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Stephen Zarlenga

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How the Economists Facilitated the Crisis and Must Now Be Held Accountable

Posted: 06/07/11 03:32 PM ET

This article is part I of III, of Mr. Zarlenga's address at the Eastern Economic Association Annual Meeting in NYC on February 26th, 2011. Listen to it here.

The ongoing financial crisis presents a rare opportunity for monetary and banking reform. There's no denying that the present "Economics Regime" has been a key cause of the pain, suffering, illness and even death inflicted on America's less affluent; and of the worldwide economic destruction. It's important that the economics profession be held to account for its part in this crisis. This was well expressed by economist James K. Galbraith in his testimony to the Senate Crime Subcommittee on May 4th, 2010:

"I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis."

With rare exceptions, those in control of the world's monetary/economic agenda and the theories supporting it have helped bring the world to its knees. Shouldn't they and their theories be held accountable?

False "monetary" beliefs have misdirected public policy decisions for decades with devastating effect! Errors of concept, methodology and even factual errors have led to disastrous outcomes for our nation and now have the potential to gradually take America down into an unprecedented abyss of lawlessness and deprivation. Consider the present insane calls for austerity.

Economists have allowed the idea to generally prevail that a government has to be run the way a shopkeeper runs his store! But methods that promote virtue and success at a shopkeeper or family level lead to stagnation and disaster when used at a national level. For example, they ignore that our government has both the responsibility and the power to provide the nation's money supply in an effective way. Delegating that power to private interests such as the banking system has always failed, and will continue to fail. Haven't we learned that by now? (See The Lost Science of Money)

These times call for greater care and heroism among economists; and cowardice is not tolerable among those who do understand.

Which particular monetary error is most responsible for the tragedies? In our view, the most glaring error is that economists have not understood or appreciated the difference between money and credit. Using credit (which is also debt) for money is dangerous, harmful and unnecessary. They can't read and grasp Knapp's State Theory of Money, available in English since 1924, to understand credit is just one type of money system, and not a good one at that! Even a superior economist like Minsky, who pointed out that such a credit/debt-based system always collapses, regarded that as a problem inherent in Capitalism, and didn't consider eradicating it but merely called for government to provide jobs when the credit structure was in collapse. A solution that one of AMI's researchers described as "trimming poison ivy!"

Too many economists have falsely concluded that "all money is debt," because most of what we use for money in our poorly structured system is debt, coming into circulation when banks make loans. This attitude ignores the possibility and necessity to define a better system based on government money, not private debt. To justify this erroneous attitude some economists actually insist that government money is also debt! But that is truly a lack of clarity in definitions that should correctly distinguish between
money and debt. This failure to understand the concept of government money as opposed to private credit/debt has had immense and deadly repercussions. The Great Henry Simons summed it up in one magnificent sentence:

"The mistake ... lies in fearing money and trusting debt."
Henry Simons, (Economic Policy for a Free Society, 1948, P.199)

This fundamental error has allowed the most egregious banking and money system based on private credit/debt to dominate our society for a century, repeatedly causing immense damage, even leading to warfare.

The privatization of our monetary system has placed control over public policy into unelected hands, for whoever controls the money system, over time will control the nation. Are we then surprised that they have used that power to benefit themselves, not our society?

Observe how they have abused the money power:
They have given special privilege to create money to some, and resulting disadvantage to others. This has led to an obscene concentration of wealth and the consequent poverty! It has encouraged lawlessness and corruption among the privileged; pushing them to diseased excesses for acquisition, and ignoring crucial elements of our culture such as infrastructure, health care, education and those among us in great need.

They have turned economics into a primitive religion, and worshiped the "market" as a god, despite all evidence to the contrary. They denigrate and ignore inconvenient evidence. "Anecdotal" was the description that the charlatan Greenspan used for real evidence that challenges their theories; a fundamental sin of poor methodology. (See the excellent documentaries The Warning and Inside Job.)

Under present leadership, the administration has done practically nothing to bring to justice the multitude of lawbreakers who caused the present disaster.

They have placed an unnecessary ball and chain on the leg of every producer by having the money supply itself bear an unnecessary interest cost to society. In 2010 our government paid $414 billion in unnecessary interest costs!

They have foisted a "fractional reserve" banking system on us prone to abuse and periodic collapse. Credit will collapse during a crisis. Government money does not collapse. Credit collapses in a crisis; money does not collapse. Government money does not collapse!

We'll see in parts II and III how to use money, not debt, as the basis of our money system, just as Dennis Kucinich proposed with his groundbreaking bill, HR 6550, that changes the way money in our nation is created and issued to reduce our nation's deficit and debt, creating millions of vital jobs to transform our economy.

Edited by Jules Brouillet

Zarlenga is director of the American Monetary Institute and author of The Lost Science of Money. Meet him at The 7th Annual AMI Monetary Reform Conference!
Brouillet is a researcher for the American Monetary Institute.