8/22/2012 6:24 PM ET|
No debt, no cuts, no new taxes?
For all the nation's economic woes, the debate seems stuck on tax hikes for the rich or cutting off seniors and the poor. We need radical ideas; here's one worth considering.
Mitt Romney's pick of Paul Ryan as his vice-presidential running mate has refocused the nation's attention on the big, structural issues plaguing the union. The national debt is now larger than the economy's total output in a year; each American's share is nearly $51,000. Inflation that has averaged 4.4% since 1970 and reduced a dollar's buying power to just 17 cents over that time. An embarrassingly convoluted and inefficient tax code rewards cheats, accountants and lawyers while hurting everyone else.
These problems trouble many of us. But the differing solutions proposed by Romney and President Barack Obama amount to a false choice of pick-your-poison: tax hikes for the wealthy or benefit cuts for the vulnerable. And the timeline for Ryan's plan balances the budget three decades from now -- so it's hardly the tough medicine we need.
What if there was another way, a way that would not only solve these problems but also address the redress owed to us by Wall Street for its shenanigans -- by reclaiming a great power, the power to create money, that protected the United States during its most trying times.
There may be such a way. It's called the Chicago Plan. And it first came up during a crisis not unlike what we have right now. It's a big plan for big problems. Yes, it's something that may not seem possible given our polarized politics. But it may also be exactly what we need. Here's why.
The plan was conceived by a group of economists back in the early 1930s. Conditions then were similar to those we face today: a stagnant recovery, banks withholding credit, too much debt, consumer price volatility and the rise of political extremism as a consequence of economic turmoil.
Although it generated much excitement within the academic community and became a more formal proposal by 1939 (.pdf file), its main tenet was never adopted:
That the government, not private banks, should control the creation of money, as it did during the Revolutionary War and the Civil War. As a result, new money would no longer require an offsetting creation of debt, as it does now. And banks should hold 100% of customer deposits in its vaults, not the 10% that is required now while the rest is lent out.
If you're like most people, the inner workings of the financial system are about as intuitive as hooking up a home stereo. But stick with me here. I'll use a simple example to illustrate all this.
Currently, the Federal Reserve (which is owned by banks but partly controlled by the government) buys $100 in currency from the U.S. Mint for the cost of printing it, thereby "creating" the money by turning it into legal tender. (It can also just electronically create money by crediting bank accounts.) That $100 gets deposited at, say, Bankof America (BAC). The bank keeps only $10 in its vault and lends out the other $90, creating an asset for itself with someone else's money.
Suddenly, the money supply has just jumped by $190: The $100 deposit and the $90 loan, which in turn gets deposited at another bank so the process can start again. The $90 deposit fuels an $81 loan. The $81 deposit fuels a $73 loan. And on and on. Soon, just a few iterations in, the money supply has swelled from the original $100 to $344. In essence, the banks have the power to print money.
The power shifts
The Chicago Plan would change all this by separating money from credit.
Bank of America would have to hold the entire $100 deposit in its vaults, acting (as banks originally did) as a safe house for wealth. Customer deposits would sit alongside it.
Loans would be funded separately -- via retained profits, equity from investors or loans of currency from the government.
The government authority that issues currency -- which could be a restructured Fed -- would directly control the money supply by changing the price and size of those loans of currency to banks versus the indirect control the Fed has now. If it wanted the money supply to grow by $344, it would lend $344 to the banks, which banks would then loan out to make a profit.
The advantages of this are easy to see. Over the past few years, the Fed has been pumping cheap money into the financial system in an effort to expand the money supply and support our recovery. But banks have often hoarded the cash -- to the tune of nearly $1.5 trillion. If that money came with an explicit cost, banks wouldn't have the choice of sitting on it. Either they would lend it to consumers or businesses, or they would loan it to other institutions that could. The Fed could more easily force that money into the economy by taking over the banks' control of the money-creation process, while banks and other institutions would focus on getting credit to those that need it.
Economists with clout
Keep in mind, this plan isn't the ramblings of anti-establishment anarchists. That's why it's so compelling.
The original Chicago Plan was backed by members of the "Chicago school" of economists at the University of Chicago, including Frank Knight (who tutored Nobel laureates Milton Friedman, George Stigler and James Buchanan) as well as Irving Fisher, whose work on interest-rate theory and the debt-deflation dynamics of depressions remains influential today.
Renewed interest in the plan was catalyzed by a recent working paper (.pdf file) by two researchers at the International Monetary Fund, Jaromir Benes and Michael Kumhof. The duo, realizing the similarities of the problems faced by the Chicago Plan authors to our current predicament, applied its solutions to an advanced "dynamic stochastic general equilibrium" model of the U.S. economy.
In plain English, DSGE models try to simulate the saving and borrowing activities of various sectors of the economy, from governments and households to manufacturers and unions. It may not be a perfect simulation, but it's as close as we can get.
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An article that stimulates the mind and questions what is, what could be, and what should be — love it, Good job Mr. Mirhaydari.
It’s a valid question: Is there a better way to reward our knowledge, resources and productivity? Personally I believe that this is the core issue: our knowledge and capabilities are outstripping our antiquated financial systems whose core tenets are a thousand years old and from a different knowledge and capabilities era.
It’s Knowledge, Resources and Capabilities vs. an effective Reward and Resources Management System. On that front our current reward/resource system is severely and arbitrarily limiting our potential and that is a terrible outcome. Here are just a couple of examples:
We limit the number of doctors we produce because the AMA is worried about doctors’ earnings potential, not because we lack the demand for doctors, or the brilliant minds who want to become a doctor.
Our space program is being challenge like never before and instead of funding it like never before we are limiting the very core of what has made us “The Superpower”, —brilliant scientist.
Did you see what the Curiosity team just pulled off, amazing. I promise you the nation that gains control of the resources on the Red Planet will dictate what happens on this planet. The space race and all of the “capabilities” it spawns: propulsion technology, material advances, computer sciences, biology advances, terraforming technologies, etc. are what builds a Nation.
The privatization of space comes with the added weight of “How do we make money right now”, rather than what knowledge, capabilities and resources can we achieve with patience and a focused effort, which we can then value through the private sector.
It is knowledge and its expression through tangible products, services and concepts (think the Constitution of the United States) that has made our lives rewarding, rather than its expression in the form of money and the arcane system used to manage and reward money.
Currently we have over monetized, over leveraged, and over insured the outcome of our efforts and ideas, time to evolve.
Not opposed to that. Vanquish the paid political posters on these Comments portals so we can get down to business. How INTELLIGENT it would be for one of these article writers to actually present a Solutions portal and manage it for a day? My guess... regardless of party, there are enough ideas to take to DC and present to ALL of Congress on behalf of ALL of the People of the United States. The best idea I can offer that straddles the economic political divide... don't pay Washington another penny until they begin legitimate cooperation without lobby present. We are worse off right now than ever in our history. Time for paid politicians to grow up; degrees to take a back seat to commonsense and experience; wealth to sit down and shut up and do the right thing without regard to race creed color sex religion national origin or class.
Very informative article Anthony. I can understand why you say the Gov't and not banks should print the money. Wall Street and the Bankers are so ponzified into their wealth, they would be frightened to death to relinquish their control.
I am not an economist, so I really do not know what the best way to go should be. All I know is that the middle class is suffering and I'm sick and tired of our elected officials doing nothing about it.
I was stunned by yesterday's article about the middle class by the Associated Press' Hope Yen that appeared on msn money. It you didn't read it YOU SHOULD ( search for hope yen middle class ).
The only thing I know is that our elected officials need to get off their high horses and help out the middle class. Come this November, I personally am going to do an unheard of thing for me, vote against all incumbent politicians and get all new blood in every branch of government, this is my only true option to see real change happen.
I agree with Trader-Joe, except not on a V.A.T. (value added tax) but on the FAIR TAX. (sales tax by end user).
1. No loop holes....none. No way for the tax system to be used to influence and control mass behavior.
2. Capturing the underground economy. It won't matter where your money comes from....cash under the table for painting a house, drugs, gambling, prostitution, etc. (billions un-taxed). When you buy your gold chains, rings, mercedes, or your grandma buys a rockin' chair....it's all taxed.
3. No IRS. No more FEAR of an intrusive government threatening you over rules even THEY can't explain twice the same way. ( Do you really think tweaking the exsisting mess to try and make "fair" will ever work?)
4. The USA becomes the worlds number ONE tax haven.....billions and billions setting in our banks instead of the Caymens or Switzerland looking to be lent out for productive use.
5. The rich pay more because they buy more....simple.
Read the "THE FAIR TAX BOOK" if you are really looking for solutions. Agree or disagree, but read about it first so you understand it.
It also makes sense that every fossil and non-recurring resource belongs to every single one of us, not a corporation who used a lawyer to steal it by contract. We all know that oil is controlled and manipulated. We are a Democracy. Let's vote on whether to continue being suppressed fleeced and manipulated by Big Oil or if structured renovation of our infrastructure should be a boom industry right now and zillionaires spending it all on recovering ecology where it was exploited. We don't NEED oil or gas, we need commonsense alternatives and transition opportunities. What we need most of all is every GOP operative voted OUT of Congress in November. Why only them? While they collectively voted NO these past 4 years, no less than a dozen single pieces of legislation had been tabled to help recover us. MILLIONS of Americans were displaced, forced down and out and died during this folly. It was CRIME, not politics. This is MY country and I will not tolerate being TREAD ON. John Roberts- Supreme Court Justice gave business entities equal status as humans. He was wrong and we are deluged with crap ads as proof. Such a man should be reachable and removed in shame. THESE are SOLUTIONS that would work... IF we were not suppressed and constrained from restoring prosperity for all instead of a handful of losers who are anti-American at best, terrorists for sure.
SOLUTIONS that are critical: Templates that replace legal exploitation. ONE contract utilized when two or more people create a union- which encompasses marriage partnerships businesses and all other arrangements that ultimately lead to He Said She Said matters. For the record, Oakland Co, MI had 28000 court cases in 2000. Less that 7000 were felonies. The 21000+ were He Said She Said and took more administration (overhead) to process. The template contains specifics, not in legalese and the document is covered in High School. Abolish all business entities, eliminate all aspects that are not indicated in the template. It also contains dissolution instructions. No entity is recognized one without this signed agreement template. No exceptions. ONE loan rate with fixed rate, term and amortization. During Henry the VIII reign, England was much like we are today. A backroom Board in a bank controlled the course of economy. If you were in favor, did a favor or were a favorite... you got a great rate. If you were not, loans often were constructed to allow the baker, retailer and candlestick maker to remain in business working for his loan payments only. Henry mandated a fixed 12% interest rate on ALL credit- regardless. It forced the creation of loan file diligence and lasted 264 years or the entire GREAT period of banking in England. Mackey used a similar structure when he established Household Finance in the 1860s. If you read the history of finance companies who did not trip into Loan Sharking at the turn of the Century, you realize that Congress needed to heave JP Morgan out of the country and embrace HFC. Their attorney wrote the Small Loan Act. They established the first Warehouse Line of Credit with Continental Bank and was the model for the Glass Steagall Act. It's Fair Debt Collection Practices and General Operation Manual (which was required memorization and application for Manager Trainees) survived the Crash of 1929 and subsequent wars. If you are wondering where they are today-- sold to HSBC after crap executives sold it's portfolio for windfall personal profits. HSBC is in the news for money laundering. HFC no longer exists. The At-Will Employment Act favors businesses over people. It creates a premise where a hired-in executive can act as a non-employee and have authorities no other employee has. That's BS. If a business subscribes to At-Will, it automatically MUST create unionization among it's workforce so there is potential fairness. Don't like it... move the HQ out of America, not the jobs. China refused to allow inspectors in their doggie treat making plants. The treats killed puppies here. We can make doggie treats, so importing them means this is done just to undermine employment here. When something dies over a business decision, the government has to send armed forces in to destroy the business because it is a terror organization. If we can make it here and we import, we are committing terrorism. Define it and enforce obliteration of violators.
While 1930 is a wise starting place for seeking stability solutions, America is the only nation to have had constant change since it's validation in 1776. We ended up with the Louisiana Purchase in 1803 only because of the French Revolution. Napoleon settled France's woes by selling it's holdings that required significant travel and cost to maintain. Smart move. Andrew Dickson White wrote about it in his book: Fiat Money Inflation in France and read it to Congress in 1876. The Small Loan Act was enacted in 1905 while 4 out of 5 families in major cities here were over-indebted to Loan Sharks. The sharks ended up filing for bankruptcy protection first because banks called in the credit they extended in 'speculation'. Glass Steagall was enacted in 1932 to stem the abuse of banks. In short, while we're being raped and pillaged by the bad GOP legislation that is The Tax Reform Act and Gramm Leach Bliley Act and At Will Employment Act and the acceptance of Law Firms, legalese and exploitation of common legal circumstances instead of templates that resolve them... the crux lies with the culprits- Congress. I don't know where you were born, but I was born here in America and if I told my employer "NO" all day, whil;e stalling solutions and playing mind games, I'd be out the door in a hot minute.
We can choose to regulate and provide strict oversight of banking or we can die.
This was... delusional??? Just as pathetic is the number of comments supporting this madness. Come on people do you really think that you can get something for nothing? Of all the stories we have seen repeated over and over the past couple decades, it would seem that the get rich quick with no downside would be easy to spot by now.
The only honorable and sustainable solution to our current situation involves pain and hard times for all members of our society as we sort through our past excesses and get a handle on the reality of our situation. While I normally like Mirhaydari this was only worth reading just to see how damaged the minds of some people are.
If we don't start acting like Americans used to very soon we are going to be living like Greeks in the not so distant future.
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Once again, market participants were focused on quarterly reports in the early going, but geopolitical worries overshadowed the impact of mostly better than expected earnings. Specifically, equities ... More
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