It All Started With Fractional Reserve Banking…

I started out with a refresher on macroeconomics (an area I think needs to be taught in high school as a requirement) and the operations of the Federal Reserve Bank. I was trying to understand what the options were with regard to the great stimulus package, and what we could expect if we did not to pass one. How bad could it get? There’s positively a glut of opinion, as you’d expect, about whether we’re completely screwed, temporarily screwed, hardly screwed, or not really that screwed at all.

The job of the Federal Reserve Bank appears to be to create money where none existed before (fractional reserve banking), and then to sell the money, which is in turn sold at incrementally higher interest rates to private banks and eventually to average borrowers including individuals and businesses. As far as I can tell, our current problem stems from the continued creation of debt, at profit, until the debt-to-real assets ratio just got so high that our system of fractional reserve banking is stretched too thin to function. Yikes. For more on this, listen to this really excellent NPR interview with Michael Greenberger who attempts to quantify the scale of the credit-default-swap problem.

Responses to this our current massive debt issue range from the fascinating Austrian School of economics, and to a lesser degree the Chicago School, which advocate a do-nothing and let the super ultra laissez-faire approach rebalance the system, to our more commonly accepted Keynesian approach which advocates government intervention, one would presume in the form of throwing more money on the problem with big stimulus packages, but not too big depending on whether you ask a Republican or a Democrat.

Interestingly, a similar problem on a smaller scale occurred in Sweden in the 1990s and was resolved with a combination of bank nationalization and separating bad assets into separate “bad banks.”

My take-away was this:

If we manage to keep our current economic system afloat (my bet is we will), we need immediate legislation that requires standard reporting and complete transparency for all forms of complex derivatives. Greenberger’s estimate (which we currently have NO WAY of verifying or denying) is that this form of “shadow finance” is valued at roughly $62 TRILLION, more than all stocks, bonds, and securities combined.

Pass more tax cuts like the one proposed by Barbara Boxer as incentive to spending, don’t just throw money at the problem.

Institute a conflict-of-interest policy that bars people like Henry Paulson (see previous post) and Phil Gramm from crossing over from the private sector into a government role, and from holding board positions while occupying any public seat of office.

If it gets any uglier, buy gold. Traditional money is just paper. Or follow Rushkoff’s advice and create your own currency like the Liberty Dollar.

Read The Road by Cormac McCarthy for preparation in the event of world-wide system collapse. Or better yet, don’t!

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February 10, 2009 | Filed Under Great Recession 

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