A Fundamental Shift in Thinking about Economics
In a system where wealth creates more wealth [see 'compounding interest'] there is an inherent conveyor belt constantly moving wealth steadily higher in the economic food chain and into the hands of fewer and fewer entities. The financial system we live in follows the law of compounding interest the way the flow of water around the world follows the natural laws which transform it from oceans, to rain, to rivers before joining the oceans once again.
This truth has managed to evade most of the economic policy makers of our time- up till and including the process generating solutions to our current financial crisis. The solutions accepted by the government are yet more examples of the continuing power of the ‘trickle down’ theory. By providing the largest financial institutions access to the government’s funds [through the new congressional bailout plan, the commercial paper proposal, the bailouts of AIG, Fannie, Bear etcetc], the government has decided to pour money into the top of the system, and hope that it trickles down to the plebeians on the bottom. That concept is fundamentally flawed, since the nature of compounding interest works in exactly the opposite fashion. I propose utilizing an essentially different theory as the guiding principal of whatever action may be taken– since money moves up the system, injecting it into the bottom will be more effective than pouring it on top. If anyone has noticed, ’smart money’ seems to agree with my assessment as to the overall efficacy of the plans being enacted around the world, as each day brings another historic step on the part of government, immediately followed by another drop in every market around the world. Until you begin to fix the fundamental basics of the system, there cannot, and will not, be any real solution.
While recognizing him as being one of the architects of our disaster, I will agree with Phil Gramm on one of his more recent points– he described the situation as a ‘mental recession’, and it’s the truth. A lack of confidence in the debtor’s ability to pay has seized up credit markets around the world, forcing LIBOR higher and higher, and pushing terrified investors out of every market, instead stuffing wads of dollars into their mattresses. This is another place where the laws of the system can be applied- you need to instill confidence in the bottom of the market, and the top will feel its effects.
None of the proposals enacted thus far have had the desired effect, since none of them have effected the root problems. Foreclosure is through the roof, the cost of every necessity from food to energy has skyrocketed, health insurance is becoming rapidly inaccessible, and unemployment is rampant. That doesn’t seem like a situation to inspire confidence. Until those factors are addressed, our ‘mental recession’ will continue, and the crisis will slowly envelope every sector as a self fulfilling prophecy preventing the credit transactions which are the lifeblood of modern business.
Now is a time for creative thought, to think outside the box, to address the problems with organically developed solutions that are aware of the landscape and aren’t just imposed with the sterility of a piece of financial modeling software.
Since the pop of the housing bubble was the fire which exposed the rotten beams of our home, that fire needs to be put out before any new construction can occur. I’ve heard it proposed, but there hasn’t been enough focus on the idea of putting a moratorium on foreclosure and getting a promise from the government to force the refinancing of every defaulted mortgage in the country. This positive effects will be three fold, and will begin instantly.
If the people of the country feel like their government is going to do something which will actually help them when they need it, ‘consumer confidence’ will increase, and that increase will travel all the way up the market, through their mortgages and lenders to the securities which they back, and all the way to the foreign markets which are increasingly turning their eyes and funds away from us.
In the instant that foreclosure rates artificially drop to 0%, the people stay in their homes, the banks have a stream of income, and the assets of the larger banks reappear on their balance sheets as quickly as they vanished.
If you want to see an example of how the process would work, look at the actions of Countrywide in the face of their lost lawsuit on predatory loans- they’ve sent out the hordes of brokers to rebuild the world they helped to turn into a house of cards.
With people in their homes and holding mortgages they can afford, consumer spending can increase, positively affecting all of the industries suffering currently- retail, restaurants, consumer electronics, etc.
With the house no longer ablaze, time and focus can be spent to rebuild with systems which make sense- transparency and regulation come instantly to mind- and we can avoid having this happen again.
Reed Mollins
reedmollins@gmail.com