On Solving the Credit Crunch

Commentary, Executive Papers, Life Lessons, Truthiness Comments (2)

Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. – Abraham Lincoln

A friend asked me about this post, the flow of invisible money, then asked me, which plan was better, was it, less corporate taxes, to help the people and the economy (the republican plan) or  was it tax breaks for the poor, then for good measure he tossed in the mortgage crisis. (democratic plan)

And the problem is …It’s complex.  We are dealing with what most economist like to pretend doesn’t exist: people don’t have perfect knowledge, and they act irrationally, even with damn good evidence.

Let’s take for instance, the mortgage crisis ( simplified, oh so simplified.)   When a human has allot of debt, or is risking his ability to take care of himself or his family, they horde. This is natural.  If i say, here is $600 dollars, go spend it, it will not be spent.  It will be saved.  There are allot of reasons but let’s just be reasonable here.  If you are in debt, if there are collectors at the door, or you may be faced with not knowing if your next paycheck may be your last, you are going to save money.   Which means business don’t make money.

The Republican Plan

Wall street (or just say Investment houses) want profits, and they don’t want the company to spend money. They don’t want extra capital expenditures.  If the stock market was run by the individual investor, then this wouldn’t be so bad, the same people needing money would get it from stocks, but in truth, (for example) Home depot, Dell and Bed bath and beyond, have a bundled stock plan in an investment house like Myrill Lynch.  The person running that invest plan does not want to lose his job, there fore he will leverage his controlling shares of “GE” To make sure that GE does not spend money on operations.

Did you get that? An Investment house does not want to lose business, a broker does not want to lose his job and an investment account (who could really care less) wants their money (big credit crunch), and because many boards are interlinked (A man on your board, and you may be on his, etc) suddenly, it’s all about keeping cost down, and paying out to to investors, who are usually very large controlling investors plans not individual people or small owners.  And thus, the republican plan now grinds to a halt, not because it wouldn’t work, but because in the end, we are all self serving bastards, who don’t want to lose our jobs. [And my belief that usually it takes 1 man to stop a big plan]

The Democratic Plan.
It’s also a good plan. What do Americans want? They don’t want to be saved, that’s not america, and not the American dream. What they want is the ability to help themselves, the possibility that they can climb out of their debt.
So the democratic plan to freeze the banks from collecting sounds good.  The people are happy, (And let’s be serious, 1 investment banker isn’t going to elect you, but 2000 home owners will.) The Debt collection process is halted for 2 months (or more)

What about the Bank? After all, they now have money to loan out. The bank isn’t going to loan out money. Why?  The bank is really there to make money and really, someone in debt is not a good investment.  Further more, they have to keep more money, just in case there is a bank run, and lastly, The bank does not want your home. It does not want to foreclose.  A house is useless to them, money is better, however, they have investors who want money, they are beating down the bank door for profits too.

2 Months later, you have desperate bankers, who definitely need money NOW, and are not up to negotiating with you (especially if you just got a 2 month reprieve).  They want to be sympathetic, these bankers, but they are losing money by the second, and every time money is pulled to pay someone, pay down bills, they lose more money.  While waiting for all this money, banks need to lay people off, and reduce spending, do only really secure loans.  Corporations are not able to secure funding and to keep solvent, they don’t want to spend money. It’s easier to lay off people,  reduce spending and wait for this crisis to pass.

And thus, the Democratic plan grinds to a halt.  Democrats have helped out the homeowner, or those in debt, and so doing, caused the same problem as the republicans.  But they’ll get re-elected.

A credit crunch is bad for everyone, but money, or the love of money, is the root of this problem. We are all different, and yet, we should still strive to help our fellow man.   Name something that doesn’t have a price in today’s world? The key to get out of this cycle is to work for your better man, yet, as this editorial states, we don’t know when someone’s slacking. Well then, how would one simulate the economy?

A plan has to be comprehensive and multi phasic:  it calls on getting companies and people to basically pretend there is no credit crunch and let people spend or save as they would normally. a) One way get companies to go along is to lower  demands for dividends and allow tax credit if it money goes to investing and employee retention (only). b) To get everybody (companies and people) out of debt lower cost of money including on the discount window, so interest rates are low, easing the rate people have to pay down their debt and some how make fixed rate lower-able.   Lower the poor tax rate, and even triple the “tax credit” amount people get for giving to charities.  Yes charities, a means to help your better man, while helping yourself and the government.

Basically, getting out of the problems we’ve had will require new ways of thinking. Not more welfare, not more blatant taxes or debt freezes.  We can’t know all the consequences of our actions, sometimes, it takes 4 years to see an impact, which is why we need to make small changes and have constant reporting.

OceansOfThought @ June 22, 2008