Conventional Wisdom

I have read several books lately by John Kenneth Galbraith; while they are older, they are very informative. In “The Affluent Society” I think he was still formulating some of his later ideas but he has a whole chapter on conventional wisdom. When you break it down to its simplest explanation conventional wisdom is simply what most people find acceptable. This doesn’t seem completely negative until you start to consider what that really means in that it is simply the net average of the most common shortcut to understanding.


Conventional wisdom therefore can be a very functionally useless but dogmatic and dangerous thing when applied to politics, economics, or any other social based and therefore intricately complicated process. Because these processes inherently contain so many different variables they are constantly changing; often rapidly. In other words, since these fields are affected by an almost limitless array of variables, the rate of change in the basic laws of social systems is likely to be exponential. Therefore, a constantly evolving understanding is necessary to deal effectively with these changes. This requires a great deal of effort and concentrated study just to keep abreast of changing conditions so that one can even begin to know how to deal effectively with basic social concerns. Conventional wisdom, by its very nature, is fundamentally incapable of effectively dealing with changing circumstance yet it is the core principle of most of our modern political parties.


In other words, politicians cannot get elected unless they understand how to play upon most people’s perception of conventional wisdom. It is an absolute necessity for success at the polls in our modern system. The logical inverse to this is the ability to gain political power by controlling media so that you can shape conventional wisdom; now you have something that is infinitely powerful even though it is also functionally unable to deal with changing circumstance. The very tool that tends to strengthen a candidates ability to get elected weakens his ability to effectively govern. The upshot is that politicians cannot ever really go against conventional wisdom without alienating their own voter base. Unfortunately, this rules out the ability to innovate and deal with issues in a proactive way. Instead, politicians must wait for conventional wisdom to convincingly fail in order to prove the necessity for innovation. Conventional wisdom is the natural enemy of innovation of any kind. Therefore, both in the field of economics and politics what we have are groups of people steadfastly devoted to anachronistic systems that are outdated but cannot be discarded until they completely collapse. At that point, innovation must come about to solve the issue and we start the whole cycle all over with this innovation now becoming the new Conventional wisdom to be protected against further innovation until it also fails because it is not allowed to innovate for changing circumstance; ignoring the truth that circumstance is always changing.


Most of our social beliefs and economic theories have historically been controlled by this cyclical process of conservative resistance to change followed by failure. We are always far behind in reacting to change because we are so enamored with conventional wisdom and the mental laziness that nurtures it. Imagine if we took this model and applied it to scientific studies (although it could be argued that this is exactly what creationist theory is all about). We would still be riding horses and struggling to grow enough food to eat every day. For some reason we have accepted that our understanding of science is constantly evolving and that every theory is just that…. a theory that only remains to be proven wrong before we adapt a new one. Yet in the social sciences of economics and politics we treasure conventional wisdom and will often violently oppose innovation that threatens it. I would venture to say that most wars can actually be traced to this kind of collision between circumstance and conventional wisdom that becomes both outdated and fanatically defended.



This is exactly the reason why American politics is so enamored of opinion polls. Successful politicians are not leading they are following. Any successful politician on the American political scene today is much more interested in finding out what the majority of the voting public believes than actually searching out solutions to problems that come from ever changing circumstance. This tendency is not limited to one political party or another. It is also not limited to conservatives vs. liberals as both are equally careful to avoid contradicting the perceived conventional wisdom of the voter base that put them into office. The key to power is holding office, not in effectively governing once elected. Unfortunately, this pandering to conventional wisdom of any kind is the exact opposite of the innovation that is needed to solve the issues arising from the circumstantial complexity of the social and economic spectrum.


While there is a growing effort to control conventional wisdom by propaganda in this country there seems to be no effort to understand the real problem behind our inability to deal with changing circumstance; our fundamental reliance on conventional wisdom and its inherent inability to deal with change. It is the crippling deformity that paralyzes our government from the very top downward. We seem much more interested in finding men who have the wisdom to spout our own beliefs back at us than finding men who want to solve problems. What we need is the understanding that, like scientific knowledge, political expertise must first accept the premise that every theory is only as good as its most recent proven effectiveness for dealing with problems. We seem to value politicians who are principled beyond those who are willing to innovate. To be seen as someone who “flip-flops” on the issues is to be seen as politically weak or possibly even corrupt and is usually the death knell of an election effort. Innovation in almost all fields is well understood to be both desirable and necessary to increase efficiency but innovation in political or economic fields is looked upon as weakness or worse yet, fundamentally foolish.


The term Conservative in its most basic sense implies an effort to preserve. This preservation can extend to many different areas or beliefs but is most often a basic resistance to change and supports the maintenance of traditional institutions and supports in society. While most conservatives would probably agree that a certain amount of change in society is inevitable, it is their basic belief that the amount of change should be minimal so as to provide stability. Unfortunately, this puts them in the insupportable position of resisting change in a modern world where technological advancement has literally exploded in the last 30 years. The fields of modern communications, economics, manufacturing, and energy are vastly different than they were just a short time ago. Advances in these fields have impacted every strata of modern society and will continue to do so for the foreseeable future. The conventional wisdom of the conservative agenda is quite literally unable to deal with how these changes have impacted society effectively. To be fair conventional wisdom in any form is incapable of dealing with innovation but a political movement that insists in basing its core beliefs on conventional wisdom to the exclusion of innovation is especially prone to this tendency. Abraham Lincoln was fond of explaining to his detractors that he “dealt with circumstances as he found them” rather than trying to control them to meet his preconceived beliefs. It is that spirit of understanding that we need to promulgate in politics and economics today. The spirit of modern conservatism can be captured in two observations.


1) Those who have power are the most anxious to maintain the status quo.
2) Fear of the unknown is directly proportional to how comfortable you are right now.



It is my own basic antithesis to the idea that conventional wisdom is an effective means of governance that leads me to say that I am not a Conservative. It is this same understanding that deeply confounds me when so many people who are obviously at the bottom of the social strata proudly proclaim that they are.

Ownership of the Media

As discussed in my last post, there were originally two main supports for avoiding propaganda on the publicly owned airwaves in this country. The first was the Fairness Doctrine which was the guiding principle behind the FCC’s efforts to make sure that custodians of the public airwaves focused on presenting the news instead of pushing an agenda. In other words, it is the basic difference between the efforts to inform vs. the efforts to convince. By the ultimate but limited usage of the FCC’s ability to control who had a license to use the airwaves the FCC attempted to make sure that no one political viewpoint could completely dominate the system. Propaganda, to be effective, must control the spread of information so that opposing viewpoints are not heard or considered and complete editorial control over what is broadcast is the first step in successful propaganda. With the Reagan administration's demolition of the Fairness Doctrine that I discussed in my last post, the door was open to removing the second support.

The second support for maintaining the integrity of the publicly owned airwaves consisted of a steady effort by the FCC to control the ownership of media as a means of assuring the spread of accurate information. The idea of a free press in this country is as old as the nation itself. The protection of this idea has taken many different forms but by and large it still springs from the basic concept perhaps best expressed by Thomas Jefferson, "The only security of all is in a free press. The force of public opinion cannot be resisted when permitted freely to be expressed. The agitation it produces must be submitted to. It is necessary, to keep the waters pure." It is the idea of a press as free as possible from vested interests of ownership that has shaped our national policies concerning the media since the early 1920's.

With the rise of corporate interests in this country it became obvious that this idea needed protection from the inevitable control that would come from unrestricted ownership of the media by the wealthy as both the Supreme Court and Congress have on numerous occasions ruled and legislated that the American public owns the airwaves. It is the duty of the FCC to see that the public interests are served by those who obtain license to utilize the airwaves. If a corporation or even a wealthy individual owns the radio or television station through which a local community gets its news it is all too common for viewpoints opposing the vested interest of that ownership to be censored or even altogether silenced by editorial authority. While this is an inevitable result of our modern business tendency for corporate entities to be vested in diverse industries it can also be a dangerous temptation for propaganda as opposed to information as corporate entities seek to convince rather than inform public opinion.

As an example let us assume that a news organization is simply that; a news organization who's sole interest is the reporting of events. In this scenario it can be argued that such an organization is in fact a purely market based entity in that its ratings are its prime motivation as ratings are directly proportional to advertising premiums which pay the bills. However, the reality of modern corporate America is that media outlets are almost without exception actually individually just one arm of what is usually a multi-faceted corporate conglomerate; usually a very small arm in terms of fiscal returns. Under these conditions is it reasonable to expect that the news media outlet will report accurately on issues that adversely affect the much larger profit share of its corporate ownership? Naturally, if other media outlets are reporting on this same issue even though it negatively affects any one corporate entity it must be forced to at least address the issue, it cannot ignore it completely nor can it arbitrarily report facts and figures without a basis in fact without facing the possibility of being exposed as propaganda rather than news. It is this diversity; the widespread ownership by groups with diverse viewpoints and vested interests that best guarantees the spread of accurate information. It can be reasonably argued that the more diverse the ownership of our media outlets are; the more accurate will be the information they broadcast. Of course the inverse axiom is that the more narrow the ownership of the media becomes the more inaccurate the broadcasts will be and the more likely they will devolve into propaganda as opposed to news.

Unfortunately, this logic has steadily fallen prey to corporate grasp in this country for the last thirty years along with the Fairness Doctrine. On February 8, 1996 the Telecommunications Act of 1996 was signed into law by President Bill Clinton. This act was the first major legislated change in the industry since the Communications Act of 1934. It was widely touted by its supporters as an act to encourage the free market in the industry and to increase competition which would inevitably drive prices down and improve the quality of communications services. While the main focus of the act was telecommunications such as the telephone industry and cable television it also directly effected FCC rules defining media ownership. Previous to this act the FCC limited the ownership of media outlets in order to assure diversity of ownership and protect the integrity of individual ownership. These regulations limited the ownership of radio stations to forty for any one group and further limited this ownership based upon markets. In other words, no one entity could own numerous stations in one market and therefore monopolize the industry and thereby the spread of information. Television station ownership was similarly limited as were newspapers. All of these types of media outlets were well recognized to be the cogs in the machinery necessary to combat propaganda.

It is interesting to look at the results of the Telecommunications Act of 1996 and its immediate effects on the industry. While one of the act's basic intents was to foster competition and fight the consolidation of the ownership of media outlets that had been underway since the abolition of the Fairness Doctrine by Reagan in the early 1980's it has had the opposite result. In 1983 the number of major media outlets in the United States was 50. This number is now reduced to 6. Private ownership of radio stations by individuals has shrunk to numbers lower than have been known since the early days of radio stations even though the gross number of radio stations is growing astronomically. Over 4000 individually owned radio stations were bought out in the first 4 years after the passage of the act by corporate entities. Huge corporate entities with thousands of stations now own the vast majority of radio stations in the United States today. Local news is increasingly not even existent on most of these stations and those that do still retain some news capability increasingly find their content editorially doctored so that the resultant report is almost unrecognizable from its original form.

As the ownership of our media outlets shrinks the pressure to remove remaining constraints to ownership has increased proportionally. In 2003 the FCC under pressures from large media concerns intent upon increasing their monopoly, further loosened the rules concerning media ownership. Unlike previous FCC rulings these changes were not made available to the public for a time period before their release so as to afford the public time to comment. The new rulings did several things to allow for more consolidation of the industry by corporate entities. Market shares for ownership of all media in a given market was raised from 35% to 45% (this had previously been raised in a similar ruling in 1985 from 25%). Restrictions on newspaper and TV station ownership in the same market were removed. Requirements for periodic license review for renewal by the FCC were dropped. In effect, licenses are no longer reviewed for "public interest" considerations at all. Not only is the Fairness Doctrine not considered in these reviews the reviews themselves are no longer conducted under this guideline so a broadcast license is in effect perpetual and subject only to monetary fees with the public interest no longer a consideration at all. We have basically come full circle with this ruling ignoring 80 years of careful protection of the public interest as the basis for all such decisions and instead bowed subserviently to the corporate interest.

Fortunately, there is still a faint heartbeat in the ideas surrounding the belief that the public airwaves are still the property of the American people. In a case brought before the United States Court of Appeals for the Third Circuit the majority ruled 2-1 against the FCC and ordered it to reconfigure how it justified raising ownership limits. Since the Supreme Court later turned down an appeal on this case (Prometheus Radio Project v FCC) this ruling still stands. It is worth noting that the dissenting opinion on this case was turned in by one Antonin Scalia who was also instrumental in striking down the Fairness Doctrine as I pointed out in my last post. Since Mr. Scalia is now on the Supreme Court we will undoubtedly hear from him again on this subject at some point. It is also worth noting that this ruling strictly applies only to the provisions surrounding the market percentage ruling and does not apply to the much more important issue of FCC review of licenses. In 2007 the FCC made another ruling removing restrictions on newspaper and TV ownership in the same market as there was some concern that the court ruling might have invalidated this section as well.

The most disturbing part of this whole situation is the loss of the recognition of how important the idea of a free press is to this nation's survival. There are several ways to attack a free press and limit its ability to inform the public. The first and most obvious way is to simply legislate it out of existence by having the state take over the media directly. This is a highly effective means and both has been and still is utilized with great success in different areas of the world to control political expression. There is little danger of this type of takeover in this country presently. However, it is beyond question that we are now faced with a different type of attack on our institution of a free press. If corporate entities are allowed to use their superior financial and political support to simply buy up media outlets they can control the information that Americans use to decide who to vote for at the polls. Since they no longer are under any restrictions such as the Fairness Doctrine or license review based upon "public interest" they basically have carte blanche control of the levers of public dissemination of information once they attain ownership. As an example of whether this in fact underway I would ask you to consider if you remember any of the major news outlets in this country reporting on the recent FCC rulings above.

The Fairness Doctrine

American thought and American politics will be largely at the mercy of those who operate these stations, for publicity is the most powerful weapon that can be wielded in a republic. And when such a weapon is placed in the hands of one person, or a single selfish group is permitted to either tacitly or otherwise acquire ownership or dominate these broadcasting stations throughout the country, then woe be to those who dare to differ with them. It will be impossible to compete with them in reaching the ears of the American people.

— Rep. Luther Johnson (D.-Texas), in the debate that preceded the Radio Act of 1927

The radio act of 1927 mandated the Federal Communication Commission’s (FCC) forerunner, the Federal Radio Commission, to grant broadcasting licenses in a manner as to ensure that these licensees served the “public convenience, interest or necessity”. What Representative Johnson understood was the power of propaganda to stifle democracy and the necessity of a well informed general public to nurture it. What most Americans fail to remember is that the American Public owns the airwaves and the protection of these airwaves so that they can be utilized to advance the public good is the mandate of regulatory bodies such as the FCC. The free and unbiased sharing of information is probably a utopian ideal but the effort to promulgate this ideal is the best protection the American public has against the proven effectiveness of organized propaganda.

The FCC is an independent agency of the US government that was created by congress in 1934 to replace the Federal Radio Commission which had previously been charged with oversight of the publicly owned airwaves here in the US. The basic operating principle for the FCC was contained within its charter to regulate radio use “as the public convenience, interest, or necessity requires.” The mandate was necessarily broad to encompass an industry that was growing in both size and importance as radio became the biggest megaphone with which to speak to the American public and there were widespread concerns over the possibility of propaganda being used to advance political positions as was currently underway in much of Europe at the time. From the very beginning, the ideas surrounding the powers of the FCC was aimed at protecting the American public’s right to information and avoidance of any private entities ability to monopolize the airwaves which were publicly owned. It was well recognized that such a monopoly would enable censorship by omission. In other words, if an entity owned all the radio stations it could virtually eliminate the spread of information inimical to its interests whether they be political, financial, or both. One can easily see that that this fear was well grounded in reality as this was largely the methodology that Hitler used to take over Germany just a few years after the formation of the FCC.

Through much of this century the FCC struggled with finding the proper balance between freedom of speech and the idea that government regulation could lead to censorship. It was in this spirit that the FCC came up with a policy formulation first known as the Fairness Doctrine. This doctrine called for broadcasters to show “due regard for the opinion of others.” In 1949 the FCC adopted this doctrine as a formal rule. In 1959 Congress amended the Communications Act of 1934 to formalize this doctrine into law, rewriting Chapter 315 (a) in this act to read as follows: “A broadcast licensee shall afford reasonable opportunity for discussion of conflicting views on matters of public importance.”

The basic premise behind the Fairness Doctrine was built on the fact that the American public owned the airwaves themselves and the FCC, as a regulatory agency of the American public, was in charge of regulating who had licenses to broadcast over these airwaves. In other words, the FCC saw itself as a trustee of a public resource and insisted that licensees who used these airwaves accept public interest obligation in exchange for their usage of the airwaves. The Fairness Doctrine itself, as one of these obligations, was simply meant to insure that a variety of views be presented; not just the views of the ownership of the license to broadcast. The Fairness Doctrine had two main provisions. The first provision stated that a licensee must devote at least a part of their broadcast time to matters of controversial public interest. The second provision stated that the licensee must also air contrasting views concerning those matters but it gave licensees wide leeway as to how that was to be done.

The Fairness Doctrine was one of the two main prongs of an effort to ensure the public’s interests were served. The second prong of this effort were limitations over how many such licenses in a given market area any one entity might hold. By controlling licenses according to these two mandates the FCC was charged with making sure the public’s interest in having the accurate information necessary to be an informed voting populace was served. I will get back to this second prong in my next post.

In actual operation the FCC’s enforcement of the Fairness Doctrine was a decidedly laissez faire approach. Contrary to what Rush Limbaugh or any one of numerous right wing ideologues regularly preaches when the Fairness Doctrine comes up it was not government censorship in any way at all. In practical terms citizen groups or private organizations would petition licensees for fair representation if they detected what they perceived to be an unfair amount of emphasis placed upon one side on an issue. The broadcast entity would then attempt to redress these grievances by apportioning time for these opposing viewpoints to be heard. There was no 50/50 rule proscribing that each licensee or broadcaster had to have equal amounts of liberal and conservative slanted views. There were no FCC censors monitoring the airwaves threatening to remove a station’s license for unequal reporting. If a private organization or citizen’s group was not satisfied with the response of their complaint or if the station itself disagreed with the complaint either was free to petition the FCC to look into the matter. The FCC retained the right of renewing broadcast licenses and licensees accordingly made every effort to placate the presenters of such enquiries. “Reasonable opportunity for presentation of opposing points of view” was the relevant phrase used in arbitrating such issues.

In such instances, the FCC considered prime time vs. less popular time on the air as well as total time allotted to each viewpoint but the main emphasis was on omission of opportunity. In other words under the Fairness Doctrine a station could spend as much as five times more time and effort presenting any viewpoint over another without violating the principle according to the FCC but it could not completely omit on viewpoint in favor of another. In actual practice over the 26 years the Fairness Doctrine was in place there is only one instance of a licensee having the licenses not renewed for violating the Fairness Doctrine for the simple reason that it was a decidedly lax guideline based upon the principle that stations could not practice totalitarian propaganda techniques. It was never intended to guarantee fair and balanced reporting, only as a buffer against unvarnished propaganda on issues that impact the public interest.

Inevitably, such a formalized guideline will run into legal challenges and this is exactly what happened with the Fairness Doctrine after Congress made it law in 1959. In 1969 Red Lion Broadcasting v. FCC made it to the Supreme Court. In this case in a unanimous decision the Supreme Court decided in favor of the FCC and against the idea that the Fairness Doctrine was antithetical to First Amendment free speech rights. It is worth looking at this opinion to understand the issue in a little more detail.

In the first Supreme Court Justice Byron White writing the unanimous opinion of the court addressed the issue of public obligation by broadcasters. In response to the idea that broadcasters were protected under the First Amendment so that they could broadcast whatever they wanted White pointed out that since the airwaves are a limited media owned by the public, it is the public’s right to information that is important:

This is not to say that the First Amendment is irrelevant to public broadcasting. On the contrary, it has a major role to play as the Congress itself recognized in 326, which forbids FCC interference with "the right [395 U.S. 367, 390] of free speech by means of radio communication." Because of the scarcity of radio frequencies, the Government is permitted to put restraints on licensees in favor of others whose views should be expressed on this unique medium. But the people as a whole retain their interest in free speech by radio and their collective right to have the medium function consistently with the ends and purposes of the First Amendment. It is the right of the viewers and listeners, not the right of the broadcasters, which is paramount. See FCC v. Sanders Bros. Radio Station, 309 U.S. 470, 475 (1940); FCC v. Allentown Broadcasting Corp., 349 U.S. 358, 361 -362 (1955); 2 Z. Chafee, Government and Mass Communications 546 (1947). It is the purpose of the First Amendment to preserve an uninhibited market-place of ideas in which truth will ultimately prevail, rather than to countenance monopolization of that market, whether it be by the Government itself or a private licensee. Associated Press v. United States, 326 U.S. 1, 20 (1945); New York Times Co. v. Sullivan, 376 U.S. 254, 270 (1964); Abrams v. United States, 250 U.S. 616, 630 (1919) (Holmes, J., dissenting). "[S]peech concerning public affairs is more than self-expression; it is the essence of self-government." Garrison v. Louisiana, 379 U.S. 64, 74 -75 (1964). See Brennan, The Supreme Court and the Meiklejohn Interpretation of the First Amendment, 79 Harv. L. Rev. 1 (1965). It is the right of the public to receive suitable access to social, political, esthetic, moral, and other ideas and experiences which is crucial here. That right may not constitutionally be abridged either by Congress or by the FCC.

White later goes on to further explains the courts views on the subject with the following:

It does not violate the First Amendment to treat licensees given the privilege of using scarce radio frequencies as proxies for the entire community, obligated to give suitable time and attention to matters of great public concern. To condition the granting or renewal of licenses on a willingness to present representative community views on controversial issues is consistent with the ends and purposes of those constitutional provisions forbidding the abridgment of freedom of speech and freedom of the press. Congress need not stand idly by and permit those with licenses to ignore the problems which beset the people or to exclude from the airways anything but their own views of fundamental questions. The statute, long administrative practice, and cases are to this effect.

White later discusses the position of the licensee that the widespread availability of broadcasting spectrum invalidates the need for regulatory oversight by the FCC with the following:

Even where there are gaps in spectrum utilization, the fact remains that existing broadcasters have often attained their present position because of their initial government selection in competition with others before new technological advances opened new opportunities for further uses. Long experience in broadcasting, confirmed habits of listeners and viewers, network affiliation, and other advantages in program procurement give existing broadcasters a substantial advantage over new entrants, even where new entry is technologically possible. These advantages are the fruit of a preferred position conferred by the Government. Some present possibility for new entry by competing stations is not enough, in itself, to render unconstitutional the Government's effort to assure that a broadcaster's programming ranges widely enough to serve the public interest.

With Congressional formalization as law and Supreme Court guidance that the Fairness Doctrine was not only Constitutional but necessary to protect the First Amendment rights of the public it is hard to see how this doctrine was struck down. As a public necessity and one of the basic supports for the democratic ideal of an informed populace it strains the imagination how such a guideline could come to be seen as censorship only 20 years later but that is exactly what happened.

In 1980 Ronald Reagan was elected president. Coming into office with an army of anti-regulation free market exponents it was not surprising that Reagan’s appointee as the new head of the FCC, Mark Fowler, was not an exponent of government regulation of the airwaves. In a move repeated in many other branches of government regulatory agencies the fox was indeed put in charge of the henhouse. Fowler had been a broadcast industry attorney who had spent much of his career fighting against the decisions of the FCC and suddenly he was now in charge of the agency. Fowler sneered at the notion that broadcasters bore social responsibilities to ensure democratic discourse. Even though such ideas were supported by numerous Supreme Court decisions and current Congressional laws Fowler suggested they were nonsense. “The perception of broadcasters as community trustees should be replaced by a view of broadcasters as marketplace participants,” Fowler said. In Fowler’s view television was “just another appliance—it’s a toaster with pictures,” he stated, “we’ve got to look beyond the conventional wisdom that we must somehow regulate this box.” Contrast this view with 60 years worth of careful stewardship of the public airwaves as one of the basic tenets of a democratic society and you can easily see the difference between a businessman and a public servant.


With Fowler’s appointment as the head of the FCC the Fairness Doctrine was a dead letter issue. The FCC no longer enforced compliance or responded to requests to arbitrate complaints. As much as Fowler would have liked to remove the Doctrine statements from the FCC charter this was a little stickier situation since Congress had formally legislated it into the statute and the Supreme Court had ruled that it was not only Constitutional but necessary for the protection of the First Amendment principles. It was up to two Reagan appointees to the DC Circuit court of Appeals to do away with the statute which they promptly did in 1986 with a nice bit of legal sidestepping that never addressed the issue formally. Judge Robert Bork and Judge Antonin Scalia ruled in a 2-1 decision that Congress had not actually made the doctrine into law in 1959. Judge Bork wrote:

“We do not believe that language adopted in 1959 made the Fairness Doctrine a binding statutory obligation,” because, he said, the doctrine was imposed “under,” not “by” the Communications Act of 1934.

According to Bork and Scalia’s twisted interpretation the FCC was not required to enforce the Doctrine but it could if it wanted to. Somehow in their opinion the wording of “under” vs. “by” made it possible for the FCC to decide if it wanted to enforce the Doctrine or not even though previous Supreme Court decisions had ruled otherwise. In early 1987 former Reagan presidential aide and newly appointed FCC commissioner Dennis R. Patrick used this opinion to justify formally revoking the Fairness Doctrine from FCC guidelines. In less than 7 years the Reagan Administration dismantled 60 years worth of carefully crafted decisions by the best legal minds in America to equate broadcasting with toasters.

Less than a year later former FCC commissioner Nicholas Johnson framed the effort to bring back the Fairness Doctrine, “It is a struggle for nothing less than the possession of the First Amendment; who gets to have and express opinions in America.” Even though a law to reinstate the Doctrine passed both houses of Congress that year it was promptly vetoed by Reagan. Another attempt to resurrect the Doctrine ran out of steam in 1991 when Bush senior promised a veto if it got to his desk. Control of the national media by those who have the means to buy broadcast licenses is a valuable commodity it seems. After all, how else will the Republican Party manage to continually convince the very people they are fleecing to vote for them if broadcasters are forced to air viewpoints that point this out.

Propaganda or news?

There seems to be quite a discussion in the news since the shootings in Tucson concerning the tone of our political debates in this country. I won’t bother to go into the tone of the rhetoric because I think it misses the real problem that we are facing. In my view, the real problem we are facing is the steady deterioration of the quality of our news sources in this country. News is no longer a fair and measured attempt to discuss the issues. It has devolved into pure and simple propaganda. No longer are media outlets tasked with reporting the issues with a representation of all the views, they are now simply hired guns attempting to control the issues by controlling which information is released to the public. All of this changed in 1987 when Ronald Reagan issued an executive order that directed the FCC to no longer enforce the Fairness Doctrine. The Fairness Doctrine basically charged the FCC with overseeing the content of news that was broadcast over the public owned airwaves to make sure that it was fair and balanced; that both sides of issues were covered. While this is an imprecise and imperfect science the FCC controlled the content previous to 1987 by periodically reviewing content to decide which entities had a license to use the airwaves. I will go into all of this in more detail in my next post but the basic point to remember is that from the 1940’s until 1987 there was a controlling body charged with protecting the American public from propaganda. This probably explains why we had a much more educated voter base previous to 1987 but without question it was not an effort to censor but rather an effort to make sure that all sides of an issue were covered equally.

The best definition of propaganda that I have found is that it is a form of communication aimed at influencing the attitude of a community toward some cause or position. As opposed to impartially providing information, propaganda, in its most basic sense, presents information primarily to influence an audience. This includes the omission of information that might tend to undermine a political position and it is the editorial tendency to control content based upon the furthering of a position as opposed to having an open discussion about the issue that defines propaganda as opposed to reporting the news. It is basically the difference in the effort to inform versus the effort to convince; they are not the same thing. This history of propaganda stretches back centuries and it has seen many diverse uses ranging from religious persuasion to political control with varying degrees of effectiveness.

One of the earliest examples of its use in this country was the Creel Commission or as it was known at its creation the “Committee for Public Information” (CPI). The CPI was formed by Woodrow Wilson under executive order on April 13, 1917. The committee was formed with the sole intent of fostering American support for involvement in World War I. Creel, a journalist, had urged Wilson of the necessity of such a commission in order to fight what he termed German propaganda. Creel believed that the CPI should concentrate on the true original meaning of propaganda which he defined as “propagation of faith.” It was the CPI the originally coined the phrase “Making the World Safe for Democracy.” Creel was joined on the committee by the Secretary of State, the Secretary of War, and the Secretary of the Navy. One of the most important contributors to this effort was a writer named Walter Lippmann. Lippmann was an intellectual who held common beliefs for the upper crust of American society at the time. In large part he believed that the American public was simply too uneducated and uninformed to make correct policy decisions even if indirectly by plebiscite. Lippmann believed that it was up to the "governing class" to correctly formulate and guide the "bewildered herd" of the American public. He wholeheartedly dedicated much of his life to carrying out this responsibility and the CPI was only the first of his organized efforts at influencing public opinion by any means necessary. It was Lippmann's own term of describing this effort as "manufacturing consent" that was later to be used to label such organized efforts of propaganda aimed at forming public opinion. Lippmann's ideas concerning the absence of necessity for truth in news were all built around the basic premise that it was up to the "governing class" to correctly lead the general public in the right direction; right being simply the direction that the well informed deemed most appropriate. The CPI itself was successful in that it managed to change the preponderance of public opinion away from an attitude of isolationism and empathy for the German cause and towards US involvement in WWI.

While it is undeniable that all the major powers in WWI put forth considerable efforts at their own propaganda, each with any eye towards influencing public opinion in favor of the respective governments involved, many observers believe that the US and Britain were much more effective in their methodology; both at home and abroad. It was their ability to totally mobilize the American public in support of the war that was at least in part responsible for the Allied victory. This message was not lost on the Germans who lost the war. As a matter of fact, many Germans believed that it was their inability to mobilize and gain the undivided support of the German people that led directly to their defeat. Regardless if this is a historically accurate view, it was widely believed in Germany at the time. One of the most fervent believers in this explanation was a young corporal who would later perfect the use of propaganda to further his ideology with such success that he gained total control of the German government. His name was Adolph Hitler and he explained these views more fully in a book he wrote called "Mein Kampf":

"Propaganda must always address itself to the broad masses of the people. (...) All propaganda must be presented in a popular form and must fix its intellectual level so as not to be above the heads of the least intellectual of those to whom it is directed. (...) The art of propaganda consists precisely in being able to awaken the imagination of the public through an appeal to their feelings, in finding the appropriate psychological form that will arrest the attention and appeal to the hearts of the national masses. The broad masses of the people are not made up of diplomats or professors of public jurisprudence nor simply of persons who are able to form reasoned judgment in given cases, but a vacillating crowd of human children who are constantly wavering between one idea and another. (...) The great majority of a nation is so feminine in its character and outlook that its thought and conduct are ruled by sentiment rather than by sober reasoning. This sentiment, however, is not complex, but simple and consistent. It is not highly differentiated, but has only the negative and positive notions of love and hatred, right and wrong, truth and falsehood."

As to the methods to be employed, he explains:

"Propaganda must not investigate the truth objectively and, in so far as it is favorable to the other side, present it according to the theoretical rules of justice; yet it must present only that aspect of the truth which is favorable to its own side. (...) The receptive powers of the masses are very restricted, and their understanding is feeble. On the other hand, they quickly forget. Such being the case, all effective propaganda must be confined to a few bare essentials and those must be expressed as far as possible in stereotyped formulas. These slogans should be persistently repeated until the very last individual has come to grasp the idea that has been put forward. (...) Every change that is made in the subject of a propagandist message must always emphasize the same conclusion. The leading slogan must of course be illustrated in many ways and from several angles, but in the end one must always return to the assertion of the same formula."

Hitler was able to use this methodology very effectively in his rise to power and later in his ability to control Germany and her armies to a degree that no one would have thought possible previously. The effective use of propaganda which united Germany while at the same time placing blame for her post WWI collapse on the international banking community and Jews was the cornerstone of his strength. While he certainly modified propaganda techniques specifically to garner all political and military power in Germany to himself, it is the methodology of propaganda and how it corresponds to what is going on today that I am writing about in this post.

After WWI there was a great deal of study carried out on propaganda techniques. This study included those used by the Allies as well as the Axis powers that faced them. Both the US and her allies used propaganda techniques to support the war effort with great effectiveness. It was generally accepted that such techniques are necessary in times of war or national emergency but the idea that they were to be used in national news media as opposed to fair and balance reporting is relatively new in this country.

In case anyone doubts that such techniques have gained usage in the national new media in this country since Reagan's executive order of 1987 perhaps it would be useful to look at some of the recognized techniques of propaganda that came out of studies done after WWI and see if we can spot any of these tendencies in modern news media coverage. I will list some of them and give some specific examples of how they are utilized today. Propaganda in and of itself isn't necessarily that big of a problem as long as it is understood to be propaganda. It is the confusion of propaganda techniques with fair and balanced reporting that lends itself to public manipulation and it seems that we have an overwhelming abundance of this purposeful deceit implicit in some, if not most of our national media outlets today. Biased reporting is one thing, organized systematic propaganda disguised as reporting the news is a much more dangerous and sinister proposition.

In 1937 a group of American social scientists, historians, educators, and journalist formed the Institute for Propaganda Analysis (IPA). The purpose of the IPA was to spark rational thinking and provide a guide to help the public have will informed discussions on current issues; to teach people how to think rather than what to think. This group's main focus was to discern and point out the differences between information and propaganda. The founders of the IPA believed that organized propaganda was a dire threat to democracy since one of the basic foundations of any democracy is an informed and educated populace. Propaganda by its very nature is a tool of disinformation specifically designed to prevent the spread of accurate information. Although the IPA eventually folded in the face of the necessity of propaganda to support the war effort one of its first goals was to list the main propaganda techniques in vogue at the time. I don't believe this is a complete list as the proponents of propaganda have increasingly improved their techniques in the years since but we will start with the list published by the IPA:

1. Name-calling
2. Glittering generalities
3. Transfer
4. Testimonial
5. Plain folks
6. Card stacking
7. Bandwagon

Name calling is pretty self explanatory but the specific use of name calling to denigrate people isn't the focus of this tool in propaganda. For this usage name calling is more specific in that it entails the usage of derogatory terms to attack the personality of political or social opponents. By attacking the person one avoids having to even discuss the issue which is one of the basic tenets of propaganda techniques. After all, the last thing that is desired is to have a fair and open discussion of the issues as this removes the possibility of being able to present the truth only as it pertains to one side of the issue. You will find lots of this rhetoric today on Fox News or talk radio. Socialists, Communists, Liberals, Leftists, and Statists are just some of the key words used but you will usually hear at least one of these titles applied with religious frequency to anyone who happens to disagree with the right wing conservative agenda that Fox news was formed to propagate. Again, propaganda itself is not an insidious thing but when it is passed off as fair and balanced reporting of the news it is both damaging to the spread of information and antithetical to the formation of an informed populace.

Glittering generalities is the practice of forming discussions around vague inherent generalities that everyone agrees with. By basing discussions and making the assumption that one side of the argument is based upon such an inherent generality the idea is to identify opposing arguments with views that oppose these generalities. A few examples one might hear daily expounded on Fox news or any number of talk radio hosts are freedom, patriotism, courage, strength, and democracy. By identifying themselves and in effect their arguments with such terms in advance propagandists intentionally strive to equate anyone who disagrees with opposite terms such as dictators, cowards, freeloaders, and socialists. While the technique is slightly different from name calling the goal is the same; to remove the possibility that opposing views will be openly discussed. One way to completely avoid such discussions is to effectively identify opposing views with positions that are inherently undesirable in advance. Not only does the usage of this tool tend to invalidate discussion, it can be done without explicitly resorting to name calling if framed properly in advance.

Transfer involves using symbolism to take the attributes of positive imagery and apply them to individuals involved in policy debates. To be honest, this is a technique the politicians have been utilizing for so long that it is normal behavior in political circles. This is exactly why politicians of all sorts love to be photographed in front of flags, monuments, and patriotic backdrops. The more emotional the response to any symbol the better this technique works and the more you will see it done. A few examples are Sean Hannity's usage of the Martina McBride "Let Freedom Ring" song numerous times each day. Who can hear the part of that song that is utilized without feeling a little lump in their throat? A good rule of thumb for judging the likelihood that a program is propagandist in nature is the amount of symbolism apparent in its introduction. This methodology is chapter and verse of Hitler’s description of using basic feelings and consistent repetition to control opinion.

Testimonial usually involves a written or spoken statement extolling the virtue of a position or product. While this technique is most easily identified in the advertising arena with the usage of spokespersons for products it is also extensively used in political debate. One of the more common modern usages of this technique is the propensity for conservative commentators to quote the “founding fathers” of this country out of context. Any real student of history understands that the “founding fathers” was a diverse group with many different agendas and it is not hard to find quotes supporting any ideology by selectively seeking out those that agree with one view while ignoring those that disagree. This is a tool especially favored by Sean Hannity and Ron Levine. Again, it is technique utilized to prevent open discussion by identifying respected historical figures views with those expounded by the host. Interestingly, as an aside one can get a feel for how artful talk show hosts are at propaganda by listening to their advertisements for products that serve as sponsors on their show. These hosts don't just advertise for the products of their sponsors they frequently give ridiculously energetic and fervent personal testimonials not only for the quality of these products but for the absolute necessity of purchasing them. Their wholesale acceptance of the techniques of propaganda in their social and political commentary leads directly to testimonial advertising on steroids when they start hawking products.

Plain folks propaganda is simply identification. The practitioner of this technique attempts to inherently identify himself with a specific social group, most often as an “ordinary Joe”. This identification is attempted so that the speaker can form a bond with his target that will allow them to believe he understands their concerns instinctively. It is a method of using emotional appeal to blunt intellectual discussion. Two of the most artful practitioners of this methodology are Rush Limbaugh and Glenn Beck. Each constantly prefaces their views by contrasting their opponents as “elitists”, “intellectuals”, or “silver spooned Liberals” who they surmise are not identifiable social companions to most of their listeners. This form of propaganda might best be represented by the meteoric rise on Fox News during the 2008 presidential election of “Joe the Plumber.” Sarah Palin is another politician who makes full use of this form of propaganda and not surprisingly Fox news hired her recently as well as a political consultant.

Card Stacking is the technique of emphasizing one viewpoint while simultaneously ridiculing the other. It is a well recognized and universally used technique in political campaigns but it has recently spilled over into national media outlets and is being passed off as news. The propagandists who practice this technique have sharpened it considerably in recent years by setting up panels for supposedly open discussions where both the agenda and the end result are carefully choreographed to make sure that the audience reaches the right conclusion. Fox news is especially adept at this technique and regularly features opposing viewpoints from the most vapid and uninformed commentators they can find. Bill O’reilly and Sean Hannity are also avid practitioners of this technique and you will regularly hear such counterpoint discussions on their shows.

Bandwagon techniques consist of convincing the audience that the great preponderance of the general public agrees with the views expressed by the commentator or political candidate. It is an emotional appeal to our basic herd instinct and usually goes along the lines of “everyone else can’t be wrong.” In other words, if the audience can be convinced that the majority of informed people hold one viewpoint it eliminates the need for them to go gather information from other sources because the great majority of people have already done that and made their decision accordingly. It is simply another tool to avoid an open discussion where opposing viewpoints can be put forth which is the root basis for the usage of all propaganda. This is exactly why Fox News concentrates so heavily on conservative victories while ignoring any instance whereby conservative agenda is refuted by the voting population. Just listen to any of the intros to talk radio’s conservative shows and you will get a perfect example of this type of propaganda; from Sean Hannity’s “Stop Obama express” to Ron Levine’s leadership reports from a hidden bunker.

I don’t believe that conservative media is the only type of media practicing propaganda in today’s world. What I do believe that ALL propaganda is injurious to the spread of information and the disguising of propaganda as fair and balanced news reporting is an effective tool being used to advance agendas in this country that informed discussions would arrest. It has gone well beyond the control of networks, which although lucrative, are small gears in a much bigger machine.

As in any agenda there are reasons for why it is being so effectively advanced and the larger picture in this case is the control of national politics and thereby control of the national government. The truth of the matter is that corporate entities controlled by the upper 1% of the wealthiest Americans are managing to gain control of the government to a degree that has never happened in this country before. Every economic study points out that since Reagan the wealthiest Americans have steadily gained control of the national wealth while the rest of the American public has actually lost buying power as their standard of living decreases and the middle class of this country absorb the nation’s debt. It is no accident that this has happened. What is a little amazing is that they have managed to do much of it with the voting consent of the very people they are squeezing out of existence, the American middle class. Propaganda, as Hitler well understood, is an invaluable tool where someone is intent upon spreading an agenda opposed to the general well being of the populace. This is especially true in a society where the voting populace controls who runs the government. Think about this the next time you hear someone on Fox rail against the very idea of the “Fairness Doctrine” as an attempt by the government to censor free speech. Who is going to be hurt by a fair and equal representation of issues over the nation’s airwaves?

What really happened.... a virtual tale

Something happened to our economy in this country in September of 2008. Something happened that was so unusual, on such a large scale that it prompted the head of the Federal Reserve and the Secretary of the Treasury of the United States to decide that drastic measures were necessary to avoid an unprecedented economic collapse. I have already established that it wasn’t the housing industry collapse. The numbers just don’t add up. It is beyond argument that the sub-prime mortgage debacle would only directly contribute some 42 billion dollars in bad debt which could not possibly create the need for an emergency injection of federal funds that wound up totaling almost 2 trillion dollars and counting. As I stated before, if it was the sub-prime mortgages that caused the whole problem we could have cleared that off the books by simply paying them all off with a small fraction of what we have already spent. What we are actually talking about here is the difference between a cause and a catalyst. The sub-prime mortgage collapse was a catalyst for the collapse. The cause of the collapse is much more complicated.

The answer to the riddle is not simple. I have already touched upon it briefly in a previous post but want to delve into the subject in a little more detail now. I personally started looking into this issue several years ago because the numbers simply didn’t add up in my own mind. I have spent quite a bit of time since then studying; poring over books and articles that seemed alternately needlessly complex and ruthlessly simple. I would like to try to break it down into terms that are easy to understand but I am aware that may not be possible. Still, I think it is worth the effort to make the attempt.

The first financial instrument one has to understand to make sense of this mess is a Credit Default Swap or CDS. A CDS is simply a way of selling debt by insuring it. CDS’s were basically invented in the early 1990’s as a means of freeing up capital. The germination for the idea for CDS’s came to fruition when JP Morgan Financial Services was in the process of trying to figure out how to loan money to Exxon in 1994. At the time Exxon was facing punitive damages stemming from the crashing of the Valdez in Alaska. Facing large damages and falling stock prices Exxon was in something of a financial bind at the time. Ordinarily, such situations are handled by high interest loans as banks feel they deserve more profit for making riskier loans. Even though Exxon was a huge conglomerate and showed little possibility of financial collapse as a result of the upcoming high fines they were expecting they didn’t have enough cash on hand to handle paying such fines without selling off something which would have only served to drive their stock prices even lower and make the loans riskier. JP Morgan came up with a rather unique solution to the problem. They loaned Exxon the money, some 5 billion in all. However, JP Morgan didn’t want to tie up all of their capital on one loan that may or may not be the last money Exxon needed to weather the storm after the accident so they were interested in selling off portions of the debt to other investors. The problem with this line of thinking was that there were very few financial institutions able to withstand such a large debt on their books.

JP Morgan executives then sold the risk on the loan to the European Bank of Reconstruction and Development which basically cleared the debt off of their books while they made also made a percentage for brokering the transaction. The whole process started a chain reaction of ideas within JP Morgan and the rest of the financial institutions around the world as they studied the feasibility of making loans while at the same time avoiding holding the debts on their books. It seemed eminently profitable to find a way to broker deals for such loans while at the same time avoiding holding long term debts on their books which unavoidably cut into the capital they had available to make the loans to begin with. This is much the same fascination that the middle ages had for alchemy. Just substitute the term “debt” for iron and “asset” for gold and you have the general idea. What could be better to a financial institution than the ability to instantaneously turn a debt into an asset?

It wasn’t long after this that another artificial construct along the same lines began to come into favor in the mortgage industry. Collaterized Debt Obligations are structured credit products that were supposed to increase the availability of credit by leveraging the amount of money available for such loans. In short, a CDO in the context of this discussion is a bundle of home mortgages that is sold as an asset. If you think this seems a little like magic you are not very far from the truth. Lending institutions have always been limited to loaning out a factor of the money they have in reserve (their depositor’s savings) in case the loans go into default. It is really a matter of common business sense that any financial institution can only lend out a finite amount of money because it has to hold a small percentage of these loans in the form of capital to support such loans in the event of defaults. Obviously, there are rules and regulations to this effect and the Federal Deposit Insurance Corporation that guarantees depositor’s money is officially responsible for enforcing such restrictions in this country.

With the advent of CDO’s, lending institutions could bundle up groups of mortgages and sell them as assets to insurance companies, pension funds, hedge funds, and investment banks. While the lending institution thereby only made a percentage of the total value of the loan, it was an instantaneous profit while it simultaneously cleared the loan from their books. This freed up their committed reserves so that they could then lend the same reserve out again and again. It is worth remembering that a mortgage based CDO is actually a bundle of debts. While this bundle of debts certainly has a marketable value it is still a bundle of debts with risk associated with just like the individual loans had as single home mortgages. However, CDO’s are by definition a chain in that each CDO is actually only as strong as the weakest mortgages in the bundle but this is a consideration that seemed to escape the notice of most of those so enamored of the use of CDO’s. In most cases the mortgage company retained the responsibility for servicing the loan and actually collecting the money but they no longer owned the loan and were only working for a fee after the mortgage was actually sold. This was also to play into the collapse of the market once it started but I will get back to that a little later.

Naturally, there had to be some way of valuing CDO’s. If you are holding a group of debts and you want to bundle them up into something you can sell, you must first decide what the value of the bundle will be. Who would be best qualified to ascertain the value of such an instrument? Since no one has the necessary prescience to know for certain about such things it fell to the creators of such instruments to value them as well. This is quite a bit like asking a farmer to tell you how much his cow is worth before you pay for it. In actuality the system for valuing CDO’s turned out to be just as fruitful as my example with the cow with the inevitable result that CDO’s were almost universally overvalued from the very beginning. CDO’s are divided into tranches which is a French word for “slice.” The tranches were rated according to the best estimate of the likelihood of the mortgages bundled to go into default. The highest rated tranches (AAA) were of course worth the most money on the market with the lowest rated tranches following accordingly. You will probably be amazed to know that the vast majority of CDO’s were somehow valued as AAA. Unfortunately, these tranches often contained sub-prime and other alternative mortgages that were well understood to be higher risk loans. When the crunch came and loans started to default it suddenly became clear to everyone that no one really knew how much this would devalue the CDO’s they were holding.

Of course there were people who wanted to be sure that the CDO’s they were buying were worth what they were valued at. As my dad used to say, it is virtually impossible that everyone was born yesterday. Credit Default Swaps or CDS’s became widely used to hedge investors bets against CDO’s. Basically the creator of a CDS agrees to stand good for the amount of the investment. In other words, if a CDO is valued at 10 million dollars you could buy a CDS that would hedge your investment by agreeing to pay you the 10 million in case the CDO itself went into default. This was a good idea but a practical impossibility as the upshot was that if a few loans in the bundle went bad there would have to be a determination of how much the total value of the CDO accordingly dropped. Again, this would call for an estimate of the value by the people who created it in the first place. Going back to the farmer analogy this would be the equivalent of the cow suddenly going blind at which point you would have to go back to the farmer who priced it in the first place to decide how much it is worth now that it is blind. The difference in the value of the blind cow and the healthy cow would be paid by the insurer to the holder of the CDS. Unfortunately, the people who originally bundled the CDO’s and sold them were not as honest as your average farmer and most of the CDO’s were in essence for this analogy full of cows with varying degrees of infirmity and potential collapse.

If all of this seems farfetched and ridiculous you are probably not a financial consultant. However, if you recently lost a large portion of your 401K this is the market you were investing in whether you realize it or not. If this were the end of the story we could all shake our heads in wonder and go about our business a little wiser and less financially able but it gets worse. The creator of the CDS who insured the value of the CDO didn’t do this free of charge. The normal matter of business was for the creator of the CDS to be paid a nominal fee for insuring the CDO. As long as the CDO held its value the fee was clear profit for the creator of the CDS. You may have heard of a company called AIG which was one of the companies that the government had to bail out when the market started to slide. As it turns out, they were the biggest insurer of CDO’s in the world at the time. You may or may not be surprised to know that many of the creators of the actual CDS’s were offshore companies under the management of AIG who actually had virtually no funds in reserve to pay for such defaults should they occur. Getting back to our analogy of the cow, if you bought insurance on the cow when you bought him at the farmer’s price and the cow died a couple of months later you would expect that the money you had been paying for insurance was a safeguard against the death of the cow. This would be true as long as the insurance company didn’t go bankrupt before you could file your claim. In our example, this is exactly what happened. As long as they were collecting money these companies were very profitable. When they started having to pay it out, they went under. There are of course rules and regulations for selling insurance in this country. Unfortunately, since the whole derivatives market is outside of any regulatory oversight these rules were not observed in setting up companies to sell CDS’s. Getting back to our analogy; this simply meant that the same farmer who chose the value of the cow before he sold it to you had his brother in law down the road who grows tomatoes set up a company outside the legal strictures of the United States and sell you insurance on the cow. Never mind that there was no money in the company to cover the loss of the cow, the brother in law made money and you got to feel secure in the mistaken belief that you were covered in the event of the untimely death of your new purchase.

All of this led to a market wherein lenders made money off of volume instead of quality. In other words lending institutions soon learned that the real money in the mortgage industry came from bundling mortgages into CDO’s and selling them, not in slowly over a period of 15-30 years making interest off of the loans themselves. The market for CDO’s boomed fantastically and lending institutions felt the pressure to make more loans. It wasn’t that people were suddenly so stupid that they began buying homes they couldn’t afford; it was the fact that lending institutions were aggressively pushing such loans because it didn’t matter if the loan was sound; all that mattered was that the loans could be sold as CDO’s and the money rolled in.

Unfortunately, this is still not the end of the story. The actual dollar amount of CDO’s in the home mortgage industry at the height of the collapse was estimated to be somewhere in the neighborhood of 6 trillion dollars. While this is a formidable number we must remember that this covers all home mortgages in the US, and only a small percentage of them were ever under the threat of foreclosure so we are still talking about numbers that could not possibly crash the whole economy. However, financial consultants being infinitely clever they managed to leverage this market to numbers as high as 350 trillion according to some estimates.

Mortgage CDO’s were taking over the financial markets of the world. The demand was so great that they had to find a way to create more of them than the housing market could possibly support. This was done by creating credit derivatives based upon CDO’s. In other words, a CDO could be created based upon the profit from an existing CDO. It was strictly an artificial construct in that it was not based upon anything but the profit from something that did exist but it could be created and sold on the market and the market was booming so much that people didn’t seem to care that what they were actually buying. It showed a profit as long as the original CDO it was based upon did and everyone was happy. While this sounds more like sleight of hand than finance it is not unusual in the financial markets. I would give you an accurate farmer analogy here but I don’t know of any farmers that would either buy or sell things based upon cows that don’t actually exist; that seems to be a business that requires a much higher degree of education to get into.

The real magic in the creation of a CDO based upon a CDO is that it only takes a fraction of the actual money to create it while it pays the same amount of profit. One hundred to one leveraging was not out of the norm in such markets by the time it went through a couple of such transformations. In other words such a CDO could be created for 50,000 dollars and sell for 5 million dollars as long as the market was increasing and everyone made a profit. Unfortunately, the leveraging worked just the opposite direction when the market started to go down. The CDO would begin losing money at the same rate that the original one it was based upon had with the noticeable exception that it didn’t have any assets at all that could be sold to get your money back. It was basically worth the cost of its creation, assuming of course that you could find someone stupid enough to buy it. Although there seemed to be plenty of people in that category when things were going good almost no one was interested when things started to go the other direction.

Getting back to the cow analogy let’s attempt to follow this logic. The farmer sells you a cow that he has chosen the value of beforehand. Don’t bother to ask how he valued the cow; this is much too complicated for you to understand. Besides if you are worried that you might be buying a blind or sick cow his brother in law who grows tomatoes and runs an offshore insurance company will sell you insurance that covers your investment for a nominal monthly fee. As long as the cattle market goes well your cattle investment goes well and you get statements every month explaining how much money you are making. Everyone is doing wonderfully in this little arrangement, so much so that the farmer soon sells all the cows he has. Since everything is going so well there is still a large demand for cattle, such a large demand that the farmer hits upon the idea of selling you a virtual cow. It isn’t really a cow, it doesn’t have skin, or hooves, or even meat that you could eat if all else fails but he tells you it is just like having a cow in that you get to make the same profit that people who own real cows make and he doesn’t have to go to the trouble of actually feeding or taking care of the cow. Naturally, the virtual cow business is a vast improvement for the farmer since he makes the same amount of money without all the expenses and sweat associated with actually taking care of a cow. It isn’t long before the money invested in virtual cattle far exceeds the number of real cattle.

Unfortunately, for everyone in this cattle business someone decides to actually eat one of the cows one day and discovers that it is too sickly and weak to eat. This immediately brings into question the original value of the cow and it sends a shock wave all the way through the system. Everyone starts to question the value of their own cattle, more especially the people who suddenly realize their virtual cattle aren’t worth the paper they exist on and they certainly aren’t good to eat because that would require they actually existed in the first place. There is a colossal fire sale on cattle of every description but there are no buyers. After all, everyone knows better than to buy more virtual cattle now and the people who made the money off the original sale of cattle have long since taken their money and gotten out of the business. The farmer’s brother in law has gotten out of the insurance business as well since without reserves he knew with the first sign of trouble in the cattle business he was getting ready to be forced pay out everything he had recently made and he doesn’t want to have to go back to growing tomatoes.

Unfortunately, the virtual cattle business was so profitable and so many banks, investment houses, and mutual funds made up of working people’s 401K’s that it will collapse the whole economy if the government allows the chips to fall. The only thing to do is to throw money at the market in the hopes that the cattle market will return and the magical alchemy of virtual cattle starts to go up again because there isn’t enough money in existence to actually pay for the virtual cattle losses if the market stays down. Meanwhile, the inventors of the virtual cattle industry and the virtual insurance industry that it fostered simply have to bide their time and wait for the market to come back. After all, the billions of dollars that just disappeared from the working people’s 401K’s will be enough to allow them to muddle through the next few years.

All of this sounds a little unbelievable. It does explain why both the Secretary of the Treasury and the head of the Federal Reserve were able to convince Bush that something major had to be done. While our GDP hovers around some 14 trillion dollars a year it is hard to see how we can afford a 350 trillion dollar bill to come due. The fact of the matter is that we have not solved this issue to date. There is no government oversight of the system that created this monstrosity of a problem. While some people are making the first attempts at setting one up one of the first orders of business of the new Republican Congress is to defang the new regulations by pulling the funds necessary to set up a regulation industry for the derivatives market. As long as the housing industry goes up this whole byzantine system works in that everyone makes a profit. The farmer who sold virtual cows made a very large profit and he would like to get back into the business but not if the government is going to regulate it. If you want to find out who these farmers are just watch who supports this new effort to cut away at regulation of the industry.

There is a scene in the Matrix where the hero is offered the choice of taking the red pill or the blue pill. One will open his eyes to the world as it exists, the other will allow him to go back to living in ignorant bliss. I don’t think it is an exaggeration to say that we are facing the same choice right now in this country. Either we will open our eyes and take the time to understand what just happened or we will go through it all over again. The problem with living in ignorant bliss is that it doesn’t last forever and we may not be able to print enough money to pay off the next installment when it comes due.

Our economy Part 2

The great collapse of 1907 wasn’t unique in the annals of stock market collapses. It was caused by rampant speculation with borrowed money as are most collapses of this nature. What set the collapse of 1907 apart was the severity of the collapse. As banks and trusts across the nation began to go bankrupt it started a run on even the soundest of banks that threatened to topple the whole banking system of the US. The only thing that kept the whole country from going bankrupt was the determined efforts of one individual; Mr. J. P. Morgan. Morgan spearheaded an effort to get all the largest banks in New York to inject liquidity in the form of capital in the market to stave off further collapses. Without his efforts the whole system would have likely collapsed and politicians took note. When the whole national economy is only saved from a total collapse by the efforts of one banker, even though Morgan was arguably the most powerful banker in the world at the time, people sat up and took notice.

The next year Nelson W. Aldrich, the chairman of the Senate Finance Committee, set up a commission to study the causes of the collapse and come up with recommendations for preventing it from happening again. Aldrich and his committee studied the records of what had happened and also took it upon themselves to study banking systems in more modern financial systems all over the world. What they soon recognized was that a central bank was needed to stabilize the economy and prevent the type of runs on banks that had happened over and over in the US previously. After much political maneuvering the Federal Reserve Act was passed in December of 1913.

The act itself established a national central bank with powers to create money and make discounted loans to member banks. All nationally chartered banks were required to become members of the Federal Reserve and purchase stock in their regional reserve bank as well as hold a certain amount of reserves in their local reserve bank. While this system has been modified and expanded many times since its formation it is still the central bank that controls US financial policy by setting interest rates and managing the money supply. In 1980 it was expanded so that all banking institutions could become members of the Federal Reserve and enjoy the advantages of discount loans and the security of government banking. It is basically a government guarantee for depositor’s money; a state run entity that controls the banking industry and therefore the US economy.

It is worth pausing here to attempt to define one of the basic economic systems that I started this post with. The great bogey man that conservatives like to use to scare the voting base into supporting their agenda with is socialism. Socialism is the first cousin to communism according to most conservatives and the onset of socialist policies is a sure fire path to communism. A basic definition of socialism would be an economic or political theory advocating public or common ownership and cooperative management of the means of production and or capital. It is the favorite stick that conservatives like to use to beat up upon liberals with as they accuse them of fomenting socialism. The Federal Reserve Act is unquestionably a socialist piece of legislation. It put the banking industry under the control of a state run, publicly owned institution; the Federal Reserve. It is THE entity that controls the US economy and has been since 1913 and it is a socialist entity.

In other words, under President Woodrow Wilson, who is widely regarded as one of the most ardent advocates of free markets that ever sat in the White House, the United States adopted a central banking policy that is the very definition of socialism. The stark realities of 1907 and many other cyclical crashes of the US economic system forced our government to adopt a socialist agenda to cope with market fluctuations that threatened to destroy our economy over and over. We have not been a free market since the inception of the Federal Reserve Act and the reason it was adopted was because the free market itself was so volatile and unpredictable that the country simply couldn’t expand with any certainty. Subsequently, the power of the Federal Reserve has been increased many times to cope with emergencies in our economic system because the simple truth is that unfettered free markets are inherently unpredictable and dangerous.

Let’s consider some other facets of the US economy as well. The public school system that fostered the great explosion of literacy in this country from the mid 1930’s onward is a socialist entity. State, local, and Federal governments own the schools and finance the education of almost every child in this country. We can argue whether these institutions are as efficient and productive as they need to be but no one can argue that they are not socialist entities.

The vast electrical grids that power homes, industrial centers, and businesses all over this country are owned by state, local, and federal governments. They were financed, built, and maintained by these same entities and are inherently socialist institutions. Again, we can argue that they have not been maintained and updated as efficiently as they should have been but it cannot be reasonably argued that they are anything other than socialist entities.

The road systems that our economy depends on to get goods to market are owned by state, local, and Federal governments who built and maintain them. The interstate road system that was built during the Eisenhower administration is the key to most all of our national trucking industry and it was built and financed solely by the Federal government. As in my other examples above we are seeing a slow and gradual degradation of this system as funds to maintain it are steadily shunted into other areas of government but it cannot be argued that our road systems are not socialist entities.

Medicare and Medicaid which provide health insurance for our elderly and those without the means to otherwise do so is controlled, administered, and ran by state and federal governments. There are many problems with the system as it stands today, not the least of which is funding but it is entirely a socialist institution.

Much of this country’s industrial might built since WWII comes from US government support and institutional lending from the government controlled banking industry. Almost all necessary and needed research and development breakthroughs in the major industries in this country since WWII were indirectly funded by government research and development programs in the military and NASA. Drug companies’ research and development projects are largely supported by government grants. I will delve more into this tendency in a later post but suffice it to say that much of our industrial strength goes hand in hand with government support of a socialist nature.

The truth is that we our economy is a capitalist/socialist hybrid that is constantly evolving to meet the needs of consumers here and all over the world. The basic flaw in Karl Marx thinking was that he didn’t see that capitalism could evolve. It is a good thing for all of us that it has. I think we need to keep that in mind when the fear mongers of the Tea Party and other right wing movements bring out the socialist stick. If it weren’t for socialism our economy would have collapsed years ago.

As a matter of fact in every facet of American life mentioned above the conservative movement of Reagan and right wing Republicanism away from socialism towards more free markets has led to a universal degradation of our abilities and efficiency.
Reagan had a line he made famous during his run for the presidency. “Are you better off now than you were four year ago?” Can anyone reasonably argue that any facet of our economy is better off now than it was in 1980 when trickle-down economics came in favor?

What kind of economy do we have?

The first thing we need to understand in dealing with the economic issues we are facing both individually and as a nation is what kind of economy we are dealing with. There are many descriptions having to do with economic theories or methodologies but there are two basic truths that we need to face in order to understand what is going on:

a) The US economy is, like our country itself, a blended version of many different ideologies; none of which can accurately describe the whole picture alone.

b) The US economy is, at least for the moment, the leading economy in what is actually a world economy comprised of many different national and regional economies more or less cooperating in business.

Let’s start with a) above. There are many terms thrown about these days in debates about economic theory. Capitalism, Socialism, Marxism, Totalitarianism, Fascism, and a fairly long list of other “isms” that are never clearly defined but used commonly to describe our economic system are thrown about in such debates with impunity. The truth of the matter is that no one wants to clearly define these terms when using them in a debate because the system we currently have in place is a combination of all of them. None of them are pure systems in existence anywhere in the world today. To be completely accurate, none of them have ever been pure systems but every economy in recent history has been some combination of them.

The purest forms of any of these systems have without fail been the most brutal. Most Americans are at least conversationally familiar with Fascism in Nazi Germany and Communism in Stalin’s Soviet Union but both were actually more accurately totalitarian governments. In any case, the brutality of these systems is sufficiently well known and documented so that I won’t bother to spend a lot of time discussing them. It is worth noting that the practical applicability of these systems seemed to be the downfall that led to the end results but human nature being what it is, it is hard to argue that such results wouldn’t be the same if we were to somehow decide to give them another try.

What is much less widely understood is the pure capitalism is just as brutal a system. It isn’t exactly a secret to anyone who cares to look into it but the societies in our history that veered closest to pure capitalism were also amongst the most brutal as well. Europe in the middle 1800’s is just one example. As the age of industrialization dawned there was a massive shift from rural to urban areas and working conditions for the vast majority of the population were to say the least brutally oppressive. Widespread use of child labor, 18 hours work days, and living conditions where filth caused disease that lowered life expectancy to ridiculously low numbers were the rule rather than the exception. It was against this backdrop that the formations of ideas in opposition to capitalism were born. Karl Marx, Friedrich Engels, and others wrote in reaction to the human devastation that pure capitalism caused all around them daily.

In this country, capitalism led to other less than stellar repercussions as well. African slavery was in some ways the ultimate expression of capitalist theory in that slave owners owned not only the capital and means of production; they owned the labor force as well. While this was abandoned after a brutal war that cost millions of lives the basic ideas of industrial capitalism practiced in the northeastern states was little better for the working class that it utilized to make profits. The closest this country ever came to a pure capitalist system was probably in the late 1890’s when we had many of the same problems that Marx had seen in Europe some 40 years earlier. Children worked 14 hour days in factories; unemployment cycles ran rampant in that large portions of the population of inner cities that were the labor force routinely faced starvation and death by exposure to the elements. Outbreaks of cholera and typhoid were widespread in many inner cities. The nation as a whole went from boom to depression with great regularity and there were basically only two classes of people, the very rich and the very poor. The very rich lived very well; everyone else struggled to survive. This is exactly why the greatest proponents of capitalism have always been those that profited the most highly from it. It has met with decidedly less satisfaction from everyone else who has ever been exposed to it.

In basic terms Capitalism implies individual ownership of the means of production. The system itself relies upon the laws of supply and demand to regulate the market and theoretically maximizes efficiency by allowing the free market to make all economic decisions. In reality Capitalism in its purest forms leads to a gradual separation of classes. The rich get richer while the poor get poorer. It also leads to the antithesis of free markets; monopoly. As an individual or corporation becomes richer and more successful they gradually gain control of a larger proportion of the market until they eventually own a large enough share to force everyone else out of the market. After this happens, a monopoly results and the rules of supply and demand are manipulated by the owner of the monopoly until there is no longer a free market at all. It is the basic flaw of Capitalist ideology that any unrestrained capitalist entity eventually eliminates competition which is the free market mechanism that the ideology depends upon to work properly. Marx understood this. His idea was that these weaknesses would eventually lead to the collapse of the system itself. If you carry the idea of Capitalism to its logical extreme you can easily see that it is a parasitic system in that it depends on constant growth to survive.

The success of a capitalist system is always measured in its growth. It is in large part the only factor that really matters. This is exactly why the most important measurement of the success of the US economy today is the Gross Domestic Product and whether it has increased or not. Our economy is not built upon the idea of sustaining a level of affluence or sustaining a lifestyle, it is built entirely upon the idea that we have to keep growing. It is in fact a logical reality that this is not possible in the long term as there are limits to everything and uncontained growth can only be supported by unlimited resources.

What happened to change things after 1893 in this country? Was Marx right in thinking that capitalism couldn’t survive, that it would collapse on its own flawed basis? The answer to the first question contains the answer to the second as well. Let’s take a more detailed look at what was going on in 1893. I have already pointed out that the problems in industrialized areas were severe but what I haven’t touched upon yet is that the problems in rural America were just as bad under this pure capitalist system.

Farm prices were in constant flux from the 1860’s on with periodic rises and falls that routinely devastated farmer’s ability to make a living. Almost all farming done at that time was by small independent farmers who were at the mercy of market fluctuations that were basically uncontrollable. To make matters worse, the banking industry was beginning to become more organized as the laws of capitalism led to the inevitable situation where larger banking interests were gobbling up smaller banking interests. This led to a situation of more centralized control of money which essentially meant that large banking interests began to gain a monopoly on the market of lending money. This led to ever increasing interest rates and less available money at the same time that farmers were more dependent on bank loans to get by from year to year as crop prices fell.

The situation got bad enough so that farmers began to organize into cooperatives and form political parties. In an effort to increase the money supply the movement advocated greenbacks based upon silver which was in more plentiful supply. A combination of events occurred to guarantee the movement was unsuccessful in this endeavor but it did serve to push the country towards an understanding that more liquid credit capabilities were needed to smooth out the cyclical nature of the farming industry. The point is that this more pure form of capitalism which existed during the latter half of the 1800’s and the start of the 20th century was undeniably a failure as far as the average American was concerned. Farmers suffered, factory workers suffered, and small business owners suffered. The only people who benefitted from this system were the bankers themselves as Adam Smith had pointed out some 150 years earlier.

It is worth mentioning here that the great fear of inflation which drives the financial markets today is the same fear that kept bankers from increasing the credit supplies that farmers and small business owners so desperately needed in the early part of the 20th century. In reality it is basic common sense that a little bit of inflation is in fact a good thing for the vast majority of consumers. If the value of money goes down while the value of goods go up who is gaining in the market; the person trading money for goods or the person trading goods for money? It is simple really. If you own more money than goods inflation devalues the commodity you own. If you own more goods than money it inflates the value of what you own. This is a nasty little secret that bankers and financial market people go to great lengths to disguise for the simple reason that inflation hurts them where they live even though it actually improves the standard of living of the vast majority of working people. It is also worth noting that every major collapse of our economy has been preceeded by a period of financial speculation by this same class of people.

The final straw the broke the camel’s back came in 1907 as far as pure capitalism in the US is concerned. In 1907 the stock market nosedived some 50% in October. As is usually the case in such collapses there were some very greedy individuals involved in rampant speculation of large amounts of borrowed money which I will go into in more detail a little later but the important point I want to make right now is that this event precipitated a nationwide depression on a vast scale. It was a depression wherein numerous state and local banks collapsed, untold businesses went bankrupt and the US economy itself came very close an actual bankruptcy on the part of the Federal Government. It was in reaction to this depression that American political leaders realized that we HAD to make a basic change from a purely capitalist system and it was a result of this realization that the US government formed the Federal Reserve System.

The Federal Reserve System is a bone of contention for many to this day. Many believe it is the basic flaw in our system but the reality is that it was formed in reaction to the fact that without a central banking system there was no way to control our economy. The Free market had basically collapsed our whole economy and everyone recognized that we simply couldn’t afford to keep going down that path. The Federal Reserve was formed to stave off the absolute collapse of our economic system, yet it was a definitive step in the direction of socialism, a direct admission that Marx was indeed right; a purely capitalist system cannot survive without devouring itself.

To be continued……