Jeff Harding writes: Fed Chairman Ben Bernanke gave a startling commencement address for
the Boston College School of Law Class of 2009 this week. He admitted
an apparent turnabout of his fundamental views of economics. No news
media picked up the significance of what he was saying.

After the introductory and self-humbling remarks usually made by great men at these events, he made the following revelatory comment:

Instead, I’d like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality.  As an economist and policymaker, I have plenty of experience in trying to foretell the future,
because policy decisions inevitably involve projections of how
alternative policy choices will influence the future course of the
economy. 

The Federal Reserve, therefore, devotes substantial resources to
economic forecasting.  Likewise, individual investors and businesses
have strong financial incentives to try to anticipate how the economy
will evolve.  With so much at stake, you will not be surprised to know
that, over the years, many very smart people have applied
the most sophisticated statistical and modeling tools available to try
to better divine the economic future.  But the results, unfortunately, have more often than not been underwhelming. 

Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect.  In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up
of molecules whose behavior is subject to the laws of physics, but
rather of human beings who are themselves thinking about the future and
whose behavior may be influenced by the forecasts that they or others
make.  To be sure, historical relationships and
regularities can help economists, as well as weather forecasters, gain
some insight into the future, but these must be used with considerable caution and healthy skepticism.

[Emphasis added]

Let me translate this for you on two levels. On one level he is
talking about his personal belief in the failure of economic
prediction, and at another level, is the realization by him of the
failure of the science of econometrics. No small thing. (05/26/09)
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Ellen Brown writes: As reported in the May 22, 2009 issue of TIME Magazine, Governor Arnold Schwarzenegger recently stated: “I understand that these cuts are very painful and they affect real
lives. This is the harsh reality and the reality that we face.
Sacramento is not Washington — we cannot print our own money. We can only spend what we have.”

Christmas comes early, Governor. You can print your own money. Fiscally solvent North Dakota is doing it…and so can California. Now!

In a May 22 article in Time titled “Billions in the Red:
Fiscal Reckoning in CA,” Juliet Williams reports that since California
voters have now vetoed higher taxes and further state government
borrowing, Gov. Arnold Schwarzenegger has indicated that he intends to
close the budget gap almost entirely through drastic spending cuts. The
cutbacks could include laying off thousands of state workers and
teachers, ending the state’s main welfare program for the poor,
eliminating health coverage for about 1.5 million poor children,
halting cash grants for about 77,000 college students, slashing money
for state parks, and releasing thousands of prisoners before their
sentences are finished. Schwarzenegger bemoaned the fact that the state
could not print its own money but said it could only spend what it had
But the state can create its own money. After all, banks do this
every day. Certified, card-carrying bankers are allowed to do something
nobody else can do: they can create “credit” with accounting entries on
their books. …

Money in a government-owned bank could give us the best of
both worlds. We could have all the credit-generating advantages of
private banks, without the baggage cluttering up the books of the Wall
Street giants, including bad derivatives bets, unmarketable
collateralized debt obligations, mark to market accounting issues,
oversized CEO salaries and bonuses, and shareholders expecting a
sizeable cut of the profits. A state could deposit its vast revenues in
its own state-owned bank and proceed to fan them into eight to 10 times
their face value in loans. Not only would it have its own credit
machine, but it would control the loan terms. The state could lend at
Ω% interest to itself and to municipal governments, rolling the loans
over as needed until the revenues had been generated to pay them off.
According to Professor Margrit Kennedy in her 1995 book Interest and Inflation-free Money,
interest composes, on average, fully half the cost of every public
project. Cutting costs by 50% could make currently-unsustainable
projects such as low-cost housing, alternative energy development, and
infrastructure construction not only sustainable but actually
profitable for the government.

If all this seems too radical and unprecedented to venture into,
consider that one state has had its own bank for 90 years; and it has
not only escaped the credit crunch but is doing remarkably well.

Only three of 50 states are now solvent, meaning they have the revenues to meet their state budgets; and one of them is North Dakota.
It is an unlikely candidate for the distinction. It is a sparsely
populated state of fewer than 700,000 people, largely located in
isolated farming communities afflicted with cold weather. Yet since
2000, the state’s GNP has grown 56%, personal income has grown 43%, and
wages have grown 34%. The state not only has no funding issues, but
this year it actually has a budget surplus of $1.2 billion, the largest
it has ever had.

North Dakota boasts the only state-owned bank in the nation.
The Bank of North Dakota (BND) was established by the state legislature
in 1919 specifically to free farmers and small businessmen from the
clutches of out-of-state bankers and railroad men. The bank’s stated
mission is to deliver sound financial services that promote
agriculture, commerce and industry in North Dakota. (05/26/09)
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James Howard Kunstler writing on May 25, 2009: Something like a week remains before General Motors is reduced
to lunch meat on industrial-capital’s All-You-Can-Eat buffet spread.
The wish is that its deconstructed pieces will re-organize into a
“lean, mean machine” for producing “cars that Americans want to buy,”and that, by extension, the American Dream of a Happy Motoring economy
may be extended a while longer.

This fantasy rests on some
assumptions that just don’t “pencil out.” One is that the broad
American car-owning public can continue to buy their cars the usual
way, on credit. The biggest emerging new class in America is the
“former middle class.” Credit kept the remnants of the middle class
going for decades after their incomes stopped growing in the 1970s.
Now, their incomes have stopped coming in altogether and they are
sinking into swamp of entropy already occupied by the
tattoo-for-lunch-bunch. Of course, this has plenty of dire
sociopolitical implications.

Unfortunately, the big American
banks did their biggest volume business in their biggest loans at the
very time that that the middle class was on its way to becoming former.
Now that the former middle class is arriving at its destination, the
banks are so damaged by bad paper that they won’t make loans to even
the remnant of the remnant of the middle class. In other words, the
entire model for financing Happy Motoring is now out-of-order, probably
permanently. …

The implications of all this in the sociopolitical and
geopolitical realms are pretty daunting. As long as we maintain Happy
Motoring as the normal mode of existence in this country, we are going
to see an ever-growing class of very resentful citizens pissed off at
being foreclosed from it. In my oft-repeated scheme-of-things, this
leads very quickly to the trap of political extremism, perhaps even
corn-pone Naziism, as the system becomes increasingly difficult to prop
up except by force. In geopolitical terms it leads to ever more
dangerous international contests over the world’s remaining oil
reserves.

All this leads to two conclusions.

One is
to accept the fact that the Happy Motoring era is over and to devote
our remaining resources to re-localization, walkable communities, and
public transit. It obviously requires a very drastic revision of our
current collective self-image, of what we aspire to and who we are. If
the car companies have any future at all, it should be based on making
the rolling stock for public transit — and for now the most
intelligent choice for us is to fix the existing passenger railroad
lines instead of venturing into grandiose new transit systems requiring
stupendous capital outlays. Let the car era wind down gracefully.
Triage and prioritize the highway maintenance agenda — we won’t be
affluent enough to keep repaving the whole existing system — and let
other nations meet the diminishing demand for cars in the USA. This
would be a “best case” scenario. (Other nations may decide to go
further up the Happy Motoring road at their own eventual peril.)

My
second conclusion is not so appetizing, namely that the bankruptcy of
General Motors may set in motion a chain of events that will accelerate
the destructive unwind of the bad credit economy, the damage to our
bond values, the loss of faith in our currency, and the authority and
legitimacy of our leaders. This last dire outcome might be allayed if,
say, President Obama directed his policy efforts to the items in the
paragraph above, that is, a reality-based agenda for true change in how
we live — but who can feel confident about that happening these days?
Maybe it will take a horrifying chain of events to get Mr. Obama there.
And then, tragically, he may be overwhelmed by the chain of events
itself. I hope not. (05/26/09)
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