money.

If all bank loans were to be paid-off, checks to banks would have to be written to almost the full amount of all bank deposits. Hardly any deposits would remain. Or, as Robert H Hemphill of the Atlanta Regional Fed once remarked: "If all bank loans were repaid, no one would have a bank deposit".

At year-end 1994 the total amount of GCM was $419 billion. Only $64 billion was deposited in banks. Thus it was bank lending and bank money creation for that purpose that gave rise to the $2875 billion in deposits held by the public, not deposits made by the public that gave rise to the bank loans.

In making loans banks create enough money for the principal to be repaid, but not enough for the interest as well as the principal to be repaid. If all loans had to be repaid on the same day some borrowers would necessarily have to default. It is in the very nature of the system to create this type of problem. Banks are always in a "need to catch-up" situation. Thus every year on average the supply of bank created money (BCM) needs to be increased by at least the average rate of interest that banks charge on their loans. This assertion is true enough to be significant, but greatly oversimplifies the actual situation.

Investment = Savings + BCM

There is a tendency to ignore whatever cannot be fitted into our system of preconceptions.

Although the liquidation process is a far from simple one, no more BCM tended to remain in existence during the Great Liquidation period of 1929-1933 than some person or company was ready, willing, and able to pay interest on it. GCM was subject to no such undesirable limitation.

Professors Henry Simons of the University of Chicago and Irving Fisher of Yale concluded that if the entire money supply of 1929 had consisted of GCM, then no money would have disappeared and the Great Depression would either have been far less severe or would not have occurred at all. Thus they advocated that in the future the entire money supply of the nation should be GCM and that BCM should be phased out.

Banking is a sort of confidence game.

In 1990 the Federal Deposit Insurance Corporation (FDIC) had only $13 billion with which to guarantee $2650 billion in deposits, that is about fifty cents for every $100 it supposedly insured.

The government's motto often seems to be, "To them that hath it shall be given".

The Fed has the power to bring on a recession or a depression at will although it has not the power to bring on prosperity at will. The historical record shows that the Fed deliberately provoked recessions in 1974-75, 1980-82, and 1991.

The banks have the ability to shut down the economy at will. They can veto prosperity by refusing to make net new loans, and it is sometimes in their interest to do so.

It is not merely inappropriate but outrageous for bankers to get the lion's share of the something-for-nothing that goes with the money-creating prerogative.

Whenever it is proposed that the government should create more money, the instant cry is, "But that would be highly inflationary!" or "But that would send prices soaring!" However, since the banks use GCM to create at least ten times as much BCM, the problem of too much money chasing too few goods is primarily a bank created problem.

From 1929 to 1933 unemployment soared from 3.2 percent of the labour force to 24.9 percent. Output of goods and services fell by over thirty percent.

When a war against poverty and unemployment is proposed there is always a chorus singing, "you can't solve a problem by throwing money at it". There was no hesitancy, however, in dealing with the problem of war against overseas adversaries by throwing money at it; and throwing money at the problem at annual rates of increase unheard of earlier and unequalled later.

It was not the war per se that ended the Great Depression as is often said. It was money-creation and money-spending at high rates.

The money created to finance both world wars was 1:4 GCM and 3:4 BCM.

Inflation causes the purchasing power of money to decline, and when the purchasing power of money declines debts will be repaid with money that will buy less than the money that was lent. As lenders of money bankers detest inflation, and as friends of bankers, managers of the Fed (or officers of the Bank of Canada) make fighting inflation their top priority and make high interest rates (also liked by bankers) their method. It would be an entirely different story if the Fed were dominated by the agents of debtors instead of by the agents of creditors.

The Fed is always ready to destroy prosperity in order to save the economy from inflation.

Recent very high interest rates are not due to large government deficits. During the World War Two years the government ran truly enormous deficits. The deficit for each of the three years 1942, 1943 and 1944 averaged 27.8 percent of the GDP, yet the nominal interest on thirty year bonds was held to 2.5 percent. Contrast this to the ten years 1981-1990 when the federal deficit averaged a mere 4.2 percent of GDP and the nominal rate on thirty year bonds averaged 10.3 percent. Put another way, in the 1980s the Fed permitted about four times the rate of interest to be paid on a deficit that was only about one-seventh as large as in the 1940s.

For 1943 the real rate of interest (that is, the nominal rate minus the rate of inflation) on a federal debt equal to 27.4 percent of GDP was only 0.87 percent. For 1994 the real rate of interest on a debt equal to only 2.25 percent of GDP was 4.81 percent.

The bonanza that inevitably accrues to a creator of money should rightfully go to the whole people via their national government, not to private companies or private individuals.

Since almost all of the current annual federal deficits are due to interest on the federal debt, if the government had created the money that private banks created since 1946 there would not only be no federal debt but no annual interest on the debt and therefore no annual deficit. The reason the government owes about $5 trillion and has to run annual deficits on the order of $200 billion is that the government permitted private banks to create the money that the government should have created.

As of year-end 1993 the private banks held $740 billion in government bonds. These bonds were all purchased with BCM, that is, money the banks created from nothing. The annual interest the government pays on these bonds is somewhere between $25 billion and $35 billion. It's a government subsidy to banks.

The very idea of a government that can create money for itself allowing banks to create money that the government then borrows and pays interest on is so preposterous that it staggers the imagination. Either everyone in government in charge of the procedure is deficient in intelligence or they have been bought and paid for by those who profit from their venality and infidelity to the public interest.

There is nothing unprecedented in the proposal that all of our money supply should be GCM. Between 1928 and 1938 the government did just this. During this period the banks were too frightened to make loans and/or the public was too frightened to borrow from banks. The primary engine of recovery from the Great Crash was GCM.

We need more of the non-debt-bearing-non-disappearing type of money that government creates and less of the debt-bearing BCM that evaporates when banks fail and depressions occur.

Bill Totten

Roots in the Holy Land

Judea Pearl recounts his family's emigration from Poland to Palestine in 1924 to rebuild an ancient city.

George E Bisharat tells of his Palestinian grandfather's hospitality before his West Jerusalem home was expropriated by Israel in 1948.

Los Angeles Times (May 16 2008)

What Israel means to me

by Judea Pearl

I was born in Tel Aviv in 1936 and, quite naturally, my feelings toward Israel are suffused with the love, pride, memories, music and aromas that nourish and sustain all natives of any country. As the years pass, I discover that these same feelings toward Israel are echoed by people everywhere, including many who have never set foot in that country. My family's love affair with Israel began in 1924, when my grandfather, a textile merchant and devout Hasidic Jew from the town of Ostrowietz, Poland, decided to realize his life dream and emigrate to the land of the Bible.

Family lore has it that my grandfather was assaulted one day by a Polish peasant wielding an iron bar and shouting, "Dirty Jew!" My grandfather crawled home, wiped his blood and announced to his wife and four children, "Start packing; we are going home!" In the weeks that followed, he sold all his possessions and, along with 25 other families, bought a piece of sandy land about four miles northeast of Jaffa. That land was near an Arab village called Ibn Abrak, which was described by the newspaper Haaretz in July 1924 as "a few mud-walled huts surrounded by a few scattered trees".

The Arab real estate broker in Jaffa probably had no idea why a group of seemingly educated Jews, some with business experience, would pay so dearly for a piece of arid land situated far from any water source, which even the hardy residents of Ibn Abrak found to be uninhabitable. But the 26 Hasidic families knew exactly what they were buying. Ibn Abrak was the site of the ancient city of Bnai Brak, well known in the biblical and rabbinic days, the town where the Mishnaic scholar Rabbi Akiva made his home and established his great school. It is said that it was to Bnai Brak that Rabbi Akiva applied the famous verse, "Justice, justice shalt thou pursue".

The vision of reviving the spirit of that ancient site of learning was well worth the exorbitant price the broker demanded, the dusty winds, the merciless sun, the lack of water and all the daily hardships that pioneering agricultural life entailed.

My father was fourteen years old when his family arrived at Bnai Brak in 1924, and whenever he reminisced about that early period of hardship, he always referred to it as the "rebuilding of Bnai Brak", as if he and my grandfather had been there before, with Poland and the whole saga of the Jewish exile merely an unpleasant nightmare.

We, the children who grew up in Bnai Brak, had not the slightest doubt that we had been there before. Every Passover, when our family's reading of the Haggadah reached the story of the five rabbis who were sitting in Bnai Brak reciting the story of the Exodus, my grandfather would stop the reading, look everyone in the eye, issue one of his rare mysterious smiles and continue with emphasis, "Who were sitting in Bnai Brak".

The message was clear: We never really left home.

A short distance from our school, there were two steep hills that almost touched each other. The older boys told us that the two hills were once a single one that got separated when Bar Kochva - the heroic figure who led a futile Jewish rebellion against Rome in the 2nd century - rode through it on his lion, creating the gully between. We had no doubt that we would eventually find Bar Kochva's burial place; we needed only to dig deep enough into these hills - which we did enthusiastically for hours. It was only a matter of time, we thought, before the Earth would unravel the mysteries of our historic infancy. It was this cultural incubator that shaped my childhood - an intoxicating enthusiasm of homecoming and nation-rebuilding.

Those who say that this sort of culture no longer inspires youth are mistaken. Seventy-eight years after my grandfather first set foot in Bnai Brak, in a shed in Karachi, Pakistan, his great-grandson Daniel Pearl stood before his eventual murderers and said, "My father is Jewish, my mother is Jewish, I am Jewish". Then, looking straight at the eye of evil, he added one last sentence: "Back in the town of Bnai Brak, there is a street named after my great-grandfather, Chayim Pearl, who was one of the founders of the town".

Was a page of history ever chanted with greater pride? Was a more gentle love song ever sung to a homeward-bound founder of a new town?

My mother's story was different, yet still driven by the same forces of history. A resident of Kielz, Poland, she applied to British authorities for immigration to Palestine in 1935, when anti-Semitic intimidation reached unbearable proportions. Adolf Hitler came to power two years earlier. His threats were broadcast all over Europe; the writing was on the wall, and masses of Polish Jews applied for emigration to their biblical homeland: Palestine. Ironically, the British government, which then controlled the region, was bending to Arab pressure to stop Jewish immigration, and my mother's hopes of leaving Poland before the storm fell at the mercy of a political controversy that has not been settled to this very day.

I recently read the argument the Arabs used in that debate, as published at the time in the Arabic newspaper Carmel: "We know that Jewish immigration can proceed without dispossessing a single Arab from his land. This is obvious. And this is precisely what we object to. We simply do not want to peacefully turn into a minority, and European Jews should understand why." The counter-argument by the Jewish leadership was equally compelling. Zev Jabotinsky said in 1937: "This sort of morality is morality of cannibalism, not one of the civilized world, for it dictates that the homeless must forever remain homeless; we beg merely for a small fraction of this vast piece of land". But the British sided with the stronger, allowing a trickle of only 15,000 immigration certificates a year.

My mother could not wait and paid a huge sum to a cousin who had an immigration certificate to arrange a fictitious marriage that would later be annulled. Fortunately, her father intervened, and she found a better prospect - my father, a suntanned young "Palestinian" who was searching the towns of Poland for a refined European bride. My mother's parents, brother and sister were not so lucky. Stranded by the British-Arab blockade, they perished in the holocaust with six million other victims of cannibalism and selfishness.

I once asked my mother how she felt when she arrived. "I came to Israel in the eve of Hanukkah, 1935", she said. "The first day after my arrival, I went up to the roof, and I could not believe my eyes - how deeply blue the sky was, compared with the gray sky that I left behind in Poland. I was breathless!

"Then I met a neighbor, a teacher who invited me to visit her kindergarten. There I experienced one of the happiest days in my life. Scores of children were standing there loudly singing Hanukkah songs in Hebrew, as if this was the most natural thing to do, as if they had been singing those songs for hundreds of years."

"Why the wonder?" I asked. "Didn't your family celebrate Hanukkah in Poland?"

"Not exactly", she said. "Yes, we lit the candles, but it was in a dark corner, with my father whispering the blessing and mumbling the songs quietly. You see, the neighbors were Gentiles, and he did not feel comfortable advertising that we celebrated a Jewish holiday. And here I come and suddenly find these toddlers singing 'Maccabee, My Hero!' in full volume, and in the open courtyard."

About three years ago, as I was preparing for a Muslim-Jewish dialogue, I read that many Palestinians have decided to view themselves as descendants of the Canaanite tribes conquered by Joshua. I couldn't help but imagine how lonely it must be for a Palestinian boy not to be able to sing "Canaan, My Hero!" in the language of his ancestors, not to have Canaanite role models after which to name songs, towns and holidays and, more lonely yet, to be taught by teachers who had never heard of his Canaanite ancestors. At that point, I understood the root cause of the Palestinian tragedy: underestimating how sincerely indigenous those children were in Bnai Brak, singing "Maccabee, My Hero!"

Throughout my childhood, we had wonderful symbiotic relations with the Arabs in the village of Jamusin, about half a mile from Bnai Brak. Jamusin supplied labor and farm products, and Bnai Brak produced commerce and technology. We often played with Arab children our age, riding donkeys in the citrus groves and playing soccer in vast empty lots, though language was a barrier. I do not recall a single religious or ethnic skirmish.

The day that Israel was proclaimed - May 14 1948 - I spent in a bomb shelter, traumatized by the sound of Egyptian war planes that were attacking Tel Aviv and its suburbs. The next day, Arab peddlers did not show up with their merchandise, Arab children were not seen in the orange groves, and the village of Jamusin, we found out later, was totally abandoned; even donkeys, goats and chickens were not to be found.

I was too young to join the Israeli army then, but all my friends who were sixteen and older volunteered, many of whom came back in black coffins. Israel lost one percent of its population in that war. Whenever I listen to speeches by pacifists and other anti-violence activists, my mind sees those young kids from around the block and the number of lives they helped save with their instinctive sacrifice.

Today, Israel is a land of contrasts. My hometown of Bnai Brak, a bustling replica of an extremely orthodox, Eastern European town, is situated among totally secular neighborhoods, in which International Workers Day on May 1 is celebrated every year with school ceremonies and marching bands. At the same time, it is not uncommon to find youth groups in Marxist-leaning kibbutzim engaging in a nightlong trance of Hasidic melodies interspersed with Arabic Debka dances. This marvelous blend of an intense reverence of the past with an innovative, indeed revolutionary and optimistic outlook to the future is the essence of what Israel means to me.

The optimists among us say that the world will never abandon Israel because civilization cannot afford to dispose of such an innovative project, one in which the noblest aspirations of mankind have been brought together to develop. Pessimists tell us that the fate of Israel is the fate of civilization itself, and the latter does not look very promising. As a member of a stubborn tribe of survivors, I take the optimistic side. True, the world may not fully appreciate the importance of such noble projects. But I am nevertheless convinced that, beneath the criticism and the rhetoric, it is the heroic example of Israel's struggle and progress that currently fuels the will of civilization to survive.


Judea Pearl, a professor of computer science at UCLA, is a frequent commentator on the Arab-Israeli conflict. He is the president and co-founder of the Daniel Pearl Foundation - named after his son - a nonprofit organization dedicated to dialogue and cross-cultural understanding.


The hope of a victimized people

by George E Bisharat

I am the son of a Palestinian father. Through countless stories about his family, I absorbed the ethic that the strong must help the less fortunate.

My grandfather, Hanna Ibrahim Bisharat - "Papa" to us - was fluent in Arabic, English, French, German and Turkish and had studied agriculture in Switzerland before World War I. He began introducing mechanized farming to Palestine and dreamed of establishing his own agriculture school. During World War I, our family harbored Australian and New Zealander soldiers who, while fighting the Turks in Palestine, were caught behind enemy lines. They offered refuge to a Syrian sheik who was fleeing powerful enemies. During the riots in Palestine in 1929, Papa sheltered Jewish friends in his stately home in the Talbiyeh quarter of West Jerusalem. Little did he expect that this home would be expropriated in 1948 and serve as the home of Golda Meir - she of the famous quip that the Palestinian people "did not exist".

Christian soldiers, a Muslim sheik, Jewish neighbors - they were all human beings in need, and we were blessed to be able to help them.

My Palestinian family, in its tradition of compassion and hospitality, is not exceptional. During my last trip to the West Bank, I met a man whose parents had been driven out of what became Israel in 1948 and had settled in the Balata refugee camp outside Nablus. The Friday before, as he was taking his son to prayer, an Israeli tank suddenly wheeled into their empty street, spewing heavy machine-gun fire. The man saw his son stumble, then plunge face first into the stairs ahead of him. When the father reached him, the boy had swallowed his teeth and blood blossomed across his shirt. Within minutes he turned blue, his internal organs destroyed. Amid Abu Sayr, age seven, died before reaching the hospital. No protests nor disturbances had preceded this incident, and no one could explain the tank gunner's zeal.

As the father related this to me and my companions, he saw my eyes film with tears. Then this humble man - a mechanic, as I recall - embraced me and patted my back. Two days after the most searing experience of his life, he offered comfort to me. "Just tell the world how they stole my heart", he whispered gently. I was reminded, yet again, of the deep courage, resilience and magnanimity of the Palestinian people.

I am also the son of an American mother, who is from an early settler family. Our ancestor, Samuel Johnson, participated in this country's constitutional convention. From my mother's side I took the ethic of civic responsibility - the conviction that in a democratic society, we are the government and that when we fail to exercise true popular sovereignty (by educating ourselves, voting, challenging political leaders and speaking out) we lose the right to call ourselves a free people.

Both of these family traditions meld in my concern over Middle East peace.

I have already suggested that the United States should respectfully counsel Israel to abandon ethnic separatism and embrace equality. Not the equality and pluralism among Jews from different origins that Judea described the other day, but equality between Jews and Palestinians and among all human beings, regardless of religion, race or ethnicity.

I understand why some Jews turned to the vision of ethnic separatism that Zionism offered, particularly after World War II; the reasons are obvious. But Zionism has been a tragic deviation from Jewish universalist ethics, a never-ending nightmare for Palestinians and a source of tension and instability in the Middle East and the broader world. A growing number of Jews and even some prominent Israelis - like Avram Burg, Meron Benvenisti and Daniel Gavron - concur in this assessment.

What does it say that the most prosperous and secure Jewish community in the world is here in the multicultural United States, flourishing under a regime of equal rights, while the Jews of Israel, armed to the teeth, live in chronic insecurity and are fortifying an apartheid wall?

Those who have dominated others always resist losing their monopoly of power and fear vengeance from those they have oppressed. White South Africans defended apartheid on just those grounds. But as South Africa has shown, a blood bath need not ensue, especially when the movement for political change is firmly committed, as was the African National Congress, to equality and reconciliation. If Israelis could muster the courage to admit moral responsibility for the injustices they have inflicted on the Palestinians, they could not find a more forgiving and generous people.

Israelis have comforted themselves over time with a series of myths, among them: that Palestine was a "land without people for a people without a land"; that the indigenous Arabs they encountered upon arriving in Palestine were little but a scattering of individuals with no sense of collective identity (as Judea put it a few days ago, peasants who had never heard the word "sovereignty"); that the settlers' European outlook and culture made them superior custodians of the country; that Jewish settlers knew the country's landscape even better than the Palestinians who had cultivated it for centuries; and that Palestinians loved their fields, orchards, villages and towns less than Zionist colonizers, and thus, fled in 1948 not in response to the massacres, rapes and systematic campaign of terror mounted by Jewish militias, but simply walked away from them to mysteriously disappear. The first step toward genuine equality between Israeli Jews and Palestinian Arabs involves liberation from this colonialist mind-set.

I am impelled in equal parts by foreboding and hope. Far from modeling equality for Israel, the United States instead is following the Israeli model of a permanent "war on terror". Now, like Israel, we have our military occupation of an Arab country. Israeli jurists counsel our State Department on the legal justifications for targeted assassinations. Israeli colonels train our Iraq-bound Marines in urban warfare tactics developed in the Jenin refugee camp. Israeli security contractors teach American police chiefs and airport personnel how to racially profile Arab and Muslim travelers. Israeli policymakers - who strongly supported the Iraq invasion - now egg our leaders on to a new confrontation with Iran.

There is only pain ahead for everyone on this path of confrontation and violence. We must find a way back from the brink and guide Israel back with us. Nothing could enhance the security of the United States more than a just and therefore durable peace in Israel and Palestine.

I am hopeful. In the West's shame over the Nazi Holocaust, we relaxed our normal skepticism and, deferring to Zionism's demands, accepted principles we would have denied anywhere else. But more people are recognizing that a Jewish state built on expulsion, repression and ethnic privilege will never know rest. Justice, equality and mutual respect are the salvation of both Israeli Jews and Palestinian Arabs. Ahead, perhaps distantly, a bright future awaits them.


George E Bisharat is a professor of law at Hastings College of the Law in San Francisco and writes frequently on law and politics in the Middle East.

Copyright 2008 Los Angeles Times,0,1815410,full.story

Bill Totten

Saturday, December 27, 2008

A Privatised Money Supply

Modern Banking and the Fractional Reserve System

Do you know where the bank gets the $160,000 for your mortgage? It's very simple. Someone walks over to a computer and types 160,000 beside your name. With only $27.93 of cash reserves for every $10,000 of assets (as of June 1999) the bank has just created the remaining $159,553 of that interest-earning money out of thin air. When, after 25 years of hard work, you pay off your mortgage, the $159,553 vanishes back into thin air. Not so the interest however. It vanishes into the banker's pocket. Chartered (that is, privately owned) banks, such as The Bank of Montreal, The Royal Bank, The CIBC, et al have created about 95 percent of our total money supply ($589.1 billion as of September 1999) in exactly this way. But the cash reserves in their vaults amount to only a paltry $3.893 billion. (About $32 billion of cash circulates in public hands.)

This is called fractional reserve banking, and it's the greatest scam of all time because it creates debt for no reason other than to enrich the banking class. Its long term effect - as becomes clearer every day - is to steadily suck wealth out of the community and into the hands of a few people, a fact that bankers and most politicians stubbornly refuse to admit. Charging interest on money created out of nothing is, in the main, unjust and immoral, and Plato, Aristotle, Cicero, the Bible (Deuteronomy 23:19), the Koran (2:275-278), the Catholic Church, many codes of law and most writers on morals have condemned it for more than two thousand years. The historical name for this evil is usury. Nevertheless bankers enjoy peace of mind because they know that the public thinks they merely lend out the savings of their depositors. In fact, banks create more than 95 percent of all deposits, for when a bank creates a loan it simultaneously creates a deposit. What banks do to justify the accusation of being economic parasites is to lend out interest-bearing money of their own creation using a very thin sliver of legal tender (cash) to back it up.

How did the banks gain this oppressive power of charging interest on mere computer entries? Very simply they lobbied and hoodwinked our politicians into giving it to them. Before World War II cash reserves of 1:10 had been the norm in practice. This meant that if you deposited $100 of cash in a bank, the banking system (though not that one bank) would eventually use that $100 to create up to $900 of credit. That credit shows up in their books as $900 of interest-bearing loans (assets), and $900 of deposits (liabilities). Note that credit is not cash - only the Bank of Canada (BoC) can print and coin money - but it's money nonetheless because you can buy things with it as long as the bank honours your cheques.

In 1991 legislation was quietly passed that eliminated required cash reserves by mid 1994. The result? Figures from the Bank of Canada Review show that by September 1998 the ratio of the banks' cash reserves ($3.893 billion) to their total assets ($1393 billion) had soared to 1:358, a ratio that was never more than 1:15 in the first half of this century. That means for every dollar of cash in their vaults or deposited with the central bank (that is, the BoC) the banks have conjured up $357 from the void which they've invested or lent out with interest. Hence the record profits. Meanwhile not one person in a hundred grasps the fact that our government permits private banks to create about 95 percent of our money supply bringing huge profits to them and endless debt to us.

Nowadays the big profits lie in government bonds, currency speculation, the stock market, and derivatives; and banks, with their power of money creation, are up to their eyeballs in all four.

But there's always a day of reckoning. History teaches us that banks are forever finding new ways to commit financial suicide, and when they do they bring the public down with them. (With the collapse of their debt-pyramids the once mighty Japanese banks have been living off the public purse for years.) But what we witnessed in 1998 was unprecedented in human history. In South East Asia, Russia and Latin America, national economies were plundered and millions impoverished, almost overnight, through the deliberate manipulation of "free" market forces.

Now that our money supply has been essentially privatized, how can we free ourselves from this sly form of economic tyranny? In the three quotes below a famous American president, a famous Canadian prime minister, and a governor of the Bank of England in the 1920s tell us exactly what needs to be done. Unfortunately, there's never been a reform of the banking system while the banks were in the driver's seat. They must first be rendered helpless by an economic collapse. When that blow comes two facts should be etched in our minds:

(1) A government can lend interest-free money into existence by borrowing from its own bank, The Bank of Canada, or, it can borrow interest-bearing money into existence by borrowing from privately owned banks.

Unfortunately The BoC has become a puppet of the financial elite, despite its mandate to serve the interests of all Canadians.

(2) A government that borrows with interest from private banks, when it can create its own interest-free money, is a government of idiots or thieves.

Unfortunately, the human mind finds it easier to believe a lie it's heard a hundred times before than to believe a truth it's hearing for the first time. We hope that the words of Jefferson, MacKenzie King and Stamp will help break down any natural scepticism you may feel when we claim that the chartered banks, in collusion with The Bank of Canada and with the complicity of our government, are riding on the backs of the citizens of this country. The right to create money belongs to the people (see notes on "It's Your Money" {1} by William Hixson), and it is the sacred duty of the state to exercise this right for their benefit. Instead, the bonanza of money creation has been handed over to private bankers by ignorant, irresponsible politicians.

I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs. -- Thomas Jefferson {2}

Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of sovereignty of Parliament and of democracy is idle and futile ... Once a nation parts with control of its credit, it matters not who makes the nation's laws ... Usury once in control will wreck any nation. -- William Lyon Mackenzie King {3}

Banking was conceived in iniquity and born in sin ... Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of the pen, they will create enough money to buy it back again ... Take this great power away from them and all the great fortunes like mine will disappear and they ought to disappear, for then this would be a better and happier world to live in ... But, if you want to be the slaves of the bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit. -- Sir Josiah Stamp {4}

How Banks Create Interest-Bearing Money Out of Thin Air

(and cost the average taxpayer, home owner & small business-person thousands of dollars annually)

Assuming a reserve ratio of 1:10 the table below shows how $100 of interest-free government created money (GCM), that is, cash, is used by the banking system to create $900 of interest-bearing bank-created money (BCM) in the form of loans. The reserve ratio is the ratio of cash reserves (GCM) to deposits (mostly BCM). In our example the banking system consists of fifty banks, but the money creation process would be essentially the same for any number of banks from one to infinity. (Note that if the system contained only one bank that bank could create $900 in loans immediately.)

See table at

Modern accounting uses double entry book keeping where liabilities and assets are kept exactly equal. A bank's liabilities are its deposits. Its assets are its loans (including bonds which are loans to government) and its cash reserves. Here is how the banking system creates money. In column 1 $100 of cash is deposited in Bank 1. Bank 1 creates a $90 loan in the form of a deposit as shown in column 2. This deposit is pure BCM and, because it must be paid back with interest, is an asset. With a reserve ratio of 1:10 the bank puts aside $10 in cash (column 3) to meet cash demands from the person who deposited the $100. The remaining $90 in cash covers the $90 loan. The borrower proceeds to write cheques on his $90 deposit and these cheques get deposited in Bank 2. For these cheques Bank 2 demands and gets cash from Bank 1 until eventually all $90 ends up in Bank 2. (Naturally in real life more than two banks are involved. Thus the transactions are not so simple and orderly as they must be here for explanatory purposes, but everything comes out in the wash to give exactly the same result.) However the original $100 deposit still stands to the credit of the depositor (a liability for Bank 1) even though $90 of it has moved on to Bank 2. And the $90 loan Bank 1 created when it first received the original $100 deposit also stands (an asset for Bank 1). Banks 2, 3, 4, etc. then repeat this process eventually creating $900 of BCM in the form of loans (as shown in column 2) and dispersing the original $100 as cash reserves throughout the banking system (as shown in column 3).

Note that $900 of the $1000 of deposits in column 1 is BCM, that is credit created by the banks in the form of loans. (Banks make loans by "depositing money" in your account which you must pay back with interest. Thus they are loan/deposits.) Only the original $100 cash deposit is GCM. One other point. As a loan/deposit gets spent, a deposit in some other bank grows in inverse proportion. Thus the banks have increased the money supply by $900 and not by $1800. That would be double counting. The important points, however, are as follows: this ingenious system is called fractional reserve banking; it creates debt for the sole purpose of enriching the banking class; it is a subtle form of theft; historically it was condemned as a form of usury.

How Much Does Bank Created Money (BCM) Cost the Average Taxpayer, Home Owner, Small Businessman?

The following figures for 1996 are from the Bank of Canada Review, Spring 1997, and Statistics Canada. In 1996 the GDP (gross domestic product) was $797.8 billion. The federal debt was $469.4 billion or 58.1 percent of the GDP. Interest payments on the federal debt - mostly financed with interest-bearing bank created money (BCM) rather than interest-free government created money (GCM) - amounted to $45.3 billion. The interest on the 6.7 percent of the federal debt held by The Bank of Canada and other government agencies flows back to government on our behalf. The approximately $42.2 billion in interest on the remaining 93.2 percent of the federal debt held by private banks and other members of the financial elite, domestic and foreign, is basically a subsidy to the wealthy. For reasons that have nothing to do with economic sense and everything to do with the fact that money buys political influence our government taxes ordinary citizens to pay for that subsidy. Assuming fifteen million taxpayers (children and poor people don't pay taxes) we divide $42.2 billion of interest by fifteen million and get an average of $2813 per taxpayer. But when you add provincial and other public debt to the federal debt you get a total of approximately $650 billion. So let's say about $3500 per taxpayer.

Now what about private debt? If you have a $160,000 mortgage or small business loan at seven percent, and it is amortized over 25 years, then your average annual interest will be $7242. (Over the 25 year period you'll pay $181,050 in interest, which is more than the principal.) Yet there's no economic reason why a government agency couldn't create and lend you that $160,000 at just enough to cover the cost of administering the loan, say 0.25 percent. Now your annual interest would be $206.

Here's another way of looking at the folly of BCM. In 1999 bank credit amounted to $557 billion, almost 95 percent of our money supply. Real interest (that is, nominal interest minus inflation) on this bank credit was at least five percent, or $28 billion. But where is this interest to come from since banks create credit, but not the interest they charge on that credit? It can't come from the approximately $32 billion in cash (GCM) that circulates in public hands. It can only come from more bank credit with more interest attached. But for all existing bank credit to be paid without anyone defaulting on their loans, the economy must expand by 2.9 percent ($28 billion of interest divided by the GDP, $953 billion). Since the average annual real GDP growth from 1960 to 1995 was only 2.3 percent, the economy is going to repeatedly stumble in its effort to keep up with the interest payments on all that bank credit. This is the root cause of what is known as the business cycle, and there's nothing inevitable about it. A lot of economic weather is man made. It is tolerated because it is the consequence of a system designed to provide investment income to those with financial assets. The cost to the community is increasing public and private debt with all the economic failure and misery that goes with it when the economy slows. What we have in a debt money system is cruelty motivated by self-interest and rationalized under the guise of economic law.

BCM should be abolished just as slavery was abolished. But it won't happen until the public understands the magnitude of this hidden injustice and screams blue murder. But better scream soon. With weapons like NAFTA and the MAI international banking fraternities, such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), will soon have the middle class in their gun sights. They may use a crashing stock market as a smoke screen to contract the money supply as did the Fed in 1929. (In a radio interview in 1996 free-market champion and economic advisor to Nixon and Reagan, Milton Friedman said, "The Federal Reserve [the privately owned US central bank] definitely caused The Great Depression by contracting the amount of currency in circulation by one third from 1929 to 1933".) Then the screams will be deafening. But it's better to cry out before you are hurt than after you are hurt, especially after you are critically hurt.

Do you want to take some action? First discuss this with others. Then send a few faxes and make a few photocopies. Tape one up in your back seat car window. Leave another in the nearest bank to show them that people are beginning to understand how they siphon off wealth from the community through their outrageous privilege of creating interest-bearing money. (Government created money is interest-free.) Finally - for the really committed - ask your local bank manager just how much truth there is in all of this. You can be fairly sure he or she will resort to their much feared weapon - impenetrable economic jargon. Some bankers will actually deny that banks create any money! This is an example of what Marshall McLuhan called motivated ignorance.






For more info visit these websites:

Bill Totten