Reviving Main Street-A Bailout we can use

Posted 1 month, 4 weeks ago (Sunday, October 5th, 2008 at 4:26 am) by nick

By Nick Polimeni

One of the reasons the Paulson bailout was touted necessary, was that Main Street economy (consumer-production, employment) couldn’t work without it. Nevertheless, a wide base of economists have maintained the bailout was not necessary; that even with the bailout there would be problems, as James K. Galbraith puts in his Washington Post article, “A Bailout We Don’t Need: “First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won’t be enough.” Others worry about the huge increase of the national debt, and yet others fear deficit spending and candidates whether they’ll be able to keep their promises.

As you can see, the lowest common denominator is: There isn’t enough money. What’s wrong with this idea?

What’s wrong with it is the underlying fallacy, wherein we take for granted that

a) The only way to create liquidity is to capitalize things through collateralization of assets in our nation’s real economy, and

b) Only the financial community can generate this liquidity.

Further, it appears that no conventional economist ever bother to go beyond the current system to examine the underlying relationship between the financial community and the consumer-production (real) economy. It’s a marriage made in hell, ready for divorce. When one pours over the thousands and thousands of public postings on the subject they are all based on the same underlying assumption: liquidity can ONLY be generated by the financial community. Even the government has to borrow from them, building an unsustainable national and international debt.

When currency was backed only by gold and silver, or other commodities, the quantity of currency was significantly restricted or subject to the ebbs and flows of the availability of that commodity. Today, however, there is no commodity upon which the value of the currency depends. The currency is backed by the productive capability of the population, and the process of monetizing (creating liquidity based on that productive ability) is not the exclusive right of the financial community, nor if we want to engage their participation, do we need to do it by surrendering all power to determine the use of that liquidity.

While there is no explicit details on how to create liquidity, the US constitution, Article I, Section 8, provides the basis for authority over the economy, with the right to: “To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;” and “to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Under that authority, the government can and should, for each economic period (a year, six months, or as reasonable):

1. Assess the available human resources (people who need and want employment).

2. Determine the productive capacity of the nation.

3. Determine if the natural resources or raw material is adequate to support that capacity.

4. Determine the consumption needs of the population.

5. Monetize whatever new amounts are required to fuel this new additional production above the previous year.

These steps can be done to any degree of detail necessary or desirable to ensure adequate monetization. The congress will pass as part of its budget a provision for new liquidity, by ordering the Treasury secretary to enter in its accounting records, under the asset heading of “New Liquidity,” and the equivalent cash increase to the Treasury.

Of course, this is sacrilege by traditional economic theory, and these schools, and their wealthy sponsors will publish hundreds of thousands of pages calling it fiscal irresponsibility, and voodoo accounting, and decree money, and they will produce historical precedents to show this is the beginning of mad hyperinflation.

In the end, this is just a method of monetizing which bypasses borrowing from the super-wealthy, and borrowing from next year’s productive capability of the population. The promissory note or security is given to the population instead. Why? It is obvious that since the currency is backed by the productive capacity of the population, then, the population has to be the primary beneficiary of that production.

The Treasury then will distribute the funds through community banks, which have explicit instruction on the distribution of the new liquidity, based on the five point assessment above. Community banks stocks are owned by its depositors (not unlike ‘credit unions”), and there is a cash ceiling to the amount of stock an individual could own, to eliminate concentrated ownership in the hands of a small group.

This process would totally alter the concept of loans, credit, and taxes. Taxes would be used to equalize wealth, or miscalculations or misestimating on the original assessment; they would withdraw directly for the bank’s liquidity any excess that could become inflationary.

In the article, “An Alternate Economic Paradigm there is a more detail description of managing the system as if it was a “complex navigational system, with locks, gates, and reservoirs,” and the management provide and monitor liquidity to float all boats. With this process, we can rebuild our industrial base, employ everyone who wants to be employed, and have the necessary liquidity to maintain a rational growth rate, with a stable currency.

It is absurd that that the only way to add liquidity to the economic system can only be done through borrowing from the financial community, or failing that, through government borrowing, and astronomically increasing its debt to the super-rich. We run our lives and our country’s economy based on available credit (ability of desire of the financial community to lend); and not on what we need and on supporting our human resources with the necessary liquidity to employ everyone who wants to be employed. We buy oil and coal because it’s “cheaper” than solar and other alternative energies, instead of supporting the alternative sources with sufficient liquidity to make it viable. Where’s the money? Is the financial community the God appointed source of it?

The real reason this method of monetization and liquidity generation is not even brought up or the status quo challenged with this, as an alternative is because it would radically alter the balance of power between the population and the super-wealthy, and this is something they powerful have not allowed for hundreds (maybe thousands) of years, and they will vigorously oppose it today. Two possible reasons conventional economists don’t bring it up is either because they’ve not thought outside the economic box they are trained into in college and MBA programs, or they have a vested interest in the status quo