America could always declare bankruptcy… That would put our creditors on hold, while we sorted out our priorities and assets…. Since bankruptcy has a bad connotation, we could call it by it’s euphemism: restructuring.

Restructuring..

Now that happens all the time… Especially among those with “big” money.. I can remember even Donald Trump had some “restructuring” issues during the eighties… A meeting was held among his prime investors (it was during the planning for the Taj Majal) and he said: “look, I can’t pay you on time… Fold me down and you lose everything… Give me a “by”, let me get through this logjam, and I’ll get ourselves back on track.. You got a choice: no money now and forever, or a full return later… It hinges on the word: “later”…. So what are you going to do?”

“Uhh…… given that choice…… we’ll settle for giving you the “by”, Mr. Trump, and we’ll take our payment a little later….”

Twenty years later Donald Trump is still around.

The key to this depression really hinges on us, the investors… Will we settle for a later version of “getting our money” or will we insist on our entire amount up front right now…. Will we demand all our “two hundred forty two dollars worth”? or will we be reasonable and settle instead for :seventeen dollars and 50 cents” and a kiss from the American people?

It is us who hold the key…

It is hard when one has saved up a lifetime, to have it drop to nothing…. Yes, it is hard. But to insist on a guaranteed life of paucity by demanding payment now and settling for 2 cents on the dollar, does not serve our best long term interests. In the broad scope of things, what does serve our best interest is to be able to keep one’s home;… to have some type of income trickling in;…. to be able to get through next week, and the week after that, and possibly continue surviving until we one day pull ourselves from out of this crises by our own bootstraps… Those goals are the ones that serve our best interests!

And here is where one has to develop the wisdom, perspective and ability to see that money and people are distinctly separate and not intertwined… Here, those worried about something as abstract as assets, debts, payment plans, must realize that out there, real people don’t have food; real people don’t have a warm place to stay; real people can’t work because they have no money to get a job, and even if an employment opportunity presented itself, they have no money to even get to work….

Our assets are entirely paper… We constantly have to remind ourselves of that. Pieces of paper that represent a certain value that rises and falls; a value that has dissipated rapidly since the Lehman collapse shocked the foundation of the financial world September 15th… just 150 days ago… One day, at some future time, they will regain their value and that money will be recouped.. (If we sell, it gets recouped by someone else.) Once it returns to its value, we are financially where we were before the crises came… We, despite the fall and subsequent rise, did not lose a penny of value once that amount again reaches that point before it fell… But with people it’s different… They suffer and it leaves scars.. They too can bounce back, but they are never the same as they could have been otherwise…

That is why when making policy, we need to put people first… We are after all, people ourselves; not dollar bills.

Bankruptcy is one of our great American traditions… It is deeply rooted in the American notion that forgiveness is a better policy than harsh punishment… It is a mechanism based on practicality instead of a philosophical morality…

Perhaps our ancestors being more familiar with debtor’s prisons, understood the concept that allowing someone to continue to contribute to society was far better for everyone as a whole, than locking them away to rot at state expense… Punishing someone for not paying their debts, certainly did not make sense for the large numbers of patriots living the American dream, who had only been brought over here to empty out those very prisons…

So the concept of having one’s assets divided among one’s creditors, and then being free to go on forward, is truly an American one.. Old World mentalities could never have grasped that vision as a benefit… That idea could only have been formulated in a land “of true opportunity”.

When one considers bankruptcy, one should remember the adage: ” it’s just about money”…. For in truth, that is what it is… really… If one loses money in the stock market, (oh well)… the same principal applies as if one bets on a race horse…. (rats)… or a basket ball team… (better luck next time)… or a Philadelphia sports team……(should have known better)…. or a person with a good credit score who then gets a string of bad luck… In the end what is lost is “just money”… they print more of it every day…

So wiping one’s debt value off the books and starting fresh does a lot of good for society… It turns a liability into an asset… turning someone who is not productive, into someone who is…

If one simply accepts the reality that the money is lost anyway and can never be repaid, bankruptcy costs society nothing…

If I give you forty dollars and you don’t pay me, and I understand that you CAN never pay me, and furthermore that if I pursue the matter that you WILL never pay me, then the fact that you DID “not pay me”…. in reality costs me nothing…. That debt does not need to be on my books anymore…

Actually carrying a debt that will never be paid, is an insult to stockholders and misleading to investors… Bankruptcy does justice to those wondering where to invest their monies by forcing the eradication of false and unrealistic accounts off a corporation’s books… Bankruptcy clears the air… With bankruptcy, all parties know where they stand…

We all know it… Every giant bank in America is bankrupt. They have debts they owe which are estimated to be 2 Trillion greater than any income they see arriving in the foreseeable future… So each of these statements we get in our mailboxes (the ones which show these banks still appearing solvent), have on their balance sheets backing them up, all these securities worth nothing, which in all honesty should not be listed in the asset column at all,

But…

And this is a big but…. and here’s the rub. One day, those values will return… One day those assets will amount to a whole lot (+2 Trillion Dollars) of money… Why? Simply because they are backed up by homes out there that will one day be lived in and will one day be paying money on a monthly basis… As soon as someone moves into an empty house and begins paying monthly payments, those deeds to those properties will again be worth something…

So can we just walk away?

Let’s see….. Here is an interesting model.. Imagine you are playing a poker game in your friend’s kitchen…. It’s one of those times when everyone has a great hand and the bidding is slow and arduous and constantly keeps escalating… What started out as a dollar bet has now climbed to $150 dollars… Time is lost entirely and suddenly everyone’s spouse is demanding they return home at once…. Since divorce is more expensive than $150 dollars, a chorus of “I’m outta here”s rounds the kitchen table… Everyone walks away and since no money ever hit the pot….( it was all verbal….) the game is done and everyone exits to choruses of “see you next week”….

I’ve seen it happen three times and being only one of 305 million Americans, I’m sure that across this country it happens much more than that….

We had a virtual value with no collateral backing it up… We walked away from our promises with no cost to ourselves nor any cost to whoever it would turn out was holding the winning hand….

We each drive home and nothing in our lives has changed……

So what if… and I stress if…. there was a way we could use this example of real life and apply it to our betting on a constantly rising housing market and figure out a way we could all walk away and have nothing in our lives change?

Perhaps a brief review of how we got here might be helpful to assist the average person’s understanding of the “virtual nature” of what is going on… My apologies for not getting technical… The evidence is out there and a great source is this wonderful person… Essentially, what we are talking about is the new toy of our decade: “the credit default swap….”

Why talk about it? In just the 8 years of the Bush Presidency, this market went from conception ($0 dollars) to between a $54 – $62 Trillion dollar catastrophe….. That was trillion with a “T”….. Need a visual?

$54,000.000,000,000 = Credit Default Swap
……$700,000,000,000 = TARP funded amount

When one takes the $54 trillion mess and divides it by the $0.7 trillion relief effort passed by Congress last October…. we see that we have impacted the crises by …… a whopping 1.3%…. Mathematically it is similar to dining out and coming up entirely short on a $54 dollar tab, then plunking just 70 cents down on the table and running out……..

Need another “moment of truth”?

At today’s $12 Trillion GDP, it would take every penny from every financial transaction in the United States over the next four and a half years, to resolve this overbalance of liabilities… That means every penny spent in the United States for 4 and a half years is the amount equal to how far overextended our banking system currently is…

I think that qualifies as a debt that will never be paid…

From zero to $54 Trillion in just the lifetime of a 3rd grader… Wow. How does that happen?

Betting…basically… Gambling….perhaps….

Here is how it works in plain language.

You buy a stock…Let’s just for fun, say it is as stock in “Hooters“… Why a stock that “sticks out” like that would ever go under… is unfathomable…. but just in case some moralistic group decided to go after that company, you decided to pay a broker to insure that stock.. You give the insurance guy a fee, and if that stock has dropped when you pull out, he pays the difference of that drop to you….

Guaranteed, right? Well….. not…. quite…… bring on structured investment vehicles…..

Senator Phil Gramm removed these “bets” from being regulated when he sneaked a indecipherable rider to the American Commodities Exchange Act of 2001 in the dead of night and buried it into a 11,000 page Omnibus Bill which he had personally held up for a full 4 months in conference committee, 3 months of which had caused the social services of the Federal Government to operate in default…. and it passed buried inside that spending bill by voice acclimation, simply so Congressmen could go home for Christmas…. (If any single person deserves the finger-pointing-blame for the global economy’s collapse, it is Phil Gramm.)

That rider made these insurance bets far less regulated than those bets being made by any crime syndicate’s bookie… Even that fellow has to follow some rules to keep from getting caught….. But with the act of removing those “insured bets” from any oversight whatsoever, there was no way or no one to regulate those insurers to see whether or not they had enough assets to cover their bets,… if they lost money… Since no one was looking… that money wasn’t there, being long ago gambled away in Vegas or spent on the Bunny ranch north of town…

So all these bets were sold….in a deregulated market… and everyone began investing in them, because they were guaranteed… Now if this market had been regulated…. money would have been set aside to pay for a reasonable percentage of future defaults… But,… because of Phil Gramm’s sneakiness… it turns out when we finally looked, there was no money there… The insurance safety net was in default….

But how did the balloon swell up so fast? How did it get so big now that everyone and every thing is collapsing? The answer can be summed up in one word: “commissions”. Even a 3% cut of $54 trillion dollars is still….. $ $1.6 trillion… That’s a lot of money to put into one’s pocket…. Big Banks, who were playing these games on the side, began to realize that if they added these previously hidden amounts to their balance sheets, listing it as part of the bank’s assets, that they too could on paper show great profits, and they too, could pocket commissions unbelievable a year or two before… Human nature being what it is…. as soon as regulation disappeared, the market took off….

Everyone bet. Some bet the market would rise… Others bet the market would fall. Some bet both ways thinking they were covered whatever happened… But everyone who bet…… bet more than they had… sometimes betting $30 dollars more for every dollar in capital they held…. So when the housing market peaked and started declining, and it was quietly discovered that the insurance which was to prevent that from happening was currently in default, then all the bets came due at the same time….no one had enough money and instantly we were suddenly bankrupt… by a margin of 30 to 1.

So what happens if we just write all these toxic debts off… What happens if $54 trillion were to be written off the books and each bank were to approach its investors and say: “Look, we are short 3 Trillion this quarter because we wrote off all of these debts… Yes, we will keep these pieces of paper off to the side, and someday they may again rise and gain value, but they will never play a role in whether or not we pay out a dividend each quarter.

“Whatever”…. the world sighs… “it’s just on paper anyway”… The bank stock being held by investors, upon such an announcement, actually becomes something of value again… For the stock can only go up… it’s on the bottom now… Without the giant liability looming over every future quarter, the outlook for big bank stocks actually looks bright…

The only actual loss that occurs from doing this: is the dividend that would not have been paid that quarter anyway…

How can there be no consequences to just writing off trillions of dollars? Surprisingly as it may sound, since it was all virtual anyway, writing off trillions doesn’t really matter…

Let’s use this example to illustrate this concept… Let’s say you once had an decent medical insurance policy and over the years it covered most of what you required of regular doctor’s visits… But there was a sticky provision when you signed those hospital bills that said you would be liable to pay for any thing not paid for by your insurance company… Now between the insurance company and the hospital, several extra sets of bandages weren’t covered, and even though you were charged them, they were never used and the hospital used them for someone else… but the charge for them was $14.95 and all ten of them give you a bill of $149.50 cents…

Let’s assume that your hospital puts you on their payment plan (which you can not afford), and issues you their own credit card with a starting balance of $149.50. Since you can’t even make minimum payments, you never pay it down… It’s financially impossible. You can’t.. you simply don’t have the money… Your hospital carries that balance year, after year, and over a decade at 1.5% a month, your balance on that amount after creeping up by a little each month, stands at $905.75 dollars and cents… Now from both of your points of view, all of that interest money is virtual… Which get’s proven because after 10 years you choose to declare bankruptcy, and your lawyer sends to that credit card company a notice of your intent, and approximately 3 days before your court date, you get an offer saying they will be willing to wipe off $755.25 from your amount if you will only rush them a payment of $149.50, which will allow them to wipe the offer off the table… If they are happy with the original amount ten years later, why continue the charade of interest charges?

Instead of complying, you choose to default: What are the consequences? The hospital doesn’t care… They really didn’t lose any money… They charged you for bandages they actually gave to someone else… you just couldn’t prove it. The $149.50 spread over ten years will not make a dent in their profits… In truth… it doesn’t matter to anyone whether you pay your bill or not…

Why do they insist on it? Because some poor suckers do pay the extra $755.s5 and give the hospital the full $905.25 amount…

It’s as if your parents gave you a down payment for your first house…. Proper papers were drawn up but hardships in the form of children interfered and well meaning parties on both side decided to just let the balance grow… As it time passed, one day you get the message not to worry about paying it back.. After all is said and done, and over the passage of time, that balance is quite inconsequential… It is no hardship to the parents… It benefits the family as a whole….

So, what if we took these models and applied it to our banking crises? And said, we will continue to honor all regular commitments previously made, but these excessive paper debts, are disappearing today?

Those, like the Chinese, worried they would not get back their money …. would be relieved. The rest of the world, worried that they too would not get back their money …. would be relieved… Understandably, what they would not get back would be the soaring expectations they had once envisioned, as they saw their investments rise up 100% in value… But their capital they once expended? That would be payed back with no problem when the maturity came due…

So what mechanism can be used to do that?

Another Bretton Woods convention would need to meet and from there, a decision would need to be made stating that all debts previously on the books between nations would be resolved at the stated amount of principal plus a nominal percentage… say 1.5%…. Not wealthy by any long shot, but…. stable… Much more stable than the scares we have all experienced since the Lehman collapsed….. Right now… stability looks good.

The banks can follow suit. Wipe off all balances, then recalculate the liabilities by taking the original principal, plus that party’s accumulated interest over the time that investment transpired, recalculate the books and we all know where we stand……

If you put $13,000 into a bank…. and it crashes, you lost your money… It can never come back… If you put your $13,000 into a bank and it grew to $113,000 by virtual manipulation and then suddenly crashed down to $12,000, you are probably whining like Phil Gramm that you lost $101,000 dollars… Whether you did or didn’t… is based solely on your method of accounting….. Your actual loss of what you put it, is $1000…. So if legislation and agreements are forthcoming that give you your principal of $13,000 plus interest of 1.5%….. you should be happy… It’s not $100,000! But it’s not a loss either….

Has this ever been done before?

On a global scale, Bretton Woods is the closest we have come… But considering the gravity of the alternative we face, that after total collapse we will no longer have any financial or political system whatsoever to protect us from anyone or anything…… it is about time we make plans to join together to have another one….

But as we saw in the examples above, on a smaller scale financial transactions like these are finessed all the time and extend no harmful consequences to anyone what so ever…..

Bankruptcy has two connotations… one is scandalous … the other pragmatic… One envisions one’s neighbor hiding his head in shame as his house goes up for sheriff’s sale, or…. one see Chrysler coming back strong just a few years from throwing in the towel…

It is the latter course we need to steer our nation towards… Those beholden to the first concept, preventing the appearance of bankruptcy out of shame, have no real stake in this argument over our financial future… They apparently have given up on the future… But those of us who see a way out, still believe that by temporarily rearranging a few of the rules we play by, we can emerge from this catastrophe with our heads held high, and all parties unscathed…..

We just have to change the rules a little. Being thinking men and women… that should not be hard to do. Once done, we shift tack, and set course on a new heading … towards prosperity.