Trickle Down Or Trickle Up?
J. Stromsteen
The world's financial system is as weak now as it has been in many decades. Federal Reserve Chairman Ben S. Bernanke has a huge problem on his hands: a very wide-ranging credit freeze up surrounding financial institutions. This is a problem that mere cuts in interest rates cannot cure.
The very low interest rates we experienced in the early to mid 2000's as well as the trend of throwing caution to the wind has left the financial world at risk. This care free attitude was spread by Alan Greenspan; a major Wall Street player who was bailed out of trouble with borrowed funds, has led us down a dangerous path.
Now there's a problem. Those speculative derivatives do not have the value that the Wall Street salesmen claimed they had. There's a desperate race to de-leverage at almost any price. Of course, buyers have grown scarce. No institutional investor wants to add more highly overvalued speculative package to his portfolio now that the true value of these packages is exposed in the light of day. We are in a liquidity crisis the magnitude of which we haven't seen since before World War II.
Commercial as well as investment banks are stuck with puffed up assets such as mortgages and private equity loans they cannot sell because they are packaged with derivatives of exceptionally questionable value. This is a kind way of saying that Wall Street fat cats lied about the value and has overpriced them by billions of dollars putting us in peril. Basically this means that banks do not have the cash to make new loans and this is destroying our credit based economy. For banks and brokers to be able to make their balance sheets stronger by de-leveraging, the banks will have to reduce the number of loans they have on their books. This, unfortunately, would devastate the economy and turn a bad recession into a long-term depression.
Hence the bailout by the Fed, in the form of longer-term financing at the discount window. What else can they do? Let the entire financial structure of the world completely freeze up? The Federal Reserve is lending cash to financial institutions while taking as collateral the subprime mortgages and related securities of highly questionable value that cannot be sold in the open market. The Federal Reserve is becoming the buyer of last resort. This is highly inflationary. The financial middlemen are supposed to take the cash borrowed from the Fed and lend it back out again, this time to higher-quality borrowers, but this is not happening. In theory, the way this would work would be a trickle-down effect.
So why don't we try a trickle-up effect? The bailout will cost at least $1,000,000,000,000. Not sure of that number? That would be one trillion dollars! Instead of giving one trillion dollars of newly created money to the Wall Street players to continue the financial problems we already are facing, why not give that money to the people of America? It will then trickle-up to the Wall Street by stimulating the economy. By giving around $3,200 to every individual in America we may be able to get the money flow back in the right direction. This would mean a family of five would receive $16,000.
Commercial as well as investment banks are stuck with puffed up assets such as mortgages and private equity loans they cannot sell because they are packaged with derivatives of exceptionally questionable value. This is a kind way of saying that Wall Street fat cats lied about the value and has overpriced them by billions of dollars putting
About the Author:
|
