Friday, December 5, 2008

• Revising Government Relationship To Money

In the search for solutions to the global economic turmoil, there is a disconnect between the objective of bankers and financial institutions, and the objective of government (read: people). The global crisis presents an evolving pathology beyond the reach of Paulson, Bernanke or any other imposition. That is the great mystery and abstruse nature of money.

If current examples of frenetic activity on the levers of the financial system are any indication, no one really understands money. The actions have been more akin to transgressions against taxpayers, although where would any forensic audits hope to begin on a course to discover root causes for the overwhelming market, currency or resource price gyrations. Some well enough appreciate how to use or manipulate money, but who really understands its complexities and flux? We all make some use of it, need it, work for it, fight for it, even beg for it, but understanding it is an altogether different exercise. We leave that to the wisdom of economists and Wall Street addressed expertise.

In the past year, banks all over the world have lost billions, and many have slid into bankruptcy. Paulson’s decision to hand billions to bankers, in the hope they would loosen their grip was just that, hope. J.P. Morgan for example acquired depressed financial entities for pennies on the dollar, expanding its presence and reach over the economy. But lend? Not so much. Why should it take risks, when it is still standing after having been more diligent, or gifted with higher levels of awareness than others?

Banks will not lend in this climate of uncertainty when the term rescue has morphed from verb, or name, into an adjective of economy. Paulson did not structure his deals with effective strings attached to ensure the function of providing liquidity to businesses. If the Secretary of the Treasury’s purpose was to stimulate the wheels of commerce on behalf of taxpayers, he is failing. Europe has also taken the bank bailout route in earnest, with each country dispersing enormous percentages of its GDP hoping to diffuse uncertainty and minimize the collapse of banks.

Did anyone listening to the concept of the government acquiring toxic assets from banks not have an intuitive flutter? And with all the talk of mortgages, are we forgetting the careless lending practices that were also applied to car loans and credit cards? Without disputing the overall concept, who could possibly be chosen as the arbiter of moral behavior on such elemental questions as the application of “valuation” on these noxious and nebulous inhabitants at the far reaches of the derivative universe? Walking on water would prove a more plausible expectation. This is not a smear on Paulson. He is human. He will no doubt do what he believes to be right. Paulson’s view is that of a banker. We will not change human nature, nor eliminate greed through regulation. Although perspective can be limiting, and in the existing financial situation may act to further exacerbate the damage, perspective can be modified. This can in turn alter behavior. The banking system may be in crisis, but much of the rest of the economy is not. At least not yet. Is a very different approach worth consideration?

There are endless suggestions floating through the political maelstrom girding an out of control financial implosion that will not be corralled. We are now heading to the $2 Trillion dollar bailout mark with no end in sight, and little substantive ignition of financing activity. On the personal front, taxpayers and workers are on average currently paying interest of 6.95% on car loans, 11.43% on credit cards, with $2.6 Trillion of consumer credit outstanding.

Taking counsel from Abraham Lincoln and Theodore Roosevelt, in the hope that we might prevent reprimand from Thomas Jefferson, may we be so bold as to proffer on the Secretary a few additional suggestions on dealing with the vicious cycle of credit contraction?

Mr. Paulson,

- Send out the whole army of economists and accountants at your disposal, add more as needed, to meet with the critical cogs in the economy, businesses, not the banks.
- Disperse these troops across the country, adding administrative support from state level when needed or appropriate, to meet with companies large and small.
- Don’t ask what they need, that would be insulting since you already know, just ask, “How much and for how long.”
- Assess the reasonableness of the demands based on current audited financial statements of each corporate entity and make a decision on the urgency of the need.
- Cut the check within two weeks, and here’s the key, No Interest. None. Why should banks be the only ones with access to borderline negative interest rates?
- Prorate repayment schedules over a five year window, preferably, but remain flexible and susceptible to the capacity to repay.
- The taxpayers (read: government) aren’t in need of interest on their money. Whether entrepreneurs or employees, they require an economy that continues to thrive, provides them jobs, a roof over their heads and nourishment for their kids. They’ve already been slapped into awareness on the traps of endless credit, they will be more astute from now on. Furthermore, the national currency is not backed by anything other that the strength of the economy, ergo, until there is a change to something like gold, silver or microchips backing the currency, the economy is it. It needs bolstering and we will trust that its resurgence will provide enough gain for us to deal with the cost of escalating debt.
- Take care to ensure that proper documents are signed with equitable collateral.
- Establish very tough regulations and repercussions in order to limit abuse, kick-backs or graft.
- Nationalize the Federal Reserve if you have time, before deploying the distributors. The Fed will be less cantankerous in good time, but you must give it the good news. It will be really good news, since there will be no leveraging with 30+ multipliers on capital to asset ratios, as we have seen over the past two decades in the financial derivative escalations.
- Government will actually have accurate measurements on the money supply, and there will be no concern for where the interest owed will come from, since none will be required. 
In other words, no one needs to fry at the bottom of the financial pyramid. This will also reduce the need to infinitely create new debt.

That’s it, Mr. Paulson. Good luck.
Your Taxpayers.

While issuing legal tender is in the government’s purview, it does so through creation of bank debt. Banks distribute currency as they see fit. Even The Fed operates under the aegis of the government though it operates privately. Increasing the efficiency of the money creation system, allowing capital to flow and infusing it directly where it will most straightforwardly impact the nation’s engines will ignite recovery. Efficiency is not the primary objective, though under current circumstances, it would appear a necessary one in the mix of considerations. The current monetary and banking infrastructures claim efficiency, while the outcome is evidence otherwise.

The American economy rests on the back of the American worker and consumer. Taxpayers own the government and currency is only a tool enabling commerce. Get it working for you, not against you. With the computing power available and the internet’s ubiquity, the possibilities to become creative on the currency front within economic, political, or other boundaries are endless even to include a large role for banks.

The government just wants its tax. On the next trillion dollars, don’t waste it on the black hole of bad debt. Get this economy thriving again and get it paying its taxes. There will then be hope on the horizon that the principal on trillions of dollars of debt will gradually get paid down.

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