Our Economy is on an Artificial Life-support System

by Richard C. Cook

Remember when the U.S. was the world's greatest industrial democracy?
Barely
thirty years ago the output of our producing economy and the skills of
our
workforce led the world.

What happened? It's hard to believe that in the space of a generation
our
character and capabilities just collapsed as, for example, did our
steel and
automobile industries and our family farming. What then are the causes
of
the decline?

Here's how I would put it today: our economy is on an artificial
life-support system, a barely-breathing hostage in a lunatic asylum.
That
asylum is the U.S. and world financial systems which are on the verge
of
collapse.

The inmates are the world's central bankers, along with most of the
financial magnates big and small. The fact is that the economy of much
of
the world is in a decisive downward slide which the financiers cannot
stop
because the systems they operate are the primary cause. As often
happens,
the inmates rule the asylum.

The problems aren't confined to the U.S. Unemployment worldwide is
increasing, debt is rampant, infrastructures are crumbling, and
commodity
prices are rising.

In such an environment, crime, warfare, terrorism, and other forms of
violence are endemic. Only the most naïve, self-centered, and deluded
jingoist could describe such a scenario in terms of the freedom-loving
Western democracies being besieged by the "bad guys."

Rather what is happening highlights the growing failures of Western
globalist finance whose impact on political stability has been so
corrosive.
As many responsible commentators are warning, we are likely to see
major
financial shocks within the next few months. The warnings are even
coming
from high-flying institutional players like the Bank of International
Settlements and the International Monetary Fund.

We may even be seeing the end of an era when the financiers ruled the
world.
At a certain point, governments or their military and bureaucratic
establishments are likely to stop being passive spectators to the
onrushing
disorder. It is already happening in Russia and elsewhere.

The countries that will be least able to master their own destiny are
those
like the U.S. where governments have been most passive to economic
decomposition from actions of their financial sectors. The financiers
are
the ones who for the last generation have benefited most from
economies
marked by privatization, deregulation, and speculation, but that may
be
about to change. Whether the change will be constructive or
catastrophic is
yet to be seen.

THE HOUSING BUBBLE SETS THE STAGE FOR THE U.S. COLLAPSE

Within the U.S. , foreign investors, above all Communist China, have
been
propping up our massive trade and fiscal deficits with their capital.
To
keep them happy, interest rates-after six years of "cheap credit"-must
now
be kept relatively high. Otherwise the Chinese, et.al., might bail-
out,
leaving us to fend for ourselves with our hollowed-out shell of an
economy.

Even so, these investors are increasingly uneasy with their dollar
holdings
and are bailing out anyway. Foreign purchase of U.S. securities has
plummeted. And our debt-laden economy, where our manufacturing base
has been
largely outsourced, is no longer capable of providing our own
population
with a living by utilizing our own productive resources.

For a while we were floating on the housing bubble, but those days are
now
history when, according to a Merrill-Lynch study, the artificially
pumped-up
housing industry, as late as 2005, accounted for fifty percent of U.S.
economic growth.

As everyone knows, the Federal Reserve under Chairman Alan Greenspan
used
the housing bubble, like a steroid drug, to pump liquidity into the
economy.
This worked, at least for a while, because consumers could borrow huge
amounts of money at relatively low interest rates for the purchase of
homes
or for taking out home equity loans to pay off their credit cards,
finance
college education for their children, buy new cars, etc.

When the final history of the housing bubble is written, its
beginnings will
be dated as early as 1989-90, when credit restrictions on the purchase
of
real estate first began to be eased. According to mortgage industry
insiders
interviewed for this article, they began to be taught the methods for
getting around consumers' weak credit reports and selling them homes
anyway
in the mid to late 1990s.

The Fed started inflating the housing bubble in earnest around 2001,
after
the collapse of the dot.com bubble, which failed with the stock market
decline of 2000-2002. Then, over a trillion dollars of wealth,
including
working peoples' retirement savings, simply vanished.

Also according to mortgage specialists, it was in March 2001, two
months
after George W. Bush became president, that a "wave of intoxicated
fraud"
started. Mortgage companies began to be instructed, by the
creditors/lenders, on how to package loan applications as "master
strokes of
forgery," so that completely unqualified buyers could purchase homes.

There could not have been a sudden onset of industry-wide illegal
activity
without direction from higher-up in the money chain. It could not have
continued without reports being filed by whistleblowers with
regulatory
agencies. Today the government is prosecuting mortgage fraud, but they
certainly had to know about it while it was actually going on.

The bubble was coordinated from Wall Street, where brokerages
"bundled" the
"creatively-financed" mortgages and sold them as bonds to retirement
and
mutual funds and to overseas investors. Portfolio managers were
directed to
buy subprime bonds as other bonds matured. It's the subprime segment
of the
industry that has now collapsed, triggering, for instance, the recent
highly-publicized demise of two Bear Stearns hedge funds.

And it's not just lower-income home purchasers who are affected. The
Washington Post has reported that for the first time in living memory
foreclosures are happening in Washington 's affluent suburban
neighborhoods
in places like Fairfax , Loudon, and Montgomery Counties .

The subprime bonds were known to be suspect. One reason was that they
were
based on adjustable rate mortgages that were actually time bombs,
scheduled
to detonate a couple of years later with monthly payments hundreds of
dollars a month higher than when they were written. Many of these
mortgages
will reset to higher payments this October.

Purchasers were lied to when they were told they could re-sell their
homes
in time to escape the payment hikes. Now the collapse of the market
has made
further resale at prices high enough to escape without losses
impossible.

One way the system worked was for mortgage lenders to maximize the
"points"
buyers were required to finance, making the mortgages more attractive
to
Wall Street. Of course bundling and selling the mortgages relieved the
banks
which originated the loans from exposure, pushing a considerable
amount of
the risk onto millions of small investors. This was in addition to the
normal sale of mortgages to quasi-public agencies like Freddie Mac and
Fannie Mae.

Was it a scam? Of course. Did the Federal Reserve know about it? They
had
to. Did Congress exercise any oversight? No.

What did the White House know?

Amy Gluckman, an editor of Dollars and Sense, reported in the
November/December 2006 issue: "During the Clinton administration,
Greenspan
was relatively 'unembedded'-averaging only one meeting per month at
the
White House..

"But when George W. Bush moved into 1600 Pennsylvania Ave. ,
Greenspan's
behavior changed. During 2001, he averaged 3.3 White House visits a
month,
more than triple his rate under Clinton and much more often with high-
level
officials like Vice President Cheney. His visits rose to 4.6 a month
in 2002
and 5.7 in 2003.

"Whatever White House officials were whispering in Greenspan's ear, it
worked: Greenspan abruptly changed his tune on tax cuts, lending
critical
support to Bush's massive 2001 and 2003 tax giveaways, and he loosened
the
reins by cutting Fed-controlled interest rates repeatedly beginning in
January 2001, a gift to the Republicans in power."

Along the way, the bubble caused housing prices to inflate
drastically,
which officialdom touted as economic "growth." Even today, periodicals
like
Barron's naively boast that this inflation boosted American's
"wealth."

But this source of liquidity for everyday people has been maxed out,
like
our credit cards, and there is nothing to replace it. There is no cash
cushion anymore, because years ago people stopped earning enough money
for
personal or household savings.

As purchasers lose their homes to foreclosure, the real estate is
being
grabbed at bankruptcy prices by the banks and by any other investors
with
ready money. Whole neighborhoods of cities like Cleveland or Atlanta
are
turning into boarded-up ghost towns.

What we are seeing are the results of an economic crime on a fantastic
scale
that implicates the highest levels of our financial and governmental
establishments. It spanned three presidential administrations-Bush I,
Clinton, and Bush II-though the worst of it came with the surge of
outright
lending fraud after 2001.

As usual when hypocrisy is rampant only the small fry are being called
to
account. Commentators, including a sleepwalking Congress, have
self-righteously railed at consumers who got in over their heads. The
Mortgage Bankers Association is even lobbying Congress to allocate $7
million more to the FBI to go after the supposedly rogue brokers
within
their own industry who are being scapegoated.

THE BUBBLES ARE ONLY SYMPTOMS

But there's much more to it than that. These bubbles are symptoms.
They are
created because our wage and salary earners lack purchasing power due
to
stagnant incomes and various structural causes. These causes include
the
outsourcing of our manufacturing industries to China and other cheap
labor
markets and the super-efficiency of the remaining U.S. industry which
is
able to manufacture products with ever-fewer workers.

Also, our farming, mining, and other resource-based industries are in
a
long-term slide. This and the decline of hard manufacturing have been
going
on since our oil production peaked in the 1970s, followed by the
Federal
Reserve-induced recession of 1979-83. Next came the deregulation of
the
financial industry. It was all part of the economic disintegration
that led
to today's "service economy."

Now, for the first time in modern U.S. history, there are no new
economic
engines at all. The last real engine was the internet which has now
reached
maturity with marginal players being weeded out.

Our biggest sources of new private-sector jobs today are food service,
processing of financial paperwork, health care for the growing numbers
of
retirees, and menial low-paying jobs, like landscaping and building
maintenance. These are increasingly being performed by immigrants who
are
also underpricing U.S. citizens in many service jobs like childcare
and auto
repair.

Today the rank-and-file of our population must increasingly turn to
borrowing in order to survive. Only the banks and the credit card
companies
are the beneficiaries. The total societal debt for individuals,
businesses,
and government is over $45 trillion and climbing. This is happening
even
while the real value of wages and salaries is decreasing.

What I have just been saying is bad enough, but here's where the real
lunacy
enters in.

A major factor connected to the decline in the value of employee
earnings is
dollar devaluation in the overarching financial economy due to the
proliferation of huge quantities of bank credit being used to keep the
stock
market afloat and to fuel the speculative games of equity, hedge, and
derivative funds.

In other words, while our factories continue to shut down, the Wall
Street
gambling casino-like its Las Vegas counterpart-is running full-bore,
24/7.
This, along with financing of the massive federal deficit, is what
critics
are talking about when they speak of the Federal Reserve "printing
money."

The main growth factors for federal spending are Middle East war
expenditures and interest on the national debt. But within the private
sector it's leveraged loans to businesses which The Economist recently
said
"mirror..interest-only and negative-amortization mortgages" in the
subprime
market. But here's the big difference: in the leveraged business
economy,
the amount of assets at stake are even greater than with the housing
bubble.

The financial world, which Dr. Michael Hudson calls the FIRE
economy-Finance, Insurance, and Real Estate-has been producing
millionaires
and billionaires among those who know how to play the game.

The Wall Street hedge funds stand out as the most irresponsible
financial
scams in history. Unregulated and secretive, they account for a third
of all
stock trades, own $2 trillion in assets, and pay their individual
managers
over $1 billion a year. Think about this the next time someone you
know has
their job outsourced to China or when his adjustable rate mortgage
resets
and drives up his monthly house payment past the level of
affordability.

The hedge funds borrow huge sums from the banks which generate loans
under
their Federal Reserve-sanctioned fractional reserve privileges. Often
this
money is used by the hedge funds to "short the market," thereby
earning
profits when stock prices decline.

In other words, the hedge funds and their banking enablers use banking
leverage to bet against the producing economy. In doing so, they may
actually drive stock prices down, causing ordinary investors to lose a
portion of their own wealth. Can this be called anything other than a
crime?

The livelihood of much of the U.S. workforce and perhaps half of the
rest of
the world's population-maybe three billion people-is being threatened
by
such financial lawlessness. The justification that was first used for
financial deregulation and tax cuts for the rich was that the trickle-
down
effect of wealthy peoples' earnings would spill over to the rank-and-
file.

The Reagan administration ushered in these policies in the 1980s under
the
heading of "supply-side economics." But the opposite has happened. The
system has institutionalized an increasingly stratified worldwide
culture of
haves and have-nots.

THE ROOT CAUSE OF THE CATASTROPHE

How did today's looming tragedy come to pass?

Looking for causes is like peeling an onion. What we are really seeing
are
the terminal throes of a failed financial system almost a century old.
It's
happening because, since the creation of the Federal Reserve System in
1913-even during the period of the New Deal with its Keynesian
economics
aimed at full employment-our economy has been based almost entirely on
fractional reserve banking.

This means that under the regime of the world's all-powerful central
banking
systems, money is brought into existence only as debt-bearing loans.
Interest on this lending tends to grow exponentially unless overtaken
by
real economic growth.

Remember that every instance of bank lending, from purchase of
Treasury
Bonds, to credit cards, to home mortgages, to billion-dollar loans to
hedge
funds for leveraged buyouts or sheer speculation, must eventually be
paid
back somewhere, somehow, sometime, by somebody, with interest. In the
end,
it all comes back to people who work for a living, whether in the U.S.
or
elsewhere, because that is the only way the world community ever
creates
real wealth.

In an anemic economy like that of the U.S. , growth cannot catch up
with
interest in a deregulated financial marketplace where interest rates
are
high. Rates may not seem high compared with, say, the twenty percent-
plus
rates of the early 1980s, but they are high in an economy with, at
best, a
two percent GDP growth rate.

And they have been high on average since the 1960s, as the banking
industry
became increasingly deregulated. Interestingly, since 1965, the U.S.
dollar
has lost eighty percent of its value, which tends to validate the
contention
by some observers that higher interest rates not only do not reduce
inflation, as the Federal Reserve contends, but actually cause it.

The situation today is worse in many respects than 1929, because the
debt
"overhang" vs. real economic value is much higher now than it was
then. The
U.S. economy was in far better shape in the 1920s, because so much of
our
population was gainfully employed in factories or on farms.

The question is not when will the system start to come down, because
this
has already begun. It's shown most clearly by the fact that according
to
Federal Reserve data, M1, the part of the money supply most readily
available for consumer purchases, is not only lagging behind inflation
but
has actually decreased in eleven of the last twelve months. This means
that
the producing economy is already in a recession.

The federal government is trying to figure out what to do. Their
biggest
concern is that foreign investors have started to pull out of
dollar-denominated markets.

The government's "plunge protection team"-known officially as the
President's
Working Group on Financial Markets-is trying to engineer what they
call a
"soft landing." It's been likened to the process by which you cook a
frog in
a pot where you raise the temperature one degree a day. The frog
doesn't hop
out because the heat goes up gradually, but before long it's too late.
The
frog has been cooked.

Even if the plunge protection team succeeds, and the frog cooks
slowly,
there will be a massive de facto default on dollar-denominated debt
and a
long-term degradation of the U.S. standard of living. The inside word
is
that we are likely to see major monetary shocks and a possible stock
market
crash as early as December 2007.

The worst off will be people locked into retirement funds which have a
heavy
load of mortgage-related securities. Entire investment portfolios are
likely
to disappear overnight.

The banks, along with the bank-leveraged equity and hedge funds, are
preparing for the biggest fire sale in at least a generation. Insiders
are
going liquid to get ready. If you think Enron was "the bomb," you
won't want
to miss this one.

WHAT CAN BE DONE?

There are so many flaws in the system that it's time for real change.

As I have been pointing out in articles over the last several months,
the
key to a rational solution would be immediate monetary reform leading
to a
fundamental shift in how the world conducts its financial business. It
would
mean taking control of the world's economy out of the hands of the
private
bankers and giving it back to democratically elected governments.

I spent twenty-one years working for the U.S. Treasury Department and
studying U.S. monetary history. For much of our history we were a
laboratory
for diverse monetary systems.

During and after the Civil War (1861-5) we had five different sources
of
money that fueled our economy. One was the Greenbacks, an extremely
successful currency which the government spent directly into
circulation.
Contrary to financiers' propaganda, the Greenbacks were not
inflationary.

Another was gold and silver coinage and specie-backed Treasury paper
currency. The third was notes lent into circulation by the national
banks.
The fourth was retained earnings-individual savings and business
reinvestment of profits-which was the primary source of capital for
industry. The fifth was the stock and bond markets.

After the Federal Reserve Act was passed by Congress in 1913, the
banks and
the government inflated the currency through war debt and destroyed
most of
the value of the Greenbacks and coinage. The banks never entirely
displaced
the capital markets but eventually took them over during the present-
day era
of leveraged mergers, acquisitions, and buyouts, while the Federal
Reserve
created and deflated asset bubbles.

The banking system which rules the economy through the Federal Reserve
System has produced the crushing debt pyramid of today. The system is
a
travesty. Banks, which can be useful in facilitating commerce, should
never
have this much power. Many intelligent people have called for the
Federal
Reserve to be abolished, including former chairmen of the House
banking
committee Wright Patman and Henry Gonzales and current Republican
presidential candidate Ron Paul.

Some might call such a program a revolution. I prefer to call it a
restoration-of national sovereignty. Central to the program would be
the
elimination of the Federal Reserve as a bank of issue and restoration
of
money-creation to the people's representatives in Congress. This is
what our
Constitution says too. It's the system we had before 1913.

THE MONETARY PRESCRIPTION

The fundamental objectives of monetary policy should be to secure a
healthy
producing economy and provide for sufficient individual income. The
objectives should not be to produce massive profits for the banks,
fodder
for Wall Street swindles, and a blank check for out-of-control
government
expenditures.

Note I referred to income. I did not say "create jobs." That is the
Keynesian answer, because Keynes was a collectivist, and the main
thing
collectivists like to come up with is to give everyone more work to
do, even
if it's just grabbing a shovel and digging ditches like they did with
the
WPA during the Depression.

It's what President Clinton did with his welfare-to-work program that
threw
hundreds of thousands of mothers off the welfare rolls and into a job
market
where sufficient work at a living wage did not exist. It's another
reason
the government is constantly borrowing more money to fuel the
military-industrial complex by creating more military, bureaucratic,
and
contractor jobs.

Back to income. The idea of "income," as opposed to "jobs," is a
civilized
and humane idea. When are we going to realize that everyone doesn't
need a
paying job in order for an industrial economy to provide all with a
decent
living? When are we going to realize that the productivity of the
modern
economy is part of the heritage of all of us, part of the social
commons?

Why can't mothers have the choice of staying home with the kids like
they
could a generation ago? Why can't some people choose to do eldercare?
Why
can't others comfortably go into lower-paying occupations like
teaching or
the arts? Why can't some just opt to study or travel for a while or
learn
new skills or start a business without facing financial ruin as they
often
must today? Why can't retirees enjoy their retirement instead of
having to
stay in the job market or worrying about Social Security going broke?

The U.S. and world economies are on the brink of collapse due to the
lunacy
of the financial system, not because we can't produce enough.

Contrary to so many doomsayers, the mature world economy is capable of
providing a decent living for everyone on the planet. It cannot
because the
monetary equivalent of its bounty is skimmed by interest-bearing debt.

These are things that monetary reformers have known about for decades.
The
first steps within the U.S. would be 1) a large-scale cancellation of
debt;
2) a guaranteed income for all at about $10,000 a year, not connected
to
whether a person has a job; 3) an additional National Dividend,
fluctuating
with national productivity, that would provide every citizen with
their
rightful share in the benefits of our incredible producing economy; 4)
direct spending of money by the government for infrastructure and
other
necessary costs without resort to taxation or borrowing; 5) creation
of a
new system of private lending to businesses and consumers at non-
usurious
rates of interest; 6) re-regulation of the financial industry,
including the
banning of bank-created credit for speculation, such as purchase of
securities on margin and for leveraging buyouts, acquisitions,
mergers,
hedge funds, and derivatives; and 7) abolishment of the Federal
Reserve as a
bank of issue with retention of its functions as a national financial
transaction clearinghouse.

While these proposals are basically simple, the overall program is so
different from what we have today with our financier-controlled system
that
it takes careful reading and a great deal of thought to understand
exactly
how it would work. One way to approach it is to look at the likely
effects.

These measures would immediately shift the basis of our economy from
borrowing from the banks to a mixed system that would include the
direct
creation of credit at the public and grassroots level. The size of
government would shrink, our producing economy would be reborn, debt
would
come down, economic democracy would become a reality, and the
financial
industry could be right-sized. Finally, the international situation
could be
stabilized because we would no longer be driven to a constant state of
warfare to seize other nations' resources as with Iraq and to prop up
the
dollar as a reserve currency abroad.

Such a system would work by creating indigenous sources of credit
needed to
mobilize the natural wealth and productivity of the nation. There are
people
who could implement this program. Systems to do so could be installed
within
the U.S. Treasury and the Federal Reserve within a matter of months.

Fundamental monetary reform implemented to restore economic democracy
is
what America 's real task should be for the twenty-first century. One
thing
is for certain. The out-of-control financial system that has wrecked
the
U.S. and world economies over the last generation cannot be allowed to
continue.

How the outcome will play out may well depend on whether there is a
Jefferson, Lincoln, or Roosevelt waiting in the wings. The success of
each
of these great leaders was due to one critical factor: their ability
to
implement monetary reform at a time of national emergency.

Richard C. Cook is the author of "We Hold These Truths: The Hope of
Monetary
Reform," scheduled to appear by September 1, 2007. A retired federal
analyst, his career included service with the U.S. Civil Service
Commission,
the Food and Drug Administration, the Carter White House, and NASA,
followed
by twenty-one years with the U.S. Treasury Department. His articles on
monetary reform, economics, and space policy have appeared on Global
Research, Economy in Crisis, Dissident Voice, Arizona Free Press,
Atlantic
Free Press, and elsewhere. He is also author of "Challenger Revealed:
An
Insider's Account of How the Reagan Administration Caused the Greatest
Tragedy of the Space Age." His website is at www.richardccook.com . He
appears frequently on internet radio at www.themicroeffect.com on
Saturday
mornings at 11 a.m. Eastern.

Richard C. Cook is a frequent contributor to Global Research. Global
Research Articles by Richard C. Cook