"The western financial system we knew has collapsed"

Willem Buiter is never one to mince words, and today his message is that the financial system is not operating:

In a decentralised market economy, financial intermediation between economic agents with financial sures and those with financial deficits (or, more accurately, between economic agents who would like to run financial sures and those who would like to run financial deficits) is an essential economic activity. If this task if not performed effectively, it will still be the case that, ex-post, the sum of all realised financial sures equals zero, that is, realised saving equals realised investment – accounting identities are very insistent – but both are likely to be far from their optimal levels. In addition to channelling resources from financial sur units to financial deficits units, the financial system performs, through risk trading, a significant part of the total risk sharing that takes place in a society. It also performs the portfolio management of much of the stock of financial wealth in existence.

Buiter does not address this issue, and I do not recall seeing it parsed anywhere, but it also seems that a disproportionate amount of effort in the financial system has been devoted to portfolio management, with effects anticipated by Warren Buffett in his stories about the Gotrocks.

The …. last two tasks of the financial system (risk trading and portfolio management) are being performed abysmally, and the first, the intermediation of financial sures and deficits, has effectively ceased…Financial intermediation has all but ground to a halt….

We have no longer just a crisis in the financial system….The western (north-Atlantic) financial system we knew has collapsed. If I may paraphrase that great ensemble of Nobel-prize winning financial wizards, Monty Python’s Flying Circus:

“This financial system is no more! It has ceased to be! ‘It’s expired and gone to meet its maker! ‘It’s a stiff! Bereft of life, it rests in peace! If you hadn’t nailed ‘it to the tax payer’s perch it’d be pushing up the daisies! ‘Its metabolic processes are now ‘istory! ‘It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir indivisible!! THIS IS AN EX-FINANCIAL SYSTEM!!”

Getting financial markets for illiquid assets going again will require public intervention…It makes no fundamental difference whether this happens along the lines originally proposed for the TARP, or by the government insuring the value of illiquid assets, as the US Treasury has now agreed to do for Citi Bank. In both cases the government and the current owner of the illiquid asset have to agree on a price or a valuation. The main practical ‘advantage’ of the insurance proposal over attempts at price discovery through auctions and similar mechanisms, is that the insurance plan hides the problem of valuing the illiquid assets behind non-transparent bilateral negotiations about the insurance premium paid and the level of the price guaranteed in the insurance contract. Opaqueness and lack of transparency are obviously at a premium when tax payer resources are being funnelled into the black holes that are our leading banks and other financial instutition.

Getting banks to lend again is even more essential than getting primary and secondary markets for illiquid structured financial products going again. It may be even more important than getting the regular commercial paper market going again, important though that is. Small and medium enterprises rely overwhelmingly on banks for external finance. Without access to bank loans, credit lines and overdraft facilities, countless SMEs that would be perfectly viable with a functional financial and banking system are threatened with bankruptcy. Without working capital, businesses go out of business. Banks are essential. But they are not lending. Why? A number of possible explanations suggest themselves.

(1) Normal commercial prudence has finally resumed its rightful place, after many years of excess Sound commercial judgements, made on a case-by-case-basis, produce the right supply of credit for each particular risky venture requesting financing. These individual lending decisions aggregate into an entirely appropriate volume of economy-wide lending that happens to be very low. Don’t blame the banks. Blame the entrepreneurs for not coming up with more creditworthy projects.

(2) In a world with multiple and quite different self-fulfilling equilibria, we somehow have ended up in the lousy equilibrium. Here each bank, believing the state of the aggregate economy to be lousy, decides not to extend credit to a would-be borrower that would be viewed as an acceptable risk, but for the dim view the bank takes of the aggregate economy. When all banks act this way, they will, by severally and jointly witholding credit, produce the lousy aggregate economic environment that they assumed/feared when they individually turned off their credit spigots. We just have to find some way of changing the focal point that coordinates individual banks’ actions to the good equilibrium. In the favourable equilibrium each bank, believing the state of the aggregate economy to be good, decides to extend credit to a quite reasonable would-be borrower the bank would not have lent to had it believed the state of the overall economy to be lousy.

(3) After years of excess and anything goes, the bean counters and risk controllers now rule supreme in the banking world. There is little upside to lending and taking a risk, but a lot of downside. Rolling over an old loan or extending a new one won’t help your bonus and it may cost you your job.

(4) Blind fear and panic rule the roost in the banking sector. Bankers are shell-shocked and paralyzed. More Prozac please.

(5) Banks hoard cash and liquidity to retain or regain their independence… Banks where the state has acquired a preferential equity stake or another equity interest are often subject to dividend limits and restrictions on executive remuneration. Paying down these government capital injections to regain full discretion over dividend payments and executive remuneration is a key pre-occupation. Banks seek out new private investors, trampling the pre-emption rights of existing shareholders and at higher financial cost to the bank than would have been attached to a capital injection by the government. All this just to retain their independence. Whose interest is being served you may ask? Not the existing shareholders. Not the other stake holders, the banks’ customers or creditors. Not the tax payers. Could it be the incumbent top management? Surely not!

I would put zero weight on (1) and roughtly equal weights on the other four possible explanations.

What is to be done? Banks that don’t lend to the non-financial enterprise sector and to households are completely and utterly useless, like tits on a bull. If they won’t lend spontaneously, it is the job of the government to make them lend. Banks have no other raison d’être.

Yves here. That point is essential and seems to be lost in most commentary. Back to Buiter:

I can think of three ways to get them to lend using the coercive powers of the state.

(A) All domestic non-financial enterprises that currently have access to bank financing and whose loans, overdraft facilities, credit lines or whatever other financial arrangements expire during the coming year, have the right to an automatic one-year extension of the expiring arrangements on the same financial and non-financial terms as the expiring arrangements. This mandatory ‘creditor standstill’ helps existing borrowers by providing them with a breathing space. It does, however, do nothing for new enterprises or enterprises that are not currently borrowing.

(B) Aggregate lending targets for lending to the domestic non-financial business sector are set by the government for each bank (last year’s total five percent, say). The banks themselves can decide who to lend to and on what terms. Any shortfall of actual lending from the target is translated pound for pound into a Deficient Lending Tax. Since not meeting the target amounts to throwing money away, the banks will lend.

(C) Nationalise the banks (paying as little as possible to the existing shareholders), fire the existing management and board of directors, and have the government appoint a new executive and a new board that are serious about meeting lending targets. With 100 percent share ownership by the state, there is no risk of lawsuits about the executive or board of the bank not meeting their fiduciary duty to the shareholders….

It would have to be made clear that state ownership of a bank does not mean that the bank’s existing or new debt is sovereign-guaranteed. Limited liability applies even when the state is the only shareholder. Whether existing or new bank debt of state-owned banks benefits from the full faith and credit of the sovereign government can be decided on a case-by-case basis.

With both Alistair Darling and Mervyn King hinting darkly at the possibility of nationalisation of the remaining privately owned banks as a possible remedy for the bank lending strike, these proposals cannot even be considered radical.

Things are critical. Unless the banks start lending in normal volumes very soon, this recession could indeed become another Great Depression. We cannot wait for the banks to find their juju. The government may have to take it to them.

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61 comments

  1. ndk

    Opaqueness and lack of transparency are obviously at a premium when tax payer resources are being funnelled into the black holes that are our leading banks and other financial instutition.

    God, I’m so happy he’s writing this. But I still don’t agree with his policy responses.

    A is basically a zombie economy.

    B would persist in increasing leverage throughout the system and force a lot of foolish lending to be done.

    C exposes the government to the full balance sheet of all financial institutions. Their equity is basically worthless already, so it’s an empty gesture. The debt, CDS, and contractual side is the ugly part. Now, you do get sovereign immunity, which is nice for those pesky CDS, but it’s a lot of work just for that. Also, remember that opacity requirement he mentioned earlier?

    At least they’re not rote, but I find all of these answers just as unsatisfying as the knee-jerk fiscal deficit (Keynesian) spending. The government’s balance sheet cannot continue to be deteriorated like this or the currency will collapse. The more bad information we into the system through coercion like this, the worse decisions individuals will make. We’re severing the invisible hand and burying it somewhere on the government’s balance sheet.

    Again, leverage in the system still hasn’t even begun to decrease yet. We’re sitting at 353% debt-to-GDP. Real interest rates are rising still, and they continue to rise through our policy actions and natural forces; debt burdens grow as deflation grows; ability to service that debt shrinks as does GDP.

    I don’t see any way out of this, and I’d rather the government at least let us retain our faith in it. Losing that would be even worse than losing the financial system.

    He’s right, though. It really has totally collapsed.

  2. ndk

    Three more quick thoughts:

    1) We probably passed the Chandrasekhar limit of debt awhile ago, speaking of black holes. The chain reaction could go on for awhile longer, and it might even be reignited as we move to a heavier element, but it should already be clear what the end state will be. There is just too much debt to service, too many obligations and too many promises, and until that’s reduced, we will continue to collapse under our own weight.

    2) I really want to encourage economists everywhere — especially the professionals, along with those of us playing at home — to continue thinking and proposing innovative solutions. Then, bring those solutions in front of public forums to get shot to pieces or bolstered. It’s great to see and debate these truly new ideas collectively, and it increases community, visibility, and awareness of the problems at the very least, even if it doesn’t result in an answer.

    3) If we don’t really have a good answer, we need to avoid the hero complex so many have. Everyone wants to save the world through a brilliant maneuver, some ingenious gambit. But collectively, we have to resist the temptation and impulse to just do something. Many economists have suggested , but I want a solid explanation of why our urgent, massive intervention might work better this time other than a reflexive “it’s bigger.” Again, though a functional financial system is key to the success of any nation, the world, and our collective future, there are more important things. Economies can, do, and have collapsed before. Some have done so in very recent history: Russia, Argentina, Indonesia. People, countries, and even governments have survived it. We must not fatally wound our government, the people’s trust in it, or its credibility in a desperate attempt to keep a failed economy alive.

    Keep on going, Buiter. I’m a huge fan.

  3. YK

    WB:"I would put zero weight on (1) and roughtly equal weights on the other four possible explanations."

    Why?

    IMHO, (1) is the ultimate reason for the lack of lending.

    WB:"Don’t blame the banks. Blame the entrepreneurs for not coming up with more creditworthy projects."

    Poor education, lack of R&D, crumbling infrastructure are the reasons (to name a few) for the deficit of "creditworthy projects".

  4. lineup32

    finally someone agree’s with me.LOL
    The idea to stop lending to anyone that can fog a mirror seemed like a good idea not so long ago but suddenly the impact on GDP and employment is also pretty clear and the choice seems to be the foggy mirror.

  5. Anonymous

    I would add another possible reason for some degree of the lack of lending.

    To the extent that a bank has excess capital that it wants to deploy in the loans business, there is little incentive to enter into a new loan or extension of an existing loan at LIBOR whatever the rate is today. Instead, the bank would generally be better served going into the secondary market for loans and buying a participation or syndicated piece being sold by some other lender in distress, such as a collapsing hedge fund or an imploding CDO fund. Same risk, much better yield when bought below par.

  6. Tom Lindmark

    Unfortunately,Buiter argued about a month ago agains precisely what he now proposes. At that time he castigated the British government for pressuring the banks to lend into a recessionary economy. Look it up.

    I generally like his columns and lately he has been spot on. This time he went off the deep end.

  7. halbhh

    Economies, like banks themselves, are creatures of confidence. They work because people expect them to. They coast slowly to a stop when the motive force of confidence is removed.

    As it turns out, of the 5 possible explanations, number 1 is both true, and sufficient by itself, and also dominate at the moment, regardless of the other factors.

    Simply, most people expect a severe recession or depression. You can verify this from the polls.

    So, primarily, banks aren’t lending because most lending is foolhardy at the moment, as we haven’t finished the downfall from the credit bubble heights.

    Once house prices for instance finally hit back to typical levels vs incomes, then finally the false ground of unsustainable mortgage sizes will be removed, and improvement will become *possible*. *Then*, you can look to other causes and solutions to “kickstart” as Obama says.

    It’s interesting to note that foreclosures have aided the economic future enormously by speeding the price adjustment which is a precondition for recovery.

  8. Anonymous

    One reason banks have to lend is that if they fail to do so they will not be able to pay their investors, whether depositors or shareholders or bondholders. If they fail then they will go out of business. But it seems to be the case now that they don’t have any reason to fear going out of business unless they are small enough. So why not nationalized Citi GS JPM etc and break them up into a thousand different companies. Too big to fail should mean too big period.

  9. Dave

    I think it’s time to reach for option “C”. Not because I’m a “communist”, or would like to see the socialisation of the banking sector (frankly, I think we’d all prefer to see sensible private-sector banking allocate capital to worthwhile projects in a sensible, competitive and efficient manner) but because, as Yves and Buiter both point out, if banks won’t lend (to credit-worthy risks) then they have ceased to perform their most useful function. A bank that won’t lend capital is worse than no bank at all.

    ndk is right (above) that under option C, the government would assume the liabilities, but as ultimate back-stop of last resort, isn’t this already the case? It seems to me that under option C, they would assume control rather than be left just carrying the bag (a.k.a. TARP) for the whole sorry affair.

    Banks can be re-floated once the economy has recovered, with a new regulatory regime in place to prevent a recurrence.

  10. ndk

    I generally like his columns and lately he has been spot on. This time he went off the deep end.

    Tom, so far as his solutions go, I agree. He’s gone off the deep end a with , though. I think it’s that hero complex. This is when economists are supposed to earn their keep and gain everlasting fame. He’s trying to do that, and I’m glad we’re getting creative ideas to discuss, at least.

    So why not nationalized Citi GS JPM etc and break them up into a thousand different companies.

    Anonymous, we can’t do this for the same reason we can’t do lots of things. Our government’s balance sheet — and yes, as in better days, it matters — .

    To the extent that a bank has excess capital that it wants to deploy in the loans business, there is little incentive to enter into a new loan or extension of an existing loan at LIBOR whatever the rate is today.

    Anonymous number B, the rate on new debt or assumed debt should converge. If there were transparency in the securitization, they would.

  11. ndk

    ndk is right (above) that under option C, the government would assume the liabilities, but as ultimate back-stop of last resort, isn’t this already the case? It seems to me that under option C, they would assume control rather than be left just carrying the bag (a.k.a. TARP) for the whole sorry affair.

    Dave, you’re 100% right too, but our government’s balance sheet can’t take that much damage. The Fed can’t just “print” money as we commonly define it. Losses matter, because they hit the asset side of its balance sheet. Its liabilities are unaffected. It would have to recapitalize itself through either(I’m tired of 1’s and A’s):

    α) Creating enough inflation combined with low enough interest paid. However, this would also further deteriorate the value of the loans it’s already purchased, so this would have to be A LOT OF MONEY. Possibly an impossibly large amount; see the graph in .

    β) Directly tax people through the Treasury for enough money to pay back the large hole in its balance sheet. This tax would be a very heavy burden, reducing real economic activity and risk a return to deflation.

    Essentially, I’m suggesting we salvage the public’s trust in our government and its balance sheet rather than throwing those out in a desperate final attempt, unless we have an idea that might really work.

  12. Joe in Morgantown

    I think its diagnosis 2,5 with a little of 1: most or all of the big banks have negative net worth. So, they can’t lend because they need the money to pay creditors. All they can do is hope their own portfolios get magically better or the government writes a big check. Did you see the amount of citi’s off balance sheet? It doesn’t have to be very toxic for Citi to be Titanically underwater.

    What about option “D”: banks that are insolvent go bankrupt?

    If I’m right about the diagnosis, “D” is the only option that doesn’t end in the default of the treasury.

  13. Don

    In an economy for which the greatest imperative is capital accumulation, all circulation of capital is intermediated by a private, profit seeking banking system. In this vein, the problem of capital intermediation must be understood as symptomatic of the larger economic context.

    In this respect, never does Buiter address the most crucial issue: for what purpose would such lending/borrowing take place? Conceiving of the problem as one in which more lending/borrowing is needed to produce and consume more, is to miss the larger context, one in which the problem is that production and consumption are based on a fundamental – and global – system of inequality (that is, too much of the labor of production is limited to those who produce cheaply, and the consumption to those who consume too richly). It cannot be overcome by producing and consuming more in the same system of inequality.

    In the end, other than the temporary nationalization of the financial system, all that Buiter proposes is to re-start the system as it is, that is, attempting to kick start the economic system without any truly significant change in that system of global inequality of production and consumption.

    As for nationalization, should it materialize, then why, I wonder, should we (the public) accept that it be done so to bring about a temporary state whose aim is to eventually take us back to a system of intermediation being privately owned. Why not ensure that it remain publicly owned, and the service provided by intermediation be in the public interest, rather than in the interest of private capital accumulation?

  14. alexblack

    Strong-arming and screaming at banks to lend, because “it’s their sole reason for existing” in this environment, is like screaming at a taxi driver that he has to start picking up passengers because that’s HIS sole reason for existing – except this taxi driver has just spent 4 days straight picking up every crazy passenger he could find, driving around the city at 90 MPH the whole time, and snorting coke to stay awake so he could pick up more and more passengers. And now he’s crashed, nodding off for some much needed sleep as he sits as the curb, trying to let his brain cells recover, and along come economists yelling at him to wake up and go pick up more passengers dammit!! While they ignore the clouds of steam eminating from his overheated engine.

    Yell away, this guy is so burned out that he can’t understand a word you’re saying.

  15. Dave

    “and snorting coke to stay awake so he could pick up more and more passengers” … Now that’s what *I* call a stimulus package ;)

  16. Anonymous

    I like option “D” as well….banks that are insolvent go bankrupt!!!

    The moment we dropped down the bailout rabbit hole was when it was clear how fascist the government has become. We are seeing America bankrupted before our eyes.

    Why doesn’t the govt promote some regional banks or smaller that are not derivatoxicated into bigger versions that are not guided by the stupidity that derivatoxication brings. These banks would be comparably easy to push funds through to deserving borrowers.

  17. Anonymous

    We should not take for granted that a banking system can only be designed around the notion that money comes into existence only as debt and that banks’s only purpose is to lend. The very reason why we are in this crisis is that this system is unstable and has an exponentially explosive dynamics simply because of the effect of positive interest rates.

    When money comes into existence as debt, funds for interest payments are not injected into the system. So the system is always insolvent from the start and it becomes more and more insolvent as time goes on. Now we have roughly 65T of total debt against 13T of M3 money: even if we collectively pulled all the money we could only pay back 20% of the debt. This unbalance is the problem.

    Debt is favored by two factors: tax laws and banking regulation. While interest payments are deductible, dividends are doubly taxed. Also, regulations forsee much lower capital charges for banks on debt than on equity positions, making the former much cheaper for them.

    Here is a radical solution:

    (i)eliminate direct and indirect taxation.

    (ii) stipulate equal capital charges for debt and equity investments, allowing the monetary authority to share the risk of equity investments.

    (iii) introduce a generalized tax on capital equivalent to negative interest rates.

  18. spare some change?

    A bank’s sole purpose is, like every other business, to make money.

    If they can’t make money lending then they won’t do it.

    If there is so much money to be made lending, to the extent that banks are foolishly overlooking this opportunity to make money, surely others would rush in to capitalize on this market need?

    To put it another way, if you had billions in cash would you be lending it?

    If lending is ‘vital’ to capitalism as we know it then why are we leaving this vital function in the hands of privately held enterprises?

    Could it possibly be that they know more about lending than the government?

    Banks lent recklessly in the last few years, but why wouldn’t they? With the GSE’s buying up mortgages, there is no risk to lending. The government created this problem in the first place.

  19. doc holiday

    Yves, ol' boy, a slight typo here: "It would have to be make clear" …. and institution in the following paragraph. I'm not trying to be a police person, or to be critical, as your blog here goes above and beyond anything out there, so thank you for your time!

    > So far, I enjoyed reading these three bits:

    1. the insurance plan hides the problem of valuing the illiquid assets behind non-transparent bilateral negotiations about the insurance premium paid and the level of the price guaranteed in the insurance contract. Opaqueness and lack of transparency are obviously at a premium when tax payer resources are being funnelled into the black holes that are our leading banks and other financial instutition.

    2. Banks that don’t lend to the non-financial enterprise sector and to households are completely and utterly useless, like tits on a bull.

    3. We cannot wait for the banks to find their juju. The government may have to take it to them.

    My take on that is that in order for the banking bull to regain its mojo, there may need to be some Austin Powers time travel or some DNA-like genetic engineering to re-invent a bull with tits, or, the other possibility is a complete re-invention of the banking industry which cuts out layers in the middle and offers a new revolutionary evolution of capitalism. Off the top of my head, I'd suggest P2P collaborative financing, where shareholders would be more involved above and beyond the state of passive share ownership, i.e, share holders in corporations may have to be more dynamic and not just sit back and wait to get lucky by buying holding paper, they may have to take on a more dynamic role and become active in hands on ownership. Maybe this happens at a local level, where local money is put into projects that the local community invests in, and then they all watch it, manage it and keep the middlemen pigs from stealing the cash.

    The idea of globalization has gone to far with corporate finance and the system has collapsed under its over-leveraged weight; the solution is this problem is to stimulate growth at a local level where small collaborative efforts will result in large scale success.

    Then again, I did have a glass of wine earlier…

  20. ndk

    I feel really bad about criticizing others without proposing an alternative of my own, so I’ve done the foolish and just so you guys can slash holes in my ideas too. It’s really rough, but I can work it up further if people think it’s useful. I’ll add a bunch of links later, at least.

  21. Yves Smith

    doc,

    I appreciate typo alerts, particularly when they are someone else’s for a change! That was Buiter.

  22. doc holiday

    Yves,

    It's funny that I can spot a typo, but then create my own split seconds later; I'm an attention deficit candidate, to be sure!

    In other news, social banking is something I have glossed over, but maybe it has some possibilities for the future? Here is an example:

    Zimple…is dedicated to improving people’s lives by enabling social networks to provide capital to diverse peoples, families, businesses, charities, organizations, and communities throughout the world.

    > also:

    Zopa is the world's first social finance company. In 2005 we pioneered a way for people to lend and borrow directly with each other online as part of our continuing mission to give people around the world the power to help themselves financially at the same time that they help others.

  23. Anonymous

    My opinion of large banks (in practice not in theory) in general is simply greed institutionalized as a business. They will protect their perceived self interests at ALL costs unless forced to do otherwise. And yes, therefore, the banking system should be nationalized NOW, period. The period between now and when nationalization actually happens will simply be, you guessed it, wasted time. Mark the timing on this post, there will be “I told you so’s” coming.
    Mbuna

  24. spare some change?

    doc holiday @ 2:36

    P2P capitalism and finance looks good on the surface, but it’s flawed. It’s a contradiction in terms because “money”, “global trade”, and other financial concepts we take for granted are a system of control that let a few banking elites plunder the world’s wealth at will. They didn’t get to the top by tolerating bottom up finance.

    Efforts like Zopa and Prosper.com are tolerated in the sense that the US postal service is tolerated by private delivery services; permitted as long as they stick with the stuff that’s unprofitable. I’m sure they have read about disruptive innovations and understand that once these things get an economic foothold, they’ll be unstoppable unless ruthlessly stomped out.

    The bottom-up capitalism wonks have technology and communications; the bankers and their minions have superior technology and communications. They also have everyone in power on their side, because that power is preserved by top-down finance. The politicians and media people are, in a sense, bribed by the system to help perpetuate it. The battle will have been lost before you even knew it started.

    Besides, I question whether my mayor is any more benevolent than President Bush. Didn’t we come down out of the trees in the first place, and then move to cities, and then flee to the Internet specifically to escape the ass-hat control freaks?

  25. fresno dan

    Agree with NDK’s comment ‘If we don’t really have a good answer, we need to avoid the hero complex so many have. Everyone wants to save the world through a brilliant maneuver, some ingenious gambit. But collectively, we have to resist the temptation and impulse to just do something”
    Doing nothing is often the best course of action – I am reminded of a Russion general who never attached Napoleon, although he was constantly urged to do so. But “man of action” gets you positive headlines while “do nothing” is the worst insult. I agree with the commenters who point out that it is worse to lose a government than a financial system

  26. ndk

    It would have to be made clear that state ownership of a bank does not mean that the bank’s existing or new debt is sovereign-guaranteed. Limited liability applies even when the state is the only shareholder. Whether existing or new bank debt of state-owned banks benefits from the full faith and credit of the sovereign government can be decided on a case-by-case basis.

    I missed this on my first read through, my apologies. It’s an excellent and accurate point. I don’t believe it matters much in practice, though, because creditors and depositors will behave very differently when they know a sovereign is on the other end of the line. As a political matter, I think the division’s not very tenable. The FDIC has stated as much when it comes to foreclosures initiated by a nationalized bank.

  27. Micahel Fiorillo

    Since the origin of the crisis lay in the decline of housing prices, caused by the disparity between personal incomes and the cost of one of life’s necessities, I’d like to propose a free market solution: unions.

    Yes, unions. If the rate of unionization were to rise from it’s current lower-than-the-1920’s level – caused by a government enthralled and captive by neo-liberal ideology – you’d see the reflation of the economy.

    By the way, you’d also see a resurgence in democracy, since ordinary people would become re-engaged in the nexus between economics and politics. I know it’s a terrifying thought for some, since it would mean a smaller percentage of the national income going to finance capital, but it would work.

    Just imagine what it would mean if Walmart were to become a union shop and the billions of dollars that are currently flowing to members of the Walton family – some of which is funding their foundation-led effort to privatize public education and further constrict democratic practice – were instead redirected to lifting the employees of the country’s largest private employer above poverty level.

    Unions improve lives, and not just for their own members; they raise the tide for all workers in the respective industries, to use a Reagan-era cliche

  28. Chris

    Ndk: actions

    Black Swan Goosed? That ought to do the trick.

    Banks and others aren’t capable of valuing the paper because of effect on shareholders, effect on balance sheets, maintaining face.

    Therefore someone or something else has to. Bankruptcy court is the fairest way. It ought to protect owners and others including tax-payers from seeing their interests destroyed through what looks more and more like fraud and cronyism and probably worse.

  29. CityUnslicker

    There is a big reason do nothing is not an option.

    When the deleverage tails off in a few months all Western Governments will look at their balance sheets and weep.
    So will the banks.

    There is too much debt to repay. There is only one solution; inflate it away.
    0% interest rates, lack of currency support, consumption tax cuts, forced lending – it all points in the same direction

  30. Anonymous

    I did not read the entire post and haven’t read all the comments but the statement at the end of the article says it all for me and I can essentially dismiss the entire rest of the article based on this;

    ” Unless the banks start lending in normal volumes very soon, this recession could indeed become another Great Depression”

    We are in the throes of a massive blowback from OVER LENDING, are we not?? Why would anyone recommend more lending?

    It will be (and should be) painful but lending needs to stop, we should invest in the right things but lending for the sake of giving people capital so they can consume needs to cease and desist immediately.

    Maybe its just wordplay I’m engaging in but all the talk about lending is just crazy talk IMO. We need to save, invest in “future building ” enterprises and get back to normal consumption. This hyperconsumption driven by “lending” is absolutely insane and should have never started.

  31. ruetheday

    Perhaps folks are finally starting to understand what Keynes (the real Keynes, not the phony, misrepresented IS/LM, AS/AD, and deficit spending Keynes of the textbooks) meant when he talked about investment under uncertainty as the driver of instability in the economy and called for greater socialization of investment.

  32. wintermute

    WB:”Don’t blame the banks. Blame the entrepreneurs for not coming up with more creditworthy projects.”

    No. This is an effect Not a cause! Is is an effect of an over-taxed, excessively red-taped, misregulated private sector.

    Swollen government-knows-best economic systems take money from the productive entrepreneurs and give it to non-productive beneficiaries. As well as crushing debt, financial-system failure, – this is yet another fundamental problem…

  33. Anonymous

    Banks are in the business of making as much money with as little risk as they can for their share holders which is quite often anyone who has a pension. The balance between making lots of money and risk alters with circumstance, but when the opportunity arises to make a little bit of money at virtually no risk this is probably an opportunity not to be missed. Why would any bank lend lots of money when they can park their money at the FED and make a profit.

    For all those who are calling for full nationalisation of the banks then what do you think will happen to the shares in the banks and what happens to your pension fund which holds those shares. What happens to foreign banks when the credit default swaps need to be settled, do you honestly think the rest of the world will continue to trade and play ball with the US.

    On the assumption that banks will not lend and quite frankly looking at quarterly statements that is not clear, then the easiest solution might be to resurrect the first domino to fall. The simplest solution from my point of view would be for the US government to act as a monoline insurer. This transfers risk to the government from the banks at a cost to be determined by the government. The treasury would of course have to stop paying interest on deposits at the same time. This all started with the threatened ratings downgrades on the monolines what better place to start to fix things.

  34. Richard Kline

    Buiter: "If they won’t lend spontaneously, it is the job of the government to make them lend. Banks have no other raison d’être." Hear, hear. Oh, the purpose of the _banks_ is to make dough, but the purpose of society is to make progress. If the banks can't make it, society needn't take it.

    Spare some change: "If lending is 'vital' to capitalism as we know it then why are we leaving this vital function in the hands of privately held enterprises?" Because we're stoopid in this country. Supposing that we follow through on Buiter's C, we try the alternative for a time.

    Michael Fiorillo, I'm with you; unfortunately the American sheeple don't think collectively, they just watch TV concurrently. Walmart should have been unionized yea long since, but then they wouldn't be the cheapest game in town.

    As far as sinking the Guvmint's full-faith-&etc. by nationalizing the banks, that's true only if the obligations of those banks are paid off at face. Guvmint: "I'm the sovereign; you're the mark; here's the mark to market; deal, baby, and the squealing is optional." If we _buy_ the banks, the government's bust. If we seize the banks, the capitalists are bust, but the country's economy has a floor under it. Quite a few stories lower, but a floor. Every dime we waste paying into the pockets of financial system plutocrats, and attempting to prop up nonsensical face prices on financial assets is wasted, aggregate burnt offerings to Mammon the Dead, not even non-solutions, but dys-solutions on the path to dissolution. CUT OUT THE FAILED INTERMEDIARIES, and row hard for the nearest shore.

    It's impolitic to say so, but I for one and damned glad that the financial system we know it is _dead_. The last fifteen years have been excruciating. There is no guarantee that we get a better society out of crisis, and our transit through fascism may be more prolonged and injurious than a best case scenario, but the Cocaine Economy has sucked for anything of lasting value in this country and this world. If we can't turn the page, then burn the page, and write a new one. The sun still comes up; children still get made and mostly fed; the blackbird whistles, the crows cart off the carrion. It's illusions which have died more than anything—so far.

  35. Anonymous

    I used to read my blogs and enjoy reading about the bankers and government officials and academics showing off their feet of clay and their complete lack of any idea about what to do. But I’ve had enough now: People around me are getting the sack, the tower cranes outside my window at work have all gone, the roads and shops are emptying. Its like a bad dream that’s morphing into a nightmare…

  36. Flow5

    "realised saving equals realised investment – accounting identities are very insistent"

    WRONG… the utilization of commercial bank credit to finance real investment or government deficits doesn't constitute a utilization of savings since financing is accomplished by the creation of new money & credit.

  37. Robert

    yeah- what alexblack said. Great analogy- let’s don’t try to resurrect a “consumption at all cost” economic model- such as when Bush instructed us several years ago- after 9/11 to “go out and buy something”. Whew- if that doesn’t represent what we should not be about I don’t know what does.

  38. Flow5

    The great German poet and playwright Bertolt Brecht would have agreed and once said it was “easier to rob by setting up a bank than by holding up (one).”

    Nationalize the money creating depository institutions. Government rule is preferrable to private control – if history tells you anything.

    From a System standpoint, time deposits represent SAVINGS that have a velocity of ZERO. As long as SAVINGS are IMPOUNDED whithin the commercial banking system, they are LOST to investment or to any type of expenditure. The savings held in the commercial banks, in whatever deposit classification, can only be spent by their owners; they are not, and cannot, be spent by the banks.

    Shifts from TDs (time-deposits) to TRs (transaction-deposits) within the CBs and the transfer of the ownership of these deposits to the thrifts involves a shift in the form of bank liabilities (from TD to TR) and a shift in the ownership of (existing) TRs (from savers to thrifts, et al). The utilization of these TRs by the thrifts has no effect on the volume of TRs held by the CBs or the volume of their earnings assets. I.e., the non-banks are customers of the member money creating depository banks.

    How does the FED follow a “tight” money policy and still advance economic growth.? What should be done? The money creating depository banks should get out of the savings business — gradually (REG Q in reverse-but leave the non-banks unrestricted). What would this do? The commercial banks would be more profitable – if that is desirable. Why? Because the source of all time/savings deposits within the commercial banking system, are demand/transaction deposits – directly or indirectly through currency or their undivided profits accounts. Money flowing “to” the intermediaries (non-banks) actually never leaves the com. banking system as anybody who has applied double-entry bookkeeping on a national scale should know (except currency).

    The growth of the intermediaries/non-banks cannot be at the expense of the com. banks. And why should the banks pay for something they already have? I.e., interest on time deposits.

  39. Stephen

    The more I think about this the main symptom is the hoarding of cash. The cause of cash hoarding by banks is fear of erosion of their capital base. Two sources

    1) Redemptions on deposits, either from fear or because people will be paying down loans or using up savings to live. I can speak from experience that we have gone through a massive deleverage on our household balance sheet in the last year. Going from a debt to asset ratio of 27% to about 10%. Assets have been liqudated to do this so our asset base has fallen as well. But we are more comfortable at that place than when we held more assets and more debt…worries over cashflow.

    Thats a market of 1 but I suspect many other households will either proactively or out of necessity go through the same process.

    Effect on the bank, we used cash and we have paid down debt. Some mutual funds were sold for cash. The net effect on the bank balance sheet is a reduction in assets, we dont borrow as much but their liabilities also dropped, less so because one of the assets eliminated was a non bank one, the house. We got out in time by the way.

    One way or another the bank readjusts as this goes on. The biggest issue being the banks worry about redemptions and deposit liquidation. I bet they have no idea right now what households are doing net/net. So need to hold cash

    2) For those households with no assets to sell, then the debt reduction cant take place and the risk of loan write offs increase. As well, the concern over assets backing Money Market Funds. I am sure it has moved into govt bills, like a turtle hiding its head. No overnight money from these huge pools of demand deposits to fund operations. And then there is the fear that these are demand deposits and consumers could walk away with it overnight, or shift institutions. Small changes in the propensity to withdraw cause huge shifts in these pools. A prudent money market manager would be increasing cash till it became apparent what was happening.

    Then there is fear of loan losses, credit cards, lines of credit (unsecured) and mtg losses. All of these mean that banks wont really know where they stand till the first bills post christmas are being paid….no knowledge till Feb I suspect. then you look retailer working capital, can they pay their lines post christmas.

    Banks wont feel cofortable, because they lack knowledge, till Springtime.

    Sperate Question…in the US you get to write off mortgage interest against income. I am sure this was a significant item in the previous year. With rates coming down and possibly mtg indebtedness coming down doesnt that mean less of a writedown vs total tax? Is this material.

    Secondly, how will capital losses on homes work. If I sell my home for less than I paid, is a tax shelter created, can they, an American Homeowner, carry those losses forward or backward in their taxes?

    Just curious abou what affect this has on government revenues and household tax liabilities in the US.

  40. Anonymous

    So even if you force the banks to lend. That doesn’t mean the consumer is going to want to take on more debt no matter how attractive the terms are. I know, I don’t.

    Anyone care to weigh in on that?

  41. Anonymous

    Why doesn’t the govt promote some regional banks or smaller that are not derivatoxicated

    It’s a nice idea. The problem is regional and local banks have their own large sector of non-performing assets: real estate construction financing on unfinished and dead in the water r.e. projects. A fair amount of that turned into Real Estate; Owned during 2007 and 2008 foreclosures.

    Such properties don’t just have reduced value. They have 0 to negative value. Look up “Tringali Auction” in the Sarasota Herald Tribune for an early 2007 example of what happens. A lot of water has surged through the dam cracks since that time. A busted project consisting of scraped earth and half-completed road and utilities infrastructure only represents property tax and insurance liabilities to a new owner. You can’t even immediately resume development if market conditions warrant. The previous civil engineers and architects were typically stuck with everyone else. They aren’t going to step back in for free. They are just as narrow minded about that as most bankers. And without them you’re restarting at square one.

    The local yokels (from the viewpoint of Manhattan) have been dealing with this through several devices.

    The favored method was to promptly sell these assets to their strongest developer clients on E-Z terms with next to free financing. The intent was the developer would swiftly complete build-outs and sell. Local Bank and friends would originate mortgages that could be resold to Indymac, Washington Mutual, Lehman Brothers, Citibank and Fannie Mae (a/k/a “Masters of the Universe” or “Low Hanging Fruit” depending on who you talk to).

    Option 1.5 to 2.0 was to move these assets off-book to wholly or partly owned subsidiaries, just like the grownups did with SIVs.

    These devices were partly successful through 2007 and into 2008. The unsuccessful portions are now reappearing on the FDIC’s inflating list of problem children.

  42. Anonymous

    If they won’t lend spontaneously, it is the job of the government to make them lend. Banks have no other raison d’être.

    Buiter is great on the diagnosis, but he's a complete idiot on the prescriptions.

    If banks have no other reason to exist, then government doesn't have to do anything.

    ndk basically is right on the money. There is no point in having insolvent or barely solvent institutions lending – all you're going to do is create more of the exact same problem, and the barely solvent banks will become insolvent. We already have the FDIC calling in C&D loans – and for good reason. There is no evidence that one year will magically make an insolvent company solvent. Delaying the problem only makes the money flows even less liquid; all coercion is going to accomplish is price-fixing – which is gerat for debtors but the banks need capital which price-fixing will discourage.

    As long as the prscription is to force credit risk to be underpriced, the money system will remain in it's vegetative state.

  43. ndk

    Chris,

    Therefore someone or something else has to. Bankruptcy court is the fairest way.

    I completely agree. I’ll highlight that a little more loudly with attribution.

    Black Swan Goosed? That ought to do the trick.

    Best caption yet. :D Anyone who’s curious can click on my name!

  44. Anonymous

    Since the origin of the crisis lay in the decline of housing prices…

    Wrong. The origin of the crisis lay in the underpricing of credit risk (low interest rates) and the leveraging that took place to make up for it. Inlfated home prices were the result of that, not the cause (though it did become part of a vicious circle).

  45. Anonymous

    when he talked about investment under uncertainty as the driver of instability in the economy and called for greater socialization of investment.

    The problem with that is the socialization only creates further uncertainty. What then?

  46. PghMike

    I’d bet on a variation of #5 — many banks are insolvent due to leveraged bets on MBS securities and synthetic CDOs based on MBS securities.

    So, if you’re an exec at such a bank, you can mark your assets to market, recognize that you’re insolvent, and have your bank taken over by the FDIC. But you’re off the gravy train, if that happens.

    Or, you can keep servicing the debt that you used to buy your bad assets, and hope that a friendly Treasury Secretary eventually comes up with a new “lending facility” that lets you put your CCC rated crap as collateral on a non-recourse loan from the Fed (i.e. you’ve sold your junk to the Fed).

    Right now, Citibank is the only one that has received such a big gift (nearly 300 billion dollars in non-recourse loans). But maybe, if you can stay alive, you can join the club.

    This will only get better when the FDIC audits these banks, closes down the hopelessly insolvent ones, and recapitalizes those that are only damaged (hopefully taking a lot of warrants for common shares for our trouble).

    Until then, bank execs will take whatever money they’re supposed to be lending, and use it as a war chest to try to ride out their disasterous investments.

  47. Anonymous

    Its refreshing to see the truth finally being told. The world monetary financial system is finished and it collapsed at its weakest point, the sub-prime mortage, on July 27-2007.
    The only rational solution is through buruptcy re-organisation protecting the essential banking functions of the banks and freezing till further notice any and all derivative payments. The most honest figure on outstanding derivatives is around 5-10 Quadrillion. Yes, that is with a “Q” with each being $1000.00 trillion. These could never be settled and any atempt will lead to Weimar Germany 1923, and austerity measures that would make what happened to 3rd world countries a joke.

  48. ThatLeftTurnInABQ

    anon @12:59am writes:

    One reason banks have to lend is that if they fail to do so they will not be able to pay their investors, whether depositors or shareholders or bondholders. If they fail then they will go out of business. But it seems to be the case now that they don’t have any reason to fear going out of business unless they are small enough.

    ————-
    PghMike @12:22pm writes:

    So, if you’re an exec at such a bank, you can mark your assets to market, recognize that you’re insolvent, and have your bank taken over by the FDIC. But you’re off the gravy train, if that happens.

    Or, you can keep servicing the debt that you used to buy your bad assets, and hope that a friendly Treasury Secretary eventually comes up with a new “lending facility” that lets you put your CCC rated crap as collateral on a non-recourse loan from the Fed (i.e. you’ve sold your junk to the Fed).

    Right now, Citibank is the only one that has received such a big gift (nearly 300 billion dollars in non-recourse loans). But maybe, if you can stay alive, you can join the club.

    A couple of the comments above dovetail with something I saw recently in :


    “Didn’t Paulson only last week say that he was done with the bailouts for now. And a week later he is having to launch another massive bailout for Citigroup”

    That is exactly what caused the run on C. They were perceived as the one with the worst assets and would have to carry it on the books instead of selling it to TARP.

    This connects with something I’d been wondering about, which is that we seem to be dealing with a failure cascade in which each bailout triggers a run on the next weakest firm. This process is analogous to what critics complained about regarding Dean Acheson’s National Press Club speech in 1950 (where Korea was implicitly excluded from the US security perimeter thus inviting attack), or to the erosional process of headwall cutting in an arroyo.

    If these analogies are correct then this is a runaway process which cannot be stopped and will continue until we run out of political capital (i.e. every last firm which is too big to fail has been bailed out already and there is no political willpower remaining to save anyone else) or the Treasury runs out of bailout money, whichever comes first.

    Perhaps a trite observation and all too obvious to the readers on this blog, but there you are.

  49. Anonymous

    something i don’t really understand…buffet has what? $30+ billion in cash. why doesn’t he a) buy a bank b) create his own bank (or bank holding company as need be), or c) get into microlending? it seems like one of the greatest opportunities in history. having a bank with a clean balance sheet, access to cheap money, and a solid (buffet) reputation, running the 3-6-3, or more like a 3-8-2 model, would, seemingly, turn berkshire into a trillion dollar firm instantly. who wouldn’t want to put their deposits in an ultra safe institution? what creditworthy customer wouldn’t come to them for a loan (even at inflated rates)? impossible you may ask…he couldn’t fast track thru the red tape? acquire a national network thru the fdic, ie bank failures? he would become the largest bank in the us, possibly the world, virtually overnight. where does the problem lie? is it with the insolvent banking system (shadow, et al) who cannot lend? or someone who has $33 billion in cash who is too timid to put it to work? instead of bemoaning the problems in the financial system, he should be part of the solution. pay 3% on deposits, get 8% on the loans, and sip a cherry coke on your lazyboy by 2. get back to the basics and let the rest of them go bust….i wish i had $30 billion.

  50. joebhed

    Come on gang, get serious.
    We wouldn’t REALLY care if the banks were either enabling or forcing more lending if WE THE PEOPLE had not gone out on a $2Trillion limb in support of that end.
    It’s all a mistake.
    Very soon to be obvious.
    The government should not be borrowing from anybody to support its capitalization of the economic workout CAUSED by the base of commercial fractional-reserve lending and the over-the-top IBs leveraging their SIVs all to hell.
    The answer to the problem created by this BUBBLE-depression is the same as the answer to the one that came in 1929.
    The CHICAGO PLAN.
    Look it up.
    Promote it to support sound money and put an end to this capitalist business cycle BS.
    Let’s get on with a real solution.
    Obama and Geithner/Summers are leading us down the garden path for one good reason.
    It’s the ONLY thing they teach at business school.

  51. Chefmark

    (3) After years of excess and anything goes, the bean counters and risk controllers now rule supreme in the banking world. There is little upside to lending and taking a risk, but a lot of downside. Rolling over an old loan or extending a new one won’t help your bonus and it may cost you your job.

    The “too big to fail|” menatality is what has caused megabanks to fail in pricing risk.
    Why else would Citi, Bear, Lehman, and other multinationals have leveraged their assets 40 to 1? When a bank is not worried about failure, it becomes a useless exercise to price in risk realistically. Thus the demise of due diligence. We can blame their greed or the irresponsible government oversight but in the end both lender and borrrowers entered into contracts that had little systemic risk of failure.
    Now the Treasury is trying to protect these firms by providing guarantees and continue the elimination of due diligence when it comes to risk pricing. This will only inhibit market pricing of risk.
    By propping up this system the Fed is merely putting off the inevitable demand destruction for credit particularly from the consumer. Business does need access to credit for capital creation. The market is driving business to go to local and regional banks for access to credit. These institutions have continued to price risk based upon local and regional economies. There is still competition in local markets for profitable investments.(I sell cars for living and I see this everyday. That’s how I have been able to continue to make a living). The best thing that could happen is for megabanks to file for bankruptcy protection, restucture themselves into smaller entities that can make good loans to states and local communites thus increasing job and capital creation in the immediate future.
    If the Treasury wants banks to lend then it should use TARP money to offer local banks the funds to remove bad debt, if they have it, and encourage a grass roots repricing of risk.(Greenspan and Bernanke have screwed it up to this point anyway).
    Paulson’s fear of systemic risk has pushed him to bankrupt the Treasury with no results. The multinationals have done this to themselves on such a scale that even the Treasury doesn’t have enough money to roll back the damage. It is time to invest in our neighbors(Main Street) instead of psuedo representatives of the US(Wall Street).

  52. Tortoise

    Let us get a grip. How did we get from worship of the omniscient markets to rush to nationalization in such a short time?

    We had a pretty good system in the seventies … Small PRIVATE companies were in charge of lending. I remember when I got my first mortgage from a small S&L, I was interviewed by one of the owners, Mr. Schwarzendruber. Obviously, the guy was very motivated to make a profit while making sure I would be able to make my payments. At the end, I felt that we both got a good deal. The system worked well. Remind me exactly why we had to change it?

  53. Anonymous

    Welcome to your typical sample of 1:

    Three days ago we dropped by Carmax and bought a car. We got a loan to do so, for $14k.

    The interest rate was not very good – 8.2%. Still, neither is our credit at the moment, and this is about the interest rate our last car loan was mad at, back in 2005. If you also consider our household income is lower now than it was in 2005 (wife went back to school), then I’m not so sure the rate went up as much as I’d expect.

    So, no banking problems here. Please, extrapolate wildly.

  54. Chefmark

    Anonymous said…
    Welcome to your typical sample of 1:

    Three days ago we dropped by Carmax and bought a car. We got a loan to do so, for $14k.

    Thanks for your business. I would ask what finance company offered you that rate? You should have received a alternate offer as well. Carmax is the only auto retailer that offers their customers more than one offer to choose from. That’s why your rate was competitve with the purchase in 2005. Competition drives banks to compete for qualified borrowers. If the automakers want to offer a restructuring plan to Congress for their profitability they should look at the way they distribute their product. Dealers have to pay the manufacturers for a invoice price that is non-negotiable, yet they are forced to negotiate with their customers in order to protect the dealers profit margins. You talk about a lack of transparency, the distribution of autos is a business model that has greatly contributed to the failure of the automakers as much as any union contract.

  55. Anonymous

    Proof that the system is gone…..
    London’s Daily Telegraph today mooted the possibility of Great Britain defaulting on its sovereign debt for the first time since the founding of the system in 1694, “You have a general collapse of the system, and people are coming up and giving you little pieces of yarn falling off of the sweater. The point is: it’s not the yarn that’s going; it’s the sweater.” According to the Daily Telegraph, the rate on Credit Default Swaps to insure British government debt stand at reached more than 100 basis points above the Libor, the standard for lending rates. A year ago, the CDS rate was only 2 basis points above Libor.

    City of London mouthpiece Ambrose Evan Pritchard also voiced his fears that Great Britain might go bankrupt, pointing out that CDS rates for British debt are significantly higher than Germany (35), the United States (43), and France (49), and is more in line with countries like Portugal.

  56. Mark Foley (not the ex-Congressman)

    There are three extra factors to think about:

    The ratings of any bank which dares to lend into the teeth of a recession will be immediately downgraded by the rating agencies. When you stick your head above the parapet, they will be happy to blow it off.

    There is also the question of human capacity – the major banks gutted their lending corps of seasoned credit people long ago because they seemed expensive and superfluous. They replaced them with originators and credit ‘by the numbers’. Now they lack enough of the seasoned credit people who can actually make reasoned judgments about situations which are not plain vanilla.

    Finally, it is supposed that there is plenty of decent loan demand out there going begging. It may be that businesses expect lower volumes and want to hunker down and wait for the storm to clear. This goes for consumers too. The governments can force banks to lend, but can’t force other actors to borrow.

    The government should spend some of its efforts thinking of ways to make deals bankable.

  57. Anonymous

    Consumers are essential. But they are not spending. Why? A number of possible explanations suggest themselves.

    (1) Normal consumer prudence has finally resumed its rightful place, after many years of excess. These individual spending decisions aggregate into an entirely appropriate volume of economy-wide spending that happens to be very low. Don’t blame the public.

    I would put zero weight on (1).

    What is to be done? I can think of three ways to get them to spend using the coercive powers of the state.

    (B) Aggregate spending targets for spending in the domestic non-financial business sector are set by the government for each consumer (last year’s total five percent, say). The consumers themselves can decide who to buy from and on what terms. Any shortfall of actual spending from the target is translated pound for pound into a Deficient Spending Tax. Since not meeting the target amounts to throwing money away, the public will spend.

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