Addiction Economics

February 2, 2009 | 8 Comments

It’s not “voodoo economics” anymore. The U.S. Congress with an army of special interests bent on getting their losses covered by anyone other than their own capital have already cleaned the whole economy out of $700 billion and are busily setting up for spending hundreds of billions more if not more than another trillion dollars. Politicians have inserted themselves by acclaim from the special interests and a compliant media and press into managing (stimulating) an economy by government addicted to spending, again after spending and spending. Its not that an idiot doesn’t know by now that spending using credit by businesses and consumers have driven the economy to this point already. That’s a Major Clue right there.

An economy is like a living organism that’s made up of people and businesses, so adding stimulants is just like taking drugs. The people and businesses live by getting what they need trading goods, services, labor, expertise and charitable acts with each other. Money is used to keep count, establish a common value and make exchanges with everyone. Money represents wealth, the paycheck is a summation of work, with the same value across the nation, readily useable to make exchanges with others. It works pretty well. It’s why it is so important that deposits made in banks are safe and guaranteed – so that exchanges can go on with the greatest possible confidence. Deposit banking is about cash, its safety is a prime concern for everyone, not something you would want full of dope.

It’s just a little astonishing that so many believe that more government spending is going to fix an economy or stimulate it in a meaningful way. The notion of taxing, borrowing and creating money and moving it to known losing propositions is a hysteria of a few infecting the economic organism of the many. It seems like the alcoholics or drug addicts have seized control, spending more, seeking a stimulus in a drive to oblivion. It’s time for cooler heads to take control.

There are sound reasons now to get busy on resetting the economy into a healthier condition. This isn’t so hard, what happened is easy to see. Just like economic bubbles through history, the housing bubble was sure to bust, just like the dot com bubble before that. People being people rush at opportunity in large numbers filling bubbles, they are not new and are not bad things when deflated naturally. But pop one and the sound and the instant disappearance are damaging just like an explosion. Pouring in money by government spending stimulus will not make a new balloon, only the slow revaluation of the property involved by cool heads will restore a market, but the balloon is forever gone.

A “fixed” economy isn’t about more government spending. A “fixed’ economy is an organism filled with confident people and businesses. Confidence and certainty in working, spending, saving, investing and building are what make an economy healthy, not quick highs from stimulants.

No amount of government spending will restore the price of houses; only an addict could believe that. But fixing the problems that created the bubble are exactly in the province of government. The government’s own businesses known as Fannie Mae and Freddie Mac both engaged in funding loan products that drove home prices so high. The money they used from selling securities made up of sliced diced chopped and reformed mortgages, was simply a securities fraud with the complicity of rating agencies. The only way back is to unslice, undice, unchop, and truthfully reform the securities so securities holders know what they have. They’re going to lose some capital.

The homebuyers have a role, too. Everyone across America has seen a drop in property values; lots of home equity just disappeared. But to have law that prohibits writing down loan principals, so insuring the lender at the full expense of homeowners is fraud too. Lenders as well as buyers both assumed risk in the mortgages, forcing one side only to a loss doesn’t even save the other as a foreclosure itself likely will involve a loss of capital, further depressing prices for everyone across the nation, and the loss of a customer. Even bankruptcy courts are prohibited from readjusting mortgage terms – an idea from the false belief that home prices would never go down and the pressure from the “special interest” of mortgage companies to gain an advantage in bankruptcies. These situations harm everyone, and destroy the confidence in the housing market with deep repercussions across the entire planet. No fix in sight from Congress – just more stimulant spending.

The other dominating issue is the “credit crises.” Well, it’s not a “credit crisis” after all. It’s a securities value crisis. The plunge of mortgage-backed securities affected all forms of securities; this time much more than usual as the mortgage backed securities are a huge market. But the only reason that the mortgage securities crisis affected banks is that the “banks” aren’t really just banks. They are “bank holding companies.” The facts are that most deposit taking and loan making banks weren’t in any particular trouble, but the holding companies who own the deposit banks and the securities firms and insurance businesses lost huge amounts of money, far, far beyond what the deposit and loan making banking businesses could make.

Bank holding companies are a renewed mistake. America learned during the Great Depression that allowing the combining of businesses such as deposit and loan banking with securities firms, insurance and other financial activities was a mistake. But clever lawyers, special interest pressure and relaxed interpretation of regulations opened the door for the fiasco to happen again. Deposit and loan banking is well known as a business that’s critical for an economy, it’s the cash and cash flow mechanism the moves the money from one cell in an economic organism to another, that’s why deposits are insured, guaranteed to depositors so the economy does not simply lock up in a seizure.

These facts make it clear that “bank holding companies” must be dissolved as soon as possible. The risks to everyone from the combining the risks of securities to the cash deposits of people and businesses is grossly irresponsible. Deposits being cash are of the full faith and credit of the nation, legal tender both private and public, and exposing them to risk is the highest form of foolish irresponsibility. Have I made the point? Banks must stand free of commingled ownership.

Securities businesses or, ugh, investment “banking” is a topic in and of itself. For today I’ll just remind that securities are not cash money, they are investment tools to gain value or earn an income. They are not cash deposits, so they can and must go up and down in value, pay an income or fail to do so. They are connections to the business or government that use the money paid for the security so making the security owner directly tied to the fortunes of the security issuer. But here the “confidence” is supposed to be about the individual business or government. The trouble started when the securities business and investment “bankers” invented new products that mixed together a purée of interests and in some securities even packaged the risk itself. Now all that’s fine, but no one explained that those are not securities in some one real thing, they are just gambling on the perceptions of the market. To call them and treat them as a unit of wealth known as securities is another fraud.

There are this humble writer’s opinions on the fast moves for an arrest of the economic fall and setting a minimum stage for a recovery. Meanwhile we are being entertained at great expense in boondoggle spending by politicians addicted to easy answers instead of doing the public’s work. Well, if they’d been doing the public’s work none of this would have happened.

Keep in mind there are only three known ways from history to act: boondoggle spending, a known way to fail to address the problems and just aggravate the misery, inflation which only serves to again fail to address the problems and aggravate the misery in a much more difficult and damaging way and lastly, fix the problems that caused the collapse in the economy and its confidence, absorb the losses and get back to work.


8 Comments so far

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