Importance of Media and Truth for Capitalism and Wealth Preservation

May 4, 2010

Dr. Sankarshan Acharya
Associate Professor of Finance, University of Illinois at Chicago
Director, Finance and Governance Research Center, India

Pro-Prosperity.Com and Citizens for Development

 

Publishers are crucial to propagate the truth, beneficial to society. Truth is the basis of trust in society. Trust means credit. Credit is the wealth stored as debt to borrowers or as assets held. Suppression of truth will invariably translate to decimation of wealth of society. This is especially important now, because the Great Recession of 2008 may recede to Great Depression II.

The truth is that no finance expert/author, culled by the top publishing houses or journals or media, has predicted the financial meltdown, let alone devise policies to avert such crises. The invited experts and authors-from the Academy, Wall Street and Government-have published no research to foresee the crisis. This is vouched by the ex-Chairman of the Federal Reserve Board, Mr. Alan Greenspan: "Everybody missed it [the Great Recession]," he said, "academia, the Federal Reserve, all regulators." Even the current Federal Reserve Chairman recommends an academic article that renders the Great Recession as a slap by the invisible hand (god). Nobel Prize winners in economics have opined in top news media like the New York Times that no one saw this coming.

We are now witnessing an unprecedented chasm between professional punditry and political wisdom:

  1. Prominent members of the U.S. Congress and President have emphasized endlessly that the great recession was manmade.
  2. The Congress has angrily blurted uselessness of the economists.
  3. The Congress has rejected the explanations of Wall Street titans that they were not responsible.
  4. The Prime Minister of U.K. wrote in a column in Washington Post in October 2008 that the Great Recession was caused by irresponsible and undisclosed lending.
  5. When President Obama announced the "Volker Rule" on January 21, 2010, the Senate Banking Committee did not have this rule in its drafted bill. The Banking Committee, the media, and even the Wall Street CEOs (who had a good meeting at the White House just a few days before the announcement) were all shaken by the White House announcement and the resolve to fight for it. President Obama sidetracked his Treasury Secretary and Chief Economic Advisor while making the announcement of the new rule. The announcement has angered some bank CEOs so much that they have switched their funding from Democrats to Republicans, as per media reports. The Volker Rule seeks to prevent commercial banks from proprietary trading by using insured funds.
  6. The Senate Agriculture Committee has just introduced a new bill to stop commercial banks from speculative trading of derivatives. The media is, as a result, talking about torpedoing of this bill by pro-Wall Street Treasury Secretary and WH Economic Advisors.
  7. The Treasury Secretary is echoing the demand from Congress for new research by the Federal Reserve to serve the public interests.
  8. The New York Times (perhaps prompted by Congress and Administration) has expressed in an editorial the urgency to replace the government economic decision makers everywhere because they promoted an economic paradigm that has collapsed.

So, what is causing the serious chasm between the unprecedented acts of the politicians and the professional punditry that had ruled the roost so far? It is the series of research-based memos that I have sent to the Congress and President from time to time. Most of these memos are available at Pro-Prosperity.Com.

But why should the Congress and President read my memos? Answer: My selfless research since 1989 has unfailingly uncovered the truth about the financial crisis and preemptive policies needed to avert it. Members of Congress and Presidents are responding to these papers and memos through new laws, but they are also swayed by lobbyists from the financial industry.

The professional pundits are suppressing publicity of this truth, lest they and their patrons would surrender their sway over governance and markets and decimate their own standing and fortunes. But publicity of the truth is necessary for faster reforms to eradicate the evil forces that control society by wangling away the hard earned savings of the real producers of globally competitive goods, services, ideas and innovations.

We face urgency:

  1. To protect enterprise and perseverance that props prosperity and security of society.
  2. To enervate the evil forces that indolently pursue for self-entrenchment in power through unconstitutional wangling of wealth created by the enterprising and persevering.

As a Fed Economist and a professor of finance at NYU and Illinois, I have published research papers and written memos to the Congress in 2003, warning then about an impending crisis due to a deliberate violation of the minimum FDICIA-1991 capital standards through multi-tier leveraging by banks with acquiescence of bank regulators. See, for example, the following links:

  1. Warning to US Congress in 2003 on home mortgage debacle.
  2. Trading by Market Making Companies is Unconstitutional and Financially Suicidal to Taxpayers.

The FDICIA-1991 bank foreclosure rule was based on my research published in the Journal of Finance. The Fed had invited me when I was at NYU in 1990 on a special package after the Congress adopted my research-based unprecedented bank foreclosure rule in FDICIA-1991, namely, to close banks with capital-to-assets ratios falling below a regulatory minimum.

While at the Fed, I warned about the transgression of the FDICIA-1991 rule due to the rampant multi-leveraging at bank holding companies. I made an issue of the transgression in a meeting with the Citigroup top management in 1994. Citigroup was angry, but other Fed officials present in the meeting implored Citi to not take the issue seriously.

While at the Fed, I wrote a series of academic papers on multi-leveraging and moral hazard in banking industry in 1995. But I chose to leave the Fed for Illinois later in 1995 with a goal to purse directly with the Congress for optimal regulatory policies to serve the best interest of enterprising and persevering households and taxpayers. I doggedly pursued for research-based preemptive policies on banking, rating and financial governance to avert an impending market crisis, notwithstanding immense personal sacrifice due to hurdles created by the vested interests.

It took many years to publish a critical mass of easily understandable papers on a new economic theory of constitutional governance for efficient resolution of moral hazard in banking and regulation. The applicable result of this research is Safe Banking Policy. I presented it to the Congress in March 2003 with a strong warning about an impending financial meltdown. The Congress then sought testimonies from the Fed in October 2003 and a Fed conference was held later that year on bank safety. The Fed invited me to the conference. But I could not attend.

The current meltdown was precisely because of the transgression of the FDICIA-1991 capital norms. Transgression was deliberately allowed by the Federal Reserve and other bank regulators until the end of 2007. By the end of 2007, I sent another paper to the Congress on how taxpayers were committing financial suicide by unknowingly letting banks use the federally insured funds for trading by private hedge funds managed by bank executives and how the bank holding companies were having insufficient capital on a consolidated basis. We now know that the Treasury Secretary urged the banks publicly in early 2008 to raise capital for survival; those banks that could not raise the minimum required capital on a consolidated basis failed.

I have illustrated numerically how banks diluted their consolidated capital to, say, one-tenth of the regulatory minimum to enhance their profits ten-fold for unseemly executive bonuses. I have also shown how each firewalled subsidiary of a bank holding company could have the minimum required capital, while the bank holding company's consolidated capital eroded rapidly. This is a truth that I have discovered since 1994 and communicated with Congress since 2003.

The Congress and White House have lately embraced some of my policy recommendations, for example, to prevent banks from using the federally insured deposits for speculative trading on own accounts or at leveraged private hedge funds, and requiring bank holding companies to have minimum capitals on a consolidated basis. It should now be obvious that all the preemptive policies, which I had discovered and communicated convincingly to the Congress in 2003, could have averted the Great Recession and the loss of at least $20 trillion of wealth.

To counteract the lobbyists, I had sent the preemptive policies, written in plain English, to the New York Times and the Washington Post in 2003. But the media seems to be controlled by the same vested interests, who detest these policy proposals. The vested interests are now exposed. They have approached me to testify in their favor before the Courts, Government Agencies and Congress. At the same time, their controlled media is hell-bent to suppress a propagation of the research-based truth to public.

My selfless research has produced other serious truths about how banks will continue to transfer hard-earned savings of the real producers, innovators and entrepreneurs to private trusts owned by the indolent bankers, even after the current Senate bills are enacted into laws. Unless all my research-based policies are implemented, Great Depression II will recur and the indolent bankers and their private trusts will control the persevering and enterprising individuals as in the Great Depression.

The truth is that the Federal Reserve has deliberately propounded a dogma of market discipline: to let bankers freely wangle away the wealth of hardworking households unconstitutionally and pile risks on taxpayers with an implicit federal insurance against failure of their institutions. This dogma (laissez faire capitalism) was badly exposed during the Great Depression and now in the Great Recession. This dogma is antithetic to my economic theory of efficient resolution of moral hazard through constitutionally mandated free trading and rules on bankruptcy. The Fed dogma of protecting too-big-to fail banks is not consistent with the constitutional principle of free markets.

The Fed had encouraged many journal editors and authors in banking and finance to propagate its dogma of market discipline. The Fed also developed a critical group of economists through special incentives to propagate its dogma among the members of Congress. The bankers have established many endowed professorships to conduct and promote the dogma the market is capable of disciplining itself to price assets fairly, notwithstanding the unconstitutional rules. The dogmatists have tried hard to block my research over the years. The dogma that the market can discipline itself to price assets has abjectly failed, as revealed by the inability of markets to price "illiquid" assets in 2008. The 2008 market meltdown unraveled the mythology of market discipline. It has also bared the truth about the importance and necessity of my economic theory of constitutional governance. This economic theory is profound because it (not the prevailing economic paradigm) props the dreams of the founding fathers of U.S.A. about a free market economy.

My research shows that the prevailing economic paradigm (Fed dogma) is a "mythology," or a science of lies. This means that every economics or finance expert appearing on media promoting this dogma is spreading pure mythology.

Publicity for money is not a desire of this selfless researcher. But publishers should publicize the truths that serve the best interests of the enterprising and persevering households. Promotion of enterprise and perseverance is necessary to prop society including the publishers, bankers and rulers. Publishers should, thus, support those who devote their lives to pursue for research-based policies to enhance enterprise and perseverance in society.

Top investment banks are now seeking my help to promote their interests by my testimony before government and courts. Yet, they are pursuing underhandedly to block the publicity of truths stemming from my research. Their obvious strategy is to prevent my research-based memos from reaching the Congress and President. Their myopic strategy will only precipitate irreparable worldwide losses of hard earned wealth, dignity and trust.

My research-based policies for governance of banking and financial markets indeed provide a robust foundation for constitutions of most major nations in the world. I have demonstrated that the current rules of governance and economic paradigm are unconstitutional. Publicity of this profound truth is necessary and urgent because we may be heading for Great Depression II. My research shows that the currently proposed reforms will not avert a graver impending crisis brewing under the veneer of an artificially restored economic normalcy.

It is important that you help publicize the truth about the constitutional rules of governance published and unpublished over decades of research. This is unique because it is the antithesis of the prevailing dogma. It is urgently necessary because the prevailing dogma has abjectly failed. Doing so will not only reward your publishing house in pecuniary terms, but also beget the public trust in you for propagating the truth.