March of We the People Towards Constitutional Capitalism

Sankarshan Acharya
Founder, Pro-Prosperity.Com and Citizens for Development

November 7, 2014. Revised November 22, 2014

We the People are decisively marching towards first-best efficient governance, i.e., Constitutional Capitalism. Through the recent midterm polls in USA We the People have taken another significant step towards Constitutional Capitalism.  How?

People want their hard-earned wealth preserved to fulfill their longing for freedom:

  1. The unanimous longing of people is freedom.  Freedom camot be suppressed by any sort of indoctrication. People serve/struggle to earn and save/invest enough to eventually fulfill their longing for freedom.  The government of We the People should fulfill the unanimous (common) longing. 
  2. When established rules of governance systemically nibble away investments, some investors and then all panic to salvage their decimated investments as they are frightened about the prospect of not having freedom for which they worked very hard. 
  3. Withdrawal of investments from business enterprises cripples the latter.  As businesses are crippled, employment opportunity collapses.  People remain unemployed and underemployed.  People may even stop searching for jobs, let alone contribute to economic growth.
  4. Even good paying jobs cannot motivate economically depressed people to produce their best if they keep losing their hard-earned investments.  This is why trillions of dollars of new money printed by the Federal Reserve and Trillions more borrowed by the US government did not raise the median income or wealth of Americans, while the rich got richer and the disparity of wealth rose above the pre-Great Depression levels.  

Constitutional Capitalism was born in 1991, which is the year when I mimeographed a paper on first-best efficient governance of banks and financial markets as a financial economist at the Board of Governors of the Federal Reserve System.  This paper evolved to thwart transgression of the bank foreclosure rule, which was enacted in FDICIA-1991, and which emerged from research I co-authored with Jean Francois Dreyfus as an Assistant Professor of Finance at the New York University in 1989. 

Despite being inherently apolitical, discoveries of truth about first-bet efficient governance of banks and financial markets kindled my interest to observe keenly the political process behind laws enacted or not enacted in USA and the rest of the world starting in 1991.  Here are my findings:

  1. Political parties as well as other associations, unions and groups of people have pursued for agendas to usurp public wealth or private wealth for their constituents through rules, policies and practices that are fundamentally unfair (unconstitutional), unsustainable and economically inefficient
  2. The usurped wealth flows unequally to leaders and their kith, kin and cronies.  This leads to a keen (often unsavory) contest for leadership within each party, association, union or group. 
  3. As a result, the vast majority affiliated to each party, association, union or group becomes relatively poorer over time.
  4. When wealth of leaders and their kith, kin and cronies becomes egregiously higher than that of the rest, the vast majority in each group join to oust their leaders. 

Here are the events on the march towards Constitutional Capitalism since 1991:

  1. Mr. Bill Clinton campaigned convincingly to become the US president in 1992.  He created millions of new jobs and raised incomes and savings of people.  But, it was as if to pull the rug under the veneer of the wide-spread prosperity during his presidency, Mr. Clinton repealed the Glass-Steagall Act in 1999 to empower a few bankers to usurp private wealth recklessly by using government insured deposits for trading against passive mutual funds, pension plans, unprivileged hedge funds, and individual investors and traders.   
  2. This wiped out the vast majority of investors’ confidence in the financial markets by the end of 2000.  They ousted the party in power, withdrew from financial markets and diverted their savings to real estate.  People thought this was the only way to secure their investments because house prices were stable and rising.  But the rug under the veneer of their prosperity was pulled out once again by an underhand shenanigan to destroy the home mortgage financing industry.  This shenanigan was consummated with a Great Recession in 2008, which is considered to be worse than the Great Depression by the Federal Reserve. 
  3. The market crash of 2008 led to an ouster of the ruling party and catapulted an underdog in the 2008 polls to US presidency.
  4. Instead of correcting the established system of inequality – which deliberately impoverishes the vast majority to enrich a few in each party, association, union or group – President Barack Obama anointed the same economic experts that had done everything to perpetuate inequality as members of his dream team.  
  5. The Financial Crisis Inquiry Commission has found that these experts and their Masters of the Universe (Robber Barons) have caused the 2008 financial catastrophe. 
  6. President Obama’s reliance on the failed experts appeared as if he too decided to perpetuate the established system inequality as per the wishes of the Robber Barons.  People noticed this in 2010 and resoundingly unseated his party in the strong Democratic senate seat in Massachusetts. 
  7. President Obama was alarmed by the jolt in 2010.  He made some cursory changes in the Dodd-Frant Act of 2010.  But by signing this act, he basically legalized serfdom for the vast majority by a few Masters of the Universe, who were found by the FCIC to be the cause of the 2008 financial crisis, and who are now legally too-big-to-fail and too-big-to-be-jailed.
  8. Since 2009, however, a silent revolution has been brewing among people, giving rise to the Tea Party as well as Occupy Wall Street movements.  But these movements too failed to rise to power as their leaders could not shape practical ways and means of attaining freedom.  They failed to dethrone the established parties. 
  9. Both the established parties have depended on the same Masters of the Universe to fund their campaigns to rise to power, without any audacity to disembowel their Masters.    

The midterm polls of November 2014 showed that people are angry with both the established parties. They, however, chose to punish President Obama by voting for the Republicans.  Was it just another angry poll verdict against the incumbent political party?  No.  My rational inference is that something more fundamental is shaping in America for an embrace of constitutional capitalism.  Here is what I see:

  1. In 2009, the Republican Party adopted a mission in its official manifesto to remove moral hazard in governance necessary for freedom.
  2. The Federal Reserve has now admitted that moral hazard is a problem facing the economy. Efficient resolution of moral hazard in governance of banks and financial markets was first mimeographed at the Federal Reserve Board in 1991.
  3. Republican leaders have publicly declared to repeal the Dodd-Frank Act of 2010, reinstate the Glass-Steagall Act and even stop FDIC insurance (Safe Banking) to facilitate freedom of Americans. 
  4. We the People expressed in 2008 polls a volition to change the system of governance of banks and financial markets, and warned the president (Mr. Barack Obama) by rejecting his party for not enacting the change he had promised in 2010 poll in Massachusetts (in the deceased Ted Kennedy's seat) and then by dramatically derailing his party in 2014.
  5. The Federal Reserve has lately threatened to break up the Masters of the Universe (Clearing House members) because of their unsustainable risk. 
    • The Fed has not specified if the break-up will be to separate trading subsidiaries, market making subsidiaries and commercial banking subsidiaries of the mega bank holdings companies (members of the Clearing House).
    • What is the source of risk of these mega banks?
    • As pointed out in my earlier papers and memos, mega banks are now taking deposits at 0 to 0.5% and lending it to the government at 3-4% for a hefty profit without any risk. They are now being accused of not lending to risky households and businesses to revive the real economy. What is then the risk the Federal Reserve now admits to seeing that the mega banks have been taking to the extent that the mega banks should be broken up? My analysis is as follows:
    • The mega banks (Clearing House members) under the purview of the Fed are essentially hedge funds backed by (can never fail due to financial support owing to) the Federal Reserve Act of 1913. They are long in stocks with unseemly high prices (like Face Book, Apple, Ali Baba, Google, etc) and short in stocks with unfairly low prices (like Fannie Mae and Freddie Mac). Their marked-to-the-market equity values will remain positive (that is, they will remain solvent) as long as the eggregiously high valued stocks stay hign and the deeply depressed prices of stocks remain low.
    • This means, the mega banks depend on squeezing both the unprivileged shortsellers of high valued stocks and the unprivileged long-term investors of under valued stocks.
    • If the government plans to revive the real economy by releasing Fannie and Freddie from conservatorship, the mega banks will be doomed as the prices of these securities rise uncontrollably to their fair values. Mega banks will have to cover their short positions in these stocks and, for their survival, they have to sell their long positions; this will make them bankrupt. It will expose the government and Federal Reserve once again.
    • If mega banks are operating as riskily as inferred above, then important public policy (namely recapitalization and freedom of mortgage lending companies) is effectively held hostage by anti-public shenanigans of the mega banks supported by the Federal Reserve Act of 1913.
    • In fact, in a shareholder lawsuit (Perry Capital vs. US), the government attorneys and the Court have agreed to not divulge publicly critical information on conservatorship of Fannie and Freddie to avoid catastrophically negative impact on the markets.
    • Markets, made/controlled formally by the Clearing House members, can obviously go haywire if the market-makers are involved in such serious risk as to have the Federal Reserve warn the market makers (mega banks) on their break-up.
  6. As per a Washington Post report dated November 5, 2014, President Obama refused to be drawn into super PAC funding by the same Masters of the Universe for the November 2014 midterm election of Democrats because he did not want to be seen to be associated with Robber Barons any more.  President Obama took five years to realize (as narrated in my paper on coalitions of borrowers and lenders) that he was doing a disservice to his own mission of removing inequality by taking the advice of the Robber Barons through the latter’s agents chosen to lead his economic team.  President Obama probably sensed correctly that people do not mind politicians taking money from real business leaders like Koch Brothers than from the Robber Barons who basically rob everyone including real businesses to throw crumbs at politicians committed to maintaining status quo.  President Obama must have, therefore, expelled the expert-agents, who had been nominated by the Robber Barons to oversee his administration, and then stopped taking funds from the super PAC of Robber Barons.  This is why Republicans out-funded the Democrats in the midterm elections of November 2014.  Similar events catapulted the BJP in India, thanks to the leaders' public embrace of constitutional capitalism conveyed to them in numerous memos. Changes in political leadership is, however, not a guarantee for establishment of a constitutional system. 
  7. Both the established parties in US have now realized (thanks to selfless memos on Constitutional Capitalism) that the real economy as well as freedom of Americans is being severely hurt by the shenanigans of the Robber Barons. 


  • We the People have succeeded in making political leaders move forward willy-nilly to preserve if not enhance (by repealing all rules that usurp) household wealth of the vast majority of unprivileged Americans irrespective of their affiliation to any party, union, association or group. 
  • Political leaders have recognized the necessity to restore confidence of investors in the government without fear that their investments will be surreptitiously usurped once again through some other shenanigans concocted by a legal but unconstitutional system of privilege granted to the Masters of the Universe. 
  • Confidence of investors is vital for their freedom and dedication to production of globally competitive goods and services on which the wellbeing of leaders too depends. 
  • The leaders have recognized that tirade against investors and shareholders of companies and homes versus taxpayers must give way to protection of hard-earned private capital needed for freedom. 
  • We the People have to still struggle to wean the political leaders away from the prevailing philosophy of sharing the loot from the established system of money and finance - and instead adopt a transparent and fair public funding of elections - because the current system is unconstitutional (fundamentally unfair), unsustainable (leading to potential social unrest) and economically inefficient (causing decay in competitiveness).
  • We the People need to continue the struggle more vigorously to establish a system of money and finance which is constitutionally fair, stable and efficient.
  • Epistemic truth eventually vibes with the conscience of every human being, i.e., becomes unanimously agreeable. A profoundly significant epistemic truth is that civilized coexistence of humans is possible only if the government of We the People does not allow even surreptitious usurpation of private and public wealth the way it is done through the currently prevailing rules of governance of banks and financial markets. Such epistemic truth always triumphs and prevails and nobody (howsoever mighty) can deny it because of the unbearable price of prejudice with a proclivity to suppress the truth.

Epilogue: US President Obama as well as his party (Democrats) and Republicans seem to have taken the above message seriously (after it was first circulated) to work towards restoring the wealth of the vast majority of American middle class, as indicated by the the steps they have taken after its circulation:

  • In a hearing before the Senate Banking and Finance Committee (SBFC) on November 19, 2014, the Director of the Federal Home Loan Financing Agency (FHFA) which now controls Fannie Mae and Freddie Mac stated that the FHFA could release Fannie and Freddie from conservatorship, but that the initiative should come from the Treasury Department.
  • There was no opposition from Republicans to such pronouncement by the FHFA Director.
  • The Chairman of SBFC, Democratic Senator Johnson, rather made a U-turn on his bipartisan bill passed earlier by SBFC to wind down Fannie and Freddie: Senator Johnson stated on November 19, 2014 that the FHFA Director should start the process of releasing Fannie and Freddie from Conservatorship.
  • After a meeting held at the Treasury Department on November 21, 2014, a Treasury spokesperson stated (according to the Wall Street Journal) that new legislation by Congress is needed to release Fannie and Freddie from Conservatorship. But the Congress already has HERA-2008 legislation which guides when and how Fannie and Freddie should be taken out of conservatorship exclusively by the decision of the FHFA Director.
  • Remarkably, no one from either the Democratic Party or the Republican Party has countered the latest discourse on release of Fannie and Freddie from Conservatorship. This is remarkable because the two parties, at loggerheads on almost all other issues, had unanimously voiced their volition to wind down Fannie and Freddie and even President Obama had agreed to do so in a conference in Las Vegas aa of July 2013.
  • After the drubbing in the mid-term polls of the Democrats and before the testimony of FHFA Director, the new HUD Secretary had expressed the possibility of a bipartisan bill to Reform Housing Finance (he did not seem to express winding down of Fannie and Freddie).
  • The Bipartisan efforts to reform Housing Finance before the November 2014 mid-term polls used to mean winding down of Fannie and Freddie to transfer the mortgage financing business to private banks with a taxpayer protection through a new agency, Federal Mortgage Finance Corporation.
  • Republicans had initiated the process of winding down of Fannie and Freddie in 2008 and Democrats had not objected to it. In fact, the architects of winding down of Fannie and Freddie are top economic advisers affiliated to both parties.
  • Despite their resounding victory in November 2014, Republicans seem to have decided against the advice of their top economic advisers to not object to keeping Fannie and Freddie (after their recapitalization, release and relisting in stock exchanges).
  • Since August 2013, President Obama had abandoned the same group of advisers affiliated to the Democratic establishment and his administration by making a U-turn on his top choice for headship of the Federal Reserve Board.
  • The heretofore bonhomie of either party establishment with the Federal Reserve and mega banks (clearing house members) have all but endded after the mid-term poll results, which like the 2008 verdict conveyed the same message of voters: to repeal the current system of money and finance that makes the vast majority of Americans poorer and a fringe richer:
    • Restore Fannie and Freddie to rebuild household wealth of those who persevere to produce globally competitive goods and services in America.
    • Stop the rule (short-selling by privileged clearing house members and affiliated hedge funds) that creates counterfeit shares to depress the values of securities like Fannie and Freddie with a premeditated plan to wind them down and thus give to the indolent usurpers the wherewithal (from selling something that they do not own) to perpetuate such anti-American and unconstitutional shenanigans that weaken national competitiveness and internal stability.
    • Make market making independent of commercial banking and trading by banks.
    • Make clearing house records of holdings of securities by Americans completely independent with a provision that only the FBI and courts can access their records should there be complaints of any fraudulent activity by anyone.
    • Above all, institute safe banking policy, which is more precisely outlined as safe central banking policy.
    • Introduce a bill for public financing of elections.
    • Introduce law to dismantle holding company structure for mutual funds which creates conflicts of interest between the investment/trading by BOD of the holding company and mutual fund managers compensated by the BOD.
    • Chart equilibrium interest rate policy in equilibrium among coalitions of borrowers and lenders.
    • Let the public exchequer fund the elections of political leaders.
    • Subject all public servants (lawmakers, presidents, governors, and officials in bureaucracy and judiciary) to the same insider trading rules as applied to other citizens. After all, the electorate is supreme in a democracy and cannot face unprivileged teatment under law by those they appoint as public servants.

Conclusion (political goal of reforming the Current System of Money and Finance):

Bipartisanship in USA - to rebuild a depressed middle class - is a welcome development. The Treasury Department or FHFA Director or Senator Johnson would not state anything inconsistent with President Obama's or Democrats' current thinking. If their goal is to release Fannie and Freddie from conservatorship, and HERA-2008 law grants the FHFA the power to act unilaterally anyway he wants (as ratified by even Judge Lamberh in his recent ruling), why is the Treasury Department asking for new legislation? My answer is as follows.

  • After the defeat in the recent midterm elections, Democrats have made the plight of the vast majority of middle class as their priority through their actions.
  • To convince the vast majority of middle class that Democrats stand and work for them, the party leaders will not only have to act in the direction of restoration of the wealth of middle class, but also have to portray their opponents (Republicans) as opposed to the middle class.
  • If Republicans propose new legislation to wind down Fannie and Freddie, they can be easily portrayed as those who initiated destruction of housing industry in 2008 and who now want to destroy the home mortgage financing industry by eliminating Fannie and Freddie by giving the mortgage finance to rapacious mega banks that caused the mortgage crisis to destroy middle class wealth mostly tied to home equity. This may be why the response of Republications to the overture of Democrats on reform of home finance since November 19, 2014 has been subdued.
  • As per WSJ, the Treasury has asked Republication (who will control both the House and Senate in January 2015) to come up with new legislation on reforming Fannie and Freddie. If the Republicans produce regislation to recapitalize, release and relist Fannie and Freddie as independent home mortgage financing and insuring entities, President Obama will claim victory as a champion of the middle class as well as of bipartisanship.
  • Either strategy of Democrats and Republicans will lead to revival of wealth lost by the vast majority of middle class and the nation (if not the rest of the world) will march towards Constitutional Capitalim.

History of Mankind: Let's all keep in mind that American colonies went to a violent war when they were frustrated with the then system which forced them to sell their sweat-filled service and merchandise for paper money printed elsewhere. The current system - Fed's printing of fiat money, the government's IOU's and SEC's permission to counterfeit financial securities - is worse than the bygone colonial era because it strips the hard-working people off their legitimately accumulated savings needed for their freedom.

This system of neo-colonial governance prevailing now has brought the global economies to a dangerous precipice. The freedom begot by either the American founding fathers through violence or India's Gandhi through non-violence has become nought.

Just visualize the most ancient war (recorded in Gita) called Mahabharat. This is significant because the latest extensive research based on genetic mapping suggests that humans popped in East Africa and migrated to the Indian peninsula, cultured there to discover strategies for civilized co-existence by thwarting the onslaught of violent wild animals and devilish himans, and emigrated to the rest of the world. This finding is consistent with the observation, suggested by the researchers, that the Indian subcontinent is the only region that has all human forms (like mongoloid, caucasian, etc.) spread all over the world. Maybe the north was very cold then and a few migrants that survived the cold forgot their ancestoral history. But their genes did not forget the necessity of the unique unanimously agreeable principle of governance for their civilized co-existence, as discovered in ancient India (the thrust of Gita): to not usurp others' wealth even surreptitiously.

The American founding fathers, after independence, established a constitutional principle akin to the thrust of Gita, namely, the government of We the People will ensure the right of every individual to life, property, liberty and pursuit of happiness.

Dilemma of lawmakers since ancient discovery of the unique, unanimously agreeable principle of governance for social co-existence of humans continues, though, persists possibly because they cannot resolve the following questions:

Mahabharat: A group of subjects agreed to play a roulette (Pashakhela) with another group supported by the rulers, guided by law signed by the then king and accepted by all. The subjects lost everything, legally. The rulers blamed the subjects for irresponsibility and carefree attitude. Even the losers reconciled to their losses because they agreed to play by the rules signed by the king. So why did a selfless Krishna take the side of the subjects to motivate the latter to war against the rulers by portraying the latter as evil forces of mankind? The subjects went to war but were reluctant to kill their brethern in the war field. Yet, Krishna succeeded in convincing the subjects to destroy the rulers who committed a perfectly legal act. When I asked my wife to tell why she worshipped an ostensibly biased entity like Krishna as God, she had no answer. Whenever people think of God, they think that it is an unbiased.entity. How could then a seemingly biased entity like Krishna be construed as God by mankind directly surrounding India and indirectly by those who have accepted the preamble of constitution to protect the right to life, property, liberty and pursuit of happiness? This constitutional preamble needs to be rephrased to make it inviolable by surreptitious rules of law.

Current Global System: The vast majority of common people voluntarily invest in financial securities and real estate. Their investments are guided by well written laws. The loss they suffered is perfectly legal. Is the advocacy for the vast majority of common people then not biased against those who gained legally?

What went wrong, if any, then (during Mahabharat) and now (modern established system) that everyone is as worried now as they were then for civilized co-existence of humans?

[This will be answered. But may I please have readers to think of their answers to these questions.]



Mr. Al Hunt, Bloomberg News

Dear Al:

It is exciting to see your column in Bloomberg News (dated November 30, 2014) on gathering of steam for a constitutional convention, especially in the wake of my missives on "March Towards Constitutional Capitalism," dated November 7, 2014, and on "Freedom from Neocolonialism..," dated November 26, 2014, published at and . 

In order to be successful, constitutional reform has to be fundamentally fair and unanimously agreeable, according to the unique rational principle of governance published in the same website,  

There is an adage in Sanskrit: "Eka Brahma, Dwitiya Nasti," which means true knowledge is unique.  


Dr. Sankarshan Acharya
Founder of Citizens for Development and Pro-Prosperity.Com
Director, Center for Research on Finance and Governance

PS: Feel free to circulate this email.  I will also cite your column while updating my missives.