Excesses of Finance and Goldman Sacks: What is the Solution?

The Wall Street Journal is criticizing the excesses of the system. And Huffington Post is quick to collect excellent evidence of the problems with our current system. However, the solutions proposed here and by Ms. Pettifor are too modest. We need more participatory democracy and a share economy where all risk is shared proportionally. Everyone agrees that the patient has a disease; but noone can agree on a remedy.

The Coming First World Debt Crisis: A Book Review

I picked up Ann Pettifor's The Coming First World Debt Crisis (ISBN 0-230 00784-8, Palgrave, Macmillion, 2006)

First of all Ms. Pettifor earns an "I told you so" award. Writing in 2006 when "stock markets in both the US and UK are booming," she forsees "a time in the not-so-distant future" when there will be a debt crisis in the first world. She identified Iceland, United Kingdom and United States as the target. And she cited the Bank for International Settlements about the failure of large complex financial instituions could fail creating an international crisis.

She does a good job of explaining the history, before World War One, before World War Two, before the Bretton Woods agreement. She points out the unique situation of the United States

She identifies (on page sixteen), that "Finance" is a "parasite" and that profits are not used to finance research and investment, but repayment and mergers and acquisitions. She distinguishes between agriculture, labor and industry that produce real wealth and financiers who do not. She cites Aristotle who distinguished between the loan of an asset that provides its own repayment mechanism and the loan of money which doesn ot have a way of repayment. That is, a cow produces calves, a hen produces chicken and eggs, a factory produces goods. It is important to remember, as she herself says, her role in the concern about Third World indebtedness and the golden jubilee.

But the difference between myself and this blog and herself is not the concern and the diagnosis, but the cure. She advoactes "free money" She says that except for cash, most of the money is bank money and reserves, and thus when a bank gives a loan, it is not someone else's savings that get loaned, and it is not even restricted by the "reserve requirement." (I recall my intermediate macro-economics professor, explaining that with a ten percent reserve requirement, each dollar gets transferred into ten dollars of loans. This is true whether one assumes one bank or one has many. I asked him, does the bank make money on the interest on the one dollar in savings or the ten dollars that is loaned out. He said it is the latter. Thus, if one saves one dollar in one's bank, the bank effectively loans it out ten times, making interest each time. If the bank charged eight percent on average, it is getting eighty percent on the one dollar you saved, minus the miniscule amount you saved.)

She quotes Keynes who said, "Why then if banks can create credit, should they refuse any reasonable requrest for it? And why should they charge a fee for what costs them little or nothing?

She quotes Josiah Charles Stamp, who was President of the Bank of England and the second richest man in Great Britian:

"The modern banking System manufactures money out of nothing. The process is perhaps the most astounding piece of sleight-of-hand that was ever invented. Banking was concieved in inequity an born in sin.. But if you want to continue to be slaves of the bankers and pay the cost of your own slavery, then let the bankers continue to create money and control credit." Henry Ford argued that money should be interest free and quoted James Dyson, a manufacturer, argued for low-interest.

But she pointed out that Once banks are able to create credit is no longer constrained by saving. But Ms. Pettifor thinks this is a good thing, because credit at low interest rates allows investment in things such as factories and it benefits the productive part of the economy (industry, labor and agriculture).

But the problem is ensuring that the money goes to good things, not McMansions, second homes for the rich or the Syn Fuels Program even though there were many successful synfuels programs and reasons to believe new ones can be successful. But how do we find the good projects and not waste real resources on bad projects? I believe participatory democracy in both the governmental sector, to the extent that the government provides credit or stimulus, and in the private sector as the share economy is the only anser.

Finance is a parasite and it must be eliminated. Computerized approaches such as the Cashless Society and Deontic Logic can provide the mechanics at low cost. Mr. Craig Pilks and myself presented a paper on this issue in 1992 at the TIMS-ORSA meeting. We looked at the cost of payment system. And we looked at the cost of database processors using the TIPS benchmark, communications lines, etc. and found the computer cost to handle all our transactions was trivial, especially compared to the then cost of our payment system. And Humphrey and others shows that paper systems whether cash or checks cost much more than electronic transactions (Payment Systems in Global Perspective by Maxell Fry, viewed via Google Books)

There is a cost of the payment system. Some argue that those who use credit cards but pay off their balance each month should not pay any of it. Others say they should. The question is whether it is cheaper for the government to run one payment system rather than have separate banks. After all, there is only one mint or conventional currency in each country. The government provides IDs that we use for all sorts of private transactions. For example, I show my passport at the lobby of many New York City offices to the guard at the front door in order to get permission to proceed to one of their tenants in the floors above. And the government can pay for the central system by avoiding the tax gap

Paul Krugman just had an article on protectionism in dealing with Carbon Taxes. What I like is Jerry's comment

Why is it OKAY to have these tarrifs on a carbon basis, but not include child labor, pollution, worker safety.

This is the idea of my first post

Wally Smith

I found a kindred spirit, Dr. Wally Smith, who writes on Interval Voting and Direct Democracy. His home page and list of papers is fascinating; Last century, my research area was symbolic computation for finite element analysis and constructive solid geometry which I proposed applying to the shape optimization problem. I printed out his material and will be reporting on it.

Approval Voting and Median Voting for Budget/expenditure/taxes

How can the whole population vote on a budget. Here is a mechanism I proposed on Usenet in 1992.

There are two parts. The first part is expenditures, voting for what projects and funding for entitlements. The second part is voting for tax rates.

Each project is funded on the basis of the percentage of voters that voted for them. (Representatives could propose omnibus bills such as funding all roads which presumably would get more votes than voting on a specific road that benefits only a few voters.) Each proposal getting 100% of the votes gets funded, then those that get 99%, etc. The legislature job is to find a funding formula that everybody (or as many as possible) can agree upon, not to make compromises.

Similarly, every entitlement spending gets funded the same way.

Lets say 100% of the the individuals feels that a service person who lost all four limbs should get a stipend of at least $30,000 a year. 99% say they should get $33,000.00 Similarly, the entire legislature agrees that a person who worked fourty years on a job that was covered by social security shoudl get $10,000 per year, 99% say they should get $11,500, 98% say they shoudl get $12,500, etc. Each would get funded at that amount until the money runs out.

I am starting research on adapating the Machine Learning Algorithm ID3 to voting on a massive scale for generating rules. This creates a decision tree and individuals can vote at each stage for the factors that would determine how much a person might receive. For example, for disabled service people, different factors such as type of injury, length of service, rank at the time of medical discharge, cost of living in their home state, etc. would be presented. People would first vote on what would be considered first (or is most important) and then vote on the amount to pay for each leaf node.)

On the revenue side, each tax rate is determined by median vote. We all vote on the percentage for each tax bracket, which could be divided based upon whether it was earned or unearned. WE could also vote on taxes on items we don't like but don't want to outlaw (alcohol, cigarrettes, twinkies). We just take the median of the excise tax that each person voted. If fifty percent of the people voted zero for any particular tax, that item would not get taxed. Thus if fifty percent of us felt that taxing twinkies or soft drinks was being too much of a "nanny state," they would not get taxed.

We also vote on what to borrow, whether we want a deficit. The deficit would be the median of what the voter select. The amount to be borrowed is also designated by median of the votes. (Alternatively, the legislature could decide that we would borrow as much as we can at x% where x is determine by median of the votes.)

Immigration, A News Article

Here is an example of the kind of case that are best handled by the sortition-based rulles approach to immigration I proposed earlier.

In the Friday July Third 2009, New York Times (page A18), discusses one case of what happens to an individual who was brought to the United States by illegal immigrant parents at a very tender age, in this case three. They go on and do very well in school (an honors graduate of high school and community college). The Dream Act proposed in Congress was supposed to do something about this.

James Surowiecki, Wisdom of Crowds

Mr. Surowiecki talks about Coase's theorem. Firms will do things in house when the coordination costs that way are cheaper than the contracting overhead to outsource. He talks about decentralization and that even though decentralization and small teams were all the vogue, more and more money and attention was given to Chief Executive Differences. He says "What is perplexing about this faith is how little evidence there is that single individuals can consistently make sueprior forecasts or strategic decisions inthe face of genuine uncertaintly...me academics suggest that they have, at bst, a minor impact on corporate performance" Eighty percent of all new products fail and two thirds of all mergers end up losing money. I asked the question in my Daily Kos diary? a country really need a chief/executive/ prime minister/ president/ head of state pointing out the problems they seem to cause in many countries. All the comments were negative and people said that any organization needs a chief executive.