I can’t think of a more important topic for a blog entry than what is going on with America’s current economic meltdown. Here’s what I have to say about it:

We find ourselves, if we think within the limits of what is going on in Congressional meetings today, in the position of watching our political leaders either vote on a “bailout” of the current American banking system, or not, as a singular “yes or no” solution to the current financial crisis. If the question of how to solve our current crisis is limited to “Bailout: Yes or No” then the answer is a resounding “NO”. This is like giving an irresponsible grown-up sort of child who has overdrawn his credit card beyond any feasible means of paying it off, yet another credit card with which to do so.

FIRST AND FOREMOST, THERE CAN BE NO MORE BAILOUTS LIKE FANNIE MAE AND FREDDIE MAC. These bailouts are an unconstitutional fraud which inevitably put the responsibility of solvency on the shoulders of the average American taxpayer, and not the speculators and investment bankers who got rich creating this nightmare. Why on earth would we put Paulson, essentially a glorified investment banker, in charge of fixing this mess. There isn’t enough real capital left in America for this plan to work. We must not forget that Fannie Mae was created by Franklin Roosevelt in 1938, as a government agency to buy mortgages from lenders, as a way of funding the purchase of homes during the Great Depression. In more recent years, Fannie Mae and its sibling Freddie Mac, were taken over by what FDR attacked as the “economic royalists” and turned into vehicles for derivatives speculation. Under the great Greenspan bubble, Fannie and Freddie were turned into money machines to feed the run-up in real estate values in order to provide assets–in the form of mortgage debt–as fuel to the derivatives markets.
This scheme was bound to fail, as it has, leaving Fannie and Freddie, and the U.S. banking system, bankrupt. WHAT SHOULD HAVE BEEN DONE HERE WAS TO TAKE THESE BANKS INTO RECEIVERSHIP, SAVE WHAT IS WORTH SAVING, FREEZE ANY ASSETS AND RESTRUCTURE. Forget about consumer confidence, the real statistics are even worse than the reported all time low, as yesterdays stock market crash clearly indicates. The bubble has already burst, and Americans who recognize the bursting of our “economic fantasy bubble” are simply FED UP!

To better understand the “fantasy bubble” concept of artificial capital and artificial capital gain, we need only to look at the following simple analogy, by way of example, which I have paraphrased from the author, economist Lyndon LaRouche:

As the first step in understanding the derivatives bubble about to pop, ask yourself the question which I posed to members of my class in economics back in 1966, a class which included Virginia’s present-day Democratic celebrity Nancy Spannaus.

Why do slumlords find investment in New York City slum-housing so profitable?

Spannaus, together with other graduate students, set up a field investigation, a project which involved many long hours at the New York Hall of Records, tracing the history of New York slum properties and their sites back as far as several generations. Nancy and other members of the task force found and proved the answer to my question.

Take any income-producing investment, whether a factory, a farm, a retail sales outlet, or a slum rental-housing property-title. From the total revenue which the owner of that investment obtains annually, a certain portion is taken out of the total. By “taken out” we mean “not poured back into reproducing or improving the physical operations of the investment itself.” Four elements of this withdrawn portion of the total sales revenue are of primary concern to us at this moment: Withdrawn rent, interest, profit, and a certain portion of the taxes paid.

Focus for a moment upon the withdrawn-rental portion—the portion of the rent not put back into either paying taxes on the real estate or maintaining and improving the structure. Let us suppose that the current holder of the title to that slum rental property decides to sell this property as a rental property; how do we determine the expected valuation used for determining the selling price? That valuation will not be based on the cost of constructing a replacement building, or the depreciated original cost of the building; it will be based upon the withdrawn portion of the rental income, or similar considerations.

Thus, we have two values for that slum property. One is the depreciated value of the original construction, including depreciated value of improvements added. The other value is the portion of the rental income withdrawn by the holder of the title. Let us give a name to the difference between the depreciated value of the original construction and the market value assigned to the rental income from that building. In 1967-69 New York City, the latter valuation was vastly greater than the first. The increase of the latter valuation over the former is termed “fictitious capital”.

The task force of which Nancy Spannaus was a member found that the slumlord system was extracting greater actual rates of return on slum properties rented by very poor families, than more legitimate landlords were taking in from decent housing rental to middle and higher income households. By squeezing the rental income to the maximum, through negligent maintenance, intimidation and other slumlord tactics, a slum property realized a higher yield than a non-slum property. One could have seen in those findings a warning of the coming age of economic degeneracy, the age of junk bonds, hostile takeovers, and derivatives. The unethical slumlord with the least degree of redeemable social value was being rewarded more richly than the responsible landlord with decent character and ethical moral standards.

That economic category, fictitious capital, is key for understanding why the present-day derivatives bubble is analogous to a cancer of the world financial and monetary system in its terminal phase. Let us describe the present global bubble in these terms of reference.

Instead of a 1960s slum rental property, take today’s near-approximation of that: Milton Friedman, Margaret Thatcher, George Bush, and Wendy and Sen. Phil Gramm’s (R-Tex.) U.S. economy. That is the “post-industrial” United States which has replaced its steel industry-centered economy with a free-to-steal marketplace economy, the present-day Wall Street Journal, American Spectator, and Washington Times’s economy of Michael Milken and kindred neo-conservative bandits.

It is visible that the net physical investment in maintenance and improvements of the productive capacities of basic economic infrastructure, farms, and factories has long since dramatically declined from it’s post WWII peak. The collapsing of farms (for the greater glory of George Bush’s cronies in the grain cartel), and the collapsing of numbers of industrial and other skilled operative’s work-places shows conclusively that the U.S. economy is being contracted rapidly by a process of asset-stripping. This is a global process. It took off first in the developing sector, especially after the installation of the post-August 1971 “floating exchange-rate monetary system,” in place of the former gold-reserve standard set earlier by the Bretton Woods agreements. After the introduction of the New York Council on Foreign Relation’s 1975-76 “controlled disintegration of the economy” doctrine as Federal Reserve Chairman Volcker’s October 1979 “Volcker measures,” this disease of looting spread throughout the U.S. economy, into all sectors.

By the beginning of the 1980s, through the asset-stripping already in place during the “post-industrial” binge of the 1970s, the United States economy had lost it’s unquestionable technological superiority (with the exception of constructing weapons of war). Under the guidance of Senate president and later President George Bush matters went from bad to worse. From the end of 1982, the asset-stripping process ran amok under the influence of the Gramm-Bush push for radical deregulation of finance. The measures of deregulation pushed by Bush and Gramm could be fairly termed the “Kravis and Milken Junk-Bond Feeding Act.” The “planned train-wreck” called the Gramm-Rudman bill, putatively intended to balance the budget, balanced nothing, but rather unbalanced much of what was left of the economy, and also the minds of its credulous supporters.

Look at this degeneration of our economy through the eyes of a 1960s New York City slumlord—his admiration would be orgasmic.

Look at the real income-stream taken away from the “reproductive cycle” of the process of production and distribution of goods and of such specifically indispensable services as education, health care, and science. Trace the profit, interest, rent, and taxes from these sources. Now carry that extraction away from reinvestment in the physical improvement of those cyclic processes of production and distribution of product, and sell those extracted sums of income-flow on the financial market. Sell them as slumlords sell property titles to slum-rental holdings—not the physical property, but rather the legal title to the rental income.

Generate thus large masses of fictitious capital. Now, in addition to the real-income stream from primary sources of rent, profit, interest, and taxation, a second kind of income-stream has been generated, fictitious capital gains.

In any market economy, even in the rural barter of livestock, the occurrence of fictitious capital and of fictitious capital gains is endemic. Under certain kinds of conditions, the pyramiding of fictitious capital gains as an income-stream upon which a second order of fictitious capital is generated, sets into motion a process made famous in modern economic history by such disastrous lunatic binges as the seventeenth-century tulip bubble in the Netherlands, the early eighteenth-century South Sea Island and Mississippi bubbles, and today’s Bush-league practices behind the junk bond and derivatives bubble.

As long as money and assets discountable for money treat such property-titles and contracts as negotiable assets, money treats real-income streams and fictitious capital gains more or less equally. In this circumstance, a legion of worse-than-useless Wall Street, City of London, and kindred parasites around the world become immensely rich, while families of farmers, industrial operatives, ordinary honest businessmen, and the nation at large become increasingly poor, even as destitute as Russia under the policy-influences of Margaret Thatcher, George Bush, and Jeffrey Sachs.

As long as the prospective purchaser is prone to act upon the belief that a nominal capital gain in a contracted fictitious capital represents an expected and discountable income-stream, this imagined new income-stream can be assigned a fictitious capitalization in the same way a slum-property title is assigned a fictitious valuation based upon the purchaser’s willingness to pay a market-price for acquiring title to the stream of rental income. Once this next phase in the spiral of financial speculation becomes the basis for a new market in such instruments, a process of “geometric” growth of nominal fictitious capital is unleashed. A ballooning of fictitious aggregates occurs. That is the distinction of a true speculative bubble, as contrasted with endemic forms of speculative activity within markets.

What is a ‘cancerous bubble’?

The present global financial and monetary bubble goes one fatal step beyond a mere ballooning of fictitious capital gains. It has a dimension which marks it as fatally cancerous for the financial and monetary systems which it infests.

Asset-stripping is the key to this point.

Let us use the term “leverage” to identify the implied multiplier which converts an imputable annual rate of income-stream into a corresponding magnitude of nominal fictitious capital. In the case of the slumlord, looting the tenants to increase the income-stream from rental income is a way of increasing the imputable income-stream, and thus the fictitious capitalization of the property-title. The valuation of the secondary and tertiary fictitious capitalizations spun off from the imputable marginal gains in fictitious capitals are themselves so based upon leverage against the primary, real income-stream.

The valuation of the interconnected whole market in fictitious capital gains depends thus upon both the relative and corresponding absolute magnitudes of the primary income-streams taken as a whole. This fact is illustrated dramatically by the case of the asset-stripping needed to sustain the massive creation of fictitious capital in the RJR Nabisco operations. Without massive asset-stripping against the economy as a whole, the speculative bubble as a whole would have collapsed approximately a decade ago.

The irresponsible and greedy architects of the current financial crisis are the American and British banking industry and Wall Street speculators themselves, who have gotten obscenely rich from trading artificial capital in a free trade economy, while the average American becomes a victim of asset stripping. Assets like employees (massive layoffs and unemployment) who can make physical improvements to the “real” asset infrastructure (or asset “overhead” if you will) which must be kept low to fuel the value of ficticious capital and increase ficticious capital gain.
To bail out these “bubble mongers” is to give them the power to push the American dollar’s final self-destruct button, creating a new Anglo-American Depression economy with Weimar/Germany hyperinflation within a matter of months. You only need to trace the roots of our economic history back to the Great Depression to see that our ignorance of the persistance of history has allowed it to repeat itself. The gradual repeal of checks and balances enacted by FDR (however unpopular they may have become in today’s new fantasy economy), the replacement of Bretton Woods with the floating exchange rate system, the gradual undercutting and eventual repeal of Glass-Steagal in 1999, the gradual power being restored to banks through deregulation, allowing them to speculate into derivatives and other forms of escalating artificial capital have actually spiraled the US economic crisis into an unprecedented path toward total collapse, which will have a much more devastating (larger, global) effect than the Depression, and will result in something more akin to what we saw in Europe in the 14th century’s “new dark age”. Unlike the Great Depression, it is unlikely that even our children will live to see the rebound from what lies ahead, if the present blank check “bailout” mentality guides economic policy along its present course.

WHAT CAN YOU, THE READER, DO ABOUT THIS…

The average American does not need to check his conscience here, because he is not to blame. You can call your senator or congressman and insist that the blank check bailouts your government is forcing you to write and pay for with your hard earned dollars BE STOPPED!

Visit larouchepac.com and read more about the background and findings of this brilliant economist, who, because of his his outspoken criticism of the status quo has more or less earned himself something of a “crackpot” reputation over the years. Nonetheless, his 8 economic predictions since the late 1950′s have all been documented and have summarily come true. No other economist in the history of the post industrial world can make this claim. His global perspective on free trade and his understanding of the history of America’s economic policy changes since the time of the Great Depression have become tragically apparent through the realization of each of these predictions.

I have followed Larouche since the late 80′s, and it doesn’t take 20 years to figure out that he is a no-nonsense, no-bullshit realist who speaks the truth.

You’ve been lied to for many, many years, and now we are seeing the result. The final lie is that somehow, it’s NOT going to be your hard earned tax dollars that are going to bail out the greedy speculators and their insolvent institutions.

Now is the time to listen to someone who has ALWAYS made sense … now more than ever.

You Should Also Check Out This Post:

More Active Posts: