Banking Crisis 2008

From UC_Chemistry

According to New York University's Noriel Roubini, the United States is now facing the worst depression since 1907. At the root of the problem is the connection between credit market conditions and the supply of money. Particularly enlightening references on this state of affairs are Milton Friedman's Dollars and Deficits, James Robertson's Creating New Money, and Presidential quotations about the privately owned Federal Reserve Bank.

Write Your Policy-Makers

Don't just sit there, do something! Find out all about your Senators and Congressmen on Project Vote Smart, including their contact information. These people have staff dedicated to researching the issues that matter to us, and (more importantly) what we think about them. So let them know! You can use the letter I sent to my Senators and Congresswoman Jean Schmidt as a reference to voice your own thoughts.

Scholarly Letter

Against Further Government Bailouts

Dear Senator/Congressman ...,

I have been following the financial crisis for the past year and I am fundamentally opposed to taxpayer purchase of "bad debt." To be sure, debt is crippling the balance sheets of corporations across the nation and contributing to unemployment and continued recession, however this is not the root of the problem. A contraction in the supply of money to repay those debts is causing the credit defaults which undermine the system. To provide real economic stability, we must begin controlling the quantity of money and not the rate at which bankers profit from it.

At the heart of the matter is our banking system, namely the connection between credit conditions and the supply of money. Contractions of the supply of money have preceded every major depression, and this is the key figure to which we must pay attention -- not the number of corporations which have had to write-down their assets, which can just as easily be re-valued when the recession reverses course.

To be brief, I'll support this statement with 6 points, referring to pp. 144-62 and p.89,95-96 of *Dollars and Deficits*, Milton Friedman (1968) Prentice-Hall, NJ.

1. "The rate of change in the quantity of money (per cent growth or decline per year) is closely correlated with the rate of change in (a) nominal income, (b) real income, and (c) prices." This makes it one of the most accurate and stable indicators of the pressure being exerted by monetary magnitudes.

2. The major component of the money supply consists of the liabilities of lending and investment institutions -- deposit liabilities (read: bank accounts) much more than loans and investments.

3. The Fed's decision to cut interest rates to pursue an "easy money" policy to increase liquidity can only be (as it has been) a short-term fix for the credit crunch.

4. To sustain the monetary growth we need right now, interest rates must rise. This is why banks are hoarding liquidity and the money supply (M2) has actually gone down in recent months despite massive increases in the money supply from government bailouts.

5. Contractions in the US have averaged about 20 months in length, thus any actions we do take are not likely to have much effect until after the recovery has begun; and are almost certain to last well beyond the onset of recovery, contributing the next round of inflation.

6. Toward this point, the beneficiaries of government price-control efforts stand to make huge windfall profits when the system recovers. Specifically, when banks resume 9:1 (debt:equity) lending practices, those hoarding liquidity (the very contributors to our present situation) will profit. Fixing this design flaw will require 100% reserve banking, which would disallow the banks to treat checking accounts as loan-able funds -- showing these accounts to be real money, liabilities of the Federal Reserve and not the bank.

To summarize, the "Lets buy up bad debt and wait until the market recovers to sell it back." plan is fundamentally flawed, since price controls will not allow the market to recover, but instead prolong our current depression by denial.

~ Your Name
Job Title
City, State

Letter to Senator Voinovich

Senator Voinovich,

I read today that the Senate is going to try to pass the bailout plan that has already failed in the House. The news reports that voter sentiment came in 100-to-1 against the bailout, causing it to fail on Monday. Now attention has moved to the Senate and they say voters are split 50-50 on the plan. I find this hard to believe and wanted to make sure you had at least one more vote against the bailout.

Your press release says you are voting for this for three reasons:

1) protecting taxpayers to the maximum extent possible;

2) stabilizing home prices and reducing foreclosures; and

3) restoring confidence in order to “grease the wheels” of the credit markets.

I would response with:

1) Taxpayers buying billions of dollars of the worst assets available - without even purchasing equity and a share in (possible) profits - is not protection

2) If you want to reduce foreclosures, spend the money directly on that. There is no reason to bail out the bankers and leave people with mortgages out to hang. Can't you help people with their mortgages and transfer the funds _through_ them to the bankers instead of going around them? It seems the goal is to allow banks to lend again by forgiving their debt and then giving the public even more debt that they can't afford. This is what so many people are just blatantly offended by. Small additions to the bill to help homeowners are insulting. Why aren't the home owners your priority?

3) Isn't $700 billion a high price tag to buy "confidence" in the credit markets?

Finally, you ended by mentioning the amount of our debt owned by foreign countries and the need to invest in America to make us free of foreign energy and control. This is probably the most important thing you could be doing. The economy is crashing because trillions of dollars are trading hands in the investment banks without creating anything of value. Derivate bets, repackaged mortgages, these are just accounting entries that allow imaginary dollars to change hands between speculators. Many economists believe there is no way out of a recession now. The only question is how long it will take us to recover and how painful it would be. I agree with those who think this bill will make the oncoming recession much longer and much worse.

The real solution is for the government to sponsor "real" economic productivity. Factories in Ohio need not close if you can find a way to put them to work. I believe the fundamental goal of political economics should be: anyone who wants a job should be able to work. People want to work, and if paper money or bankers credit disappears and jobs are lost this is a failing of the system.

The government has the ability to print money (we know that, because you're asking to print $700 billion). Instead of throwing that at the banks and hoping it makes them want to keep lending, why not spend that on new economic projects, new scientific research? How much economic development could really be done in our state and in our country if $700 billion were spent on creating new jobs and putting people to work?

Now is the time for a leader to come forward and put the people first, to find real problems to fix our economy and make sure jobs are available despite the problems we face. One commentator noted that if President Bush had gone into the Middle East to bring "jobs" to the people instead of "democracy", he would probably have been the most popular president in modern history. Whoever can find a way to do the same here in the United States - now that we are standing on the edge of an outright depression - will become equally popular. This is what the people want.

Thank You for Your Attention,
~ Your Name
Job Title
City, State

Letter to Congressman Chabot

Congressman Chabot,

I wanted to thank you for voting against the bailout plan on Monday. I appreciate the responsible attitude you are taking towards the bill and your concerns “that the bill lacks the necessary reforms and protections to prevent this crisis from occurring in the future.” I am among those who are not convinced this bill will fix the economy. Instead, its goal is to take on the failing debt currently held by investment banks and have the taxpayers cover the bank’s losses from poor investments. This is not going to be a profitable endeavor. If it were, Wall Street would keep the assets themselves so that they could profit from them.

Pretending that this bill will help the taxpayers is irresponsible, and I thank you again for seeing that and voting against it. I have yet to hear a good argument for why the investment banks must be bailed out while the average home-owner in risk of default and bankruptcy is left hanging in the wind. If the government is bailing out bankers it would make just as much sense to bail out the people losing their homes. Money could be directed _through_ these people and their mortgages before reaching the bankers instead of directing the money _around_ them, helping one group and hurting the other. $700 billion is equivalent to 6 stimulus checks, as given earlier this year. For a married couple that’s $7200, enough to make an entire year of house payments on a $100,000 loan at 6% - and that’s if you bail out all taxpayers. The number of people that really need help is much lower, and the amount that can be directed to them under this plan is thus much higher! Add-ons to the Wall Street bill and proposed tax cuts are just insulting when we consider the amount of money being discussed. Helping the taxpayers should be the priority of this bill, not an add-on or secondary thought.

You seem to realize that our country is facing a much larger problem over the coming years, and that the immediate concerns in the market are only a foreshadowing of that. As the investment banks fail and the money supply and credit contract, we are looking at an all-out recession that will overshadow the problems we’ve had this year. Throwing money at these failed investment banks and hoping they continue to extend credit is not the solution. What guarantee do we even have that they will want to extend new credit? The real solution is direct investment in our economy to ensure American jobs are not lost, to ensure that the standard of living does not decline. How many jobs could be created or at least secured in the coming years with $700 billion? How many loans could be readjusted, with help and new credit available from the government? The oncoming recession is promising us lost jobs, closed factories, reduced wages, and it is against these things that the battle must be fought. We must respond to the situation directly with leadership and determination. Turn this bill around and tell the American people we are investing $700 billion in new jobs, education, and a prosperous future for our country. Who would oppose such a bill? How many emails and phone calls – the same ones that come in now against this bill - would flood in expressing thanks to our leaders for putting our interests first?

Now is the time for new leaders to put forward a path to economic recovery and prosperity, one that helps the average citizen and promises him/her the opportunity to compete in the global marketplace and to share in its prosperity. Neither of the presidential candidates are doing this, and instead they have both voted for the Wall Street bill. They are content to watch our economy collapse and stand on the side-lines going “whoops…” I hope you vote against this bill once more and continue to look for real solutions to the problems we face.

Thank You for Your Time,
~ Your Name
Job Title
City, State