I pride myself for being a hack, weekend economist.\u00a0 I admit it isn’t going to make me rich, but it is interesting.<\/p>\n\t
It is easy, at first pass, to answer the “why did we bailout the financial sector” question.\u00a0 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.\u00a0 So whether or not the companies are to blame for their own mess; we need them, so we have to save them….I guess.<\/p>\n\t
But why do we need them?\u00a0 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.\u00a0 How could the disease be the cure?<\/strong> (BTW:\u00a0 that was the premise of the bailout:\u00a0 We want this bailout money to go towards lending.\u00a0 Lending had stopped because risk couldn’t be accurately gauged.)<\/p>\n\t The question then becomes, “Why do we need lending?”\u00a0 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?\u00a0 How long could that take?\u00a0 A year?<\/p>\n\t Why the cry from Washington of “We must act NOW,” as in RIGHT now.\u00a0 They passed the TARP bill almost immediately with no rules attached, and started handing out money willy-nilly….compare that with healthcare:<\/strong> 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:\u00a0 No debate, no moral imperative, very costly, no oversight\/enforcement, benefits only a few.\u00a0 How did that happen?<\/p>\n\t I think I figured it out, and I figured out a few other things in the process:<\/p>\n\t Money is debt<\/strong>.\u00a0 That is why we need debt.\u00a0 Without it there is no money….literally.\u00a0 95% of all money in circulation is debt.\u00a0 If all that debt were paid off……..there would be almost no money, and thus no economy.<\/p>\n\t The government doesn’t create money in our monetary system.\u00a0 The banks do. <\/strong> They do so through loans.\u00a0 To simply a bit, when you take out a loan, that is new money.\u00a0 It isn’t taken from another person’s deposit and given to you.\u00a0 The money didn’t exist before.\u00a0 When the bank credits your account for the amount of the loan the money comes from nowhere…it is created with a digital keystroke. <\/strong>Money can be thought of as a series of IOUs (debt), which, if they are all paid back….equals zero.<\/p>\n\t (This answers the question as to why banks are so profitable.\u00a0 They don’t actually need any money.\u00a0 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.\u00a0 Interest on what?<\/strong> They didn’t risk anything…..they didn’t actually put up any money on their side.\u00a0 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.)<\/p>\n\t So back to the bailout:\u00a0 Why must the debt keep flowing?\u00a0 Why MUST banks lend or the economy comes to a screeching halt?<\/p>\n\t Two reasons:<\/p>\n\t 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.\u00a0 If<\/strong> loans don’t go out, the money supply contracts and deflation occurs.<\/strong> Deflation is a hard loop to get out of, and is definitely bad for the economy.<\/p>\n\t 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.\u00a0 But what if we decide to charge interest (which banks do)?\u00a0 There is only two dollars in our economy…the money simply doesn’t exist.\u00a0 One of us has to go bankrupt because we won’t be able to pay.\u00a0 The only way to pay is to borrow money from a third party (or borrow more your original lender).\u00a0 This is how our economy works.\u00a0 You always borrow the principal of the loan, but you must pay back principal plus interest.\u00a0 Where does the interest come from?<\/strong> We borrow it (because that is pretty much the only way to create money).\u00a0 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.<\/strong> That is what we are seeing now.<\/p>\n\t And that is why lending must happen.\u00a0 That is why we saved the financial sector.\u00a0 Debt is money.\u00a0 Without the debt\/credit\/banks….there is no money and no economy.<\/p>\n\t I think if everyone were a little more educated on how our money system works this would be a better country to live in.\u00a0 All that shit they do in Washington is just smokescreens and old, self important white men thinking they know something.<\/p>\n\t “Permit me to issue and control the money of the nation and I care not who makes its laws.<\/em>” \u2014 Mayer Amsched Rothchild<\/p>\n\t “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.<\/em>” \u2014 Thomas Jefferson\n<\/p>\n","protected":false},"excerpt":{"rendered":" I pride myself for being a hack, weekend economist.\u00a0 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.\u00a0 The answer is because they are rich and have powerful lobbyists, and there is intuitively some […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_newsletter_tier_id":0},"categories":[1],"tags":[28,41],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p3IMYj-3s","jetpack-related-posts":[{"id":230,"url":"http:\/\/chasingeden.com\/?p=230","url_meta":{"origin":214,"position":0},"title":"Incentives: The key to understanding everything","author":"kellio","date":"September 26, 2009","format":false,"excerpt":"I have some things to share with the 7 or so people who might read my website: Why I am apolitical: I've always stated that I am apolitical, neither democrat, nor republican, nor centrist, nor libertarian.\u00a0 But I have strong ideas about politics and the role government can have in\u2026","rel":"","context":"In \"economics\"","block_context":{"text":"economics","link":"http:\/\/chasingeden.com\/?tag=economics"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":110,"url":"http:\/\/chasingeden.com\/?p=110","url_meta":{"origin":214,"position":1},"title":"Economics…the dismal science","author":"kellio","date":"November 10, 2008","format":false,"excerpt":"Banks are not using the Fed bailout money to ease the tight credit market.\u00a0 They are using it to shore up their balance sheets and consider acquisitions of weaker banks who were perhaps not able to get as much bailout money.\u00a0 It is simply making the concept of \"too big\u2026","rel":"","context":"In "Stories\/Observations"","block_context":{"text":"Stories\/Observations","link":"http:\/\/chasingeden.com\/?cat=11"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":479,"url":"http:\/\/chasingeden.com\/?p=479","url_meta":{"origin":214,"position":2},"title":"Capitalism, Jobs, and Supply Side Economics: Companies are not in business to hire people. They are in business to make money.","author":"kellio","date":"September 19, 2011","format":false,"excerpt":"The supply side argument goes that if companies (and the rich) have more money (through incentives, lower tax rates, etc.), they will use that extra money to invest and create jobs. This argument is silly. \u00a0Republicans have been making this argument since Reagan, and perhaps they really believe it...but it\u2026","rel":"","context":"With 1 comment","block_context":{"text":"With 1 comment","link":"http:\/\/chasingeden.com\/?p=479#comments"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":552,"url":"http:\/\/chasingeden.com\/?p=552","url_meta":{"origin":214,"position":3},"title":"Tax cuts for the rich do not stimulate the economy. They aren’t even a neutral. Tax cuts for the rich are a drain on the economy.","author":"kellio","date":"May 15, 2012","format":false,"excerpt":"A little high level data\/history here, and then we'll jump into Myths related to taxes for the rich. \u00a0I will provide a logical plausible mechanism for why low taxes for the rich do not stimulate the economy. 1. \u00a0The GDP growth rates during times of high marginal tax rates on\u2026","rel":"","context":"In \"economics\"","block_context":{"text":"economics","link":"http:\/\/chasingeden.com\/?tag=economics"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":62,"url":"http:\/\/chasingeden.com\/?p=62","url_meta":{"origin":214,"position":4},"title":"Inflation, the Printing Press, Theft and the Jedi Mind Trick of Fiat Money","author":"kellio","date":"March 28, 2008","format":false,"excerpt":"My two geek hobbies are happiness research and economics. I post about them often. Today I'll talk a about economics and money as it relates to the big, bad looming\/imminent debt crisis. I've written before about Fiat money. Fiat money is money with no intrinsic value, backed by nothing of\u2026","rel":"","context":"In "Interesting Tidbits"","block_context":{"text":"Interesting Tidbits","link":"http:\/\/chasingeden.com\/?cat=8"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.financialsense.com\/fsu\/editorials\/2007\/images\/1-Dow.png?resize=350%2C200","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.financialsense.com\/fsu\/editorials\/2007\/images\/1-Dow.png?resize=350%2C200 1x, https:\/\/i0.wp.com\/www.financialsense.com\/fsu\/editorials\/2007\/images\/1-Dow.png?resize=525%2C300 1.5x"},"classes":[]},{"id":113,"url":"http:\/\/chasingeden.com\/?p=113","url_meta":{"origin":214,"position":5},"title":"Finance: Is it useful?","author":"kellio","date":"November 19, 2008","format":false,"excerpt":"Not all \"stuff\" is created equal....or is even useful at all. I'm not talking about diamond studded toothbrushes for your toy poodle.\u00a0 That's fine with me.\u00a0 If you want to waste money on your dog's oral hygiene, so be it. I'm talking about entire industries\/sectors of the economy that don't\u2026","rel":"","context":"In \"economics\"","block_context":{"text":"economics","link":"http:\/\/chasingeden.com\/?tag=economics"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"http:\/\/chasingeden.com\/index.php?rest_route=\/wp\/v2\/posts\/214"}],"collection":[{"href":"http:\/\/chasingeden.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/chasingeden.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/chasingeden.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/chasingeden.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=214"}],"version-history":[{"count":9,"href":"http:\/\/chasingeden.com\/index.php?rest_route=\/wp\/v2\/posts\/214\/revisions"}],"predecessor-version":[{"id":216,"href":"http:\/\/chasingeden.com\/index.php?rest_route=\/wp\/v2\/posts\/214\/revisions\/216"}],"wp:attachment":[{"href":"http:\/\/chasingeden.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=214"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/chasingeden.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=214"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/chasingeden.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=214"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}