The Fed/ECB dollar swap

George Rebane

Does everyone understand what went down this morning between our Federal Reserve and the European Central Bank?  I venture that less than one in ten thousand Americans know that their pocket was legally picked today by international central banks.  This morning the Fed executed a “dollar swap” with the ECB that essentially allows the tottering European banks to have an endless and cheap supply of new US dollars flow to them through the ECB.

When I saw this barely coherent report on the online edition of today’s WSJ blandly talking about “making dollars available” to the ECB, I almost tossed my cookies.  My take on what had actually happened was corroborated by a couple of phone calls to one of my Washington spies who sent me the summary page of “the Fed memo” (about what the Fed did) that was hastily circulated to members of Congress to soften any awkward outcries to the press.

RR readers know the precarious sovereign debt positions of countries like Greece, Spain, Italy, … .  There is little chance that the euro will survive as the European currency, let alone continue on its vaunted march to becoming a competing reserve currency to the US dollar.  Recall that bankrupt countries borrow from commercial banks to finance their existing debt and continue funding their insane social programs.  Lenders to some countries have already taken ‘haircuts’ on the amounts loaned.  More of this is on the way since none of the eurozone countries have any foreseeable chance of growing their way out their debts.  Instead, many of their economies are shrinking.

So here’s the situation.   A growing number of eurozone countries, up to their eyeballs in debt, owe on their purchases of stuff like oil, other commodities, and their international trade imbalances.  The bills must be paid in dollars.  Their banks are tapped out of dollars (they can still borrow euros from the ECB which can print them, but euros won’t do) so they must borrow from the only source that will still give them the time of day, the ECB.  But the ECB is fresh out of dollars.

So Mario calls Ben and asks for a dollar/euro swap along the lines that was set up way back when “to provide dollar liquidity to foreign banks”.  This essentially means that the ECB sends over to the Fed some euros – at TODAY’S EXCHANGE RATE – and the Fed sends over some newly printed US dollars which get credited to Europe’s banks, who in turn lend them to the heavily perspiring eurozone countries.

In theory the Fed gets its dollars back along with some below market interest income when the ECB is able to repay.   But if the ECB can’t come up with the dollars as stipulated, then there is no default.  The built-in swap provisions allow the ECB to roll over the debt (er, I mean swap) and get more dollars if it needs them for more euros at the bygone fixed exchange rate.  This can go on indefinitely, and it means the Fed is on the hook for continuing to print more dollars to pay European debt with no end in sight, and no way to cash in on the collateral euros it holds in the ECB account.  The way it’s set up, this debt cannot default.

Now I know, dear reader, that you think this is a post in which I’m pulling your leg, and that it should really be posted on April Fool’s Day.   Unfortunately, I’m dead serious.  Without a single elected representative having had a say in this, the Fed has committed to have the dollar follow the euro into what most likely will be an inflation death spiral.  And the American taxpayer will become the lender of last resort to the profligate socialist governments of Europe.  You can get your own snootful on this through a careful read of the memo’s summary page I mentioned above – Download Fed Memo_111130.

I wonder if the fact that 70% of the profits for our international corporations comes from trade with the eurozone has anything to do with this quietly arranged European bailout that went down today.  Like the Chinese don’t want us to go broke, these multi-national corporations (and we?) don’t want Europe to go broke.  You may want to call your congressional rep and hear what s/he has to say about all this.  And that’s how we play kick the can. 

Comments

[louis from Italy]

Thank you Mr Rebane for your post. I totally agree and see your point. I have another point which perhaps all should focus on: the price of oil in Euro (not in US dollars) seems to be have always been quite stable. I find it strange that the dollar has not yet surged againt the Euro and if it did so I feel we could see an instant crisis throuout the system.
best to all,
Bert

[Martin]

Another end-run around Congress following what was recently leaked in the news that since 2008 the FED has secretly given Trillions of $$ to failing US and foreign banks but no one Congress seems to care. And, where's The Kenyan on this? ....absent.

We're in deep trouble folks.

[Account Deleted]

Thanks for the details on how this was done. Yesterday all I could get was that the Fed had "provided liquidity" for the ECB. There is another reason the Fed is straining to keep things solvent in the Euro zone. It is unclear, but troubling as to how deep the major US financials are invested in CDFs for Euro debt. If they cave, it will be back to "too big to fail" time. The only nit to pick is that it seems to me that the Fed, not the ECB picked the US tax payers' pockets. I'm sure that the justification in the Feds minds' is that we, as taxpayers, pay now or pay more later. The trouble is that this just buys a little time and then what? The underlying problem is just getting worse.

[Account Deleted]

Sorry - not enough coffee yet. credit default swaps, CDSs, not CDFs.

[George Rebane]

ScottO - the ECB, along with the coordinated actions of the other named central banks, pulled the trigger on the swap. The Fed technically had to comply and did. But Ben had to know the greater implications of this swap, and should have immediately conferred with the country's political leaders to advise them of what was coming down and whether he should comply. We don't know yet what he did, but play out both scenarios, and then judge for yourself either the silence from the administration (and congressional leadership), or that the Fed's unelected elite are flying solo in making momentous decisions about the country's future/survival.

[Account Deleted]

Along those lines - I was reading the Fed memo (summary) and then went to the Fed's web site. These memos don't seem to be available to the general public. Are they somehow available from the Fed if you know the secret handshake? Or was this just for certain members of the fed govt? The lame stream press always seems so clueless on this sort of thing. They are far more ramped up about voluntary $5.00 a month fees from banks.

[D. King]

"So Mario calls Ben and asks for a dollar/euro swap along the lines that was set up way back when “to provide dollar liquidity to foreign banks”. This essentially means that the ECB sends over to the Fed some euros – at TODAY’S EXCHANGE RATE – and the Fed sends over some newly printed US dollars which get credited to Europe’s banks, who in turn lend them to the heavily perspiring eurozone countries."

So, tax the poor / middle class through inflation.

http://www.youtube.com/watch?v=e9IYcq6hzJE

[George Rebane]

ScottO - good questions, but at certain times I do have to keep my sources confidential.

DaveK - you got it; inflation is a government instituted assets tax that hits hardest on the poorest.

[D. King]

Here is a short video that may help our leftist friends to understand current events and policies to avoid in the future. Well, maybe!

http://www.youtube.com/watch?v=KGPa5Ob-5Ps&feature=channel_video_title

If they only knew what the new patent laws will do to innovation!

[Mikey McD]

Only elitist central planners/politicians can justify using more debt and currency debasement to combat too much debt and currency debasement.

At lease we can be comforted by the godfather of socialism's answer to our present day crisis.... "in the long run we are all dead." I feel better already.

Don't look for the approval of such shenanigans in the US Constitution, no such right exists.

[Mikey McD]

The lame stream media should be reporting on this travesty nonstop (24/7). Add this to the long list of treasonous acts perpetrated against the American people by the unaudited, unconstitutional, uncontrollable Federal Reserve. No organization on the planet has and will do as much harm to the working class as the FED. End The FED.

The central planners disrespect for personal liberty and complex systems leads to demise.

[Mikey McD]

Rate of inflation since 1913 (Start of THE FED): 2187.1%

TWO-THOUSAND-EIGHTY-SEVEN PERCENT IN LESS THAN 100 YEARS!

http://www.usinflationcalculator.com/

[George Rebane]

MikeyMcD 244pm - the difference between inflation amount and inflation rate is important. The 2187.1% in 98 years is the AMOUNT of inflation suffered by the dollar since the Fed was established. The average inflation RATE for that period is about 3.5% per year.

[Account Deleted]

Being correct about what is happening (the huge debt and unfunded liabilities) and how it will end is important, but if your timing isn't right, you still lose your shirt. We can expect Pres. Zero to make sure the Fed will keep the spigot open for another year, but there are other events and the unexpected to watch out for. Exciting times, for sure.
Things seem to be pretty stable right now, but stuff happens (the mid east exploding, massive strikes in most of the former Euros, etc) and the 3 Gs will suddenly be red hot. Guns, Groceries and Gold. Washington isn't stupid and will work hard to try to avoid that, but the music has to come to an end some time and I think a lot more than one chair has been removed in the last 40 years. Where will you sit, folks?

[George Rebane]

Point of information in this game of musical chairs. THERE ARE NO CHAIRS. The music has to keep playing, and when it stops ...

[Paul Emery]

AS a musician that has rehearsed beginnings and endings of songs for 45 years I can say that every song does eventually end.

The ruling class always prevails when ever there is a disaster and it's the poor that suffer. At one time it was useful to have legions of poor people because they was useful menial work that needed to be done and it needed a cheap labor force. Not so true today.

In Ireland during the 1850's millions of Irish either starved to death or left the country because there was no food for them because of the potato blight. There were starving villages bordered by prosperous British farms that grew other crops that they were not allowed to eat. They were guarded by cheap labor soldiers employed by the rich farmers for protection. So you had the ruling class, the lower class workers and soldiers paid cheap and the rest were left to starve or leave the country. In Russia and central Europe the situation was largely the same and it lead to revolution and ultimately Communism when there was no longer a strong enough central authority to control the rebellions.

So perhaps it's worth considering the value of an effective social net because if you turn loose the dogs of desperation and rebellion it won't be pretty.

Of course the so called "revolution" created another ruling class and on we go....

What does that mean today? Can we learn from history ?

[George Rebane]

Well said Paul. We cannot leave the poor. All we must do is to be able to make mostly good decisions between those who can't and those who won't. Then succor the former and encourage the latter, else the blood in the gutters may be our own.

[bill tozer]

Man I wish this was an April's Fools gag. Now I know why Obama treated the British diplomats so shabby the moment he took office. And the BIG O is no fan of Germany either right now. Merkel and the Big Zero just have not found their warm fuzzy moment yet. France is more to The Big O's likening, but they are getting too chummy with the Germans fighting to save Euroland. Guess the only one in Euroland that sees eye to eye with the Big O is Greece. Now don't that beat all. http://www.bloomberg.com/news/2011-12-01/franco-german-push-for-budget-rules-snubs-investor-bid-for-ecb-crisis-role.html

[bill tozer]

Paul, don't forget the Black Plague. Made the potato famine seem like sand box stuff.

[Larry Wirth]

In 1914, the German Mark was worth .025$ and on 1 Jan 1924 it was again worth .025$. In between, between 1916 and Dec 1923 it was inflated to 50,000,000,000 to 1$US. How was the problem fixed without much fuss? I know the answer, but George is much better at explaining such things, so have at it George. Because it increasingly looks like our own near term future. Thanks. L

[Larry Wirth]

Oops! Meant the Mark was worth .25$ US, not .025$ US. By the way, it was worth that much until the mid Seventies when it began to float upwards to its final rate of .45$ US just before the Euro came into being.

[Paul Emery]

Bill

I don't understand why you chose to trivialize an historic event that caused approximately 1 million people to die and a million more to emigrated from Ireland, causing the island's population to fall by between 20% and 25%. At some point our contemporary ruling class will have to cater to an increasing larger disenfranchised underclass. That's why many Conservative economists in Europe and in this country support what our host would consider Socialist programs to keep meat on the bones so to speak of the working and non working classes. They stay happy and become good consumers.

There is not a chance that this will change significantly and certainly not enough to satisfy the fringe Conservatives that are currently leading noisemakers at least over here although not so much elsewhere though.

I use Ireland's potato famine as an example because it became a rallying point for various nationalist movements, as Ireland was then part of the Great Britain, that ultimately overthrew the ruling class in the revolution that led to the Republic of Ireland in 1922 after a violent revolution.

From a recent history of Ireland:

At the top of the "social pyramid" was the "ascendancy class" (ruling class), the English and Anglo-Irish families who owned most of the land, and who had more or less limitless power over their tenants."

The Celtic grazing lands of Ireland had been used to pasture cows for centuries. The British colonised the Irish, transforming much of their countryside into an extended grazing land to raise cattle for a hungry consumer market at home. Pushed off the best pasture land and forced to farm smaller plots of marginal land, the Irish turned to the potato, a crop that could be grown abundantly in less favorable soil. Eventually, cows took over much of Ireland, leaving the native population virtually dependent on the potato for survival"

[bill tozer]

Oh Paul, I am a bad boy. I want to push Granny over the cliff, take away the homeless's blankets on freezing nights (or give them smallpox laden blankets) and snatch food from the mouth of Tiny Tim on Christmas. Yes, God created whiskey to keep the Irish from ruling anything. No blacks or Hispanics or Jews in Ireland, so the Irish learned to improvise. Actually, I had an ancestor who fled Ireland when the Queen of England ordered his head on a platter. He was a passive/rebellious man who send the Queen some risque Fredicks of Hollywood type undergarments. Some people do not have a sense of humor. Because of him, I am here. Sure, when people are hungry, change is in the air. When the World War I vets marched on Washington to get prepayment of their veterans benefits, Hoover told the military to show restraint. Instead Patton sent the troops in and busted heads. NY Gov FDR heard the news and commented "I just won the election for President." France's revolution was stupid cause they just threw the bums out and replace one King with an Emperor. Kingfish Long rose in popularity in hard times. We have a nation where people flee to for the chance of a better life. They just want the opportunity, the chance. Jamaican immigrants fair much better here than do our Black-American citizens. They see America as opportunity, as do immigrants from South America and India. The left sees the glass as half empty, the game is rigged, life is hopeless (as they use their flush toilets, have drinking fountains with clean water in public squares, own microwaves, have grocery store shelves restocked daily and talk on their cell phones while driving their very own automobiles). Makes me hungry for meat and potatoes.

[RL Crabb]

Some Irishman once said, "Other people have a nationality. The Jews and the Irish have a psychosis." Maybe we should add conservative Americans to the list.

And I believe it was Doug MacArthur who routed his former comrades-in-arms.

[Todd Juvinall]

Eisenhower was the culprit.

Bill, you hit the nail on the head with your humor. Sorry Crabb didn't get it.

No matter how good we have things the liberals always find the subset they can claim are abused in order to gain power. It is in their DNA. No logic involved.

[George Rebane]

PaulE 253am - I do consider your citations of the British occupation of Ireland and the Irish potato famine to be a gratuitous historical non sequitur to this discussion. The disconnects between that era and our situation now are just too many to point out.

And your lead to the "happy consumers" proposition being brought on by more doses of socialism is a perennial progressive dream that, for the rest of us, appears like the nightmare it has now turned into in Europe. Your ascription of these views as being unique to RR readers invites a broadening of reading habits.

However, on these pages I do have a four year public record of promoting a sharing or redistribution of wealth with those who can't produce it, while we continue efforts to reduce their numbers. And as has been said here many times by me and others, for those who can't, we're not going provide through collectivist methods that have inevitably led even the most advanced countries in the world - with all the support of modern society and technology - into bankruptcy, rioting, and TBD misery. But thanks for confirming again how the liberal mind approaches the solution to what caused the problems in the first place.

[Account Deleted]

From Paul - 'So perhaps it's worth considering the value of an effective social net because if you turn loose the dogs of desperation and rebellion it won't be pretty.'
The most effective social net is an educated and properly motivated public. Simply taking resources from the better off will not help the have-nots in the long run. It never has. We have a huge number of brain dead entitlement-mentality masses in this country and yes, they are a problem when the goodies run out. When we get to the end of the quanitative easing, and the money's no good, a lot of realities will sink in. First of all, there won't be any govt services, (the left's safety net) because most of the govt workers will be the first to walk off the job and riot. (see Europe).
No, it won't be pretty - do you really think Paul, you are telling us conservatives something we don't know?

[Paul Emery]

George

The Irish history I recalled was just an example of how the ruling class ultimately cooks their own goose when they become too greedy.

Of course we do have a ruling class today (worldwide) and they are most aware of history and that's why they will support the "Socialist" programs you feel will cause the world to go bankrupt. It's a lonely world for American Conservatives. The Cheese Stands Alone...

[George Rebane]

Amazing PaulE, simply amazing. The headlines of ALL the world's media are shouting the news of Europe's imminent collapse, which might well trigger a worldwide financial panic, and you are still talking of "Socialist programs that (I) feel will cause the world to go bankrupt"!! Didn't you read my post? Much of Europe is already bankrupt, capice?? We're not talking about "feelings" any longer, we're talking about drastic bailouts with newly printed faith-based money that will destroy the wealth of hundreds of millions of workers across the world.

And you are citing economists who are recommending more socialism to cure what got Europe there in the first place - that's like shooting yourself in the other foot to fix the first one with a bloody hole in it.

Conservatives lonely? If that were so, then the ECB's printing presses would already be humming, instead of Angela and Nick dickering while an apprehensive world looks on. Your comments here clearly illustrate the ongoing problems in interplanetary communications.

[D. King]

“Your comments here clearly illustrate the ongoing problems in interplanetary communications.”

Come on George!

It’s about a new world order, which has been conceived under the influence of pot and delicious cheetos!

[Paul Emery]

As you know George I prefer to use the word adjustment rather than collapse.

I really enjoyed reading the Cato institute piece 'The End of Market Failure'http://www.cato.org/pubs/regulation/regv23n2/zerbe.pdf
It's clear, precise and certainly serves as a Libertarian 101 primer on the costs of government interference in the market place. Thanks for the link.

I use the word "socialist" because you feel comfortable about it and it eliminates the need for response on your part. I don't see the type of Conservative economics that you value being a major player in this adjustment process for the reasons I stated. For one thing much of what you expose is very American and so early 20th Century and builds on values that most of the world has not shared in their history. Institutions such as the Socialist ones you dislike have long traditions especially in Europe and, like all enduring institutions, have built in survival mechanisms that will trigger resistance when threatened. Because there is nothing like an international Conservative movement to bolster them they will look elsewhere for their substance and no doubt the financial and cultural institutions will follow. Look for a global reset at the most with a revaluation of currency to capital and the predictable inflation that can be managed along the way.

Nothing personal but I feel you're wrong on this one. There will not be a collapse. The armies of socialist turned communist countries will not be goose stepping through Western Europe and Obama will be re-elected by default because he's just mediocre enough to cause no trouble to the ruling class.

[Paul Emery]

More on the European Conservative movement from
http://www.ebireflections.com/2/2/4
and
http://www.social-europe.eu/2011/04/the-new-progressive-conservatism-in-europe/

"Is conservatism dead on the Continent? Even the more right-wing governing coalitions of Germany and Italy are participating in the culture of international bailouts for bankrupt governments, as European nations are being subsumed into a mammoth superstate. Where is the conservative movement in Europe? Does it exist?

Conservatism is indeed rare in Europe. A major reason is the long legacy of fascism, which helped to discredit much of the European right. The decline of authoritarian regimes in Europe after the defeat of Nazi Germany and Fascist Italy at the end of World War II also entailed the collapse of any other existing conservative forces."

[George Rebane]

Fair enough PaulE. I use socialist in the sense that I have essayed here, which we have discussed before. I do find it remarkable that with all the emphasis that I put on this being an epochal time - "... the last great century of Man." - with regard to almost all dimensions of human existence, accompanied by clear statements that we can't go back, and outlines of alternative redistributive futures, and in spite of that you still interpret my ongoing remarks in that light.

On the other hand, when one reads the liberal media, there is a constant drumbeat of wanting to go back to the early part of the 20th century and redo the assault on Mt Socialism - socio-political stasis codified. In these exhortations for a "fundamental transformation", I for one am still looking for a new idea that the progressive/communist cadre from TeddyR to Lenin did not already exhaust (please note that I left out Stalin).

No personal offense taken in your disagreement. Such is the sum and stuff of pleasurable debate on this blog, and I especially enjoy our jousts. And, of course, instead of my own dire predictions, I'm rooting for your assessment of an "adjustment" in the world's economies, accompanied by a "reevaluation of currency", no matter that I am still blind to such pleasant sounding prognostications. All of us who frequent these pages will be closely monitoring the developments.

[George Rebane]

PaulE 340pm - these analyses that confuse the conservative/libertarian ideologies with collective fascism are a tiresome undertaking to refute one more time. No one yet knows what "progressive conservatism" means besides being an oxymoron within traditional semantics. I will take a pass and let my published words stand.

[Paul Emery]

It's an interesting study though to look at Europe to access it there is anything like the Conservative movement in this country. Without the underpinnings of history that fuel the romanticism of the movements there is not much to hold onto. There seems to be a swing between center left and center right that sways with the current fashion. Right now it's on a center right arch for sure.

My observations are that Socialist institutions (your defination of course) fight for survival much like corporations. If they don't get fed they cease to exist so their only mission is to eat what they need to survive and grow. Corporations eat profit, socialistic institutions eat tax revenue. They are also driven by the feeders at their trough with whatever diversions for influence are available to justify their existence such as special interest money. In that sense they are similar in their structure and mechanism when it comes to survival.

[George Rebane]

PaulE - perhaps another more lucid way to say "Corporations eat profit, socialistic institutions eat tax revenue." is that "... socialistic institutions eat other people's profits." With that distinction, I agree on the 'need to survive and grow' objective.

[bill tozer]

What was the topic? Got so involved reading the autobiography of Vlad the Impaler that I forgot to toss the house boys in the basement some tofu. Vladdy, Vladdy, Vladdy, what a character! Oh yeah, the topic? Bailing out Euroland. Hmmm. Well, hyper inflation has not reared its ugly head yet so everything must be ok, right? Yes, Paul and George and even little ole me agree there will unrest in the streets. That is a given. Take away a baby's baba or dinky and they scream bloody murder. I also agree that we should have and definitely DO have current safety nets. For those who are too old to work or disabled or who simply do not have the mental capacity to do even the simplest tasks, we have disability, SSI, crazy money, food stamps and Medical. Think it was the Pilgrims on the boat that quoted the Bible and instituted the policy "if a man will NOT work, he will not eat." Hunger is a great motivator to alter behavior. Hunger has driven moi on and on in the harshest of environments. All in all, I am glad some on the Fed Reserve do not believe in throwing good money after bad because politicians totally lack the stomach to solve Euroland's big headaches. Raise tuition and there will be rioting in the streets. Make union folk pay 3% more into their pensions or pay 6% of their health care and again there will be rioting in the streets. A total no brainer. http://money.msn.com/business-news/article.aspx?feed=OBR&date=20111202&id=14584493

[RL Crabb]

I must be channeling Bill Tozer. Today, for some unknown reason, I was thinking about Vlad Dracul. I was remembering how he dealt with the safety net problem. He invited all the the poor and disabled folks to a banquet and after they arrived and settled in for the feast, the doors were bolted from the outside and the building set on fire. What a sense of humor!

[bill tozer]

Wonder what delicious food Vladdy served? A feast is a terrible thing to waste. Yep, Vlad was an unusual fellow and had a odd penchant for decorating the roadways. In his book "The Misunderstood One", Vlad shares his highly guarded secrets on home improvements.

[Paul Emery]

Pretty clever George (02 December 2011 at 06:05 PM)
The similarities of the food chain are obvious. Corps and "socialist" enterprises have to eat to survive. Both have to justify their existence by filling a need for goods or services. How can we defend ourselves against make work defense contractors that loot us of billions by promoting needless wars through special interest money. Since the only customers war toy suppliers have are the gvernment shouldn't we not allow lobby money to enter the arena affecting elections and policy. That's not free enterprise and has nothing to do with free trade.

[George Rebane]

PaulE - you raise a very complex part of the lobbying issue. I'm not aware of any evidence on defense contractors "promoting needless wars" or "looting" the government. Most certainly I saw none of that in my years in the combat systems development industry. We submitted proposals that the government advertised in The Commerce Business Daily. The only weaknesses we saw were in the government's procurement system that was managed in many places by political hacks instead astute technicians. Those were the individuals and projects that we and other contractors literally saved by our own performance. You have no idea how many unbilled hours those of us on the front end spent in sweating solutions to our nation's defense problems. The Soviets had no such hours expended in the behalf of their workers' paradise.

By its very DNA, government does everything inefficiently, including procuring guns, grenades, and green technologies. At least in the defense industry we are competent.

[Paul Emery]

"Political Hacks" ? Does that mean they were placed in there to do the bidding of special interests? Explain what you mean. "Promoting needless wars" is indeed a defensible opinion.

They don't necessarily lobby directly, instead the use the collection agency services of the Republicrats to voice their opinions.

Of course they promote military necessity to sell their products. You can't be so naive to suppose they don't. They chum the water to get the big fish. I consider them to be socialistic by your terms since they wouldn't exist except for the necessity of the government products and services they provide.

You certainly won't see infrared guided cluster bombs for sale at B & C

[George Rebane]

PaulE - 'political hacks' were managers and execs promoted because of their connections and not due to professional accomplishments. "Promoting military necessity" is not "promoting needless wars", there seems to have been a shift here.

By extension, your reasoning points to any business venture to be 'socialistic' if they sell anything from soup to submarines to the government. And all of them would exist without the US govt being a customer - they would simply sell to other governments. Do you know where you are going with this line of argument? I don't.

[Paul Emery]

To the extent that military contractors lobby to support foreign policy favorable to military interventions that would use their goods and services I would say they are guilty of promoting war for the purposes of their own profit. There are no free bullets. This of course is no surprise. I doubt there would be many wars if there was no profit. In our case we just borrow money by increasing the debt. Socialism? You bet.

[George Rebane]

PaulE - you seem to admit war as 'push phenomenon' by the sword makers convincing the king to arm and fight his neighbor. I think reality is bit more complex. For eons kings have envied the riches next door and have decided all on their own to get by force what they could not from trade. Throughout history this 'pull phenomenon' has caused kings to command their sword makers to arm their armies.

In recent years the situation has become more complex, but it would still strain credulity to ascribe the rise of the British or Soviet empires to the exhortation of English and Russian sword makers. Even Krupp did not goad Hitler into the ideology of a master race requiring Lebensraum attained through force of arms. It was Hitler who told Krupp to ignore Versailles and gear up for war.

Even today it's a mixed bag of whether national policy leads arms procurement or armament manufacturers lead foreign policy. Most certainly it was the former between WW1 and WW2, and now it looks like we're back to a lean military.

But I would agree that the government-industrial complex is more than a bit of expressed socialism, because here we are talking about companies that could not exist without the government as a customer, and the government would be instantly singing castrato without the reliable supply from its industrial minions.

[Paul Emery]

An example that I can use with some authority is the situation in Northern Ireland which was exploited by the arms dealers on both sides for their profit. The war would have ended years earlier but was encouraged because of the ready access to patriotic cash on both sides. Once the Boston money slowed down the war slowed down. .

In my opinion the war in Iraq was largely make work for contractors who were big contributors to Repub campaigns. Modern war is largely taxpayer subsidy for high tech industry.

[Paul Emery]

correction

I meant to write "contributions to Republicrat campaigns"

My inherent prejudice shows. I have to remind myself they are essentially the same,

[Greg Goodknight]

"In my opinion the war in Iraq was largely make work for contractors who were big contributors to Repub campaigns."

This is borderline insanity. Dems in Congress were nearly as enthusiastic as the R's were for meddling in the gulf, and folks like Sam Nunn (D-GA) were as relentless a booster of military tech as any R (especially if jobs got moved to Georgia), and Dems like DiFi have been delighted to feed the machine.

[George Rebane]

GregG 1058am - I guess you didn't see PaulE's 829am where dispensed the blame a little more evenly. Apologies, I could/should have just made the correction for Paul, but I got lazey.

[Paul Emery]

This is an illustration and begs the question should defense contractors be allowed to influence policy that brings them profit?

"The ten largest defense contractors in the nation spent more than $27 million lobbying the federal government in the last quarter of 2009, according to a review of recently-filed lobbying records......Such an increase in lobbying expenditures is partly a reflection of just how profitable the business of waging war can be. Each of these companies earned billions of dollars in defense contracts this past year. As the U.S. ramps up its military activities overseas, and the army is stretched thin by other ventures, it stands to reason that the contracts won't dry up any time soon."

http://www.huffingtonpost.com/2010/01/21/top-defense-contractors-s_n_431542.html

[George Rebane]

PaulE 123pm - agree fully that this Huffington Post piece does beg the question. But I'm not sure you meant to say that; see http://rebaneruminations.typepad.com/rebanes_ruminations/2011/11/on-flat-tax-blinder-is-leading-the-blind.html

Nevertheless, as we reduce our military manpower levels, we will have to depend more and more on advanced systems and technology which come from defense contractors who make a profit. Your solution?

[Paul Emery]

Allowing defense contractors to affect public policy when it comes to military actions is like allowing doctors to invent diseases, which they do by the way.

AT what point does the the harsh critique that you apply to such organizations such as Sierra Business Council that they use their bully pulpit to affect policy that they profit from apply to the defense industry that reply's almost entirely on public funding?

This lobbying can also be evidenced by the fierce opposition to the closing of military bases both here and abroad. It's all "socialism" as I see it.

I'm not sure how your link applies.

[Todd Juvinall]

27 million to lobby? My golly, that is about 57 seconds of federal deficit. How terrible!

I would suggest Solyndra losing 580 million bucks of our hard earned taxpayers money, you know PaulE, those men an women, getting up every day to toil at the Subway sandwich shop for 9 bucks and hour, those folks who have the tax money yanked from their check so Obama could give it to Solyndra executives to pay for their yachts, yeah, you have your priorities just about right.

[George Rebane]

PaulE 304pm - can't make sense of "AT what point does the the harsh critique that you apply to such organizations such as Sierra Business Council that they use their bully pulpit to affect policy that they profit from apply to the defense industry that reply's almost entirely on public funding?"

It appears that we're going to circle the 'socialism' barn a few times again. I covered the definition here
http://rebaneruminations.typepad.com/rebanes_ruminations/2010/07/who-is-a-socialist.html

The link in my 137pm is to the piece I did that included discussion of reasoning which included arguments that 'beg the question' the important definition of which is not well understood.

[Paul Emery]

My question stands. My use of the word "socialism" is partly a sarcastic commentary of your vernacular.

So George isn't the process essentially the same for organizations such as the SBC and Big War Defense Contractor that in that they both use their status to affect public policy in manners that reward them financially. Since they are both dependent on government funding is not the similarity on your eyes profound?

[Paul Emery]

similarity in your eyes profound?

[Todd Juvinall]

So PaulE, how do we as a people create the mechanisms of safety the military uses? Would you have the Generals run the factories and have the soldiers as the workers? Tell us how you envision a military without the "industrial" complex?

[Paul Emery]

Good question. Also how do you temper the influence of the Complex to promote wars that they will profit by therefore receiving taxpayer subsidies to promote war? I'm open to ideas. I don't necessarily have an answer.

[George Rebane]

PaulE 402pm - equating SBC and the defense industry on the basis of both getting funded by the government is a necessary but not sufficient argument to accuse them of being equal socialistic organizations. Many people, including me, don't understand the beneficial role of SBC in our lives (in fact I can cite several projects which SBC has undertaken that I believe have hurt me and my neighbors - the promotion of Prop23 and AB32 to being the most egregious).

Few people could make the same case for a whole catalog of defense systems spending. BTW, any argument that if we don't develop system/capability X, then China/Russia/... won't also develop them is beyond the pale and will have to be argued with someone else.

Is there a better system than denying business lobbying rights? Perhaps, but I'd be real careful what I do there. Remember, it's the scumbag politicians that do what's wrong. And always trying to put them into a sanitized environment will not work - scum will seek out scum.

[Steve Frisch]

Fortunately, by a margin of 61.5% to 38.5% the voters of California did not agree with George, including the good voters of Nevada County.

By the way Paul, SBC is not "dependent on government funding".....the misconceptions of idiots notwithstanding.

[Steve Frisch]

By the way George, If one wanted to donate to the SESF would that donation be tax deductible?

[Steve Frisch]

Seems the very same Sierra Environmental Studies Foundation that Russ, George and Barry are on the board of directors of did a little work on Prop 23 as well.

http://sesf.typepad.com/files/prop-23-tech-note_10-04a.pdf

Perhaps they forgot....or are they saying that their public education is valid and everyone else's is wrong? Hmmmm

[Steve Frisch]

How could I have missed it, is Mikey McDaniel is on the board as well? Those must be some fun non-profit board of directors meetings.

[Mikey McD]

“We all want progress, but if you're on the wrong road, progress means doing an about-turn and walking back to the right road; in that case, the man who turns back soonest is the most progressive.” – C.S. Lewis

[Todd Juvinall]

It looks like the tax leech (99% tax funding) is protesting again. Someone must have hit a nerve.

PaulE, now that you have had some time to think, what is you \r solution to the military "industrial" partnership in creating, building and sustaining our nations military and it suppliers?

[George Rebane]

SteveF - Both SBC and SESF do what they each believe benefits society. Unfortunately, as MikeyMcD points out, we seem to pull in opposite directions many times.

[Todd Juvinall]

One thing I have learned about liberals like SteveF is they can spend a million bucks advocating, we can spend two bucks and they call that equal.

[Steve Frisch]

So let me see if I have this right....you get to blast me for being associated with a non-profit, yet you serve on the board of a non-profit, and you justify your hypocrisy by claiming to be on the "right road"? So does that mean that you should have special rights because of the righteousness of your cause? Or do you support equal protection and rights under the law? Which is it boys?

You post on your web site an argument in favor of prop 23 yet excoriate me for opposing prop 23?

Todd, are Russ, George, Barry and Mikey "tax leeches"?

Seems to me that the problem you have here is that SBC is just better at what it does than SESF is. The funny thing is I actually like and would support your Techtest.

You guys really take the cake. You are the biggest bunch of phony, self-righteous fools I have ever met.

[Paul Emery]

George

Your personal opinion of the relative value of the two comparisons has little to do with the question involved. I certainly have many concerns about defense spending for contractors. In the Iraq war for example we have defense contractors involved in torture (see Abu Ghraib) and propaganda, inventing false news stories stories to influence public opinion. These same companies were directly involved in lobbying to support the wars that employ them. The question is back to the one of shall we allow doctors to invent diseases. Since it's the natural survival function of corporations to do whatever they can to turn a profit.

Steve

I was begging the question for the purpose of agitating conversation. In that sense Blackwater is almost totally dependent of taxpayer subsidies certainly much more than SBC therefore they are more socialistic.

Sure Todd

No lobbying or contributions from defense contractors. Pure and simple. The danger of make work wars is too grave to be allowed.

[Steve Frisch]

I get it Paul, I just don't want people to think Todd is accurate, because he is not. He clearly know nothing about non-profit reporting, finance or even how to read financial documents; which is clearly evidenced by his serial failure as a business-person. Of course his bailout is "special", he is absolved of his sin because he is on the "right road".

[Barry Pruett]

The difference between Russ's work (SESF) on Prop 23 versus Frisch's work (SBC) against Prop 23 is the "call to action" to voters. Generally speaking, 501(c)(3) corporations are forbidden from engaging substantially in lobbying activities unless they have made an election pursuant to 501(h). SBC's article opposing Prop 23 was what is called Grassroots Lobbying Activities.

Grassroots Lobbying has three elements.
1. Identifying Specific Legislation - both SESF and SBC identified Proposition 23
2. Opposing or Supporting the Legislation - SBC opposed Proposition 23 while SESF dd neither
3. A Call To Action - SBC urged voters to oppose Proposition 23 while SESF did not such urging

http://barrypruett.blogspot.com/2010/08/is-sierra-business-coucil-violating-irs.html

See also the IRS website for further details
http://www.irs.gov/charities/article/0,,id=163392,00.html

Russ's analysis was exactly within the IRS law, while SBC clearly crossed the line. It is not my opinion...it is the law.

[Steve Frisch]

Barry Pruett Esq., you are dead wrong. What you failed to disclose in your comments is the "substantial part" test. Yu are either a liar, or a bad lawyer.

"if a substantial part of its activities is attempting to influence legislation"

Since a substantial part of SBC's activities [tested in court several times by other non-profits and generally held to be roughly 20%] is not related to 'lobbying' we did not cross any 'line". In other words, it IS your opinion, and not the law, and if you want to test me bring it on big boy.

In addition, you did not answer the real question; how can you critique me for being involved in a non-profit when you serve on the board of one that enjoys the same rights and privileges that mine does?

Hypocrisy thy name is Barry.

[Steve Frisch]

Oh, forgive me Barry, that should read, "you are either a liar or a bad lawyer'. My apologies.

[Barry Pruett]

I am sorry Steve, and I am not trying to argue with you and further this will be my last post on the matter. You must have missed this part in my post - "engaging substantially, in lobbying activities."

Further, devoting less than 5% of activities to lobbying is not substantial. Seasongood v. Commissioner, 227 F.2d 907 (1955). Spending between 16.6% and 20.5% of an organization’s time on lobbying is substantial. Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974). So, your 20% marker reflects the "expenditure test" not the "substantial part test." Also as I said before, it is the "call to action" which triggers the substantial part test in the first place. If there was no "call to action" then SBC would not even be close to any line and would not be triggering the substantial part test. There is a big difference between a technical paper and urging voters to support or oppose legislation.

I am not critiquing your involvement in a non-profit per se. I am critiquing the standard of such involvement. Traveling the state and lobbying against a ballot initiative is not the proper function of a non-profit. It really is that simple.

[George Rebane]

PaulE 825pm - lot of threads intermingling here, don't know what you are referencing. Please give me a time tag as a courtesy so I don't have to go through this long comment stream trying sort which thread might apply. Too busy.

SteveF 821pm - let's see now, you're back here calling people idiots and fools and other personal aspersions. Is this the best you can do in debating the points raised, or do they elevate your arguments?

My points with you and SBC involve a reasonable difference of opinion on the merits of the causes SBC promotes vs those of SESF's. And you go ballistic because of that? Why don't you study the strong responses of DougK and PaulE to see if there's anything you could pick up there about civility.

[Barry Pruett]

I am sorry Steve, and I am not trying to argue with you and further this will be my last post on the matter. You must have missed this part in my post - "engaging substantially in lobbying activities."

Further, devoting less than 5% of activities to lobbying is not substantial. Seasongood v. Commissioner, 227 F.2d 907 (1955). Spending between 16.6% and 20.5% of an organization’s time on lobbying is substantial. Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974). So, your 20% marker reflects the "expenditure test" not the "substantial part test." Also as I said before, it is the "call to action" which triggers the substantial part test in the first place. If there was no "call to action" then SBC would not even be close to any line and would not be triggering the substantial part test. There is a big difference between a technical paper and urging voters to support or oppose legislation.

I am not critiquing your involvement in a non-profit per se. I am critiquing the standard of such involvement. Traveling the state and lobbying against a ballot initiative is not the proper function of a non-profit. It really is that simple.

[Douglas Keachie]

"Conclusion: Passing Proposition 23 to suspend the remainder of AB32 will have a
positive economic impact on Nevada County, reducing the risk of escalating state
mandated carbon taxes and fees."

Seems to me this is taking a stand. No case law more recent than 1955 and 1974 on this issue?

[Steve Frisch]

Can't even do on-line research can you Barry? Substantial part and expenditure are tied together:

http://www.irs.gov/charities/article/0,,id=163393,00.html

"Whether an organization’s attempts to influence legislation, i.e., lobbying, constitute a substantial part of its overall activities is determined on the basis of all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial."

http://www.irs.gov/charities/article/0,,id=163394,00.html

"Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in section 4911."

So, once again, you are wrong.

[Steve Frisch]

Doug, they is a lot of more recent case law. Rest assured I checked this out thoroughly. I would put my crack legal team up against the Pruett, any day. But then, I guess all these guys also object to the National Federation of Independent Business taking a stand on this issue? The same organization that gave Dan Logue legislator of the year? Of course not, BECAUSE THEY AGREE WITH HIM.

This is not about the law, it is about the people here openly supporting the selective enforcement of the law.

[Steve Frisch]

That's rich, you lecturing on civility. You countenance liars who attack me and my organization, then serve on the board of an organization that does exactly the same thing. The difference between you and me is that I do not hide behind false civility while I act dishonorably.

[George Rebane]

SteveF - now you're accusing me of "false civility" and acting "dishonorably". I guess it's time for another timeout, go get a happy face.

[Paul Emery]

George

05 December 2011 at 06:25 PM

[Steve Frisch]

How convenient---you get to bounce me after I expose your hypocrisy. Fine!

[George Rebane]

PaulE 927pm - thanks much. I suppose you want me to respond to "Your personal opinion of the relative value of the two comparisons has little to do with the question involved."

Paul, my personal opinions on how I see the world is what I do here on RR. That's all I can give you, I don't pretend to speak ex cathedra like some of my betters here do. And I do my best to counter well-meant criticisms of my positions, and even some criticisms not so well-meant.

[Todd Juvinall]

I swear, that SteveF is a hoot! I posted a story on his 99% he listed as government money to run his non-profit and it was copied from his tax return and he calls me a liar! These scofflaws when caught in their own web of deceit lash out as he did here against his exposers. The SBC tax returns are on the AG's website which SteveF directed us all to go look at. Wow!

Oh, and I have no idea what his personal attack on my business acumen is all about. But, those libs need a straw man don't they?

Here is my post and anyone can go look at SBC's tax return.

http://sierradragonsbreathe.blogspot.com/2011/11/sbc-990s-2002-2009-you-decide-if-they.html

So I guess SteveF is saying his tax returns are phony?

BTW, who paid for the rip to China SteveF? Was it the American taxpayer?

[Barry Pruett]

Steve: The "expenditure test" only applies if the organization has made the 501(h) election thus the higher percetnage allowable due to the election. You should know that, or you are being misleading.

Doug: Old case law means that the law surrounding this area is very well settled.