**Note: We are republishing each of the 22 challenges from Catherine’s fiscal cliff article – one a week. Helps to digest them bit by bit!**
By Catherine Austin Fitts
The remarkable and miraculous secret is that if our governmental resources were invested to optimize return on investment, the wealth creation possibilities would be exponential. Investment of federal resources is driven by a cocktail of political considerations focused on centralizing control of resources, as opposed to economic performance and fiduciary responsibility. This means that return on investment to taxpayers is ignored. This also means there are limited criteria and incentives to ensure that federal resources optimize human and environmental resources. Essentially, the federal budget is the vehicle used to engineer a financial system that is not aligned, reported or optimized in tandem with our living ecosystems. Combined with fiat currencies, this is the single greatest reason for damage to our living ecosystems globally.
The wealth potential that could result from a reengineering of the current governmental investment model is compelling. Consequently, it is worth giving serious consideration to structural changes that will make the pie bigger instead of merely liquidating our world.
The current state of performance standards for government spending and investment was best described to me in by Richard Ravitch, real estate developer and Chairman of the AFL-CIO Housing Trust and later Lieutenant Governor of New York, who said to me over dinner at the Jockey Club in Washington in 1997: “As long as I can get government subsidies, what do I care if people have education or jobs?”
The challenge of envisioning, let alone implementing, performance or reporting standards for government finances is not an academic one. The current government budget is successfully operating according to performance goals – those goals are merely outside the law and the “official reality” as we believe them to be. Government finances are propping up a 500 year-old global central banking–warfare model whereby the centralization of control of global resources by global banks and corporations is being facilitated.
To put it simply, the federal budget manifests the current state of affairs, i.e. ongoing global economic, whereby unproductive and unhealthy behavior in the private and public sector, whether in the “military-industrial complex” or at the municipal and household level, is subsidized with our nation’s equity as well as equity drained globally. (The previous sentence is very difficult to follow. The “i.e” and “whereby” make it very convoluted. This means that a negative return on investment to taxpayers is facilitating an increasingly negative total economic return throughout the economy. This has resulted in an entire economy and various markets increasingly becoming dependent on government money. Consequently, a reengineering of the federal budget to performance standards designed to optimize economic health would necessitate a fundamental reengineering of the entire economy. That is a tall order – one that likely explains the decision to shift all of the capital promised to retirees offshore and into other economic entities before the boomers started to retire.
Appreciating the absence of economic performance standards is a prerequisite to appreciating the extent to which the government budget is centralizing control of wealth in a manner that destroys wealth and, therefore, the tremendous wealth potential of real change. Change requires hope and there is plenty to be hopeful for once you understand that there is never enough money when returns are negative, but money is increasing where returns are positive.
I have several writings that describe use of the federal budget to prop up uneconomic private activities and the potential for changing the investment model:
- The Myth of the Rule of Law
- Dillon Read & Co. Inc. & the Aristocracy of Stock Profits
- The Story of Edgewood Technology Services, Parts 1-3
- Financial Sense Interview: America’s Black Budget and the Manipulation of Markets
- On the Solari Investment Model
In these writings, I describe the economics involved in government housing, welfare, prison and municipal programs in the early 1990’s.
Federal spending seemed intentionally designed to insure that there could be no flexibility between categories. We were spending $55,000 a year for a woman and 1.8 children to live in a place and in a manner such that they would and indeed could never become taxpayers and get off the dole. We were spending $150-250,000 to build public housing while HUD foreclosed homes that could be bought and fixed up for $50,000 were available a block away. We were paying large corporations $35-150 dollars an hour to do things that people who lived in those neighbourhoods could be trained to do. The implications were enormous: theoretically, at least, there was the opportunity, using more accurate place based information, to place public finances on a sounder footing in which the tax payers’ investment returns were positive. Therein lay a problem however, because there was no political constituency for place-based financial statements. Return on investment to special interests was not compatible with a positive return on investment to taxpayers. There were two kinds of special interests. The first were technically legal. The second were illegal. The second was growing. My refusal to follow illegal orders and success at cleaning up Iran Contra fraud ultimately led to my leaving the Administration in 1990. I was told the day after I left that the preparation of place-based financial accounting and statements had been terminated.
In late 1995, The Hamilton Securities Group began work on Community Wizard, a software tool designed to facilitate community Internet access to all public data and some private data on local resource use, including federal tax, expenditures and credit data. The initial response to the tool from Congress, HUD and our technology networks was astonishing. People were ecstatic to realize that they did not have to continue to live and work in the dark financially. It was a relatively easy thing for new software tools to help people learn about the flow of money and resources in their community. Additional software tool development also resulted in numerous tools to analyze subsidized housing in a place-based context, including detailed pricing tools that combined significant databases on government rules and regulations with all of our pricing data from the various loan sales, with databases about mortgage, municipal and stock market financing of homebuilding and home ownership. Such tools would allow people to take a positive and proactive role in insuring that government resources were well used. Such tools would allow investors to improve the performance of local investments.
Catherine Austin Fitts, Dillon, Read & Co. Inc & the Aristocracy of Stock Profits
Luis Mendez, one of my partners at Dillon Read, visited me in Washington in 1996. Explained to him that there was currently no mechanism to optimize government investment and operations within a place. There was no political constituency for place based financial statements. Return on investments to special interest was directly contradictory to return on investment to taxpayers. [I explained that we were making a software tool that would allow individuals to see and manipulate government financial data within their county or Congressional district called Community Wizard] He said that Wizard was a stupid idea, that would not work. Things were hopeless, he said.
I showed Luis a printout of the Comprehensive Annual Financial Reports for his community of Bronxville, New York. When he saw the figures, he exploded in rage. The first item was $4 million of flood insurance. This was the worst form of corruption, Luis said. Apparently, Bronxville was on a hill. The next day Luis spent two hours on the phone with the Deputy Mayor of Bronxville going through each item and informing him this was all going to stop. Apparently, things were far from hopeless, once one had the information. It just took one good map to see how to fix thousands of little things, one at a time.
HUD has a program called Hope VI, which is the construction of new public housing. Here is how the money works on Hope VI. We tax people who make $36,000 a year. We then take the money and use it to build housing that costs $150 -250,000 (inclusive of all overhead, etc) per apartment unit, which we use to warehouse people who make $10,000 a year or less in a manner in which they re unlikely to become taxpayers. This generates a large number of jobs, profit, and private equity for a group of lawyers, accountants, developers, consultants and others who tend to make substantially in excess of $36,000, say anywhere from $75,000 to $500,000 or more a year. In the HUD programs, a surprising number of them went to Harvard, Harvard Business School, the Harvard Kennedy School, and last but most special, Harvard Law School. If not Harvard, someplace more like it than the University of Tennessee agricultural school.
A few years back I took the pricings on the HUD defaulted mortgage portfolio to the [assistant to the ]head of Hope VI. I explained that HUD had substantial single-family inventory in those same communities. Empty single-family homes could be bought and repaired at a fraction of the price of new construction of public housing by private developers. The HUD official said, “but then how would we generate fees for our friends?” You just have to love a woman who is that honest.
The result of this situation is summed up by this statistic: twenty or thirty years ago, 70 cents of every dollar of federal pending went into the pocket of someone in the neighbourhood it was targeted at. Today that number is less than 30 cents. What that means is that investment in community development has enjoyed about a 300 – 400% increase in overhead, at the same time that technology has actually made it possible for overhead to drop dramatically The public policy solution has been to outsource government functions to make them more productive. In fact, this jump in overhead is simply a subsidy provided to private companies and organizations that receive hereby a guaranteed return regardless of performance. We have subsidies and financing to support housing programs that make no economic sense except for the property managers and owners who build and manage it for layers of fees. We have a horde of service providers to federal programs who are “expert” at helping communities of people who rarely show signs of improvement….
The truth is that the private sector is eating government programs and administration alive. This means that fundamental economic productivity is decreasing while government investment earns a constantly decreasing rate of return to taxpayers. This has been going on for a long time. For example, in 1988, I was invited to a budget briefing for business leaders by Secretary of Defense Weinberger at the Pentagon. For eight hours he and his corporate guests painted a clear and detailed picture as to how the top corporations in America would protect themselves during globalization. This would be accomplished by substantially increasing the amount of cost-plus fixed price contracts they would be guaranteed from Washington.
I had little appreciation then for what this meant Wall Street might be cooking up in the mortgage and mortgage securities market.
In the 1990’s I helped HUD institute a network of computer centers in HUD housing. My company also started a data servicing company, Edgewood Technology Services, in a residential community in the Washington, DC area. We were able to document that a woman living on welfare and HUD housing subsidies with an average of 1.8 children who was costing the US taxpayers approximately $55,000 a year could become a taxpayer with a relatively modest investment of time and effort. I provided the resulting documentation to the White House Budget office (OMB0 that a portion of the welfare and unemployed population could learn marketable skills and become taxpayers working from residential communities with sufficient telecommunications access. Given the federal governments explosion of data servicing needs there was a pathway to improve both the economy and save significant costs for the federal budget.
This model was rejected for a model that was both harmful to the overall economy and significantly drove up the expense on the budget. What was adopted was predatory subprime mortgage lending, a significant expansion of the War on Drugs, and mandatory sentencing and private prisons which I describe at length in Dillon, Read & the Aristocracy of Stock Profits.
Now, instead of a woman with 1.8 children costing the federal taxpayers $55,000, she, or one of her children, would be rounded up and sent to prison at a cost, according to GAO in 1996, of an average $154,000 per year (reflecting system wide costs for criminal justice and prisons). If one or more children then were turned over to foster care, the costs would be far greater.
I served as a managing director and member of the board of Dillon, Read & Co. Inc. After I left to serve in the first Bush Administration and then started Hamilton Securities in Washington, Dillon Read invested in a start up private prison company Cornell Corrections whose success depended entirely on a rush of federal prison companies issued after legislation to increase mandatory sentencing. The costs to taxpayers were significant. Here is one example of how an uneconomic activity propped up with government money can make Wall Street rich:
