The Second Reformation – Part I


The first Reformation began in the 16th century when Martin Luther started a movement to break away from the Catholic Church, which had shaped society in Europe for 1,000 years. When people feel disenfranchised from the system, once empowered by something, in this case Martin Luther, they will form a new system. That is what the early Lutherans did; they formed their own church that met the needs of their people. Thus began the Protestant branch of Christianity.

It may be about to happen again; however, this time it is not a greedy and repressive Catholic church causing the problem, nor is the effect going to be limited in scope to Europe. The next reformation will affect the world’s new God, ‘money’, and involve the reshaping of our new-world church, the world’s financial institutions, on a global scale.

Which form is the best economic system: Capitalism or Socialism
The measure of what is best will vary depending on whom you ask, and what kind of mood they are in. For many people it all boils down to the selfish notion of whatever is best for them as an individual. When that is resolved then it becomes what is best for the family, children and other heirs. Once that is secure, what is best for society in general may or may not be considered. Not everyone fits this pattern however. Some people have a more highly evolved sense about their place within a society, realizing that when society is made better as a whole, that their lot in life can be improved also. Instead of the proposition being ‘I Win – You Lose’, it becomes ‘If you win, I win too’.

Socialism is an economic system in which the means of production are publicly or commonly owned and controlled cooperatively; or a political philosophy advocating such a system. As a form of social organization, socialism is based on co-operative social relations and self-management; relatively equal power-relations and the reduction or elimination of hierarchy in the management of economic and political affairs. (Wikipedia)

Few people in today’s world will argue about the problems inherent in a pure Socialist/Communist society as we saw in the former USSR. In a pure Socialist society, the drive to grow and improve is removed. All incentives to excel in life are diminished or obliterated. Because of the abuses suffered under Capitalism, where very powerful people could completely dominate a whole class of people, it became a desired feature of a new system to eliminate the possibility that one person could come to dominate over another. That was the intent; in practice though it had problems.

The flaws with the Socialist system are many, but most notably, it is easily gamed by people who would manipulate it for their own personal gain. People who would normally excel and seek power still do so, any way they can find it; usually with under the table with illegal activities or corruption. In addition, people who lack power become increasingly dependent on the state to provide all their needs with the result being lower productivity and a population that lacks fulfillment. The happiness that can come as the result of a rewarding lifestyle is just not possible.

Capitalism is an economic system in which the means of production are privately owned and operated for profit, usually in competitive markets. Income in a capitalist system takes at least two forms, profit on the one hand and wages on the other. In any case, profit is what is received, by virtue of control of the tools of production, by those who provide the capital. (Wikipedia)

Carl Marx came up with the theory of Socialism as an answer to the corruption and abuse that he witnessed in early 19th century England with child labor and sweat shops being the norm. Marx was not an evil wana-be dictator hell bent on the murder of millions of people in Russia. He was a humanist that simply saw a flawed system, and wished to improve humankind’s lot on this Earth. Others would take those ideals and twist them into what became Soviet Communism.

The flaws in human nature that led to the horrible working conditions in 19th century England are still with us. Humankind still has the capacity to act selfishly and with a greedy heart by treating other people like livestock; there to do their bidding, and nothing more. Capitalism was at risk of abject failure during and shortly after the 19th century because of these abuses.

Therefore, while Capitalism has been more successful in terms of the growth and prosperity of our society than its antithesis, Socialism, they both contain similar flaws; flaws in our human nature.

In dealing with human flaws, where Capitalism primarily differed with Socialism, is that the real power remained distributed in the hands of the people. Democracy won the day. Those people through their elected representatives learned how to place a yolk around the neck of Capitalism to keep its greed and corruption in check, and from gaining too much control, thereby realizing a balanced system. In a balanced system, Capitalism could provide growth and improve ones lot in life without the fear of repression or enslavement.

The Capitalist system though is self-serving, not self-correcting as some would profess. Those who sit at the top of the food chain, pine for a return to a pure unfettered Capitalism where their power can grow unchecked, claiming that only when set completely free can the system reach its real potential. They will go to any length, and spend any amount of money on propaganda to sell their position to the gullible voting public. All that is needed is time and money. Enough time for people to forget what they are capable of, and enough money to buy their votes.

What does all this mean to Mr. and Mrs. Main Street USA.
In the early part of the 20th Century America was at a crossroads. Capitalism was failing horribly with wild economic boom/bust cycles, and a new kid on the block Communism was starting to look attractive to the people living under Capitalist repression. Leaders knew they needed to do something drastic to preserve their Capitalist system or risk losing it to a communist takeover as Russia did just a few years earlier. What they did would turn out to be revolutionary, and save Capitalism. They introduced social reforms into the system, attempting to realize a few of the benefits of Socialism without adopting the entire system. This was not even meeting Socialism half way; it was more like a gentle nudge in the general direction. However, it was enough at the time to make a dramatic difference. Society blossomed like a flower.

The result was twofold: First, the people were lifted up out of poverty, creating for the first time on planet earth a society dominated by a middle class. The second thing to happen was that this new middle class had an insatiable hunger for ‘things’; the trappings of the wealthy that they had been denied. That desire to buy the things that they needed and wanted made them into a whole new entity; they became consumers. The more people consumed, the more producers could grow and produce the things they wanted. The American consumer economy created unprecedented growth, leading them to dominate the entire world as far as Income per capita and standard of living.

America has a debt problem; however, it is not the one you have been hearing about
A little problem happened on the way to the bank however. Economic output requires resources, many resources; especially energy. When domestic resources could not meet demand, those resources had to start coming from elsewhere. When that happened, the growth dynamic changed. Wealth started being syphoned off the economy to other nations. With those dollars disappearing, it became harder and harder for the typical American family to continue the growth they had all become accustomed too. However, being a resilient and industrious people, we found ways to continue to grow the economy, even while more and more of the nation’s wealth was being drained off. We discovered a new source of untapped labor by putting women to work. That bought us another decade, or so. However, the hunger to consume and grow the economy was great, and the producers of goods found ever more ingenious ways to tease that hunger.

They soon discovered that extending credit was an easy way of creating wealth where it did not exist before. The banks became the creators of the money supply by lending out more money than they had in deposits; they were permitted to actually create money out of thin air. Up to 10 dollars for every dollar they have in deposits can be created by a bank and loaned out.

It was soon realized that creating money out of thin air was very profitable. In fact, it did not even matter if the people borrowing the money had the ability to pay it back. More profit is made on a risky loan, than on a secure one; a lot more profit. There soon began a new gold rush, a credit gold rush, for the remaining gold left in the pockets of the middle class. The fact that this huge influx of money to the system maintained a healthy economic growth meant that the powers that be, the government, who should have been watching out for us, and crying foul, were turning a blind eye.

While Americans were going farther and farther into debt in a crazy attempt to maintain what had long ago become an unsustainable growth in the economy, the drainage of wealth from the American middle class became even more acute. In search for ever better profits, and a global market place with access to education, suddenly an inexpensive workforce became available. Manufacturing moved overseas in the proverbial blink of an eye. All those wages paid to American workers and being plowed back into the economy where gone. More wealth than ever before was now being syphoned out of the American economy. More and more debt would be needed to keep the economy fueled and growing. The only way to effectively do that was by easing credit so that anyone with even a slight desire could take a big swing at the American dream, go deeply into debt and buy a house. In addition, very efficient sales and marketing firms made sure everyone who was still breathing and capable of forming a signature got their piece of debt to fuel the economy. It was a feeding frenzy at the mortgage brokers to see who could sell the most debt, risk be damned.

The normal checks and balances that would prevent abuse of the system were tore down, one by one until the feeding frenzy reached a point commonly referred to as a population crash. A population crash occurs when a species of animal is given unrestrained access to food, and so they over breed creating more and more of their own kind until suddenly the last of the food is eaten, and there is no more to be found. The population then crashes with a massive die off because of starvation, sometimes even leading to the end of that species. It is a real phenomenon that happens in nature. We are now going through a financial population crash as the supply of new credit, like an animal’s food supply has dried up. When there was no one left to loan money to, all the people who could take on debt had already done so, the system lost its food supply, and the whole system started crashing.

In a panic, the government made a bone headed move with TARP. They gave billions of dollars to the banks in an attempt to create liquidity so people could start getting access more debt and keep the economy fueled. The banks in one of the only intelligent thing they would do throughout this fiasco withheld the funds and tightened up credit. They knew that the people could not perpetuate the debt game any longer. There was no one left to borrow the money they were given. In fact most banks didn’t even want or need the money, but were forced to go along. After all they could creat as much money as they need any time they wished.

The economy continued to suffer for another year with anemic growth. However, before you rush out and give your banker a big hug and a thank you for the tough love, know that they did put that TARP money to good use. They had to spend it once it was on their books, so they lined their own pockets with record payouts and bonuses to all executives. The rich get richer, while the rest of us stew in our own juices.

This will be continued in part two where solutions to some of our most pressing problems will be laid on the table.

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4 responses to “The Second Reformation – Part I

  1. I’ll nonimate you to be king. There certainly needs to be some new thinking. However I’ve been comming to the conclusion that the only way to really effect major change is the old tried and true method. Violence and civil disobedience. our Representative government was desiged to bring change to society and avoid the violence. As we can see our system has been captured by organized money and those who are in control as usual, will not relinquish that power without being forced to do so.

    • I could not agree more Nick, change is going to have to come from the bottom. I hope it doesn’t require violence though, but if that is the only way to take the country back, then so be it.

  2. Interesting reading, although much of the historical account of what caused what is incorrect.

    Here’s an example: “The only way to effectively do that was by easing credit so that anyone with even a slight desire could take a big swing at the American dream, go deeply into debt and buy a house.” –

    The rules in buying a house had stayed steady since credit had started being used. You normally had to save up about 20% for a down payment, since banks having to take the risk of the mortgage loan, found that was enough to help ensure the home buyer would not walk away. This started to change when the CRA was pushed hard against banks in the early 1990’s during the early Clinton years.

    Banks had to play ball with the federal government in order to be allowed to expand their operations. This meant they had to lower their standards to get loans to low income people who didn’t have the saved down payment and credit rating so they could buy a house to be in compliance with the CRA. In order to juice the lower standards across the industry, former democrat administrative officials took over operations at Fannie Mae and Freddie Mac, two GSE’s, and pushed lower and lower mortgage standards. Fannie and Freddie also bought up mortgage packages from banks, much of which included the high risk loans. Banks and mortgage companies found that they could push more loans with the lower standards and then resell them to Fannie and Freddie for $2000 for each loan.

    This became a situation of capitalizing of the profit and socializing the risk, causing an out of balance system that was caused by government social engineering. Fannie and Freddie had to be bailed out to nearly half a trillion dollars, and still counting by the tax payers. It’s sad though that now, the one’s who ran Fannie and Freddie into the ground, are working to buy up blocks of properties at pennies on the dollar, making out like the bandits they are. Those in Enron who were responsible for fraud were sent to jail. Those who ran Fannie and Freddie fraudulently aren’t going to jail, they are still enriching themselves, and the rest of us are suffering for it.
    For detailed researched information and names, read Reckless Endangerment.

  3. You state that I’m light on facts, and then just spout the same right wing propaganda that we keep hearing. The banks do what they want, and they sold risky loans to make money.

    “The Financial Crisis Inquiry Commission reported in January 2011 that “the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.” — Subprime mortgage crisis – Wikipedia: http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

    “This American Life”: Giant Pool of Money wins Peabody
    http://www.pri.org/stories/business/giant-pool-of-money.html

    http://en.wikipedia.org/wiki/File:Mortgage_loan_fraud.svg

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