Local Electrician Solves Economic Crisis

Submitted by ARL’s foil, Mr. Harry Dexter White

Step 0.  Study “Modern Monetary Theory”

Step 1.  Give every US citizen enough money to pay off all of their debts on the condition that the money be used to actually pay off that debt.

Step 2.  Increase bank reserve requirements to sterilize all that money.  Reserve requirements should be high enough to raise consumer rates high enough to discourage further borrowing.  (100%??)

Step 3.  End all tax deductions on interest, especially mortgage, corporate and student loans.

Step 4.  End government loan guarantees.

Step 5.  End FDIC except for one govt bank that offers the most basic consumer banking services.

We clear the housing market, boost the middle class, encourage saving, shrink the financial system, break Chris Martenson’s worry about divergence of money supply and debt.

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12 responses to “Local Electrician Solves Economic Crisis

  1. Pingback: Modern (& Ancient) Monetary Foolishness | A Reasonable Life

  2. See this link for chartalism and MMT

    I’ve been reading about what a Greek return to the drachma would look like. There is some ancient legal principle “Lex monetae” that says that money is whatever the government says is money.

    The application of the principle of “lex monetae” or the “state theory of money”, which is a universally accepted principle of law, should ensure the continuity of existing contracts also in third countries’ jurisdictions. As set out by F.A. Mann (“The Legal Aspect of Money”, 5th ed.), it is the law of the currency (“lex monetae”) that determines how in case of a currency alteration, sums expressed in the former currency are to be converted into the new one. The underlying assumption is that money as a legal construction is subject to the power of the State. It is held that each State exercises its sovereign power over its own currency, and that no State can legislate to affect another country’s currency. From this it follows that it must be the law of the currency which determines what is money and what nominal value is attributed to it.

    We create money through bank lending and govt deficit spending. Govt debt is either an accounting fiction or a method of managing the money supply. Both really. We can print more money, to finance a debt Jubilee and extinguish that money at the same time by taking the power of money creation away from the banks and reserving the first use of money to the govt. 100% reserve requirement is the same as taking money creation away from banks.

    The Austrians remind us that money creation is inflation a means of confiscating wealth, a back-door tax. They are correct in this. But a back-door tax isn’t necessarily worse than the front-door tax. We just need to use money creation more effectively to fund the govt.

    Part of the difficulty of our current situation is the interconnectedness of the consequences of bad policy. Everyone agrees (don’t they?) that the mortgage interest tax deduction is bad. But it is unpleasant to contemplate the consequences of taking it away. It is bad because it inflates house prices, but a lot of reasonable people borrowed and bought at those inflated prices. A debt Jubilee with govt created money makes those borrowers whole. It makes the creditors whole. There are some serious inequities that arise from a Jubilee, but none worse than the other options.

    As for the govt bank, my feeble libertarianism struggles with the volume of financial products that are offered to consumers that are designed to cheat them. I bank with USAA, which I am fond of, but even they send me “convenience checks” that are linked to my credit card in an attempt to lure me into debt servitude. USAA still sells actively managed mutual funds. I want access to a financial institution that only offers financial products approved by Elizabeth Warren. When that is an option, I can in better conscience say to the proletariat, “You are fools who deserve what you get if you choose to bank with the loan sharks at Countrywide.”

    Smash the Banks,
    and have a nice day.

    HDW

    • Isn’t there an even more important principle: that money is whatever the market says is money. Its one thing to (by fiat) impose a money on the market, its quite another for the (real) market to accept it. We might think of quite a few examples where a definitive lack of confidence in the fiat money fostered (free) market alternatives. I mean to say that, sure, the government has that power, just as the market has the power to reject it when it isn’t sound. Debasing the currency, by any means – including the “fiction” of deficit spending (accurate enough I suppose) – erodes market confidence, as does excessive taxation, which (again in the context of your argument) may be construed as simply another form of currency manipulation, though perhaps somewhat less fictional, ha, ha.

      This thought, though, reminds me of the real underlying problem of intervention and manipulation, which is unintended consequences (which you cite too). Property rights, of course, figure highly in my own considerations. All of these mechanisms ultimately constitute an attack on property. Free markets (i.e. economic liberty) rely on the protection of property (i.e. for some, “the pursuit of happiness”). A functioning society, in my opinion, requires that protection. Thus, I agree with the Austrian POV on confiscation, including inflation, taxation, and excess regulation.

      For what its worth, my biggest concern with a debt Jubilee is that it too is another form of confiscation, even if considered to be remedial. It is true, to my thinking, that the existing credit/debt money system is fatally flawed and, one might argue, that all of the debts accrued though it equally invalid. Yet, it has been used (and abused) to amass wealth and induce servitude. A jubilee of the sort you propose, I fear, would only set those outcomes in concrete, the sort of inequities that you also cite. Is there a better alternative? Heck, I don’t know, other than merely opting out and/or hedging against the rigged game. Not ideal, but there’s no other feasible way that I can see that doesn’t utterly destroy our society through some sort of (smash the banks/eat the rich) revolutionary fervor.

      Dangerous territory to be sure, and perhaps unavoidable at this juncture. Still, taking on an idealist’s pose, I agree that the government ought to restore the constitutional role of money creation. Giving that power to bankers was, is, and always will be a bad idea. Fed vs Fed. What a pickle.

      HT

      • No. Money is not whatever the the market says is money. Markets will use what the govt says is money. That is why Argentina is such a popular investment destination these days. Because markets can’t remember the Argentinean default. What are they going to do, not trade with Argentina? What would cause the pain in a Greek default? Greece’s addiction to primary deficit. Default causes a very short period where credit is inaccessible. But it doesn’t last. People always talk about Weimar, but inflationary defaults happen all the time, without catastrophic consequences. Look at Mexico knocking three zeros off to make the Nuevo Peso. And the economy grinds on.

        I don’t disagree with the worry about unintended consequences. However the question is not whether to intervene or to not intervene.
        The question is how to unwind the existing interventions with the minimum of collateral damage.

        I don’t the the End-the-Feders including the good Doctor have thought through what would be required to transition to an economy less dependent on debt. I think the jubilee is the missing step.

        Maybe I should reverse the numbering system of the 5 point plan. Step 1 is just an attempt to indemnify citizens against the unwinding of the govt interventions addressed in 2 through 5. One of the strengths of the US economy is lenient bankruptcy resolution. Allowing people to cry “Do over!” is good for them, good for the community and good for the economy. Step is 1 is just bankruptcy resolution writ large.

        By the way I’m ok with “smash the banks”, I’m profoundly sorry that we missed the opportunity in 2008. I think we’ll get another chance. Start the whole process with a bank holiday. Forgive the debts. Smash the banks. Ask Volker which bank functions are benefits to society and which are parasitic rent seeking.

        I’m all for opting out and hedging against a rigged game. That is where my personal responsibility lies. But it is comforting to have a solution in my pocket on the off chance that Ben, Barack or Krugman call me for advice.

        HDW
        Once you go Icelandic,
        You never go Bernank.

      • Mr. White:

        Once you go Icelandic,
        You never go Bernank.

        Now that’s funny.

        OK, I understand your point regarding money…all I mean is that market confidence is necessary for it to function. The market is always seeking, if not ever quite achieving, efficiency. When your money becomes a cost rather than a friction-less means of exchange, it is unavoidable that the market resorts to alternatives. On the small scale, as I mentioned before, you get more barter, not very efficient unless you take into account paralyzed credit, onerous taxes or other regulatory burdens, and inflation or currency exchange risks.

        One reason commodities get popular is their (often) fungible utility as a means of exchange. Bonds, of course, have always played a central role here, but as they actually represent a debt payable in the fiat currency, their value has come increasingly under challenge along with the underlying currency. I even have a feeling that, at the moment, Credit Default Swaps are having somewhat more utilitarian value as a means of exchange than their underlying securities. It is true that none of these replaces outright the role of the fiat currency, at least in the payment of certain debts, notably taxes themselves. But the market will minimize it’s reliance on that form of money when it fails to fulfill its basic role in the economy.

        I daresay the dollar has been the unofficial money for a good part of the world for many decades, regardless of the local fiat. So, what happens when you destroy a currency? Of course, life continues, or rather the market continues. We don’t actually need the banks any more than we need any particular currency. The market is fully capable of adjusting to other means of finance and of exchange itself. I might differentiate how that would happen on the global trade market vs in the domestic market, but it isn’t all that uncommon for domestic markets to adopt another country’s currency or some other means of exchange, even if it is only temporary.

        In your Jubilee scenario, which I agree is nothing more than one huge bankruptcy, the collateral damage done to our trading partners – those who would then be holding worthless dollars – would obviously adjust too, but it would take a while before they began to trust the new currency. The price of tea from China would be higher for a time, just as American goods were in Argentina for a spell. Sure, a new equilibrium would be established, but – whew – there’d be a whole lot of upset in the mean time. Doesn’t have to be catastrophic, of course, but it sure can be. Weimar did play a contributory role in WWII, after all. (Not to mention HDW, ha, ha.)

        Where I’m sure we agree, though, is that the current situation is just THAT bad. It’s so bad that it is going to be (IMHO) globally transformative in the end. How bloody the transformation might be is still a big open question. No easy way out of this. You might be right that a Jubilee scenario is the easiest, but – aside from the fact that it will never happen (let’s face it the banks do want to own everything, just maybe..for the moment at least…not your house, ha, ha) – it still presents significant risks, political, geopolitical, and logistical.

        But, hey, let’s keep playing with it and see where it goes. How do you manage to secure continued food or fuel imports in your scenario? Let’s just start there.

        HT

      • Part of this comes from a post read on “Fraudulent conveyance”. Used to protect American farmers against British financiers, it says that if the lender doesn’t have a reasonable expectation that the borrower has the ability to repay the loan when the loan is made, then the loan contract is fraudulent and invalid. If you put up your house as collateral, and I lend you ten thousand dollars with a contractual agreement that you will repay me $2 the first month and then double the payment for the succeeding 24 months, I don’t get to keep your house. If a bank writes a no money down mortgage to a Mexican strawberrry picker, he ought to get to keep the house, and the investors that got sold the fraudulent loan ought to eat it.

        HDW

      • Regarding MMT, read this article at Von Mises and let me know what you think.

        HT

      • MMTers hold that the sovereign issuer of fiat currency can never become insolvent. For the MMTers, the point of taxation isn’t to raise revenue for the government, but rather to regulate aggregate demand.

        I haven’t time to read the whole article, but this quote from it seems like a good summary of what is true about MMT.

        HDW

      • I think that the analysis at Mises is consistently disappointing. This article does nothing to disabuse me of this low expectation. MMT does not say that deficits don’t matter. Obviously because deficits are money creation and money creation matters. Hence the usefulness of taxation.

        The mises folks hate fiat and dream of gold so much that they can’t think clearly about fiat.

      • Mr. White:

        So, let me get this straight: You like fiat, you buy into MMT, you think taxes and government spending are useful tools of managing the money supply, and somehow reconcile the unfolding disaster that has resulted from all of the above with a desire for some version of semi-libertarian, anarcho-capitalistic, small-scale, decentralized distributism. And, of course, you want to “smash” the very institutions that dreamed it all up to begin with. I gotta tell ya, I’m starting to suspect that you’re simply bucking for membership to our (ARL’s) Cognitive Dissonance Hall of Fame. Do you now want to explain how inflation is a great alternative to actual growth? Seriously, all you have to do is ask. Honorary memberships are freely given.

        Oh, I know, you simply want the power of printing press taken out of the evil bankers hands and put back into the rightful hands of “the people”. Sure, that’ll work lots better. Plenty of disciplined thinking going on up there on Capital Hill. Maxine Waters can head up the committee. Maybe Al Franken can help. But, let’s face it, It’s not like they aren’t actually going to hire bankers to do all for them anyway. And, besides, in the wake of Nixon (closing of the gold window), all of our “money” is now backed by Treasury debt anyway, so I really don’t see any material difference regarding who’s actually issued it. Finally, the only Jubilee’s you’d ever get out of these bozos are just like the ones we’ve already been given: TARP I, TARP II, QE I, QE II, Operation Twist, and whatever else they’re doing that they don’t dare tell us about yet.

        Well, I’m getting up early to go fishing in the AM, so I’ll probably have to get back to this, but I’ll leave you with one or two more provocative questions (though you’ve not answered the last one yet, btw). But, if, on the seemingly remote chance you’re not simply playing out a little HDW jousting match here, consider how might anyone expect to use this fiat money that you admire so much as a store of wealth, how one might price the money itself, in short how any market can expect to be so ludicrously dependent on such a whimsical and corrupt instrument.

        I myself tend to believe that there were rather good reasons for the constitution to specify what money ought to be, so, no surprise, you can put me in the Mises camp. But, heck, I’ve only spent 50+ years being cheated by these money printing hacks. I’ve still got a few good years left in me to find a way to cheat them back with my own Hot-Potato-Paper-Ponzi scheme, the only thing that seem to work in this system. Of course, I’d only have to be willing to sell my soul to do it.

        But, why we waste any time at all wondering how it is that corporate greed or political corruption is so out of control is beyond me. What’s the alternative besides inflation-eroded and/or debt-busted poverty? There’s your honest wage for you. And, all for want of a sound currency that lies beyond the corruptible influence of flawed leaders and bankers. It’s no wonder at all that the majority of “growth” (for lack of a better word, but, heck we use it to describe metastasizing tumors too) this country has experienced for nearly 40 years is in the financial and public sector. Very productive,all of that. Sort of proves the (Mises) author’s point, don’t you think? He, like me, was actually talking about the “real economy”, you know: the one where actual goods are produced, where wealth is saved and invested, not spent into creation by a bunch of self-important clowns and their army of OCD-suffering bureaucratic “public servants”. (You might just want to revisit “Brave New World”, you know? Maybe “Animal Farm” too.)

        But, that I take this position probably doesn’t surprise you all that much, now does it Mr. White?

        HT

      • Harry:

        I didn’t say I like fiat. I can do fiat, or I can do gold. But if we are going to do fiat, we could do it better. We could give govt first use of the fiat dollar. Yes, it falls short of the gold denominated libertarian paradise, but I don’t think it consigns me to the CDH. In 2008 I didn’t understand enough to have an opinion about whether the bank bailout was necessary or not. “If the banking system collapses there will be food riots in the streets.” Well this is my take now. Take the newly created bailout money and use it fix the financial system instead of giving it to the perpetrators. There is a material difference in who issues it. By the way, all of this is my answer to your “Pick my Bones” post. We would be better served by a banking system run by the US Postal Service.

        As for the “real economy”, “the one where actual goods are produced” I don’t see much shortage in “actual goods.” So something must be working ok.

        Have fun fishing.

        HDW

  3. Regarding your “Jubilee” concept, I’ll need to give it more thought. Can you give me the high points of “MMT” that you are drawing from specifically? I would generally be on board with items 3-5, though not sure about a government bank. I suspect that changing reserve requirements wouldn’t be necessary if money creation were taken away from the banks, but if left with them, of course, increase them. Still chewing on items 1 and 2a. Will study this more.

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