13: Finance is an Extractive Industry

This is Chapter Thirteen of my book, How to Dismantle an Empire, from Section Four: Attack of the Petrodactyls. There’s one more chapter in this section, going deep into the nitty-gritty of economics.

This one is especially important because it shows how the mortgage is the key to it all. Inflation is created by manipulating the interest rate, and is essential for the extraction scheme. Without inflation built-in, we wouldn’t be snared into gambling with our savings to keep up. We would pay off our houses, which would cost less with a stable high rate. I show paradoxically how that works.

I distinguish between money and wealth, which is the natural, physical and human capital. I suggest that, like the Godfather, we leave the money and take the assets. The money will just shoot us in the foot.

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At the core ... there is a simple relationship
between the structure of a society and its 
measure of justice. Stated succinctly, it is 
the distribution of economic and financial 
power that determines how just a society is. 
The more concentrated this power, 
the less just a society. ... an unregulated 
(so-called ‘free’) market leads irrevocably 
to the concentration of economic power.

... it is the economic structure of today’s 
global world that generates the greatest 
obstacle to moulding a more just world 
society. Political power is subservient to 
economic power, simply because economic 
and financial power give political power to 
those who have it, and, inversely, those 
without economic power are bereft of the 
means to wield political power. 

Of course, economics aside, unjust 
political systems cause great suffering, 
but the political regime of a land is visible 
and can, in principle, be fought against. 
Not so the economic system, the workings 
of which are largely invisible.

PHILIP B. SMITH & MANFRED MAX-NEEF
Economics Unmasked, 2011

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finance is an extractive industry

In Economics Unmasked, Philip B. Smith and Manfred Max-Neef look at the concentration of economic power as the litmus test for injustice in a society:

... the market transfers more wealth and power to those who already have much of both, while depriving those without either of the possibility of defending themselves against exploitation and its concomitant injustice. Colonization ... was indeed initially promoted by political and military means. But it was fundamentally an economic arrangement, in which the poorer countries delivered cheap labour, raw materials and agricultural products, while serving as a market for finished products ... [today, however,] practically no military might is needed, but only largely invisible economic power, to continue unabated this centuries-old process of plunder. This explains why globalization is so popular, domestically and internationally, among those individuals and nations with the most wealth and power.

Smith and Max-Neef use the terms wealth and power rather than money. Common Dreams journalist Paul Buchheit illustrates the difference:

According to the authors of the Global Wealth Report, the world's wealth has doubled in ten years, from $113 trillion to $223 trillion [in 2012], and is expected to reach $330 trillion by 2017. The UN definition of wealth includes (1) natural capital: land, forests, fossil fuels, and minerals; (2) physical capital: buildings and infrastructure; and (3) human capital: the population's education and skills. We need to add a 4th category: the magical creation of wealth by the financial industry.

As Buchheit makes clear, the financial industry isn’t actually creating wealth at all by the UN’s definition. The amount of natural capital is not increasing—on the contrary, forests, fossil fuels and minerals are being depleted at a rapid pace. In Eduardo Galeano’s The Open Veins of Latin America, he sees natural capital as blood drained from the living continent to feed the voracious appetite for power elsewhere:

Latin America is the region of open veins. Everything, from the discovery until our times, has always been transmuted into European—or later United States—capital, and as such has accumulated in distant centers of power. Everything: the soil, its fruits and its mineral-rich depths, the people and their capacity to work and to consume, natural resources and human resources.

If natural capital is not increasing with the purported doubling of wealth, what about physical capital? Infrastructure, even in developed countries, is falling apart faster than it’s being repaired. Tools, machinery and factories have moved where labor is cheapest. And human capital has certainly not experienced a doubling in education and skills over the course of each decade based on the investment that's been made in it. The only thing that's increased is Buchheit’s fourth category: the magical creation of wealth by the financial industry—which isn't wealth by the UN's definition, only money.

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the magical creation of money

Is there a relationship between the issuing of money and the economic power that usurps the natural, physical, and human capital of whole countries? Who has been given the magical ability to create money and how does that relate to ownership of the real wealth?

In the first sections we saw that money is not a unit of trade because goods and resources flow in one direction, from “poorer” or “undeveloped” nations to the so-called “rich” and “developed.” Likewise it’s not a measured of stored labor-value because the countries who export the products of their labor are still in debt, not amassing a surplus for a rainy (or dry) decade.

So what is money really? As stated before, money is a means of organizing labor in the interests of whoever issues it. Money is a credit that, in order for it to have any value, must be backed by actual wealth as the UN describes it—natural, physical or human capital—not mere financial instruments. Money gives the issuer of the credit de facto ownership of said capital. Money under capitalism is an economic system for concentrating ownership of capital.

Communism and socialism, however, as they've been actualized, aren't the opposite of capitalism because they also don't distribute the wealth. Like capitalism, they concentrate ownership within a centralized government, but use political power rather than economic. They distribute the results of production, not the means or responsibility, sometimes according to political favors along party lines.

The opposite of both capitalism and communism is sovereignty within a federal system. The money issued by the colony of Pennsylvania in Benjamin Franklin’s time was backed by the natural capital of land. The mortgagee repaid the credit by providing goods and services to the community. The government issued additional money to pay for government services, such as subsidized postal service, roads, schools and libraries. They collected the money back in mortgages and taxes, giving them the perpetual ability to organize labor for the community’s benefit. It was a complete circle with no need for inflation.

But today neither the state nor the “federal”/ centralized government has the power to issue money. Dollars are issued by the Federal Reserve, a federation of bank owners. Coins alone can be government-generated, and then only at a national level. The wealthy individuals who own the banks control the natural, physical and human capital of the United States and organize labor in their interests.

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truthish lies and legal fictions

The vast majority of the credit traded as money (97% of dollars) is issued by commercial banks as mortgages. When a person applies for a mortgage, their future labor is the wealth they pledge for the loan. The bank can issue ten times their “capital” in loans, but the capital is mere bank credit that gives the bank owners control over ten times the amount in real estate without ever touching their own investment.

The bank credit issued as the mortgage doesn’t come from the bank owners’ own money, which remains safe as the capital and not at risk. Neither does it come from depositor accounts, as was portrayed in It’s a Wonderful Life. If it did, there would be higher interest paid on long-term deposits and pension accounts in order to attract stable funds.

In the early days of the mortgage, foreclosures were successfully challenged in court because it could be shown that the bank had contributed nothing to the contract in order to make it valid. Later judges agreed with the argument in principle but reversed the verdict because they said it would call the whole basis of the economy into question.

As said before, banks create money through double-entry book-keeping, entering a loan as a credit and a debit simultaneously on both sides of a bank’s ledger so that their books balance. The credit is an IOU—the mortgagee’s promise to pay with their future labor against a debit deposited into the seller's bank. To balance their books, the lending bank then borrows from the recipient bank at the interbank lending rate, set by the Fed funds rate, which has been hovering between zero and .25% since 2001. Through this legal fiction of a 30-year mortgage, the banks control a stored value of sixty years labor, split between two people.

In George Carlin’s words, "They own you."

[This article by Richard Werner describes how banks create money and why other firms can’t do the same. Thanks to LoWa for the recommendation!]

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barometric pressure and the money bubble

Let's take a closer look at what it means that the mortgage creates only the principal and not the interest. Where does the rest of the money come from? By lowering the interest rate, the banks churn out enough credit in new mortgages and refinancing to keep the game going. Using one of the many amortization tables available on the web, this table illustrates what happens when the interest rate goes down for a household that can afford exactly $1000 a month in mortgage payments, including interest:

Monthly Payment    Interest         Principal 
$1000                         10%               $115,000
$1000                           9%               $125,000
$1000                           8%               $137,000
$1000                           7%               $150,000
$1000                           6%               $165,000
$1000                           5%               $185,000
$1000                           4%               $210,000
$1000                           3%               $240,000
$1000                           2%               $270,000
$1000                           1%               $310,000

Each time that money is borrowed at a lower rate, it creates more funds. The line curves exponentially, so that from 10% to 9% creates $10,000 but from 2% to 1% creates $40,000. As it drops from 10% to 1% the hypothetical value of the same house has nearly tripled, as has the very real debt of the new owner. Although their monthly payment is the same, they’re at three times the risk of foreclosure and would require three times as much to pay off their mortgage early.

As new bank credits enter the economy—disbursed to the seller of the house or to the borrower for a refinance or equity loan—the recipients use it to pay other people, putting it into circulation. If an extra $12,000 is distributed among 10 people over a year, it would raise the monthly mortgage for which each can qualify to $1100, enabling them to borrow an additional $12,000, continuing to spur the debt spiral up.

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letting off steam

However, rather than circulating, within one or two exchanges the money is extracted from the economy as interest payments. Banks retain the interest payments as profits and disburse them to shareholders and executives as bonuses. They become foreign investments and hedge funds rather than becoming income for ordinary people.

With only the principal created by the banks as money and the interest payments removed from the economy, there's not enough money left in circulation to pay off the mortgages. A debt-generated money system issued by private banks must keep expanding the money supply in order to issue their own payments. Inflation, which is really the dilution of money in relationship to the real assets, is inevitable in its design.

Inflation is presented as prices "growing" of their own volition, but it’s really an increase in the amount of money in proportion to the goods and services that back the money. Your house is not worth more, your money is worth less. Every time that the banks issue more debt-money, it’s like adding hot water to an increasingly weak tea: they pour debt into the economy, and out pours ownership of the houses. They pour in more hot water, and out pours control of jobs and livelihoods. They pour in the hottest water of all, and out tumble young people, up to their necks in student debt with no way to get a fingerhold on the steep sides of the cup.

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a federation of bankers

The Federal Reserve is the lender of last resort. In setting the Fed funds rate, the banks function more or less democratically, sharing a common purpose. A bank’s commercial lending rate is typically a three-point spread over the interbank borrowing rate. It’s favorable for them that the lending rate fluctuates so that borrowers will refinance when it goes lower, and the banks can profit from the difference between fixed and adjustable rate mortgages (ARMs).

The base rate history of the Bank of North Dakota shows that interest was 14% in 1980 and went up to a high of 19% in the middle of 1981. For the months in between it careened wildly, up to 18%, down to 10% and back again. But since 1981 it’s wobbled steadily downward until, in 2001, it reached a low of 3.25% where it’s stayed ever since [until now]. With the Fed funds rate at less than .25%, the variable lending rate was at its rock-bottom level. This put a ceiling on how much new money could be put in circulation by dropping the interest rate.

Starting in 1992 through 2002, Federal Reserve Chairman Alan Greenspan expanded the money supply directly by over 12% a year, doubling it in less than a decade. After 9-11 it reached 15% a year. When Ben Bernanke took over, during a period of 18 months up to 2010, he began his own massive expansion from $850 billion to $2.1 trillion. And these are the central bank dollars that create the monetary “capital” that banks can expand with mortgages at 1:10.

However new mortgage borrowers have been harder to come by once the interbank interest rate hit zero and couldn’t be set lower. To incentivize new buyers the Federal Housing Association (FHA) started insuring mortgages with as little as a 3.5% downpayment. Banks could then issue chancier mortgages at no risk to themselves because they were protected if the home foreclosed lower than its remaining debt. A home buyer with only $10,000 down could qualify for a $350,000 home rather than the $50,000 home they could have bought during the old days of 20% downpayments. By 2012 FHA insurance was bankrupt, partially due to sellers who had additionally financed the closing costs in order to lure in marginal buyers.

In 2008 the federal government extended first-time homebuyer tax credits of 10% of the purchase price up to $8000. Once again this market manipulation funded the banks, rather than homebuyers, by preventing the market from adjusting to the available pool of money. In fact the tax-deductibility of mortgage interest itself was a gift to the banks. In a free market, home prices would fall to the level that homebuyers could afford after they paid their taxes to the government. But once prices have been driven up, a "tax reform" eliminating the mortgage interest deduction would force homeowners out of houses on which they can't make payments without that deduction.

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bubble magic

Home ownership is promoted as an investment, rather than a purchase, because the price inflates over time. Homeowners don’t question why a house that’s several decades older should cost more, even though other possessions lose value with age and use. Is a house worth more after thirty years? Unless renovations have been done, the house has wear and tear, old plumbing, a deteriorated roof, outdated electricity, and peeling paint. The mortgage has been calculated at the maximum, with little left for maintenance. Clearly, it's not the house that has gained in value; the money itself has lost value.

What happened during those decades that the interest rate was dropping and the money supply was expanding? From 1992-2000 was a stock market boom, particularly in high tech. With interest on deposits negligible, savings were withdrawn and banks admonished homeowners to “put their equity to work” by refinancing and investing in the stock market. In a self-fulfilling prophecy, the influx of speculative money pushed real estate prices up, making it less accessible for those wanting its use-value as a place to live and put down roots.

The stock market and real estate are both hypothetical wealth valued at the price that someone else paid for other shares of the same stock or for a similar house. When a stock sells, the buyer transfers money to the seller. No money is actually invested in the company; it’s more like a stake in a Ponzi scheme where its worth depends on a buyer who believes they can sell it again for more. Sooner or later someone is left holding the bag.

When a stock is first sold, it mobilizes funds for productive investment or rewards the employees and initial investors. But the secondary market, where well over 95% of purchases take place, merely shuffles ownership. John Maynard Keynes said that, as a result of this detachment:

I am irresponsible towards what I own, and those who operate what I own are irresponsible towards me ... Experience is accumulating that remoteness between ownership and operation is an evil in the relations among men ...

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from equity to inequity

Moreover, stock shares are owned by a fraction of the population. The wealthiest 1% owns over half of all investment assets. The wealthiest 10% owns 81% of all stock while over half of the population owns no stock at all. The stock market rises only because new money is coming in from many people, often in the form of pensions and 401K funds, and being transferred to fewer people at the top. It’s a transfer of money to the rich.

From February 2000 to October 2002, however, the NASDAQ fell by 78%, resulting in the disappearance of $8 trillion of hypothetical wealth from the buyers, who were not likely to be the 1%. Those who still had money to invest bought books like Rich Dad, Poor Dad and got into the rental market. Meanwhile homeowners who had lost their savings and possibly their jobs borrowed against their home equity or refinanced. In this way their theoretical home value became actual money circulating in the economy. Both of these factors caused home prices to rise, which increased equity, which enabled more debt, which put more money in circulation.

By 2007 the mortgage debt had reached its limits of expansion, with not enough money in circulation to make the payments. The housing bubble burst, followed by foreclosures and deflated sale prices. Layoffs began in earnest and employers shed 8.4M jobs in two years.

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the lost generation

If money multiplies without an increase in the actual wealth that backs it, what happens to the families who have to depend on money for their security? Imagine a young couple who managed to buy a house just out of college in 1982. As homeowners who had physical capital, they were elated when their house went up in value the first two decades. They could borrow against the gain and take money out, especially when the interest rate went down—free money! Who cares what caused it?

But at the same time as their home value increased, so did their healthcare costs. With two kids to support while working two jobs, daycare and private schools took a bite out of their windfall. And just when their kids were ready for college in 2012 they found that tuition had gone up by 550% in the 30 years since they had graduated. Their wages, on the other hand, had stayed stagnant or declined during what economists termed “the lost decade.”

To help put their kids through college, they sell their home but discover that prices have dropped to the same level as 2002. This reduces their gain to little more than their original downpayment had been. Between rising rents and the kids’ college dorms, they’re now paying more for housing than they had for the mortgage, with nothing to show for it.

The money they had borrowed against their equity wasn’t used for frivolous purchases, but for upkeep on the house and for services they could have afforded on their salaries if prices had stayed the same as 1982. Meanwhile the “stored labor” they saved for retirement has lost value every decade in terms of the labor it will buy when they retire. They'll be lucky if they don't outlive their money.

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leave the money, take the assets

To recap, money is not wealth. Wealth, according to the UN, is natural, physical, or human capital. Through the creation of credit issued as debt, aka money, banks lay claim to the physical capital of the community in the form of the houses. The credits (the debt-issued money) then become backed by human capital, in the form of labor to increase corporate profits or provide goods and services to those who do. The government empowers the banks by accepting these credits, and only these credits, as taxes.

After bank credits have been enriched in their trade value through the human capital expended to earn them, they return to the bank in mortgage payments. The police back the credits with violence by enforcing foreclosures over mortgages or property taxes. Once bank credits have passed through the economy, it becomes impossible to separate earned income from speculative gains.

Debt monetized through housing and labor is key to a system for taking assets without any value rendered. Once the physical assets have been usurped, labor turns the magical substance created by banks into a trade value, which is then received back in their corporate hand. The interest becomes the profit of the bank owners. The resulting concentration of economic power, which is Max-Neef’s hallmark of an unjust system, lays claim to natural capital in the form of agribusiness, water rights, mining concessions, and oil extraction, which the military enforces abroad. In this sense, we’re all working for the bankers.

As Wendell Berry writes in Jayber Crow,

I watch and I wonder and I think. I think of the old slavery, and of the way The Economy has now improved upon it. The new slavery has improved upon the old by giving the new slaves the illusion that they are free. The Economy does not take people's freedom by force, which would be against its principles, for it is very humane. It buys their freedom, pays for it, and then persuades its money back again with shoddy goods and the promise of freedom.

We can’t fix the economy because it’s not broken. It’s serving the purpose for which it was designed—so well, in fact, that it’s become glutted with a surfeit of over-accumulation. The dollar itself may be the next bubble to burst. Any reforms or redistribution of the money will postpone the crisis and validate the bank credit with our blessing.

Perhaps we should take a page from the immortal words of The Godfather when Al Pacino said, “Leave the gun, take the cannoli.” In our case, leave the money, take the assets. If we take back our assets so they can no longer be bought with bank credit, the dollars will return to the dust and vapor from whence they came. Then our economies can return to their real purpose: to protect, preserve, and proliferate the natural, physical, and human capital of communities.

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CHAPTER 13 EXERCISES

Using examples from the book, or from your own research, logic, and experience, comment on the following and what it means today:

Paradigm Shift #13A

Political power is subservient to economic power.
Political power is overt; economic power is invisible.

Paradigm Shift #13B

Money is not wealth and wealth is not money.
Wealth is ownership of the capital: natural, physical, and human.

Money is a means of organizing labor in the interests of whoever creates it.
It can be used to extract the wealth from the community or to enhance and protect the wealth for the community.

Capitalism is a system for extracting labor by assuming bank ownership of the wealth.

Sovereignty is a system to give communities power over their own labor by passing the wealth from one generation to the next with the responsibility to enhance and protect the natural, physical, and human capital, and enable individual choice whenever possible.

Paradigm Shift #13C

Banks create the money, not governments, and extract the interest while the principal cancels itself out, leaving not enough to repay the loan. Therefore housing inflation is required in order to keep extraction going.

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LEXICON

Explain how the following definitions change the dialogue around social problems. What are examples to which the term might apply? Is this concept used in discussion of the examples to which it applies? If not, how does this affect the potential solutions?

wealth: according to the United Nations, the natural, physical, and human capital: land and resources; buildings and infrastructure; education, skills and creativity of the people.

free market: the unfettered ownership of wealth (natural, physical, and human capital) by money, without regulations, laws, or taxes.

capitalism: an economic system a system for extracting labor by assuming bank ownership of the wealth.

sovereignty: the right of self-determination at the lowest possible level, without taking the same away from anyone else; enabled by economic and political systems in which communities own their natural, physical and human capital.

double-entry bookkeeping: the means by which loans generate their own funding by entering the debit and credit on either side of the ledger so they balance.

Bank of North Dakota (BND): the only state-owned bank in the United States, established by farmers in 1919, soon after the Federal Reserve was slipped through Congress.

stock market: a clearinghouse to trade shares of hypothetical corporate ownership which, in a practical sense, transfers middle-class savings and retirement funds to venture capitalists and corporate board members in exchange for gambling chips.

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QUESTIONS FOR REFLECTION AND DISCUSSION

Could a monetary system be designed to not require inflation? What would change if money didn't lose value over time? Would there be a need for speculative investments? If long-term savings didn't need to keep pace with inflation, could retirement be funded without the need to sell the family home?

Discuss why a low interest rate is not good for homebuyers. How does it affect home-owners? Home-sellers? Does the deductibility of mortgage interest make it "foolish" to pay off a mortgage, as is often thought? Why would the Federal government insure low-downpayment loans, rather than let the market adjust to the available buyers?

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People are inherently good and, when they behave badly, systems and stories are to blame. But which came first? A reader called Winston Smith cites Richard Vobes on 'You are the king!' who refutes taxation. I look at taxation as chump change compared to the mortgage, that makes us servants to the rich. The story of good vs. evil, heirs vs. slaves, is the foundation for the system that backs our money.

I explain the five rules of parasitic rulers: 1) first the words, then the world 2) make a god in your image 3) coin the realm to own it 4) create chaos; divide to conquer and 5) impose solutions to problems you cause. I give examples in each, including David Webb's video The Great Taking, articles by Pepe Escobar and Ron Unz, and Christian Zionists.