Time for a transaction tax on derivative trades

A one percent transaction tax on derivatives trade would pay for the entire US budget. If congress wasn't being paid off by these same big banks there would be no federal budget deficit.

JPMorgan, Bank of America Corp., Goldman Sachs, Morgan Stanley and Citigroup Inc. executed 96 percent of the $293 trillion in over-the-counter derivatives trades made by the top 25 U.S. bank-holding companies and their customers as of Sept. 30, according to the Office of the Comptroller of the Currency.

A Note About Leverage and Credit Default Swaps

Leverage is only possible if there are funds available at low interest rates, compared to what money managers think they can get somewhere else, usually involving some high risk speculation scheme. This is so only because there is too much capital available compared to the need for capital. If there were productive uses for the funds at reasonable rates why would holders of the funds being willing to lend them out at low rates to money managers who want to lever up some speculative scheme?

Our financial problems today are largely a result of money managers using leverage to increase yield at great risk, and then buying phony insurance in the form of credit default swaps (CDS) to guarantee their risky investments. Unlike real insurance, CDS don't require any reserves to pay off if the investments go bad. Also, they don't require that the purchaser own the asset being insured. So an outfit like Goldman Sachs can buy a CDS on some collateralized asset they don't own, and then proceed to drive the price of that asset down so that they can collect on the CDS.

Talk about Ponzi schemes, this one doesn't even require convincing investors to give you their money.

How Wealth and Income Inequality Causes Unstable Credit and Asset Price Bubbles

Income and wealth inequality is the root cause of financial instability. Capital, and the need for capital must be balanced for an economy to function stably.  

If the accumulation of capital exceeds the need for capital to fund growth, the taxes on wealth and capital gains must be increased, and that on consumption and consumer income decreased .

If consumer demand, and the attendant capital needs, outpace capital accumulation, the reverse is required. Taxes then should be shifted from capital gains to consumption and consumer income.

Over the past several decades capital accumulation has outpaced the demand for capital, largely due to reductions in top bracket tax rates and stagnation of middle class incomes. The discussion that follows shows what happens when this occurs.

Enterprises need capital to expand and take advantage of new opportunities. This allows economies to grow to accommodate increases in population and the attendant need for new jobs.

If too little capital is accumulated, growth will be curtailed. If  the effect is severe enough, sufficient growth will not be achieved to accommodate population increases and the need for additional jobs, and the standard of living will fall. 

If too much capital is accumulated, rates of return on capital drop.  As rates of return drop,  capitalists seek ways to improve them through the use of leverage or through the use of techniques to increase the demand for credit. 

If leverage is used ,  risk increases, necessitating even larger rates of return. This leads to a potentially unstable situation. So there is a limit to the amount of leverage that can be used.

As the limits of leverage are reached, investment banks and hedge funds will look for ways to stimulate demand for credit. This can be done by relaxing the standards for issuing credit, and compensating by using techniques to hide risk.

By collateralizing debt and issuing insurance on debt capitalists can be made to feel more comfortable with less secure investments. Debt issued with relaxed credit standards can be mixed with more secure debt making it harder for rating agencies to correctly assess risks. If regulation does not keep up with these measures, or decreases, the value of the collateralized assets and insurance instruments will be jeopardized.

Excess capital can also result in additional risky speculation. When returns on productive investments are low and approaching inflation levels, capitalists will be willing to take larger risks in short term speculation on valuable assets and commodities, caused prices to rise. In turn, the rise in prices creates an upward momentum in asset prices that attracts even more speculation. Such price bubbles tend to be self sustaining as more and more capitalists are willing to take advantage of the upward momentum in prices, until eventually that trend cannot be sustained and the bubbles burst.

All of these measures are driven by the need to increase returns on capital, when there is just too much capital for the real investment needs of the country. This is the situation that has developed over the last few decades largely because returns have been going more and more to capitalists while workers wages have stagnated. With stagnating wages, the demand for goods and services has not kept up with the accumulation of capital.

The stagnation of wages has been caused largely by shrinkage in the manufacturing sector, causing consumers to seek returns in the financial sector and to tap available credit to sustain consumption. This is evidenced by the excessive growth of the financial sector. At the same time, high income and capital gains tax rates have been reduced, accelerating the income and wealth gap between capitalists and middle class consumers.

Unless taxes are shifted to wealth and capital gains from consumption and consumer incomes, this increasing spread in income and wealth will continue to cause instability and the kind of financial crises we are now experiencing.

The Free Market Myth

You hear a lot of noise from conservatives about how the free market is the be all and end all of all things good. This is far from the case when government is in bed with private industry. Here are a few cases where the free market isn't free.

1) Cell Phone Service
Every day in almost every newspaper in the country there are full page ads from cell phone companies offering essentially the same type of service with the exception that the instrument that you can use is in the exclusive domain of one company. Cell phone users are paying for all this advertising and hardware exclusivity. The price of cell phone service is outrageous compared to internet phone service. Had the government invested in the infrastructure for high speed internet service in cities and along interstate highways, mobile telephone service would have been nearly free everywhere, as it is on the internet now.

2) Cable TV
Here again we have multiple companies charging high prices for nearly identical services, where you have little choice in what is available for purchase. Services are bundled for the convenience of the supplier and investor, instead of the consumer. If you're interested in only HBO you can't get it without subscribing to a whole raft of channels you don't want. HBO now has HBO Go which allows streaming of content on the internet, but it's not available unless you pay around $100 a month for HBO and a bunch of junk you don't need from a cable company.

3) Commercial Television
We are still locked into an outdated system where programming is interrupted by commercials. Now commercial channels don't even allow you to watch the program without pasting animated advertising at the bottom of the screen during the program. If you prefer to watch the same program uninterrupted and are willing to pay for it, it's not available.

Where is the free market that is supposed to be the best way to satisfy consumer needs? It's a myth. What is sold is determined by what is best for the companies selling it. This happens because politicians are owned by corporations. Ala carte cable TV services aren't available because cable companies write the laws that control cable TV. And, cell phone companies write the laws that control mobile phone service. And, commercial TV companies write the laws for commercial TV.

Recently there have been articles in the news about building high speed internet infrastructure. Cities are looking at 100 Mbps, Google at 1000 Mbps. This is ten to one hundred times the fastest service available now. It will enable phone, data, and TV in HD over the internet. It is the future, but will it come to pass. It is unlikely, because it would deny commercial TV, cable TV and cell phone companies the profits they now make due to laws written for them.

What we have now is not capitalism. It's state capitalism. They used to call it fascism. And, people seem to be the proverbial frog in the heating water, accepting more and more intrusion into the decisions they should be making as consumers.

Signs of a Declining Empire

Sometimes it appears that the country is stuck in a quagmire from which it cannot remove itself. We are a divided country along partisan lines. The Republican Party is controlled by the right wing, moderates having almost completely disappeared. The Democratic Party is controlled by the coalition developed during the Clinton administration which is in bed with commercial and banking interests, not unlike the GOP of old. Neither party can muster a controlling majority and candidates who would bring about real change cannot get elected. Obama is the classic example of a candidate that can get elected. He is charismatic, a good orator, and continuously triangulates in an attempt to please everyone. Unfortunately, that means perpetuating the stasis with which we are confronted. This stasis has led to several disheartening consequences.

1) We have become a nation of consumers, not producers, dependent on foreign countries for most of our consumer goods. Trade decisions are heavily influenced by international corporations that profit from favorable trade agreements. The economy is heavily influenced by a Federal Reserve Bank that does the bidding of Wall Street at the expense of average people. Trickle down is the modus operandi, and promoting the general welfare is on the back burner. Laws to limit speculation and prevent excesses are undone. Speculative bubbles are left to burst with catastrophic consequences.

2) We no longer can pass any real reform legislation, due to our inability to overturn the filibuster rule in the Senate. With the country nearly equally divided, with few prospects of sixty percent majority, legislation is watered down to where it is just nibbling at the margins of real reform. Major decisions boil down to catering to a few Senators from small states who are riding the political fence.

3) There is no will in either party to confront the dangers of the military industrial complex. The Republican Party never met a war it didn’t like and the Democrats are scared to death of being labeled weak on defense. We have supported a client state, Israel, in the Middle East that has resulted in our not being able to be an unbiased arbiter of thorny issues there.

4) We have left the prosecuting of military adventures around the world to a small group of volunteer service people, largely from the poorer segment of society, while the children of the rich and powerful are safe at home to pursue their personal ambitions. This has led to a lack of appreciation of the horrors of war and the terrible after effects on the participants in combat.

5) Foreign policy, heavily affected by multiple foreign wars and threats of war, has been been delegated to the military command structure to a large extent. What the generals want they get, so as not to anger the Republican right wing and make the Democrats appear weak. The money for war and the number and length of wars is increasing dramatically. Congress seems incapable of limiting war spending of any kind, while scrutinizing every penny spent to promote the general welfare.

Unfortunately, there are few signs that anything will change for the better in the future. We seem resigned to letting the system drift downward, like lemmings going over a cliff. There is no great outrage toward the intractability of our problems. The old don’t seem to be concerned about the state of affairs they are leaving their children and grandchildren. And, the young seem content to wile away their time in the fantasy of video games and reality television, rather than in preparing themselves to tackle the problems ahead of them. It’s all very disheartening.

Our UnRepresentive Democracy

Some aspects of our constitution have constricted us in adapting to changing circumstances over time. Other western countries with parliamentary systems have been able to adopt programs such as universal health care, while we have been unable to do so because our system allows a minority to block major legislation. This is primarily due to how our Senate operates.

Consider the chart below which shows how many people are represented by each senator from the several states. The average number of constituents represented by a senator, that is, the total population less Washington DC, divided by 100, is about 3 million people. In contrast, Wyoming senators each represent only 266,334 people while California senators represent 18,378,333 people each.

To compound the problem people in overrepresented states are more Republican. From the House representation which is nearly one person, one vote, there are 59.1% Democrats and 40.9% Republicans in the country. The overrepresented small states have 46% Republican senators vs. 54% Democrats, while the underrepresented large states have only 35.3% Republicans and 64.7% Democrats.

To compound the problem even further it only requires 40 senators to stop key legislation due to the filibuster rule. This enables lobbyists to concentrate their time and money on 40 people to block any legislation. And, if a Republican president is in office there is no hope of overriding a veto. This phenomena enabled Bush to get almost anything he wanted while the Republicans had a slim majority in congress, whereas the Democratic legislation can be easily blocked even with Democratic majorities in both houses. Since small conservative states are overrepresented in the Senate, it is nearly impossible to get a majority necessary to prevent legislation from being blocked.

A recent poll showed that the country supports the Obama health care program by a sizeable majority.

From Reuters:

“A Times/CBS poll found 85 percent of respondents wanted major healthcare reforms and most would be willing to pay higher taxes to ensure everyone had health insurance. An estimated 46 million Americans currently have no coverage. Seventy-two percent of those questioned said they backed a government-administered insurance plan similar to Medicare for those under 65 that would compete for customers with the private sector. Twenty percent said they were opposed.”

Yet the latter program has been taken off the table by a small state senator from Montana, Max Baucus because he said it’s a non-starter in the Senate.

A similar situation exists in the effort to reregulate banks. The powerful banking lobby can easily round up 40 senators to block the effort, in spite of the fact that the majority of Americans want it done.

A few words in support of our government

Our government has made the decision that there will be no more Lehman's. That's probably a decision forced upon them by the specter of a complete collapse of the financial system if a big bank like Citi were to go under. Furthermore, our government has concluded that it can't convince Congress to provide the funds to bail out the banks without some help from private sources. But, private funds sit on the sidelines, too afraid to invest in the toxic waste.

The government has given the banks bailouts at little or no interest to beef up their balance sheets. And, since the government has driven down interest rates to near zero, the banks are also getting deposits from private sources at near zero rates. The government has noticed noticed that the banks have developed a strong revenue stream from these sources of funds, due to the huge spreads between the cost of funds and the rates they can charge on new, healthy loans. Both Warren Buffet and John Hempton have provided evidence for this.

These revenue streams will enable the banks to write down their toxic loans against income, if they withhold dividends. The government can apply pressure to ensure this gets done. As the loans are written down they can be sold off to private buyers, who, in turn, can renegotiate the terms with the distressed borrowers and make a reasonable profit on the deal.

But private buyers are wary that the downside risk is too great to be buying up the toxic loans, even at a discount. To reduce the downside risk and bring buyers into the market, the government is willing put a floor under the losses on prospective buyers of problem loans and are willing to make low interest loans to the buyers to leverage the investment and increase their return. This all is part of the Geithner plan.

So the question arises, why should the government do this? The government is essentially using taxpayer resources to bail out the system? True, but if the system will collapse if it's not done, what is the alternative?

There are a couple remaining question to be answered. First, where is all this bailout money coming from. And, second, can the taxpayers be made whole, or at least partially compensated. To answer the first question, we must ask what private investors are doing with their money if they are not spending it to stimulate the economy or investing in, or lending to, businesses, including banks. Mostly, they are buying treasuries at little or no interest. So, if the investors won't spend or invest, and are giving the money to the government, all the government has to do is spend and invest it for them, which is what they are doing by bailing the banks and funding the stimulus. What better use could the government put this money toward than saving the country from the calamity that could arise if the system crashed?

Now, is there a way to make the taxpayers whole, or at least partially compensate them? If the government really wants to compensate the taxpayers who did not contribute to the problem they first have to identify who these taxpayers are, as opposed to the ones that contributed to the problem. This shouldn't be that hard. If we look at who profited from the bubbles, it was clearly the investor class, particularly high income investors and speculators, and the financial and insurance sectors that were so busy profiting that they overlooked the fact that what they were doing was putting the whole country in jeopardy. Some investors have already suffered from losses on their investments, but others have still prospered more than they suffered.

Obama has already taken steps to try to correct the problem. He has proposed raises taxes on the high income investor class, and taxing profits from investments at higher rates than currently are in effect. This is not soaking the rich. It's just taxing them to pay for the trouble they've caused with their hedge funds and derivative investments that have nearly driven the country into a second depression. This is one way of partially compensating low income people who have not profited from the bubbles over the last couple decades, who have seen their paychecks stagnate, and now are losing their jobs. They have suffered enough. And, their children and grandchildren don't need to be saddled with debt that more properly belongs to those who have profited from the growth in the financial sector over the last several decades.

Further measures may need to be taken. A financial transactions tax may need to be implemented after the crisis to make taxpayers whole. The whole financial and insurance industry may need to be restructured to prevent the development of businesses that are to big to fail. Laws to reign in greed and irrational exuberance seem not to have worked, so it may be time for the government to take a more active role in the financial and insurance industries which have caused this crisis. When finance grows from 19% of GDP to 30% in a couple decades it saps the talent from other industries that actually produce goods and services that are necessary to the economy. It's time to reign in these industries to a more reasonable size relative to the rest of the economy.

How the government is bailing out banks at your expense

Banks have made bad loans and are leveraged to the hilt so investors will no longer lend them money or invest in them. The fair thing to do when banks are in this condition would be to take them over and reorganize them to put the losses they have accrued in the hands of the shareholders and creditors where they belong. But, the banks have tied themselves in a Gordian knot by insuring loans with phony insurance called credit default swaps. So the government is afraid that reoganizing them could result in a cascade of bank failures that could jeopardize the whole financial system. So, instead, it has chosen to flood the financial system with free money from taxpayers by lowering interest rates to near zero and lending money to every bank that has a problem.

With rates low, banks can get nearly free money from depositors and they can borrow from the government without limit, as long as the congress is willing to appropriate the funds. These funds are used to make new loans at very attractive spreads. These interest earnings have gone way up over the last several months. The government looks at this and says, Hey! These banks are really making money. All that's needed is for us to keep pouring money into the system and keep interest rates low until they get well. As the income flows in, banks can improve their balance sheets and gradually write off their bad debts instead of paying dividends. What the government doesn't seem to care about is that banks are able to do this because the government has driven deposit rates down to near zero and is running up debt at the expense of taxpayers. In this way the same people who caused the problem are benefiting from the government solution.

Since the government probably can't supply enough money for the whole bailout, because taxpayers won't allow congress to appropriate the necessary funds, the government has devised a clever way to get private investors to participate in the bailout. As banks write down their bad loans, they can sell them off to private investors, who in turn can buy them at a price which allows them to renegotiate the loans and make a nice profit. Some private hedge funds are already doing this. But most are still sitting on the sidelines, spooked by the possibility that they will get burned by the bad loans. To sweeten the deal enough to get private investors cash into the game, government has decided to lend these private investors money to leverage the deal, thus increasing their returns. And, on top of that, it will guarantee the loans from downside risk, another gift from the taxpayers to the capitalists.

An interesting point illustrated here is that it's not necessary to be a recipient of bailout funds to profit from bailout deluge. If banks don't have too many bad investments they can use the windfall profits afforded them by the government dictated low deposit rates to get well and claim they did it without a government bailout. But, this is hardly the case, and I'm sure they're not going to volunteer to help pay off the national debt the government has run up to afford them the windfall profits.

It's all one big oligarchy. Once the taxpayers have paid a big price to buy time for the banks to work off their bad investments, the people at the Fed and Treasury can go back to the banks where they used to work and get fat salaries and bonuses for saving the banks with taxpayer money. And, we and our descendants will be left to pay off the federal debt they have run up.

What will the stimulus bill accomplish?

The financial crisis does not yield easily to stimulus because it's primary cause is an overhang of debt built up over several decades. How this occurred is explained in a previous post on this blog, My Short Explanation of the Financial Crisis. Consumers are no longer spending on discretionary purchases and businesses are not investing because demand is declining. As the government pumps money into the system to replace that previously supplied by consumers and businesses, only that which is given to consumers that are just getting by will be spent to sustain demand. Consumers that are meeting their basic needs will use the money to pay off debt or save it. Businesses that are burdened with debt will use it to pay off debt, which may be due to bad investing or a result of the crisis. Those that are not will pay it out in dividends or bonuses, since opportunities for expansion are limited due to reduced demand for their products. The primary useful effect of the stimulus will be to keep workers in productive jobs rather than just pay them to be unproductive. In this sense it is not really a stimulus program, but a program to reduce the severity of the consequences of the crisis and shorten the recovery time, as the debt overhang is worked off. To not have any government spending could worsen the consequences and possibly lead to a deflationary spiral that could lead to a depression.

The key to how the stimulus should be used relates to who should be helped and who should not. Banks and investors that invested unwisely should suffer the losses. Right now this segment is sitting on the sidelines with their money in treasuries making little or nothing. They are not investing, because demand is dying and investing would be unproductive. But, they have reaped large rewards over the last several decades through leveraging, which caused the crisis, and should now be willing to now take their losses. Reducing capital gains and dividend taxes, especially retroactively, would just be a windfall for banks and other large investors that have reaped the gains, but now want to socialize the losses. Income tax rebates for wealthy investors will not stimulate the economy. They will be used to pay down debt from leveraging bad investments. Consumers are already paying the consequences for their spending euphoria over the last several decades. They are not being bailed out. And they will continue to suffer the consequences, for as long as the recovery takes.

So, is the stimulus package configured right? To the extent that tax cuts are going to investors who made bad decisions, it's not. To the extent that the cuts are going to people just getting by, it is stimulative. There appears to be an argument over specific spending projects in the package and how quickly the money is spent. Since the primary effect of the program will not be to stimulate the economy, but to reduce the severity of the consequences while debt is being worked off, any programs that keep people employed productively are worthwhile. If the money is spent so quickly that it becomes inefficient and wasteful, it will be counterproductive. If is spent so slowly that people are not employed productively, it will be inefficient, cause more pain, and lengthen the recovery period. Since it will take considerable time to work off the debt, the most important consideration is to keep the spending at a pace that keeps people employed productively without waste or undue hardship.

My Short Explanation of the Financial Crisis

Over the last several decades the finance industry has grown to be the largest contributor to GDP. Yet it's difficult to discern what they have been producing, other than bubbles and crises. In the process they have internationalized capitalism. During the same time corporations and the people who own and run them have prospered handsomely while the average workers situation has deteriorated.

This has resulted in huge capital accumulation around the world, way more that can be productively put to use funding real opportunities. With the help of the Fed and the government, providing easy money and reduced regulation, asset values continued to rise, seemingly in perpetuity. This was an opportune situation for the application of leverage to magnify profits. Profits were rolling in at unforeseen rates. With too much capital, and to few places to apply it, banks found it necessary to fund poorer and poorer investments, lest their huge profits be truncated. But, poorer investments necessarily implied higher risk so a method had to be found to hide risk. Into the breach jumped the investment banks, rating agencies, and insurance companies. Securitizing debt obligations was the answer. Pool the risky assets, slice and dice them into tranches of various levels of risk and sell them to all those investors looking for a place to put their unused capital. But, how to rate such assets, no one knew. Rating companies, also wallowing in huge profits and fearing loss of them, threw up their hands. They had no models to do it. So what to do? Rate them highly and continue to make huge profits or rate them realistically and let their competitors reap the huge profits. The decision was easy.

But, buyers of the new assets were asking questions. How risky were they, really. They found it hard to believe that slicing and dicing bad assets could end up with a highly rated asset. Into the breach jumped the wiz kids at the investment banks and insurance companies once again. Guarantee them! Write some insurance guaranteeing the asset. Viola! Credit default swaps. Not only were these magic instruments not covered by insurance regulations, but they could be traded on their own, opening up more opportunities for profit. The investors bought the swaps to guarantee the overrated assets and the profit bonanza continued on.

With all these new assets and guarantees all that was needed was more risky assets to finance. Ah, alas the government had sanctioned expanding home ownership, the new ownership society. Just get rid of all the rules for qualifying home buyers, the problem would be solved and the profits would continue to roll in. No one dared question the infinite wisdom of the finance industry. After all, the industry had soaked up most of the talent from Ivy League schools in the last several decades. And the real estate and construction industries were more than willing to accommodate the new bonanza.

But, ooops! The payments came due, the ARMs (Adjustable rate mortgages) were no longer hugging home buyers, they were strangling them. And securitizing debt had been expanded to auto loans, credit card debt and almost any other kind of debt. The jig was up. Time to pay the piper. The asset value climb was over. Time to get real. The banks found themselves having to come up with additional reserves to cover the falling value of the assets on their books. And they had to pay off the leverage loans. And their investments in swaps were tanking. The couldn't refinance their commercial paper. What would they do? Other banks wouldn't lend to them. After all, they were having their own problems.

Time to play the trump card. Who's running Treasury, one of our own, Henry Paulson, he'll save us. Sure enough, he seems to be doing just that, using the well worn Bush technique of scaring the hell out of Congress to get them to write a blank check, as was done in the Iraq war. Alas, they fell for it again, and here we are, once again, kneeling at the feet of the money changers that couldn't find anywhere to invest their heaps of cash skimmed off the top of every transaction that makes up that holy of holies, the GDP.

The Underlying Problems of the Financial Crisis

This financial crisis is not caused by a shortage of capital. The world is awash in capital. Why else would capitalists be making bad investments? When all the good investments are funded the only ones left are the bad ones, or using the money to speculate in financial markets. Now these banks and hedge funds with all the money are pulling their capital out of productive uses and putting it in government securities at little or no interest because they are afraid they will lose it. In short, they are hoarding, instead of investing. The government giving these same banks more money will not fix the problem. Why wouldn't the banks just take the cash and pay it out in dividends and executive bonuses, buy more government bonds, or use it to de-leverage bad investments? The most direct way for the government to solve the crisis would be to take the money they're getting and invest it in productive companies that need the cash to operate or expand, or divert it to infrastructure projects and research that employ people who will spend the money they earn, thus creating demand. To give the money to people who have demonstrated that they won't invest it in productive enterprises is rewarding them for bad behavior. When the private financial system fails, it's an opportunity to show that the federal system works, not a time to be weak kneed and just throw good money after bad and send the bill to the taxpayers of the future.

The genesis of this whole problem is the world wide financial pyramid that allows corporations to divert most of their profits to executives and stockholders, while squeezing labor costs to the bone. They spend huge sums lobbying for special treatment and tax loopholes. This is the whole reason that corporations exist. Over the last several decades wages have stagnated while capital has been accumulating. People have even been encouraged to borrow against what few assets they have to spend more on products and services, allowing corporations to divert even more to executives and stockholders. Why should they do otherwise? Only the government has the power to balance the creation of capital against the welfare of the general public, through regulation and taxes. Call it class warfare, or whatever you want. That's what happening. There is no need for government to pay people to do nothing. Our infrastructure is falling apart, research on new technolgies is suffering, and demand is falling because consumers have exhausted their credit, prices for goods and services continue to rise, while paychecks stagnate. The government needs to play a positive role in countering the excess accumulation of capital at the expense of the standard of living of average citizens.

International trade has exacerbated the problem. Having goods made offshore, where labor is cheaper makes for higher profits and greater opportunity for diverting more to capital, less to labor. Profits of offshore enterprises mount and what do they do with these profits? They invest them in US government securities, fund US consumer debt, or bid up the price of assets around the world, creating the bubbles we've seen. Petroleum exporting countries pile up huge cash reserves looking for a place to make more money. The answer is to put this excess capital in the hands of consumers that will spend it instead of hoard it. This can only be done through progressive taxation, direct government investment in enterprises that produce useful goods, or government funding of infrastructure or long term projects for which there are long gains. Corporations will only invest for the short term. Their stock is valued on current or short term profits, not long term success. That's why they show little interest in future technologies and keep building gas guzzlers until oil prices skyrocket. The conservative distrust of government has been a primary reason why we are in this fix, since government is the only solution to correcting it. If this financial crisis doesn't demonstrate this, I don't know what will.

Capitalists vs. Businessmen

I think it's time to clarify the distinction between capitalists and businessmen. We sometimes consider them one and the same. Capital is life blood of business. If businesses want to innovate or expand, capital is almost always needed beyond that which the people running the business can provide. So they turn to capitalists to provide it.

Capital is accumulated when individuals or businesses earn more than they need for day to day operations or consumption. So, they look for a place to put it where they can access it later, or where they can earn a return on it by lending it to someone else. Banks used to be businesses that fulfilled this role. They take deposits from people or businesses, pay them a return for the use of their money, and lend it out to others who can use it to innovate, expand or acquire infrastructure like homes, land, buildings, transportation, machinery, etc. Such assets have value to those who acquire them and value to the society in improving our standard of living.

So what is a capitalist? Anyone who accumulates wealth beyond their needs and lends it to others. This can take the form of bank deposits, stock or bond purchases, or personal loans. In this sense, a capitalist can be an individual, a small business, or a mega-conglomerate.

So what is businessman? Anyone who starts or acquires an enterprise which provides goods or services to others for a profit.

So what is the distinction? If a capitalist operates a bank, brokerage, or other business strictly as a service to others for a profit, they are a businessman. But, if what the capitalist is doing no longer becomes a service to others but an impediment to needs of others to innovate, expand, or acquire infrastructure to facilitate their operations, they are no longer a businessman, but only a pure capitalist.

The distinction is easily seen by considering what is happening in our financial markets now. Our financial system, when run efficiently, provides the necessary capital to allow the smooth functioning and funding of our productive enterprises. The stock market and banks provide the capital for companies like GE and Home Depot to innovate or expand their operations, and to provide the necessary cash flow for day to day operations. This is often called liquidity. To maintain liquidity, banks have to provide reserves to allow withdrawals by depositors, and they must take care to assess risk properly and limit leverage so they don't get caught in a bind if asset values start to fluctuate wildly. They must take care not to get trapped in viscous cycles by assuming conditions will continue to progress as they have in the past. In short, they must be always vigilant that they are there to provide a valued service and not to take advantage of their position to enrich themselves at the expense of the economy they are serving.

Deviating from these principles is what caused the current economic crisis. Businessmen in the finance industry abandoned their role as businessmen and became pure capitalists. Seeing their competition use leverage and derivatives to increase profits at the expense of risk, they had a choice to make, continue being conservative and providing a business service for a reasonable profit, or jump on the band wagon and do what their competitors were doing to make better returns. This happened at all levels of the economy. Even though the average Joe or Jane didn't come up with any fancy derivatives to increase their return, they were more than willing to use leverage and credit, engage in speculative transactions like flipping assets for a profit, and invest in stocks for no other reason than that they were going up, with little consideration of the value of the underlying investment. They added to their stock of credit cards and borrowed on their homes to increase consumption, paying little attention to what would happen when they had to pay off these debts. Banks stopped being businessman and reverted to pure capitalism, sending out credit cards to people without due consideration of their ability to pay. Instead they just assumed a percentage were going to go bad. As is now apparent, this kind of behavior is what has led to the many bubbles that have formed, and that have now caused our credit markets to freeze up.

So what are bubbles? A bubble forms when asset prices are bid up due to the expectation that a current trend will continue, ignoring the underlying asset value. It's essentially a switch from fundamental investing to speculation. Individuals can get by with a whole lot of speculation for a while, then go broke and start over. But, when the whole financial industry engages in the process we get what we have now, a credit crises, where everyone loses confidence in the people and businesses they do business with in a normally functioning market environment.

What has happened over several decades is the finance industry has syphoned off a sizeable portion of the GDP to enrich those in the industry at the expense of productive businesses who need their capital and services to grow and innovate. We are at a point now where capitalists would rather put their money in treasuries at near zero rates of return, than invest in businesses which need the capital to function and grow. During the housing bubble buildup capitalists, large and small, made abnormal profits by encouraging people to buy houses with little or nothing down, low or zero interest rates initially, and other incentives to unsophisted buyers. The real estate industry and the housing industry went along because it was very profitable. But, anyone could have seen that at some point homes would become too expensive to sustain the rate of sales and the bubble would deflate, which it did. That in itself wouldn't have caused the crisis we are now in, if large financial institutions had not shifted from being businesmen to pure capitalists, chasing profits without regard to risk.

Now we find ourselves in a situation where the capitalists money is sitting on the sidelines in treasury instruments earning little or no return, while businesses and individuals are starved for the lifeblood they need to function efficiently. We should realize that every dollar that goes into a fat salary of an executive is a dollar that could be used by some innovator or businessman to improve the standard of living for all. Every dollar that is tied up in a bank not being used, or is being paid to a congressman to write a loophole for a capitalist is not being used to improve our standard of living. Every dollar that goes to buying the sixth or seventh home, the yacht or private jet for someone who successfully gamed the financial system is not going to improve the standard of living for all in our society. The redistribution that is taking place is not from the rich to the poor, it's from all of us to people in the finance sytem who are gaming the system by being pure opportunistic capitalists instead of business people who provide capital to our productive businesses for innovation and growth.

So how does the government fit into all this? First, is important to recognize, as we have seen historically, that the business environment is not stable without some form of regulation. This can take many forms. Non-government agencies like the Fed are charged with containing inflation and maintaining stable employment and growth by adjusting the money supply and providing credit as needed. But, they are not charged with containing speculation or regulating the business environment, particularly preventing bubbles from developing. They don't have the tools. And government oversight is hindered by the campaign financing and lobbying activity that influences government officials. The revolving door of individuals moving from industry to goverment and back also contributes to a lack of objectivity in regulating business. This must change if we are to secure anything resembling long term stability and an efficient system.

When we have a crisis like the one we have now where the government is receiving funds from capitalists for essentially safe keeping at little or no interest, they must use this money to provide relief to the people and businesses that would normally be receiving it to innovate or expand their businesses or to individuals that can use it to get out of a bind and continue productive employment and purchasing. Instead, they are using it to relieve the pressure on a non-productive finance industry that was instrumental in causing the problem in the first place. This money should go to directly to aid the people and businesses that are productive, to improve infrastructure, and to increase demand for useful goods and services in a declining economy.

The bottom line is that we must come up with incentives for people, businesses and government to keep its eye on how money passing through the economy is being used. Where it is not being put to productive use, government regulations and tax policy should be adjusted to see that it is. The government is charged with promoting the general welfare and this a fundamental role of government.

Progressive Taxation and the Myth of Redistribution

The problem with conservatives using of the cliche' "redistribution" in response to any question on progressive taxation, is that it assumes that the income going to corporations and wealthy people is earned in the first place. Corporations are chartered by the government and given special consideration, avoiding some forms of liability, to accumulate capital for investment. Corporate charters do not address any aspect of fairness in determining how corporate income will be distributed. Corporations sole reason for existence is to maximize return to shareholders and minimize the cost of the factors of production, including labor, whereas the Constitution charges government with promoting the general welfare. So there is a conflict in the goals of these two institutions. Wealthy people and corporate executives are much more dependent on income from capital than from wages. So benefits accruing to corporations also tend to accrue more to the wealthy than to average wage earners.

In assessing what income is actually earned, all factors must be considered, not just who receives income under current law. Clearly corporations and their largely wealthy benefactors would not prosper to the extent they do if they didn't operate in a country with an established system of laws and infrastructure bequeathed to them by past generations. So it is not clear that just because someone earns an income that it should be attributed only to their own efforts. Some credit must be given to the system they operate under and the contributions of others in generating their income. This is particularly true of corporate income, where executives get to decide where the income goes, without much interference from outside sources. Under conditions of labor surplus this results in most of the income being diverted to owners of capital. Under labor shortages, more would be claimed by labor. But, under our current system, where illegal immigration and outsourcing operates largely unfettered, labor is at a major disadvantage in maintaining it's interest without government assistance.

Aggravating this conflict of interest is the fact that wealthy people and corporations have more influence on government through lobbying and campaign financing, whereas average wage earners have a much reduced voice in how laws are made. This allows the wealthy to create tax loopholes which favor their interests at the expense of the average wage earner.

The solution to this conflict could come from two different directions. First, corporate law could be changed to charge corporations with some measure of promoting the welfare of their workers, not only the welfare of their shareholders and executives. The other way, which is currently used, is progressive taxation. It will be difficult to make major changes in this arrangement, so, at least for now, we must be content with using progressive taxation to promote the general welfare. So the next time you hear a conservative claim income redistribution in response to a question of on progressive taxation, point out to them that it is only a means to compensate for the unfair claims on income, due to the advantages given to corporations and the wealthy by our corporate charters and lobbying laws.

Advice to My Grandchildren

After living in Sun City Summerlin, Nevada and witnessing world events over the past decade, and the long campaigns over the last year, I've come to the conclusion that the best advice I can give to my grandchildren is to settle in an area with as much diversity as possible. That includes diversity in race, culture, education, lifestyle, income, wealth, and environment.

It seems to me that most problems are created when a majority of people share the same outlook. They come to believe that because they are in the majority their way of thinking and doing things must be the right way, and that people who don't fit the mold must be wrong headed or inferior in some way.

This seems to be true whether it's a country, a small town, a university, a corporation, a club, a religion, or any other organization where like minded people come together. Only if no group predominates do people actually come to think for themselves rather than follow convention to avoid being ostracized, or get in a rut simply because it's the course of least resistance.

I think I first came to realize this by living in a community where people come from all parts of the country. But, even here the people share a common characteristic, age, which seems to be a basis for many of their thoughts and actions. This is mitigated by having close association with family of widely varying age. Living in a city which is a broad mix of people of different backgrounds and wealth was another broadening experience. And, probably, living alone has been an influence on my thinking, not having someone who shares most of my values to reinforce the rightness of my thinking. All of these things have given me a much more open attitude towards life and people.

Seeing how a government controlled by one political party operated was another eye opener. Witnessing how countries dominated by one religion operated was another factor. Observing how the West, the dominant countries of the world over the last century, faced the challenge of new world powers like China, India and Russia was another factor.

And, finally, seeing how the country became polarized to the point of ignoring reality and important issues, to seek belonging to political tribes bound mainly by like identity, was the final factor in my coming to this conclusion. The extreme reactions to a candidate of black/white heritage and to two different women making their first foray into national politics illustrated the point.

It is my hope, that as time moves on, we will come to realize that the right way of thinking and doing things can only be discovered by taking into account the wide variety of ways people live their lives across the world. Only then, can we draw conclusions about the best way to live our lives.

The Reality and Consequences of Asymmetric Warfare

Much has been written about the metaphor and the reality of “The War on Terror”. Unfortunately, not many lessons have been learned.

The usual short definition of terror is the intentional killing of innocents. It is quite clear that when someone blows themselves up in a disco and takes innocents with them, an act of terror has be committed. It is less clear when innocents are killed in what is usually called an act of war. The occupation of a country usually results in some form of insurgency if the citizens of that country think an injustice has been done. The acts of the insurgents usually take the form of clandestine attacks from cover or suicide bombings of various forms. Such acts of insurgency are usually countered by a violent response from the occupying force, which almost always has modern weapons at its disposal. Since it is difficult to find insurgents because they attack and then hide, usually among the civilian population, the counterattack usually involves the bombing or destruction of a suspected hideout or other location where the suspects are thought to be. This minimizes the exposure of the occupying force to counterattack. In the process, innocents can and usually are killed or injured. This form of attack by the occupying force is usually justified on the basis of combating the initial attack by the insurgents and the innocent life lost is called “collateral damage”.

The consequences of such actions and reactions are not often perceived in their totality. The occupying force considers justice to be done, in an eye for an eye form of revenge. But, the insurgents view it as a further injustice, in the cause they are fighting in the first instance, the occupation. And the innocent victims view it as a fresh injustice, since they had harmed no one up to that point, and it is usually not their decision where insurgents decide to hide. Such a reaction often moves the innocents and their sympathizers into the camp of the insurgents. In this sense, the effects of the attack and counterattack are counter productive to both parties. The occupying force clamps down harden on the insurgents and the insurgents are motivated to strike out once again. The result is an escalation of violence.

One aspect of such encounters that is not often perceived is that to the insurgents the counterattack is just as much an act of terror and the original incident. It kills innocents when it could have been avoided, except for the revenge sought by the occupying force. So the metaphor, “war on terror” becomes the mantra of both parties, solving nothing. Nothing has been done to examine the grievances of the two parties and seek a solution to the injustices. It becomes simple a matter of who can persist the longest, and in some cases it has been decades.

This is not war in the conventional sense where well equipped enemies battle for territory. It is more akin to crime, like the clan battles of the Hatfields and McCoys, with the exception that one side holds most of the cards, so the other side has to move to less and less conventional methods, which usually results in an escalation of brutality. Add to this, religion or ethnic differences and you have what usually amounts to an insoluble problem.

The effects of such conflicts are different for the occupying, well equipped force and the inadequately equipped insurgency. Simple means of war such as rifles, grenade launchers, and explosives are relatively cheap and available. Modern means such as helicopters, cruise missiles, drones, and the electronics to operate them is very expensive. Add to this the difference in the value placed on individual lives by the warring parties and there is no obvious winner. The modern force spends itself into bankruptcy or destroys the will of the affluent society backing them up while the insurgency, having little to live for anyway (occupation saps the will to succeed) and a nearly endless supply of expendable lives can fight on for decades.

At some point, someone should begin to realize that there are better things to do in life and decide that talking, trading, and backing off is a better alternative. What stands in the way is usually religious zeal to prove that your way is the right way and the other guy is either evil or deranged.

Confusionocracy

There is much confusion these days about democracy, theocracy, philosophy, ideology, politics, and basic human rights. Our current administration has the noble goal of spreading democracy around the world, but considering the state of the world today, what could result is just as likely to be an authoritarian theocracy as a liberal pluralistic democracy like ours, that respects human rights. Given a choice, a deeply religious majority is more likely to vote for a government based on the tenets of their religion than one where interest groups vie for control and share power in a questionably stable way.

Our country was settled by people fleeing countries with a state religion, and persecuting those of other religions. At the time, almost all people were religious, having no scientific basis for explaining naturally occurring phenomena other than religion. Hence, it’s no surprise that this country was founded by people who had at least a rudimentary belief in a higher power that might be controlling things. But, it wasn’t long before people of the same religion were in control of the town meeting hall in Salem and burning witches, illustrating that once a single religion predominates over others, and controls the government, irrational behavior is likely to follow. If that example isn’t convincing enough, we only have to look to the Taliban in Afghanistan and the threat we are facing from extremists of the Islamic faith around the world.

Fortunately, when our country was founded, there were a few cooler heads that prevailed in spite of their religious inclinations. In secret, they came up with a constitution that called for freedom of religion, but restricted government interference in religion, a pretty wise decision by a bunch of not so old aristocratic, land owning white men. They enshrined these famous words in a declaration of independence, “that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, and that among these are Life Liberty, and the Pursuit of Happiness.” It makes no difference who the Creator was, most of us would all agree that, as individuals, we are entitled to certain inalienable rights which should not be infringed by government or any other voice of the majority. Today we call these human rights, and have enshrined them in our bill of rights and enumerated them in documents agreed to by almost all members of the United Nations.

We are now faced with a resurgence of deeply dedicated religious people. We call them fundamentalists because they believe and adhere to the fundamental teachings of their religion, as given in ancient texts which they consider infallible. These people value their religious beliefs higher than their own lives. When this condition exists, rational behavior based on evidence cannot be expected. There is no a priori respect for inalienable human rights as enshrined in our founding documents.

So we have some decisions to take regarding how we conduct our own affairs, and how we confront others who may threaten our way of life. We cannot confuse religiosity with ideology or political persuasion. We cannot confuse “democracy”, rule by the majority, with a government limited in its powers to curtail human rights. Can we rely on polyarchy, the rule by competing interest groups, to preserve human rights and prevent domination by religious majorities? I’m not very confident we can.

In the end, we may have to accept some measure of authoritarianism to protect human rights from infringement by religious majorities, as is now current policy in Turkey. After centuries of rule by caliphates and sultanates Mustafa Kemal Atatürk enshrined a Security Council of the military to ensure that a secular regime would always be in control, in spite of the fact that Turkey is overwhelming an Islamic country, and once was the seat of power of the Islamic Sultans. This structure is being challenged today by Islamic fundamentalists.

As a goal for our country, aren’t we better off championing human rights and structures to secure them, over democracy. It is impossible to be secure if the ruling authority is guided by irrational precepts of age old dogma, rather than a well founded faith in the goodness of human nature and the inalienable rights of individuals, which has served us well for over 200 years. To this end, we must not only be conscious of how other countries are ruled, but we must take great care to ensure that our own government doesn’t come under similar pressures to what Turkey now faces.

Capitalism vs. Capitalism

We are seeing today a conflict between modern unfettered capitalism and the polite capitalism of the bazaar that developed in the high middle ages and continued into twentieth century America.

In ancient times the only real capitalism is what we call here polite capitalism, typified by bazaars and open markets where farmers and craftsmen traded the products of their labor with others who specialized in different activities. Although the bargaining was as hard as any time in history, this form of capitalism was considered a respectable way of increasing the welfare of all, and underhanded dealings, trickery, and speculation were viewed as undermining the process.

Capitalism changed in the last couple centuries when markets expanded from the direct exchange of goods and services in bazaars, to unfettered modern capitalism, with the introduction of central banking, corporations, trusts, holding companies, stock markets, and speculation. The scale of projects during the industrial revolution and subsequent development of assembly line manufacturing and railroads necessitated such changes to a great extent. But, along with such concentrated control of capital came practices which were inconsistent with the polite capitalism conducted by individuals in earlier times. A class of workers devoted to the mechanics of financial transactions, removed from the real reasons for investing developed. They soon learned that more profit was to be made from churning assets, developing sophisticated derivatives to mitigate risk, and increasing the volume of financial exchanges, than could be made from providing investment capital to industrialists and entrepaneurs. In this environment, speculation rose to equal importance to investing, and clever use of deceptive techniques to make money from handling money became respectable.

But, polite capitalism never really disappeared. Even in advanced western countries, polite capitalism still exists, although it is facing a great challenge. Drive through any small town in America and you will notice that the gasoline prices are nearly the same everywhere. You might call it collusion, but it’s really not. It is more a respect for neighbors that know each other well, and all of which must make a living in trying times. They would rather compete on providing the best service, rather than strictly on the price of the commodities they sell.

So along comes Wal-Mart, imported consumer goods, cheap foreign labor, outsourcing, cutthroat competition and all the other products of unfettered capitalism. The prices of goods and services drop, but home grown businesses soon are forced to close and polite capitalism begins to disappear. It’s neighbor against neighbor, chasing the lowest price, since the wages drop even quicker than the price of goods and services and small town America is on hard times.

The result of the transition from polite capitalism to unfettered capitalism is often a loss of ethical business practices and a shift to impersonal economic interactions, along with a transfer of wealth to those most skilled in financial matters rather than in providing exceptional craftsmanship. The mass produced products tend to be more standardized, but variety and quality is more erratic. Handcrafted products become prohibitively expensive for the average consumer.

We may want to consider whether we are losing or winning in transition from polite capitalism to unfettered capitalism.

National Newspaper Week

Please, members of the press, help us open a discussion of our fragmenting moral framework

This week is National Newspaper Week. The public depends on newspapers and other media to keep informed of events and assess their consequences. This not only requires an accurate record of events but also the background surrounding the events and a moral and ethical framework through which the events are viewed.

In recent year the national framework of conventional wisdom, assumptions and taboos has deviated considerably from the framework used by the rest of the world. I ask the press to take the opportunity of National Newspaper Week to examine why this has occurred, and open a discussion of why our world view is diverging from the rest of the world, whether we are on the right track or the wrong one, and how the differing views can be reconciled. To illustrate how things are changing I offer a couple examples.

Religious influence on government

USA Today reports that the Congress, at President Bush’s urging, has just passed legislation that would bar detainees from challenging their detention in courts, a change that goes against a couple hundred years of American history. This has been discussed in the press from most angles, legal, ethical and moral. The one angle not discussed has been religious influence on such decisions. Why the change now? Is it related to the ethnic and religious background of the detainees? Have we divided the world into people that are evil and those that are good? If so, is this because of our religious beliefs? This is not a subject that should be taboo and above discussion if it is changing long standing principles that have served us well.

The morality of warfare

There was a time when emperors and kings lead their troops into battle. There was a time when stealth and surprise attacks were dishonorable. Obviously we’ve come a long way from those times. But even recent world wars were fought with a near parity of forces, comparably equipped, at least at the start. There was some honor in such wars, even though circumstances deteriorated and masses of civilians became targets, ostensibly to avoid even larger casualties, or justified on the basis of the support of the general population for the acts of the military.

This is not the situation we face today. We have countries equipped with sophisticated weapons of massive destructive power and extreme accuracy battling resistance movements not tied to any government and without any modern weapons other than rifles and grenade launchers. This is the epitome of asymmetric warfare. When an aggrieved group of people finds they have no means to challenge their occupation or displacement by an enemy with a modern army and the support of superpowers what are they to do but surrender or use unconventional methods like terror to achieve what they view as justice? In our frame of reference, we have defined such terror as despicable and the worst form of brutality, even though those engaging in it may consider it so important that they are willing to give up their life in the cause, and even though respected countries have used it to win independence.

On the other hand, we sanction the use of smart bombs of deadly accuracy and devastating explosive power operated from safe quarters miles away to attack domestic facilities that may contain many civilians, to assassinate a single cruel dictator with which we have a conflict. This is the way we went after Saddam at the start of the Iraq war and killed innocent civilians in a restaurant in Iraq. We don’t call this terror. We call this collateral damage. It cannot be taboo to challenge this form of warfare. Is this form of warfare honorable, or have we completely dismissed the concept of honorable warfare?

The weakening of rules against torture is another way we have voluntary relinquished the high ground in our claim to be honorable and humane people. Why are we doing this? There may be unique circumstances that occur once or twice in a lifetime that require breaking the rules to prevent massive loss of innocent life. But, why is this something that we want to write into law? Is this rational? Or are we driven by emotions or religious zeal to repeat the brutalities of the past that we have tried for centuries to rise above?

Please, members of the press, help us open this discussion

The examples I have given here a just a couple ways we seem to have been regressing as a society into the brutal ways of the past. The rest of the civilized world is not with us on this. They have a different frame of reference. Are we to follow the ways of those we consider evil, or are we to lead by maintaining our honor and humanity. The press can help us here by breaking old taboos against the discussion of religion and in challenging a frame of reference which is no longer in concert with world opinion. We should have learned by now that the enemy that currently threatens us is operating out of deep religious conviction and zeal, and as a result is behaving irrationally. Do we want to join them in their irrational ways or do we want to examine our own premises and challenge our changing worldview of what is honorable and moral?

The American Plutocracy

The United States is now divided roughly at the median income. Those above it consider themselves “winners”. Their income comes from their job(s), their 401k and other investment portfolios, and the increasing value of their home equity. They are from good families that value education and have connections to the best schools and job sources. Most of them don’t give a hoot about the lower half of the income spectrum whom they consider “losers”, a bunch of uneducated ne’r-do-wells who will not succeed under any circumstances, so government welfare for them is a waste of economic resources. They allow the political donor class to call the shots in government and believe that what is good for corporations and the political donor class is good for the country. They hope to become part of that class at some point in the future.

“Free trade” allows corporations to prosper, and as long as the “winners” can hire competent management of their portfolios and keep trading up in their homes their success will follow that of the corporations and the political donor class. Allowing unlimited immigration and unlimited outsourcing will eventually drive the wages of the “losers” to subsistence levels, allowing more of the wealth of the nation to go to the “winners”.

The US is a plutocracy where the corporations run the nation, supported by a slim majority of the population who profit from the status quo, think they do, or aspire to at some point in the future. As long as these “winners” constitute a majority of people who vote, nothing will be done to change the status quo. Only if the “losers” either achieve a majority and start voting, or come close to revolution, will the situation change.

Promoting religion and religious values in politics is a way of keeping some of the “loser” class voting for the values of the “winner” class. If they consider the “winners” better people with “good religious values” and the “losers” people of low values and parasitic qualities they will continue to vote the “winners” interests even though they may constitute part of the “loser” class economically.

Bush’s proposed legislation and campaign tactics demonstrate his dedication to this philosophy. His foreign policy and global trade policy indicate that he would like to see it spread around the world.

The Futility of Modern Warfare

The Israeli-Palestinian conflict and the Iraq war have raised questions about the efficacy of using conventional methods of warfare to occupy territory and counter insurgencies. Dedicated enemies that are willing to die for a cause apparently don’t fear shock and awe as much as the deliverers envision. And, the cost of conventional wars is becoming astronomical. It seems possible that a dedicated group, using stealth and the cover of local populations can bleed the resources of major powers using conventional forces until they either are seriously impacted by the disparity in economics of the two types of warfare, or their will to continue is defeated.

In Iraq, we have fielded a half million troops over a period of four year to sustain a force of 120,000, spent a half trillion dollars, lost 2,500 lives, 15,000 injured, 8,000 seriously and 20,000 suffering from post traumatic stress disorder. And with the help of over 200,000 Iraq troops we have not been able to achieve a decisive victory over a few thousand insurgents. I think we have demonstrated that force alone will not achieve our ends.

In Israel, a country we have subsidizing to the tune of two to four billion dollars a year for several decades, and which has devoted a large portion of its resources to defense, has not been able to control an insurgency of ill equipped, impoverished Palestinians with no end in sight. If there is a cause which is supported by donors from without, it is quite clear that an insurgency can be sustained perpetually.

Modern western nations have attempted to stigmatize the means used by insurgents to wage insurgencies by giving them the label, terror, because the blood and gore is visibly apparent, and civilians are casualties. Modern warfare has become more like a video arcade game, where missiles are fired from aircraft or bunkers far away to completely destroy targets or people with no evidence of the blood and gore attendant to it, and where the loss of civilian life is sanitized by calling it collateral damage. Such propaganda has been somewhat successful in convincing the populations of modern countries that their actions are just, while those of the insurgents are not. But, it has not been successful in convincing the insurgents and their sympathizers of this. In reality, war is war, the violent and cruel destruction of human and material resources as a substitute for communication and common understanding that should be limited to the defense of homelands from dictators with diabolical intentions and megalomaniac visions. Its use as a tool to spread democracy or to successfully occupy territory over a long period appears to be counterproductive and a net drain on the resources of those who employ it.

The conclusion to be reached is that the tools of war and the reasons to go to war need to be reevaluated to suit our times. Strong countries can be more successful in defending what they have developed by assisting weak countries in their development. Rogue nations are more likely to decay and fail when left alone to fend for themselves, rather than when they are threatened, blockaded or sanctioned. Any external threat tends to bring a nation together to defend its sovereignty. When left alone to decay, an insurrection of a disaffected population is more likely, and as we have illustrated here military might is only a temporary solution to controlling a population that becomes more and more dedicated to a cause it perceives as just.

The Politics of Fear

After decades of ignoring terrorist acts against our foreign installations and ignoring border and internal security we are attacked by Islamists using our own planes. What does this tell us? Does it say we have been caught with our pants down and need to pay attention to our internal and external security, or does it tell us we are faced with a formidable new enemy that is going develop sophisticated weapons, invade our country, and subjugate our people? Do we beef up our intelligence services, improve our cooperation with foreign allies, and rationally consider what caused the act and how to fight this new enemy, or do we embark on a quasi-religious campaign to demonize countries we think irresponsible and mount a conventional war of gigantic proportions to demonstrate our strength and ability to inflict massive damage on our enemies?

Unfortunately, in both cases, we did the latter, defining an axis of evil in Iraq, Iran, and North Korea, mounting a shock and awe campaign of standoff warfare and then invading the first country in the axis of evil, Iraq. What signal does this send to the other two countries? Are they more likely to think we are just settling old scores with an old enemy or is this the first in a series of invasions of the three countries in the axis of evil? It would seem a rational response of the other two countries would be to fear an invasion by the world’s greatest superpower, particularly if the superpower continues to avoid direct diplomacy where real attitudes can be discerned, and continues to make threats of dire consequences if their instructions are not followed to the letter.

How can these countries keep from feeling boxed in and threatened if the world’s greatest superpower goes around the world rounding up support for sanctions or other aggressive actions against them? Are they most likely to give up their sovereignty and submit, or are they more likely to want to develop a nuclear retaliatory capacity to defend themselves, when they see that other nuclear armed countries are not as threatened by nuclear armed superpowers?

We continue on the path of force and fear, squeezing and squeezing the cornered rats, because we can, because we want to show them who is boss, and more realistically because of our own paranoid fear that they are a dire threat to us. Isn’t this a time to step back and ask ourselves what the real threats are? Certainly they have more to fear from us than we have to fear from them. Wouldn’t some serious diplomacy, one on one, go a long way toward diffusing the situation? Are we so prideful that we can’t explain to them the axis of evil thing was a mistake and that we are really not interested in invading them? Or is this just the politics of fear used by this administration to rally the Rambos to the polls in the next election?

The Phony War

The so-called War on Terror is a phony war. Are we to believe that we are threatened by a disorganized band of disaffected radicals led by an exiled Arab hiding out in the hinterlands of Afghanistan or Pakistan?

After decades of ignoring border security and the status of foreigners entering the country legally but overstaying their visas, and meddling in the affairs of Islamic countries around the world, we are surprised that we are attacked using our own aircraft as weapons? Correcting this lapse of security is obviously is not a job for highly trained pilots, cruise missiles, tanks and a marine landing. It’s a job for the intelligence services, law enforcement, and maybe a few Special Forces, along with cooperation with other nations in confronting the threat. It’s also a signal to get off our duff and do something about border and internal security. We have our own domestic wackos, what’s a few more? We live in a dangerous world and we need to be vigilant.

But, the administration needed a war to accomplish its real goals, the plans for which were already on the drawing board. Old scores with Saddam Hussein must be settled, a beachhead in the Middle East must be established, and the waning powers of the executive branch must be shored up. There is nothing like a war to put the fear of God into the populace, legitimize the expansion of executive powers, and expose the weakness and sheep-like tendencies of Congress, who worry more about the next election than the welfare of the country.

We need look no further than Washington DC to find the axis of evil. The combo of chicken hawk neocons and frustrated cold warriors eager to kick ass and take names to control the world is all that is needed. These plotters claimed for themselves the sole authority to define what is good and what is evil, what tools of war are legitimate, what aggressive actions need to be taken preemptively, without threat to the country, and the means to carry them out. They abandoned the principles of humanity the country has held for generations by eschewing limitations on torture, using renditions and secret hideouts for interrogation, and sidestepping international conventions and cautions to accomplish their goals.

What do weak countries and their people do when confronted with the threats and actions of a superpower that controls a major portion of the worlds economic infrastructure and has the military might to crush any confrontation on the field of battle? How do people without sophisticated weapons confront a superpower or a country like Israel that is backed up by a superpower? Do they meet them on the field of battle with their rocks and rifles to be crushed by exploding missiles fired from planes or bunkers miles away? What recourse do they have besides secret forms of insurgency like sniping, exploding devices, or kidnapping? When these are the only weapons available and are effective why are they considered illegitimate?

In such conflicts between the weak and the strong, the strong not only exercise military superiority. They demand to right to define the terms and language of engagement. The tactics used by the opposition are stigmatized as terror, while the destruction of civilians along with military targets by antiseptic standoff warfare is deemed collateral damage. The use of disproportionate force is justified as the right of self defense.

History has shown that the only defense against incursions into weak countries by strong military powers is insurgency. Just as the colonialists were denounced by the British for using guerilla tactics instead of meeting in ranks on the field of battle in the Revolutionary War the insurgents of today are condemned for using guerilla tactics to defend their territory. If weak powers are to preserve their way of life against the demands and incursions of strong military powers they must use all effective means at their disposal to defend themselves. Striking at the homeland of strong military powers is a legitimate means of defense. Particularly, in the case of democratic countries, where the civilian population must sanction the actions of their government, attacks against the civilian population have a measure of legitimacy.

We must come to realize that most of our problems with Islamic groups stem from two sources: the dangers of religion in creating extremist tendencies in downtrodden people who see no hope in the future, and our meddling in their affairs and supporting other countries that do. They have a right to decide how they want to be governed. And they must have the courage to overthrow dictators in the same way they are willing to repel an occupying power. We must restrict our actions to defense of our own country from external and internal threats, and diplomatic initiatives to influence the affairs of other countries, unless more drastic action is sanctioned by a legitimate majority of the world’s nations. We must uphold the values that made our country great and that are embodied in the declaration of independence and the constitution. We must maintain our system of checks and balances. We must keep our press free of governmental pressure. We must provide for the least among us who can’t provide for themselves. We must sustain a strong and vibrant middle class. We must treat people humanely and compassionately. We must lead be example, not by force. If we do otherwise we are on the road to the trash heap of history.

Globalism

The theory behind Globalism is that more goods and services can be produced if their production occurs where there is a competitive advantage, resulting in greater wealth than would otherwise occur without it. This conclusion involves two fallacies. One is that greater wealth may not be the best yardstick of success. The other is that there is no global government to regulate Globalism. The latter makes it more of a contest of survival of the fittest, than a road to prosperity for all.

I probably won’t live to find out, but it will be interesting to see if it results in a reasonable standard of living for all people, or an opportunity for a smaller and smaller number of people to corner the market on more and more of the worlds resources while more and more people work for survival wages. It is not in the interest of whoever controls the dice to let people starve because they are not productive in that state, so it is likely that most of the world’s population will at least have a subsistence living and some measure of security. That’s not too bad considering how most of the world lives right now. And it may be all that’s needed to be happy.

What’s Happening to Our Democracy?

Our two party system seems now to be wholly owned by the corporations and the political donor class. Unfortunately, the movers and shakers in the media are also members of this upper crust, and seem to be taking their cues more from the politicians than from the people. It’s amazing to see legislation that gets passed in direct opposition to the will of the majority of the people, as indicated by the polls.

We have lost the integrity of our own borders, not due to bad laws, but due to lack of enforcement of the laws, since both parties seem to favor flooding the country with immigrants. And we seem to be more concerned about what is happening in other countries than what is happening in our own. If we don’t like what’s happening, we just roll out our military might and throw our weight around a little to get them to come around.

The Republicans have always been largely a party of business and the wealthy, allowing a little trickle down to pacify the peons. Their ideal seems to outsourcing labor, and importing cheap goods. For those jobs that can’t be outsourced, they rely on immigrant labor to drive down wages. They’ve now added the religious to their fold by electing born again Christians to solidify their hold on political power, although they, themselves, seem to worship at the church of GDP and totally free markets. They seem to have never met a victim of circumstances, or at least acknowledged them.

The Democrats, on the other hand, never met a victim they didn’t love. They used to be the party of American middle and lower classes. Unions also used to represent these people. But, now the Democrats and the Unions seem to have turned their attention to international victims, almost exclusively, leaving the American middle and lower classes to fend for themselves without a party to call their own. After all, with no border control and both parties ignoring immigration law, the demographics are rapidly shifting to unskilled, uneducated foreign immigrants, the better to inflate their voter rolls and union coffers.

The ruling class seems more interested in making money by churning money in the financial markets than actually making things and getting them to consumers. Why make things when you can get them cheaper from sweat shops in foreign countries? As long as the stock market is booming all is well for this group. Why should they be concerned when it’s not their jobs that are disappearing? If you control the boardrooms of corporate America you can always see to it that the profits go for big executive salaries and bonuses. With the principal stockholders being pension and insurance fund managers you don’t have to be worried about anyone raising a stink when you hire each others executives to sit on your corporate board. All the ruling class has to do is insure that it, and its cadre of hangers on and wannabees, is at least fifty percent of the electorate. Then it will be possible to drive down the wages of the lower half to subsistence levels, and feather their own nest. By using social issues like religion, human rights, and environmentalism and perceived foreign threats, it’s pretty easy to hoodwink the electorate for an extended period of time, particularly if they’re dominated by uneducated foreign immigrants.

Let’s face it, the system is broken and not about to change anytime soon. The ruling class has it figured out to their benefit, so why make waves. The same thing has been going on in Latin America for decades. In some countries there it’s become so bad that populist socialists have become all the rage once again. Is that what it will take to wake up America? Are we a country of all the people, or not?