Tuesday, April 14, 2009

Suggestion: controlled demolition of the financial system

Note: below goes against what George Ure is predicting, but Ure is saying what he thinks will actually happen based on the government policies chosen so far, while Ringoen is arguing for a different course of action. I agree with Ringoen's idea, but I would not be surprised if Ure's prediction turns out to be true. Ringoen's plan would be a drastic (and I think needed) change in government policy, a policy that extends back to the Bush administration and is being continued by the Obama administration.

This article by Gordon Ringoen


makes some good points about the problem with the financial system being insolvency rather than lack of liquidity. Lack of liquidity would mean that all would be well if we could get financial activity back the way it was before things fell apart, but we know that isn't true because, as the article points out, for the last several years banks were operating a ponzi-based business model by making loans that they had no intention of keeping on their books. People were buying houses with borrowed money in order to to quickly resell them at profit, etc. But this business model is over, and we do not really want to return to it. As he puts it,

" If, in the unlikely scenario, they (the bailouts) do reflate the financial system, the bubble would still exist and huge amounts of additional credit would be needed to get the economy expanding again. The bubble would just be bigger for the next bust. The amount of credit required to perform this would surely bankrupt the country by making the U.S. dollar worthless and would chase away foreign investors and central banks who own 60% of our Treasurys. The total amount of bailouts necessary to reflate is unknowable but it is more that we can withstand."

Instead he says that the market needs to deflate to bring assets back into agreement with the real economy. I think this definitely means house prices and some other things as well.

Ringoen says that the choice is not between bailouts or systemic collapse, but suggests controlled system demolition as the right alternative. This is the difference between his argument and the mindless Limbaugh-Republican fake-populist tea party anti-bailout, anti-stimulus rhetoric. He at least acknowledges that there is no return to business as usual.

He suggests,

"Instead of giving non-discriminating bailouts, the government could let these insolvent financial institutions fail and then make direct grants or loans, where necessary, to avert total collapse. It could be considered a controlled demolition. Though painful, it would reduce the total cost to the government, and most importantly, would destroy uneconomic claims necessary to bring the real economy and the financial system back to balance."

Ringoen is also in favor of stimulus spending to put people back to work in value-creating jobs. I think we have to take the unemployed into account whatever we do. Unemployment is likely to increase, and the first duty of government and community is to take care of those who are not able to take care of themselves.

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