It All Started With Fractional Reserve Banking…
I started out with a refresher on macroeconomics (an area I think needs to be taught in high school as a requirement) and the operations of the Federal Reserve Bank. I was trying to understand what the options were with regard to the great stimulus package, and what we could expect if we did not to pass one. How bad could it get? There’s positively a glut of opinion, as you’d expect, about whether we’re completely screwed, temporarily screwed, hardly screwed, or not really that screwed at all.
The job of the Federal Reserve Bank appears to be to create money where none existed before (fractional reserve banking), and then to sell the money, which is in turn sold at incrementally higher interest rates to private banks and eventually to average borrowers including individuals and businesses. As far as I can tell, our current problem stems from the continued creation of debt, at profit, until the debt-to-real assets ratio just got so high that our system of fractional reserve banking is stretched too thin to function. Yikes. For more on this, listen to this really excellent NPR interview with Michael Greenberger who attempts to quantify the scale of the credit-default-swap problem.
Responses to this our current massive debt issue range from the fascinating Austrian School of economics, and to a lesser degree the Chicago School, which advocate a do-nothing and let the super ultra laissez-faire approach rebalance the system, to our more commonly accepted Keynesian approach which advocates government intervention, one would presume in the form of throwing more money on the problem with big stimulus packages, but not too big depending on whether you ask a Republican or a Democrat.
Interestingly, a similar problem on a smaller scale occurred in Sweden in the 1990s and was resolved with a combination of bank nationalization and separating bad assets into separate “bad banks.”
My take-away was this:
If we manage to keep our current economic system afloat (my bet is we will), we need immediate legislation that requires standard reporting and complete transparency for all forms of complex derivatives. Greenberger’s estimate (which we currently have NO WAY of verifying or denying) is that this form of “shadow finance” is valued at roughly $62 TRILLION, more than all stocks, bonds, and securities combined.
Pass more tax cuts like the one proposed by Barbara Boxer as incentive to spending, don’t just throw money at the problem.
Institute a conflict-of-interest policy that bars people like Henry Paulson (see previous post) and Phil Gramm from crossing over from the private sector into a government role, and from holding board positions while occupying any public seat of office.
If it gets any uglier, buy gold. Traditional money is just paper. Or follow Rushkoff’s advice and create your own currency like the Liberty Dollar.
Read The Road by Cormac McCarthy for preparation in the event of world-wide system collapse. Or better yet, don’t!
Serious Discussion About Stimulus Strategy
Pro-stimulus? Anti-stimulus? It’s hard to know whether government’s attempts will prove effective. Wondering what the right approach should be? Watch and learn:
In The Know: Should The Government Stop Dumping Money Into A Giant Hole?
I think I’ve seen this on the news about fifteen times in the last couple of weeks!
I Want a Modular Pod-Car for My Bailout Money
The Big 3 Auto industry bailout is all the rage now on blogs and news sites. Though many raise the question of why the car companies have not produced more desirable vehicles (UAW drives up prices and kills profits for affordable fuel-efficient cars, bad management with no vision, car companies force consumers to believe they want SUVs through advertising, etc., etc.), I have a different question:
What could the car companies be making that would reinvent our current scenario?? Solar-powered pod cars of course.
Even a decent hybrid would make me happy, but can you imagine the massive coolness of a WPA-like effort that created modular pod cars, solar-powered, that ran on rails for long-distances? In the software industry, modular development isolates the flaws in a program to a specific function that can be retooled as needed without crashing the entire program. Modular transportation would provide as-needed resources without the all-or-nothing approach we have now. For example, my family goes up to Tahoe fairly often in the winter. We decided we needed all-wheel-drive for safety on those trips. Not to mention a car that could slam a snowbank and we’d survive. But that leaves me driving a 20 mpg car on a daily basis. We could give up our trips to Tahoe, but my sanity would suffer! (Mountains… snow… ahhh…) It would be sooooooo groovy to be able to unhook my personal pod for day trips to the grocery store. To tack on the 4WD engine-assist only when needed. To take the rail at least 50% of the way: hook the pod to the rail and go, via geothermal or solar or some other non-coal, non-petroleum renewable source.
I have never understood why we get so brainwashed into our current scenarios that it seems like we have no other options. Yes, it would be really freakin hard to institute a change of that scale. But we have huge problems that need solving in new ways. We need more cooperation and much, much less “every man for himself” thinking. We tend to think of state-imposed programs as unAmerican and bad. It would be great if the Gates Foundation or Buffet’s money took on this task. Heck, I bet the Ikea guy could kick some ass with this! GoogleCars anyone?!?! Open source. With third party add-ons.
We are not going to be able to operate our Spaceship Earth successfully nor for much longer unless we see it as a whole spaceship and our fate as common. It has to be everybody or nobody. ~Buckminster Fuller
Why I am Slowly Becoming a Progressive Libertarian
I strolled over to Cato Unbound yesterday for some fascinating reading. I found this month’s Lead Essay entitled Corporations Versus the Market. These guys are Libertarians, and I thought I was reading just to get a different perspective on things. On Facebook, some friends and I have been having a discussion about Red States versus Blue States, which led into a discussion about illegal immigration, and finally to corporate profits. With a newly elected Obama, I think we all need to reassess. The Bush years exposed the so-called conservative Republicans as none-of -the-above. The spending and federal bloating were out of control.
The fascinating thing about the Cato essay is that I found that I agreed with all of it. The essay argues (I hope I am paraphrasing accurately) that our current system is actually a huge promotion of corporate welfare via bailouts, subsidies, protectionist tariffs, and even the use of eminent domain for corporations. We don’t have a “free market.” If we did, we’d see lots more small and local businesses and fewer big-box and national chains. Government policy protects these businesses. They don’t really occur naturally. (I suppose by “naturally” I mean in a truly free market economy.)
This environment of the federal government favoring large corporations, combined with the federal government taxing us hugely, has led to a worldview that expects the government to redistribute wealth because we have neither control of any spare income (which instead goes to federal taxes) nor control over huge bureaucracies like in the case of the healthcare industry.
Here’s a real world example. I have been working for the past year to establish safe routes to school for our local elementary and junior high. I petitioned the city to improve signage and reclaim roadway on a very narrow and very high-traffic stretch of road. This is (IMHO) a traditional obligation on the part of local government: ensure safety for local residents on local roads.
But the city won’t help. Why? They told us to go get a federal grant to pay for it. The federal government’s reach into all areas of civil life has undermined our power as local citizens to have an impact. Not good!
So there it is. Duh pookie is now a Progressive Libertarian blog! I keep laughing to myself about how I just became a “compassionate conservative”!! I’d love it if there truly was such a thing.
Pain Aversion: The New Economics
According to Henry Paulsen, the economy has stabilized. Investment bankers are all cozy and happy now. Next up, US auto giants are hurting. After them, people in pain from expensive mortgages and foreclosures. Though I lean liberal, I have limits that apparently the US government does not. Where I come from, Americans work hard to earn what they can. Government provides a leg up on occasion, but the bulk of the effort lies with the individual. Corporations operate in a free market and should not be artificially emboldened or protected by governmental interference. Healthy competition has always fostered innovation.
Except where US automakers are concerned. Though the US automakers share of the market has been in a continual decline since the 80s, somehow they failed to wake up to the fact that people were buying foreign cars for a reason. Somehow US automakers forgot to ever do the reality check that other companies do: are we still competitive? And naturally, what can we do to become more competitive? Instead, US car makers kept pumping out suboptimal fuel efficiency, boxy fifties-era “American looking” styling, obscenely over-sized SUVs, and all with plenty of cup-holders rather than blue-tooth enabled. According to CNN Money:
If the Big Three carmakers were to cut U.S. operations by 50%, 2.5 million jobs could be lost in 2009, according to a study released Wednesday.
The Center for Automotive Research reported that the total employment impact includes nearly 250,000 jobs lost at the automakers and nearly 800,000 at suppliers.
In addition, the organization estimates another 1.4 million job losses outside the industry, such as those caused when stores go out of business in communities hit by plant closings.
That is pain. And the pain is compounded by the sudden lack of mobility of a large sector of the workforce who can’t relocate to better or different jobs because they’re tied to their horribly overpriced mortgages!! The thing I can’t understand, is why more people don’t just walk away when the value of their house is underwater. So you rent for a while. On the positive side, 
even if you have to declare bankruptcy as an individual, you’ve retrieved your mobility and are free of a huge burden of debt. Is this one more example of pain-avoidance? Do people consider it too painful to just let the house go?
If the automakers do receive a bailout, maybe Congress can enforce some sanity: require that the automakers use the funds to retool their factories to produce a hybrid car on par OR BETTER than the Prius. The minute they do, you better believe I’m buying American.
Where’s Our Green New Deal? Treasury Reinforces Old Economy
I haven’t read Thomas Friedman’s new book Hot, Flat, and Crowded, but I’m going to. Friedman argues that we are at a unique moment in history where we need to forcefully impose green thinking. He takes the long view that we absolutely MUST shift out of our oil/coal dependent energy economy and throw money at all opportunities for green energy innovation. Here’s a quote from a HuffPost interview:
Just don’t tell me — this is the Cheney line — let’s let the market work. Just let the market work. As if the market is neutral. We give nothing to renewables. We give very little to renewables. And we have legacy subsidies and tax incentives for dirty fossil fuels. The whole thing is totally skewed. This market has been gamed from the beginning. If we’re going to game the market let’s at least game it so that clean fuels are on an equal footing with the dirty fuels.
We should be throwing money at this problem. This could give birth to a whole industry. This is not a thing you nickel and dime.
In the meantime, Neel Kashkari is pissing off finance execs by refusing to discuss recent Treasury decisions. Treasury increased funding to AIG from $123 BILLION to $130 BILLION with no explanation, among other mysteries. Bloomburg News is suing Treasury under the Freedom of Information Act for details about who/what institutions are receiving the massive amounts of dollars the government is throwing at them. WHATUP WITH THE SECRECY?? IT’S TAXPAYER MONEY!! Here’s a quote from the Bloomburg article:
The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn’t made.
The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn’t include an additional $700 billion approved by Congress in a bailout package.
So, is our country bleeding or what? It’s all headlines right now, we’re not experiencing food shortages or energy blackouts yet. But dang! Is there impending doom? What would REALLY happen if these financial institutions collapsed, or to put it another way, if the Invisible Hand did its worst? Mass unemployment at least. Are we are only staving off the inevitable?
Like Friedman, I can’t help feeling like our country’s lack of imagination at the highest levels is our biggest burden. Hurry Obama!!! We need you. And don’t forget to make Al Gore, or somebody with VISION, Chief of Energy Independence when you pull together your cabinet!
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