Time to End the 'Shampoo Economy'

Dan Petegorsky

"Bubble, bust, repeat...bubble, bust, repeat...bubble, bust, repeat..." That's how economist Jared Bernstein (now economic adviser to Vice President Gore) described the last decades of unrestrained greed that brought on our current meltdown.

Today saw critical new developments in the battle to make sure that the institutions and practices responsible for the meltdown and continuing consumer rip offs aren’t allowed to return to their previous dangerous and unaccountable roles. The developments include:

Senator Merkley has come out strongly in favor of key elements of these reforms – and there’s a vital role for all of us in pursuing these and other efforts to ensure oversight of a wide range of financial services corporations who’ve gambled recklessly with both our and their investors’ money with disastrous effects for too long.

As the business press is reporting, the financial industry is preparing to fight the reforms tooth and claw: “Facing the inevitable assault of government regulation, the hedge fund industry is quietly building up its arsenal.” Last month, when the Mortgage Bankers Association succeeded in defeating legislation to assist homeowners facing foreclosure, Senate Majority Whip Dick Durbin said “the banks...are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Let’s prove Durbin wrong and show them who the real owners are. Sign up with Americans for Financial Reform now, and get your organization to join the campaign.

Comments

  • (Show?)

    Today's five-minute reading assignment comes from the Bible: Genesis, chapter 41.

    Discussion question: Why am I bringing this up, and what does it have to do with Oregon politics?

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    "When two full years had passed, Pharaoh had a dream: He was standing by the Nile, when out of the river there came up seven cows, sleek and fat, and they grazed among the reeds. After them, seven other cows, ugly and gaunt, came up out of the Nile and stood beside those on the riverbank. And the cows that were ugly and gaunt ate up the seven sleek, fat cows. Then Pharaoh woke up."

    Totally clear, Kari: bad money chases out good money.

  • Old Ducker (unverified)
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    If you really want to get rid of the boom/bust cycle, eliminate the Federal Reserve, outlaw fractional reserve banking, restore sound money (gold standard) and legalize free banking (bank issuance of specie).

    There are several bills in various states to legalize settlement of debts/credits to the state using existing legal tender gold coin and electronic transfers based on gold deposits with parity based on the london price. This is a good first step as it would be a simple matter to extend it to private debts, so we would already have an alternate money in place when the FRN (dollar) crashes.

  • rw (unverified)
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    Most folks would think the fat cows were greedy cows. I think the gaunt cows are greed. Of nature, naturally, up comes quiet prosperity, sleek, pleasing. Devoured, destroyed, nullified by greed, the gaunt h'aint of "Never enough".

  • muhabbet (unverified)
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    thank you admin

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    Old Ducker wrote: "If you really want to get rid of the boom/bust cycle, eliminate the Federal Reserve, outlaw fractional reserve banking, restore sound money (gold standard) and legalize free banking (bank issuance of specie)."

    It's nice to know that there's always room for comedy here on Blue Oregon. The comments quoted above qualify!

    The Federal Reserve system was invented precisely to level the boom/bust cycles, including inflation and creation of a national monetary system. The gold standard went the way of high button shoes because it was high button shoes. Ditto for bank-issued money.

    As far as "free banking" (i.e., banks free of governmental regulation), ever since repeal of Glass-Stiegel we have seen ample proof that "free banking" is a dangerous hallucination. "Free banking" has led to the worst excesses of our current economic disaster. And it still hasn't reached its nadir.

    In the last election we were treated to bizarre statements from at least one candidate (one cannot call him a politician) along the lines of the statement quoted above. His use of that kind of language characterized him immediately as un-serious -- and that's being kind.

    President Obama's "plans to rein in Wall Street, including development of a new Financial Product Safety Commission [and] launch of a major new national campaign, Americans for Financial Reform" are precisely the kinds of medicine this country and the rest of the world most desperately need. And it is the Federal Reserve that is vitally needed to springboard these concepts -- as long as we don't allow gobbledegook word magicians to run it ever again.

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    Well said, Lee.

    News and commentary on these issues have now exploded in the last day, both nationally and locally. Re. the Federal level, Joe Nocera's piece this morning shows that while many in the financial services lobby and their enablers in Congress are squawking, the President's proposals are actually far less sweeping than necessary, and need significant strengthening.

    Just as important - and telling - was the front page story in the Business section of the Oregonian this morning, Foreclosure relief bill stalls in Oregon Senate. The opening sentence says it all: "The chief legislative proposal to stem record foreclosures in Oregon remains stalled in the face of continuing pressure from industry lobbyists."

    It will take concerted action both in Salem and D.C. to fend off the mounting attacks and push through the kind of structural reforms we need. As Nocera puts it, we're going to have to make a lot of bankers mad.

  • Joe White (unverified)
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    The current financial problems originated in the financial sector, and have Democratic fingerprints on them.

    The Clinton era regulations requiring banks to issue subprime loans in specified zip codes was a great vote buying scheme for the Dems short term.

    It just didn't work so well for the economy long term.

    It was a classic case of overregulation, something Democrats still don't understand.

    (Chuck Schumer's instigation of the run on IndyMac was nothing short of criminal. But I'll leave that for a later post.)

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    Oh, get off it, Joe. That line has been debunked many times over, on this site and elsewhere.

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    Any moves to prevent use of TARP funds, Fed loans etc. to lobby against these reforms?

    How to we get to making the legislation stronger?

  • rw (unverified)
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    Why do the racialists continue to mumble it's the po'folks' fault even to this day?

  • Old Ducker (unverified)
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    Leo, When the dollar collapses after the next FED created bubble bursts, people like you will do what they've always done and blame it on the "free" market. Why not just abandon the pretense and just abolish it now?

    The part I don't get is that while you don't value liberty in any form, you aren't in the power elite that benefits from tyranny. The only explanation is brainwashing, i.e. "programming." It clearly shows in your near complete ignorance of economics and the history of banking.

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    It's a very good question, Rebecca; I suspect it's because this "big lie" conforms to how they want to continue seeing the world.

    A recent must read on this topic is the report that was issued just the other week by the National Council of Negro Women in conjunction with the National Community Reinvestment Coalition, Assessing the Double Burden: Examining Racial and Gender Disparities in Mortgage Lending.

    The report showed that borrowers of color we much more likely to receive high-cost loans that their white counterparts - and that in key cases the disparity actually increased as income levels rose! In other words, this was not about "bad borrowers" so much as "bad loans."

    As the report notes, "Middle- and upper-income African-American females were at least twice as likely to receive high-cost loans as middle- and upper-income white females in more than 84 percent of the metropolitan areas examined."

    Chris - re. making the legislation stronger: alongside direct corporate campaigns, that's one of the key missions of the new Americans for Financial Reform coalition.

  • mp97303 (unverified)
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    Why do the racialists continue to mumble it's the po'folks' fault even to this day?

    Not to belabor the point, but the Federal Reserve Bank of Boston put out an interesting report about this very topic

    here

  • socialjustice (unverified)
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    Lee- Has the Federal Reserve been successful at eliminating booms and busts and curbing inflation? Did we not have a boom a few years ago? Is this a bust? How about the roaring 20's and the depression? It seems to me that in the conduct of monetary policy rates were too low and the Fed also failed in their role as a regulator. The Fed could have required the banks to hold more capital. The monetary system needs to have something that limits the amount of credit extended. Markets would do this, but market forces will not work if certain entities are too big to fail. The only way the real estate bubble grew to such size was because the government agencies were able to raise increasing sums of money and lend it out only becasue of their implicit government guarantee. That is not a free market. The Fed and the existing monetary system is a failure. Will it take a crash in the dollar, hyper inflation and sky high interest rates for people to ralize this? The time to make changes is now and expecting the FED to be a super regulator is a huge mistake. The Banks cannot regulate themselves. The FDIC is a far better choice.

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    Old Ducker: Leo, When the dollar collapses after the next FED created bubble bursts, people like you will do what they've always done and blame it on the "free" market. Why not just abandon the pretense and just abolish it now?

    You must have been one of those people who, when Bill Clinton was elected in 1992, said "He's going to raise taxes on rich, and the DOW is 2700? SELL! SELLL!! IT'LL NEVER BE THIS HIGH AGAIN!!!

    I remember many Republicans doing this. Strangely, they never learned their lesson. (Or maybe not so strangely, because, judging by their protest signs, Republicans are too stupid to even spell as well as a third-grader.)

    Here's a clue, "Ducker": things aren't true just because you want them to be.

    Really. No matter how much FOX Lies says otherwise.

  • Old Ducker (unverified)
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    Steve, I remember Clinton saying "the era of big government is over." I just wish he had been right about that.

  • rw (unverified)
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    ... and guess what Dan? Though I am a white woman who has kept a traditional Native home for most of three decades now, folks think I'm mixed blood. I wear corporate drag, and am not a tie-dye avuncular... but my features allow folks to see me as nearly anything they like. And because my son is SO very traditional in the truest carriage, they assume suchlike of me. Wonder what rates I would get, my dreadful credit rating notwithstanding...

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    socialjustice,

    I believe the Fed is kind of a denatured & privatized version of the proposals of the People's Party to create what they called sub-treasuries which were to be public entities. I am not sure that would have much applicability today as they were designed to deal with the credit problems of small-owner farmers facing transport monopolies and manipulations of the seasonal price cycles of agricultural commodities of the time. But I have heard the possibility of making the Fed public & taking it out of the direct hands of bankers floated in abstract media discussion. Not that there's any real likelihood of that just now.

    There's a way in which the self-dealing of financial managers lies at the core of a wider problem of the same nature across the U.S. corporate spectrum. A lot of attention gets paid to CEO salaries because they define a range and are easy to describe, but the same kind of inflation beyond any genuine value applies to several layers of top management below the CEO, depending on the the size of the company, which Boards sign off on because they are part of the same class. In big finance this is even more exaggerated because the money they "make" is in itself derivative of the businesses they finance and even more detached from actual goods or services, so the setting of salaraies and other forms of compensation is almost arbitrary and starts to get driven by psychologies of competitive emulation & proving negotiating power.

    The point of this is that so much of the "expertise" to regulate the industry (now there's a term that needs rectification) resides in members of the benefiting class that even moving the regulation into wholly public entities could only moderate the problem I think. I don't have any good ideas about how to address this.

    (Management self-dealing periodically gets a degree of push-back from shareholders, but that has tended to narrow the view of the role of the corporation purely to return on investment, such that short term high returns drive out or down or absorb perfectly profitable companies that could provide stable & secure employment & produce good things at reasonable prices, to be replaced by sacrifice of stability and community accountability for the sake of squeezing out the most immediate penny now.)

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    Old Ducker,

    The gold standard created the long depression of the late 1870s to the early 1890s, essentially because of the opposite of what they used to say about inflation. If inflation is too much money chasing too few goods, deflation & depression are too little money chasing too many goods. By the 1880s industrial and agricultural productivity in the Euro-diaspora world economy had outstripped the arbitrary limit set by the amount of gold as an absolute quantity available. This was relieved for a period in the 1890s as the South African gold discoveries on the Witwatersrand in 1886 came into full production, and to a lesser extent by the Klondike gold discoveries a bit later.

    A converse example much earlier was the effect of Spanish importation of massive quantities of gold from the Americas into Europe, which created an inflation that promoted rising productivity and investment compared to the near steady state of the European middle ages. Of course a fair amount of that was intensified by the "primitive accumulation" of stealing the labor of slaves in ag-industrial monoculture plantations and the lands of Native Americans and South & Southeast Asians and the enclosed commoners of Britain and the deepening enserfment of Russian/ Polish/ Prussian peasants etc. etc.

    Point is though that at bottom gold is no less fiat money than anything else. It doesn't have intrinsic value but has prices that vary in relation to other things just like any other commodity. Put more of it in the system without changing productivity, its value goes down & prices go up. Let productivity outstrip its quantity, it obstructs lending & circulation of money.

    The point is productivity and relating money to productivity - and these days, being sure you adequately measure productivity in relation to real costs by preventing externalization of those costs onto the ecological or social commons for privatized gain that doesn't reflect the total costs of a given activity and thereby expropriates other people's shares of the common wealth.

  • Old Ducker (unverified)
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    BO isn't accepting long posts from me. Can anyone tell me why?

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    The point is productivity and relating money to productivity

    This is a critical point Chris - and one that Les Leopold draws out in his new book, which I highly recommend, The Looting of America.

    As Leopold sees it, rising income inequality over the last 30+ years - a time when, in the US, productivity has risen very dramatically - and the accelerating growth/concentration of investment capital were key contributing causes in the rise of what he calls "fantasy finance."

    One of his charts shows on the one hand the decline/stagnation in real weekly wages between 1973 ($746) and 2008 ($612 - both in inflation adjusted 2008 dollars), and on the other what that 2008 figure would have been if, as they had over the entire post-war period until then, wages had increased along with productivity ($1,171).

    Re. your other point on potential regulatory expertise residing in the beneficiary class: I have several friends tracking this stuff who have worked for years in the financial industry, and they too point to this. They identify the (or at least a) key factor in the equation is the huge salary differential between the private investment sector and the public (i.e., regulatory) sector.

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    Old Ducker,

    I have been having weird things happen too. What I think is that it's not the length but how much time you are in the typing box. So if I've been typing a while, it will reject the post. I then cut or paste the text, reload the page, and paste the whole text in, and it accepts it. Give that a try and see if it helps. (Sometimes I compose in my e-mail program -- plain text -- & paste in but usually I forget).

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    Thanks for the ref Dan. There are a number of books I want to get and take a week and read along these lines.

    Your friends' suggestion sounds highly plausible to me.

  • rw (unverified)
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    Dan, am reading that piece you linked. All I can can is, "Dayam. Sheesh. Wow."

    And still we have the institutionalized racism debunkers.

  • www.myshopbay.com (unverified)
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    I purchased the ralph lauren polo t-shirt for my friend as a gift and he was SO excited he wore it the very next day. When I asked him about how many compliments he received he just grinned. Apparently everyone loved it!

    While it's such a great shirt, just be such not to over wear it!

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    Chris - as it happens, Paul Krugman notes in his column this morning that the Oministration's plan does nothing to address the perverse incentives/compensation questions.

  • socialjustice (unverified)
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    Chris- Those are good points. The amount of money paid to those who are able to aggregate capital or borrow large sums of capital is staggering. The main advantage of gold over other fiat money is that there is a limit to its creation and it is difficult to counterfeit. With money now being basically bits and bytes in a computer, we should all be worried. Clearly a simpler system of deposit taking and sane lending would be less costly to all of society, easier to regulate, and more stable.

  • socialjustice (unverified)
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    John Succo on Minyanville makes and excellent point:

    The government's white paper describing the causes and effects of the financial crises provides the rationale for President Obama's proposals for reform. Conveniently, nowhere does the paper mention the actual primary causes:

    1. The Federal Reserve kept real interest rates negative for nearly five years. Negative interest rates are an abomination, a radiation to proper pricing of risk:they encourage if not force excessive risk-taking.
    2. The Federal Reserve kept margin requirements at banks too low for too long.

    3. The shoddy monitoring of off-balance sheet leverage and derivatives, both of which accelerated leverage to unparalleled levels.

    4. The Congressional creation and support of the GSEs, which guaranteed and bought debt that would otherwise never been made because of its quality.

    Of course the banking industry played along. Unfortunately, the private market will always take advantage of shoddy government regulation. But the private market never would have had the fuel or the risky inclinations if not for the above.

    But the above wasn't mentioned, because the paper was written by those culpable.

    Now we are about to give the very institution, a private bank with its own shareholders and where only half its board members are appointed by the government, undefined powers. Ron Paul has nearly half of Congress willing to support a bill to audit the Fed. It can't come soon enough. We know a lot more about the operations of the CIA than we do about the operations of the Fed, whose operations that always devalue our currency.

    We will rue the day that we gave this power to the Fed. The power is undefined; they have carte blanche. We should by now all realize the destruction for which the Fed is already responsible.

  • socialjustice (unverified)
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    John Succo on Minyanville makes an excellent point:

    The government's white paper describing the causes and effects of the financial crises provides the rationale for President Obama's proposals for reform. Conveniently, nowhere does the paper mention the actual primary causes:

    1. The Federal Reserve kept real interest rates negative for nearly five years. Negative interest rates are an abomination, a radiation to proper pricing of risk:they encourage if not force excessive risk-taking.
    2. The Federal Reserve kept margin requirements at banks too low for too long.

    3. The shoddy monitoring of off-balance sheet leverage and derivatives, both of which accelerated leverage to unparalleled levels.

    4. The Congressional creation and support of the GSEs, which guaranteed and bought debt that would otherwise never been made because of its quality.

    Of course the banking industry played along. Unfortunately, the private market will always take advantage of shoddy government regulation. But the private market never would have had the fuel or the risky inclinations if not for the above.

    But the above wasn't mentioned, because the paper was written by those culpable.

    Now we are about to give the very institution, a private bank with its own shareholders and where only half its board members are appointed by the government, undefined powers. Ron Paul has nearly half of Congress willing to support a bill to audit the Fed. It can't come soon enough. We know a lot more about the operations of the CIA than we do about the operations of the Fed, whose operations that always devalue our currency.

    We will rue the day that we gave this power to the Fed. The power is undefined; they have carte blanche. We should by now all realize the destruction for which the Fed is already responsible.

  • (Show?)

    Is the issue really the basis of currency/exchange or the out-of-control degree of leveraged bets on whatever the underlying real assets are? The figures I've found most staggering are the estimates of the credit derivative markets: upwards of $62 trillion dollars in 2007, greater than the size of the actual world economy.

    My point is: no matter what the medium of exchange in the real economy, if "investors" are allowed to make bets on that economy with stakes in the tens of trillions of dollars and with other people's money ultimately backing those bets, we're still in deep doodoo.

  • socialjustice (unverified)
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    Dan- You are of course right, the issue is leverage. What entities are resposible for allowing the leverage to grow to obscene levels? Who decided that credit default swaps served the public good? These huge bets with other peoples money are still occuring. Why do we still want the taxpayers to ultimately back Goldman Sachs and Citigroup? People should be free to bet, just not with the public's money and expecting the FED to stop this as a regulator is totally naive. The FED is the entity that has enabled this to go on for far too long.

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    The FED is the entity that has enabled this to go on for far too long.

    Socialjustice - there's certainly much blood on the Fed's hands, so to speak - and Dean Baker's book is a searing indictment especially of the Greenspan Fed - Plunder and Blunder: The Rise and Fall of the Bubble Economy.

    The question that folks are struggling with now is how it's possible to regulate this kind of activity. And in one key sense, I think the answer is: you can't. As others have said, anything that's "too big to fail" should be too big to exist. The Swiss are now talking about chopping the big holding companies down to size. (Note: this is a huge development, since we're talking about real giants like UBS and Credit Suisse.) Obama's plan did NOT out this on the table.

    On the regulatory level, the problem is that if you don't concentrate power in one institution then you keep the door open to the kind of "regulatory arbitrage" that's marked the status quo, right?

    One solution, which many progressive groups and economists appear to support, is to couple increased authority for the Fed with a real restructuring of the Fed to make it more accountable and transparent. In that regard, National People's Action and PICO recently won agreement by Bernanke to hold a series of 7-10 public hearing across the country; those have already begun. But the Administration's plan did not include that kind of structural reform of the Fed itself.

  • socialjustice (unverified)
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    Dan- I agree it is tough to regulate especially in a global world. The first step it to make sure deposits are safe. Banks should be banks. Insurance companies should be insurance companies. Leveraged Speculators should be leveraged speculators funded with something else besides insured deposits. Investment managers should be investment managers. Keep it simple. If entities want FDIC insurance which depositors will demand then there should be real limits on the risks and leverage the banks have on the books. The second step is to make sure that companies not under the FDIC umbrella are not too big or too systemically important to fail. If shareholders, and more importantly creditors, know that a company will be allowed to fail and will not have access to Fed Lending/Govt. backstop then these creditors will be a lot more careful. Banking regulators should be there to protect depositors. Without a govt. backstop the funding of a Fannie Mae or a Citigroup would have been cut off long ago. Third, over time ban most derivatives which are basically just bets. Yes, in some cases they provide a useful tool, but the negatives outweigh the positives. I am a big fan of checks and balances. I do think the banking system should remain independent and I am fine with a Central Bank that can provide temporary liquidity to solvent institutions at punitive rates, but our FED seems to do pretty much whatever it wants whenever it wants and has no problem changing the rules as it goes along. If we decide that these giant Financial Sepermarkets are somehow in the public interest then absolutely we do need a regulator that oversees them; however, too much power is in the hands of the FED and too much risk has been taken with banking deposits. The FED as an institution failed as a regulator pehaps because in its back pocket it knows it can always just create more money to paper over its mistakes. It seems to work for Wall St, not for the American People.

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    OK, gang - one more resource to share: a new episode of Laura Flanders' GRITtv, The People Fight Back Against Wells Fargo. All about "reverse redlining."

  • Scott J (unverified)
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    Kari,

    my hat is off to you on bringing up the passage in Genesis. It is quite relevant.

    If anything, it demonstrates that boom and bust cycles happen not just in the demands and cravings of mankind, but the cycles of nature.

    Cycles have been around forever and will continue to happen. You can't tame demand and desire. All you can do is push demand into the black market if you over-regulate it.

    With respect to the verse...it demonstrates the need for wise gov't not to spend all the income or national assets in the boom years, knowin there will be lean years.

  • Old Ducker (unverified)
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    <h2>Okay, so BO doesn't want my long post to steve in regard to the 1873 recession and other items. I just post this short note explain why every "progressive" should support abolishing the FED and restoring sound money: if the US gov't had to raise taxes to finance wars, there would be very few wars.</h2>

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