Important people are telling us to be afraid… very afraid… of what will happen if we don’t "fix" this "thing".
I’m not talking about politicians. I have the general impression that they are, at best, only slightly less clueless than me about the crisis, as well as the
bailout rescue plan bailout supposedly designed to stem the crisis.
I’m talking about economists. They ALL predict gloom and doom for ALL of us. Thomas Friedman (not an economist) translates the severity in simple terms, about how it affects us all:
This is a credit crisis. It’s all about confidence. What you can’t see is how bank A will no longer lend to good company B or mortgage company C. Because no one is sure the other guy’s assets and collateral are worth anything, which is why the government needs to come in and put a floor under them. Otherwise, the system will be choked of credit, like a body being choked of oxygen and turning blue.
Well, you say, “I don’t own any stocks — let those greedy monsters on Wall Street suffer.” You may not own any stocks, but your pension fund owned some Lehman Brothers commercial paper and your regional bank held subprime mortgage bonds, which is why you were able refinance your house two years ago. And your local airport was insured by A.I.G., and your local municipality sold municipal bonds on Wall Street to finance your street’s new sewer system, and your local car company depended on the credit markets to finance your auto loan — and now that the credit market has dried up, Wachovia bank went bust and your neighbor lost her secretarial job there.
We’re all connected. As others have pointed out, you can’t save Main Street and punish Wall Street anymore than you can be in a rowboat with someone you hate and think that the leak in the bottom of the boat at his end is not going to sink you, too. The world really is flat. We’re all connected. “Decoupling” is pure fantasy.
So I do "get it". The crisis is real. The failure to do anything will have enormous implications.
But I’m slowly coming to the opinion that we should…. do nothing.
That’s right. Let the motherf’er crash.
You know why?
Because it’s a ridiculous system.
No, I’m not talking about capitalism. I’m a capitalist like everybody else. I like wealth to the extent that it allows me to live comfortably.
I’m talking about the financial system which depends on debt in order to prosper. I’m talking about what is known as the "credit market". The term "credit market" refers to the market where financial instruments that embrace credit risk (the risk that the creditworthiness of a borrower may change) are traded.
First of all, it’s not really a credit market. It’s a debt market. It’s an actual market, just like the stock market; the only difference is that the "financial instrument" being traded in a "credit market" isn’t a share of stock, it’s an IOU, a debt. Unlike stocks, which have (ostensibly) a value which fluctuates with the value of the company, debts don’t really have a fluctuating value. Their worth is the worth of the debt paid in full (with interest). We just pretend that their value is the value of the "creditworthiness of the underlying borrower".
This pretense works great in a rising economy. Borrowers pay back their debt, and so the financial instruments that "embrace credit risk" are solid.
But what happens to the "credit market" in a downturning economy? Well, as we have seen, the "creditworthiness of underlying borrowers" takes a tumble. And because the credit market is so pervasive in the world of finance, the economy plummets, making the creditworthiness of underlying borrowers even worse. And suddenly, it’s an avalanche.
The recent downturn in the stock market is merely a by-product of the CRASH in the credit market. There’s no equivalent of the "Dow Industrial Average" for the credit market, but if there were, it would be at, or close to, zero. In the eyes of the financial community, ALL debt right now is considered worthless, or at risk, including your home mortgage, car payments, etc. As well it should be, because if things really continue to crash, you may not be able to make those payments.
So there’s a scramble right now to prop up the credit market artificially with a $700 billion bailout, so that we will all be spared the pain. And I can understand why.
But from a long-term economic standpoint, does this makes sense? Why are we propping up a credit market which is (I’m convinced) structurally flawed in the first place?
Debt, people, is bad. It’s never something that we should want as individuals. It is, of course, necessary — most of us would not be able to have homes or cars without it. Most businesses, which employ people, would not be able to get off the ground, or expand.
So it is a necessary evil, but it IS evil.
It therefore makes no sense to have in place a market which encourages — indeed, thrives on — debt. And it makes even less sense to allow such a market to become so pervasive that its collapse threatens our entire economic system. It’s institutionalized insanity.
So the systemic solution, in my opinion, is to end the
credit debt market. We are going to have to do that someday, or we’ll be in this situation again decades down the road. I’m not talking about ending debt — we should still be able to get loans from financial institutions for ourselves and to keep American business thriving.
And I’m okay with allowing companies to use debt as collateral for further loans. But only once. For example, Bank A wants to borrow from Bank B and puts up a slew of home mortgages as collateral. That’s fine. But Bank B can’t use those mortgage based assets as collateral for its loan from bank C.
But must importantly, those mortgage based assets, and other assets based on debt, should not be traded in some sort of "market". We’ve got the stock market, the commodities market, etc. — those are good enough. Those are markets rooted in tangible things, and things which are good for the economy and basic sustanance (companies, food, etc).
Soooooo… since the "credit market" is on its knees already, I say we let it die a natural death. Will it come at a cost? Well, stupid things usually do. But for the long-term prosperity of the nation, it’s for the best.
That’s my two cents (which is what I’ll probably have left if my advice is followed).