In all the great debate and analysis of news I participate in on the web very rarely do I see a proposal that goes beyond a buzzword like "healthcare or "tax relief." Very rarely do I see one particular issue fleshed out beyond knee jerk reaction. Often this takes the form of the newwest revelation about the current administration's obvious corruption and some analysis or outrage by bloggers, including myself, that no one really gives a rat's ass. I do this on my own blog and although I feel my ideas to be radical simply because they are based in a healthy paranioa are they constructive? I would say very frankly yes and no. I feel they are constructive in the nihilistic sense that they strip down some of the false pretense of the Left vs Right political debate that is neither here nor there, but, I feel they are a waste of time if this deconstruction of the political game is not followed through with a sustained energy to propose real problems to real solutions.
The fact that we are stuck in the knee jerk, muckraking mode in this election cycle and in our analysis of it is not our fault. Like mushrooms we are kept in the dark and fed a bunch of bullshit. I for one, feel I need more knowledge before I can truly comment effectively on a great deal of issues. On my time off I have taken to reading on the Internet and sharing my thoughts via blogging. I am starting to take the first steps now towards being an activist and an advocate for people and the ideas I feel can be trusted.
One such person is Catherine Austin Fitts. Why Democrats are not lionizing this woman, her work and her story is beyond me. She is a friend of mine; and, a friend of yours. Her work is readily available on the web I will cite some and leave links. Joining her in the effort to make our dollars work for us and revitalize the places we live in is as simple as a mouse click. I will return to this.
Catherine Austin Fitts began her career in 1978 at Dillon Read in corporate finance and mergers and acquisitions. Eight years later she became the firm's first woman Managing Director and board member. Her success raising capital for the renovation of New York's subway system, City University of New York, and several other major projects prompted Business Week to refer to her as a "Wonder Woman" and generated a reputation in financial circles that she could fix anything.
Fitts left Dillon Read in 1989 to join the first Bush Administration, working as Assistant Secretary to Jack Kemp at the Department of Housing and Urban Development with the task of "fixing" HUD and the Federal Housing Administration and cleaning up the S&L scandals. In 1990, she was named to the Securities and Exchange Commission's Emerging Market Advisory Committee. A year later, President Clinton's Treasury Secretary Nicolas Brady and Chief of Staff John Sunnunu, asked her to be a governor on the Federal Reserve Board and a member of the board of Sallie Mae. This was heady stuff for a woman of forty. But she'd already started her own investment bank and software firm, Hamilton Securities Group, Inc and turned down the Federal Reserve offer.
In 1993, Hamilton Securities, Inc successfully won a competitive contract bid with HUD to re-engineer portions of its $500 billion portfolio of mortgage insurance, mortgages, and properties. While fulfilling its contract, repackaging and auctioning off $10 billion of defaulted FHA loans, Hamilton developed a package of software tools to access publicly available online government financial records. This included an online disclosure and bid optimization system for the sale of defaulted HUD loans and an easy-to-operate program called Community Wizard, which allowed local users to create "place-based" data bases to track government money flows and facilitate business in their own neighborhoods.
Hamilton's efforts and loan sales software would save the FHA funds billions of dollars and earned Vice-President Al Gore's Hammer Award for re-engineering government. Also Community Wizard, perhaps Hamilton's most powerful innovation, became the central piece in prototyping a computer-learning center and data processing service in the Edgewood Terrace apartment building, as part of Fitts' idea to move neighborhoods from government subsidy to entrepreneurial business through private markets and investment. Following her very successful career line, Fitts again was a shining light in the dark world of federal credit and balance sheets.
The Real Deal About Enron, an interview with Catherine Austin Fitts, January 2003, By Daniel Armstrong*
So what's not to like. Here is a brilliant woman on the rise, solving real problems with smart solutions that make places qualitatively better. This is the progressive vision, is it not? Truly this is how we would like our government to function for us. We would all be proud Democrats to have Catherine Austin Fitts as a Secretary of HUD in the next administration. So what happened?
The answer requires a little backround in Economics, HUD loans and crime.
The world really isn't any different, it's just that some of the veils have been shorn away, and long-time Wall Street insider Fitts figures there's no sense pretending innocence any longer. Tax evasion, insider trading, drugs sales, black budgets, and terrorism are a significant part of global economic dynamics. It's simply how the money works in a financial system where so-called creative accounting methods are as transparent as mud and money laundering is part of the quantum mechanics of financial law. "The Real Deal," as Fitts refers to her straight-on analysis of money flows, "is that financial fraud, in all its wide variety of deceits, is the most profitable business on the planet today." Based on her eleven years experience on Wall Street and eight working with federal agencies cleaning up HUD and several large banking scandals, my guess is that Ms. Fitts knows what she's talking about.
The United States Department of Justice estimates that $500 billion to $1 trillion in criminal proceeds are laundered annually worldwide. It may be twice that. And the Real Deal is you can't do accurate economics if this isn't accounted for. Sums this large--hundreds of billions of dollars, says Fitts, can only be laundered into the system through Wall Street and the central banking system. Companies like Worldcom, Tyco, and Global Crossing. Banks like Citigroup, JP Morgan-Chase and the New York Fed. This isn't wild talk. We've heard it all in the unravelling of the Enron web already. The largest banks do the largest business transactions and they are the only ones capable of disguising the underside of these vast financial flows. This is curious and profound commentary from a former Managing Director and board member for the elite New York investment firm Dillon Read, Inc. and onetime Assistant Secretary of HUD. When she looks at the Enron bankruptcy, with her BCCI and S&L clean-up experiences to draw upon, she aptly quotes Yogi Berra, not Paul Volcker, to describe what she sees: "It's déjà vu all over again."
Curious and profound indeed! This is where I find Economics gets very muddled for me. I understand concepts like debt=bad, and my favorite, buy low, sell high; But, this is not the easy relationship we have in our central banking system. It gets very convoluted, and as it turns out, this lack of transparency is part and parcel of the system itself. There used to be a system in place called the Bretton Woods Treaty whereby the dollar had a relationship to gold and the outflows of gold from the treasury were easily tracked. This transparency in part was the downfall of this system which happened during the Vietnam period. As we fought the war for control of dope in South East Asia with a conscript army, gold flowed out of the treasury. In the 70's we saw the true effect this had on our economy.
The point of this rather breathless enumeration of the wonders of modern life is simply to point out the interconnectedness of these developments. What they collectively represent is a very efficient reform of the strategic nodes of the American political economy in such a way that ownership and control were consolidated, competition eliminated, control over cash flows tightened, transparency obfuscated, and the mechanisms of enforcement strengthened. Absent this discussion so far has been analysis of some of the costs.
The US economy today has a debt to GDP ratio of 280%. Gross derivatives exposure is on the order of $40 trillion, or 400% of GDP. Many take comfort from the fact that most of this debt is categorised as private sector, but this is not exactly true. The GSE's alone have gross liabilities of over $2 trillion, or 20% of GDP, and this does not of course include their derivatives books, which we unfortunately cannot examine. This amounts to a debt to equity ratio of around 33 to 1, compared, say, to Citigroup's comparable ratio of 5 to 1. Although it is true that the government in recent years has boasted a cash flow surplus thanks to windfall, bull market tax receipts, this, too, is open to question.
... the government's own accounting systems are in such a shambles that it is simply impossible to know how much money it spends and on what
Sander's Research The Illiquid Economy
So a lack of transparency is part of the fix. It is no wonder then we tend all be chasing our tails when it comes to the economy and economic issues. The will from the American people is there for sensible fixes, but, that is not the will of Wall Street or the Federal Regulators at all. In fact a sensible fix would destroy a great deal of their wealth and power. Like a tapeworm, this system works by making the host, us, want what it wants. So what we get is a meaningless debate about jobs, the "free" market and "isms" like capatalism that are neither here nor there and really so much sound and fury. It's not that America is dumbing down, on the contrary, the Internet has allowed millions of us to wisen up. We are simply not being given the data needed to see the big picture and that is the problem. Our dollar is backed basically by the thickness of Greenspan's glasses, ultimately it is backed by our tax dollar, and where that money goes even the government can't tell us. So what's HUD got to do with it?
Unfortunately answering that question means we need to first understand something that is hard for us to admit, "say it ain't so" is our first response. We need to understand criminal enterprise, the big money involved, how that money works both in politics and in the markets. Why? Because the big banks use the government to borrow our money for nothing, then they loan it back to us at 18%. The same thing goes on mortgages and the leading lending institutions the ginnie mae and freddie macs are basically a department of HUD. The difference is that there is very little regulation or oversight and investments are rarely questioned in mortgages. Illicit money is no good if it can't become liquid. And, we are talking big bucks, in the trillions in illicit, illiquid cash that needs to move through legitimate vehicles to be used.
Controlling All the Cash Flows
And so we come back to where we began. The proceeds of crime are just another source of cash. Crime is an attractive business either because you are forced to be a criminal because other avenues are closed to you, or because the arbitrage between operating legally and operating illegally is lucrative enough to make it worth your while. Obviously annual cash flows of $500 billion and higher cannot occur without the knowledge and at least the tacit sanction of the regulators and the central bank through which the money has to move. If you doubt this, consider the fact that Citibank was found guilty of helping the Carlos and Raul Salinas move scores of millions of dollars generated by narcotics trafficking out of Mexico, and that the most senior management in the bank knew about it and condoned it. Citi was fined, I believe, but that was that. The Bank of New York was caught facilitating millions in dollars worth of Russian criminal profits. Considering the IMF was lending billions to Russia at the same time, more drastic disciplinary action might have been taken since so much money had just gone missing . Not on your life. In an economy as highly geared as the US economy is, it is too important a source of money to be cut off. From our back of the envelope calculation earlier, one can readily see that to cut off money laundering would invite a stock market crash.
This brings us back to Olson. As marginal tax rates rise, so do the returns for non-participation. Using taxpayer guaranteed insurance, for example, to backstop private finance for public housing is nothing but a way of structuring a co-operative framework for free riders, who are, in effect, extracting the equity from the communities that they are investing in. From a financial point of view, this is not all that different from selling narcotics into a community and using the proceeds to finance a land deal. At some point, so many people become free riders that the net returns from economic activity are negative. This is, in essence, the significance of the story of Hamilton Securities that Catherine Austin Fitts describes in her SRA article The Myth of the Rule of Law.*
Sander's Research The Illiquid Economy.
Ahh so I do have a point! We are back to Catherine. HUD as Fitts discovered is being run as a criminal enterprise. The net result is negative return on investment for he places we live in. Fitts' fix, placed based data to invite private people to invest in HUD loans by giving good data in an easy format stepped on some very big toes. The unintended result of Hamilton Securities fixing HUD was that fix exposed organized crime at the highest levels of government and Fitts payed dearly for this. Hamilton Securities was systematically destroyed by the DOJ. Seven years of law suits, seized software and records, and, the destruction of Fitts' reputation. The result? Hamilton has been cleared of all wrong doing. I believe I am doing a diservice by telling this story in my own words, so please read: The Myth of the Rule of Law.
Since this time this amazing woman has used the knowledge and skill she has to start another investment company Solari. Solari is the fictional money of Dune. Basically Solari is a common sense way to give power back to the people. It makes the wealth we create serve our interests in the places it is created. Solari is a model, a software and an investment that you can make right now. Every one has 34,000 or so votes, their dollars, make them really work to create wealth in places and revitalize this country. This idea is picking up steam as more and more people start to feel sick to their financial stomachs from The American Tapeworm.
Peace!
Ted