Markets and Money Plan to Save the World

The problem was pronounced “contained,” by then-US Treasury Secretary Hank Paulson on April 7th, 2007. And then, on July 20th, Fed chairman Ben Bernanke admitted that the crisis could bring losses up to $100 billion.

But there was no container large enough to hold the subprime losses. Each time one was set out, it quickly overflowed. The latest reports tell us that the bilge is now 500 times deeper than the Fed head forecast…and still rising. And this comes after $11.7 trillion has been committed in the US alone to pumping it out. Whether the plumbers are plain idiots or clever rogues, we can’t say, but it should be obvious after two years of watching them, their pumps don’t work.

It is not often that we are called upon to advise the world’s government. In fact, we can’t remember a single time. But we can’t resist a lost cause. So, we offer the Markets and Money Plan to Save the World, or DRPtStW for short.

We begin with a brief rehearsal of what went wrong: The economy as it was before the spring of 2007 was too wonderful for words; whenever you tried to describe it, it sounded ridiculous. For example: “The richest get richer and richer by borrowing from the poorest.”

“We think; they sweat,” said one analyst, explaining how Americans could live beyond their means year after year. The West was just recycling the East’s “savings glut,” added Bernanke. Meanwhile, derivatives – based on mortgage debt from people who couldn’t pay – “helped to make the banking and overall financial system more resilient,” said the IMF in 2006.

Each sentence must have made the gods choke…groan…and then laugh. But beginning in 2007, came a correction. Suddenly, the big spenders saw their houses fall in value. Lenders watched their collateral collapse. The end was nigh. Two years later, $50 trillion has been lost, according to an estimate from the Asian Development Bank. After a slap in the face like that, you’d expect a little clarity. Instead, the public seems to have acquired a taste for bamboozle; now they can’t get enough of it.

Just read the Financial Times. This week it has a windy series on the “Future of Capitalism,” inviting readers to imagine how the decaying old creed might be reformed. Alas, for capitalism, it’s out of the frying pan, into the toilet. Larry Summers, Obama’s number one financial advisor, voiced the prevailing view: “This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century. And this is one of those times…there’s a need for extraordinary public action at those times.”

The gist of his program can be expressed in another wistful absurdity: The consumer economy died because of too much spending; now we will revive it by spending more. “Give me your cunning bankers, your hopeless CEOs, your huddled masses of chiselers, spendthrifts and boondogglers,” says the Obama team, “and we’ll give them other peoples’ money!”

“There’s no place that should be reducing its contribution to global demand right now,” explained Summers. “The world needs more demand.” But it was demand that the world recently had too much of. English speakers took on too much debt to create it…and built too many houses and too many shopping malls to satiate it. And despite the ready cash offered by Bush, Bernanke, and Paulson, demand has sunk, because the real problem is not an absence of spending, but a surfeit of debt. In America, for example, total debt went from 150% of GDP in the ’80s to 350% in 2007. The financial markets panicked when it became clear that debtors didn’t have the cash flow to pay off the debt…and that an entire world economy had been fizzed up to supply products to people who couldn’t afford them. Investors have been discounting debt-soaked assets ever since.

The fix is obvious – reduce the level of debt. About $20 trillion worth of debt, in the United States alone, needs to disappear. Then, consumers can go back to doing what they do best – consuming. But how do you reduce the debt level? Former Treasury Secretary Andrew Mellon had the right idea in 1929: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… It will purge the rottenness out of the system… Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

What’s the cure for a depression? It’s a depression. Let willing buyers and sellers mark debt down to what it is really worth. Mellon’s plan was not followed by the Hoover or Roosevelt administrations. Instead, they introduced elaborate bailouts, stimulus programs, and boondoggles. That is why the depression is known as the Great Depression, rather than the So-so Depression. By the end of the 30s, the US economy was almost exactly the same size it had been at the beginning. Likewise, in Japan, holding off liquidation brought a “lost decade” in the ’90s. Bush followed in Hoover’s footsteps. And now, the Obama administration follows in Roosevelt’s and Miyazawa’s.

Here’s our advice: forget it. Let the depression do its work. Let the bad times roll!

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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