The history, root cause and possible way out of this economic swampArticle added by Jeffrey Reeves on February 23, 2009
Jeffrey Reeves MA

Jeffrey Reeves

Denver, CO

Joined: March 24, 2010

My Company

Americans can trace the condition of the nation's economy in 2009 back to two major currents in American legal and political history.

The law and corporations
  • A long series of U.S. Supreme Court decisions relating to corporations, dating back to the 1809 U.S. Supreme Court case before the Marshall Court of The Bank of the United States vs. Deveaux, gave corporations citizenship by proxy. Numerous subsequent decisions affirmed and clarified that corporations had standing as citizens because their shareholders were citizens. These decisions also confirmed the long-standing concept of limited liability from English common law.1
The manipulation of the monetary system and the income tax system by the U.S. Congress
  • Although the attempts to manage the U.S. monetary system date back to the founding of the country2, it was not until the Wilson Administration in 1913 that the establishment of The Federal Reserve Banking System was enacted into law.3

  • Congressional actions relating to the monetary system (banking and investing), especially the formation of the Securities and Exchange Commission in 1933, and the passage of The Glass-Steagall Act of 1933 (and its subsequent repeal in 1999), created the failed corporate banking and investment environment that is damaging your personal economy and the economy of America today.

  • Congressional tinkering with the tax system is legendary. Its failures are apparent. Its irresponsibility is blatant. Its lack of morals and ethics are not in question. The pork-barrel bailout of 2009 demonstrates once again that Congressional self-interest is the very fabric of the culture of the "Dolts in D.C." (my fond term for the elected aristocracy who run and ruin our government).

  • The Employee Retirement Income Security Act [ERISA] passed by the U.S. Congress in 1974, and its seemingly unceasing amendment, is the most far-reaching and damaging law to your personal economy.
Tying them together

This article is not comprehensive; that would require an entire book. Rather, it aims to raise questions and draw a blueprint for you to follow in your own pursuit of the truth. The following observations are, therefore, presented succinctly and without comment.
  • The standing of corporations and their executives and major shareholders is the background of the story that is unfolding.

    • The laws referenced above regulate corporations and corporate decision-makers. They apply equally to the banking and investment businesses.

    • High-level executives recognize that their personal liability is limited to the value of their holdings in the companies they operate.

    • Since the compensation of these C-level executives is significant, and since they can use that compensation to purchase other assets, they can reduce their risk of personal loss relative to the failure of the enterprises they manage to just that portion of their substantial net worth that they directly invest in the companies they run.

    • They can also liquidate some portion of their ownership in the enterprises they operate5 and use the proceeds to purchase protected assets. This gives these executives the freedom to behave in ways that you and I could not.
  • The IRS, because of the power Congress invested in it through ERISA, plays a special role in this melodrama when it comes to your money that is in the possession and under the control of the banking and investment businesses mentioned above. This is especially true relative to the money you borrow from the IRS when you contribute to retirement accounts.

  • The most notable business frauds and failures in recent history were among companies that were directly or indirectly involved in businesses that relied on government and government regulation imposed by the U.S. Congress:

    • Public utility-related businesses

      • Enron, MCI, Qwest, etc.
    • Banking and finance

      • Fannie Mae, Freddie Mac, Bear Sterns, Lehman Bros, CitiCorp, etc.
  • All of these factors and the businesses that relied on them conspired to distort Americans' view of their personal economies. Americans developed a mindset over the past 30 or more years that has led them individually and collectively into a dungeon of debt. It has also distorted the simple and true path to a successful personal economy.

  • The role of the U.S. Congress in this debacle is paramount and readily apparent in the HR1 - Pork Barrel Bailout of 2009. Congress is institutionalizing and bureaucratizing the debt paradigm that has created the problem the bailout claims it intends to solve.
The history and root cause of the debt paradigm

You might have guessed that greed -- especially corporate greed -- is the root of today's financial failure. Let me explain why. This summary will be brief and will leave out a great deal of detail. I encourage you to fill it in yourself.

In the early to mid-1970s, America was in a deep recession. The financial services industry as we know it today did not exist. There were banks, stockbrokers and insurance agents. The disciplines were separate, and each served a vital function in the economy of the typical American family.

Then 1974 arrives and, in response to a variety of factors in the marketplace and the perennial penchant of the U.S. Congress to make life worse for most of us while trying to make it better for some of us, America is burdened with the Employee Retirement Income Security Act (ERISA.) ERISA is a wide-ranging law that was supposed to protect the retirement income and other benefits of American workers.

The reality is that ERISA has made the government and the investment community wealthy. It concurrently added tremendous burdens on employers, tricked American employees into moving trillions of dollars from their own pockets into the accounts of financial behemoths, and created an immense future tax liability for the American retiree in the process.

Before ERISA, Americans followed a wealth creation and money management model that valued saving money and creating equity. The typical American family had money in a savings account at the local bank, in one or more whole life insurance policies, a car that was free from any loan and a house that would soon be paid for.

Since ERISA, a different model took over -- the debt paradigm. The debt paradigm doesn't value saving or equity building. In fact, it discourages them. Instead it encourages debt in all its forms -- big mortgages, credit cards, auto loans, college loans, and worst of all, tax-deductible savings in 401(k)s and IRAs. Each is basically a loan from the IRS that has to be repaid at a later date at an unspecified interest/tax rate.

The onslaught of enemies of the financial model that Americans followed for two centuries -- I call it the Money for Life Model -- continued to grow. In 1977, a financially naïve high school coach launched an all-out war on saving. Don't save, he entreated his lemming-like followers. Take your money out of safe and secure vehicles like whole life insurance policies, buy some expensive term insurance (from me), and buy some very unreliable mutual funds (from me) with the difference. The result was less money controlled by individual Americans and more money in the accounts of the behemoths.

Then, along came EF Hutton. EF Hutton dreamed of capturing more of America's money by promoting universal life insurance with promises of high interest rates. EF Hutton and other ill-informed or simply greedy insurance companies and investment firms implanted the myth that universal life is more flexible and offers better returns than its 100+ year-old predecessor, whole life insurance.

EF Hutton failed and Americans lost money. Several insurance companies that were selling only universal life insurance failed and Americans lost money. Eventually the failure of universal life destroyed almost all of the large mutual companies in America and transferred even more of the money from individual Americans into the accounts of a growing number of corporate financial behemoths.

"But wait," as the pitchman on television shouts, "there's more."

In 1986 ERISA is amended, as it will be time and again by our self-interested U.S. Congresspersons. This time, the behemoths seduce Congress to take a real bite out of the Money for Life Model. The IRS Code is amended to deny American savers the opportunity to save as much as they want of their own after-tax money in whole life insurance policies. This frees up billions for the behemoths.

Yet it also creates a bit of a problem for the behemoths. In less than a decade, they succeeded at sucking much of the savings out of America's pockets for deposit in their accounts. They needed a new source of money. Enter the emphasis on the 401(k) to fatten their accounts. Not only do the behemoths want your savings, they want your income, too. The max-out myth begins and Americans are lulled into a sense of safety by a current tax deduction that is worth ten times more to the IRS when you retire compared to the deductions you save in current taxes.

Now, not only do the financial behemoths have all of your money and a good chunk of your income, but the IRS (the biggest behemoth of all) also has, very surreptitiously, taken control of a very big chunk of your retirement income.

As we pass through the financial euphoria of the 1990s, mutual funds multiply like fungi in a petri dish and more American money moves from the control of Americans to the accounts of the behemoths. Larger and larger incomes allow the behemoths to swell their holdings and give the unsuspecting American, as well as the behemoths, a false sense of prosperity.

You'd think that the end is near, but there are still a couple of chapters. The recession of 1999, followed by the damage to America's psyche on 9/11, and the ensuing two-plus years of devastating market losses hurt all Americans in one way or another. It also bothered the behemoths. Americans hesitated, reduced 401(k) contributions, and shied away from mutual funds.

The behemoths needed a new way to pilfer money from Americans. "What's left?" they wondered. We have all the savings. We have all the income we can get. Aha! There's one source left: home equity. We can convince America that real property -- especially the homes they cherish so much -- will increase in value forever. We'll convince the U.S. Congress -- especially the folks on the banking committee -- to encourage lending money to anyone who wants it. Then we'll convince the borrower to use the shadow equity in their homes to finance other purchases and even investments.

And so it was. And so it is. Now the country is broke. The banks and investment firms are broke. Americans are broke. But there are exceptions. Remember the corporate shield that many executives hid behind? It worked. They are not broke.

A possible way out for the rest of us

There are other exceptions among financial entities. Mutual insurance companies are doing quite well, as are owners of mutual insurance policies. Credit unions seem to be doing OK, too.

Their policy owners and members own these financial businesses. These financial businesses focus on the Money for Life Model -- save first and secure your equity. Investing -- giving control of your money to a behemoth -- is not necessary or even appropriate for most Americans.

1My apologies to legal scholars and historians for paraphrasing a couple of hundred books on this subject.

2Robert E. Wright and David J. Cowen, Financial Founding Fathers: The Men Who Made America Rich, University of Chicago Press, 2006

3Some conservative financial thinkers and economists believe this was a disastrous decision based on the greed of a few powerful bankers. Read a review of the book Creature from Jekyll Island by G. Edward Griffin
Buy it on

4Of course that does not relieve them of liability when they act illegally, as has been the case with failures like Enron, MCI, etc.

5There are limits and reporting requirements that, when violated, constitute illegal acts.

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