Congress, Society

James Madison’s Prescient Warning

-Submitted by David Drumm (Nal), Guest Blogger

Republicans want to raise taxes on the poor to pay for tax cuts for the wealthy. CEOs are using taxpayer funded bailouts to rake in obscene salaries and bonuses. The wealthy fund play-for-pay think tanks that spit out position papers that support their benefactors’ desire to get wealthier. Certain media enterprises push messages such as corporate tax holidays and corporate deregulation that enhance the wealth of the few at the expense of the many.

Professor G. William Domhoff calculates that 1% of the nation’s population owns 43%, and 10% owns 83%, of the nation’s financial wealth. This is the scenario that James Madison warned of, in an essay published in the New York Post.

Madison wrote:

We are free today substantially but the day will come when our Republic will be an impossibility. It will be impossibility because wealth will be concentrated in the hands of a few. A republic cannot stand upon bayonets, and when that day comes, when the wealth of the nation will be in the hands of a few, then we must rely upon the wisdom of the best elements in the country to readjust the laws of the nation to the changed conditions.

The quote is included in the 1972 book entitled The Great Quotations: The Wit and Wisdom of the Ages. The book was written by George Seldes who spent thirty years researching the book for accuracy.

Madison was a firm believer in meritocracy. In Federalist no. 57, he wrote:

Who are to be the objects of popular choice? Every citizen whose merit may recommend him to the esteem and confidence of his country. No qualification of wealth, of birth, of religious faith, or of civil profession, is permitted to fetter the judgment or disappoint the inclination of the people.

When the wealthy use their money and power to influence governmental policy to enhance their wealth and power, meritocracy is replaced by a sense of entitlement. Paul Krugman wrote about the Angry Rich “who feel that things to which they are entitled are being taken away.” In The Wail of the 1%, when the privileged class loses its privileges, they get angry.

Madison’s words ring true today and we ignore his warning at the Republic’s peril. The “best elements in the country” cannot be found in the field of Republican candidates nor in the current occupant of the White House.

H/T: Rick Ungar.

62 thoughts on “James Madison’s Prescient Warning”

  1. Will Goldman Sachs prove greed is God?The investment bank’s cult of self-interest is on trial against the whole idea of civilisation – the collective decision by all of us not to screw each other over even if we can
    Matt Taibbi
    The Guardian, Friday 23 April 2010
    http://www.guardian.co.uk/business/2010/apr/24/will-goldman-prove-greed-is-god

    Excerpt:
    So Goldman Sachs, the world’s greatest and smuggest investment
    bank, has been sued for fraud by the American Securities and Exchange Commission. Legally, the case hangs on a technicality.

    Morally, however, the Goldman Sachs case may turn into a final referendum on the greed-is-good ethos that conquered America sometime in the 80s – and in the years since has aped other horrifying American trends such as boybands and reality shows in spreading across the western world like a venereal disease.

    When Britain and other countries were engulfed in the flood of defaults and derivative losses that emerged from the collapse of the American housing bubble two years ago, few people understood that the crash had its roots in the lunatic greed-centered objectivist religion, fostered back in the 50s and 60s by ponderous emigre novelist Ayn Rand.

    While, outside of America, Russian-born Rand is probably best known for being the unfunniest person western civilisation has seen since maybe Goebbels or Jack the Ripper (63 out of 100 colobus monkeys recently forced to read Atlas Shrugged in a laboratory setting died of boredom-induced aneurysms), in America Rand is upheld as an intellectual giant of limitless wisdom. Here in the States, her ideas are roundly worshipped even by people who’ve never read her books oreven heard of her. The rightwing “Tea Party” movement is just one example of an entire demographic that has been inspired to mass protest by Rand without even knowing it.

    Last summer I wrote a brutally negative article about Goldman Sachs for Rolling Stone magazine (I called the bank a “great vampire squid wrapped around the face of humanity”) that unexpectedly sparked a heated national debate. On one side of the debate were people like me, who believed that Goldman is little better than a criminal enterprise that earns its billions by bilking the market, the government, and even its own clients in a bewildering variety of complex financial scams.

    On the other side of the debate were the people who argued Goldman wasn’t guilty of anything except being “too smart” and really, really good at making money. This side of the argument was based almost entirely on the Randian belief system, under which the leaders of Goldman Sachs appear not as the cheap swindlers they look like to me, but idealised heroes, the saviours of society.

    In the Randian ethos, called objectivism, the only real morality is self-interest, and society is divided into groups who are efficiently self-interested (ie, the rich) and the “parasites” and “moochers” who wish to take their earnings through taxes, which are an unjust use of force in Randian politics. Rand believed government had virtually no natural role in society. She conceded that police were necessary, but was such a fervent believer in laissez-faire capitalism she refused to accept any need for economic regulation – which is a fancy way of saying we only need law enforcement for unsophisticated criminals.

    Rand’s fingerprints are all over the recent Goldman story. The case in question involves a hedge fund financier, John Paulson, who went to Goldman with the idea of a synthetic derivative package pegged to risky American mortgages, for use in betting against the mortgage market. Paulson would short the package, called Abacus, and Goldman would then sell the deal to suckers who would be told it was a good bet for a long investment. The SEC’s contention is that Goldman committed a crime – a “failure to disclose” – when they failed to tell the suckers about the role played by the vulture betting against them on the other side of the deal.

    Now, the instruments in question in this deal – collateralised debt obligations and credit default swaps – fall into the category of derivatives, which are virtually unregulated in the US thanks in large part to the effort of gremlinish former Federal Reserve chairman Alan Greenspan, who as a young man was close to Rand and remained a staunch Randian his whole life. In the late 90s, Greenspan lobbied hard for the passage of a law that came to be called the Commodity Futures Modernisation Act of 2000, a monster of a bill that among other things deregulated the sort of interest-rate swaps Goldman used in its now-infamous dealings with Greece.

    Both the Paulson deal and the Greece deal were examples of Goldman making millions by bending over their own business partners. In the Paulson deal the suckers were European banks such as ABN-Amro and IKB, which were never told that the stuff Goldman was cheerfully selling to them was, in effect, designed to implode; in the Greece deal, Goldman hilariously used exotic swaps to help the country mask its financial problems, then turned right around and bet against the country by shorting Greece’s debt.

  3. The No-Pay Movement
    Matt Taibbi
    August 6, 2010
    http://trueslant.com/matttaibbi/2010/04/06/the-no-pay-movement/

    Excerpt:
    “Often also called an activist, Mr. Keiser created quite a stir a few days ago when, on an Al Jazeera program, he claimed that Greece, for the past decade, has fallen victim to the “economic terrorists” of the Wall Street banking systems and the IMF. In the interview which followed, he claimed “if the Greeks want to be protected from the IMF, then they should nationalize their banks thus establishing government owned institutions so as to revive the banking system”, while at the same time “ceasing to pay back the loans which were issued illegally” via “cooking the books” of the Greek economy by Goldman Sachs. He proposed the expulsion from the country of American banks as well as the IMF. The consequence will be “two or three years of heavy recession”, during which time Greece will be able “to rebuild its economy”, ensuring its economic independence.”

    via The IMF Flag Reads: ECONOMIC SLAVERY.

    Since I started covering the financial crisis a year and a half ago, I’ve been getting a lot of letters that say things like, “This all sucks. But what should we do about it? If you don’t have any answers, what’s the point?”

    I don’t want to get into this too much since I have more on this coming out in my book, but I would like to point out some of the answers other people are providing to this question. One is this above plan from the hilariously blunt Max Keiser, whose “Goldman Sachs are scum” interview was one of the comedy highlights of 2009.

    Keiser in an interview basically says that the debts countries like Greece owe to banks like Goldman, Sachs for loans and rate swaps are illegitimate since they were criminal deals, made with the intent to cook Greece’s books and defraud the citizens of Greece out of their tax money. He therefore proposes that Greece should simply stiff Goldman for those obligations and that, furthermore, American banks should be expelled from the country while the government temporarily nationalizes its banking system and establishes its independence from the financial services industry.

    I’m not sure I know enough about what the consequences of a plan like that would be to say whether this is feasible or not. But I think Keiser’s idea does underline an important point about the situation, which is that as powerful as these Wall Street banks may seem, they are also exquisitely vulnerable. Right now virtually all of them are dependent upon the government keeping accounting standards lax enough for all of them to claim to be functional businesses. It is generally accepted that if the major banks on Wall Street were forced to mark all of their assets to market tomorrow, they would all be either insolvent or close to it.

    Thus their “healthy” financial status is already illusory. So imagine what would happen if large numbers of those dubious loans on their balance sheets that they have marked down as “performing” were suddenly pushed ahead of time into the default column. What if Greece, and the Pennsylvania school system, and Jefferson County, Alabama, and the countless other municipalities and states that are wrapped up in these corrupt deals just decided to declare their debts illegitimate and back out?

  5. The 1% seem to have understood the workings of government better than the 99%, and acted on it.

    Thus the 1% – 99% disparity.

    Only good actions are worthy.

    A man not given to frivolous words, in public anyway, Robert Gates, recent said:

    “I do believe that we are now in uncharted waters when it comes to the dysfunction in our political system — and it is no longer a joking matter … we have lost the ability to execute even the basic functions of government much less solve the most difficult and divisive problems facing the country. Thus, I am more concerned than I have ever been about the state of American governance.” (Constitution Center in Philadelphia, where he received the Liberty Medal).

  6. Jill,

    It isn’t just the politicians in this country who are to blame for the economic woes of many countries. A number of our financial institutions bear a great part of the responsibility.

    *****

    Regarding Greece:

    How Goldman Sachs Helped Greece to Mask its True Debt
    By Beat Balzli
    Der Spiegel
    2/8/2010
    http://www.spiegel.de/international/europe/0,1518,676634,00.html

    Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.

    *****

    Wall St. Helped to Mask Debt Fueling Europe’s Crisis
    By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
    February 13, 2010
    New York Times
    http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=all

    Excerpt:
    Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.

    As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
    Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.
    The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
    It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

  7. There are many of us who understand the importance of Madison’s words and take his warnings seriously. We don’t just talk about it … we act on it.

  8. SwM,

    Anyone who thinks the battle to protect this Republic and its democracy is only taking place overseas is a fool. That battle is also being fought right here, at home … both in the courts and in the streets.

  10. SwM,

    The vote in the Ohio Supreme Court supporting the right to a voter referendum on this issue was 7 – 0!

    Now we have to get the clock reset for signature collection … another trick the Republicans have tried to use to thwart democracy.

  11. Swarthmore Mom.
    You are spot on that the economic troubles started during the Reagan years and have continued unabated since then.
    Elaine,
    Great updates! I was really happy to see that Lech Walesa is coming to OWS. The movement is really spreading.

  13. SwM,

    Not only did the Republicans gerrymander, they attempted to thwart the democratic process as if the State of Ohio is some third world country ruled by despots.

  14. A good case can be made the extreme income equality started with Reagan’s “trickle down” economics.

  15. lottakatz 1, October 15, 2011 at 10:56 am

    One of the reasons for an estate tax …
    =====================================

    That is correct.

    According to the Wall Street Journal, a plutonomy is inherently unstable: “Plutonomies are far less stable than economies built on more evenly distributed income” (see The Homeland: Big Brother Plutonomy).

  16. The maldistribution of wealth has been accomplished through buying politicians of all stripes who then enact legislation to further concentrate wealth in the hands of those who purchased them. This has not only occurred in the US but throughout the world. For example, it is a socialist party in Greece ramming austerity down the throats of their people. So looking at this as an issue of party politics is a mistake. This is a world wide phenomena which appears to be at the breaking point.

    Today is a world wide day of action for this very reason. If someone has interest in joining the day of action there is information at occupy wall street.

  17. From my point of View and I hold it dearly….Reagan did more to bastardize the Tax system as it stood then….something called TEFRA….I do not put him on any pedestal…..If that is your wish you may do so…A lot of times what people say that they are against is really what they are for….as dredd said…whats up is down and whats down is up….

  19. You know something Elaine….that is kind of scary…I am sure there are some folks that would not argue the point that Reagan is to the left of the current office holder….

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