The Winning Economic Philosophy of Governance

February 19, 2012

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

February 19, 2012

To:      Honorable President Barack Obama
Cc:       Honorable House Speaker John Boehner
Honorable Minority Leader Nancy Pelosi
Honorable Senators Harry Reid, Richard J. Durbin, John McCain, and Jim DeMint

Sub: The Winning Economic Philosophy of Governance

Humans have perennially clashed over two antithetic philosophies: (i) elimination of usurpers and subjugators to create equal opportunity for all to persevere and prosper, and (ii) usurpation and subjugation.  History shows that the first philosophy has triumphed and prevailed with immense prosperity bestowed on societies that have adhered to it for as long as they have.

The usurpers and subjugators never gave up, though, even after being thoroughly vanquished:  they have surreptitiously improvised and sophisticated their philosophy.  The current system of money and finance is a surreptitiously improvised and sophisticated philosophy of usurpation of others’ hard-earned wealth for subjugation.  The 2008 financial catastrophe proves beyond a reasonable doubt, however, that the philosophy of usurpation and subjugation rooted worldwide has been all but vanquished. 

The Dood-Frank-Volker Rules may extend the longevity of the philosophy of sophisticated usurpation and subjugation.  But this philosophy will definitely face natural demise through Great Depression II unless the society jettisons it by urgently adopting first-best efficient rules of governance, i.e., my Constitutional System of Money and Finance including my Safe Central Banking in its entirety.  

How am I so definitive of the natural demise of the prevailing economic philosophy through depression?  Eventual worldwide consciousness about how a philosophy of usurpation and subjugation, practiced through a sophisticated system of money and finance, destroyed wealth and freedom of the vast majority will definitely cause catastrophic financial panics and runs.  The 2008 catastrophe is a mere harbinger.  The adverse consequences, ex post (after worldwide consciousness), will induce even the proponents of the philosophy of usurpation and subjugation to accept the first philosophy.  No informed individual, including the usurpers and subjugators, cherishes the second philosophy.  The usurpers and subjugators perpetually fear about being subdued by an eventually informed public, as happened historically. The longing for the first philosophy is, thus, universal. 

For now, can a nation continue to grow and prosper economically when the hard-earned wealth of its persevering households is usurped surreptitiously through an established system?  No.  The systemic risk facing the US and most of the world today is the second-best (inefficient) system of money and finance, which has permeated a philosophy of usurpation and subjugation of people who persevere and produce by those who do not.  This system is a guarantee for an eventual economic decay everywhere. 

The Volker rule (banning flow of insured funds for proprietary trading) is at best a flippant, if not an impractical, regulatory mechanism to redress the concerns raised in my 2007 paper on lending taxpayers’ funds to private hedge funds is financially suicidal to taxpayers. This paper-submitted to the US President, Congress and Treasury Secretary in October 2007-must have then induced the Treasury’s public pressure on highly leveraged financial institutions to deleverage by either raising capital or selling assets to comply with the FDIC-IA 1991 bank foreclosure rule.

If the Volker rule can be adopted even for namesake, it may only stretch the life of the current second-best system of money and finance-which is economically inefficient and detrimental to national competitiveness and which causes surreptitious usurpation of others’ wealth after massive destruction of hard-earned capital-that has publicly collapsed since 2008. 

The Volker rule is like a heavy dose of antipyretics to subdue the economy’s fever (excessive trading).  It does not diagnose, let alone cure, the fever’s root cause: the second-best system of money and finance.  Fever is an internal mechanism to raise the temperature of a body to fight intruding germs.  Antipyretics, without medicines for terminating the intruding germs, can kill a body.  Likewise, trading is a vital internal mechanism of an economy that diffuses concentration of risk and is, thus, needed to keep the economy healthy.  A ban on trading will lead to an unhealthy concentration of cash with some firms or individuals and untradeable assets with others.  Such concentration of risk can choke economic activity including employment creation.  This may eventually cause a manmade economic depression.   

The current ever-expanding US regulatory paradigm, with the Dodd-Frank-Volker Rules added to it, is sinking the economy deeper into an abyss.  The economy can extricate itself from this abyss naturally through an economic depression which is inevitable if the current second-best system of money and finance continues, irrespective of the Dodd-Frank-Volker Rules. 

The catastrophic natural outcome (economic depression) can be averted, however, through first-best rules, namely, Constitutional System of Money and Finance including Safe Central Banking in its entirety, which I have proposed to the US Congress since 2003, and which the US government partially adopted to stem the domino of financial catastrophe in 2008 via Fed-backed insurance of previously uninsured money markets and bank debts.

Safe Central Banking is the only equilibrium outcome which is economically efficient (first-best) and attainable within the most general mathematical model of microeconomics yielding macroeconomic policies available in the literature.  This model was first mimeographed in 1991 at the Board of Governors of the Federal Reserve System is now revised as Arbitrage Pricing of Total Risk of Assets and First-best Governance of Financial Markets.

Economic equilibrium is akin to stability mandated in the constitution. I have presaged and communicated with the Congress since 2003 that instability was natural for an economy without Safe Central Banking.  That Safe Central Banking is needed for stability was proved beyond any doubt during the financial catastrophe in 2008 when the US government was forced to insure the previously uninsured money market funds and bank debts. 

The other elements of Safe Central Banking obtained in my general equilibrium model-to make the system of money and finance economically efficient and constitutional-are to offer safe central banking privilege to all firms and households (not just financial firms) and to disband the current federal guarantee of bank deposits.  The US Congress has not yet adopted a completely coherent Constitutional System of Money and Finance including Safe Central Banking which has stemmed from my first-best policy research.  The second-best policy promoting guardians of the economy, who have admitted their failure before the Financial Crisis Inquiry Commission, are still in denial and ruling the roost by hoping that the Dodd-Frank-Volker Rules will pacify the public to forget the massive destruction of wealth due to the second-best system.

A complete adoption of my first-best Constitutional System of Money and Finance including Safe Central Bankingwill obviate the practically infeasible Volker rule and most of the Dodd-Frank Act and avert the depression-causing systemic risk facing the economy.  Furthermore, my first-best system is necessary to guarantee the individuals’ rights to property, mandated in the constitution, by eliminating surreptitious usurpation of others’ hard-earned wealth, now taking place under the current second-best system of money and finance.

The public can no longer be misled:  Googling for information on system of money and finance brings my paper on Constitutional System of Money and Financeto the top of more than 400 million websites and on safe banking policy brings my paper on Safe [Central] Banking to the top of more than 100 million websites.

The only feasible alternative for economic growth and prosperity amid stability is my first-best Constitutional System of Money and Finance including Safe Central Banking in its entirety. 

With profound regards,
SankarshanAcharya