Richard C. Cook: The Crashing U.S. Economy


Richard Moore

Original source URL:

The Crashing U.S. Economy Held Hostage
Our Economy is on an Artificial Life-support System

By Richard C. Cook

Global Research, July 7, 2007

Remember when the U.S. was the world's greatest 
industrial democracy? Barely thirty years ago the 
output of our producing economy and the skills of 
our workforce led the world.

What happened? It's hard to believe that in the 
space of a generation our character and 
capabilities just collapsed as, for example, did 
our steel and automobile industries and our 
family farming. What then are the causes of the 

Here's how I would put it today: our economy is 
on an artificial life-support system, a 
barely-breathing hostage in a lunatic asylum. 
That asylum is the U.S. and world financial 
systems which are on the verge of collapse.

The inmates are the world's central bankers, 
along with most of the financial magnates big and 
small. The fact is that the economy of much of 
the world is in a decisive downward slide which 
the financiers cannot stop because the systems 
they operate are the primary cause. As often 
happens, the inmates rule the asylum.

The problems aren't confined to the U.S. 
Unemployment worldwide is increasing, debt is 
rampant, infrastructures are crumbling, and 
commodity prices are rising.

In such an environment, crime, warfare, 
terrorism, and other forms of violence are 
endemic. Only the most naïve, self-centered, and 
deluded jingoist could describe such a scenario 
in terms of the freedom-loving Western 
democracies being besieged by the "bad guys."

Rather what is happening highlights the growing 
failures of Western globalist finance whose 
impact on political stability has been so 
corrosive. As many responsible commentators are 
warning, we are likely to see major financial 
shocks within the next few months. The warnings 
are even coming from high-flying institutional 
players like the Bank of International 
Settlements and the International Monetary Fund.

We may even be seeing the end of an era when the 
financiers ruled the world. At a certain point, 
governments or their military and bureaucratic 
establishments are likely to stop being passive 
spectators to the onrushing disorder. It is 
already happening in Russia and elsewhere.

The countries that will be least able to master 
their own destiny are those like the U.S. where 
governments have been most passive to economic 
decomposition from actions of their financial 
sectors. The financiers are the ones who for the 
last generation have benefited most from 
economies marked by privatization, deregulation, 
and speculation, but that may be about to change. 
Whether the change will be constructive or 
catastrophic is yet to be seen.


Within the U.S., foreign investors, above all 
Communist China, have been propping up our 
massive trade and fiscal deficits with their 
capital. To keep them happy, interest rates-after 
six years of "cheap credit"-must now be kept 
relatively high. Otherwise the Chinese,, 
might bail-out, leaving us to fend for ourselves 
with our hollowed-out shell of an economy.

Even so, these investors are increasingly uneasy 
with their dollar holdings and are bailing out 
anyway. Foreign purchase of U.S. securities has 
plummeted. And our debt-laden economy, where our 
manufacturing base has been largely outsourced, 
is no longer capable of providing our own 
population with a living by utilizing our own 
productive resources.

For a while we were floating on the housing 
bubble, but those days are now history when, 
according to a Merrill-Lynch study, the 
artificially pumped-up housing industry, as late 
as 2005, accounted for fifty percent of U.S. 
economic growth.

As everyone knows, the Federal Reserve under 
Chairman Alan Greenspan used the housing bubble, 
like a steroid drug, to pump liquidity into the 
economy. This worked, at least for a while, 
because consumers could borrow huge amounts of 
money at relatively low interest rates for the 
purchase of homes or for taking out home equity 
loans to pay off their credit cards, finance 
college education for their children, buy new 
cars, etc.

When the final history of the housing bubble is 
written, its beginnings will be dated as early as 
1989-90, when credit restrictions on the purchase 
of real estate first began to be eased. According 
to mortgage industry insiders interviewed for 
this article, they began to be taught the methods 
for getting around consumers' weak credit reports 
and selling them homes anyway in the mid to late 

The Fed started inflating the housing bubble in 
earnest around 2001, after the collapse of the bubble, which failed with the stock 
market decline of 2000-2002. Then, over a 
trillion dollars of wealth, including working 
peoples' retirement savings, simply vanished.

Also according to mortgage specialists, it was in 
March 2001, two months after George W. Bush 
became president, that a "wave of intoxicated 
fraud" started. Mortgage companies began to be 
instructed, by the creditors/lenders, on how to 
package loan applications as "master strokes of 
forgery," so that completely unqualified buyers 
could purchase homes.

There could not have been a sudden onset of 
industry-wide illegal activity without direction 
from higher-up in the money chain. It could not 
have continued without reports being filed by 
whistleblowers with regulatory agencies. Today 
the government is prosecuting mortgage fraud, but 
they certainly had to know about it while it was 
actually going on.

The bubble was coordinated from Wall Street, 
where brokerages "bundled" the 
"creatively-financed" mortgages and sold them as 
bonds to retirement and mutual funds and to 
overseas investors. Portfolio managers were 
directed to buy subprime bonds as other bonds 
matured. It's the subprime segment of the 
industry that has now collapsed, triggering, for 
instance, the recent highly-publicized demise of 
two Bear Stearns hedge funds.

And it's not just lower-income home purchasers 
who are affected. The Washington Post has 
reported that for the first time in living memory 
foreclosures are happening in Washington's 
affluent suburban neighborhoods in places like 
Fairfax, Loudon, and Montgomery Counties.

The subprime bonds were known to be suspect. One 
reason was that they were based on adjustable 
rate mortgages that were actually time bombs, 
scheduled to detonate a couple of years later 
with monthly payments hundreds of dollars a month 
higher than when they were written. Many of these 
mortgages will reset to higher payments this 

Purchasers were lied to when they were told they 
could re-sell their homes in time to escape the 
payment hikes. Now the collapse of the market has 
made further resale at prices high enough to 
escape without losses impossible.

One way the system worked was for mortgage 
lenders to maximize the "points" buyers were 
required to finance, making the mortgages more 
attractive to Wall Street. Of course bundling and 
selling the mortgages relieved the banks which 
originated the loans from exposure, pushing a 
considerable amount of the risk onto millions of 
small investors. This was in addition to the 
normal sale of mortgages to quasi-public agencies 
like Freddie Mac and Fannie Mae.

Was it a scam? Of course. Did the Federal Reserve 
know about it? They had to. Did Congress exercise 
any oversight? No.

What did the White House know?

Amy Gluckman, an editor of Dollars and Sense, 
reported in the November/December 2006 issue: 
"During the Clinton administration, Greenspan was 
relatively 'unembedded'-averaging only one 
meeting per month at the White HouseŠ.

"But when George W. Bush moved into 1600 
Pennsylvania Ave., Greenspan's behavior changed. 
During 2001, he averaged 3.3 White House visits a 
month, more than triple his rate under Clinton 
and much more often with high-level officials 
like Vice President Cheney. His visits rose to 
4.6 a month in 2002 and 5.7 in 2003.

"Whatever White House officials were whispering 
in Greenspan's ear, it worked: Greenspan abruptly 
changed his tune on tax cuts, lending critical 
support to Bush's massive 2001 and 2003 tax 
giveaways, and he loosened the reins by cutting 
Fed-controlled interest rates repeatedly 
beginning in January 2001, a gift to the 
Republicans in power."

Along the way, the bubble caused housing prices 
to inflate drastically, which officialdom touted 
as economic "growth." Even today, periodicals 
like Barron's naively boast that this inflation 
boosted American's "wealth."

But this source of liquidity for everyday people 
has been maxed out, like our credit cards, and 
there is nothing to replace it. There is no cash 
cushion anymore, because years ago people stopped 
earning enough money for personal or household 

As purchasers lose their homes to foreclosure, 
the real estate is being grabbed at bankruptcy 
prices by the banks and by any other investors 
with ready money. Whole neighborhoods of cities 
like Cleveland or Atlanta are turning into 
boarded-up ghost towns.

What we are seeing are the results of an economic 
crime on a fantastic scale that implicates the 
highest levels of our financial and governmental 
establishments. It spanned three presidential 
administrations-Bush I, Clinton, and Bush 
II-though the worst of it came with the surge of 
outright lending fraud after 2001.

As usual when hypocrisy is rampant only the small 
fry are being called to account. Commentators, 
including a sleepwalking Congress, have 
self-righteously railed at consumers who got in 
over their heads. The Mortgage Bankers 
Association is even lobbying Congress to allocate 
$7 million more to the FBI to go after the 
supposedly rogue brokers within their own 
industry who are being scapegoated.


But there's much more to it than that. These 
bubbles are symptoms. They are created because 
our wage and salary earners lack purchasing power 
due to stagnant incomes and various structural 
causes. These causes include the outsourcing of 
our manufacturing industries to China and other 
cheap labor markets and the super-efficiency of 
the remaining U.S. industry which is able to 
manufacture products with ever-fewer workers.

Also, our farming, mining, and other 
resource-based industries are in a long-term 
slide. This and the decline of hard manufacturing 
have been going on since our oil production 
peaked in the 1970s, followed by the Federal 
Reserve-induced recession of 1979-83. Next came 
the deregulation of the financial industry. It 
was all part of the economic disintegration that 
led to today's "service economy."

Now, for the first time in modern U.S. history, 
there are no new economic engines at all. The 
last real engine was the internet which has now 
reached maturity with marginal players being 
weeded out.

Our biggest sources of new private-sector jobs 
today are food service, processing of financial 
paperwork, health care for the growing numbers of 
retirees, and menial low-paying jobs, like 
landscaping and building maintenance. These are 
increasingly being performed by immigrants who 
are also underpricing U.S. citizens in many 
service jobs like childcare and auto repair.

Today the rank-and-file of our population must 
increasingly turn to borrowing in order to 
survive. Only the banks and the credit card 
companies are the beneficiaries. The total 
societal debt for individuals, businesses, and 
government is over $45 trillion and climbing. 
This is happening even while the real value of 
wages and salaries is decreasing.

What I have just been saying is bad enough, but 
here's where the real lunacy enters in.

A major factor connected to the decline in the 
value of employee earnings is dollar devaluation 
in the overarching financial economy due to the 
proliferation of huge quantities of bank credit 
being used to keep the stock market afloat and to 
fuel the speculative games of equity, hedge, and 
derivative funds.

In other words, while our factories continue to 
shut down, the Wall Street gambling casino-like 
its Las Vegas counterpart-is running full-bore, 
24/7. This, along with financing of the massive 
federal deficit, is what critics are talking 
about when they speak of the Federal Reserve 
"printing money."

The main growth factors for federal spending are 
Middle East war expenditures and interest on the 
national debt. But within the private sector it's 
leveraged loans to businesses which The Economist 
recently said "mirrorŠ.interest-only and 
negative-amortization mortgages" in the subprime 
market. But here's the big difference: in the 
leveraged business economy, the amount of assets 
at stake are even greater than with the housing 

The financial world, which Dr. Michael Hudson 
calls the FIRE economy-Finance, Insurance, and 
Real Estate-has been producing millionaires and 
billionaires among those who know how to play the 

The Wall Street hedge funds stand out as the most 
irresponsible financial scams in history. 
Unregulated and secretive, they account for a 
third of all stock trades, own $2 trillion in 
assets, and pay their individual managers over $1 
billion a year. Think about this the next time 
someone you know has their job outsourced to 
China or when his adjustable rate mortgage resets 
and drives up his monthly house payment past the 
level of affordability.

The hedge funds borrow huge sums from the banks 
which generate loans under their Federal 
Reserve-sanctioned fractional reserve privileges. 
Often this money is used by the hedge funds to 
"short the market," thereby earning profits when 
stock prices decline.

In other words, the hedge funds and their banking 
enablers use banking leverage to bet against the 
producing economy. In doing so, they may actually 
drive stock prices down, causing ordinary 
investors to lose a portion of their own wealth. 
Can this be called anything other than a crime?

The livelihood of much of the U.S. workforce and 
perhaps half of the rest of the world's 
population-maybe three billion people-is being 
threatened by such financial lawlessness. The 
justification that was first used for financial 
deregulation and tax cuts for the rich was that 
the trickle-down effect of wealthy peoples' 
earnings would spill over to the rank-and-file.

The Reagan administration ushered in these 
policies in the 1980s under the heading of 
"supply-side economics." But the opposite has 
happened. The system has institutionalized an 
increasingly stratified worldwide culture of 
haves and have-nots.

How did today's looming tragedy come to pass?

Looking for causes is like peeling an onion. What 
we are really seeing are the terminal throes of a 
failed financial system almost a century old. 
It's happening because, since the creation of the 
Federal Reserve System in 1913-even during the 
period of the New Deal with its Keynesian 
economics aimed at full employment-our economy 
has been based almost entirely on fractional 
reserve banking.

This means that under the regime of the world's 
all-powerful central banking systems, money is 
brought into existence only as debt-bearing 
loans. Interest on this lending tends to grow 
exponentially unless overtaken by real economic 

Remember that every instance of bank lending, 
from purchase of Treasury Bonds, to credit cards, 
to home mortgages, to billion-dollar loans to 
hedge funds for leveraged buyouts or sheer 
speculation, must eventually be paid back 
somewhere, somehow, sometime, by somebody, with 
interest. In the end, it all comes back to people 
who work for a living, whether in the U.S. or 
elsewhere, because that is the only way the world 
community ever creates real wealth.

In an anemic economy like that of the U.S., 
growth cannot catch up with interest in a 
deregulated financial marketplace where interest 
rates are high. Rates may not seem high compared 
with, say, the twenty percent-plus rates of the 
early 1980s, but they are high in an economy 
with, at best, a two percent GDP growth rate.

And they have been high on average since the 
1960s, as the banking industry became 
increasingly deregulated. Interestingly, since 
1965, the U.S. dollar has lost eighty percent of 
its value, which tends to validate the contention 
by some observers that higher interest rates not 
only do not reduce inflation, as the Federal 
Reserve contends, but actually cause it.

The situation today is worse in many respects 
than 1929, because the debt "overhang" vs. real 
economic value is much higher now than it was 
then. The U.S. economy was in far better shape in 
the 1920s, because so much of our population was 
gainfully employed in factories or on farms.

The question is not when will the system start to 
come down, because this has already begun. It's 
shown most clearly by the fact that according to 
Federal Reserve data, M1, the part of the money 
supply most readily available for consumer 
purchases, is not only lagging behind inflation 
but has actually decreased in eleven of the last 
twelve months. This means that the producing 
economy is already in a recession.

The federal government is trying to figure out 
what to do. Their biggest concern is that foreign 
investors have started to pull out of 
dollar-denominated markets.

The government's "plunge protection team"-known 
officially as the President's Working Group on 
Financial Markets-is trying to engineer what they 
call a "soft landing." It's been likened to the 
process by which you cook a frog in a pot where 
you raise the temperature one degree a day. The 
frog doesn't hop out because the heat goes up 
gradually, but before long it's too late. The 
frog has been cooked.

Even if the plunge protection team succeeds, and 
the frog cooks slowly, there will be a massive de 
facto default on dollar-denominated debt and a 
long-term degradation of the U.S. standard of 
living. The inside word is that we are likely to 
see major monetary shocks and a possible stock 
market crash as early as December 2007.

The worst off will be people locked into 
retirement funds which have a heavy load of 
mortgage-related securities. Entire investment 
portfolios are likely to disappear overnight.

The banks, along with the bank-leveraged equity 
and hedge funds, are preparing for the biggest 
fire sale in at least a generation. Insiders are 
going liquid to get ready. If you think Enron was 
"the bomb," you won't want to miss this one.

There are so many flaws in the system that it's time for real change.

As I have been pointing out in articles over the 
last several months, the key to a rational 
solution would be immediate monetary reform 
leading to a fundamental shift in how the world 
conducts its financial business. It would mean 
taking control of the world's economy out of the 
hands of the private bankers and giving it back 
to democratically elected governments.

I spent twenty-one years working for the U.S. 
Treasury Department and studying U.S. monetary 
history. For much of our history we were a 
laboratory for diverse monetary systems.

During and after the Civil War (1861-5) we had 
five different sources of money that fueled our 
economy. One was the Greenbacks, an extremely 
successful currency which the government spent 
directly into circulation. Contrary to 
financiers' propaganda, the Greenbacks were not 

Another was gold and silver coinage and 
specie-backed Treasury paper currency. The third 
was notes lent into circulation by the national 
banks. The fourth was retained 
earnings-individual savings and business 
reinvestment of profits-which was the primary 
source of capital for industry. The fifth was the 
stock and bond markets.

After the Federal Reserve Act was passed by 
Congress in 1913, the banks and the government 
inflated the currency through war debt and 
destroyed most of the value of the Greenbacks and 
coinage. The banks never entirely displaced the 
capital markets but eventually took them over 
during the present-day era of leveraged mergers, 
acquisitions, and buyouts, while the Federal 
Reserve created and deflated asset bubbles.

The banking system which rules the economy 
through the Federal Reserve System has produced 
the crushing debt pyramid of today. The system is 
a travesty. Banks, which can be useful in 
facilitating commerce, should never have this 
much power. Many intelligent people have called 
for the Federal Reserve to be abolished, 
including former chairmen of the House banking 
committee Wright Patman and Henry Gonzales and 
current Republican presidential candidate Ron 

Some might call such a program a revolution. I 
prefer to call it a restoration-of national 
sovereignty. Central to the program would be the 
elimination of the Federal Reserve as a bank of 
issue and restoration of money-creation to the 
people's representatives in Congress. This is 
what our Constitution says too. It's the system 
we had before 1913.


The fundamental objectives of monetary policy 
should be to secure a healthy producing economy 
and provide for sufficient individual income. The 
objectives should not be to produce massive 
profits for the banks, fodder for Wall Street 
swindles, and a blank check for out-of-control 
government expenditures.

Note I referred to income. I did not say "create 
jobs." That is the Keynesian answer, because 
Keynes was a collectivist, and the main thing 
collectivists like to come up with is to give 
everyone more work to do, even if it's just 
grabbing a shovel and digging ditches like they 
did with the WPA during the Depression.

It's what President Clinton did with his 
welfare-to-work program that threw hundreds of 
thousands of mothers off the welfare rolls and 
into a job market where sufficient work at a 
living wage did not exist. It's another reason 
the government is constantly borrowing more money 
to fuel the military-industrial complex by 
creating more military, bureaucratic, and 
contractor jobs.

Back to income. The idea of "income," as opposed 
to "jobs," is a civilized and humane idea. When 
are we going to realize that everyone doesn't 
need a paying job in order for an industrial 
economy to provide all with a decent living? When 
are we going to realize that the productivity of 
the modern economy is part of the heritage of all 
of us, part of the social commons?

Why can't mothers have the choice of staying home 
with the kids like they could a generation ago? 
Why can't some people choose to do eldercare? Why 
can't others comfortably go into lower-paying 
occupations like teaching or the arts? Why can't 
some just opt to study or travel for a while or 
learn new skills or start a business without 
facing financial ruin as they often must today? 
Why can't retirees enjoy their retirement instead 
of having to stay in the job market or worrying 
about Social Security going broke?

The U.S. and world economies are on the brink of 
collapse due to the lunacy of the financial 
system, not because we can't produce enough.

Contrary to so many doomsayers, the mature world 
economy is capable of providing a decent living 
for everyone on the planet. It cannot because the 
monetary equivalent of its bounty is skimmed by 
interest-bearing debt.

These are things that monetary reformers have 
known about for decades. The first steps within 
the U.S. would be 1) a large-scale cancellation 
of debt; 2) a guaranteed income for all at about 
$10,000 a year, not connected to whether a person 
has a job; 3) an additional National Dividend, 
fluctuating with national productivity, that 
would provide every citizen with their rightful 
share in the benefits of our incredible producing 
economy; 4) direct spending of money by the 
government for infrastructure and other necessary 
costs without resort to taxation or borrowing; 5) 
creation of a new system of private lending to 
businesses and consumers at non-usurious rates of 
interest; 6) re-regulation of the financial 
industry, including the banning of bank-created 
credit for speculation, such as purchase of 
securities on margin and for leveraging buyouts, 
acquisitions, mergers, hedge funds, and 
derivatives; and 7) abolishment of the Federal 
Reserve as a bank of issue with retention of its 
functions as a national financial transaction 

While these proposals are basically simple, the 
overall program is so different from what we have 
today with our financier-controlled system that 
it takes careful reading and a great deal of 
thought to understand exactly how it would work. 
One way to approach it is to look at the likely 

These measures would immediately shift the basis 
of our economy from borrowing from the banks to a 
mixed system that would include the direct 
creation of credit at the public and grassroots 
level. The size of government would shrink, our 
producing economy would be reborn, debt would 
come down, economic democracy would become a 
reality, and the financial industry could be 
right-sized. Finally, the international situation 
could be stabilized because we would no longer be 
driven to a constant state of warfare to seize 
other nations' resources as with Iraq and to prop 
up the dollar as a reserve currency abroad.

Such a system would work by creating indigenous 
sources of credit needed to mobilize the natural 
wealth and productivity of the nation. There are 
people who could implement this program. Systems 
to do so could be installed within the U.S. 
Treasury and the Federal Reserve within a matter 
of months.

Fundamental monetary reform implemented to 
restore economic democracy is what America's real 
task should be for the twenty-first century. One 
thing is for certain. The out-of-control 
financial system that has wrecked the U.S. and 
world economies over the last generation cannot 
be allowed to continue.

How the outcome will play out may well depend on 
whether there is a Jefferson, Lincoln, or 
Roosevelt waiting in the wings. The success of 
each of these great leaders was due to one 
critical factor: their ability to implement 
monetary reform at a time of national emergency.

Richard C. Cook is the author of "We Hold These 
Truths: The Hope of Monetary Reform," scheduled 
to appear by September 1, 2007. A retired federal 
analyst, his career included service with the 
U.S. Civil Service Commission, the Food and Drug 
Administration, the Carter White House, and NASA, 
followed by twenty-one years with the U.S. 
Treasury Department. His articles on monetary 
reform, economics, and space policy have appeared 
on Global Research, Economy in Crisis, Dissident 
Voice, Arizona Free Press, Atlantic Free Press, 
and elsewhere. He is also author of "Challenger 
Revealed: An Insider's Account of How the Reagan 
Administration Caused the Greatest Tragedy of the 
Space Age." His website is at . He appears frequently on 
internet radio at  on 
Saturday mornings at 11 a.m. Eastern.

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