Banks can loan out 90% of all of their deposits. Investments banks and many other financial institutions can invest 100% of their deposits. What has happened recently is that the banks and other financial institutions have been investing in each other and artificially inflating the value of their capital.
Just imaging the effect of a well regulated bank taking 90% of its deposits and redepositing that money in a neighboring bank. And that bank, in turn, does the same thing back to the first bank. The apparent capital of a commercial bank, then, can be extremely inflated. This effect has been even more extreme in other financial institutions. More ‘fake’ capital, (money), has also been generated in a similar way by financial markets and by the new fangled products that traded there. The result is a lot of ‘paper’ wealth has been generated and used as collateral for investing in ‘real’ wealth; such as real estate.
Now, that fake money has evaporated leaving everyone with more debt than real money. The result is deflation; the value of money increases compared to the value of other property. In other words, a dollar can buy more tomorrow than it can buy today. That is why the trillions of dollars injected into the economy by the government are not yet causing inflation. Those cash injections are only filling in the void left by the evaporation of the fake money.
But governments are clumsy managers. Chances are they will inject cash until the economy has recovered enough to inspire businesses to spend again. And for reasons stated in other parts of this blog, that will is going to take an exteded period of time. By then businesses would have hoarded so much cash that they will go on a spending spree. This, combined with all of the other cash injected by the government, will inevitably inject too much cash into the economy.
We will experience a lot of inflation when that time comes.
The reason why the economy is collapsing is because too many average consumers have lost their purchasing power. From the beginning of the crisis this has been obvious. So why are policymakers concentrating on implementing a trickle-down approach to rescuing the economy?
They have put their faith in the directors of big businesses to save our economy. Almost all of the cash meant to rescue the economy, (last count = more than 2.7 trillion), has been given to them. This is despite the widespread belief that free markets most efficiently direct investments to where they would be most useful. Our leaders need to remember why free markets work well.
Free markets democratize the economy. They give consumers the power to direct the economy. Consumers do this with their purchasing power. They give money to sellers and investors who offer the best deals for the things consumers want. In a free market anyone can hope to become a self-made business magnate. And the customers get to choose them. Free market economies serve the will of the people.
Our free market economy is quickly disappearing. The people have lost their purchasing power and Congress has abandoned them. Money for saving the economy has been given to the leaders of big businesses. They are not investing that money in people who would compete against them. The directors of big businesses are using their purchasing power to help themselves. Regular consumers are left to fend for themselves.
Congress’s mistake must be corrected soon. The bailout money is being hoarded by big businesses that are laying off employees. More consumers are losing their purchasing power. If centralized control over the economy remains for the long term, then innovation would probably be stifled by timid bureaucrats and big business leaders eager to protect their profit margins. The situation is getting worse.
Policymakers and Congress can easily correct this situation. Simply direct the bailout money to average consumers. Let them choose which businesses deserve a bailout. Chances are almost everyone will get what they want.
Posted in bailout, economy, government, markets, policy, Principle Ideas, Problem, Solution
Tagged bailout, big business, Congress, consumers, economy, free market, Solution
If you are one of the women bitter about Barack Obama being the next President of the USA, then here is some comforting news for you. Hillary may be President in eight years.
If America can elect Barack Obama to be the President, then it certainly can elect a woman to be one too. Discrimination against women in American society is not more severe than it is against African Americans. Women are the majority of the electorate. Male African Americans don’t have that advantage. But an African American male has competed directly with a white female and has won the race for President. Discrimination against women cannot be why that happened.
But American culture can be blamed for having an important role in Hillary Clinton’s defeat this year. Traditionally in America women have enjoyed being considered the kinder gender. Even today women are expected to be more kind and nurturing than men. But it is difficult to imagine nice people surviving in the mean and dirty world of traditional American politics. Voters have been skeptical of candidates that may not be mean enough.
There are at least two ways to help women and nice people in general overcome the electorate’s doubts about kind people being effective in politics. Either kind people must give up being nice and become as mean and dirty as the men who have traditionally been political leaders in America. Or people’s perception of American politics as a domain only for the mean must change.
Americans seem to be losing their tolerance for mean politicians. That is why Barack Obama’s campaign theme about ‘Change’ and ‘Hope’ has been so important for his victory and Hillary Clinton’s defeat. He concentrated on giving voters the impression that he is a peaceful, clever, and thoughtful candidate. That is a stark contrast with the macho rhetoric of Republicans. Barack Obama portrays himself as a ‘nice’ guy who is capable of making government nice too.
Hillary Clinton’s primary campaign has concentrated on proving to voters that she can be brutal enough to fight fire with fire. She portrays herself as ‘experienced’ with politics as usual. She would have given the Republicans a strong dose of their own medicine. Americans are not hoping for that.
Fortunately for Hillary Clinton, Barack Obama has offered her an opportunity to redeem herself by becoming Secretary of State. She can remain in the national spotlight while her persona is transformed for the better. Rather than merely being just another ambitious mean person, Hillary Clinton can show that she is someone who can really help make the world a better place for Americans.
Barack Obama has given many people the hope that he can transform American politics from being a mean process into one that welcomes kind people. If that happens, then women and other people associated with kindness may have a better opportunity to succeed in politics than they could have hoped for otherwise. And Barack Obama may helped Hillary Clinton become a better champion.
Posted in Culture, politics, Principle Ideas
Tagged 2016, Barack Obama, Change, Clinton, Election, Feminist Movement, Hillary, Hillary Clinton, Hope, Obama, politics, Presidential Election, Secretary of State, Women
This should be self evident: Businesses that are too large to fail should not exist in a free market economy.
A business that becomes too large to fail also becomes a liability for the rest of society. The benefits of economies of scale for society are outweighed by the inefficient monopolistic tendencies of businesses that dominate markets. And the implicit guarantee of a government bailout encourages too much risky behavior. It even encourages directors and executives of companies to strategically engineer the need for bailouts. When a business becomes that large it should be broken up into competing businesses that don’t dominate markets.
We are being told that the government bailouts are supposed to preserve our free market economy. But the only thing the bailouts are preserving is the freedom of over-sized businesses to dominate a market economy that could otherwise be truly free. Break up the bailed out businesses.
State governments should be bailed out for the same reason that businesses that are too large to fail have been bailed out. If those banks are too large to fail, then certainly State and many county governments are too large to fail. More people have more at stake in most state governments than there are people with a stake in any particular company. If there is any private business that is too important to fail, then certainly state governments are too important to fail too.