Elegant Market-based Solution to the Financial Crisis
Personal_Finance / Credit Crisis 2008 Oct 17, 2008 - 05:22 AM GMTBy: David_Haas
THE PROBLEM: In a strange and awkward way, some of us here in the mezzanine have experienced a rather morbid and dark sort of enjoyment as we watch those on stage who created the world-altering credit crisis, and the governments who enabled it, squirm and writhe - like a child caught in his first big lie - as they attempt to sort out the consequences of what they've done. What we see from our vantage point is, instead of coming clean, they continue adding layer-upon-layer of ever-glossier, ever-less-credible volumes to their original prevarications. In my opinion, this is EXACTLY NOT what the world needs right now.
The frustrating part for those of us who pay attention is that we know we're all on the same big ship.
In our souls, we deeply fear that we've just slammed the massive-blue-iceberg-in-the- night; our ship is screeching, tearing, moaning, and listing; the slushy waters we're heading into here in the wee hours of morning are dark and shark-infested; and, most fearsome of all, the lifeboats may be few. As we all know, fear is a most-powerful motivator and millions of people have been dynamically motivated by recent events to grab their money and run. Fear is also highly infectious and travels especially rapidly in today's interconnected world. As I was just reminded by a reader, “what we have to fear most is fear itself”.
Maybe I'm being (a little?) dramatic, but I write this commentary based upon numerous conversations I've shared with a broad cross-section of people over the past few years. By 2005, I began noticing that these “everyday folks” were beginning to sense that things had, for reasons unknown, gotten “way out of whack” and that something major was about to happen. Some feared it might be another terrorist attack. Others were more certain it would be “of a financial nature” but they just weren't sure where it might originate. Now that we know where some of the largest problems had been festering, we're experiencing a collective state of shock as we watch our “leaders” seemingly grabbing one straw after the next, hoping “this next great solution” will be the one that catches hold and enables the markets to begin to firm up, regain confidence, and move forward once more. We are all overdue for this collective sense of relief.
At the risk of stating the obvious, why can't a single one of these prominent leaders see that what we're really suffering is a crisis of confidence? Why isn't it painfully obvious to them that the money problems are merely a symptom of the root-cause, which is LOST CONFIDENCE? As if it's all they know how to do, these political and financial titans continue throwing mountains of money at a problem that cannot be solved with more money which, of course, really means debt. It's like trying to remove a hex-bolt with a philips screwdriver - ineffectual, wrong tool for the job.
What they need to do is have a catharsis - a true and convincing cleansing - and a plan to address the worsening psychology of the crowd. If they won't do it voluntarily, the markets will surely force their hand. They need to set about SYSTEMATICALLY REBUILDING TRUST. The recipe for this is simple: Restore our confidence and our money will follow. Obviously, this kind of “simple analysis” is monumentally hard to do when lofty educations, multi-lettered credentials, and hardened egos are at stake. To be fair, Ben Bernanke may not have the world's largest ego but his handlers - the policymakers - most assuredly do. And so we continue flying in the fog.
The problem is, these leaders just don't get it. They fail to understand that we no longer have confidence in them, let alone their ever-more-complex “plans” to spend our money and their “shiny new initiatives to stabilize markets” with billions, then trillions, then “virtually unlimited amounts” (that's the last figure I heard) of our future tax money. Don't they see that they're slipping down the slippery slope tearing out the underbrush as they go? Can't they simply look out the window and see which direction their bus is moving in? These helm-holders seem to forget that we work hard for this money they so cavalierly throw from helicopters and blast from water-cannons (figuratively speaking, so far).
With each news conference, each closed-door weekend meeting, and each predictably-hopeful “evening report”, the handlers confirm more positively for each and every one of us that they've forgotten just whose money it is they're spending and whose futures their decisions are encumbering. Bottom line is, we all know that it's our money they're throwing around. They have the credit card, we pay the bill. And that's why the working man isn't buying it - or much of anything else for that matter. They've lost our confidence and we're all feeling the damage in our very own pocketbooks. So what does the common man do to exercise a little control? Naturally, he's had to stop consuming - which leads us ever further down the dismal path of deep recession, or worse. This is the self-fulfilling prophecy that, if left unchecked, spawns recession, then depression, then either deflation or hyperinflation as a final resolution. THIS IS THE CYCLE THAT MUST BE BROKEN NOW.
So, rather than beat this dead horse further and play another inning in the blame game, today I intend to publicly offer my uniquely simplified version of what I see as a potentially effective, grass-roots, market-based solution to the credit crisis worldwide. Appropriately, my solution starts right here in the good ole USA where much of the problem began. .
First, a little background. One morning last week I awoke from a restful sleep and confidently announced to my wife that, overnight, I had developed a simple solution to the credit crisis while I slept. This didn't seem strange to me because I've learned in my nearly 49 years on Earth that many of life's serious problems are solved while we sleep. Perhaps it's because we can truly “let go” when we sleep that our true mind - our subconscious mind - can get into gear without the interference and incessant, distractive chatter of the ego and set about crafting a practical, emotionally-detached solution to the problem it's presented with.
THE ELEGANT SOLUTION:
In the yin and yang symbol there is black melded into white, representing darkness and light, evil and good, problem and solution. Upon observation, one sees a single spot of black on the white field and vice versa. To me, this would represent the “seed” of light found in darkness or the seed of darkness found in light. By this logic, if darkness represents the problem, then the seed of the potential solution can be found somewhere within that which caused it.
Aside from the mass psychological basis outlined above, a major contributing factor in the lack of trust in the financial system is that savers have been consistently penalized for saving since, at least, 2001 . Any economist knows that personal savings is the bedrock that investment and capital are founded upon.
Obviously, credit markets rely on people who save their money. Knowing this, why would we continue to insult and abuse those who hold the true power to resolve our current crisis; the savers? Instead of this direct approach to solving our crisis - rewarding savers - our leaders have gone in the opposite direction. Through their actions, we've exponentially increased the rewards for debtors, absolved them of their debts, and specifically avoided holding any of them responsible for their prior acts - while, apparently, handing them the spoils (ownership) of the entire game-board they just lost on. Somebody please check me if I'm wrong here but aren't the biggest banks presently taking ownership (with government money) of the entire world financial apparatus? Are these same banks not…oh never mind.
Here's how we fix the problem from the grass-roots where, I firmly believe, the only lasting, workable solution can ever come from. First, we need to re-capitalize the banking system from the bottom up (as opposed to the top down) so that it can repair it's hungry balance sheets and itself become confident enough to begin interbank lending again. To accomplish this, WE NEED TO GET SAVERS TO BOLDLY MOVE THEIR MONEY INTO BANKS AGAIN. This re-capitalization, in my view, should NOT be a function of government!
How can we accomplish this? That's simple too. We begin paying savers not just a good but, in fact, A VERY STRONG AND HIGHLY ATTRACTIVE RATE OF INTEREST on their money. Why not use the bloated “bailout war-chest” to subsidize savers for a change? Money would quickly flood back into our banks if for no other reason than to seek the reward of a strong rate of return without risk to principal. As part of our confidence rebuilding plan, we would also extend the government (FDIC or Treasury?) guarantees to whatever amount of money a saver/investor wishes to deposit. Rest assured, seeing credible evidence that confidence had been restored, money would come from around the globe seeking a safe, high rate of return. Voila! A true, market-based rescue plan.
Where would the money come from? For many years, people have marveled at the huge spread between the interest rates charged on credit cards (especially if there's any impairment on the borrower's credit rating) and the interest rates paid to depositors in the very same institution. Banks have been brazenly greedy and have refused to pass on even a sliver of the profits they raked-in from this spread. Rates being charged to borrowers often run up into the double digits and, for many people, peg themselves up against state usury limits. For some people, these interest charges can reach levels in the range of 30% to 40% per year based on what I've read.
Do you think capital would form quickly inside an institution offering government guaranteed savings accounts yielding 30% PLUS per year? I think the mood of the country, in fact, the world would change in the blink-of-an-eye if a solution like this were put forth and this problem, despite its massive scale, could be quickly and positively solved.
LET'S LET SAVERS AND INVESTORS DEPOSIT THEIR EXTRA MONEY INTO THEIR CREDIT CARDS - WITHOUT LIMITS ON WHAT THEY CAN DEPOSIT - AND ENABLE THEM TO COLLECT INTEREST AT JUST A PERCENT OR TWO LESS THAN WHAT THE BANKS WOULD CHARGE THEM IF THEY WERE CARRYING A CREDIT BALANCE!
As I imagine it, my solution would accomplish several things:
1. It would quickly infuse massive amounts of capital back into the banking system and fatten up institutional balance sheets rebuilding public and inter-institutional confidence.
2. It would put a great deal of discretionary interest income back into the hands of savers (a group that has been punished long enough) and offer irresistibly strong rewards for saving .
3. The majority of today's savers tend to be members of older generations who have accumulated their wealth over many years. This strong new source of interest income flowing into their households would take a tremendous burden off of them and their families, and greatly improve their outlook as well as their quality of life in retirement.
4. Much of the interest earned would be spent or re-invested directly into our domestic economy. This would, of course, create domestic jobs, ease unemployment and the increasing demands on the social safety-net, and improve the social mood AS IT INCREASED TAX REVENUES TO PAY DOWN DEBT at the local, state, and federal levels.
5. It would likely lead to a substantial government revenue increase without a growth-threatening tax increase!
6. It would get rid of the temptation for governments to further increase the indebtedness of future generations to unsustainable levels by continually throwing massive amounts of money we don't have at a problem that can only be solved with LESS DEBT, not more.
I will stop right there because all I'd intended to do with this post was to “float” my idea out into the realm of possibility through cyberspace. I'd love to hear feedback and entertain others' informed opinions of why this idea is or is not workable. Maybe it can serve as a starting point in a worldwide discussion. Perhaps, if nothing else, it will provide a new and “hopeful” direction that is at least a little bit more fresh and insightful than what we keep seeing emanating from the smoky halls of government and the creaky towers of finance. After all, they've delivered us to where we are and I sense it will, ultimately, be up to we-the-people to deliver the solution. I've thrown my hat in the ring. Let's see some others gain the courage to stand beside me and do the same.
For more interesting reading on a variety of topics please visit: www.haasfinancial.com
By David Haas
Consultant
In my consulting practice, I work with individuals, business owners, and professionals. I assist business owners and professionals in several critical areas ranging from business start-up, marketing, operational challenges, employee retention, and strategic planning to personal asset protection, financial, and retirement income planning. Often, these areas relate and need to be integrated to work most effectively. I also assist business owners in developing exit-strategies that enable them to maximize the value of their business interests and preserve their lifestyle in retirement. For individuals, I primarily focus on tax reduction, financial, and retirement income planning.
© 2008 David Haas, Consultant
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