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
How Big Firms Were Allowed to Leverage Debt to Assets at 33:1
A must read article from the New York Times explains how a little-known ruling in 2004 eliminated the requirement that large investment banks retain a reasonable amount of cash to cover losses.
Here’s an excerpt:
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. [The fox guarding the hen house possibly?]
Still, nothing illegal happened. There’s no one to prosecute since they got permission. How scary is that???
On the topic of a dissenting view of the bailout, check out this awesome clip from Representative Kaptur from Ohio (Thanks The Soccer Mom Vote!) While I have argued that it was probably necessary to bail out the ultra-wealthy, I liked that Kaptur called out the Paulsen crew for the fear-mongering and obfuscation. Considering Paulsen was somewhat instrumental in CAUSING the meltdown. (see above!)
Go for the Cash! (Or Stay in for the Long Haul?)
Now that we’re all stock market investors with our 401Ks, mutual funds, and savings, we have to decide whether it’s a better idea to stay in the market for the next ten years and ride it out or get out now while there’s anything to get. (You know it’s bad when the word PLUNGE feels overused.) I read a blog post from a guy in Iceland who says people there are stockpiling food stuffs. Not so good! And really, I don’t know what the heck I’m talking about since I’m not one of the ruling elite, super ultra wealthy, 1% people. But here’s what I read today in the NY Times: A terribly weak argument about how you shouldn’t get out because if you do, you won’t know when to get back in and you’ll probably lose money as a result. The argument is backed by cumulative data from the last 30 years. (Ironic. Maybe they should’ve gone back farther.)
There are two gigantic things the article does not address:
- What if you don’t have thirty years to wait for your money to be worth anything? What if you only have five years? There is some break even point that we surely do not have magic-allseeing-crystal-ball access to, but I couldn’t wait. This is our family savings. If my husband lost his job in six months, we’d be up a creek. This is why we got out.
- Secondly, what no stock broker, money manager, or investment banker will tell you, is that if you “panic” and get out of the market, you will be contributing to bringing down the house of cards that the government is so desperately trying to prop up. Our system is based on using your capital as leverage. If you take away your capital, the system collapses. Just ask Iceland.
So it might be unAmerican or unCapitalist, or… dare I say it… bordering on SOCIALIST if you take your money out. It could be actually, for real, and without doubt inviting economic calamity. All I know is the money belongs to my family. I don’t want anyone else gambling with it anymore.
When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing. ~Bernard Baruch, 1929.
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