The Housing Crisis

According to a recent news story, three-quarters of “middle class” (whatever that means) Americans can no longer afford to buy a house.  This appears to be one step closer to one individual’s vision of Klaus Schwab’s and the World Economic Forum’s “Great Reset” in which, as one enthusiast put it, “You will own nothing and be happy.”  The American dream used to be owning your own farm or business.  Then it became getting a good job and owning a house.  Now it's degenerating into getting a universal basic income and finding a place in a government housing project.

How to Save Your Sixteenth Century Mansion

A week or so ago we came across a plea for contributions so that some group in the United Kingdom could purchase a near-pristine example of sixteenth century “recusant” architecture.  A “recusant” was a Catholic who refused to conform to the legally established Church of England, thereby becoming subject to fines or imprisonment.

To the People of Ireland and the World

In Dublin on Monday, April 24, 1916, forces of the Irish Republican Brotherhood and the Irish Citizen Army, supported by 200 members of Cumann na nBan (League of Women) occupied the General Post Office on Sackville Street, later renamed O'Connell Street in honor of the Great Emancipator, proclaiming an Irish Republic. After fighting that lasted a week, the rebels surrendered. They were imprisoned, and all of the leaders with the exception of Eamon de Valera, technically still an American citizen, were tried and executed in secret.

A critical provision of the proclamation, read before entering the General Post Office, was to assert the importance of ownership as the basis of the indefeasible sovereignty and independence of every Irish man and woman:

We declare the right of the people of Ireland to the ownership of Ireland, and to the unfettered control of Irish destinies, to be sovereign and indefeasible. The long usurpation of that right by a foreign people and government has not extinguished the right, nor can it ever be extinguished except by the destruction of the Irish people.

Today, the effective exercise of the natural right of the people of Ireland to the ownership of Ireland, while no less sacred now than then, is even more remote and less attainable than it was immediately preceding the sacrifice of Éirí Amach na Cásca, the Easter Rebellion. The size of the current deficit — 22% of GDP — dwarfs in relative size even the deficits incurred by the other "PIIGS." It is an incredible tsunami of debt that, under existing financial and economic assumptions, can only result in the economic destruction of the Irish people.

There is, however, hope — and a way of getting out of what threatens to be a disaster unequaled in scope for a century and a half, not since An Gorta Mór, "The Great Hunger," before which even the worst possibilities presented by today's impending financial catastrophe pales into insignificance.

There are, nevertheless, lessons to be learned from the Hunger, even if there is otherwise no possible comparison. The most obvious is that the Famine was completely avoidable, and would have been, had the great mass of Irish men and women been direct owners of the land. More than enough food was produced in Ireland to keep everyone alive and comfortable during even Black 47, the worst year of the Famine, but it was exported in payment of debt (usually incurred at the gaming tables of London and Paris) and to provide income for absentee landlords.

Today's financial disaster was also completely avoidable:

• Had the Bank of Ireland discounted and rediscounted loans to fund financially feasible and properly vetted capital projects instead of engaging in open market operations to purchase government debt securities and finance gambling on the stock market, the deficit would necessarily have been limited to existing accumulations of savings, whether domestic or lured in from abroad.

• Had such credit been extended in ways that made every Irish man, woman, and child, instead of the government and foreign investors, a direct owner of the agricultural, infrastructural, industrial and commercial assets of Ireland, the income generated by that ownership would first have paid for its democratic acquisition, then provided a "second income" to supplement and, in some cases, replace wage income.

• Had financing for new capital formation come from the expansion of commercial bank credit, the income from capital would have generated sufficient effective demand to keep the economy on an even keel while the banking system provided adequate financing for any feasible capital project, whether agricultural, commercial, or industrial.

Instead, the financial resources of the nation were expended on increasing the size of government, taking away the personal sovereignty of each Irish citizen to the extent that the government took over, and driving the country to the brink of ruin.

A way out?

Yes!

• Pass enabling legislation to create a "Irish National Citizens Land Bank" to take immediate title at no cost to all government-owned land, natural resources, and infrastructure. Every Irish citizen and legal resident of the country would immediately receive one no-cost, non-transferable, voting and fully participating equity share in the INCLB, making the declaration in the Easter Proclamation a reality.

• The use of all land and natural resources held by the INCLB would be determined by an elected central authority, located outside of Dublin (possibly Meath) with mandatory input from local, county, and provincial authorities. Existing shares in the INCLB would be surrendered without compensation at death or on immigration, and new shares issued at birth or on declaration of permanent resident status.

• The INCLB would acquire additional land, natural resources, and infrastructure at fair market value when it came on the market, exercising a right of first refusal for all such offerings.

• Financing for acquisitions would come from discounting loans for the purchase at the Bank of Ireland.

• All income from leasing and usage fees above the costs of administering the INCLB would be distributed to shareholders as a dividend, to be taxed as regular income.

• Pass legislation to establish "Homeowners Equity Corporations" as a way to solve the housing crisis.

• Reform the commercial and central banking system to prohibit government borrowing and discourage non-productive private sector borrowing, especially for stock market speculation, except out of existing accumulations of savings.

• Reform the tax system to encourage wealth accumulation and a more just distribution of the costs of government.

• Implement a program of "Capital Homesteading."

These and other steps can be taken almost immediately. With the rise in economic growth in which everyone, not just a few participate, the deficit can be reduced dramatically as people take back the economy from the government, and start to take care of their own needs out of their own incomes.

More than fifteen centuries ago the Irish saved civilization. It's time to do it again.

#30#

Halloween Horror Special IX: Fed the Impaler, or, "I Never Drink . . . Wine"

It's something of a record. To date, there have been nearly 200 film versions of Bram Stoker's Dracula, more flicks than any other single cinematic source. In distant second are the various adaptations of Sheridan Le Fanu's Carmilla, with a nod toward (and a clean set of heels away from) the notorious Countess Elizabeth Báthory, the "Blood Countess." Of interest to very few people is that both of the fictional vampires were the creations of Irish writers.

The original, "real" Dracula legend also has a tie-in with Ireland. It seems that Edward IV's favorite sociopath, John Tiptoft, earl of Worcester, "the Butcher of England," as Lord Deputy of Ireland brought his favorite methods of execution (beheading, quartering and, especially, impalement) with him in furtherance of his duties in 1467. Tiptoft entered legend himself by encompassing the deaths of the popular earl of Desmond and his two sons — one too young to know what was going on — on trumped-up charges of treason.

It seems that Tiptoft, one of the most brilliant scholars of his day (who says a genius can't be a psychotic?), collected early printed books (incunabula) . . . of which the anti-Vlad propaganda pamphlets issued by the German settlers in Wallachia (from which much of the Dracula legend derives) comprise a significant proportion. The Vlad in question, of course, was Vlad III Tepes, Voivode (Prince) of Wallachia, "Vlad the Impaler," usually given the title borne by his father: Dracula. We won't get into the issue of whether Vlad was framed by his enemies, or whether Humpty Dumpty was pushed.

So much for the Halloween Horror aspect of today's posting. How are we going to work in the eponymous "Fed the Impaler" shtick? (BTW — looking up "eponymous" will get you something similar to what looking up "lascivious adulterer" ["Don't call me that until I find out what it means!"] got the Peter Sellers character in What's New, Pussycat? — "a man who is a lascivious adulterer.")

Nothing easier. Just as Tiptoft, the 15th century Irish power-that-was, copied the worst possible model for politics (the Dracula legend/propaganda), the current Irish leadership is copying the worst possible model for economics: Keynes, and American efforts based on post-Keynesian prescriptions. Nowhere is this more evident than in the housing crisis afflicting both countries.

Only a short time ago the "experts" in both countries were loudly proclaiming that the problem was all over except for the remaining bailouts, subsidies, stimuli, and increased government debt. No problem. The Great Recession is over; there will be no double dip. (Of course not. You can't double up when you're still in a single.) Then the next round of financial crises started. Don't worry, though. The plan that worked so well before will work again: spend more money that you haven't got to rescue the gamblers and leave the poor schmoes who over-bought or under-paid based on the rosy colored prognostications of those same experts hanging out to dry.

Fear not. There really is a potentially viable, natural law-based solution that has been developed. It is a possibility with which both countries — or any country, for that matter — can experiment. You've seen it mentioned once or twice on this blog already, so (like yet another Dracula remake — do I hear cries of, "Blah, blah!"?) prepare to see something you've seen before, and even managed to work in its component parts. It just hasn't been put all together into an integrated system. Yet.

And, yes, we know we keep pushing the basic idea. That's only because the powers-that-be keep pushing programs and principles that have been shown time and again not to work. Why, then, should we let up on something that actually has a track record of sorts, even if limited? Why dismiss something that has been shown to work, and keep hitting us over the head with something that has a perfect record — of failure?

We refer, of course, to the "Homeowners Equity Corporation," or "HEC." (We know it would be more in keeping with the theme of this series and the season to call it a "HELL," or "Homeowners Evil Liability Liquidation," but from yesterday's posting you know of our success with trying to force an acronym.)

(Don't you just love all these parentheticals?)

Briefly — for we have to get back to our coffins before the first ray of sunlight embiggens the dawn — the HEC would be a for-profit stock corporation that purchases foreclosed residential properties in a local community, and through a "lease-to-equity" arrangement would enable homeowners facing foreclosure to: 1) remain in their residence, 2) pay off the market cost of the residence, and 3) build up equity as shareholders of the HEC.

The HEC would allow citizens to escape from the worst form of credit (loans for consumer goods that don't pay for themselves and are made to people who can't repay the loans) to the best form of credit (loans to purchase capital assets that pay for themselves and that turn non-owners into owners of income-producing assets). The HEC concept is based on a new monetary and tax approach that promotes the financing of private sector capital formation in ways that create new owners of that growth and thereby spread purchasing power throughout the economy.

One of the key characteristics of the Homeowners' Equity Corporation idea is that it minimizes risks of the resident-shareholder foreclosing on the home mortgage by acting as a form of capital credit "insurance," through pooling of risk. There will always be a certain percentage of homes that are unoccupied for a time, but the shareholder's equity will be based on a HEC's value per share, based in turn on the aggregate value of all homes owned by a HEC, not the value of the home occupied. Also, a HEC's value per share will depend in part on the occupancy rate of all homes, as will the payments on the loans used by the HEC to acquire the homes. It is obviously much easier to make payments on 100 houses, of which 90 are occupied and generating rent payments, than on a single house with no rent payments coming in.

The HEC would also provide a means for those who cannot afford monthly lease payments on their home, to participate in the lease-to-equity program. Vouchers linked to need (for a specified amount of time) could be provided. (For example, 25% of a HEC resident-shareholder's income would go to cover housing leases. The amount of the voucher to supplement this would be the difference between the homeowner's total income and the monthly lease payments. To protect against people playing the system, there might need to be a limit on how much of a voucher someone could receive and for how long they could receive a voucher to remain in a particular residence owned by the HEC.)

Ireland would be the perfect place to experiment with the HEC. The concept of public housing is well entrenched. It would be a small leap for people to accept ownership by the public instead of public ownership. This is especially true since the "feel" of the arrangement, while based on individual private ownership, is more communitarian than most private ownership and has a superficial resemblance to a standard rental arrangement — but one from which you can walk away with the value of the equity you've built up, rather than a pile of rent receipts.

The alternative? Continue to let outdated financial technologies and disproved economic dogma exsanguinate the economy and fail to bring the HEC and other Just Third Way programs to the attention of prime movers and potential door openers.

It's your choice.

#30#

Halloween Horror Special VII: The Fall of the House of Usury

In "The Fall of the Houses: U.S.H.F.U.E.R.," a short story by Ingmar Alban Po (who just won the Noble Prize for Literature and Economics), the greedy, dirty, lousy, good-for-nothing capitalist pigs have tricked the local peasantry into buying overpriced and super-sized mansions constructed by the local building contractor, Vincent "Mac" MacDonald. These shoddily built roach motels are, naturally, referred to as "Mac's Mansions."

Having been convinced that the dwellings can only increase in value, the peasants purchase the homes with no down payments and by assuming sub-prime mortgages. This pleases the robber baron who governs the area, Lord Frederick "Freddie Mac" MacDonald, no end, for the contractor is his illegitimate half-brother, as well as their mother, the Dowager Baroness Lady Fanny May (she kept her maiden name). Besides, as required by the State under socialism, Lord Freddie and Lady Fanny create the money to purchase the homes out of nothing, and charge high rates of interest, thereby making enormous profits off of something that does not generate a profit — the classic definition of usury and other dishonest profit.

When an economic downturn hits the Barony, the peasants start losing their jobs and can't keep up the payments. At the same time, since there's no one left who wants one of Mac's Mansions at Vincent's prices, the prices fall, and the homes fall into disrepair. Outraged, the peasants approach the Castle with torches and guns, and quickly elect Lord Frederick to another term when he explains that it was all somebody else's fault. Unfortunately, all the houses collapse during the annual Oktoberfest, although no one is hurt due to the fact that everyone is in the beer tent.

Po's story is, of course, an allegory for the ongoing foreclosure/housing/sub-prime/etc. crisis in the United States, hence the otherwise obscure latter part of the title, which stands for "United States Home Foreclosures Undermine Economic Recovery." If Po had been a better writer, perhaps the powers-that-be would have paid attention to the serious problems represented by the crisis. Instead, all focus has been on the stock market and the miracle expected from the (second) defeat of the Republicans in November. The first defeat, as everyone knows, reestablished prosperity throughout the land, to such an extent that the recession is over, and everybody has a job again.

We still need to deal with the foreclosure crisis, though. A couple of years ago CESJ came up with the "HEC," the "Homeowners Equity Corporation" as a way of applying to housing the binary financing techniques developed by Louis Kelso, who built on the work of Harold Moulton in The Formation of Capital. These techniques have already been successfully applied in the ESOP, and have been embodied in Capital Homesteading as a way to finance the acquisition of capital by people who currently own little or nothing, and are not in a position to cut consumption and save in order to invest.

A HEC would be a for-profit stock corporation that purchases foreclosed residential properties in a local community, and through a "lease-to-equity" arrangement would enable homeowners facing foreclosure to: 1) remain in their residence, 2) pay off the market cost of the residence, and 3) build up equity as shareholders of the HEC.

The HEC would allow citizens to escape from the worst form of credit (loans for consumer goods that don't pay for themselves and are made to people who can't repay the loans) to the best form of credit (loans to purchase capital assets that pay for themselves and that turn non-owners into owners of income-producing assets). The HEC concept is based on a new monetary and tax approach that promotes the financing of private sector capital formation in ways that create new owners of that growth and thereby spread purchasing power throughout the economy.

One of the key characteristics of the Homeowners' Equity Corporation is that it would minimize the risk of the resident-shareholder foreclosing on the home mortgage by acting as a form of capital credit "insurance," through pooling of risk. There will always be a certain percentage of homes that are unoccupied for a time, but the shareholder's equity would be based on a HEC's value per share, based in turn on the aggregate value of all homes owned by a HEC, not the value of the home occupied. Also, a HEC's value per share would depend in part on the occupancy rate of all homes, as would the payments on the loans used by the HEC to acquire the homes. It is obviously much easier to make payments on 100 houses, of which 90 are occupied and generating rent payments, than on a single house with no rent payments coming in.

The HEC would also provide a means for those who cannot afford monthly lease payments on their homes, to participate in the lease-to-equity program. Vouchers linked to need (for a specified amount of time) could be provided. (For example, 25% of a HEC resident-shareholder's income would go to cover housing leases. The amount of the voucher to supplement this would be the difference between the homeowner's total income and the monthly lease payments. To protect against people playing the system, there would need to be a limit on how much of a voucher someone could receive and for how long they could receive a voucher to remain in a particular residence owned by the HEC.)

It's at least better than ineffectual hand-wringing over the plight of the dispossessed or those threatened with losing their homes . . . as you laugh all the way to the bank after making a killing on collateralized debt obligations backed by bundled toxic sub-prime mortgages and bailed out by the federal government with new money created in anticipation of future tax revenues collected from the jobless and homeless poor.

#30#

The Mortgage Crisis in Ireland

It appears that the crisis in property values might have the potential to bring Northern Ireland and Éire together, if yesterday's report published in the Belfast Telegraph is any indication ("Republic's toxic assets 'could cause Northern Ireland property prices to nosedive'," Belfast Telegraph, 07/07/09). Officials at the highest levels on both sides of the border are holding emergency talks on what to do about the situation, reported in language with no small hint of hysteria and panic.

Ironically, a solution — Capital Homesteading for Every Citizen — has been suggested not once, but several times. As reported on this blog, we have managed to get word to a couple of Ministers and members of Dail Eireann, as well as to members of the Economic Social and Research Institute (Ireland's premier think tank), but there has been no real interest expressed, for whatever reason. This is more than a little perplexing, for included in the overall Just Third Way Capital Homesteading proposal is the "Homeowners' Equity Corporation" program, or "HEC." The HEC has the potential not only to solve the current "toxic asset" crisis, but also point the way to a permanent solution to many of the other economic and political ills afflicting not only Éire and Northern Ireland, but the United Kingdom, the United States, and the rest of the world.

Coincidentally, this writer contributed an article yesterday to the Helium Writers' Cooperative on the subject, which has (at least as of this morning) achieved the top rating. Clearly people are seeking a new solution, and, just as clearly, those who have come across the HEC believe that there may be something in the proposal (to say nothing of Capital Homesteading itself) that has the potential to achieve something positive.

The HEC has the potential to answer every concern expressed in the article in the Belfast Telegraph. The problem is that the leaders in Éire and Northern Ireland either don't know anything about it, or, if they know about it, haven't taken it seriously.

What we need, obviously, is for people with contacts — or people with contacts who have contacts — at the appropriate levels of government (at this point that is probably the ministerial level) to open the door to these ideas and get them to the people who can take the ball and run with it. This, of course, means you — whoever you are. If you have read this far, you evidently think there's something in the Just Third Way that has the potential to bring about lasting reform in our economic and political institutions. The question then becomes what you are going to do about it.

Here's what you can do:

1. Get to your contact(s) (or your contacts with contacts) and mention that there is a program that has the potential to solve what many people are starting to regard as one of the worst financial disasters in history.

2. Send your contact(s) to the CESJ website, pointing out that most of the literature on the subject is free and available for download.

3. Suggest to them that if they find the material has possibilities (and, at this point, anything has to be better than what is in place), they open the door for a meeting between a minister (or, better, the Taoiseach, Mr. Brian Cowen) and Norman Kurland to discuss the best way to implement Capital Homesteading.

In light of the increasingly horrifying economic news coming out of Ireland (or anywhere else, for that matter), nobody has anything to lose by giving serious consideration to Capital Homesteading. It might even do some good — and, in social justice, it is your personal responsibility to see that contacts are established and doors opened so that something effective can be done.

How Would YOU Spend $925 Billion (and Rising)?

As the amount of Mr. Obama's "stimulus" (newspeak, evidently, for "pork") continues to escalate from incredible, to unbelievable, to beyond human comprehension, we thought we'd ask ourselves a simple question: "How would we spend what will soon amount to over $1 trillion in light of Just Third Way principles?"

This is a question that can only be answered in stages. The first stage is to realize that, in a justly structured economy, there would never be a question of the State deciding how to spend a pot of money, and then putting an unconscionable burden of debt on future generations to pay for it. No, because certain proposals under the Just Third Way are, in part, predicated on the validity of Say's Law of Markets and the Real Bills doctrine, we realize that you can't spend what you don't have. Production equals income . . . and you can't just go out and create money (additional purchasing power) that is not tied to an equivalent value of new production.

It doesn't matter how much you have piled up unsold in warehouses, how many "toxic assets" a bank holds, or even how many homes are foreclosed. The money already exists to purchase these things. Creating more money inflates the currency — and creating what will soon amount to more than $1 trillion of purchasing power tied to existing goods and services could very easily ignite hyperinflation.

The "proper" response (actually, "barely rational response") when faced with the current situation is not to create new purchasing power for existing goods and services and redistribute wealth indirectly through the extremely risky method of inflation. When faced with such a colossal mess and an inability to think of anything better, the "right" thing to do is redistribute wealth directly by raising taxes to the point where all wealth that someone is not consuming is taken and redistributed among people who will use it for consumption — or at least tax the haves enough to provide the have-nots with enough to keep them alive and well until they can get back on their feet.

Thus, stage one is to keep people alive and well by taking care of them temporarily. This is going to cost some money, but it's money that's already out there. Tax the rich enough to meet these emergency needs, then lift the tax once the emergency is over.

This leads to stage two. The haves will immediately protest that if you tax away their unconsumed wealth, they won't be able to finance new capital formation, new jobs will not be created, and the economy will decline even more rapidly.

Answer: every reader of this blog knows that the commercial banking system combined with the Federal Reserve has the power to create money. It's where Mr. Obama plans on getting the bulk of the $1 trillion pork pie he's requesting. If you can create money for consumption, you can create money for investment. You don't need the haves to finance capital formation out of their unconsumed wealth. You just need access to capital credit.

Thus, stage two is to shut off the money spigot from the Federal Reserve to the government, consumers, and speculators, and turn it on for people who will use it to finance investment in new capital. This is all the stimulus anybody needs — and it won't cost the taxpayer one cent.

For stage three, things actually get easy. We need to identify our first investment, ideally one to which every single American currently has access . . . but is unable to finance due to lack of capital (not consumer) credit — that credit coming from opening up the Federal Reserve capital credit spigot for ordinary Americans.

What is most people's single largest investment? Their house. The problem is that it's not really an investment. Housing is a consumption item . . . unless . . .

Unless you're a landlord purchasing property to rent out to a tenant. Then what would ordinarily be a consumption item for you turns into an investment (capital) for you, and a consumption item for your tenant.

That being the case, what's wrong with being both landlord and tenant? The rent you pay as tenant then becomes the means by which you as landlord pay for your investment. This is the financial technique of purchasing only investments that pay for themselves within a reasonable period of time out of the income that the assets themselves generate, that is, "self liquidating" assets. The purchase of existing facilities, including rentable space, by creating new money to do so is as sound as financing future construction — better, in fact, because you have a "track record" of established tenancy or production to provide a solid indication of the present value of the future income stream.

An added bonus (and it's a big one) is that many analysts believe housing is the primary "leading economic indicator." Save the housing market, and (so many analysts believe) you will have saved the entire economy. (You could say something similar for food and clothing, but you must live where you live — meaning you can't live where you are not — while you don't have to grow your own food or make your own clothing right there.)

Stage three is thus to save the housing market, and do it in a way that turns a consumption item into an investment so that you can create the money to save the market in a non-inflationary way. We haven't mentioned it lately on this blog, but there is a proposal to do just that, the "Homeowners' Equity Corporation," or "HEC."

A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants.

The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.

Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of increasing mountains of government debt. Let the free market decide what happens to those institutions deemed "too big to fail." If they truly are "too big too fail," then they won't. Otherwise, they clearly weren't "too big to fail" at all.

Almost Desperate Enough for a Good Idea

Lawmakers are starting to panic in light of the refusal of the financial markets to obey the media's premature hints about the end of the financial crisis. They are starting to listen to just about everything except common sense. If things get much worse, they might even be willing to listen to that (i.e., read this blog).

A CNN report on October 21 on CNNMoney.com ("Ideas for 2nd Stimulus Cover Broad Swath," Jeanne Sahadi) stated, "The drumbeat for lawmakers to do more to boost the economy is growing louder. And the chances have increased that Congress could pass a second stimulus package during its lameduck session following the presidential election."

Unfortunately, those in power are still stuck in the Keynesian paradigm. This limits the choices to tax-and-spend, or print-and-spend. They are ignoring the possibility of creating money through a properly regulated banking system for productive purposes, thereby putting currently wasted resources, excess capacity, and idle people back to work doing something worthwhile.

What is a "properly regulated banking system"? A system that embodies structural "checks and balances" (i.e., what an accountant would call "internal controls"), policed first by the industry itself, and then by the State when self-policing fails to maintain separation of function and democratic access to money and credit.

Our "Capital Homesteading" proposal would, in part:

• Use the Federal Reserve (the central bank of the United States) to finance all future capital formation through the private sector.

• Amend the definition of "qualified industrial, commercial, and agricultural paper" to include an extended term of the loan and a requirement that paper does not qualify for discounting unless extended through expanded ownership mechanisms, such as Capital Homestead Accounts, Homeowners' Equity Corporations, Community Investment Corporations, Consumer Stock Ownership Plans, Employee Stock Ownership Plans, and similar vehicles.

• Abolish the Open Market Committee and prohibit the Federal Reserve from future dealing in government bonds, whether primary or secondary.

• Abolish fractional reserve banking and mandate a 100% reserve requirement for all commercial banks.

• Prohibit State ownership of productive assets of any kind, or from owning shares in financial institutions.

Specifics about Capital Homesteading can be found in the book, Capital Homesteading for Every Citizen. An examination of the monetary theory underlying Capital Homesteading can be found in "A New Look at Prices and Money."

With lawmakers running around and stating that they are willing to try anything, it's probably about time that they decided to try something that will actually work.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

Ben Stein: "How Not to Ruin Your Life"

The other day actor/economist/monotone Ben Stein published a short article on the financial crisis. Since we agree with just about everything he said (except for the fact that he strangely omitted any reference to our proposed solutions), we thought we'd send him a note, reproduced here. Please feel free to track down his contact information and send your own missive. (We did NOT include the "donate" button in our e-mail to Mr. Stein.)

Dear Mr. Stein:

Thank you for your article on the current run of financial fiascoes. I hope that more people pay attention to you than have been listening to us for the past year and more.

In light of that hopefully not ephemeral hope, I think it would be of great mutual benefit if you were to investigate the work of our "Center for Economic and Social Justice," ("CESJ"), a good introduction to which can be found on the web site, www.cesj.org, while running commentary can be found on our blog. Our "Just Third Way" consists of four essential "pillars" that we believe provide the foundation for an economically (and thus politically) just social order:

1. Limited economic role for the State,

2. Free and open markets,

3. Restoration of the rights of private property, particularly in corporate equity, and

4. Widespread direct ownership of the means of production.

Dr. Norman G. Kurland, president of CESJ, is a graduate of the Law and Economics program at the University of Chicago. Previously active in the Civil Rights movement, as Washington Counsel for Louis O. Kelso (inventor of the ESOP, or Employee Stock Ownership Plan, and co-author with Mortimer J. Adler of The Capitalist Manifesto, 1958 and The New Capitalists: How to Free Economic Growth from the Slavery of Savings, 1961), Dr. Kurland was instrumental in persuading the late Senator Russell Long of Louisiana to champion the enabling legislation for the ESOP in 1973. Dr. Kurland later served as Deputy Chairman for the Presidential Task Force on Project Economic Justice under President Reagan, the goal of which was to counter Marxism in Central America and the Caribbean Basin by implementing Kelso's ideas.

Our immediate, short term (partial) solution to the current situation is to implement the "Homeowners' Equity Corporation," or "HEC." Rather than go into it here, I invite you to follow the link. Our long term solution is Capital Homesteading for Every Citizen, ditto. More information about CESJ can be found on the web site. I invite you to look over the material and, if you have any questions or comments, give Dr. Kurland a call.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

"Good Policies Can Save the Economy"

They've been let off the hook for a few days, but it's about time the Wall Street Journal received another squeak from the wheel. This one is about the return of the Federal Reserve to its original purpose (in a small way). As usual, we encourage you to write your own letters, whether to your local newspaper or to the Wall Street Journal. You don't have to include a CESJ donate button in your letter.

Dear Sir(s):

In "Good Policies Can Save the Economy" (WSJ, 10/08/08, A17), Lee E. Ohanian notes possibly the most significant policy change since the derailing of the Federal Reserve in 1917 to finance World War I. Unfortunately, he makes it sound as if the recent Fed decision to begin discounting short term qualified industrial, commercial, and agricultural paper, while necessary, constitutes a departure from the proper role of the central bank of the United States. On the contrary, the decision is a long-overdue return of the Federal Reserve to its original purpose: to provide the private sector with necessary credit and liquidity when the existing money supply proves inadequate.

Still, the decision, while a move in the right direction, is only a first step. It demonstrates that existing accumulations of savings are not necessary to finance capital formation, as Dr. Harold G. Moulton pointed out in his landmark 1935 study, The Formation of Capital. Countering the established dogmas of Keynesian economics, Dr. Moulton proved that the economic growth of the United States from 1830 to 1930 was financed not out of existing accumulations of savings, but by the expansion of self-liquidating bank credit.

Tax cuts, while no doubt welcome, are thus not necessary if the goal is to provide financing for new capital formation. Providing liquidity and credit for capital formation is the role of the Federal Reserve, which since 1917 has (contrary to the 1913 Act) largely been restricted to monetizing government deficits and providing financing for politically-determined objectives, e.g., financial institutions considered "too big to fail."

A program called Capital Homesteading for Every Citizen has been developed that would open up access to capital credit to every American for the purpose of purchasing self-liquidating assets. A first step toward establishing a national Capital Homesteading program would be the implementation of "Homeowners' Equity Corporations," or "HECs," a mechanism designed to solve the current home mortgage crisis and accelerate the return to an asset-backed currency, which the Federal Reserve's decision initiated.

HECs — like leveraged Employee Stock Ownership Plans ("ESOPs") — would obtain acquisition loans from commercial banks, which would charge a transaction fee for the service. The commercial banks would then discount the loans at the regional Federal Reserve bank, adding sorely-needed asset-backed liquidity to counter the credit crunch in local economies. Analogous to the "free" land under the Homestead Act of 1862, the Federal Reserve would provide "free" credit, with the discount rate set to reflect only transaction costs and a revised risk premium, thereby creating currency backed by income-producing assets. The homes could then be leased to their former owners or new tenants at a monthly payment sufficient to cover debt service, maintenance, taxes, and administrative costs. Tenants would earn shares in the HEC as lease payments were made. When a loan was fully paid, the tenant could exchange the HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover costs.

Yes, we need good policies — but we have to make certain that they are the right good policies.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

Europe's Banks Worse Off than those in U.S.

According to a story last week in The Telegraph ("Europe's banks more leveraged than U.S.
Banks," Ambrose Evans-Pritchard, 10/02/08), German Finance Minister Peer Steinbruck in the space of one week flipped from asserting that the meltdown was solely an American problem, to orchestrating the Bundesrepublik's biggest bank bailout. Belgium followed suit by bailing out the 300-year old Fortis, assisted by the Dutch, and then Dexia, with French aid. Ireland then moved into first place in the financial crisis sweepstakes and issued a blanket guarantee for the six largest banks in the Republic. France soon displaced Ireland, while Italy and Spain are growing increasingly nervous.

Naturally, everyone is joining in the "Blame Game" instead of seeking a genuinely viable solution. What is most astounding is that Germany, which benefited from the "miracle" wrought by Dr. Hjalmar Schacht in the 1920s to stop the hyperinflation, should be so blind to the obvious way out: stop extending credit for consumption and government debt, and back the currency with hard assets.

Because the meltdown started with residential real estate, the solution should also start there. It would take very little for the affected countries to study and implement our Homeowners' Equity Corporation proposal, thereby putting a stop to the situation that triggered the current crisis. Rather than repeat what has been stated in so many postings on this blog already, any interested reader can link to the concept paper here, and send this posting via e-mail to those in their countries' governments who are desperately seeking a realistic solution to the crisis.

You really don't have anything to lose.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

How the Federal Government Can Bailout the Taxpayer

I was tempted to title this posting, "Everything Old is New Again." Frankly, the situation faced now by the U.S. federal government (and, if my information is correct, the government of the Republic of Ireland, at least in part, which just bailed out the six largest banks in the country) is analogous to that which faced the United States in 1862: a seemingly senseless and increasingly unpopular war, a crumbling economy, high taxes, eroding national credit, inflation of the currency . . . the list could go on endlessly.

What paved the way for the economic rebirth of the United States after the Civil War was Abraham Lincoln's 1862 Homestead Act. This "privatized" the immense holdings of federal land in the west, and provided both the resource base and market for the industrial expansion of the eastern states. This led to the United States, which in the early 19th century was a very minor player in commerce and industrial development on the global stage, eventually becoming a world leader in industry, commerce, and agriculture.

Our proposed "Homeowners' Equity Corporation," or "HEC," would do much the same, only more. A HEC is a proposed for-profit, professionally-managed stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at their current market values.

HECs — like leveraged ESOPs — would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve under Section 13 of the Federal Reserve Act at a rate reflecting transaction costs and a revised risk premium, thereby creating an asset-backed currency. The homes could then be leased at a realistic market rate to their former owners or new tenants.

The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. The shares could be retained within the HEC in segregated, directly-owned accounts, or accumulated in a "Capital Homestead Account." When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance, administration, and property taxes. Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

"Not Everyone Should Own a Home"?

The following is an open letter to Ms. Janet Albrechtsen, who (as I have verified), writes a weekly column for The Australian. Ms. Albrechtsen appeared in today's Wall Street Journal in an editorial titled, "Not Everyone Should Own a Home."

Dear Ms. Albrechtsen:

With all due respect, I believe that either you or an editor mis-titled your column in today's Wall Street Journal ("Not Everyone Should Own a Home," WSJ, 10/06/08, A19). Rather than make a case that there are people who by nature cannot own homes (a contradiction of basic principles of the natural law, of which private property is a major part), you present an excellent case that there are some people who shouldn't be selling homes, or fiddling around with the free market in an effort to achieve political goals and limited special interests of selected groups. This, as you point out, is an absolute disaster.

You are, however, correct in your statement that no one in Washington seems to be talking about fixing the financially counterproductive, even suicidal policies that got the United States and the rest of the world into its present position — although it might be more accurate to say that no one is Washington is listening to viable solutions.

Since February of this year, volunteers at the interfaith Center for Economic and Social Justice ("CESJ"), www.cesj.org, have been attempting to gain the ear of someone who will listen to the short term solution we have worked out to address the housing situation, as well as the long term program that would prevent it from happening again.

By actual count as of Friday of last week, I personally have sent 92 letters and e-mails on this subject, more than half of which went to the Wall Street Journal. Others in the CESJ network have either copied selected letters to their Congressman and Senators, or sent them as e-mails to their own networks. Twenty-seven of these letters have been slightly modified and posted on our blog, as will this letter.

Former Congressman Walter Fauntroy has been making great efforts to bring these ideas to the attention of various Senators and Congressman. We expect to hear this week whether or not he has been successful.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

How to Restore Credit and Sound Currency Globally

There was so much in today's Wall Street Journal demanding a response that we got swamped. All we managed to get out was this squeak from the wheel and the above letter to one of the columnists. This proves beyond a shadow of a doubt that we need your help! Send some letters! Wake somebody up! If you're doing a lot of complaining ... make it effective. Send a solution along with the complaint, if only by linking to one of these blog postings.

Dear Sir(s):

There is a calm and reasonable response to the wave of financial panic spreading across the globe ("Europe Races to Shore Up Banks as Crisis Spreads," WSJ, 10/06/08, A1). The banking systems of the world should be restructured in accordance with the principles of prudent finance and, frankly, common sense. The subprime mortgage crisis, which initiated the current hysteria, is actually the best opportunity the economies of the world have had to put matters on a sound basis since the U.S. federal government privatized its immense holdings of land in the 19th century with Abraham Lincoln's 1862 Homestead Act.

The first step is to restore the faith and credit of government — all governments. This can only be done by restoring an asset backing to the currencies of the world. Beginning in the United States, steps should be taken immediately to establish "Homeowners' Equity Corporations," or "HECs." A HEC is a proposed for-profit, professionally-managed stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at their current market values.

HECs — like leveraged ESOPs — would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve under Section 13 of the Federal Reserve Act at a rate reflecting transaction costs and a revised risk premium, thereby creating an asset-backed currency. The homes could then be leased at a realistic market rate to their former owners or new tenants.

The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance, administration, and property taxes. Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt.

The second step is to cut all governments off from the money creation powers of their countries' central banks. A government must live within its means, and its means are determined by a country's tax base. In an emergency, the State can borrow at market rates from the existing accumulations of savings — but by doing so endangers its sovereignty and the liberty of its citizens, as Henry C. Adams pointed out in 1898.

The third step is to finance all new capital formation through loans from commercial banks discounted at the central bank. To ensure the optimal spread of economic power through the economy and provide a sound basis for economic growth, these loans should be made in a way that creates new owners of the capital in formation, leaving current owners with their accumulations intact, but opening up opportunity for those who currently lack ownership of the means of production. These loans can be collateralized by using the standard risk premium charged on all loans to purchase "capital credit insurance" covering 75% to 90% of the total amount of the loan. To make this even more secure, there should be a capital credit reinsurance pool, composed exclusively of cash, government securities, and the soundest of blue chip investments.

The fourth step is to limit the involvement of the State in the economy.

The fifth step is to establish free and open markets, in which every person can participate as a provider of labor, of capital, or both, within a just system of regulation that provides equality of opportunity, not results.

The sixth step is to restore the rights of private property, especially in corporate equity, most particularly in the right to receive the income from what is owned.

More about the Homeowners' Equity Corporation can be found here. The other steps are part of a proposal called "Capital Homesteading for Every Citizen," from the book with the same title. We can't continue to blame a vague and generalized "them" for our troubles. If we want things to get better, it's up to us to demand changes consistent with the principles outlined above.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

Banking Boondoggle Binds Billionaire Bailout Bonanza

The other night (09/29/08), the ABC evening news ran a little cartoon to explain why Congress' failure to pass the Billionaire Bailout Bonanza would necessarily result in constriction of capital credit. The cartoon seems to have been produced by the same people who do the animated question-and-answer for PBS's America's Test Kitchen, which gives generally good information about cooking science piggybacked on bad animation. Unfortunately, in this case the animation was much better than the information.

While slickly presented and clever, the segment simply gave a quick rundown on how fractional reserve banking operates when based exclusively on existing accumulations of savings. It didn't call it "fractional reserve banking," of course, but kept referring to "recycling" currency, and described the multiplier effect — again, without calling it that.

The most damaging assumption underlying the explanation, however, was that existing savings are needed to finance business operations. This is the most basic Keynesian dogma, and the one most easily disproved — as it was by Dr. Harold Moulton (then head of the Brookings Institution in Washington, DC) in his 1933 monograph, The Formation of Capital.

To make matters worse, Keynes saw no problem with government creating money at will to finance its deficits, but flatly declared that creating money for capital formation was impossible. (The General Theory of Employment, Interest, and Money, 1936, II.7.5) (Don't try to figure that out. It doesn't make sense, and explains why trying to reason your way through a Keynesian economics course in college results in severe migraines. Malthus made economics dismal, while Keynes made it miserable.)

The cartoon did not explain where the money came from in the first place to start lending out to achieve the multiplier effect. The implication, however, was clear: the money will come from the Federal Reserve creating money to bail out the billionaires. The cartoon did not raise the possibility that the same mechanism could be used to create money to finance the acquisition of homes by ordinary people through Homeowners' Equity Corporations ("HECs") on divestiture of the State-owned properties via Community Auction Boards ("CABs"). Further, by changing from fractional reserve banking to a 100% reserve requirement, you would, ipso facto, end up with a currency backed by liens on hard assets instead of the government's ability to tax people.

Obviously Congress has locked itself into the Keynesian paradigm at a time when they should be investigating Kelsonian binary economics, especially as set forth in the second book Louis Kelso wrote with Mortimer Adler, The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings (1961). The subtitle is the more descriptive and certainly more accurate portion of the title — but you can judge for yourself by downloading the free .pdf available from the Kelso Institute. You might want to alert your Senators and Representative to the existence of this little treatise. It's short enough that even a politician could find the time to get through it, and still find time to give the HEC proposal a once-over.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

Billionaire Bailout Bonanza!! Wall Street and Banking Industry "Biggest Winners"

We do not like to be prophets of doom. If, however, the report from the Associated Press the other day accurately reflects what is going to happen, we're already far advanced down the slippery slope to a financial meltdown. What's proposed could make what's happened to date look like a minor inconvenience.

In "Who wins, who loses under proposed bailout plan? Financial industry a big winner in bailout proposal, but not so troubled homeowners" by Tom Raum, Associated Press Writer the media paint a rosy picture of the very institutions that got us into this mess in the first place being the "biggest winners" in the Cheat-the-Taxpayer Sweepstakes.

There are "benefits," however. As the article states, "There are other winners, too, if the bailout works as intended: anyone soon trying to borrow money - for cars, student loans, even to open new credit card accounts."

Perfect. After massive money creation to finance extremely speculative ventures (securitized sub-prime mortgages), all we need is more money creation for consumption purchases, while putting a stranglehold on money and credit for productive purposes. We don't need more government or consumer credit. We need credit to make owners out of people who currently own nothing. That means capital credit that purchases something that generates its own repayment, not consumer credit that reduces future consumption income to meet current wants and needs.

The United States already has the highest burden of consumer debt in its history, exclusive of the subprime mortgage fiasco . . . so the bailout promises to make it even bigger! In response, the Federal Reserve refuses to create money for productive purposes, preferring to create it solely to monetize government debt and bail out speculators and gamblers . . . against its own rules, which restrict it to monetizing only loans for qualified industrial, commercial, and agricultural projects, not government deficits.

Does any of this make sense? If not, take a look at the Homeowners' Equity Corporation proposal and Capital Homesteading for Every Citizen. The only thing you have to lose is your existing burden of debt, and the $2,300 or so additional burden the Billionaire Bailout Bonanza as currently proposed wants to put on you.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):

Billionaire Bailout Bonanza: "Manie Men Feare"

"The Lord Viscount Wentworth came to Ireland to governe the kingdom. Manie men feare." — Diary of Sir Edward Denny, July 23, 1633. That brief statement by a Protestant "Planter" in 17th century Ireland should serve as a most useful warning for Messrs. Bernanke and Paulson. Thomas Wentworth, Lord Deputy (later Lord Lieutenant) of Ireland under Charles I Stuart was the most powerful man in the three kingdoms of England, Scotland, and Ireland in the 1630s. He absolutely controlled money, credit, taxation, and the courts in Ireland, and exercised his "brilliant but sinister influence" in England as Charles' chief adviser on all matters economic, military, and political.

Unfortunately, although Wentworth sought to retire quietly when Catholics and Protestants temporarily overcame their differences and combined to get rid of him, he was decapitated on Tower Hill amid great rejoicing on May 12, 1641 before a crowd estimated at around 200,000. A few months later the "Great Rebellion" started, touching off the Civil Wars in England, which led to the execution of Charles I and the dictatorship of Oliver Cromwell.

The current situation is a perfect recipe for equal outrage. People are genuinely terrified, yet the masterminds behind the proposed Billionaire Bailout Bonanza can only reassure the taxpayer that the burden will fall on him or her ("Taxpayers Will Pay Anyway"):

"By voting down the proposed $700 billion financial bailout package — and causing a spectacular stock market rout — a majority of members in the House of Representatives made a clear statement that they didn't want to put taxpayers on the hook for the failures of financial institutions.

"But there's a catch: taxpayers are already on the hook for the failures of financial institutions, and it's possible that the bill will actually be larger without bailout legislation than with it. That's because the regulators who mind the financial industry — the Federal Reserve, Treasury and FDIC — will keep doing what they've been doing: stepping in to prevent the chaotic failure of banks and other large financial institutions. This means continuing to put hundreds of billions of taxpayer dollars at risk, but in a way that adheres to no clear plan of action and doesn't require members of Congress to explicitly approve their actions."

Thus, the speculators and gamblers stand to profit twice and thrice via 1) the original profits made on sub-prime loans, 2) the bailout, and 3) their probable repurchase of the same loans in the greatest short sale in history. The taxpayer gets stuck each time, paying for someone else's losses in the biggest high stakes game ever run — and without even being permitted to get into the game.

If Bernanke and Paulson, to say nothing of the Congress, had a healthy concern for their own wellbeing (to say nothing of their responsibility to the common good), they would be looking into our Homeowners' Equity Corporation as not only a way out that benefits everyone except the gamblers and speculators, but as a way to save their own necks. "Heads will roll" is an expression that came from somewhere, and it was not always a metaphor.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):