Bailout-Rescue Main Street, Alternative Solutions

Posted 1 year, 4 months ago (Monday, October 13th, 2008 at 11:09 pm) by nick

The Opportunity of a Millennium

By Nick Polimeni

News world-wide forecast from as optimistic as severe downturn, to as panic driven Great World Depression. Commentators, editorials, and economists provide intelligent analyses of why their predictions are reasonable expectations. But these sources can have not produce ideas outside conventional economic thought, or generally accepted accounting concepts, rooted in 14^th Century Merchant of Venice mentality, and MBA bottom-line re-oriented schooling, all of which leave an incomplete picture.

The reason is the socially generated distortions or disregard of fundamentals.

No wealth can exist without human labor; even natural resources must be acted upon by human labor to become useful wealth. When you work to produce something, you are creating wealth, and the wealth so created IS the money to buy wealth created by others. Abundance of physical wealth allows the use of excess labor to perform services to support productive, and other social needs.

The fact that we have authorized governments (tongue in cheek) to monetize wealth (i.e.: create the physical money or to have it noted in some account to represent that wealth), does not change the fact that labor has created it. Governments have transferred most of these rights to private entities, financial community, who now generate and distribute the money or liquidity.

The only reason we need money at all is to trade the wealth that’s in the marketplace; therefore, we don’t need to monetize all wealth in a country, because not all wealth is being traded at a single moment. When all the trading is done, the money, is used for the creation of more wealth in the real economy, or it is used to trade rights future transfer of wealth in the financial markets, where promises for future wealth delivery is traded. The financial markets and the financial community utterly depend on the existence of real wealth, no matter what the name of the instrument, whether stocks, bonds, securities, and so forth. When the wealth does not exist, there’s nothing to trade.

To maintain economic stability the government and central banks need to expand and contract the money supply in relationship to tradable object. They accomplish this by what is known as macro-economics, which is popularly recognized as changing interest rates, and buying and selling securities.

Macro-economics can be compared to using a Rube Goldberg machine to scramble and fry an egg, and the end result is significantly delayed, plus the egg will be full of egg shells. Furthermore, despite all the very rational calculations about what can happen there is one variable in this equation, so unpredictable that cannot be factor into any of the formulas of economic projections with any degree of accuracy: Human emotions and reactions: greed, fear, belief, trust, perception, panic.

Distribution of liquidity is accomplish through the flow of money from the government and central banks to the financial community, and the financial markets, and these have the further responsibility to distribute the money to the real economy. Because the financial community is privately owned, they are first ruled by their own profitability, and this often conflicts with the social and economic needs of the community the purport to serve. Therefore, no amount of macro-economic management wisdom is ever going to manage human emotions, greed and fear, or vested interests; therefore, the possibilities of the Paulson bailout working are from slim to marginal.

Paulson’s change of direction in favor of purchasing equity in financial institutions which need assistance is a more intelligent direction than purchasing troubled assets. This is a step socialist economy, where “the people” own the resource, but the government controls it at its will and discretion. The problems of distribution remain the same. So long as attempts continue to save the financial community and financial markets, in the guise of kick-starting the whole economy, the relentless march into a depression will continue unabated, compounded with the hyper-inflation that takes place when huge amounts of money are released into the economy, without an equivalent rise in production.

There are two economies: the real economy, and the financial markets economy. The roles have been reversed, where the real economy depends on the financial one. But fundamentally, the financial markets depend for their life and health on the real economy, and to restore it, the real economy must be provided with the liquidity necessary to re-start companies that had to close for lack of funds, and to rehire employees who were fired, and another yet extremely important steps, to re-industrialize our economy to a rational use and processing of our natural resources, to supply our own needs.

The opportunity to democratize the economy is now at hand; from a capitalist economy, where the pools of capital are controlled by the few private entities, to the dispersal of capital where everyone involved in the creation of wealth has a stake and a say; and skipping economic socialism.

• Every citizen who has retirement account or nest-eggs of any kind anywhere have experienced a significant losses as a result of having no control over how their retirements were to be invested, or due to ill advise of from the financial community, will be issued a CD for the amount of the loss, and it shall be deposited in that individual’s local bank. The maximum amount should be capped at around $300,000, for individuals, and adequately more for companies that were forced to close their doors as a result of the financial crisis, to cover the re-start and re-employment. Those who have never had enough wealth to save or invest, should minimally be reimbursed through shorter term CD’s for their loss of buying power due to inflation over the last ten or so years, and at the pre-Clinton calculation methods for inflation.

All these CD’s will provide the necessary liquidity to community banks to finance the local real economy. Loans on the CD’s and their redemption should be subject to local management to meet local needs, through some degree of democratic participation by the affected community.

This single step gives a myriad of avenues to heal and keep a healthy economy without the decade-cycle of booms and busts, the legacy of the financial community.

Financial markets will normalize as the real economic recovers, and evaluation of underlying assets is achieved. This evaluation can be assisted with a unit of measurement to be adopted, regardless of their trading price. The recommended unit is an hour of work of an able bodied unskilled worker. This will give a general idea of replacement value of existing wealth, and this simple gauge will provide a great deal of stability. (The Hour Money was conceived by Professor Bob Blain, Emeritus Professor of Sociology, Southern Illinois University Edwardsville, although he never provided a scale of skills.)

Also, trading just for trading sake is just a game for speculators, and with a unit of value the prices will not swing too far in either direction, except when the underlying asset is found to be false or is in some way damaged or destroyed. There is a mad rush to be trading at all times, for some maniacal reason, and the thrust for yields, yields, yields in the 10’s 20’s and 30%, when the real economy is can generate a growth of a few percentage points, where can the excess in the yields expected by financial communities come from? In gambling, there are winners and losers. When this is a significant part of what the financial markets do, the only result is transfer of wealth and it’s usually from the rank and file worker up the economic ladder. Those yields were able to be supported by continual inflation in the financial markets as a result of their abuse in generating liquidity.

There isn’t a single crisis. There are many areas experiencing their own specific crisis, such as the real estate market, and the “shadow economy” as part the financial community, which deserve specific attention. What is recommended in this essay is a different approach of rescue from the bottom up, rather than the top down for more trickle and longer repair time.

Nick Polimeni has a strong conventional background in economics in business practice, accounting, banking, and graduate work as a generalist; he sees self-education beyond the conventional as a period of greater understanding and development past conventional systems. He blogs here regularly, and his work is just now becoming public. Comments posted here will be answered by him, or responded to in specific articles on related issues.