Trickle Down Or Trickle Up?
The world’s financial system is as weak now as it has been in many decades. Federal Reserve Chairman Ben S. Bernanke has a huge problem on his hands: a very wide-ranging credit freeze up surrounding financial institutions. This is a problem that mere cuts in interest rates cannot cure.
The very low interest rates we experienced in the early to mid 2000’s as well as the trend of throwing caution to the wind has left the financial world at risk. This care free attitude was spread by Alan Greenspan; a major Wall Street player who was bailed out of trouble with borrowed funds, has led us down a dangerous path.
The derivatives speculated by Wall Street players do not have near the value they led us to believe they had. Now we are left in a frantic pursuit to de-leverage in spite of the cost. Unsurprisingly the buyers have thinned out and institutional investors do not want to add to the already puffed up package in their portfolio; particularly now that the real value is evident. So now we are finding ourselves in a liquidity emergency to the extent of which we have not experienced since pre World War II.
Commercial as well as investment banks are stuck with puffed up assets such as mortgages and private equity loans they cannot sell because they are packaged with derivatives of exceptionally questionable value. This is a kind way of saying that Wall Street fat cats lied about the value and has overpriced them by billions of dollars putting us in peril. Basically this means that banks do not have the cash to make new loans and this is destroying our credit based economy. For banks and brokers to be able to make their balance sheets stronger by de-leveraging, the banks will have to reduce the number of loans they have on their books. This, unfortunately, would devastate the economy and turn a bad recession into a long-term depression.
This is the reason for the bailout by the Federal Reserves by means of long term financing at discount prices. What other choice do they have? They can let the entire financial infrastructure of the world freeze up or lend cash to financial institutions and take the subprime mortgages and related securities of questionable value as collateral. In this way the Federal Reserve has become the buyer of last resort which is very inflationary. These financial middlemen are intended to take the cash borrowed from the Federal Reserve and lend it out again to higher quality borrowers; unfortunately this is not happening. Theoretically, this would work out as a trickle-down effect.
So why don’t we give a trickle-up effect a try? The purposed bailout will cost at least $1,000,000,000,000. That is one trillion dollars for those having trouble! Instead of giving one trillion dollars of newly created money to the Wall Street players who are largely a part of our current problems, why not give that money to the people of America? This way it can then trickle-up to the Wall Street players by stimulating the economy. By giving about $3,200 to each person in America we may be able to get the cash flow back in the right track. This means a family of five would get $16,000 in cash to spend how they choose.
Why can’t we do this to help all of America in this way instead of a few Wall Street fat cats? Why is it they should be given a trillion dollars of new money to throw around like they have in the past?
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