Financial expert Zubi Diamond, author of Wizards of Wall Street, says that Republican proposals to fix the economy are deficient because they fail to protect invested capital in the stock market from the hedge fund short sellers.

Republican Representatives Paul Ryan and John Boehner, who voted for the $700 billion big bank bailouts that began under President Bush, have put forward much-publicized proposals to solve the economic crisis.

But Diamond says he has had no luck in getting Boehner—or other top Republicans—to pay any attention to his detailed and specific plan to save the economy by reinstating the safeguard regulations that protect invested capital and shareholder rights.

He argues that, until and unless the hedge fund short sellers are prohibited from looting the publicly traded companies, real economic growth cannot take place. It is this capital, he notes, that funds the loans for borrowers, the day-to-day operations of the corporations, their payrolls and the funds they needed for growth and expansion. “This is the money needed for job creation and employment,” he asserts.

Diamond predicts that the current crisis—and the failure of Congressional Republicans to offer a viable alternative—will give President Obama the excuse he needs to nationalize the banks and further the process of socializing the U.S. economy.

According to a story in The New York Times, small investors have fled the market to the tune of $33.12 billion in the first seven months of this year. “One of the phenomena of the last several decades has been the rise of the individual investor,” noted the Times. “As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.”

The hedge fund short sellers are represented by the Managed Funds Association (MFA), considered the most powerful special interest group in Washington, D.C. Its president is Richard F. Baker, a former Republican member of Congress. Another hedge fund operator, Paul Singer of Elliott Management, a member of the MFA, is a major contributor to the Republican Party and gay rights causes.

The MFA spent $980,000 on lobbying federal officials and members of Congress in the second quarter of this year. The MFA spent $1.37 million on lobbying in the first quarter. Members of the MFA also raise money for members of Congress.

Their mission is to maintain secrecy over their operations and remain free from federal regulation. “Unlike mutual funds,” notes the Associated Press, “hedge funds don’t have to register with the SEC [Securities and Exchange Commission] and thus don’t have to disclose who runs them, how much money they manage and what securities they buy.”

Ryan’s economic “Roadmap for America’s Future” has received rave reviews in the conservative press but contains no proposals to reform Wall Street and regulate the hedge fund short sellers. It proposes tax cuts, spending freezes and reductions, and private Social Security accounts.

House Republican Leader John Boehner’s August 24 remarks to the City Club of Cleveland on jobs and the economy were noteworthy for the call to fire President Obama’s economic team. He recommended Ryan’s proposal and called for tax cuts, spending reductions, and more free trade agreements. But his speech failed to include proposals for reform of Wall Street.

Alluding to Republican distaste for federal regulation, Diamond said, “Proponents of deregulation should have the common sense to differentiate between good necessary regulations that are required to protect property ownership, the value of our homes, and investor capital, from bad unnecessary regulations which hamper free market capitalism and business freedom.”

Republicans, however, have continued hammering Obama over the scheduled termination of the Bush tax cuts.

“Tax cuts are good but they will not solve the economic crisis or create jobs in the private sector,” Diamond argues. “What is needed is legal protection for the invested capital, and the protection of the value of our homes.”

As such, Ryan’s much-ballyhooed budget proposal for personal investment accounts for future retirees, in order to provide “additional capital stock for the U.S. economy,” does not provide any real security or capital. Ryan calls for the government to “guarantee” those contributions, putting the taxpayers on the hook for the depletion of those accounts if and when the hedge fund short sellers loot the economy.

Without safeguards, the “additional capital stock” will be ripe for the picking, and the government will be on the hook for these losses as well, producing even more debt, Diamond says.

The Ryan proposal is not new. Some conservative columnists and commentators have long noted that Social Security is going broke but then argue that letting people invest some of their Social Security taxes in private accounts will help save the system and produce more benefits in the long run.

Diamond notes that the assumption behind such a scenario is that the stock market continues to inspire confidence in people. But the exodus of small investors from the market means that ordinary Americans have seen the volatility in the market, brought on by hedge fund short sellers who use computerized programs to devastate companies and entire sectors of the economy, and want out.

The “flash crash” on May 6, 2010, went beyond anything that should rationally be expected in trading activities and was a wake-up call to ordinary investors.

The hedge fund short sellers discovered on this day through “price discovery” that no one stepped up to buy Accenture (ticker symbol ACN) until the stock price dropped as low as one cent from $44.

Zubi Diamond asks, “How would you like your home and bank account to be subjected to price discovery and have your whole net worth sold for one cent because no one stepped up immediately at that very moment to put a bid on your net worth as they manipulated the price downward through unrestricted short selling.”

On the other hand, he asks, “How would you like to be the person who paid $44 per share and then the computerized hedge fund short selling kicked in, drove down your share price to one cent in the name of price discovery, forced you into liquidation and they walk away with your invested capital? That is the reality and evil of unrestricted computerized hedge fund short selling.”

Until Congress fixes the problem, he argues, there will be no investor confidence and people will have no faith in private accounts of any kind.

Diamond says, “If you want to speculate on the direction of the price of a stock which you do not own, it is allowed in America, but with some rules and regulations to ensure that you do not manipulate the stock prices causing it to move in one direction or the other to suit your purpose.”

Members of MFA lobbied the SEC to remove those rules and regulations by claiming that short selling is useful for price discovery—that is, the price for a specific commodity or security through basic supply and demand factors—even if it is unrestricted.

Diamond says that Republicans have to get beyond the Bush-era playbook of tax cuts and deregulation and understand that it was the Bush Administration that began the process under SEC chairman Christopher Cox that opened up the market to blatant manipulation by the hedge fund short sellers. Only when regulations such as the uptick rule are brought back, and mark to market accounting is completely ended and replaced with book value cost accounting, can there be any hope of restoring confidence in the system. Only then is real economic growth possible.

Diamond says, “The countries that restrict short selling will see their economy grow and expand. The countries that have unrestricted short selling will slide into a depression with no hope of recovery until short selling is either restricted or banned.”

He notes, “India banned short selling. Their economy is growing, expanding, and over-heating. China banned short selling. Their economy is growing, over-heating, and expanding. Australia has a short sale restriction regulation. Their economy is growing, expanding and over-heating.”

He notes that Germany in mid-May 2010 banned naked short selling and just three months later their economy registered a record GDP growth expansion.

To make matters worse, Diamond notes that the Financial Accounting Standards Board (FASB) is proposing to impose mark-to-market accounting on bank loans. It previously did this to bank assets with disastrous results.

“They want the banks to use mark-to-market accounting on their outstanding loans, forcing them to lower the value of the outstanding loans to what someone will be willing to pay for that loan today instead of using the book value of the loan. This will cause a lending freeze and whatever life that is left in this economy will come to a halt. It will devalue the banks and plunge us not only into a double dip recession but a depression.”

“The enemies of capitalism are at it again,” he says.

Businessman Pieter Samara agrees, saying the change to mark-to-market accounting in November, 2007, constituted “one of the greatest crimes against the American people” by collapsing private sector access to credit and transferring control of capital, production and productivity from the private sector to the federal government and Federal Reserve.

This is why, in the accelerating crisis, which some say will be a double-dip recession or even a depression, Obama seems to be leaving it to Ben Bernanke and his promise that the Fed will do “all it can” to try to ensure an economic recovery.

Samara, who believes that the U.S. is undergoing “regime change” away from free enterprise capitalism to the establishment of a socialist government, says that while the Republicans understand that Obamanomics has failed, they must quit acting like “Democrat light” in the current crisis and recognize that the Federal Reserve has become part of the problem.

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