A Radical Solution to the Economic Crisis

It seems I am quite out of the mainstream on the most fundamental issues of the day. Way out of the mainstream, actually. If you look at my solution to the problem of inflation, you’ll see that I am a fan of both freedom and changing the fundamental rules of the game. So, here goes:

The economic crisis has mainly been caused by the housing bust. House prices are dropping to below what people owe, so the loans that were made to those people became “toxic,” with massive defaults looming. Banks started failing, and companies and people stopped being able to get loans, which means businesses failing and fewer people being able to get housing.

One way to get out of this crisis is to increase consumer spending; this is very hard to do. The government often tries to do this with a tax rebate, and it might do so again. But what if we could have a stimulus as big as a tax rebate every month and it would cost the government nothing? That’s what I’m proposing.

But first, let’s get a little more background. There is only a finite amount of land in the world to live on. Back in the middle ages, it was parceled out among the nobles by the king; this was feudalism. If you lived on the feudal lord’s land, you had to pay him for that privilege, even if he didn’t net you anything. This tradition continued into the American colonies: many of the states were land grants by the European courts to individuals: Pennsylvania to Penn, Maryland to Lord Baltimore, and so forth.

This tradition continues to the present day in the form of titles. Government grants deeds and titles to the land and that piece of paper allows its holder to do whatever they want to those who live on it regardless of whether they have ever even seen the place, or been there, or done any maintenance on it, or anything! Just like those feudal lords back in the day.

There are other standards that could be used to determine who owns the land that are much more just. The one I am offering to you today is called “occupancy and use.” If someone lives on a piece of land, takes care of it, and improves it with their own labor, they are the owner of that parcel. This standard allows more freedom than the old feudal system and it is actually more just, as well.

What would be the implications of changing our standard from government titles to occupancy and use? After a short adjustment period, no one would be required to pay rent or a mortgage! This is the monthly stimulus I was talking about before. In most areas, people are paying between $300 and $3,000 a month JUST TO BE ENTITLED TO LIVE; to have a home. If we switched over to an occupancy and use system, that money would be going into the pockets of consumers instead; they could start saving more *and* spending more.

This would be quite a shock to the economy. Some of the implications would be plummeting house prices and failing banks. But those things are happening already! Why not channel those destructive tendencies into constructive outcomes? More people will be secure in their living situations, gain confidence in the markets, and have tons more money to spend!

There would be some winners and some losers with this system:

Losers –

People who have paid off their homes. Essentially these people will be no different than than they were before, but if they were using their home as a store of value for their retirement, it will dramatically lose most of that value (though not all; if there are people willing to pay for the house without taking out a loan, they could compete to buy it). Their retirement should end up a lot cheaper as well, though, so this might balance out.

Landlords. These people would lose their properties to their tenants, although, if they are really excellent, they will probably be able to get some of their tenants to continue paying (though much less) for their services of fixing things and being responsible for problems. Some renters rent because they don’t want to be responsible for these things and they would probably continue to do so. The fact that I am (sort of) about to become one of these means I’m not just writing this post in self-interest.

Banks. A bunch more of these would fail, which would suck in the short term.

Winners –

The poor and the middle class. Huge portions of the budget of these groups is made up of housing; often between 40 and 50%. All that money would be freed up to save or spend on things people want.

American retail and manufacturing. Think of what all that extra money will be used to buy! Think of all the improvements renters will make!

The future. We would be moving away the old feudal way of doing things and toward a more just and free society. If these changes were coupled with other freedom-enhancing reforms, America could lead the way into the governmental and societal structures of the future, just like it did in 1776. Our children and their children would have places to live, be motivated to improve them, and be able to provide for their families even more easily.

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Too Slow to Blog (and I Don’t Get Bailed Out)

I wanted to post yesterday about how when an industry is failing, the government seems to incentivize the biggest companies to fail the fastest.  That is, the first company to fail inevitably gets a bailout, but not everyone can get one, so later companies just have to work through their issues.

Sadly, I have been proven wrong, since I read over the shoulder of someone on the Metro that AIG has been bailed out by the government.  How do they make these decisions?  To shower some failing companies with money and security and leave others by the wayside?  It seems impenetrable to me.

I think my first point still stands, though.  If you know you’re going to fail, try to be the first.  That way there will still be some funds left to keep you afloat.  If that fails you, be the biggest in your field (even if you got that way by taking risks you shouldn’t have taken).

Our financial future: the problem with 401(k)

In the past few days we have seen something of a crisis brewing in the financial centers of the country. There have been crashes, bailouts, and the housing bubble has burst. I have a unique take on the cause of all of these problems, and I am going to try to explain it as simply as I can, I hope I can do it justice.

The problem with the markets today is that there is a glut of capital that is essentially mandated for investment into stocks. This glut has been deliberately and directly created by act of the U.S. Government. These trillions of dollars are by statute required to be invested in one of two things: mutual funds or government bonds. Those who choose government bonds are doing nothing more than propping up the government with free credit (though supposedly paying less taxes while they do so), but the more insidious problem is that the majority invest in mutual funds, and their money is trapped in the market, and cannot be withdrawn.

Of course, I am talking about the 401(k) plan and its sister, the IRA. These plans were set up ostensibly to ensure people will save for their retirement, and they have, to some extent, achieved that goal. However, they have also skewed the market by providing what amounts to unlimited and unretractable money to mutual funds who have something, anything, to offer.

Let me go back to the conventional wisdom. The current crisis is supposedly the result of reckless lending to people trying to buy homes. The lending institutions would loan money to anyone who came asking, and then bundle those loans together and sell them to mutual funds, who would be making good interest on the mortgages as the borrowers started paying in. The incentive to bundle the loans and offer them on the market was this: there was so much money in the market that funds were desperate for things to buy!

We have a word for what happens when there is too much money in the market: inflation. If the Consumer Price Index, which is what is used to measure inflation, included investments in its list of things that it checks prices for, the measurement would have been through the roof over the last 15 years. It is not unreasonable to assume that the average American is going to be invested in the stock market, so there is no reason not to include a bundle of stocks when considering prices. If you want to enter the market today, you will paying a lot more for equivalent resources than someone who entered 20 years ago!

This inflationary effect has largely been ignored, or lauded as a true increase in value, when really it is a unique situation in history. A cause, and I think the main cause, of high inflation in the stock market when “consumer” inflation is so low is the glut of money mandated to stay in the market by these government plans.

If the money that is trapped in these 401(k) and IRA plans were released, or had never been stuck there, the market would be less skewed. People could have and probably would have used the money to start small businesses, buy commodities like gold and oil, or simply saved in a savings account. Many also would have invested the money in stocks of their choosing, rather than the broad managed mutual funds (where their money may be supporting companies and initiatives that they dislike, though they will not do the work to discover this).

The structure of the 401(k) and IRA systems make them essentially a direct subsidy to two groups: retirement plan managers and companies that are issuing common stock. They drastically increase the ability for common stock companies to get credit and they line the pockets of the owners of the largest financial firms. Here is a list of some of the top retirement benefit companies. You’ll note that the top few control the vast majority of accounts. These companies and the companies that offer the mutual funds they select as investment choices make billions because the government mandates they, or people like them, manage your retirement funds.

To sum up: the government has told companies that the best way to handle their employee’s retirement is to require the employees to invest in either a) government bonds, free credit for the government or b) mutual funds, free credit for corporations and controlled by the biggest financial companies. Many companies have done as the government told them. This has caused a glut of money and artificial inflation in the stock markets, especially the markets for mutual funds. This artificial inflation and easy credit to corporations is what is coming back to bite us in the butt now.

The government has no plans to do this any differently in the future.