Subprime, Ron Paul and Paradoxes

by John M. Regan, Jr.
by John M. Regan, Jr.

People are still talking about the subprime thing. You can go to a bar like I did the other night, meet some guy for the first time, and maybe he’s never heard of Ron Paul but he has heard about the "subprime" thing. Which is strange, if you ask me: you know there’s a big, big problem out there; wouldn’t you also want to know about the solution?

But it just goes to show you, the subprime thing is giving everyone the willies, because it's signaling the unraveling of the monetary ponzi scheme. Like any ponzi scheme, you have to keep new people paying in. The prevalence of subprime lending, almost all of it very recent, merely indicates that there's no one left to dupe; the system has had to tap individuals that plainly cannot ever pay, just to keep the game going a little while longer.

But to use the musical chairs metaphor: the music is about to stop, there are 4,000 people in the room and one chair. The establishment's proposed solutions – to the extent they have any at all – are the equivalent of knocking down a wall to make the room bigger and see if we can get up to 5,000. Everybody senses that this is insane, so there are a lot of raw financial nerves out there.

If you had asked me two years ago how long the whole drama could go on, I would have said "indefinitely". Maybe another 100 years. Maybe a thousand. The power to create money at will and put it wherever is, in many ways, too profound to fathom – like Tolkien's ring.

But now I think I was misunderstanding, which I have to admit happens to me a lot, especially when I try to think about things that are sort of paradoxical. Like life, for example: it is incredibly powerful and incredibly fragile at the same time.

Similarly, the "money" power of the Federal Reserve – our own monetary Frankenstein monster which reflects us yet inevitably, viciously turns on us – is both profound and seemingly limitless, but yet somehow still mundane and weak. It is the heart of a wretched and lawless system that nevertheless has a few fundamental rules.

Such as this one: the banks are all insolvent, but the insolvency has to be manageable. The subprime problem illustrates the same thing that Fed Chairman Ben Bernanke would telegraph if he ever sent those oft remarked money laden helicopters aloft to drop their load: the situation has become utterly unmanageable.

And indeed we see, the major players are beginning to carp at each other (most recent target Goldman Sachs for their cynical short plays), and are running to Abu Dhabi and Beijing to "shore up capital structure" (Citigroup and Morgan Stanley).

Of course, it is not enough. Somebody is going to be left holding the bag, they all know it, and they’re all scrambling around, pointing fingers, trying to make sure it isn’t them. And it’s too late. And it’s coming soon. They know that, too.

So I've revised my thinking somewhat. I now think there is a real and substantial possibility that a major worldwide economic event will occur in a matter of months, maybe even weeks. And I think the event, should it occur, will center on exactly what it should be centered on: the monetary-financial-banking system.

Thus it's not too soon to start thinking about how calamity and suffering can be avoided, and as it happens I think it is quite simple, and very much like the ancient Solon's solution: the "debts" to the banks must be absolved and the dollar must be redefined in gold terms based upon what is currently on hand at the Treasury and the Federal Reserve, so as to cover deposits in the banking system and avoid a collapse of activity in the "real economy". The gold would be eventually distributed to the banks physically, and the Federal Reserve would be closed. Forever.

When Murray Rothbard wrote about a similar solution in 1995, he estimated that gold would have to be valued at about $7500 per ounce. Since we have had a blow off top in the credit markets in the years since, I wouldn't be surprised if today's figure was more like $20,000 per ounce.

So there it is. An abrupt transfer of wealth from Wall Street back to Main Street through debt cancellation, reversing nearly 100 years of stealth theft by central banking. Not perfect, but what else are you going to do? Besides, with nothing behind them "loans" are basically fraudulent anyway. The "lender" is at least as guilty as the "borrower" – so it’s a wash, culpability-wise.

And one other really important thing. The 20th century American experiment with central banking began in 1913 with gold at $20 an ounce, and would end with gold at $20,000 an ounce less than a hundred years later. What a nice, clean measure of the economic destruction wrought by central banking for future generations to ponder should they ever, ever get the ridiculous idea that the government should have a central bank.

Is this a disaster? Sort of. Not really. In any event, it doesn’t have to be a murderous rampage. The real reason banking disasters cause so much pain and suffering is that the bankers and the rulers, though having plainly screwed everything up royally, fight to retain their position at everyone else's expense – in other words, to preserve the status quo ante, where they remain on top no matter how profligate, incompetent or downright evil they have been. They often succeed in convincing the mob that the problem is their profligate neighbor, the schmuck that went on the hook for his overbuilt, overvalued house; instead of the morons in Washington and on Wall Street who have commandeered the wealth of the country mainly by half-clever trickery. It is the latter who deserve to suffer, at least to the extent of losing their privileged position and having to provide something of actual value for their living. And they're too pudgy and comfortable to riot. I mean, imagine a few thousand Wall Streeters and Washingtonians pouring into the streets shaking their fists, angry about the new gold standard. And they all look like Karl Rove. It’s kind of funny.

It's not that I hate them or anything. I'm certainly no class warrior. But somebody has to get stiffed to fix all this, and in justice it really should be them first for a change. The beauty of the situation is that they have been such effective parasites, they are practically the only ones who can be stiffed. Nobody else really has anything: no savings, no unencumbered property.

I once spent an afternoon talking with one of the directors of the Federal Reserve Bank of New York. I was all prepared to encounter an evil wizard/master of the universe type. The man I actually met was polite, charming, loved his wife and children, was grateful for his good fortune and generous with his time. In his spare time he was an amateur and somewhat frustrated thespian. Of course, he was committed to our "confidence based system" but he saw no evil in it.

I'm hoping Ron Paul gets elected in part because the alternative is that men like that get marched off to the guillotine or the gulag when the revolution turns violent.

So you see, I don't hate him at all: I'm trying to save his life. So is Ron Paul.

December 22, 2007

John M. Regan, Jr. [send him mail] is a sometime attorney living precariously in Rochester, New York. After he helps Ron Paul fix the financial crisis, he might want to get a novel or two published.

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