By Marilyn M. Barnewall
March 14, 2009
To define wealth, we must look at a variety of things. productivity (a person's or a nation's), the real and lasting value of an asset, whether the asset's value is real or imagined, and the benefits realized by a person or a total society.
What is wealth?
What Bill Gates did with MicroSoft and what Stephen Jobs did with Apple are good examples of wealth. By creating software that enabled people to easily use personal computers for both business and personal reasons, productivity was increased about tenfold. Productivity is one way to judge true wealth. Gates and Jobs created something meaningful. What they did basically moved America's economy from manufacturing and industry to an economy driven by information and technology. This is a perfect example of wealth.
The money Gates and Jobs gained from their success is profit, not wealth. The increased net worth of people who invested early in MicroSoft stock provided profit, not wealth. If someone utilized profits from their MicroSoft profits to build a home for themselves or the homeless, that portion of profit from the stock sale becomes wealth. Profits make people rich, not wealthy. Entire nations became wealthy because of the profits resulting from micro-chips and software produced for personal computers. or, they remain third world nations.
Wealth occurs when jobs are produced, salaries are paid, and people buy homes because the new products create new jobs. People get rich when they profit on investments, they possess wealth when they utilize profits to establish something of lasting value for themselves and their communities (a community may be as small as a family). The failure of Wall Street represents lost profits. The Wall Street profits that would have been productively used are lost wealth.
Most third world nations can trace their economic designation as "third world" to greedy governments filled with individuals seeking to profit from positions of power. They and the oligarchies surrounding them prefer personal profit to using their nation's natural resources to build national wealth. That statement ought to make Americans very leery about the non-stimulus stimulus package that was signed into law this week - the one that provides a lot of profit to those in positions of power.
Frank Shostak, an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org is chief economist of M.F. Global. His January 6, 2009 article is of substantial interest to anyone trying to understand whether government intervention will help solve our economic problems. You can find the article, titled "Why Congress Must Stop the Fed's Massive Pumping."
In his article, Shostak refers to "false activities." He says "False activities cannot survive without the support of monetary pumping; they cannot secure goods and services without money out of thin air." With this single statement, Shostak provides the answer to why government intervention with TARP - or, stimulus - funds will not bring the American economy back to life.
Based on that statement, we can look at Citigroup, Wells Fargo, Bank of America, Bear Stearns, General Motors, Chrysler, AIG and all of the governors of states standing in line to get their share of your and my taxpayer dollars as "false activities." They cannot survive without the "support of monetary pumping. They cannot secure goods and services without money out of thin air."
When speaking of "money out of thin air," Shostak refers to fractional-reserve banking. Fractional-reserve banking increases the amount of fiat currency. Fiat currency is what we (and most other nations around the world) have: A currency with nothing of value - like gold - backing it).
Fractional-reserve banking refers to how money is created out of thin air. Every time a consumer or a business borrows money from a commercial bank, 90 percent of the amount borrowed creates new dollars. For every dollar you or I or a business of any size borrows, 90 new cents are created. If you borrowed $30,000 to buy a new car last year you, personally, created $27,000 in new greenbacks fresh from the printing press. If you borrowed $300,000 to buy a new home, you created $270,000 in new currency. And, as long as new cash is being created, the people we send to Washington to represent us can keep spending it because the Treasury will keep ordering new Treasury Bills and the Federal Reserve will keep giving them to its member banks to sell. No wonder they encourage us to bankrupt ourselves with debt! Without our borrowing so they can create new money that will be taxed several different ways in the process of what we're borrowing for, they cannot keep spending like drunks on a binge.
So, the "false activity" about which Shostak speaks creates money out of thin air while a "true activity" - a new business, a new law or medical or dental practice, a new idea about how to make better shoes or apartment buildings - creates true wealth. "False activities" require the government to make cash available, "true activities" do not.
Why is that?
Because people need true activities and will financially support them. If they do not need the activity, it will fail and soon be gone. If the dentist has bad breath or there are so many lawyers that a community cannot support all of them, the dentist and some lawyers will fail. True activities make this happen because free enterprise lets cream rise to the top. Those who succeed are the best of the available field. Thus, true activities encourage quality to rise to the top.
False activities encourage. lack of quality to rise to the top. That is why governments and giant corporations do not manage much of anything very well. They encourage negatives to rise to the top. those willing to compromise their integrity to get ahead, those who will take bribes to maintain their power, and those who have never managed a risk in their lives. They support bad behavior - like bailing people out who cannot make their house payment while penalizing those of us who do. They keep their power because that is the kind of environment big governments and big companies create. Thus, politicians rise to the top, not intelligence or creativity or honesty or ethics. The Enrons of the world exist because some people find managing the risk of truth telling beyond their capabilities.
Remember this: Free enterprise - or, capitalism - requires risk management skills. When risk is removed from our personal or business lives, we are living in a socialist, risk-free environment. Socialism is not known for bestowing freedom on people.
The basic question is this: Are you willing to trade your freedom for a risk-free society run by government?
What people were viewing as they watched the executive managers of the automotive industry be questioned about the money they need so they can continue their "false activities" is men who do not realize that their primary responsibility as executive managers of free enterprise capitalist companies is to manage risk. The reason they failed as executive managers is their inability to manage risk. Thus, they seek a socialist solution: a government hand out. They become false activities dependent on money out of thin air.
What the government is trying to do with its plan of "let me give everyone money so the economy will be stimulated and we can get back to truly irresponsible spending" suggests that all it takes to establish and maintain a healthy economy is money. If that were true, the world would be full of healthy economies because, God knows, governments around the world have thrown huge amounts of money into their systems.
Shostak is right. Some activities are false, some are true. You can tell the difference between them by who pays for them.
Barrack Obama wants to print cash America does not have to pay for infrastructure improvements. It is part of his economic recovery plan. We need the improvements to infrastructure, for sure.
Why is his plan destined to fail?
Because it is a false activity. It requires government to print money it doesn't have to pay for projects about which it knows little or nothing and will, thus, be unable to manage properly.
What government should be doing instead is helping cities and states gain sufficient support from the people for infrastructure improvements. Help them get the support of the people for municipal bonds. let TARP guarantee the bonds (provided the people get to vote on which infrastructure projects will be accomplished). If mayors and governors get to choose which infrastructure projects will be funded through bonds, it will likely not be the most needed project.
Each state government should be required to provide the new administration with a list of 25 potential infrastructure improvements picked by the people. Send some of the TARP funds to pay for mail-in elections to identify the most-needed infrastructure updates. Let the people choose the ones they consider most important. To do that, state governments need to honestly tell people about potentially faulty bridges that might come crashing down. Honesty is hard for government at all levels because the only way to get elected is to make promises that are impossible to keep and to hide the real problems. which is why false activities get so much attention and true activities remain hidden.
Once the infrastructure improvements are identified, open-bidding sessions should be publicly submitted. Each bid for each project should be published in the daily newspapers. An engineer consultant should be retained by each state to evaluate the bids and point out any short comings. His or her comments should be published along with the bids.
Once the bidding process is completed, the work begins. It is done not by those who are inexperienced but get the job because they are out of work (another reason false activities fail). It is done by experienced people who, by contract, will be held to the terms of the agreements they signed to win the bid. No under-bid contracts allowed. You get paid what you bid and if you run out of money before you complete the job, you get to pay for it, Mr./Ms. Contractor.
The government, then, is lending the money to states rather than printing money that will never be repaid.
Instead, TARP gives money to the largest banks in the country. What are these big banks doing? They are putting their most worthless assets in off-shore subsidy accounts.
According to Raymond Baker, a Senior Fellow at the Center for Information Policy, and Jack Blum who, though now retired, has investigated financial crimes for the federal government for 30 years, the banks receiving the most TARP funds have sent their garbage assets to subsidy accounts in offshore tax havens. You can view the American News Project video on this topic.
Morgan Stanley has 99 subsidy accounts offshore, Citigroup has 92, Bank of America has 52, J.P. Morgan has 27, and Lehman Brothers had 23. They establish these accounts, send their trash assets there to hide them from auditors, but list them at full value on their balance sheets as if they were AAA quality. If you want to know the truth about why credit is frozen at the major banks, take a moment and watch the video.
For the most part, the smaller banks around the country do not have the troubles you hear laid at the door of the entire commercial banking industry. The six largest banks are the ones with problems. And that should tell us something, too: Organizations that get too big to be responsive to consumer needs and wants should be discouraged - as Adam Smith, the father of capitalism, said. When companies no longer respond to consumer needs, Smith told us in the Theory of Moral Sentiments, greed, not capitalism, is running things. Boy! Was he right!
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It will be a miracle if the government's tampering with those "too big to fail banks" that are in trouble because of their very "too big" status does not cause extensive harm to currently healthy commercial banks.
© 2009 Marilyn M. Barnewall - All Rights Reserved
Marilyn Barnewall received her graduate degree in Banking from the University of Colorado Graduate School of Business in 1978. She created the first wealth creation (credit-driven) private bank in America in the 1970s. Prior to her 21-year banking career, she was a newspaper reporter, advertising copywriter, public relations director, magazine editor, assistant to the publisher, singer, dog trainer, and an insurance salesperson and manager.
She was named one of America's top 100 businesswomen in the book, What It Takes (Dolphin/Doubleday; Gardenswartz and Roe) and was one of the founders of the Committee of 200, the official organization of America's top 200 businesswomen. She can be found in Who's Who in America (2005-08), Who's Who of American Women (2006-08), Who's Who in Finance and Business (2006-08), and Who's Who in the World (2008).