Jacksonian Democracy, Upcoming Political Axis, the 2016 Presidential Election

Point Not Related to Post: Before I begin my blog post, I'd like to apologize for the current ads on my blog page. I'm still trying to figure out how these ads work and I will change the ads to items that I not only approve of, but items I have used, currently use, or items that I would use.

This post will be about the upcoming political axis, the basic foundations of the American political system, and the alignment of the factions within the Republic. This post will be split up into six sections:
1. Introduction
2. Historical Background and How We Got Here
3. Jacksonian Democracy
4. Republican Party Factional Alignment
5. Democratic Party Factional Alignment
6. Conclusion

Introduction:
I touched on the upcoming political axis and the split in the political parties around the financial institutions in my post about the decentralization of money. In a previous posts, I've also discussed how the US is a constitutional republic that's anti-democratic and fundamentally imperial wherein where the elites have a lot of power (see the section about "Liberal Empire" in the link). I've also previously discussed how the democratic institutions in the American Republic were used as a way to increase the flexibility of the system by allowing for transfers of power between groups (usually from the financial/capitalist elites to the people or vice-versa). In this post, I'll be combining all of these historical realities and analytical concept to develop the analytical framework for the system we're heading towards.

This post will primarily be about the individual party alignment given the factions, but in order to do so I'll first need to define faction. Although the elites have a lot of power in the American political system, it ultimately comes down to the number of votes that determine who becomes a Representative or Senator (and President to a lessor degree, as that's done by the electoral college). So the key unit of the American political system (the faction) is composed of a combination between existing elites and the people at large. In other words, a faction is just a way for a group of elites to provide financing/networking for a set of voters with common political interests.

Historical Background and How We Got Here:

In the American political system, each party is composed of roughly 3-5 factions (usually 2-3 major factions and 1-2 smaller factions). Over time, the factional alignment shifts within the political structure as elites and voters come and go. While this basic factional structure--and the party alignment based on the factional structure--of the system stays the same, the power of determining this underlying structure has always been shifting from the elites to the people in various ways. In some periods (ex. the Civil War/Reconstruction/Gilded Age or the Hamiltonian era--even after Hamilton's death--before the development of the Jacksonian system) the elites have a major power base. In other periods, the populace at large holds more power (ex. the Jacksonian Era, the Progressive Era). Over time, this power goes back and forth along this axis, but the fundamental structure of the Republic remains the same.

Since the fall of the USSR and the downfall of the anti-capitalist financial systems, we have essentially lived in a country where the elites have had the most power since the Gilded Age. Inequality, in both income and wealth, is at the highest level its ever been at in American history outside of the Gilded Age or the 1920's or maybe the time period after/during the Hamiltonian system (which I'm not too sure about as Hamilton's system targeted high wages). The level of inequality we're seeing WILL be resolved in one form or another. During the past 40 years, we have seen a MASSIVE increase in the standard of living, in opportunity for those at the bottom who now have access to the same to powerful technology, we have lived in a world where what was previously available to the few has now become available to the many much like what happened in the Gilded Age. Due to the massive innovation, a rise in technology, and a massive increase in opportunity, a very small minority of the population has captured most of these gains (due to the nature of these gains). This system has shown REMARKABLE class mobility (for leftists who argue this, just take a look at where most of the elites in our society came from, and you'll rapidly see that almost all of them are from working or middle class backgrounds), but it has also left many different groups behind and has resulted in a system where those who have shown the daring, the skills, the intelligence, or had the luck on their side benefit massively while other groups have been left behind. So what we have had is a system where the elite have almost all of the power and the populace at large has very little. A correction will be in the books in one form or another.
Note: Income inequality was a factor in causing the Great Depression, but it WAS NOT the primary factor. The biggest reason for the Great Depression was a combination the geopolitical financial policies of Woodrow Wilson and the Democrats towards the rest of the world that left the American financial system holding foreign debts as assets that could never be paid back. Those assets were finally written down by a Republican administration under Herbert Hoover after DECADES of Republicans trying to write down unsustainable debts, including the Harding Administration, which couldn't get authorization from Democrats in Congress to write down debts. Other (more important) reasons than income inequality include the existence of the gold standard, policies by Woodrow Wilson that provided short term credit to people like small farmers so they could maintain their lifestyle--largely via the War Finance Corporation that was created during World War I--that was proving to be unsustainable, and the creation of the Federal Reserve that stabilized short term interest rates for almost 20 years. In American history before the Fed, short term interest rates were never stable and panics were quite common. These regular panics, while creating short term instability, eliminated malinvestment quite regularly. So the Federal Reserve was largely responsible for the Great Depression. In the case of the gold standard, it meant that the debts denominated in US Dollars couldn't be devalued until the Dollar was devalued, which is what happened. Inequality was certainly a factor, but IT WAS NOT the primary factor. If the only issue was inequality, the 1929-1933 fallout would've been no worse than 1873 or the 1970's or maybe slightly worse than 2008.

Anyways, I will now take a slight detour into discussing the impact of Supreme Court decisions in the political system over the past few decades. Basically every single Supreme Court case or every decision by the Supreme Court has ruled in favor of more power to the people instead of to party elites over the past 35-45 years, except for Citizen's United which was ABSOLUTELY AND CLEARLY the correct decision (the only argument against it is "equality"). So what we end up having is a system where the party base is far more influential in the decision of a politician than the party elites. In other words, the individual politicians are moving much further towards the alignment of the party base, which makes them more "extreme". However, the party base is much more energized and politically engaged. In other words, we're headed to a system where the candidates of each party are more representative of its base where the most important thing in the general elections is to bring out the party base.

On top of this, we also have gerrymandered districts wherein the districts are drawn up by state legislatures every 10 years after a census. Basically, the districts are usually (almost always) drawn up by state committees that are essentially chosen by the state legislatures. So what usually happens is that the party controlling the state legislature gets to rig the districts in such a way where their guys get more support through the political system even because they draw districts in such a way where you get more extreme divides. What ends up happening is that the enemy for the established candidate no longer comes from the other political party, but from the established candidate's own party in the primary. So again, we get more "extreme" candidates supported by an energized and politically active base.

Jacksonian Democracy:

Historically speaking, we've seen this kind of a political shift before. The current political system is becoming very much like Jacksonian democracy. What is Jacksonian democracy? It's essentially a quasi-corrupt form of democracy where a certain set of voters with a common interest use some set or group of elites to provide financing for the mobilization of support. The winner of the election uses the political system to reward their buddies with administrative positions in the government. Every time there's a shift in an election, different cronies replace the previous ones. Due to the Supreme Court decisions over the past 35-45 years, this is the kind of system we're heading towards.

Currently, we still have a political axis with remnants of the old system and much of the new system built into it. In the GOP, the shift to the new kind of system is MUCH MORE noticeable than in the Democratic Party, but the shifts are working through the Democrats as well although they're not as pronounced yet. The rise of someone like Bernie Sanders as a serious Presidential candidate or others (to a lesser extent) like Elizabeth Warren or even Barack Obama are due to the rise of this new political axis.

In other words, we get more "extreme" candidates from the wings of the party while the key to winning elections becomes bringing out your vote. So you get a highly engaged and active citizenry, but that citizenry becomes more "extreme" along the political spectrum. Historically, what usually happens is that you get crazy elections where there's so many divisions that Presidential elections run the risk of being thrown to the House of Representatives since there may not be a candidate who can get to 270. You get a sort of "spoils system" where any sort of major shift in office of a politician involves a complete replacing of the entire political and bureaucratic edifice from the exact opposite side of the spectrum. You effectively get shifts between the two poles of the axis instead of compromise for the middle voter.

Republican Party Factional Alignment:

So now, this brings us to the question: what are the alignment of the factions? In the case of the Republican Party, we'll use the Presidential race to enlighten us on some information. We are now down to a list of six candidates running for President: Donald Trump, Ted Cruz, Marco Rubio, Ben Carson, Jeb Bush, and John Kasich. Ben Carson has little money or support and it's only a matter of time before he drops out as he isn't a serious candidate. John Kasich went all out in New Hampshire and has very little money and unless he's able to rally public support very quickly from all sections of the country, he's out. In the case of Jeb Bush, he had raised $156 million as of February 1st, then he spent $26 million in New Hampshire where he finished 4th and due to Jeb's brother being one of the worst Presidents in American history he doesn't have any real chance. So essentially, we're down to three candidates: Donald Trump, Ted Cruz, and Marco Rubio.

Among these three candidates, we also have a new factional grouping for the GOP which is becoming apparent in the House and Senate as well. The major factions are all currently represented in the Presidential election with a candidate. The MAJOR FACTIONS compromising the GOP are:
1. Business (non-financial) Republicans leading the industrial working class (represented by Donald Trump)
2. Energy/commodities(/and some Wall Street) elites leading the Jacksonian class which consists of certain union workers, Protestants, social conservatives (represented by Ted Cruz)
3. Technology/financial/military elites leading the urban-middle to upper-middle class conservatives (represented by Marco Rubio)
Note #2: I'm aware of the fact that Jeb Bush may outlive Marco Rubio, but even if he does, Jeb Bush is representative the past. He IS NOT the future and is just a remnant of an old system where he'll soon be dead in the water as a legitimate representative of an actual faction in the new political axis. To be quite frank, he has no business running in the first place. The LAST THING this country needs is another Bush Presidency.

Also note that the GOP has smaller factions consisting of:
1. Libertarians which aren't led by many elites and have largely thrown their support to the Jacksonians in this Presidential primary
2. "Establishment" Republicans (who used to lead the party about a decade ago, but have now dwindled in size and scope) that're now basically dead in the water and have thrown their support to Rubio or Bush in this Presidential primary

Democratic Party Factional Alignment:
In the Democratic Party, the factional alignment has been slower to shift. It's also important to note that in the Democratic Party, there's also a much greater strength of unity in the whole political system. The current Democratic Party factional alignment is built on two primary factions:
1. Academic/Public sector unions as the leaders of middle class progressives (primarily white liberals)
2. Financial/Wall Street elites leading the urban/suburban middle class workers
3. Political elites leading large minority groups

What I've described is basically the bulk of the current Democratic Party, but this structure could break down in 4-8 years easily. With the rise of people like Trump who are advocating the use of capital and finance in order to invest in inner-cities and develop minority communities, a large portion of minorities could easily flip their support to the business Republicans.

Again, we currently have elements of the old political axis with the rise of a new political axis. So I suspect we'll see strong minority support for Hillary Clinton in the rest of the primary, which is an area where Bernie Sanders has struggled (and something that I don't see changing, but I could be wrong here).

Conclusion/What We Do and do not Know About the Upcoming Axis:
Basically, we know about 60-80% of how the upcoming political system will align, but there's also much we don't know. For example, the classic item we do not know is along what side of the axis do different minorities end up on. If minorities do end up on the Republican side, then we could see a situation where Democrats start campaigning on other issues that push more whites into the Democratic camp. So there are a few doubts as to what factions will remain on which side, and quite frankly, we simply do not know the full facts and cannot predict the future.

As I mentioned above, the entire axis is built on the level of centralization over the financial system. The Republicans are for less centralized government control over finance while the Democrats are for more centralized control over finance. This is THE ONLY unity between the axis. In every other issue ranging from foreign policy and war to many domestic issues like debt or education, there's serious divisions within the parties--although the Democrats are more united than the Republicans.

So what we are really dealing with is heading to the future, but returning to the elements of the past. The United States is starting to head back to what it was in the 19th century. There are serious issues regarding unity in the Republic with LOTS of regional divides both within and between the parties. The politicians are becoming more and more representative of the wings while each side becomes more partisan and the most important part is becoming the ability to bring out the vote, not targeting the middle voter.
Note #2: We ARE NOT in this kind of a system YET. Our current system has elements of the old AND elements of the new. Also note that in the Jacksonian period (although during the time period, franchise was mostly limited to adult white males), voter turnout was quite high. Under the current system, voter turnout is ~50% in the general elections and ~25% in the midterms. I THINK we're starting to see this shift and we're beginning to see younger people become the most politically involved they've been in decades, maybe even a century, but I COULD DEFINITELY be wrong and I may even need to be laughed at for suggesting this.

An Infrastructure Proposal Using Asset-Backed Securities, Shadow Banking, and Public Capital (if necessary)

As I've briefly mentioned in other posts, there is deficient infrastructure in many parts of the United States. Usually, most people think of infrastructure issues as roads and bridges, but those are often the most useless kinds of infrastructure (even though roads and bridges are still very important). In the United States, almost all infrastructure is done by state and local governments due to the decentralized nature of the American Republic. Most infrastructure needs are also localized and dependent on the specific areas in question. So when discussing ways to finance American infrastructure, we need to be aware of the geopolitical necessities of the areas in question. With that in mind, the geopolitical needs of infrastructure in the United States are primarily local, not federal--which we must also be mindful of.

For this post, I'll split it up into several sections
1. The Basic Underlying Financial Structure
2. Capital Structure for Federal Infrastructure Financial Intermediary (FIFI)
3. Ways to Manage Bubbles
4. Shifts in the Underlying Financial System

1. Basic Underlying Financial Structure:
So the question is, how can we properly align the interests of the financial system in these projects to the long-term interests of the local/state populace? We can first begin by having some sort of a tax being issued by the local or state authorities after the completion of a local infrastructure project. If a local community has an issue with water being clean or has a problem with a sewer system, the financing received by the local/state government can be used to build a system to bring clean water or to upgrade existing water systems or renovate a sewer system. Then, we can take x% revenues (say 10%) of the local company controlling the water networks, pipe networks, or sewer networks or whatever else for the next 20-40 years and this would be sent into some other newly formed state or regional company that gets revenues from similar types of projects in the state or region concerned. This newly formed company would issue equity, which would be bought by some financial intermediary that could either be a private financial institution or a public financial institution if private capital proves unwilling or insufficient to do so.

From here, we can now take these equities for accumulated by the financial intermediary in question and then issue some asset-backed security (ABS) for a certain set of projects in a regional area. We could split up these ABSs into different types of infrastructure investment split into regional areas for specific kinds of projects. For example, we could have a sewer system infrastructure ABS (IABS) that is centered in the South. You could also have an ABS that consists of road networks in the Midwest. We could have an ABS for ports on the West Coast. Cities or localities could use these IABS to create localized, or even state-wide or regional, public transportation systems. You could have another set of IABS for international airport reconstruction across the entire country too so we could even have IABS for federal projects as well.

Each of the localized and specific IABS could be used to create collateralized debt obligations (CDOs) for specific regions that can be bought and sold as general securities rather than for specific goals. There would be several reasons why we would want to do this, including as a way for the federal government to limit excessive asset bubbles in specific areas generally (like, say, the South) without specifically having to divert financing from Southern sewer systems more than Southern rail or public transportation.

Ideally, we could split up the United States into various regional components like the South, New England, Atlantic Coast, Midwest, Southwest, Pacific Northwest, and the Mountain West. Different types of securities based on regional locations could be issued by some regional or state authority that would use the equity of local/state infrastructure companies created.

2. Capital Structure for the Federal Infrastructure Financial Intermediary (FIFI):
The initial equity capital for FIFI could be provided for by either private or public institutions. We could have some sort of an initial public offering where the total equity capital of the FIFI would be, say, $2-3 trillion for a 20-30 year charter. The IPO of the FIFI could be run like a regular IPO through primary dealers in investment banks or through other means if necessary. Private investors could be allowed to bid for shares in the FIFI, and if the private sector or the financial system provides unwilling to provide enough capital or provides insufficient funds for FIFI, the rest of the capital can be provided for by the federal government.

Then, we can set strict equity capital requirements of, say, 40% so that the total assets held by FIFI cannot exceed approximately 2.5 times the initial equity capital requirements of FIFI. The assets of FIFI would be equity of the local infrastructure companies. The liabilities of FIFI would be the various kinds of IABSs that would be publicly tradeable assets on private exchanges.

Due to the fact that it's the equity of local/state companies that would be being securitized, if we were to see a rise in the volatility of the income streams of these companies, we could easily see the returns of the assets to investors in both FIFI and in the private sector firms holding the IABSs to get larger returns. So not only do would we have a framework to finance necessary productive infrastructure projects, but we'd also have a system whereby a rise in the volatility or uncertainty of the earnings of these individual infrastructure projects would lead to an increase for private investors and for the federal government.

3. Reducing Impacts of Possible Financial Bubbles:
In the framework and proposal I laid out, there's a major risk of a speculative infrastructure and overproduction boom coming out of this kind of investment system. So one way we can reduce the damage from the possible boom or bust resulting from this kind of system is to get the Federal Reserve involved. Currently, the Federal Reserve holds MBS and Treasuries as its primary assets. In the case that this proposal gets through or taken up in some form, I suggest that the Federal Reserve could buy IABS in addition to both MBS and Treasuries.

In other words, the Fed could sell some of its MBS or Treasuries and instead swap them for IABS so that it could sell IABS in specific regions to curb local bubbles. If there was a specific bubble that was occurring in the South or Midwest, but not enough investment in the Pacific Nortwest, the Fed could sell its IABS related to the South or Midwest and buy IABS in the Pacific Northwest as a way to prevent the booms and busts from getting too out of hand.

The primary mechanisms through which catastrophic booms involving excess capacity and overproduction would be avoided or prevented is by ensuring that investment is highly centralized while being kept a relatively small percentage of GDP, using equity financing as a way to limit the amount of debt financing involved for the state and local governments in question, and by ensuring a consumption driven economy with virtually no restrictions on consumption.

4. Shifts in the Underlying Financial System:
In the infrastructure proposal I'm currently proposing, I'm also advocating for a shift in the current financial and monetary system. Currently, the Federal Reserve controls the short term money market rate of interest by buying and selling T-bills, Treasury bonds, and MBS. In this proposal, I'm saying that we should strongly consider shifting away from setting the short term money market rate of interest and instead focus on curbing possible bubbles and financial regional instability in the United States.

Instead, the short term money market rate of interest would now not be the primary target for the Federal Reserve. Instead, the Fed would be focused on dealing with regional bubbles and the short term money market rate of interest would be allowed to fluctuate. Private consumption would be a role for the private sector that'd be in the hands of households and financial institutions to do whatever they want.

In other words, the tools of this mechanism would be to finance localized infrastructure projects without changing the underlying economic system to an infrastructure driven model. Basically, we would still have a financial and economic system that'd be primarily driven by private consumption, but investment could still take place, and be tightly directed if necessary by either federal or local authorities as needed.

Note: This financial system and basic procedure to finance infrastructure spending using existing financial institutions can still be done without a Federal Reserve. With the Federal Reserve, there is an easy way to stop bubbles from a centralized position. Without a central bank, it would be up to regional, state, and local areas to tighten liquidity.

Note #2: This program should happen alongside the elimination of Fannie Mae and Freddie Mac. Rather than securitizing household debt through some agency while then claiming the need for "regulation", it'd simply make more sense to create ABSs via equity financing so that debt and excessive leverage doesn't become an issue.

The Capital Interests and the Federal Government, Securitization, and Alexander Hamilton

In my last post, I discussed the role of the United States in the international financial crisis and how the financial crisis couldn't have possibly been caused by the separation of commercial and investment banking. In another post, I've attacked the idea that the United States is a democracy wherein the governance structure was built around the people. These are ideas usually pushed by those with certain political agendas, but such ideas aren't true. In reality, the governance structure of the United States is completely built around capital, especially finance capital.

So how did this come to be? After the Revolutionary War, there was a major issue regarding the level of centralization in the United States. During the Revolutionary War, many of the states had ran up debts to finance the war effort. In order to deal with these debts, Alexander Hamilton decided that it'd be a good idea for the federal government to assume all of these debts by issuing government bonds (most of which were known as Hamilton 6's for their 6% yield). In other words, the first securitization in American history occurred as an essential financing operation for dealing with the Revolutionary War debts. All of this was in the Funding Act of 1790.

In other words, Hamilton created an asset backed security (ABS) by issuing federal government bonds backed by the Revolutionary war debts in the US at a low price (high yield) and issuing these ABS, or government bonds in this case, at a lower yield--where they ended up trading close to par in merely a few years. The first financial intermediary in the United States involved in securitization was essentially the first central bank of the US: The First Bank of the United States.
Note: In order to pass the charter for the First Bank of the United States, Hamilton essentially bribed half of Congress to take up his scheme by making them shareholders in the First BUS.

So why did Hamilton do all this to pass the First BUS and the Funding Act of 1790? He did this because with only state securities and no federal securities, the allegiances of the local elites were to the state governments instead of the federal government. So Hamilton bought up the assets of the elites and issued new federal assets wherein the price of the assets they held went up, then used that procedure to reduce the debt servicing costs of everyone, and used the profits created by the First BUS to finance "internal improvements" (what we would call infrastructure and public works).

In other words, Hamilton used the capital interests of the United States to control the legislature, and created an entire financing mechanism to work for the American Empire (Hamilton's own words according to The Federalist Papers). So the entire idea of "big government" in the United States is nothing more but a representation of the interests of capital, especially finance capital. Hamilton used the method of securitization as a mechanism for finance capital to dominate and control the American political system.

From 1790 onwards, the entire American financial system has operated through asset-backed securities which were used to finance many projects including a larger rail network than the rest of the world combined. In the 19th century, there was even a repo market for railroad securities and other capital assets and this was called the "call money" market. Although the first securitization occurred under the federal government, that securitization occurred because of the capital interests. The capital interests, when they would find themselves short of capital, would use the federal government to supply the capital. In other words, the federal government was used by finance capital as a tool to leverage already existing private capital in order to construct a rail network that was larger than the rest of the world combined by 1860.

Since the removal of the charter for the First BUS and the Second BUS, finance capital has been securitizing debts and issuing capital assets up until 1933 (when the reasons for the Great Depression were horribly misunderstood by various leaders). In the case of railroad securities, much of the capital was subsidized by the federal government because of the capital interests of the United States. Simply put, the Panic of 1873 was very similar to the Panic of 2007-08.

So this brings us to the next question: if the federal government was a tool for the capital interests to run the country, why did the democratic ability to vote come into play in the power structure of the United States? As I've discussed in a previous post, inequality creates a supply-side shift that must be counterbalanced by a demand-side shift which can create instability in a developed economy. What essentially happens is that as inequality goes up, the demand necessary to buy goods produced falls and the only resolution is really to decrease inequality for a developed country. So if you have this problem, at some point it becomes necessary to find some way to transfer resources from the rich to the poor (which can take place in a variety of ways). Democracy allows for a check on the current power structure while allowing for larger institutional flexibility.

In the longer term, it is not in the capital interests to squeeze labor indefinitely because they run out of the ability to be able to produce goods that're consumed. Contrary to the Marx-based view that inequality must be resolved by a collapse of the old system and Revolution of some kind, power structures just adjust and power/prestige is transferred while still maintaining the underlying institutional basis. Basically, the capital interests (particularly finance capital) still runs the show.

In essence, the power of the federal government as we think of them today, the ability to finance its operations by issuing bonds, the ability to have a unified federal currency to keep track of payments, the ability to tax, and the ability to use the financial and economic system for geopolitical purposes really derives its power from the capital interests, particularly finance capital. Suffrage and free elections came into play as a way for institutions to be more flexible and allow the capital interests to maintain power.

The International Role for the United States in the Current Financial Crisis

As promised, this post will be on the international aspects of the financial crisis of the United States. There's been much talk on how this crisis was a domestic crisis caused by bad banks or something of the sort. While there were a lot of issues in the American banking system in this crisis, the cause of the crisis was not the banks and it certainly wasn't "deregulation" or the removal of Glass-Steagall. The cause of the crisis had more to do with international capital flows and how these international capital flows were resolved on the domestic side (which led to domestic imbalances) rather than what the banks actually did.

In this post, I'll start off by splitting this post into four parts:
1. The role of regulation in exacerbating the 2008 financial crisis
2. International Aspects of the 2007-08 American Financial Crisis
3. The Domestic Crisis as a Response to International Capital Flows and the Role of China
4. Restoring Healthy Household Balance Sheets MUST Involve Changing International Imbalances

The Role of Regulation in Exacerbating the 2008 Financial Crisis :
In 2008, the US experienced a financial crisis. Of course leftists, socialists, and statists would immediately claim that the problem is "deregulation" or "financialization". As I've stated, this is completely nonsensical. When a leftist, socialist, or a statist points out how the removal of Glass-Steagall "created" the crisis and that we need to protect commercial banks from the "gambling" of investment banks, they seem to forget that commercial banking is more dangerous than investment banking. Of course, the leftists, socialists and statists never mention that the largest bank failure in American history came from Washington Mutual, which was a savings and loan thrift (a commercial bank with deposits backed by the FDIC) making regular loans in a bad area. They didn't diversify anything and were lending into one of the worst hit areas in the financial crisis. Since Washington Mutual was a commercial bank, the bank had no ability to hedge and got absolutely crushed.
Note: Commercial banking is basically when a bank issues regular loans and takes in deposits.

Also note that leftists, socialists, and statists always leave out the role that Fannie Mae and Freddie Mac had in securitizing mortgages. Around 50% of total mortgage securitization in 2008 went through Fannie Mae and Freddie Mac. The leverage ratios for Fannie Mae and Freddie Mac were also worse than any banks and their bailouts were also larger than any financial institution. Keep in mind these were GOVERNMENT AGENCIES whose sole purpose was to securitize mortgages as a way to increase home ownership for lower-income people and the poor by making them take on debts they couldn't afford. Simply put, it was government regulation that created incentives for turning lower income people into debt slaves. Of course, leftist "logic" tells them that we need more rules to tell people what to do because what we told them to do last time didn't work. As such, it's obviously not logical thinking.

So what actually caused the depression and the downturn in the American economic and financial system? The impact on unemployment and household balance sheets along with the sluggish recovery came from over-indebted households that were sustaining unsustainable consumption levels by borrowing money and using their houses as ATMs. So how did this situation come to be?

The International Aspects of the 2007-08 American Financial Crisis:
As I've discussed before, the role of the US Dollar as the world's reserve currency must take primary importance when discussing the 2007-08 financial crisis. By definition, a country that's the world's reserve currency implies that all international payments are cleared in its currency. Thus, in order for foreign countries' accounts to be resolved, other countries must--on the net--accumulate dollars or dollar backed assets. So this accumulation of USD assets by foreigners necessarily means the United States is running a capital account surplus. Since the capital account balance+current account balance=0, a capital account surplus is necessarily a current account deficit. In other words, the US Dollar as the world's reserve currency forces the US to run persistent current account deficit (see chart below).

As we know Y=C+S=C+I+NX (where C=C_p+C_g, S=S_p+S_g, I=I_p+I_g), so a persistent current account deficit forces a demand leakage that creates a persistent lag and fall off in the total income of the United States. In order to maintain this income at a high level and maintain GDP growth rates until 2008, the US used the capital account surplus to lend money to consumers to consume beyond their means to sustain higher levels of income, sustain higher aggregate demand, and thus reduce unemployment.

The decision between higher unemployment or higher income from 1998-2005 was really in the hands of the Federal Reserve. If the Federal Reserve took up monetary tightening, the current account deficit would've resolved itself as lower income, lower aggregate demand, and higher unemployment. Since the Federal Reserve took up monetary easing, the current account deficit resolved itself as higher income, higher aggregate demand, higher employment, and a massive credit-fueled consumption bubble.

Household debt levels increased at a very rapid rate from ~1999 to 2007 and these debt levels kept increasing until US households effectively hit debt-capacity ratios, which means that debt servicing costs were too high for current income levels to maintain. When this happened, the US consumer could no longer consume what the rest of the world was overproducing which created a domestic adjustment in the United States.

The Domestic Financial Crisis As a Response to International Capital Flows and the Role of China:
Simply put, the domestic financial crisis is nothing more than a response to the shifts in international capital flows and the way in which American policy makers chose to resolve the effects of international capital flows. Due to the US Dollar being the world's reserve currency, the international capital flows of USD and USD-backed assets created domestic imbalances. The domestic imbalances were merely a response to international imbalances created by the role of the USD as the world's reserve currency.

Starting in the late 90's, the Chinese government decided to take an investment and export-based growth model that drove Chinese growth by expanding Chinese exports and turbo-charging their current account surplus. The expansion of the balance sheet in the PBoC (the Chinese central bank) as a means to accumulate USD assets (FX reserves since the US is the world's reserve currency) was an explicit attempt to drive up growth rates via an undervalued currency. Of course, an undervalued Chinese currency helps Chinese exporters and this produced a Chinese current account surplus. Of course, since the USD is the world's reserve currency, the capital account of the US is basically completely uncontrolled while the US is the world's largest economy. In other words, the only country large enough and willing enough to run the corresponding current account deficit to China's current account surplus was the US.
Note #2: The specific direction of the flows do not matter. What matters are the NET flows between the countries.

In other words, the Chinese government decided to hit its GDP growth rates by lending the US money to buy Chinese stuff and to finance our housing bubble. Ironically, this is exactly what the US did from 1914-1929, but that's a different topic for a different day. The 2007-08 crisis represented the moment when this international imbalance could no longer continue as American households hit debt capacity ratios. A correction occurred and the US current account deficit fell ~3% in 2008-09. China still hit GDP growth ratios by switching its model from primarily an export-driven model with moderate levels of investment to a model that was more reliant on fixed-asset investment than probably any other country at any time in world history.

Restoring Healthy Household Balance Sheets MUST Involve Resolving International Imbalances:
In order to have the American financial and economic system return back to its vitality, we must fix the problems of household balance sheets. The American economy and financial system is still highly indebted. If we continue to run current account deficits, the American financial system is still (by definition) being a net debtor, on the margin, to the rest of the world. If we want to really reduce the debt levels of the United States, we must begin by first reversing the current account deficit and turning it into a current account surplus.

In the current worldwide financial situation, we have the rich countries in the world borrowing from the poorer countries, but it's poor countries that're capital poor with domestic infrastructure and investment needs. In other words, the current account balances must shift for the current financial system to adjust. The US is the world's most capital rich country in the world. The solution must necessarily involve the US exporting its capital to developing countries, which would not only provide investors with productive assets that produce a real return, but would also help the poor and middle-classes deleverage.

There are a few ways to resolve this problem in international asset markets. One way would be with a tariff on foreign goods that would impact the capital account balance via a shift on the current account, but this isn't ideal because there's no need for the US to protect American goods from foreign competitors if you're the most wealthy country in the world. A more sensible way to resolve these issues in international asset markets would be by simply tax the accumulation of American asset abroad, which would affect the current account balance of the United States by reducing (and hopefully reversing) the capital account surplus of the US. The most ideal solution would be to simply switch to a Bancor or some other form of an international currency, but this is nothing more than idealism as of right now.

Capital Flows and the Impacts of International Liquidity on Less Developed Countries

I'll start off by saying that this will be my first post on financial crises, how they play out, and the international nature of these things. This post will primarily discuss how capital flows in wealthy countries affect less developed countries. The next post (which will be done by the end of this week, it's already ~60% finished as of this publishing) will discuss the specific crisis that began in 2007 and the middling through we're currently ongoing. Now, I'll begin by bashing leftists, socialists, and statists as usual.

Usually when I hear about economic crises, we usually hear people say that financial crises that were caused by factors like "deregulation" or "financialization". Of course, such ideas usually come from those who subscribe to certain political ideologies (usually leftists, socialists, and statists). Not surprisingly, most of the basis for such arguments is nonsense. Almost all financial crises (I can't think of one that wasn't) are international in nature, not domestic or national. So focusing on the domestic or national nature of these crises tells us very little about the development and occurrence of financial crises. Financial crises occur, and are triggered, by expansions and contractions of liquidity in the world's financial centers in combination with international capital flows.

Basically, financial crises aren't caused by "deregulation" or "financialization". New financial instruments will play a role in a financial crisis, but they're not the cause. The cause of any financial crisis lies in international capital flows across borders. Anyways, I'll begin by splitting this post into three separate parts:
1. Liquidity
2. Wealthy Countries Financial Centers as Drivers of Capital Flows
3. Impacts of Capital Flows on Less Developed Countries (LDCs)
NOTE: I'M DEFINING LDC DIFFERENTLY FROM THE DEFINITION USED BY THE WORLD BANK. I'M USING LDC TO MEAN EMERGING ECONOMY!

1. Liquidity:
First, I'll start off with the concept of liquidity. What is liquidity? This is a difficult term to define, but liquidity is basically the amount of "cash" in the financial system. Does liquidity have to be solely defined as the amount of cash? Of course not. Liquidity can not just be cash, but can also be any sort of instrument that is basically like cash. In my post about the basics of banking, I talk about how money has a hierarchy with the short term money market rate of interest being the price of liquidity. In my post about QE and monetary policy, I spoke about how the point of QE was to create a massive pile of cash looking for somewhere to go. Basically, the purpose of QE was to create a massive increase in liquidity by a central bank coming in to swap less liquid assets for more liquid ones. In my most recent post, I discuss how the use of liquid assets in today's financial system has led to a massive decentralization in money. I basically treat these highly liquid assets as another form of money because they're convertible for cash at any point. Anyways, I'm gonna focus on the concept of liquidity for the rest of this post where I'll use liquidity to represent the "money-ness" of an asset.
However, liquid assets can be virtually any money like asset including Asset-Backed Commercial Paper or short term bills (ex. T-bills). In other words, expansions in liquidity can come in a host of ways for a multitude of reasons.

This brings us to the next question: how does a massive increase in liquidity affect asset markets? When you expand liquidity, by definition, we see an increase liquid assets. This can come about for various reasons, but the most common reason usually stems from central bank balance sheet expansion. So how exactly does this work? Recall from my post on the basics of monetary policy and QE that central banks can buy assets by issuing new deposits (or reserves). When central banks expand their balance sheet, it shows up as an asset swap on the private sector balance sheet. So the end result is that the private sector ends up with a bunch of cash looking to go somewhere as short term money market rates fall (assuming you're not at the ZLB). So the cost of financing short term drops while there's a whole bunch of cash looking to go somewhere for a yield. The end result is often times mistaken to be inflation, but the end result often times is asset market dislocation, asset bubbles, massive increases in debt, and the longer term consequences are often deflationary, not necessarily inflationary (although it does depend on the balance sheets and supply-side structure of the different economies in question).

2. Wealthy Country Financial Centers as Drivers of Capital Flows:
So now that we have a basic understanding of liquidity and what drives liquidity, we can see that the largest expansions of international liquidity can only come from the world's largest and most powerful economies because they're the largest and most powerful. Today, that role is played by the Federal Reserve (and has been played by the Fed since either 1914 or 1919 depending on how you look at it).

From September 2008 to December 2014, the balance sheet of the Federal Reserve has increased from $900 billion to $4.5 trillion (it's held flat since). So the net increase in cash for the private sector from the Federal Reserve has been $3.6 trillion. So during this expansionary phase, we've had a $3.6 trillion increase in cash that's looking for a yield. This pile of cash looking for an interest bearing asset goes into both domestic and foreign assets. Due to the sheer size of the American economy, even the smallest capital flows into foreign assets creates huge distortions. For example, a country like Nigeria (with a population of ~150 million people) has NGDP of ~$500 billion. So even a small shift in capital flows by the Federal Reserve can have a HUGE impact on the finances of the country.

When you get a massive expansion of liquidity in the international financial centers, it means there's plenty of cash available for whomever (usually foreign firms/governments) to issue liabilities to get access to international financing. On the other hand, when the wealth country financial centers start to contract liquidity, the amount of cash available for foreign firms/governments becomes very tight. So what we start to see is that the capital that flew into these countries during the expansion phase tends to fly right out in the liquidity contraction.

Simply put: liquidity expansion in the world's financial centers leads to capital inflows and economic expansion in LDCs while liquidity contraction in the world's financial centers leads to capital outflows and economic contraction in LDCs.

3. Impacts of Capital Flows on LDCs:
During the liquidity expansion in the wealthy countries financial centers, financing is available in large amounts for any LDC that cannot finance investment (or consumption) out of current income. So firms and governments can access financing easily for either investment or consumption. If the investment is productive, the future increase in real income is usually well more than enough to pay back the debt and then some. So if an LDC uses foreign financing well to fund productive investment opportunities, they may experience an economic contraction, but they will not be in horrible shape. They may still have a financial crisis (and usually do), but the impacts of the financial crisis will be limited.

Inversely, if the foreign financing is used to finance unproductive investment or unsustainable consumption, the economic activity creating by the unproductive investment or unsustainable consumption stops immediately as financing as dried up which will trigger a financial crisis. Unlike the case where the foreign financing is used well, this time the financing is used poorly while debts still need to be serviced which will usually lead to either private bankruptcies or an increase in government debt which could, and often does, trigger a government debt crisis in LDCs that have poorly managed incoming capital flows.

Note that if the debt taken on by the LDC is denominated in foreign currencies or via a currency peg, the country will usually run out of FX reserves trying to pay off the foreign debt or maintain the peg and eventually, the country will experience a currency crisis along with a sovereign debt crisis and private bankruptcies. Even if the foreign currency debt of the LDC is used productively, there's still a VERY HIGH chance of large private bankruptcies, a banking crisis, a currency crisis and a sovereign debt crisis simultaneously.
Note: If the total financial system of the LDC holds FX reserves larger than their foreign currency obligations, they'll usually be fine, but that's rarely the case. Even when it is the case, things can still get screwy. The only way for a financial system to protect itself against the risks of having foreign currency debt is to not have debts denominated in a currency you can't control.

The Decentralization of Money and Its Consequences

A decent while ago, I wrote a series of posts on the basics of money and banking that mostly focused on traditional banking and monetary policy. This post, on the other hand, will go further in detail and consists of three sections:
1. Shadow Banking
2. The Decentralization of Money
3. The Consequences of the Decentralization of Money

But before I get into anything else, I'll first speak a little bit more about how our current financial system operates outside of traditional banking. Basically, what I termed as money in my first post about money is the primary form of money for most households. However, the primary form of money as used by the entire financial/economic system is actually much larger than the total amount of bank deposits. Of course, it depends on what you consider money since many very intelligent, knowledgeable people would simply consider this form of money as a "very liquid assets", but I'll be treating these "very liquid assets" as money because (in today's financial system) they are money.

Shadow Banking
Anyways, firms that hold assets like treasury bills/bonds, mortgage backed securities (MBS) or asset-backed commercial paper (ABCP) or other securities that include the securitization of things like credit card loans or student debt or corporate debt or various forms of equity or whatever else can be can used as collateral in a transaction called a "Repurchase Agreement" (repo). So what exactly is a "Repurchase Agreement"? A repo is just an agreement where person A sells an asset today at price P with the agreement to buy it back at some time T (after today) at a certain price Q. The time-adjusted relative price differential is known as the "repo rate" and can be thought of as an interest rate on the repurchase agreement. If the repo seller defaults on their obligation (fail to repurchase), person B can choose to either keep the asset or to liquidate the asset for cash at market price.

Anyways, the important points aren't about the details of repo transactions, but instead about how capital assets can be used as a mechanism to acquire on-demand financing and, for many transactions, capital assets are basically as good as money because they're used as collateral to acquire cash. Now someone could make the claim that they're used primarily to acquire some form of traditional bank credit, but they could just as well be used to acquire some "bank deposits" in a money market fund (MMF).

So for there to be a widely used repo market for capital assets, there must also be a liquid market for capital assets. So in order to have a liquid market for capital assets, we must also have market-makers. These market makers are willing to buy and sell capital assets from anyone at the market price, which means that they generally have some kind of an inventory--and in order to be able to buy or sell capital assets, they must be able to acquire the funds to make the purchase/sale. So these market makers make the market by using their existing inventory as a means to acquire financing via the repo market. In other words, the entire capital asset market functions off the repo market.

Keep in mind that MMFs, hedge funds, investment banks, and all other similar types of firms are outside of the traditional banking system, but these firms are still critical parts of the American financial system. Basically, all of these institutions are effectively "shadow banks". Typical banks fund regular loans by issuing deposits. Shadow banks fund capital market lending via money-market funding.

Decentralization of Money:
As I briefly discussed earlier, shadow banking effectively creates capital assets via the creation of "deposits" in MMFs or some equivalent that can be converted into reserves held at the Federal Reserve or bank deposits, and thus anything else, at 1:1 par on demand. In other words, when you get some firm issuing ABCP to fund productive investment which is then bought by a MMF which issues "deposits" to buy various ABCPs from other firms as well, and then packages these ABCPs into an ABS, which is then sold to some hedge fund, what we end up having is a form of money creation.

For the financial system as a whole, the money created here was by the MMF that issued "deposits" to buy ABCP (or some other asset like a normal loan or whatever), which was then packaged into an ABS and sold to a hedge fund. However, if that hedge fund were to get rid of that ABS to some other firm that wanted an asset which could provide a return, that capital asset (ABS in this case) can be turned into cash at any given point to meet cash flows due to the existence of a repo market. So as we can see, these capital assets function as cash for much of the productive (and some parts of the financial) economy.

Basically, distinguishing between money for different groups or types of firms becomes very difficult. Hell, even talking about what money is becomes difficult and virtually any firm or company in our financial system can basically issue money at will, even though it's not a "traditional" "bank". So what does this do? For a person who isn't very well-versed in finance, it certainly does confound them, but other than that, all it tells us is that the money issuance by the financial system and private sector is far more decentralized than it has been in probably about 100 years (before World War I).

Anyways, when money becomes this decentralized, it becomes difficult to even distinguish what money is or what it gets used for. So what this has produced is a few discontents who feel that this decentralization in the issuance of money has transferred power from "the people". In other words, we've created a new set of discontents because we have a financial system that's become far more decentralized over the past 70 years, and particularly the last 30-40 since the USSR had sustained financial pressure and eventually broke.

Consequences of the Decentralization of Money:
Due to the drastic amount of decentralization in money and banking we've had over the past 30-40 years and technological shifts we've seen in our lives, what we end up with is a system where it's very easy for virtually anyone to get financing to do basically anything. Of course, the costs of the financing aren't free and can vary depending on the person, but that's besides the point.

Not only is it firms in, or related to, the financial sector that have really benefited in their access to financing, but it's also others who now have access to credit ranging from credit cards to online sources of financing (like Lending Club). What this massive decentralization of finance has basically created a massive financial system that operates under such lenient conditions that haven't existed until really the days before the creation of the Federal Reserve.

The most obvious direct consequence is that the federal government has a very small role in the operation of the financial system, which has meant more decentralization across the board for the entire country. Over the past 25 years, the nationalist sentiment in the US stemming from the Cold War has slowly started to dissipate while internal divisions between states are becoming far more prominent than they've been over the past 80 years and probably back to a time before World War I. Note: I'd say we have less government intervention than the financial system than we did during World War I and certainly less than we did during the interwar years, even though taxes have gone up (taxes are a terrible way to measure the centralization of an economic system, and particularly a financial system).

So there's this idea that it was the banks who created this crisis that's being pushed by certain political movements--primarily the left which consists of most Democrats--which isn't correct for reasons I'll discuss in another post (not that there isn't an issue with the banking system, but it's not a lack of government control). Anyways, the political impacts are that we'll end up seeing a divide that's very similar to what basically existed in the 19th century United States where the political divide literally takes the line along the banks with one side being for a greater centralization and control of money/banking and the other side being for less control of money/banking.
Note #2: There's a difference between control over the financial system and breaking down the big banks. Those are two completely different things and completely different issues. I do suspect the cartel formed by the big banks will be broken, but that will come from both sides--albeit from two completely different angles. One side (probably Democrats) will be for "regulation" while the other side (probably Republicans) will push something more akin to "free banking". But in reality, what I've described has already started to happen.

Political Correctness, Free Speech, and Censorship

About a month or so ago, I took apart the fundamental aspects of all leftist thought, whereby leftist is defined as anything rooted in Marx-based thought. I added a specific note wherein I specifically exempted the American left from my critique because if I hadn't, my attack would've had no validity. However, I will not exempt myself from such attacks on various aspects of the American left today (note that this argument still applies to non-American leftists). On the contrary, I will be discussing the importance of free speech, a free press, and how political correctness is not only retarded and erroneous, but how it also compromises censorship.

I'll start off by discussing political correctness. The idea of political correctness is the basic idea that certain things shouldn't be said because those aforementioned things can be perceived to hurt a certain group or people who may fell marginalized or socially disadvantaged in a certain way. Simply put: political correctness is the idea that nothing should be said or written if it makes someone, or some group of people, feel bad in whatever way anyone may deem it so. In other words, political correctness is inherently stupid. Why is political correctness inherently stupid?

There's lots of reasons why, but the first basic reason it's stupid is because if you actually care about how someone, somewhere said something that made you feel bad, you need a reality check. The idea that there should be strong negative consequences, and even bans, because someone disagrees with you and has done no action to harm anyone else while claiming you "feel bad", imagine the kind of actions we're allowing because someone "feels bad".

Another reason why political correctness is retarded is because we don't have free speech to make people "feel good" (or some variation that usually amounts to the same thing). We have free speech because healthy debate is necessary for sound decision making. The basic point of free speech isn't to make people feel good that they can say certain things. One of the most important reasons for free speech is to allow for the dissemination of information. When taking most decisions in anything half-way complex, we don't actually know what will happen or what all of the possibilities are. We have free speech as a way for people to get access to different sources of information from different points of view. It's virtually inevitable that some of those views or sources of information will piss someone off somewhere, even if the point of view or source of information is robust. Do we ban such behavior simply because someone "feels bad" (or some equivalent)? If we do, then we're not only jeopardizing a particular action being taken by a certain individual, but we're interfering with the entire decision making process by preventing necessary debate. Unless you think that someone can be right all the time about everything (only a sucker would think this way), political correctness cannot end well.

Secondly, we have free speech and a free press to prevent certain people from ruling with a firm hand. We have free speech and a free press to place checks on those in authority and on rulers in general. Using the argument that someone may "feel bad" or that someone may be "marginalized" or some other equivalent nonsense allows figures in authority to stomp out anything simply because they don't like it while claiming someone somewhere "feels bad" because someone said or wrote something they didn't like. In other words, political correctness distorts incentive structures.

Thirdly, political correctness relies on the basic ideas that a certain opinion or view that marginalizes a certain person or group of people leads to a certain action so that opinion or view must be ruthlessly crushed. In other words, it's just another way of saying that opinions of a certain kind lead to a certain action so anything that comes close to showing that opinion must be crushed because of various actions that result.

In other words, political correctness presupposes that:
1. We know what's correct beforehand and we know what the correct decisions are before we make them
2. Opinions are never changing
3. Opinions lead to actions
4. Thus, preventing certain actions means preventing certain opinions from being voiced

Of course, opinions are changing and one of the key aspects of free speech is that dissenting opinions or views must necessarily be tolerated because we don't know what's gonna happen or what's actually correct. Similarly, a free press and free speech is necessary for a sound decision-making process. Anyone who always thinks we have 100% accurate information all the time and that opinions are always constant is necessarily an idiot.

We actually know very little and our information or our process for converting information into knowledge is always muddled. In other words, our opinions must necessarily be constantly changing for them to be correct at some point because of our lack of knowledge. Unless we want to limit our knowledge, political correctness isn't a good option.

Also, opinions don't usually lead to certain actions because our opinions themselves are changing. We don't take actions based on opinions if we think our opinions could be wrong. However, there are many cases where people do one thing while saying the exact opposite or having a different "opinion". In other words, not only does hypocrisy exist among human beings, but the idea of opinions leading to actions is inherently wrong. PEOPLE SHOULD BE JUDGED ON ACTIONS!!!

POLITICAL CORRECTNESS IS CENSORSHIP!!!!!!