I pride myself for being a hack, weekend economist.  I admit it isn’t going to make me rich, but it is interesting.

It is easy, at first pass, to answer the “why did we bailout the financial sector” question.  The answer is because they are rich and have powerful lobbyists, and there is intuitively some truth to the claim that without a finance sector to grease the wheels of the economy, that it would grind to a halt.  So whether or not the companies are to blame for their own mess; we need them, so we have to save them….I guess.

But why do we need them?  Why, if too much credit got us into this mess in the first place, was there a deafening cry from Washington to get credit flowing again.  How could the disease be the cure? (BTW:  that was the premise of the bailout:  We want this bailout money to go towards lending.  Lending had stopped because risk couldn’t be accurately gauged.)

The question then becomes, “Why do we need lending?”  What is so important about the ability to keep credit flowing that we literally cannot do without it, even for a little bit, while the financial sector shakes out and healthier companies (those without exposure to bad debt) take the place place of the old financial sector?  How long could that take?  A year?

Why the cry from Washington of “We must act NOW,” as in RIGHT now.  They passed the TARP bill almost immediately with no rules attached, and started handing out money willy-nilly….compare that with healthcare: In healthcare there is a near endless debate over a change everyone agrees in theory needs to happen (overhaul of costly system) and for which there is a moral imperative (richest country in the world with 47 million uninsured citizens)….then TARP:  No debate, no moral imperative, very costly, no oversight/enforcement, benefits only a few.  How did that happen?

I think I figured it out, and I figured out a few other things in the process:

Money is debt.  That is why we need debt.  Without it there is no money….literally.  95% of all money in circulation is debt.  If all that debt were paid off……..there would be almost no money, and thus no economy.

The government doesn’t create money in our monetary system.  The banks do. They do so through loans.  To simply a bit, when you take out a loan, that is new money.  It isn’t taken from another person’s deposit and given to you.  The money didn’t exist before.  When the bank credits your account for the amount of the loan the money comes from nowhere…it is created with a digital keystroke. Money can be thought of as a series of IOUs (debt), which, if they are all paid back….equals zero.

(This answers the question as to why banks are so profitable.  They don’t actually need any money.  They give you money they just created from thin air, and then you have to put up the house/car/etc for collateral (which you may end up losing to them) and pay them back interest.  Interest on what? They didn’t risk anything…..they didn’t actually put up any money on their side.  They don’t stand to lose much, since they can buy insurance on loan failures and they get the collateral if you don’t pay.)

So back to the bailout:  Why must the debt keep flowing?  Why MUST banks lend or the economy comes to a screeching halt?

Two reasons:

1) Loans are always being paid back (which destroys money; money lent is money created, money paid back to the banks is money destroyed), so for the money supply to continue to increase, there must always be more loans going out than there are payments coming back in.  If loans don’t go out, the money supply contracts and deflation occurs. Deflation is a hard loop to get out of, and is definitely bad for the economy.

2) If I borrow a dollar from you and then you borrow a dollar from me and we later pay each other back, then all is good.  But what if we decide to charge interest (which banks do)?  There is only two dollars in our economy…the money simply doesn’t exist.  One of us has to go bankrupt because we won’t be able to pay.  The only way to pay is to borrow money from a third party (or borrow more your original lender).  This is how our economy works.  You always borrow the principal of the loan, but you must pay back principal plus interest.  Where does the interest come from? We borrow it (because that is pretty much the only way to create money).  Individuals may be debt free; that is true…but the system as a whole must always borrow an escalating amount because the system must always pay back principal plus interest on the original principal or people (the system) goes bankrupt. That is what we are seeing now.

And that is why lending must happen.  That is why we saved the financial sector.  Debt is money.  Without the debt/credit/banks….there is no money and no economy.

I think if everyone were a little more educated on how our money system works this would be a better country to live in.  All that shit they do in Washington is just smokescreens and old, self important white men thinking they know something.

Permit me to issue and control the money of the nation and I care not who makes its laws.” — Mayer Amsched Rothchild

If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied.” — Thomas Jefferson

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