Originally published Thursday October 16th, 2008
Setting aside blame for the current credit crisis, the use of fiscal policy to remedy monetary problems continues to use 1930’s solutions to 2000’s problems. In addition if banks, that have the best understanding of each others problems, do not trust themselves, why should savers or government. In addition banks have been given access to borrowings by central banks but refused to accept it, due to stigma association, however banks share prices continued to fall. Therefore the commitment of greater and greater amounts of fiscal and monetary resources to the financial industry will only have a slow effect with drastic side issues, and is equivalent to throwing the whole universe down a black hole.
In addition financial institutions are only getting used to the implications of short selling, mark to market and capital ratios, all of which are reasonable and correct policies. Therefore a temporary suspension of these policies, of approximately a year, would give banks and regulators the time to adopt correct working practices for the use of financial products that are or have been developed.
The essential problem is that the velocity of money has shrunk to an unreasonable low level. Therefore to compensate the amount of money in circulation needs to rise to maintain the present global output growth at reasonable price growth. Addition problems are that: individual savings are at an unreasonably low level and job creating entities cannot gain access to capital in the form of borrowings.
The monetary solution requires that all individuals savings and deposits at financial institutions needs to be guaranteed by the respective central banks of that country and currency.
There needs to be a policy of immediately replacing all terminating borrowings of job creating entities, to reduce the possibility of a recession or depression. Securitised borrowings, from institutions with the necessary credit rating quality (rating), that have come up for redemption and that cannot be refinanced in the market at reasonable rates, should be refinanced by national central banks, creating new money. Assistance to inter-bank lending can continue to be given to through central bank lending windows (with the attached stigma).
Loan officers from financial institutions that have stopped refinancing non-financial job creating entities should have secondments to local central bank offices, with their pay still furnished by their permanent employers. Any loans not renewed by the loan officers present employers should be provided by central banks, again creating new money. This requires access to the data bases and records of banks that are not lending, the internet and, a new data base at central banks; with supervisory and approval officers at central banks.
Once problemed financial institutions and the regulators have established the correct working practices and are in the position to start to lending to non-financial institutions, increasing the velocity of money, central banks can then reduce the amount of money by selling their loan books back to the previous lenders or, in the
case of securities selling to the market.
The net effect will be a reduction in the size of employment in banking (fundamentally a structural issue) whilst maintaining the amount of employment in the rest of the economy. The penalising of future generations by increasing national debt would have been avoided, and any issues of moral hazard would have also been prevented.
Steven J Cohen, BSc (Econ) Hons CFA
Thursday October 16th, 2008
950 N Kings Road, Suite 151