Why Paulson and Bernanke's Plans Don't Work

by: James Wood November 17, 2008 | about stocks: DIA / QQQQ / SPY    

James Wood

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Today the world faces its largest economic challenge since the Great Depression of 1929. Ben Bernanke, who has been an avid reader of the causes and solutions to the Depression of 1929, has concluded that throwing a lot of government money at the problem will stimulate the private economy and help us work our way out of the problem. It worked pretty well in the Great Depression.

However, this time it will not work. The risk we face with a continuation of this strategy is destroying the value of the US dollar and causing a greater problem, hyperinflation, than we had with the 1929 Depression. The plans presented by Secretary Paulson and the Fed Chief Bernanke are not viable and will not achieve the objective of stabilizing the economy, preserving the banking system and promoting employment.

Let’s first see what the problem is. The root cause of our current problem is an excessive amount of money, highly leveraged and as a result, we have a lot of bad credit. While an excessive amount of money and bad credit are different issues, practically, they are intimately related. A reader of history finds that excessive amounts of money are almost always related to financial busts and panics.

What’s different this time from 1929 is the pervasiveness of the excessive credit and poor credit. In the 1930s, debt was about 150% of the GDP. Today it is about 350% of the GDP and this is before derivatives. While we do not know exactly how much derivatives increase leverage, it probably doubles the indebtedness. We probably have more than 5 times the indebtedness in terms of GDP now than we had in the Depression of the 1930s. In the 30s, we could increase further our indebtedness. Today, we are obliged to lower our indebtedness to assure the viability of our financial system. Fed Chief Bernanke is applying a solution for a 1929 problem which is not applicable to our highly over leveraged economy of today.

Starting late last year, the world started the process of deleveraging. Every type of financial class now recognizes we have excessive debt level which has created a situation where our financial institutions are not safe. We have many institutions with leverage ranging from 30 to as high as 100, when derivative leverage is taken into account. If you really want to see excessive leverage, look at Freddie Mac. They now have only about $9 billion of net worth going quickly to zero net worth, and they owe much more than $1 trillion in direct liabilities and guarantees. That is more than 100 to 1 leverage in a government supported institution. And it is equally bad in many unregulated and regulated financial institutions, particularly where there is a high use of Credit Default Swaps.

The rise of private equity, hedge funds and investment banking activities for the last 5 to 10 years has been predicated on higher leverage to increase profits. The leverage that made things so profitable in the past years is the same leverage that today makes investments so unprofitable in a down market. Only much lower leverage can make financial, industrial and commercial operations with acceptable risk levels in the markets for the coming few years while we are in the down market. (And if we are smart, we will not return to high levels of leverage even when the markets begin their upward climb)

The need to deleverage the economy is what makes the Bernanke strategy of providing more money to the economy a losing strategy. First, the old saying: You can lead a horse to water, but you cannot make him drink. The Fed can provide money to the banks, but the Fed cannot make the banks lend if they think they will not get back their money from the borrower. The Fed is completely powerless in this situation. They can put the cost of money at zero and they will not convince a bank to lend if the bank does not believe in the capacity of the borrower to repay. The $100+ billion given to the banks in recent weeks from TARP will have no direct benefit to bank borrowers. The recipient banks have said publicly they will hold the money as a cash cushion or they will use the money to buy other banks. Secretary Paulson says his measures are stabilizing the banks. The truth is a $100 billion will provide slightly improved liquidity for the banks for a few weeks but do nothing to fix the underlying problem.

Banks lend based on cash flow and security. First let’s look at cash flow. Profits are going to be dropping like a rock at the vast majority of borrowers. Who can say what they will earn in their business in the next year? Furthermore, many, perhaps most, people and businesses also find they have debts which their bank is asking to have repaid. Not only does the borrower have a problem of not earning what he hoped, but also banks now want their money back. That situation will cause many bankruptcies. Now look at the value of guarantees. Take, for example, houses. It is likely the value of houses will continue to decline for at least another year or two and very likely more. As a banker, if I do not know the value of my security, I do not know the relation of security value to the loan I have made. Prudent bankers, who are already losing fortunes, are unlikely to want to lend in this situation where they can neither determine the estimated cash flow for repayment nor the value of their security guarantee.

In short, the fundamental plan of Paulson and Bernanke will fail to stimulate new lending even if they give away $700 billion. The Paulson plan is primarily bailing out bank equity investors; it is not stimulating the economy and banks to lend. Increasing the money supply at this time runs the risk of creating hyperinflation and destroying the value of the US dollar. We are fundamentally in a deflationary cycle which needs to be worked through.

Summarizing

  1. The Bernanke and Paulson plan for the economy does not work because it depends upon pumping money into the economy. It might have been a solution in the 1930s, but it will not work today.
  2. The real problem with the economy is over leverage and we are obliged to dramatically reduce leverage in the economy today, not increase the money supply and leverage. Deleveraging will inevitably cause some very bad short term consequences in the economy as a result of deleveraging.
  3. The Bernanke / Paulson plan to provide liquidity to banks and ask them to on lend these funds is bound to fail because banks are afraid to lend to their borrowers
  4. The sad result is that the Bush government represented by Bernanke and Paulson does not have a viable plan to help the economy.

Conclusion: In a worst case scenario, still of low probability, the current administration plan could lead us to hyperinflation which is worse than the Depression of the 1930s. At a minimum, the current administration does not have a feasible work out plan. President-elect Obama needs new ideas because the current administration does not have a viable idea to cure the economic problems we have.

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This article has 23 comments:

  •  
    Nov 17 08:05 AM
    Obama's plan will be more debt through increased investment, er government spending. He's been talking about rebuilding roads, bridges, infrastructure and investment in green technologies for 2 years. More borrowing from future generations to fund today's greed.
    Reply | Link to Comment
  •  
    Nov 17 08:26 AM
    It is factually wrong to think the current economic situation is even close to 1929. Actually 1932, the year I was born, was terrible and FDR had very little to do with getting us out of the soup. Actually, his policies extended the depression by implying that things were so bad they needed Uncle Sap to get the economy going. Sound familiar? If the truth be told, Hitler's invasion of Poland had more to ending the depression than FDR. That was the first time anyone in our family good get a full time job.

    This economy is stronger than that of the seventies. We also had economic problems in the early nineties that I personally thought were worse than now. Real estate prices were plummeting. The Free Market corrected and even made a clueless Clinton appear to me an economic genius. The luck of the Irish.
    Reply | Link to Comment
  •  
    Nov 17 09:08 AM
    Good article.

    You state "...throwing a lot of government money at the problem will stimulate the private economy and help us work our way out of the problem. It worked pretty well in the Great Depression."

    Did it really work that well? If so, how come we were still in depression in 1940, eleven years after the crash? So, this time, even if throwing in tons of government money works just as well as it did last time, we'll be in this recession until 2019?!

    I think markets provide better solutions than throwing in government money. Poorly managed companies of all types should fail, and competent people should pick up the pieces and rebuild.
    Reply | Link to Comment
  •  
    Nov 17 09:10 AM
    Mr. Wood,
    I don't think Paulson and Bernanke pumping money into this economy is going to lead to hyperinflation. As you noted, so far Treasury has just been putting money in new bank preferred shares to restore banks' assets/capital ratio. This money is locked into those shares and will never circulate. Once the stock market rises again and brings bank common shares up with it the banks will become overcapitalized and can buy the preferred shares back from Treasury. A temporary relaxation of legislated asset/capital ratios would have served the same purpose without moving any money around, but they decided to go the preferred shares route.

    Even if Bush or Obama sends out a new $600-800 billion round of stimulus checks a lot of people will use that money to pay off their high interest debts. In our fiat money system a bank loan creates money, it doesn't "lend" money that already exists. When loans are repaid the money ceases to exist. So pumping "stimulus" money into the present economy will probably have the effect of reducing the money supply, not inflating it. Some people will spend the money but others will save it or pay off debts.

    Increasing savings in this environment that you accurately describe, where banks will only lend to good risks and good risks are hard to come by, will hold down interest rates as bank deposit/loans ratios will decline and banks won't be able to afford to pay much interest on deposits. Inflationary effects will be minimal or negative.

    I agree that the current problem is overleveraging, so if stimulus checks will have the effect of reducing leveraging then they're probably a good thing.

    The increase in Treasury debt to the Fed does not have to be a bad thing because it does not necessarily ever have to be repaid. This debt can and should be monetized because monies transferred between a federal Treasury and its central bank are merely accounting formalities. Treasury gives the Fed an IOU (a bond) and the Fed writes a credit for that amount into Treasury's Fed account which Treasury can then spend, just like our bank makes a "loan" to us by creating a deposit in our account which we can then spend.

    I think one of the things that is going to come out of this weekend's G20 meeting is a new protocol for monetization of national debts. If only one country does it then that country's currency will inflate and lose exchange value, but if everyone does it because everyone's national finances are in the same debt-boat then there is no change to exchange rates. All of the newly monetized debt can be written down to zero with no effect at all on national financial viability,

    Go to epicoalition.org and read Warren Mosler's "Soft Currency Economics". He has a good understanding of how fiat money works and how a national government and its central bank can use the available tools to regulate money in the interest of the national economy.
    Reply | Link to Comment
  •  
    Nov 17 09:23 AM
    All this talk about hyperinflation does not understand that hyperinflation is caused by "too much money chasing too few goods." This means that there has to be an excess aggregate demand over aggregate supply. Right now, try as the central banks may, aggregate demand is falling. The "pouring of money into the economy" is more than offset by the evaporation of wealth and liquidity as asset prices continue to plummet. Bernanke and the central banks are now right in trying to boost demand by pouring liquidity into the system, but in order to be effective, it is more important to stop housing prices from further slipping. The slippage of housing prices continues to erode wealth and balance sheets. I have proposed that the US government offer a buy-back program to owners of existing homes below the median housing price at the market price of a specified point in time, say October 2008. The government can hold on to them, and better still rent them out, and then wait till the market recovers before gradually selling them off. This way we can reverse the market psychology and engineer a fast recovery of the economy. Short of an effective plan to stop housing prices from further slipping, the government will be forced to spend more and more to bail out more and more banks and companies.
    Reply | Link to Comment
  •  
    Nov 17 09:29 AM
    P.S.
    I'm pretty sure you're absolutely right that current measures will not prevent business declines and failures because stimulus money will not be spent on consumption. Just as WWII brought us out of Depression and back to full economic production for the war effort via government direct spending into the economy, I think large scale infrastructure spending will be required to bring the present economy back to life. But this takes a long time.

    As I noted above, this deficit spending does not have to eventually be recovered via taxes if the money is created by the Fed and Treasury's debt is monetized. As Mosler notes in his Soft Currency Economics, when there gets to be too much money in the economy and inflation starts increasing, that's when the government should suck some out via taxes. Regulation of a fiat money economy involves money creation by the federal government and taxation, to directly increase or reduce the amount of money circulating in the economy.

    Like any other power this money creation power can be misused by ignorance or abused by political ambition. But we have to live with this, because regulation of our money and economy is up to us frail humans. There is no God-like savior to come down and fix this for us. As Paul said to the Philipians, "work out your own salvation in fear and trembling".
    Reply | Link to Comment
  •  
    Nov 17 10:34 AM
    "if Bush or Obama sends out a new $600-800 billion round of stimulus checks a lot of people will use that money to pay off their high interest debts. In our fiat money system a bank loan creates money, it doesn't "lend" money that already exists. When loans are repaid the money ceases to exist." - derryl


    This line of reasoning does not go far enough. What is actually happening is that the USTreasury is taking on extra debt, giving the money to consumers, who then use the money to extinguish their personal debt. The total debt has not decreased but has simply been transferred from the consumers to the taxpayers.

    So net-net, the Treasury prints up new money, gives it to the consumer, who then uses it to extinguish prior obligations which created the same amount of money. The money is created twice and extinguished once after everything is said and done. The money supply is still higher than it was before the consumer borrowed in the first place.

    Bailouts do not reduce the money supply when they are used to pay down personal debt.
    Reply | Link to Comment
  •  
    Nov 17 11:34 AM
    1) Yes, infrastructure projects. Replace imported oil slowly but surely.
    2) Use SBA to guarantee 50% of loans, provide regional responsible banks $250-$500 B to loan and SBA with local offices in almost every town in America decide on if a business is viable and has good management/plans. Plus, successful retirees assist entrepenuars and start-ups to refine plans. Innovation is need to created efficiencies in a BIG hurry. Large, mismanaged businesses with poor management that ask for bailout should have sweeping management changes and money provided in tranches, just like a hungry entrepenuar is enticed to perform or be shut off by an Angel or VC.
    3) Higher Education should be provided the poor. Step up and do something with your life but don't expect welfare forever. President Clinton had this right.
    4) When inflation does hit, it will rise slowly but steadily. If energy as a national focus is pursued this will temper speculative investment in energy. If the energy policy is weak and only focuses on solar and wind, NG which CANNOT replace petroleum alone (need nuclear power and electric vehicles as an interim plan) then the speculators and global investor will drive up the price far more then printing digital credits and this effect will trickle down into food and other goods creating hyperinflation.
    5) This government must learn economics, conduct real-time research with the consumer. If this government is wise, the USA will send many delegates overseas to all nations to promote trade and again, conduct consumer research overseas to gauge current and future demand.
    6) The G20 meetings are surely discussing debt renegotiations and restructuring. All deravitives and CDO's should be valued at ZERO until buckets of true valuations of these investments can be created and valued OUTSIDE of Moody's and other rating agency stamps.


    On Nov 17 09:29 AM derryl wrote:

    > P.S.
    > I'm pretty sure you're absolutely right that current measures will
    > not prevent business declines and failures because stimulus money
    > will not be spent on consumption. Just as WWII brought us out of
    > Depression and back to full economic production for the war effort
    > via government direct spending into the economy, I think large scale
    > infrastructure spending will be required to bring the present economy
    > back to life. But this takes a long time.
    >
    > As I noted above, this deficit spending does not have to eventually
    > be recovered via taxes if the money is created by the Fed and Treasury's
    > debt is monetized. As Mosler notes in his Soft Currency Economics,
    > when there gets to be too much money in the economy and inflation
    > starts increasing, that's when the government should suck some out
    > via taxes. Regulation of a fiat money economy involves money creation
    > by the federal government and taxation, to directly increase or reduce
    > the amount of money circulating in the economy.
    >
    > Like any other power this money creation power can be misused by
    > ignorance or abused by political ambition. But we have to live with
    > this, because regulation of our money and economy is up to us frail
    > humans. There is no God-like savior to come down and fix this for
    > us. As Paul said to the Philipians, "work out your own salvation
    > in fear and trembling".
    Reply | Link to Comment
  •  
    Nov 17 11:39 AM
    Oh yeah, one last thing Derryl: I am a very big fan of Laffer's idea of a six month, no income tax holiday for every American. That will help increase consumption a bit and offset falling asset values. Businesses will expand and hire slowing layoffs. No need to tax further actually Derryl. Inflation is a tax in and of itself that is spread as equal pain to all Americans. Tax capital gains but do this in 2011-2012 rather then now, in fact, best to lower capital gains next two years.


    On Nov 17 09:29 AM derryl wrote:

    > P.S.
    > I'm pretty sure you're absolutely right that current measures will
    > not prevent business declines and failures because stimulus money
    > will not be spent on consumption. Just as WWII brought us out of
    > Depression and back to full economic production for the war effort
    > via government direct spending into the economy, I think large scale
    > infrastructure spending will be required to bring the present economy
    > back to life. But this takes a long time.
    >
    > As I noted above, this deficit spending does not have to eventually
    > be recovered via taxes if the money is created by the Fed and Treasury's
    > debt is monetized. As Mosler notes in his Soft Currency Economics,
    > when there gets to be too much money in the economy and inflation
    > starts increasing, that's when the government should suck some out
    > via taxes. Regulation of a fiat money economy involves money creation
    > by the federal government and taxation, to directly increase or reduce
    > the amount of money circulating in the economy.
    >
    > Like any other power this money creation power can be misused by
    > ignorance or abused by political ambition. But we have to live with
    > this, because regulation of our money and economy is up to us frail
    > humans. There is no God-like savior to come down and fix this for
    > us. As Paul said to the Philipians, "work out your own salvation
    > in fear and trembling".
    Reply | Link to Comment
  •  
    Nov 17 11:42 AM
    "This line of reasoning does not go far enough." Smarty

    Speaking of ...

    I have reconsidered my call for a general amnesty on fractional reserve loans. This would not liquidate mal-investments and free up resources as needed. Currently I think the solution is to allow foreclosure with NONE of the proceeds going to the banks who after all stole the money from the general public via inflation. Instead it should benefit the general public (the victim) in some way. Destruction of the money obtained from the proceeds seems called for but a more politically acceptable way would be to distribute the money to the public as compensation payments for the evils of fractional reserve banking.

    This change would make the banks far more careful about lending in the future and also increase their willingness to avoid foreclosure.

    The correct and honest solution is also to outlaw FRB or allow "free banking". Once that is implemented, then allow banks to get possession of foreclosed collateral but only if the loan was non-FRB.

    Probably not my last thoughts on the subject.

    What do you think?
    Reply | Link to Comment
  •  
    Nov 17 12:14 PM
    "Instead it should benefit the general public (the victim) in some way." - moonbat

    Looks like you're close to stepping on a statist banana peel there.

    One question: Who gets to decide how the public is 'benefitted'?

    The only way to make things 'fair and honest' all around is to forbid any fractional reserve banking efforts and require 100% backing of all currency. This would be extremely difficult to do under current circumstances.

    About the only way would be to instantaneously devalue the dollar so that every outstanding dollar is backed by the same amount of gold. This would push the price of gold into the $35,000+/oz realm just to cover our national debt (based on US gold holdings), much higher if you include all the fractional reserve money based on that debt, possibly as high as $315,000/oz.

    You would also need to immediately stop all redistribution programs and deficit spending. The economic dislocations would be very severe and painful to a large segment of the population.

    Given my holdings of gold I wouldn't mind. Such a change would set me up for a life of ease, but many others would suffer greatly in the aftermath.
    Reply | Link to Comment
  •  
    Nov 17 12:31 PM
    "Looks like you're close to stepping on a statist banana peel there. " Smarty

    Smarty,
    Believe me that occurred to me. Of course FRB should be eliminated and I would be happy to see auction proceeds destroyed even though this would cause monetary deflation BUT under no circumstances should bankers be allowed to collect the collateral from a FR loan. This is equivalent to allowing a counterfeiter to be compensated for a loan gone bad.
    Reply | Link to Comment
  •  
    Nov 17 01:49 PM
    Appreciate your posts Smarty Pants! Lessons learned on this topic have been instrumental in my RECOUPING the 580K I lost in 2000-2001. Gold and silver (physical buying) is what did it! One day, it will be the clear investment choice that folks SHOULD have made in this decade! Thanks again.
    Reply | Link to Comment
  •  
    Nov 17 02:50 PM
    "The Paulson plan is primarily bailing out bank equity investors"

    So far it is not even doing that - note the BKX back near 52-week lows...


    You may be interested in the following two pieces about Anna Schwartz - I found them fascinating:


    WSJ: Bernanke Is Fighting the Last War
    www.careerjournal.com/...

    Barrons: Tearing Into the Fed and Treasury Plans
    www.smartmoney.com/inv.../

    Reply | Link to Comment
  •  
    Nov 17 02:57 PM
    "under no circumstances should bankers be allowed to collect the collateral from a FR loan" - moonbat

    I appreciate your ethics, but you are probable causing as many problems as you are trying to avoid. Consider this.

    Banks are as much as 9x leveraged for their reserves. Which 8 secured properties are the ones that can't be foreclosed? How do you decide which of the 9 properties is "really" secured by the actual money? Draw straws? What happens to the other 8 if the owners default on the payments? Do they just get to keep the house? How do you satisfy the mortgage recorded in public records? Just delete it? What about that 9th guy who lost his house? Why does he get screwed and not the other 8?

    I'm of the opinion that following the current foreclosure route is the proper way to go. The bank doesn't get any more out of a foreclosure than what they are owed on the loan (plus costs of foreclosure). Any excess is returned to the purchaser. Remember that the foreclosure usually involves an auction of the property where the bank has a default bid for the amount owed and no more.

    If the bank winds up with the house they have to pay for taxes and maintainence until they can sell it. If they sell for less than the original loan they take a loss. Enough losses and they go out of business.

    I think your ethical result can be achieved just by preventing any more FR loans from here out. Let the old ones settle normally. When the FR loans are paid off it will extinguish the 'fake' money and leave only 100% backed loans.


    User 30121: I'll be sending you a bill for consulting services rendered.
    ;-)
    Reply | Link to Comment
  •  
    Nov 17 03:51 PM
    "I think your ethical result can be achieved just by preventing any more FR loans from here out. Let the old ones settle normally. When the FR loans are paid off it will extinguish the 'fake' money and leave only 100% backed loans. " Smarty


    Yeah, this would work, and like you say, without unintended consequences. To me, the problem of FRB is not that the money is unbacked (but that is probably a natural consequence) but that it is created and lent out rather than borrowed from a saver and lent out.

    Concerning ethics: I have this deeply held intuition that ethics is vital for a sound, prosperous economy.

    Thanks Smarty, always a pleasure.
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  •  
    Nov 17 03:52 PM
    I believe Paulson and Bernanke's plan is to cause inflation. I think that is their very intention. Without it housing prices will continue to plummet. I don't think they are trying to cure the disease, rather, they are treating the symptoms. Just a way to artificially prop up the economy until one day it sort of fixes itself. Right now we are witnessing gold and commodities at very attractive levels with a strengthening dollar. As the bailout dollars begin to trickle into the economy we should expect commodities to rise with the dollar remaining flat or decreasing versus other currencies. Logically I would believe that the dollar should plummet but other countries are devaluing their currency as well so the dollar should remain strong comparatively speaking.
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  •  
    Nov 17 04:50 PM
    "I have this deeply held intuition that ethics is vital for a sound, prosperous economy." - moonbat

    It has been my experience that ironclad integrity is a great time saver and often the difference between success and failure. It often saves a great deal of paper as well.

    I have personally lent several thousand dollars on a personal request for a friend's immediate business need based soley on his character. Discussions of repayment did not commence until the day after money changed hands and in fact they were quite one sided. He told me how much extra he would give back for the favor. I was handsomely compensated without asking for a thing though I did have to wait nearly a week to get my money back.

    If I had to, I would guess that I probably made more on the exchange than the person who borrowed the money did from its use, but that is none of my business. I was glad I could help when he needed it. The money allowed him to close a transaction with a first time customer and open a new business account which will profit him for some time to come.

    It's not something I would do all the time, but for this person the thought that my money might not return never entered my mind. I would do the same again for twice as much money without hesitation just as I believe he would do for me if I had such a need.
    Reply | Link to Comment
  •  
    Nov 18 03:11 AM
    I agreed with Derryl, the extra money supply doesn't feed into the main street without the banking multiplier effect. In fact because the effect is gone, we shall have less money supply to the main street. Result is asset deflation; and we are witnessing it already.

    This happened in a few countries before during the Asian financial crisis started in 1997. Money Supply & CPI figures of 1998-1999 of Bank of Korea or Hong Kong Monetary Authority showed that additional money supplied by the central bank did not created inflation but the contrary happened.


    On Nov 17 09:10 AM derryl wrote:

    > Mr. Wood,
    > I don't think Paulson and Bernanke pumping money into this economy
    > is going to lead to hyperinflation. As you noted, so far Treasury
    > has just been putting money in new bank preferred shares to restore
    > banks' assets/capital ratio. This money is locked into those shares
    > and will never circulate. Once the stock market rises again and
    > brings bank common shares up with it the banks will become overcapitalized
    > and can buy the preferred shares back from Treasury. A temporary
    > relaxation of legislated asset/capital ratios would have served the
    > same purpose without moving any money around, but they decided to
    > go the preferred shares route.
    >
    > Even if Bush or Obama sends out a new $600-800 billion round of stimulus
    > checks a lot of people will use that money to pay off their high
    > interest debts. In our fiat money system a bank loan creates money,
    > it doesn't "lend" money that already exists. When loans are repaid
    > the money ceases to exist. So pumping "stimulus" money into the
    > present economy will probably have the effect of reducing the money
    > supply, not inflating it. Some people will spend the money but others
    > will save it or pay off debts.
    >
    > Increasing savings in this environment that you accurately describe,
    > where banks will only lend to good risks and good risks are hard
    > to come by, will hold down interest rates as bank deposit/loans ratios
    > will decline and banks won't be able to afford to pay much interest
    > on deposits. Inflationary effects will be minimal or negative.

    >
    >
    > I agree that the current problem is overleveraging, so if stimulus
    > checks will have the effect of reducing leveraging then they're probably
    > a good thing.
    >
    > The increase in Treasury debt to the Fed does not have to be a bad
    > thing because it does not necessarily ever have to be repaid. This
    > debt can and should be monetized because monies transferred between
    > a federal Treasury and its central bank are merely accounting formalities.
    > Treasury gives the Fed an IOU (a bond) and the Fed writes a credit
    > for that amount into Treasury's Fed account which Treasury can then
    > spend, just like our bank makes a "loan" to us by creating a deposit
    > in our account which we can then spend.
    >
    > I think one of the things that is going to come out of this weekend's
    > G20 meeting is a new protocol for monetization of national debts.
    > If only one country does it then that country's currency will inflate
    > and lose exchange value, but if everyone does it because everyone's
    > national finances are in the same debt-boat then there is no change
    > to exchange rates. All of the newly monetized debt can be written
    > down to zero with no effect at all on national financial viability,

    >
    >
    > Go to epicoalition.org and read Warren Mosler's "Soft Currency Economics".
    > He has a good understanding of how fiat money works and how a national
    > government and its central bank can use the available tools to regulate
    > money in the interest of the national economy.
    Reply | Link to Comment
  •  
    Nov 18 09:31 AM
    Why is everyone so gun ho about stabilizing housing? Let the air out of the bubble. Or better yet just prick the darn thing. The median income to median house price in the US is still absurdly above historical norms. Once that comes down, housing has, in essence, stabilized itself.

    I am in the real estate business (broker) and I find that this advice/suggestion is beneficial to the market as whole even though it might actually starve me.

    Thoughts?
    Reply | Link to Comment
  •  
    Nov 18 10:29 AM
    I think much of this commentary misses the underlying fundamentals:

    1. We have become too much of a consumer economy. The "investments"... in housing were substantially a waste. How do media rooms and granite counter tops make us more productive in the long run competition with the rest of the world? That capital is sunk and cannot be redeployed unless we mandate that those receiving foreclosure relief pay us back by providing spare bedrooms to the homeless. Our entire policy of directing money into consumption is politically popular but grossly mistaken.

    2. The government machine absorbs money and produces costly outputs that are at best a waste and at worst counter productive. Education has become a joke. Public schools are like insane houses run by the inmates. College grads cannot write a complete sentence. Lavish facilities and tenured professors do not assure that we will provide the next generation with necessary skills and mental toughness. The same is true of all government programs. BUT, in times of crisis, we run home to momma and plead for federal help. Help is then rationed by the political process to prop up the status quo, punish enemies and reward campaign supports. The only challenge is to manufacture a good cover story that convinces people that we have their interests at heart.

    3. Human capacity for ignoring reality is boundless. We chatter about the issues of the day but ignore the long run fundamental errors because we cannot accept the truth: We have met the enemy and it is us. Nothing that is created in Washington can change the underlying reality of our current state. We have squandered our capital and must rebuild it by long and painful savings and sacrifice. Everyone must work harder and consume less. It is just that simple. BUT, the political and social divisions demand that we manage our own psychology so as to blame others and seek to extract retribution. This is a recipe for further failures. IF it gets bad enough, we will trade our freedoms for promises of material security.



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  •  
    Nov 18 01:41 PM
    Point of clarification for Mr. Woods: the Depression was over a decade long in length, taking place principally during the 1930s, but even into the 1940s (up until the start of WW II). The date 1929 is significant because of the stock market crash that took place in October of that year, with some (but not all) analysts believing the crash was the primary catalyst of the Depression. The point is, referring to "the Great Depression of 1929" is not only factually incorrect, it fails to demonstrate the length (and therefore severity) of the Depression this and other countries had to endure.
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  •  
    Nov 18 03:47 PM
    Just more unpatriotic negativity from liberals who question the party of the REAL Americans, and hate freedom.
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