Our Call to Battle

by
William Krehm

The Wall Street Journal (26/02, “Obamas School Choice” editorial) minced no words on the matter of opening the best schooling to talented children, no matter how humble their parents earning-powers. And wasnt the president a winged instance of that principle practiced?

But let us return to the editorial, remembering that the WSJs basic purpose is hardly to champion the nations underdogs no matter how talented: “President Obama made education a big part of his speech Tuesday night, complete with a stirring call for reform. So well be curious to see how he handles the dismaying attempt by Democrats in Congress to crush education choice for poor kids in the District of Columbia.

“The omnibus spending bill now before the House includes language designed to kill the Opportunity Scholarship Program offering poor students vouchers to opt out of rotten public schools.”

Of course, it is an omnibus bill operating on the same principle that results in people without the necessary cash or private coaches traveling in public transport or in shoes in bad repair. The “law of averaging.” However, talent does not average out, and when it happens it should be respected and treated as a national resource.

At risk of repeating ourselves necessary because those who should be speaking up in our southern neighbors legislature are no exception: they get the “issue” out of the way by disregarding it, or slitting its throat.

Inevitable because of the constraint of available time? Then they as we, since there are no haloes around Canadas head in this as in other vital matters seem to believe not that a knowledge of history would save us time. But rather that is “saved” by walking over the faces and hopes, of an elite of talent already sifted for quality by the first of lifes tests. That is particularly inept because human investment has been identified as the best investment a government can make.

The lesson was purchased at the greatest cost ever paid for a lesson in both history and economics it was one of the most important lessons to come out of World War II. Suppressing that lesson, and pretending that it does not exist, cannot serve a helpful end.

But part of due retribution is for those who have ignored crucial bits of our history be condemned to have it repeated to them through every available channel. Boring that may be, but we must at whatever cost let in a few rays of light in on such survival matters. COMER is putting on its battle jackets again and reorganizing to bring the survival message at stake in this matter to the public and government levels so that we can get ear of in both Canada and the United States. We are reorganizing both our publications and our membership towards this end. And here is the suppressed message that ignores a simple accountancy solution that got the United States out of a major crisis in 1996, and Canada to a lesser degree in 2002. And here are the details of the solution already tried and found workable in those years and now has only to be extended to human capital to get the country and the world out of a threatened melt-down without the government taking over a single bone-rotten bank, or the worst of its portfolio of lost gambles. Here is the suppressed bit of history that we must never stop retelling:

At the end of WWII Washington dispatched hundreds of economists to Japan and Germany to predict how long it would be for the two leading axis powers to regain their powers as key world traders. In 1961 some 16 years later one of these economists wrote a paper in which he stated it was amazing how wrong he and his colleagues had been. And the reason, he concluded, was they had concentrated on physical destruction. and overlooked that the highly gifted, educated, and disciplined work forces of those two leading Axis lands had come through the war essentially intact. His name was Theodore Schultz and for a few years he was feted and prized for having identified one of the great lessons of WWII: that investment in human capital is one of the most profitable investments a government can make.

Eventually this had great consequences of the way governments kept their books: private and corporate taxpayers were always required to enter every transaction in their ledger twice once for the initial cost in cash or debt of the government and once for the current value of the physical assets of that investment. That was known as “accrual” or “capital” accountancy and that initial cost was “amortized” over the foreseeable useful life of the market value that was “depreciated” over at least approximately a similar period.

But that was not the way governments kept their own books. They did in fact “amortize” their cash cost over the foreseeable life of the asset value of the investment, but the asset value itself was “depreciated” in a single year, and at the end of that year assigned a value of a token dollar. This had two resounding results. It produce a capital debit on the government books that was not necessarily there, and it opened the possibility of lucrative privatizations for the well-connected. If you have bridges, raw land or buildings, and highways carried at one dollar, you can buy at “a thousand times book” and resell for a crazy profit and go to church with the gait of a philanthropist.

That convenient way of sparing many in the saddle of the risk of saddle-sores, was discontinued under much disarray at the beginning of 1996 in the US and very partially some six years later to a lesser extent in Canada. By the 1970s the banks had recovered from their devastating losses that they had gotten themselves in during the 1920s. By the time F.D. Roosevelt was inaugurated for his first term in 1933, 9,000 banks had closed their doors, and the first thing the new president did was to declare a bank moratorium during which all banks shut their doors. When they reopened for business the Glass-Steagall law had prohibited them from acquiring interests in “non-banking financial pillars.” In those innocent days that covered only stock brokerages, insurance and mortgage corporations. The reason? The Great Depression of the 1920s had been brought on by the banks being allowed to take over non-banking financial companies and in that way getting control of the cash reserves needed for the acquired companies own businesses. And once that happened that served the banks as “legal tender” base for their own banking multiplier. But many of these other pillars were already charging interest, the reserves from legal tender become “near-money,” since in that case they move inversely with the rate of interest set by the central bank. So that not only left the acquired companies in potential trouble, but loaded the banks with a growing skyscraper of interest-bearing money of varied quality as the skyscraper of bank growth went up compelled to keep on rising in order not to collapse, with the element of risk supposedly “insured” against by derivative devices that would cause a first-year maths student to be kicked out of the course. It was like a crazy skyscraper that was compelled to rise ever faster with an elevator that could only go up, never down.

It Should Take More than “Insurance” to Evoke Trust

Its soundness was guaranteed by insurance companies on the basis of derivative “swaps.” The details of such derivative constructs were banned from discussion at practically all international economics congresses in recent years that we have attended. But quite apart from the dubious assurance of the solidity derived from the exponential mathematical series that is the heart of the atomic bomb, John Maynard Keynes who died in 1946 pointed out years before his death the absurdity of trying to deduce from the experience of the past what will work in the ever-changing future on the basis of any mathematical or other assurance dubbed “insurance.”

There had been a protection against the dominant power this would otherwise give banks whose basic revenue is interest rates. That had been the statutory reserves that required the banks deposit with the central bank a proportion of the deposits they receive from the public. By raising that proportion that lowered the net amount of deposits left to the banks to lend out themselves, this limited the effective power of the banks over the economy. But that was done away with systematically. Whenever the International Monetary Fund is called in by a country for help for its lack of foreign currency, the IMF lays down as a condition the end of the statutory reserves. The net result of such a position is to leave the benchmark interest rate set by the central banks in a monopolist position in managing the course of the economy. It raised interest rates to the position of “dominant revenue,” so well described by the late great French economist FranÁois Perroux. It was the revenue of the group with monopolist power, by its rate of growth both of its rate and absolute volume that is taken as a reliable index of societys well-being as a whole.

Meanwhile, the “near-money” interest-bearing short-term funds taken over by the banks as money-base for their bank-money creation, which every takeover of near-money involved as bank money-creation supposedly insured by derivative swaps provided a bogus insurance based on an illiterate notion of what mathematics can do.

There is a howling need to bring professional mathematicians to teach economists and economics students the empirical content of any mathematical device is zero. Its analytical powers are what are unbounded. Contemporary economists that do not distinguish the two are at the basis of the current collapse of our monetary systems.

The ultimate bankruptcy of official economics today is that it has cast off all reference to the lessons of our own history and economic experience. Had this not been done and removed beyond all serious criticism, a completely prepaid package of capital resources would be recognized available to almost any of the developed countries in the world today.

By 1991 the adventures of the US banks in taking over the mortgage trusts (Savings & Loans) in the US had led to many of the banks losing most or more than most of their capital. The Bank for International Settlements a world central bankers war-room dedicated to bringing the world banking systems back to the freedom of the 1920s that ushered in the Great Depression had declared the debt of developed countries risk-free and thus requiring no down-payment for banks to acquire. As a result Canadian banks increased their holdings of such debt by 400% to a total of $100 billion held entirely on the cuff, nothing down. At the same time the manager of BIS decided that there was to be no trifling with anything different from what they chose to call “zero inflation” to be achieved by pushing interest rates “high enough to do the job.” The “job” was atrociously defined since nobody moving from a town of 20,000 population to New York expects the cost of living to remain the same. How then could it when humanity as a whole is making just such a move, quite apart from the technological revolution that makes anybody without a university education of the proper sort less and less employable? As a result, BISs oversight almost brought down the world banking system. What saved it was the decision of the Clinton government that the days of high interest rates were over, to get around that one they finally listened to their auditing officials and decided that the time had come to bring in accrual accountancy and “depreciate” the physical assets of government not in a single year but in roughly over the same period as the cash or financed cost of a capital project was being “amortized.” Doing this and extending the treatment to 1959 turned up almost $1.25 trillion of additional net worth prepaid.

That equipped governments to deal with physical investment except, of course, such government investments were financed in recent decades not with the Bank of Canada, where such costs would have been nominal, but through the private banking system. What still remains on our government books as current spending is human investments, that on the basis of Washingtons costly researches, came up with Theodore Schultzs astounding conclusion supported in particular by Japans imaginatively planned reconstruction of its economy from a textile-based one with most of its raw materials coming from abroad to a heavy-machinery-building economy where a vastly increased proportion of the gross income would remain in the country, Even during recessions the government would choose a single company in each of the new engineering lines to proceed with innovations that would at the next economic revival become available to the entire industry. You need brilliant, educated, talented managers to develop well in advance ideas like that.

The Suppression of Schultz and His Law

The detail pertinent to the present deepening current crisis of the world is with the suppression of Schultzs conclusion for it was not simply “forgotten” we still have a vast amount of government investment in human capital already invested and completely paid for that is on the government books not even at a token dollar. And yet, to treat human investment on government books for what it is after the job already done on the physical investments of government is a cookie-cutter affair. A cook used to reading recipes could handle the issue.

What would this be worth to the nation? Let us make the comparison of the US shift to accrual accountancy for its physical investments in 1996. The official calculation was at the time just under $1.25 trillion. Even the movement of the price level over a 13-year period for most of it, and another 37 years for a bit of it, would let us, say, double the figure for bringing in accrual accountancy to government investment in human capital today. But that calculation was based on continuing to use the private banks instead of the Federal Reserve for the financing of it. In Canada our central bank was nationalized primarily for such purposes. But it was no lapse of memory that prevented the use of the central banks in either country in shifting to accrual accountancy in their different degrees. This time that is part of the deal, since we are going to have to battle hard to get any of it through. That would bring the US figure for a similar job today up to at least $3 trillion and Canada to the usual 1/10 of the American statistic or $300 billion.

But there are some unusual features of human investment. Its expenditure is in itself an investment. The children of better-educated parents for social as well as strictly genetic reasons tend to be better educated and healthier, and better adjusted. And their children, thanks to the same factors and opportunities, equally so. So instead of having spending, the result is more like further investment. Whatever England spent on teaching Isaac Newton algebra is still bringing in income to Britain in millions of ways today.

Obviously all levels of government will have to be included in this scheme for they contribute to the investments and hence are entitled to a participation in the returns. What sense then does President Obamas wasting both our time and bringing on a further debasement of the legal tender trying to straighten out the banking system en route?

On that point The New York Times (27/02, “Failing Upward At the Fed” by Floyd Norris) reports: “Sometimes nothing succeeds like failure.

“In his speech to Congress, the president asked the legislators to quickly reform financial regulation. Representative Barney Frank, the chairman of the House Financial Services Committee, told me after the speech that he expected to pass a bill this year to make the Fed into a systemic regulator, able to take jurisdiction over any financial institution if it threatens the financial system.

“Books will be written on the failure of the Fed in the last cycle. It decided that it did not have to worry itself over rising asset prices. So it stood by, first in the technology stock bubble, then in the house bubble. It saw credit getting excessively loose, and leverage piling up, but comforted us with the assurances that if there was a bubble, the Fed knew how to clean up after it burst, principally by cutting interest rates.

“It championed letting the shadow financial system grow without oversight, and shied away from doing anything about highly risky mortgages.

“Perhaps most important, the Fed and other regulators had no idea of how much risk they had allowed into the system. They knew that the various financial innovations were designed to let banks make more money without being required to put up more capital, but they did not figure out that meant that the capital there might be inadequate. They threw up their hands at the complexity of it all, and said banks could use their own models to assess risk.

“In sum, the Fed thought it had learned the lessons of the 1930s, but it had not learned the lesson of the 1920s, that allowing assets asset prices to soar to absurdly leveraged heights could lead to a collapse as the need to repay loans forced sales that drove prices lower, resulting in the need to repay more loans, and on and on.

“Even now, the banks being bailed out have not been required to detail the toxic securities they own. Without that information, it is impossible for even sophisticated analysts to assess whether each bank has taken all the write-downs it should. That is one reason banks are hesitant to trust each other.”

And this is what the Obama regime has opted for rather than using $3 trillion of already invested capital that has financed the most productive investment a government can make cannot be just a slip in judgment, but a choice of loyalty. The prepaid human capital spent in retraining work forces, sending talented kids to college, cleaning up the environment will run up no debt but lead to a softening of the depression that is already upon us, and equip the professionals and workers for an early revival.

This is what the coming Obama crisis will be about. It will take more than charm and good intentions to get humanity out of the chapters of disaster that are blowing out of Washington.

That is why COMER is getting into campaign form once more.