The Fourteenth Banker Blog

August 8, 2010

Big Problems Require Out of the Box Thinking

Filed under: Running Commentary — thefourteenthbanker @ 3:26 PM

This week, very late in the game, the big banks revised down their economic growth forecasts. Bloggers (which many times means economists that are not on the paid staff of corporations or the government) have been predicting this for perhaps six months. Of course, getting people to buy financial instruments generally requires a certain optimism.

We are at a point where ordinary policy prescriptions seem fruitless. Take for example this post by Gonzalo Lira, which points out exactly that fact. After a long and commendable preamble, Gonzalo has some suggestions for drastic steps. For example:

If I were absolute dictator of the United States, I would ignore both of these policy “choices”. Instead, for the sake of the long term health of the American economy, and the other world economies intimately connected to it, this is what I would do:

•Allow interest rates to float at the whim of supply and demand. The Fed would provide liquidity, but only at market rates, never subsidized.

•Impose a flat tax across the board of 15% for individuals earning any income over the minimum wage, 25% for corporations, a 20% national VAT, and impose a capital gains tax of 40%, with no loopholes, subsidies, tax breaks or tax write-offs—not even amortization or depreciation.

•Cut government spending to the bare bones, until the budget is balanced. Cut military spending to 10% of what it is today.

•Eliminate Social Security and Medicare/Medicaid, and impose a private but highly regulated pension and health care system, like the ones here in Chile (which are damned good, BTW, and which were also, unsurprisingly, imposed by a dictator—but are still going strong 20 years after he left)

•Cut the Fed’s life-support of the Too Big To Fail banking system, and let those zombies die already. While we’re at it, prosecute the banksters.

•Finally—and this is the tough part—let the economy crash: Let the asset prices collapse to sustainable levels, and let aggregate demand collapse to sustainable levels.

If the above measures were imposed, and the U.S. economy were allowed to crash quickly, harshly, unemployment as measured by U-6 would spike to 50% or 60%, and hang around 35% for a good six months before slowly settling to 20% in a year or so—which is where we are now. Half the S&P and all the Too Big To Fail banks would go broke. Imports would evaporate. The idea of America as a consumer society would be gone almost overnight. There’d also be riots and general civil unrest for a year or two, but nothing that terrible—Americans are a remarkably docile people.

What would happen after that? What would the U.S. get for this short-term pain and suffering?

The two thing needed for true long-term prosperity, from where the U.S. economy is today: Asset price levels would collapse. And aggregate demand levels would also collapse.

It would mean that trading—in whatever assets—would cease to be financially beneficial, and instead production would reassert itself as the form of social wealth creation.

It would also mean that mindlessly consuming would also cease to be a macroeconomically beneficial policy priority, much less a personal goal. It might even lead to a truly Green economic mentality—true conservation, as opposed to the pseudo-brand, where buying more and more “green” stuff is supposed to be “helping the environment”, when of course it isn’t.

These measures would all be very painful—adaptation always is. But this approach—what I would call Free Market Redux—would be the healthiest way to rebuild the U.S. economy, and frankly American society.

While these particular prescriptions are just some of many options, what strikes me is that to implement them requires a disregard of the current powers that be, the First and Second Estates. There would be fallout and it would hit those classes.

Our own Jerry J made another suggestion in a comment a couple days ago, which also strikes at the heart of the current power structure, albeit in a different way.

I am surprised that there were no comments on the obsolete character of the American Third Estate. This relates to the link by 14th to a Salon column by Michael Lind titled ” Are the American People Obsolete” by Michael Lind.

Lind sees that Americans will allow outsourcing of employment to their absolute detriment and that Americans no longer have the ability to sustain marketing of goods and services in the US. He is correct but omits a massive parameter. What are the per capita parameters of all US sourced claims on persons , corporations, states and state units? Similarly, what are the same parameters applied to other states that would replace future marketing of goods and services sought by the US population?

No matter what, first estate wealth survival requires the generation of personal income to amortize the claims on these US persons and groups over and above some personal income level to enable the desire to amortize the claims over a number of generations.

The elites destroy themselves. In doing so, they collapse the existing system. If the third estate is obsolete, then the third estate could politically cause all debts to be forgiven as well. Our kind of Terror could be via currency. Easily done constitutionally. Probably as easy as the Weimar Enabling Act of 1933. Congress may grant sums to the citizen. Congress say, authorizes United States Notes again. Grant each citizen United States Notes as universal legal tender. Pick up the money at the post office. How about a grant to natural citizens of $2 million each. The posting of the money at a central point forces issuance of say a mortgage release. The elites and their institutions then have all cash in the form of US Notes they can spend. Almost all are free and clear and own their assets outright. Obsolete is obsolete. Ha Ha, I could not resist this one. Sounds ludicrous? Why, if the natural person American national is obsolete from a discussion point? For years now, the right wing has been saying the US government cannot pay back it’s debt when , in point of practical fact,government debt functions as a currency form at the top. All that prevents full circulation is the fact that Treasuries are registered. Registry is only around 35 years old. Before that most Treasuries were bearer as were corporate debentures. Amend the IRC and remove the registry requirement.

Seriously, the always ignored aspect in these types of commentary is that elite wealth almost totally depends on claims from other Americans. Indeed, the shoe is on our foot because we owe trillions to the other nations who would wind up with legal tender too!

The elites are simply destroying themselves in the US: In a fashion that is remarkably close to broad spectrum Marxist expectations.

Comrades come rally…………..?

Again, this prescription defies conventional wisdom. To sum it up, everyone is given a pile of cash with which they then use to repay in full all their indebtedness to the elites. The elites then have a pile of worthless money and everyone else is debt free and has no more house payments. Instead of the Feds inflating its way out of its debt in a way that is carefully formulated to preserve the First Estate, it does so in a way that liberates the Third. Interesting thought experiment. In the resultant turmoil a lot of people get hurt, but it is not only the Third Estate. A lot of people are helped. The reformulation of the economy would create enormous economic activity.

I put these thoughts out only to point out that we have self-limiting economic beliefs that foreclose almost any option other than the slow rot of our system by the protection of the status quo. Economic suckers all, we realize not that our prosperity has already been outsourced by the very transnational companies and their executives that cry out, “Free Enterprise, Free Enterprise!”, a sort of revealed wisdom myth that they use to their advantage while ensuring their personal security by looting the system.

Nothing should be done in haste. But Washington should adopt a new credo. Listen to the radicals. Listen to the people. Listen to the elites and then give their point of view no more credence than the others. Standing in the way? Our system of non-representative government where gerrymandered incumbents don’t really have to deal with free elections. From our Declaration of Independence:

That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

Our system of government could restore its promise. In gerrymandering districts our states have done a huge disservice to the people of this nation. The trading off of one minority seat for five majority seats may have once served a purpose, now it has been abused.  Brave judges should throw out the principle underlying the design of congressional districts by elites. Every seat should be up for grabs in free and fair elections. If the populace had the opportunity to drive major change in the House of Representatives, perhaps 200 new members instead of 50 with party shifts in 150 districts, then the government would be more responsive to the people. That was how it was designed to be. The Senate provided the term stability. The House was responsive to the current mood of the country. The White House and Judiciary provided checks and balances. Now seats are sold out. Further, hindrances to third and fourth parties should be abolished. A multi party system would bring greater diversity of thought to Washington.



  1. In going through some old papers, I came across an article from Business Week Online that was dated Jan. 2005, titled, “The China Price”. It laid out how rapidly our manufacturing base was being hollowed out even then, how much of a race to the bottom we are engaged in. I was reminded that money knows no allegiance to country or people. The men who trade in money don’t either. I don’t support a VAT or a flat tax because they are regressive. So, I say we should let corporations off-shore whatever they want, but for every dollar’s worth of investment they make overseas, they will pay at least 50% to the US Treasury in taxes. As I understand it, right now we don’t even make them pay full taxes on their domestic profits, forget trying to tax their off-shore profits. So, instead of taxing their profits, tax their investment capital. I’m sure this is simplistic and probably not doable, but it would sure as hell make ME feel better.

    Comment by Sandi — August 8, 2010 @ 4:32 PM | Reply

    • Something along these lines must be done. The question of what is right for the home community is never asked.

      Comment by Amos — August 9, 2010 @ 8:09 AM | Reply

  2. There are interesting parameters to the unorthodox idea I tossed out. The reason for the very high grant of currency is to force quite a number of things before the currency is revalued at some point in the future after the deed is done. One effect,as an example, would be instant co-op status for mass rental projects like the bankrupted Peter Cooper Village and Styvesant Town in Manhattan. The property carries enormous debt being foreclosed. Simply divide the total debt by the units and the tenants wind up with a co-op share. NO time for condo conversion. Another aspect is the effect on producer corporations. After the funds flow through and the morass is settling down, the corporation owns all it’s physical assets and intangible intellectual property but has little or no debt. The shareholders own the works free and clear. True, the corporation has no cash or worthless cash , no receivables either, but there are also no debts to pay. Pension plans and such would wind up with equity shares by some sort of arbitrary arrangement enforced by the state. Obviously , future claims not yet triggered as debt would remain.

    The losers here are those that own debt and that means the end of banking after seven hundred years, as we know it. A new anking system would need to be put in place.

    But the crux of all this is that unless the elites force the generation of income of retail debtors to the banking system, the entire system would collapse. Current US policy will collapse it’s own money system under present policies and trends. What comes with this collapse is an anarchy and terror no one could adequately describe assuming foreclosures and nasty collection efforts from people with no income. It means the literal elimination of present elites by falling back into the same abyss as the Third Estate or else. Just how much total uncollectable debt losses will terminate the system in a panic cascade we have already experienced as possible? In my view, that number is at most 25 %. I am talking actual cash losses of retail debt , then magnified into mass collapse by secondary and derivative liability triggers. The USSR had some things going for it that we do not. First, everyone rents from the government. They simply stopped paying rent and utilities and people had shelter and warmth. They were not turned out in mass onto the roads like the French in 1940. Our system unless swiftly terminated would massively turn people into homeless wanderers in a cold climate.

    So, present policies will ultimately cause mass death unless the debt is terminated simply by decree with no systematic solution being available.

    What I suggest as a thought experiment is a systematic solution that would avoid huge problems.

    The part I did not discuss is the second part. Insuring distribution of goods and services. No such system could be put together in the anarchy of a debtor collapse that the present elites are insuring will happen based on their views being implemented.

    Comment by Jerry J — August 8, 2010 @ 4:46 PM | Reply

  3. Or…

    You could order the FDIC to only insure 80% of assets, and then repeal the Federal Reserve act of 1913 and order Congress and the Treasury to follow The Constitution (with the books open and able to be audited at any time by any one).

    Same effect, less work, permanent fix.

    Comment by dnarby — August 8, 2010 @ 8:52 PM | Reply

  4. The problems that have developed with elite dominance are of the ever reappearing type throughout the history of human commonwealths of any complexity. Read Jared Diamond’s chapter on the Chaco Canyon Anasazi and tiny Tikopia Island. Compare to the history of China over the long run. Big or little, commonwealth dissipates. Ours is at the edge of collapse from the next crisis that cannot be interdicted.

    American’s pride themselves on having organized the most lopsided of Commonwealth arrangements. Dual citizen Federalism. There is only ONE linked elected Federal election of state officials representing all the sovereign states and the dual citizens. The framers thought they had this problem of Federal linkage of the sovereign states licked with Senator’s being appointed by the legislatures.

    Our political system is profoundly local in nature and therein lies the problem that creates commonwealth destruction of activities that, by nature, are only administrable by the Federal sovereignty. Any corporate type charged with dealing with the state for the benefit of the corporation understands that our system provides unequaled opportunity to split political action away from the general commonwealth of the citizenry.

    Complexity is the perfect handmaiden to isolate the state to your benefit. The elites have now set the stage for their own demise by putting virtually all of their wealth into compromised assets… claims on retail debtors, while at the same time stripping away the earning power of these same retail debtors. These elites either increase income for retail debtors on a stable long term basis or reduce debtor claims and absorb the losses . The latter is a short term solution. It is no accident that the economic growth of the west compared to elsewhere grew exponentially due to bank credit since the renaissance. Consequently, a reduction of claims against retail debtors must be offset by new credit opportunity based on increased incomes of retail debtors. The finance economy requires massive commonwealth among the citizen groups or it passes into oblivion. That oblivion looks to be underway for natural reasons related to long term over supply of labor and natural sustainability requirements now emerging into human understanding.

    The present invested capital cannot be recovered.Claims on retail debtors are invested capital since the funds were spent by the retail debtor. In general though, complexity requires very long term investment not rendered a loss by innovation. We require innovation that at the same time kills us through lack of foresight.

    The weak state is unable to settle the issues in every key area so far as I can figure out. The very structure of the state prevents the commonwealth issues from balancing out. The Roman Republic was in this situation by around 100 bc. It took an Octavian to create a settlement. Even so, that settlement only lasted around six generations before senility again set in.

    The next major finanancial crisis that balloons to the size of the autumn of 2008 will almost surely force a major,very rapid, political and economic settlement. Like Paulson’s TARP proposal, only it must work and very quickly. That means debt cancellation of some type that addresses future earnings of US debtors.

    Comment by Jerry J — August 9, 2010 @ 12:41 PM | Reply

    • “What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?” Adam Smith

      Comment by thefourteenthbanker — August 10, 2010 @ 7:38 AM | Reply

  5. Here is an old article dating to 1997 by Jacques Attali one time president of the European Bank for Reconstruction and Development. It ran in Foreign Policy.

    The piece is really , really good and is titled ” The Crash of Western Civilization: The Limits of the Market and Democracy” Foreign Policy , Number 107, Summer 1997, pp 54-64

    Subsequent events make this piece electrifying.

    Comment by Jerry J — August 9, 2010 @ 3:39 PM | Reply

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