Compound it! It’s in our nation’s best interest to do so! — kavips

Most people do not understand the role credit plays in one’s everyday transactions… We use credit when we go out to eat; we order, and at the end hand a plastic card to our server, wait, sign a piece of paper, and move on… We know that we get a bill sometime, and that we have to look at it to make sure someone else is not using our number, and pay it hopefully before the deadline or due date. So when someone talks about credit being used by business we think of the transaction we have just made and say “yeah, I get it: Americans buy with credit cards.”

Well, I hate to break it to you but that is not exactly what we mean when we say credit is important in everyday business transactions…

Perhaps one could understand better if we preceded with an example…. Let’s take the restaurant we were just eating at and diagnose its transactions to comprehend how the use of credit fuels all our business transactions…

Let’s go back to when the restaurant was originally built. Most people think that cash builds restaurants, but really it is banks that pay for the construction…You can see their signs at construction sites… It’s simple, really. You, the business person, ask a bank for a start up amount… That amount should cover the cost of the building, start-up and running costs for a minimum of 6 months… Let’s say you buy $4 million.. over 5 years at 6%, your monthly payback is $77,331. If you are a really good operator (25% after controllables), you will need sales of $309,324 dollars that month to break even… Your weekly sales must average $77331 dollars to meet that target…

So on a month you take in $310,000 in sales, and you have to cut payroll checks twice, as well as two cuts of invoice checks… But wait, 3/5ths of your sales are in credit cards. You will receive that reimbursement in a little over three months.. Currently you have only $124,000 in your bank account and all of that is needed to pay the 75% ($231,993) of your sales that is going to expenses……. You are short. The cash on hand just barely covers payroll (30% of 310,000 = $93,000)… Payroll is something that must be paid… and so you hold off on the other bills.. You have thirty days to pay them, and you can stretch it out to forty five by jawboning… So on the forty fifth day, you cut all the checks and dig into your surplus loan amount to cover them… Basically until your credit card payments start flowing in after the third month past your opening, all you will have cash which will mostly be used to cover payroll.

So during this time you bought food on credit, bought electricity on credit, bought liquor on credit, in fact, every invoice you signed while preparing for the opening, was a credit memo on which you were promising to pay… For example, the food distributor upon getting your order, has to buy your product from his wholesaler, and then store it on his premises until you are ready to order it.. He then has to wait 45 days before your payment check comes in for all that food.. So he takes out a loan to buy the food, and when you pay him… he pays back his bank….. Likewise, your electricity is supplied to you up front without a monthly payment… That distributor had to buy that electricity from the midwest, and got a loan to do so… When he gets your payment, he will pay it back…

So it is with all your suppliers. They are without money until you pay them… They also survive on “loan money” until you cut your check..after which they pay back their loan….

So what does it mean when they say credit is freezing up? It means your supplier cannot get his food for you unless he puts up his cash first. It means the electricity gets cut off until the electric company gets your cash. It means the repair company won’t come out unless it gets paid in cash. It means that: since you don’t have cash….. you are out of luck….

According to the Federal Reserve, approximately 60 percent of banks have decreased credit limits on commercial construction; 30 percent have reduced the account limit on business credit cards; and 50 percent have reduced credit lines to financial firms.

Approximately 65 percent of banks (good news is it’s down from the 80% of October) said they are tightening lending standards and reducing the size and maturity of credit on commercial and industrial loans to middle- to large-market companies.

The day to day transactions needed to get goods and services from one point to another are in jeopardy…..It is especially clear if you break down this same transaction and follow it through its process from beginning to end.. How much credit does it take to get a jalapeno onto your taco?

Farming is all done on credit. The farmer considers his costs, his interest costs, and the price of his commodity, takes out a loan, and upon selling his product, pays it off.. Any extra he keeps. He repeats the process for the following crop.. A “no” from a bank, means no crop. His buyer, estimates the price of all the jalapenos he will buy from different farmers, calculates the interest, and then takes out a loan to pay off the farmers selling him jalapenos, and after selling the product, pays off the loan… Any extra he keeps. A “no” from a bank, means he is out of business. His seller. a major US Produce distributor, follows the same principal. It takes out a big loan to buy a large percentage of the entire season’s crop of jalapenos… It calculates the interest as part of the cost of doing business, and sells the jalapenos to chain grocery stores, restaurants, and regional local produce companies. Upon receiving his payments, he pays off his loan, pocketing any extra he made for his distributorship… A “no” from his bank, means the jalapenos never make it across the border. The regional distributorship buying off the national distributorship, gets a loan to buy the product, and after receiving payment, pays off the loan and interest and uses to difference to fund his business.. Likewise,.. a “no” from the bank means the National Distributor will be throwing away some jalapenos.. The restaurant needs jalapenos and is expecting them on the next day… We have already discussed the payment method they use, and in forty five days, their check clears… The distributor deposits their check and writes one for the national distributor… That business takes that check to the bank and then writes its check to the Mexican buyer of the farmer’s produce.. Upon receipt of that last check, the buyer cuts all his checks and sends them out to the farmers…. Upon receipt of all these checks, their recipients head to their local banks… Hopefully the amount they get, covers the loan and its interest… As we saw during the last decade in our own America with Farm Aid concerts year after year after year…. quite often it is not enough… The bank then forecloses…

If one bank says no anywhere along the chain, the whole system shuts down and none of the entities within that chain can pay back their loan… Now if it was your money and you had six times the possibility of never getting it back…. would you lend it out? Like me, you’re saying “hell no.” So you see… you can’t blame the banks for not lending in such times of crises….

You can also see that easy credit is a necessity, not a luxury that must be maintained if we are not to break down completely.

Why do we operate on credit and not on a cash base economic structure?

That is a valid question.. For as a consumer, we are a cash base society.. We get a pay check, deposit it, and then spend down to zero. We then put another one in and do the same.. and repeat… Why can’t our economic system function in the same fashion, … get the money first, pay in real time with cash, and wait to receive your payment in cash upon selling?

The answer is that it can and does on a small scale… Your yard sale for instance…. Farmer’s and flea markets are another example… But running an economy on a cash-only basis requires just one thing: lots of cash up front… Very few of us have it… Economies cannot grow on a cash basis, because the process is closed ended.. That is a fancy way of saying that an God given opportunity cannot be exploited in a timely fashion, Imagine if you as a dairy farmer lucked into having all your cows produce twins.. Your cash was tapped out so you could not buy a milker to take on the extra load. Upon seeing the milk go to waste, you capitalize on your good fortune by selling the cows cheaply for beef… If only you could have had another milker, you sighed..

In a static cash-based economy, growth can only be done by those with cash on hand… Take the top 10% for instance that owns 60% of the wealth for example… The top 10% that owns the plurality of this nations wealth, would have to make all of this nation’s economic transactions. If they don’t have a hand in the transaction, it doesn’t get done. As in the Middle Ages, our bottom 60% would live a limited existence and could only move out of the legions of the “have-nots” and into the realm of the “haves” through crime and highwaymanship. Responsible lending is the reason our economy is so prosperous and egalitarian. Without easy credit there would be no Jobs, no Gates, no Turners, no Hagels,no Markells, and no Hiltons… Easy credit is responsible for almost all the risers on our current list’s of industrial tycoons, just as it was during the Golden Ages of the latter 1800s….

But with credit, which is basically a guaranteed form of trust, we can raise jalapenos, we can buy and distribute them, and we can get our pay later. The fluidity of our market which we take for granted, would not be there without credit…

65% of our banks say they are tightening credit. What does that do to our economy? The answer as we saw above, is obvious. Our economy grinds down to a halt.

So what options can be used to grease the wheels, to get more “yes”s to come from banks than “no”s….

Obviously instilling confidence in everyone that we are indeed “out-of-the-woods” is the key… As long as we truly believe the system is intact and that when we lend out our money we are confident that we will get it back plus interest, then nothing else needs to take place.. All the other stuff we hear, such as buying up commercial paper, toxic mortgages, bank stocks, are all just tools to get us back to that psychological point of losing fear…

We must realize at some point, as did Roosevelt, that we have nothing to fear but fear itself.. He then put the banks on holiday…

Forcing someone to part with their money is close to impossible… It is called robbery and usually involves holding a gun to someone’s head… That is what a lot of those tax breaks in the stimulus package do and is why they will fail… A tax incentive for me to build and hire? What’s the point if doing so causes me to go under because no one has money to buy whatever it is that I spent all of this investment to make? No! Something out there needs to happen so lenders holding on to their money see they have a better chance to survive by lending it out than they do keeping it tightly fisted….

Again, the opposite of tax cuts can have a great effect here.. The effect is temporal and must be rescinded as soon as we reach two quarters of continuous GDP growth… And that is to tax the money that is being held in a bank’s reserves and not being lent, at a relatively high rate of 50%… Doing so would provide sufficient shock to the system which might then push recalcitrant bankers to prefer to lend at a “no tax rate” and take that minuscule chance on the economy tubing… instead of keeping their money close by and guaranteeing they will lose 50%… If they chose the latter, the Fed can certainly use that tax money amounting to 50% of that banks assets, to turn around and buy the controlling share of that bank, and then, make good quality loans and slowly ease the system of credit back into fluidity…. Taxing reserves at 50% sends the appropriate signal to banks: “Start lending, sorry, you have no choice.”

Again, contrary to what we have often heard, taxes are good… And the secret to good taxes is that they must be applied in moderation… Yes, there is such a thing as a too high level of taxation… We have plenty of evidence where high taxes stifle growth… But we now have at our disposal an arsenal of evidence illustrating the poor effects of following policies of “no” or “extremely low” taxation…. The obvious answer to both points, is that we need to find a level of equilibrium and hold at that mark where our tax needs and economic growth needs balance and compliment each other… We were at that level once…. As mentioned in another chapter, and as evidenced during the last decade, the ideal marginal rate level appears to be holding at 30%…. Our goal then is not to lower taxes… Our goal is to achieve an equilibrium that balances the needs of our government, economy, and our people. All three need to be growing for our nation to be successful…. not just one…

I’ve often thought about pulling this stunt at one of my public speaking engagements but so far have chickened out… It involves pulling out on stage a three legged stool with two legs sawed shorter so it fiercely wobbles and then nonchalantly back up and sit down on it while speaking and topple over to the floor… As I pick myself back up in front of the audience, I pick up the stool and announce (the audience realizing by now they have been rather cleverly set up). “This is what happens when you elevate one leg of our system past the others… The welfare of “Our Wealthy Corporations” over the past eight years has been force fed and elevated to where it is now sapping away the wealth away from “We The People”. as well as the wealth of our Federal and state Governments through excessive borrowing and deficit spending… For eight years we have focused on the economy, by cutting taxes, dropping our oversight abilities, merging while deregulating, allowing our multinational businesses to do whatever they want with no one looking over their shoulders… We created this situation, one piece of legislation at a time… Overall, what is urgently needed is to bring the economic model back into balance… Cutting it back too far does just as much damage as well. Remember the stool metaphor; it simply needs to be in balance!”

To achieve this balance we need to re-evaluate the rate of taxes levied on our investment community, tweaking them upward to a point where the government can again receive sufficient money back into its treasury to re-begin its trip back to solvency. Likewise raising the tax burden slightly higher makes reinvestment into research and development (R & D) the optimal choice for every business seeking an avenue to avoid returning that increased taxation back to the government coffers. That investment into R & D creates jobs, jobs, and more jobs….

Now here is the irony. As irony it is delicious and historically has been proven to be a correct hypothesis based on the results of its implementation during the Golden Years of the 1990’s… It also was a driving force behind our economy during the Eisenhower years, although at that time we did not yet fully understand the intricacies of how it worked… The higher rates of taxes directed more money to head towards R & D’s within all corporations, so it could not hit the books as “profit” and therefore not be “taxed”. New jobs were hired to fill those positions in R & D, and new buildings were built, new products developed, and new investment was spurred. The effect of putting money into all those people, buildings, new products, and additional investment, is that their increased money was now entering the community, and creating demand for such common use items as more orange juice, potato chips, coca cola, houses, cars, restaurants, and you name it… etc.. As each of those industries found themselves forced to expand just to keep up with the growing demand of their products, they too created new jobs, which in turn created even more demand for those common everyday products. The following year, because of the past year’s growth, even more investment was internalized in order to keep it out of the government’s hands… Which, as you can well guess…..spurred the cycle forward even faster… Now with all those new businesses (along with all the old businesses) investing a higher percentage of leftover money back into themselves, they, as well as the entire economy, grew larger, served more people, and expanded.

Now here is the rub. The taxes coming off all that increased growth, even though a large potential was recycled back into the businesses to avoid the higher rate of taxation, increased the amount of money pouring into the Treasury’s coffers, and coupled with decreased spending, were what enabled this nation to finally balance its budget… so far the only time in our lifetimes…..

The Nineties got it right. Truly it was a Golden Age if there ever was one…..

And what cracks me up every time I think about it…. is that we actually get the Republican dream of a growing economy, one that works exactly the way they say it would, growing treasury revenues through growing the economy, while still sending profits out the gazoo… and we don’t do it by cutting taxes! We accomplish it by raising them! It’s wonderful. The Clinton years are the clinical proof that it works.. One may add the opposite, that the Bush years are the clinical proof that cutting taxes doesn’t work… It really doesn’t… Cutting taxes actually robs the economy of money that it needs to grow… Yes… it does… Need proof? We’re living it.

Lets use the same model….

Taxes are cut…. no longer do we need to hide money into R & D… That was long term investment, kind of hard to explain that one to the shareholders, now isn’t it… Instead, we opt to maximize our profits, which makes sense now that we will not be taxed too harshly on them…We scan the globe for options on how we can push profits…

There are two types of investments… One is real, and the other is virtual… One improves efficiency… The other just climbs in value… or more appropriately, perceived value… As more money pours in, some type of economic bubble inevitably develops… We get too much money chasing too few high yield returns… The bidding goes up, and up, and up, and on paper business appears to be doing well.. But really you are buying just paper certificates… You impose your value on those pieces of paper, and others may view them with the same worth as do you… but if that value is ever diminished… what do you have? Pieces of paper.

When that money is spent on a factory, and it fails, at least some of that money can be recouped from scrap iron. That is the difference between a real expansion and a virtual expansion. Due to 21st Century deregulation and the fact that no one really knew what was going on with unsecured derivatives…. we thought tax cuts were causing our economy to boom… We ignored the tell tale signs of manufacturing loss, increased household indebtedness, increased loan defaults, which were buried under a mountain of data showing tremendous profits from the financial, insurance, and medical sectors. We were told that our coffers were filling because of our tax cuts.. No,

As an economy all our profit was being bet on horses who for a while were paying off… Then one horse, a favorite, on whom everyone’s bets were riding…. stumbled and fell…

And when that one horse went down… so did our entire economy… And as it started collapsing, we glance around and to our surprise, we had nothing at all to show for it… To whom could we turn to bring us out? No one but the American people represented by the Federal Government.

And we faced the same problem after 1920’s when we had the same cavalier approach to investment… We faced the same problem after the Reagan-Bush 1 extravagance finally caught up to us in the early nineties. And we have it now…

Cutting taxes too low is very bad for long term growth.. Of course, raising taxes too high is equally damaging, but as every little child knows: if something is too hot.. or too cold, you go to the one that is just right… If something is too hard… or too soft….. you go to the one that is just right… It is a shame that what every little kid knows was lost on those making our national financial decision over the past eight years…

Balance between the three legs holding us up: The People, Our Government, and Our Businesses.

The idea is not new except perhaps in the economic world… In fact it is simply a transference of Henry Kissinger’s world diplomatic outlook, where stability is achieved by balancing Red China, the Soviet Union, and the United States against each other.. If one country got too feisty, the other two were strong enough to stop it… As a result, balance was created by moving beyond the two-way, unstable, bi-polar arrangement between the US and USSR… With just two players, every gain was the opponent’s loss.. Stability was never achieved…. With three major players, one had always to remain cordial with both adversaries since one had to ensure they would never become the odd man out, and stability eventually followed…

That was in the seventies… It is about time the same principals came to roost in the economic spectrum….

Now an increase in taxes will boost the economy. But…. it is hard when things are going so bad to persuade people in a panic that something that looks like it should have the opposite effect is really one’s savior.. I understand. It is equally hard to tell someone violently vomiting from a bacterial infection, that a moldy piece of orange peel, covered in grey fur, holds the key to their salvation…

So we disguise it… With the orange peel, we make it into a nice little pill, and call it penicillin….

With the tax code, we make it into a nice little pill and call it an “economic incentive”…. Is it a tax? Of course not! Who would dare think of taxing someone during a Depression… It is more of a …………shall I say……. “economic incentive”….. sort of something to get the economy rolling a little faster…. “By using an incentive to get business to spend more in their R & D departments, which we think will eventually drive our economy into high gear, we are going to charge those companies a little more who choose not to invest money into R & D…. I mean that’s a fair as America gets.. Should those helping pull us out of our recession be penalized for spending their money on their business, to grow us new jobs? Or should they be rewarded?

“Most think they should be rewarded…Right? So since our current economy has made it absolutely impossible to cut taxes further and still stay viable (I’m sorry but it’s just a fact of life), it makes sense to raise the tax rate on every other business who does nothing to alleviate our pain and suffering, thereby giving a huge reward to those who are putting their money to work for us… the American people…”

Something like that… you get the drift….

Remember a ways back when I said we needed to force the hands of institutions that controlled capital, and find an incentive they could not refuse to enlist them to begin lending?

Well, raising their tax rates while giving them a discount from it equal to the amount they lend out, is exactly the incentive that is needed.. If one is going to lose “X amount” to the government anyway, might as well lend it out and take a chance that the money will return… That’s an offer no bank can refuse…

There is one important note that occasionally gets mentioned but probably does not get mentioned enough… That is that we have already tried all of our money supply tricks and they do not work… The Fed rate today is 0.25%… Go figure… Borrow a $100 dollars and pay back a $100.25….. over a year?… During the height of the boom the spreads between what lenders got and what they charged to lend, were between 1% and 2 %… Today most loans are between 5% and 6 %, meaning the bank is collecting between 5% and 6% percent off each business transaction. One might expect that since the same rate of return (1%) was acceptable before, that it might be as acceptable today? If banks were happy during boon times making 1%, why can’t we have loans today at 1.25%? And the answer, to be frank, is that they are overcharging all of us to counteract the bad assets they themselves placed on their own books….

Which brings up three questions: Should a bad asset bank be formed? Should banks be allowed to fail? And should shareholders or taxpayers be the ones to bare the brunt of the costs of our recovery?

The principle of the bad asset bank is for the Government (Federal Reserve) to buy bad loans from banks, so the banks can forget about what happened and move on… In principal, the bank owes its investors the money which those loans were supposed to generate… It is duty bound to funnel much as possible of its income back into paying those notes that went bad… Since the amounts are so extravagant (1-2 Trillion) and the money required so great, there is little left over to do what banks are supposed to do…. which is lend it out so it can earn more interest for the bank and its stockholders… If the Fed (federal taxpayers) buys up these assets, the bank no longer has to owe these huge vacuums sucking up their revenues, and can instead use that money towards lending to businesses which are carrying out the commerce of our nation.

There are several reasons that make a toxic bank a bad idea… First is that it was tried during the first bailout… That was the reason the first piece of bailout legislation was passed and very quickly that plan was deemed to be insufficient and the money was switched over to directly infusing capital into the banking system… If the toxic program was not a good idea then; what makes it so great now?

Another downside. Banks are able to lend up to 10% of their capital. By injecting new capital instead of buying toxic assets, the American taxpayers get a $10 dollar bang of money lent, for every $1 dollar of new capital they invest…. Buying up $1 dollar of toxic debt just frees up $1 dollar which can be lent…

Likewise, a bad bank will have to choose which banks to support.. and which to let fail… Most of the toxic wastes are held at the top echelons of bankdom, ie. in the large nationwide corporations… However most of the loans done which allow business transactions to continue on a daily basis, are made at small, community oriented, local banks… The asset plan will do little to get money where it is needed, to those local banks. But direct capital injection, can and should be done on the level of local banks in their communities….

The bad banks are argued to be necessary because the bundled securities markets have dried up… No one is buying bundled loans, and no capital from sales of those is entering the banks financial stream… If the Fed buys the notes, they will most likely be at a premium and if sold, will be devalued almost entirely.. The American taxpayers pick up the cost of the entire security. But instead of using these scarce dollars to pick up bad assets we know we will lose money on, why not simply guarantee for a fee, (sort of what AIG did) that the government would guarantee their value? Then let the market buy the securities as they used to?

Remember we collect the fee, and pay out only if the security goes bad… Similarly to what we did with the originally FDIC insurance of $35,000, now up to $100,000 depository insurance… We guarantee the deposit… Doesn’t mean we own the bank…. It worked for banks.. It is still working for banks… Thank heavens it works for banks…

That option would move assets out to investors, remove the debts off that banks books, infuse capital into the bank which could then be lent out at levels 10 to 1….

Over all a toxic bank is not the best use of Federal money at this time…

The next question is whether banks should be allowed to fail?

A lot of effort was spent in investigating this question… Even one Nobel Laurette was promoting the idea of letting banks fail….Our investigation after looking at the broad realm of evidence, found considerable disparities in the results and found instead that there were two groups of people who were each supporting their own camp… We classified one as being a group that makes it’s decisions rationally; the other group tended to base their decisions emotionally…

The argument for propping up banks has now become a cliche: they are too big to fail; and that their collapse will impact us far greater than any cost of propping them up. The other side, points to morality and says that propping up bad people has bad implications; letting them fail punishes those who did wrong and were irresponsible.

The problem with these arguments is that neither of these jousts confront and interact with the other, thereby making them both right in their perspective frames.. One stems from the brain… the other from the emotions. The two themes we discovered across the spectrum of literature on this issue are either those appealing intellectually for assistance, or those ratcheting divisive emotions to make their case.

We believe that the best bet to settle the argument is to fast forward fifteen years and look back at how our grandchildren will come to learn about it… Will their lives be better or worse if we let all banks fail….

The argument for letting banks fail is: that is how it works… Banks fail, those holding financial interest in that bank go broke… lose everything…. the pieces are then bought up cheap, and others profit from that bank’s demise… The idea is that fear of collapse will keep banks from ever straying into a stratospheric lending spree that will ultimately cost them everything… The motivation for this method usually can be found in the final lines of its arguments. Statements like “can we continue to reward those who made mistakes”, or “they failed, and they should bear the burden” were pasted at the end of all argument for letting banks go… I have read those arguments and if one wants to take my word for it, they make good sense…. on a small scale… ie. One bank failing out of a 100, should be let go to fail… The system will compensate and the total economic health will improve… Darwinism in the banking world is a good thing. The next question is whether the extinction of a whole species is a good thing.

That is the problem underlying all talk of having banks fail. The discussion and all the evidence takes place in a closed arena. Assumptions are made that do not take into account the wider notion of human nature… Let banks fail they argue? That is just what the former Secretary of the Treasure Henry Paulsen did with Lehman Brothers… Clear the boards… But, that action spread off a widespread panic that spread to the ultra safe money market funds, drying up cash flow to all businesses, large and small. In other words, the free market could not solve the problem without government help. Even the bank the government had hoped would be able to bail out the other banks, Citigroup, required a government handout to stay afloat.

The question brought up is one of degree.. Do we compare our current crises to that of the Great Depression of the 1930s, or is it more like the collapse of he Japanese banking system in the 1990s. The Japanese did what we are in the process of doing, and propped up their banks… Similar to a dilapidated house, they chose to pour money into it, instead of to raze the building and rebuild over-top of its location….The benefit to razing the house and rebuilding, is that costs are fixed… And with the end product, we know exactly what we got…. To pursue the alternative tack, is worry that no one knows whether the house will collapse even long after considerable effort has been made to “restructure” it… The Japanese chose to restructure their financial house giving them a weak system... The Great Depression razed ours and WWII rebuilt it….

Again, notice how the argument takes place in a little bubble… Does anyone consider the experience of the Japanese who lived on the island during this time? To be honest, they lived very well.. Now compare that to how Americans lived through out the Great Depression… not so very well.. Or even better, compare that to how we will be living in two months!.. If one wants to judge the world through bank stock values…. then letting banks fail might make some sense… Like the house metaphor, at some future point they may be stronger if razed and rebuilt. However propping up the system, has done rather well for the Japanese population .. It’s done well for Toyota, Nissan, and Honda..Those car makers are outperforming our own domestic Big Three… And let’s not forget that one of the global consequence of “letting banks fail” before we knew we could fix them, was the fascism that sprang up in Germany, Italy, and Japan… which cost the global economy considerable strife for 5 or 6 years there during the forties… Basically a lot of men died for the principal of “letting banks fail”…

Japan is an island. What is at stake today is the total catastrophic failure across every financial market spanning the entire globe..

When we are talking about entire systems failing, and the collapse of the Bretton Woods world order, and an onset of the post Roman Dark Ages again…. I find fault with some of the Nobel Prize economist’s reasoning… And I have only to look at the last Great Depression to find evidence that makes us wonder what it is that those recommending total collapse and failure are smoking….

It must be good.

To grasp all of the implications of total collapse, where everyone’s money dissipated into thin air, I thought a great model would be to find a microcosm where that actually happened… My reasoning was simply that if all the money evaporated from the global economy, the effects would be similar if not on a greater scale, to what they would be on a small rural community centered around one bank, which collapsed completely. Because of the Great Depression, there is some factual historical evidence of what happens when a one-bank-county loses it’s bank and everyone from top to bottom, is suddenly bankrupt….

Here is a collection of stories (with interviews) that describe that atmosphere around the rural Nebraska town of York during the Great Depression.. It gives us a sense of what to expect… No jobs, no ability to make payments, multiple foreclosures, no buyers for the foreclosed properties, bank failure, and absence of cash based economic transfers…. the use of barter… What eventually pulled rural America out, was the gradual effect of the New Deal legislation… People on “relief” or working on government jobs, began to use money again.

The problem with letting all banks fail and flirting with total collapse… is evident in the scenarios mentioned at the beginning of this chapter… Remember those tracings of lines of credit following jalapeno’s? Everyone depends on credit… If the global economy fails, we do not get our jalapeno’s, our gas, our food… We do not have jobs… we lose our livelihood and house.

The “effect” that bank failures cause upon society is surprisingly absent in each of those epistles that promote total collapse. They always only focus on the banking industry. There appears to be a better way to go than letting everything collapse… What is eminent from our studies of the Great Depression, is that depression lasted far longer than it should have, because less stringent Keynesian methods were applied than were actually needed… We credit the war with bringing us out… What the war did was drop all pretension that the government had no place in its economy, and caused the government to place orders and pay for them with borrowed money. Those orders for ships, steel, and fighting materials are what pulled our nation out of its hole… Today’s stimulus package should be considered as the same response to the same economic troubles that we tried at the outset of WWII, just without the war.

Instead of “letting banks fail” we pump up the economy. The economy will allow banks to write down their bad debts..

The third question is whether it should be the stockholders or the taxpayers who should bear the brunt of rebuilding our Bushwacked economy….

Again the answer should be framed not against who is the more culpable, but which method will get us to where we need to be….. faster…

Which benefits America more? Growing the economy and then selling off the preferred assets bought by the government and pay down its debt? Or, allow wealth to dry up entirely by making all those investors, pension plans, mutual funds worthless by doing nothing and allowing the free market to devalue everyones portfolio….

We saw in the great Midwest… what happens when wealth dries up… Life turns bleak… Making investors pay has some moral benefits such as teaching them that “they who erred shall be punished”, but considering that we are all gamblers of some sort, hurting ourselves severely to teach those who lost, a lesson already learned, seems kind of pointless, really…

The severity of the situation has moved us to a point where practical solutions are needed. Moral ambiguity and waffling philosophies are simply extra baggage getting in our way… When a risk is big, we insure ourselves against it.. What that means is that each of us takes some responsibility for assuming a small burden of the risk, knowing that we can plan against a steady cost, and not be devastated by capriciousness of misfortune…

This bailout plan and our tax system fulfills the role of an insurance company in a time of crises. Our government bails out the banks, the stockholders get some return on their dollar, and the taxpayers pay a little premium over many years to keep our society afloat…. Why? Because we like it that way… Letting anger get the best of us and force us into a cataclysmic decision that destroys our future altogether, …. well… you decide…

Quick access to easy credit is needed to advance ourselves out of this slump… It does not come naturally during times of economic crises… To open avenues towards achieving easy credit, the predominant factor is to return that confidence back to our lending institutions insuring that their lent money will be paid back with interest…. We have determined that the outside forces have the most say in the matter..As the economy shows signs of picking up, the money will be lent.. However history shows that it is slow to return to the levels of exuberance. Human nature being what it is, a “stick” in the form of lost revenues from taxes designed to penalize the hoarding of capital, would be the shortest route to chase the money out of bank vaults and into the world of business. Likewise, guaranteeing repacked toxic assets for a fee attached, and allowing that product to be picked up by private investors, not the Fed, would help move the assets off of banks books at a smaller cost to taxpayers, thereby allowing a bank’s profits to return to the business of lending out some loans……