The fiscal cliff -- kleptocratic Shock Doctrine in action

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    Senate passes bill to avert 'fiscal cliff'

    Tuesday, January 01, 2013

    By the Associated Press

    WASHINGTON (AP) -- The Senate has passed legislation to block the impact of across-the-board tax increases and spending cuts that make up the fiscal cliff.

    The vote was an overwhelming 89-8 and came well after midnight on New Year's Day [Tuesday, 1-1-13. Yes, we did go over the fiscal cliff. So Republicans can claim that they did not vote for a tax increase: they only voted to cut taxes for people making less than $400,000 per year]

    The White House-backed legislation would prevent middle-class taxes from rising, and raise rates on incomes over $400,000 for individuals and $450,000 for couples.

    It also blocks spending cuts for two months, extends unemployment benefits for the long-term jobless, prevents a 27 percent cut in fees for doctors who treat Medicare patients and prevents a spike in milk prices.


    Here are some key points of the deal:

  • Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts will be taxed at a rate of 39.6 percent, up from the current 35 percent. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.

  • Estate tax: Estates will be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates ...

  • Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families will increase from 15 percent to 20 percent.

  • Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000 ...

  • Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.

  • Cuts in Medicare reimbursements to doctors: Blocks a 27 percent cut in Medicare payments to doctors for one year ...

  • Social Security payroll tax [goes up]: Allows a 2 percentage point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2 percent.


    Marcia Fudge says fiscal-cliff deal cuts payments for illnesses that disproportionately impact minorities:

    PolitiFact Ohio

    By Stephen Koff, Plain Dealer Washington Bureau Chief

    January 04, 2013

    Neither side got everything it wanted, noted U.S. Rep. Marcia Fudge, a Warrensville Heights Democrat who voted for the deal.

    One compromise in particular still leaves Fudge uneasy: the funding measures used to keep Medicare from cutting its pay to physicians by 26.5 percent. To avert the physician pay cuts, Congress diverted money from several other medical programs, Fudge said in a Jan. 1 [2013] news release.

    This took care of the so-called Medicare doc fix -- but it also happened to take money from programs that pay for "treating illnesses disproportionately impacting minorities, including end stage renal disease and diabetes," Fudge said ...

    Did Congress really get the money to keep paying doctors for treating seniors (via Medicare), by cutting what it pays hospitals and others for treating diabetes and other diseases?

    PolitiFact Ohio took a look.

    If this sounds like Congress took from Peter to pay Paul, the president and CEO of the Federation of American Hospitals, Chip Kahn, might agree. He put it [this] way to Kaiser Health News: "It is not in the best interest of patients or those who care for them to rob hospital Peter to pay for fiscal cliff Paul."

    Fudge, too, does not like this change. Her district not only includes every major hospital system in Cuyahoga County, as her communications director, Belinda Prinz, told us, but also has a significant black population.

    African-Americans have a disproportionately high incidence of diabetes and are 1.8 times more likely to have diabetes than non-Hispanic whites, according to the American Diabetes Association.

    One in four African-American women over age 55 has diabetes, Prinz said in an email, citing this and other American Diabetes Association figures. Complications can cause blindness, kidney disease, heart attacks and strokes, and amputations sometimes result -- with African-Americans 2.7 times as likely to have lower-limb amputations, the association says ...

    The impact is unsettled for now. The GAO and inspector general have [complained about] some of these programs for waste or unnecessary spending. Yet Fudge is in good company -- namely, the American medical community, although like any constituency, it too has its interests to protect.

    Because her claim requires this additional information to fully understand, we rate it Mostly True.


    Rep. Jim Renacci [and] 6 other Ohio Republicans opposed 'fiscal cliff' deal

    By Sabrina Eaton, Plain Dealer Washington Reporter

    January 02, 2013

    WASHINGTON -- A compromise that the House of Representatives adopted late Tuesday [1-1-13] to keep the nation from plunging off a "fiscal cliff" passed over opposition from seven Ohio Republicans ...

    The measure passed the House of Representatives 257-167, ... It was backed by 172 Democrats and 85 Republicans ...

    [Bob] Gibbs said he opposed the deal because it would increase spending by $330 billion while adding almost $4 trillion to the [debt] ...

    Ohio GOP Sen. Rob Portman, a Cincinnati-area Republican, released a statement that said the agreement would stop huge tax increases from being imposed on the "overwhelming majority of Ohio's families and job creators," ...

    Democratic Sen. Sherrod Brown of Avon said the deal would prevent "dangerous cuts" to Social Security and would reduce the deficit "by asking millionaires and billionaires to pay their fair share." ...


    In fiscal cliff fit, House skips out on Sandy aid bill

    By Jane C. Timm, @janestreet on 01/02/2013

    Rep. Peter King, R-N.Y., ... joined by other New York area-lawmakers, express their anger and disappointment after learning the House Republican leadership would not hold a vote on a super-storm Sandy aid bill ...


    While cutting funding for kidney disease and diabetes, the deal was loaded with pork for the kleptocrats:

    Fiscal Cliff Deal Sneaked In Wall Street Gifts,

    Posted: 01/02/2013

    The 11th-hour deal to avert the so-called fiscal cliff preserved billions of dollars in corporate tax giveaways even as it slashed take-home pay for millions of American workers ...

    The financial services industry, ... is one of the primary beneficiaries of special-interest tax breaks. The active-financing exception, for example, permits banks like Morgan Stanley to avoid the 35 percent U.S. corporate tax rate on interest income from money lent overseas.

    A handful of other U.S.-based multinational companies with financing arms, such as Ford Motor Co. and General Electric, also use that exemption to lower their tax bills. The two-year cost to taxpayers is an estimated $11.2 billion, according to the congressional Joint Committee on Taxation ...

    The exemption belongs to a small group of boutique corporate tax loopholes that are worth a lot of money to a relative handful of corporations. It even has its own lobbying coalition, the Active Finance Working Group, which serves as a prime example of how important the 20 or so companies that benefit from the exemption consider it ...

    As part of the fiscal cliff deal, Congress also extended another little-known tax break that benefits large multinationals selling products through overseas affiliates.

    This "pass-through" exemption permits a U.S.-based company to set up a new corporation in a tax haven like the Cayman Islands and sell it a patent owned by the U.S. parent company. Royalties on overseas licensing of that patent would then route to the tax-sheltered firm, instead of the U.S. parent company. The Joint Committee on Taxation says the two-year cost of extending this shelter is $1.5 billion.

    Help out NASCAR: Sec 312 extends the "seven year recovery period for motorsports entertainment complex property," which is to say it allows anyone who builds a racetrack and associated facilities to get tax breaks on it. This one was projected to cost $43 million over two years.


    The agreement ... came loaded with extensions of separate existing tax breaks for businesses and industries, many of which had expired in the past year -- about $67.9 billion in all in 2013, as tabulated by Congress' Joint Committee on Taxation.

    (The extensions will actually cost much more: Not only were they made retroactive to cover 2012, but some of the breaks and credits would be in effect for 10 years if left in place.) ...

  • An arcane provision of corporate tax law, called active financing income, that lets U.S. corporations defer taxes on some income they earn from their overseas subsidiaries. That provision will cost the U.S. Treasury more than $9 billion this year and $1.8 billion next year ...

  • Tax breaks for Hollywood producers who shoot their movies and TV shows in the U.S., at a cost of about $430 million through 2014.

  • A program that sends most federal taxes collected on rum produced in Puerto Rico and the U.S. Virgin Islands back to those territories to subsidize domestic production. Bar tab: $222 million over two years.


    [The cliff law] also includes these [chunks of pork]:

  • $430 million for Hollywood through "special expensing rules" to encourage TV and film production in the United States. Producers can expense up to $15 million of costs for their projects.

  • $331 million for railroads by allowing short-line and regional operators to claim a tax credit up to 50 percent of the cost to maintain tracks that they own or lease.

  • $222 million for Puerto Rico and the Virgin Islands through returned excise taxes collected by the federal government on rum produced in the islands and imported to the mainland.

  • $70 million for NASCAR by extending a "7-year cost recovery period for certain motorsports racing track facilities." ...


    Among the provisions in the new law are:

  • A tax credit for research and development, benefiting a wide range of industries, including manufacturers, pharmaceutical companies and high tech companies. Cost: $14.3 billion.

  • An exemption that allows banks, insurance companies and other financial firms to shield foreign profits from being taxed by the U.S. The tax break is important to major multinational banks and financial firms. Cost: $11.2 billion.

  • A tax break that allows profitable companies to write off large capital expenditures immediately -- rather than over time -- giving some companies huge tax shelters. The tax break, known as bonus depreciation, benefits automakers, utilities and heavy equipment makers. Cost: $5 billion ...



    Check out Section 322 of the bill. Under the provision, financial services firms and manufacturers can defer U.S. taxes on overseas income from a type of financial transaction known as "active financing":

    It will cost taxpayers $9 billion. Citi, Goldman Sachs, Caterpillar, JP Morgan, General Electric and Citigroup are among some who will benefit from this pork.

    Sec. 328 extends "tax exempt financing for York Liberty Zone," ... a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp. Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds ...

    There is a big debate on why Speaker of the House John Boehner pulled the Hurricane Sandy aid package from a floor vote ...

    The estimate of insured losses from Sandy comes in around $20 billion -- but the total aid package proposed is three times that amount ...

    Some funding is for Head Start programs but not all of that money is going toward those programs affected by Sandy.

    There's also money for fisheries in Alaska, ... and repairs to the Smithsonian ...


    Here are [some] corporate subsidies in the fiscal cliff bill that you haven't heard of.

  • A hundred million or so for railroads: Sec. 306 provides tax credits to certain railroads for maintaining their tracks. It's unclear why private businesses should be compensated for their costs of doing business. This is worth roughly $165 million a year.

  • Disney's Gotta Eat: Sec. 317 is "extension of special expensing rules for certain film and television productions." It's a relatively straightforward subsidy to Hollywood studios, and according to the Joint Tax Committee, was projected to cost $150 million for 2010 and 2011.

  • Help a brother mining company out: Sec. 307 and Sec. 316 offer tax incentives for miners to buy safety equipment and train their employees on mine safety. Taxpayers shouldn't have to bribe mining companies to not kill their workers.

  • Subsidies for Goldman Sachs Headquarters:Sec. 328 extends "tax exempt financing for York Liberty Zone," which was a program to provide post-9/11 recovery funds. Rather than going to small businesses affected, however, this was, according to Bloomberg, "little more than a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp." ...

  • $9 billion off-shore financing loophole for banks: Sec. 322 is an "Extension of the Active Financing Exception to Subpart F." Very few tax loopholes have a trade association, but this one does. This strangely worded provision basically allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it ...

  • Tax credits for foreign subsidiaries:Sec. 323 is an extension of the Look-through treatment ... [which] cost $1.5 billion from 2010 and 2011, ... It's a provision that allows US multinationals to not pay taxes on income earned by companies they own abroad.

  • Bonus Depreciation, R&D Tax Credit: These are well-known corporate boondoggles. The research tax credit was projected to cost $8 billion for 2010 and 2011, and the depreciation provisions were projected to cost about $110 billion for those two years ...


    Busy lobbyists -- Ohio tax loopholes

    127 loopholes in Ohio state taxes as of 2-4-13

    Estimates are in MILLIONS OF DOLLARS. The tax officials don't give figures for items under $1 million, labeling them "MINIMAL."

    Exemption (ending with) Millions Forgone in 2013

    Sales and Use Tax Exempt entities

    Sales to churches and certain other non-profit organizations 407.2

    Sales to the state, any of its political subdivisions, and to certain other states 210

    Sales by churches and certain types of non-profit organizations 29.1

    Exemption for property and services used or consumed to produce a product Tangible personal property used primarily in manufacturing tangible personal property 1,621

    Packaging and packaging equipment 266.2

    Sales of tangible personal property and services to electricity providers 491.5

    Tangible personal property used or consumed in agriculture and mining 289.6

    Tangible personal property used to produce printed materials 32.4

    Tangible personal property used in storing, preparing and serving food 22.9

    Tangible personal property used in preparing eggs for sale 2.4

    Building and construction materials and services used in certain structures 184.5

    Tangible personal property used directly in providing public utility services 113.4

    Property used to fulfill a warranty or service contract 47.8

    Motor vehicles sold in Ohio for use outside the state 41.6

    Tangible personal property used in research and development 22.1

    Tangible personal property and services used in providing telecommunications and satellite broadcasting services 95.1

    Qualified tangible personal property used in making retail sales 38.9

    Property used in transportation for hire 39.4

    Qualified call center exemption 25.3

    Copyrighted motion pictures and films 7.9

    Equipment used in private warehouses and distribution centers with inventory primarily shipped out of state 2.4

    Drugs distributed to physicians as free samples 14.6

    Property used in air, noise, or water pollution control 17.3

    Emergency and fire protection vehicles and equipment 1.3

    Tangible personal property used in electronic publishing 5.6

    Property and services used in constructing a qualifying convention center 2

    Prescription drugs and selected medical items 637.6

    Transportation of persons and property 132.3

    Newspapers 16.3

    Magazine subscriptions 11

    Artificial limbs, prostheses, wheelchairs and other durable medical equipment 17.5

    Sales of used manufactured and mobile homes 2.8

    $800 tax cap on qualified fractionally-owned aircraft 1

    Sales of materials and services for maintenance and repair of aircraft 4

    Flight simulators 1.6

    Value of motor vehicle trade-ins 143.9

    Discount for vendors 51.6

    Food sold to students on school premises 17.3

    Value of watercraft trade-ins 1.6

    Sales to non-commercial, educational broadcast stations MINIMAL

    Sales to veterans' headquarters MINIMAL

    Sales to facilities financed with public hospital bonds MINIMAL

    Sales of animals by non-profit animal shelters MINIMAL

    Agricultural property (use on use) MINIMAL

    Agricultural land tile and portable grain bins MINIMAL

    Tangible personal property used or consumed in commercial fishing MINIMAL

    Ships and rail rolling stock used in interstate or foreign commerce MINIMAL

    Sales of property for use in non-profit presentations of music, dramatics, the arts, and related fields MINIMAL

    Property for use in a retail business outside Ohio MINIMAL

    Property used in energy or waste conversion facilities MINIMAL

    Sales of computers and computer equipment to certified teachers MINIMAL

    Sales of qualified tangible personal property to qualified motor racing teams MINIMAL

    Sales of tangible personal property and services for maintenance and repair of qualified fractionally-owned aircraft MINIMAL

    Bulk water for residential use MINIMAL

    Refundable deposits on beverage containers MINIMAL

    25 percent refund for tangible personal property used by electronic information service providers MINIMAL

    Individual Income Tax Exemptions, exclusions and deductions Personal, spousal, and dependent exemption 581.9

    Social security and railroad retirement benefits 280.1

    Deduction for taxpayers not eligible for employer sponsored medical plan 22.7

    Exemption for disability income 34.1

    Exemption for active-duty military income 21.2

    Deduction for excess medical expenses 79.3

    Exemption for pre-1972 trusts 10.3

    Deduction for long-term care insurance premiums 7.9

    Deduction for contributions to college savings programs 12.2

    Deduction for contributions to medical savings accounts 1.3

    Exemption for military retirement income 28.6

    Deduction for health insurance coverage of qualifying adult children and other dependents 3.7

    Non-business tax credits

    Joint filer credit 232.8

    $20 personal exemption credit 166.7

    Retirement income credit 139.5

    Resident credit for income taxed by another state 151.9

    $50 credit for taxpayers age 65 years or older 34.2

    Credit for taxpayers with income below $10,000 12.7

    Dependent care credit 6.3

    Campaign contribution credit 5.1

    Lump sum retirement income credit 1.5

    Displaced worker job training credit 1

    Credit for adoption related expenses 2.50

    Business Tax Credits

    Historic structure rehabilitation credit 59.9

    Technology investment tax credit 3.80

    Motion picture tax credit 9.4

    Credit for alternative fuel sold at retail (phased out) 0

    Lump sum distribution credit MINIMAL

    Deduction for organ donation expenses MINIMAL

    Enterprise zone day care/training credit MINIMAL

    Enterprise zone employee credit MINIMAL

    Grape production credit MINIMAL

    Ethanol plant investment credit MINIMAL

    Corporate Franchise Tax Goodwill, appreciation, and abandoned property of financial institutions 123.00

    Credit for financial institution investment in a dealer in intangibles 1.5

    State chartered savings and loan credit 1.4

    New markets tax credit 1.7

    Commercial Activity Tax Exclusions and deductions Exclusion of first $1 million of taxable gross receipts 215

    State and federal fuel excise tax exclusion 32

    Qualifying distribution center receipts exclusion 56

    State and federal cigarette excise tax exclusion 5.3

    Exclusion of real estate brokerage gross receipts that are not retained 1.2

    State and federal alcoholic beverage tax exclusion 1.9

    Professional employer organization exclusion 2.4

    Motor vehicle transfer exclusion 1.7

    Exclusion of certain services to financial institutions 1

    Tax Credits

    Credit for increased qualified research and development expenses 15

    Job creation credit 56.8

    Job retention tax credit 21.5

    Credit for net operating loss carry-forwards and other deferred-tax assets 8

    Research and development loan program credit MINIMAL

    Exemption for pre-1972 trusts MINIMAL

    Anti-neoplastic drug exclusion MINIMAL

    Horse racing taxes and purse exclusion MINIMAL

    Public Utility Excise Tax Exemption for municipal utilities and non-profit waterworks 72.6

    Credit for certain natural gas companies 8.1

    $25,000 exemption from gross receipts for each public utility company MINIMAL

    Sales to other public utilities for resale MINIMAL

    Kilowatt Hour Tax Exemption for qualified end-users 4.8

    Insurance Premium Taxes Deduction for premiums received from qualified small business alliances 26

    Credit for small insurers 2.2

    Ohio Life and Health Guaranty Association contribution credit 1.3

    Cigarette and Other Tobacco Products Taxes Discount for cigarette tax stamps 12.7

    Discount for timely payment of other tobacco products' excise tax MINIMAL

    Alcoholic Beverage Tax Advanced payment credit/discount 1.4

    Sacramental wine exemption MINIMAL

    Small brewer's credit MINIMAL

    Small wine producer's exemption MINIMAL

    Estate Tax Deductions Marital deduction 48.6

    Funeral and administration expenses and debts against estate 9.2

    Deduction for qualified charitable contributions 10.3

    Estate Tax Credits Credit for each estate 34.3

    GRAND TOTAL 7,757.5, which is $7,757,500,000.00

    Top -- Home

    [Fiscal Terrorism]

    Fiscal Cliff Scare Talk Follows Shock Doctrine Script

    By Dave Johnson, November 12, 2012

    If you have already read The Shock Doctrine by Naomi Klein you have probably been rolling your eyes at all this 'Fiscal Cliff' scare talk ...

    The Phony 'Fiscal Cliff' Scare

    At the end of the year the Bush tax cuts expire. When this happens tax rates will rise modestly to where they were when Clinton was President. Also at the end of the year budget 'sequestration' occurs. This means that the various cuts Congress approved to end the debt ceiling 'crisis' will begin to phase in.

    Remember, the debt-ceiling 'crisis' was when Republicans refused to allow the country to honor its debts, holding the economy hostage, unless they got deep budget cuts in the things We the People do for each other.

    That's it. That's the 'crisis.' All of the people who had been hysterical about the budget deficit 'crisis' are now hysterical that ... tax rates at the top will go up (cutting the deficit) ...

    The 'Fiscal Cliff' is not a cliff and the language itself is intended to scare people. The name itself is designed to create panic, evoking disaster imagery of people and the economy falling off a cliff. It is the latest manufactured 'crisis' and we are all supposed to be terrified and demand immediate and extreme solutions.

    Again, the very people screaming loudest about deficits are the people who passed tax cut after tax cut, and military spending increase after military spending increase, and started war after war. Then these same 'serious people' - kleptocrats - terrify the public, telling them that budget deficits will lead to the destruction of the country ... After a decade of screaming 9/11, 9/11, 9/11, they screamed 'deficit, deficit, deficit.' Now they scream, 'fiscal cliff, fiscal cliff, fiscal cliff.' ...

    The 'Grand Bargain' ...

    The outline of this 'bargain' involves 'tax reform' and 'getting a handle on entitlements.' Tax 'reform' does not involve raising tax rates on the wealthy ...

    'Getting a handle on entitlements' means cutting Social Security, Medicare, Medicaid, Food Stamps and the rest of the things that We, the People do for each other -- the things we are entitled to as citizens in a democracy.

    (Note -- Social Security by law can not and does not contribute to the deficit -- they just threw it in because it is 'in crisis.' The Social Security 'crisis' is that under certain economic projections its funding might run a bit short many years down the road. Compare this possible future shortfall to the huge, vast, bloated, enormous military budget which, unlike Social Security, has no separate funding mechanism and runs 100% short every year. But that is not a 'crisis.')

    So a fix for a budget problem caused by cutting taxes, massively increasing military spending and crashing the economy will be 'solved' by ... once again [shifting] the income and wealth of the country ... away from We, the People and upward to the same 1% who have been benefiting from everything in our economy since the election of Ronald Reagan -- the disaster-capitalism formula: cut taxes, raise military spending, then use the resulting deficits to scare people into accepting extreme 'solutions.' Rinse and repeat.

    The Shock Doctrine

    The Shock Doctrine is a book by Naomi Klein that describes a 'disaster capitalism' strategy used by wealthy and powerful people to take advantage of crises -- even causing crises -- to herd people into accepting 'solutions' to those crises that really just enrich the 1% at the expense of the rest of us.

    In times of crisis (real or perceived) the public is in a state of shock, distracted and ready to grasp at straws to get out of the panic. This is the perfect time for 'serious people' to come in and offer pre-planned 'solutions.' These solutions usually involve privatizing public institutions and wealth, cutting public services, cutting taxes on the rich, seizing property, lowering wages and pensions ...

    This shock-doctrine disaster capitalism model has become standard practice. We see this happening over and over again: crises occur or are manufactured, the media whips people into a panic, and then the 'solution' is introduced. The solution involves a 'reform' that transfers wealth or institutions into a few private hands ...

    Inoculate yourself by reading The Shock Doctrine. Inoculate your friends by telling them about the book, and how this game works, over and over again ...


    Commentator 1 wrote:

    Paying over $400 billion per year interest on the national debt as it continues to grow should be repugnant to all of us -- what a waste of our tax dollars. So, here is a proposal in the tradition of President Abraham Lincoln:

    Immediately pay off the entire U. S. debt with electronic (and printed when necessary) U. S. Treasury bills, "electronic greenbacks." These treasury notes will pay no interest; and will be "stored" in the U. S. Treasury until the debt-holders give the U. S. Treasury their account numbers for "electronic greenback" direct deposit.

    The new greenbacks will be legal tender in the U. S. and must be accepted abroad by U. S. agencies, contractors, and banks chartered in the U. S. no matter where they are operating.


    FEATURE ARTICLE from The American Scholar, 1-1-12, By Richard Striner

    [Can greenbacks save the economy?]

    Congress could create money, as it did during the Civil War, funding public projects that shock the economy back to life.

    Just after the election of 2008, the Nobel laureate liberal economist Paul Krugman ... drifted back to the maxims of John Maynard Keynes -- maxims he called "more relevant than ever" -- [but] our thoughts could be turning to the older and in some respects wiser innovations of President Lincoln and the Republican Congress during the Civil War.

    Here's the gist of it: using the monetary methods of Lincoln ... we could pay for a faster recovery and a great many worthy projects without higher taxes, without more national debt, and believe it or not, without inflation. How? By letting Congress exercise a little-known power that is used (very quietly indeed) by the Federal Reserve: the power to create new money ...

    Federal Reserve Chairman Ben S. Bernanke: In an interview with 60 Minutes on March 15, 2009 [by] Scott Pelley ...

    Bernanke: "... The banks have accounts with the Fed - so, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money."

    Pelley: "You've been printing money?"

    Bernanke: "Well, effectively."

    If the Federal Reserve can create new money, couldn't Congress do the very same thing? The answer is yes, and here's the precedent: the Legal Tender Act of 1862, in which the Republican-controlled Congress authorized creation of "United States Notes," known as greenbacks, that were printed up and spent into use.

    The U.S. Constitution has no provision for this practice, but it does authorize the minting of coins ...

    Three main factors explain the success of the Legal Tender Act:

    First: the underlying strength of the Northern economy.

    Second: the fortuitous timing of the law. It went into effect during the months of Union military success in the spring of 1862, floating the greenbacks on a buoyant mood of confidence in victory.

    The third reason was the enactment of a comprehensive tax law on July 1, 1862, which soaked up much of the inflationary pressure produced by the greenbacks. The Union ultimately raised half again as much war revenue from taxes as from the issuance of paper money ...

    Notwithstanding the overall success of the Union greenbacks -- and notwithstanding the importance of the 1871 Supreme Court decision in the case of Knox v. Lee, which declared the Legal Tender Act constitutional -- Civil War greenbacks were slowly withdrawn from circulation (and were redeemed in gold beginning in 1879).

    Some people, many of them farmers who wanted government and not banks to control the currency, protested against this policy and founded the Greenback Party in 1874. Some social reformers recommended financing federal relief measures with greenbacks during the Gilded Age.

    In 1894, a maverick Ohio businessman named Jacob Coxey led an "army" of unemployed Civil War veterans to Grover Cleveland's Washington in the middle of an economic depression. They demanded a multimillion-dollar "Good Roads" bill that would wipe out unemployment through job-creating public works. The finance method they proposed: greenbacks ...

    The Great Depression led some distinguished American economists to recommend reviving the greenback method. Their program was trumped by the influence of John Maynard Keynes, whose 'General Theory of Employment, Interest, and Money' hit the shelves in 1936. The result of our adherence to some form of Keynesianism ever since has been a staggering national debt.

    Conservatives and liberals alike should step back from conventional thinking [which does not] touch sufficiently on the central point that we ought to be considering now: the nature of money ...

    The conventions of our money supply are so arcane that explanation is daunting. Journalist William Greider once observed that the American process of money creation is "a powerful mystery to most citizens." ...

    In `Secrets of the Temple: How the Federal Reserve Runs the Country,' Greider quoted the head of the Federal Reserve Bank of New York, who went so far as to assert that "no President really understands these things." If that's true, it's nothing less than a major civic tragedy ...

    Where does modern money come from? And what does it consist of?

    Generations ago, the coined money created by our government consisted of gold and silver -- precious metal that was clearly private property -- an internationally portable treasure that was brought to the mint on occasion by its owners, then stamped into coin and given back ...

    In 1934, when monetary gold was largely removed from circulation through the Gold Reserve Act (it was melted into bullion and eventually shipped to Fort Knox), its possessors got paper currency in exchange.

    But the precious-metal standards are defunct as the basis for our money. And even in their heyday, money created by the gold and silver standard amounted to less of the total money supply than that created in a different way.

    The ... truth is that most of our money supply is not created by the federal government, as most people seem to believe, but instead by banks.

    Centuries ago -- as early as the founding of the Bank of England in 1694 -- money lenders figured out a clever way to make double, triple, or quadruple use of the coin deposits that they received from their customers.

    The bankers made loans in the form of paper bank notes emblazoned with a clear-sounding promise: "payable to the bearer on demand." But bankers issued far more of these notes (via loans) than they could ever redeem at one time. That is to say, the volume of bank notes in circulation vastly exceeded the coin deposits "on reserve." [the more notes, the more interest income for the bankers]

    The bankers figured it was unlikely that everyone possessing a banknote would storm into the bank at the same time, demanding redemption in cold hard coin. Under normal circumstances ... these moneylenders won their gamble ...

    The privately issued bank notes expanded the money supply, not as legal tender (under law, people weren't required to accept them) but as a purchasing power that functioned as a surrogate for money ...

    In the United States by the 1870s most banks began to shift from the issuance of bank notes to "checkable deposits" -- modern-day checking accounts.

    Instead of giving a borrower a loan in the form of bank notes, bankers would give borrowers a checkbook and say that the loan had been credited to their account as a new deposit. All they had to do was write checks, and then the bank would redeem the checks in coin from its cash reserves when the checks were presented at the bank ...

    From checking deposits, this practice evolved into the lines of credit that we all know and use every day, with our credit cards, cash cards, online bill paying, and so on ...

    Consider how it works. Write a check, and then presto, you have paid: you have made a real purchase. A sale has been recorded in the books ... Swipe the credit card, and once again, you have paid. When the bank extends credit, it creates new purchasing power.

    But the mechanics of the process are as deceptive as they were long ago, when many people who read the promise "payable to the bearer on demand" presumed that behind every banknote was cash, real coin of the realm, in the very same amount.

    In fact, cash is unimportant in the ledger transactions that constitute the juggling act today.

    Consider an example of present-day banking practices, carefully expounded by a widely used economics text, `Economics: Principles and Policy,' by William J. Baumol and Alan S. Blinder. "Even a single bank can create money," these economists explain, and they give a quick example to illustrate:

    A man deposits $100,000 of cash in his checking account. So "the bank now has acquired $100,000 more in cash reserves, and $100,000 more in checking deposits." It would sound as if these two different monetary terms -- the $100,000 worth of "cash reserves" and the $100,000 of "checking deposits" -- are interchangeable ways of referring to the same amount of money. But they are not: these banking terms ... represent an accounting trick whereby the $100,000 can be doubled into two equal units of $100,000 apiece.

    Since the Federal Reserve's "reserve requirement" is (in this example) represented to be 20 percent, the bank's "required reserves rise by $20,000, leaving $80,000 in excess reserves." And so the bank lends the $80,000 to another customer.

    But remember: the original depositor can still write checks to the tune of $100,000. What has happened here is pure sleight of hand, and the two economists sum it up quickly: "There is now $100,000 in checking deposits and $80,000 of cash in circulation, making a total of $180,000. The money-creation process has begun."

    Thus commercial banks are allowed in our system to make double use of checking deposits. The legal principle is simple: like insurance companies, the banks are obliged under law to pay money on demand to their customers in certain situations. Consequently, as long as these banks can make good on their promise to pay -- never mind how -- the methods they use to shift money around are almost none of our business, at least in the eyes of the law ...

    Banking regulation at the federal level has a long and interesting history. It began with the chartering of banks by Congress: The First and Second Banks of the United States (chartered respectively in 1791 and 1816), the national banks chartered by Congress in 1863 (which were regulated by the Comptroller of the Currency), and the Federal Reserve System, created by Congress in 1913.

    The Fed was (and is) a hybrid public-private institution that was designed to be a "lender of last resort" in a banking crisis. The regulatory powers of the Fed (as applied to member banks) would be steadily increased down the years ...

    Most of our money is created by the banks in the process of lending. The tangible stuff that we keep in our pockets and use as legal tender -- the coins produced at the U.S. Mint and the Federal Reserve Notes produced at the Bureau of Engraving and Printing -- gets furnished by the Treasury to banks (when they need it) in exchange for securities that function as collateral.

    Such physical money plays a secondary role in our economy. The cash transactions that we make in the course of the day are insignificant compared with our direct electronic transactions.

    So, through the method that is known in economics as fractional reserve banking, this creation of our money supply by the banks takes place with Uncle Sam as a cooperative assistant.

    The term "fractional reserve" refers to the existing money that the banks have to keep on hand to pay depositors and creditors, which constitutes a fraction of the brand-new money that the banks are creating through their lending and credit operations.

    Consider the extraordinary magnitude of this process. Recall our first example: a deposit of $100,000 generates $80,000 more. Now suppose that the borrower who takes out the loan -- the $80,000 -- deposits this newly created money in a different bank. Presuming the same reserve rate of 20 percent, this $80,000 could support yet another loan to the tune of $64,000. And so on, until at last, at the end of the chain, the first deposit has led through a multiplication of loans to $400,000.

    But the principle starts at the top, with the Federal Reserve, which can add to the "excess reserves" of the system by creating new money through "credit." The staff of the Federal Reserve once explained the process in a 1939 guidebook titled `The Federal Reserve System: Its Purposes and Functions.' One sentence in the book, deleted from subsequent editions, reads,

    "Federal Reserve Bank Credit does not consist of funds that the Reserve authorities get somewhere to lend, but constitutes funds that they are empowered to create." ...

    The Fed created credit that was used to buy bonds -- preexisting bonds -- from the portfolios of banks. The money that was paid for these bonds led to larger excess reserves in the banking system, and these excess reserves led to purchases of newer government bonds ...

    William Greider describes the almost circular mechanics of the process:

    To ensure a successful bond sale, the Fed expanded bank reserves by buying up outstanding government securities. The commercial banks lent the expanded money supply to private customers who would in turn lend it to the government by buying the new Treasury issues.

    The customers then sold their new government securities to the commercial banks -- and [the banks] eventually sold them back to the Fed when the central bank was again required to expand the money supply. In a roundabout way, the government was borrowing its own money -- and paying a fixed fee to middlemen for the privilege ...

    [And now the taxpayers are forking over more than $400 billion every year to the money lenders as interest on the federal debt; that's more than $4 trillion over ten years] ...

    During the Great Depression, several important American economists protested against fractional reserve banking. One was Irving Fisher of Yale ... In 1936, Fisher wrote that "everyone except the banker who lends money lends pre-existing money, not money of his own creation. The government should take away from banks all control over money creation."

    Henry C. Simons of the University of Chicago condemned "the usurpation by private institutions (deposit banks) of the basic state function of providing the medium of circulation."

    John R. Commons, a past president of the American Economic Association, recommended in 1934 that "in order to create the consumer demand, on which business depends for sales, the government itself must create new money and go completely over the head of the entire banking system by paying it out directly to the unemployed, either as relief or for construction of public works." ...

    Greenback spending could have made a great difference in the way Roosevelt's New Deal was financed. An amendment to the Agricultural Adjustment Act of 1933 gave the president authority to issue new greenback currency, but the doctrines of John Maynard Keynes prevailed ...

    The greenback tradition these days is little more than a relic. Now and then a heretical writer has attempted to revive the tradition; in the 1990s, for example, a retired businessman and engineer named William F. Hixson wrote that "it never makes sense for the government to permit banks to create money and then borrow it from them at interest, since the government can create money just as cheaply and efficiently for itself and then have the use of it without a debt to repay and without any burden of interest." ...

    Among the powers that Congress has granted to the Federal Reserve -- beginning with the Banking Act of 1935 -- is the power to set the reserve requirements for banks.

    In 1980, this authority was expanded to include the reserves of all "depository institutions," from commercial banks to savings and loans to credit unions.

    By raising the reserve requirements (as the Federal Reserve began to do under Paul Volcker's chairmanship in the early 1980s), the Federal Reserve can counteract inflation by pulling more money out of the excess reserves, which will tighten up the money supply by reducing banks' power to lend, thus fighting inflation ...

    We shouldn't have to choose between the all-or-nothing options of bank-created money and money created by the government, not if we can employ the best of both.

    Instead of canceling the power of banks to create new money, we could add to the expansion of our money supply with new money that the government creates ...

    Here is how the process might work: Congress would legislate a limited creation of money to be spent through direct appropriation. The new appropriated funds would then be sent by the government through direct electronic deposit to employee or vendor accounts in commercial banks, where the funds would immediately be convertible to cash ...

    As these deposits augment the excess reserves of the banking system -- creating some potential for inflation -- the Federal Reserve would begin to raise reserve requirements ...

    This amounts to the system that we have in place now, except that Congress -- in addition to the Fed -- would have the power to create new money out of nothing. Greenbacks should be issued now by executuve order]

    This would constitute a very neat division of labor: the Fed would create the new money for private investment, and Congress would create the new money to underwrite our public investments ...

    The United States is not broke -- and we should laugh at the delusion that we are. The potential for abundance is everywhere around us, but it stagnates for sheer lack of funding. We have contracted our nation's power to produce and consume just to prove that we can live within our means. And that's a formula for economic ruin ...

    Why shouldn't the American people have additional funds to be used for such impeccable purposes as national security, infrastructure maintenance, public safety, environmental protection, and research to counteract global climate change -- funds created by the government without more taxes or debt?

    Does the principle seem too good to be true -- a mere mirage, something for nothing?

    Think it over, for the system that we have right now is an exercise of mind over matter. The system I propose would give the people and their leaders an equal share in money creation with the bankers who are seeking private profit.

    It's a profitable game, the creation of money, and we need more players at the table.

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    [Sequestration: Could spending cuts hit here?]

    Filed by Steve Fogarty February 23rd, 2013

    ELYRIA -- Employees and officials of Nelson Stud Welding are nervously awaiting ... possible cuts to naval programs...

    "Depending on what happens that could affect up to 10 percent of our workforce," Nelson Stud President and CEO Ken Caratelli said late Friday.

    The Elyria-based company, a subsidiary of Doncasters Group Ltd., manufactures welding equipment, specialized weld fasteners and other components used on virtually every ship in the U.S. Navy, according to Caratelli ...

    "The [Navy] goal is to have over 300 commissioned ships in operation at any given time," he said. "We are on every one of those vessels."

    If [there are] delays or cuts in funding for the Navy's aircraft carrier construction and maintenance program ... it could result in the loss of jobs for more than 20 workers at Nelson Stud's facilities in Elyria, LaGrange and Westlake, Caratelli said. The company employs more than 200 people.

    Caratelli declined to give a figure for the size of the firm's contracts with the Navy. "It's a good part of our business," Caratelli said. "There's a lot of content in those products. Those carriers are like cities, with 5,000 sailors and Marines aboard." ...

    It is widely assumed that cuts to naval defense programs are pending as part of the sequester, which became law in 2011 during the congressional battle over raising the country's debt limit.

    Cuts of 8 percent for the military, and 5 percent for domestic programs were structured to be so draconian that they would force Republicans and Democrats to come to terms and work out a deal by the end of 2012 ...

    Last week, Adm. Mark Ferguson, vice chief of naval operations, told the Senate Armed Services Committee that anticipated cuts included cancelation of deployments, postponement of ship and aircraft maintenance and suspension of training programs ...

    The company's welding processes were invented by founder Ted Nelson during World War II, according to Caratelli. "The first application used in the shipbuilding industry was in securing wooden decking over steel decks on aircraft carriers," Caratelli said.

    The issue of cuts carries "a lot of emotion for us beyond dollars and cents," Caratelli said. "The Navy is where this business and industry is founded," he said.

    Contact Steve Fogarty at


    Federal cuts will affect Northeast Ohio if budget stalemate continues

    By Sabrina Eaton, Plain Dealer Washington Reporter

    February 24, 2013

    If Congress fails to act this week [by 3-1-13], approximately $85 billion will be cut from the federal budget by September [2013], split evenly between defense and non-defense programs [the sequestration] ...

    Warrensville Heights Democratic Rep. Marcia Fudge -- who refers to the cuts as "March Madness" -- predicts they'll cost 700,000 jobs around the nation, which could slow down the economy enough to cause a recession ...

    Ohio primary and secondary schools could lose $25.1 million this year, jeopardizing about 350 teachers and aides. The cuts would hit schools that serve a high number of low-income families especially hard, based on figures from Democrats on the House Appropriations Committee.

    Ohio would lose an additional $22 million in IDEA Special Education Grants ... This is money that goes for about 270 teachers, speech and other therapists, and aides working with about 12,000 children with disabilities, according to information provided by Sen. Sherrod Brown of Ohio.

    Additionally, 2,500 low-income preschoolers could be stuck at home if Ohio loses an estimated $15 million in Head Start funding, according to the White House and the National Education Association. And a cut of $4.3 million in federal child care assistance could mean a loss of support for 800 Ohio children.

    President Obama says GOP bills would only double down on "harsh, harmful cuts" that affect emergency services, seniors and middle-class families and "ask nothing of the wealthiest Americans or the biggest corporations."

    "Now Republicans in Congress face a simple choice: Are they willing to compromise to protect vital investments in education and health care and national security and all the jobs that depend on them?" Obama asked in a Feb. 19 [2013] speech.

    "Or would they rather put hundreds of thousands of jobs and our entire economy at risk just to protect a few special interest tax loopholes that benefit only the wealthiest Americans and biggest corporations? That's the choice."


    "Seven Faces of The Peril" [is] a paper by St. Louis Fed president James Bullard. Bullard has generally been considered an inflation hawk, but in this paper he describes a technical problem with inflation targeting.

    Most central banks follow something called the Taylor Rule, in which interest rates are raised when inflation gets too high and lowered when things cool off. But Bullard notes that a standard model of the Taylor Rule has two points where it's in equilibrium:

    One [point] is fine: it corresponds to an interest rate of about 2.8% and inflation of 2.3%. This is roughly where the U.S. has been until recently. But the [other point] is trouble: it corresponds to an interest rate of zero and deflation of about - 0.5%. This is where Japan has been.

    Bullard's conclusion is simple and direct:

    "The U.S. economy is susceptible to negative shocks which may dampen inflation expectations. This could possibly push the economy into an unintended, low nominal interest rate steady state [deflation]. Escape from such an outcome is problematic ... The U.S. is closer to a Japanese-style outcome today than at any time in recent history ..."

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