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CRISIS

Because of the recent financial crisis.  I have decided to create this section in the blog.  I will try to explain in only economic terms  some of the misstatements and myths in some of the information.  If you want the long term solution, review the section on the website “The Monetary Solution”.

1. Income tax debate is on the fiscal side of gov’t is not the monetary side!  Increasing some taxes on only the rich will not hurt the economy.  It will help balance the budget!

2. Free Markets vs Socialism.  the recent debate discusses taking over the commerical banks.  the right says this is socialism interfering in the free markets.  The power to create money is a federal gov’t power which was licensed to the Federal Reserve which in turn licenses the commerical banks to implement this process in their loan creation.  The Federal Reserve (central bank) regulates this process.

Since it is a power of the Federal gov’t anyway, it should be able to change, improve and increase regulation and control as it sees fit to solve the crisis and improve the economy.

 Freddie Mac and Fannies Mae have a similar mandate-but completly different in operation.  This institutions worked very well until the sub prime product and underwriting was implemented.  (See sub prime on the blog) 

3. The cost of creating all this money to bail out any of these systems is nominal except for excess inflation.  Therefore prudent creation for appropriate bail outs and encouraging liquidity is an easy solution.  We do not have to create Treasury bills, notes and bonds to create money!

4. Just becasue we rescue and liquify banks does not mean they will lend enough to stimulate the economy because they are to sacred of loss.  Also borrowers will not borrow for the same reason.   This has been the experience in Japan for the last 15 years.  The solution is to issue loans with equity participation rather than just interest charges.

5. Reworking mortgages is a very difficult because of the securitization-many owners.  We should explore lowering the interest rates and extending the mortgages for inital, primary owners only.  There are negatives for lowering the amount of the loan-like the property values.  We know foreclosures ae bad for everyone including banks!

This is just a start, please submit your questions and comments.


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