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Economy 101

February 23, 2009 - Michael Palmer
Sorting out the stimulus

As a voter and taxpayer, it has been quite confusing to hear the rhetoric coming out of Washington about the economy.

First the bank bailout, I asked the manager of my bank to explain this one: A condensed version was still very lengthy and hard to follow.

Remembering that banks, unlike democratically elected governments, are private businesses for private gain. Basically he told me not to buy into the illusion that that the money loaned by banks belongs to depositors. This is false. Banks create MONEY OUT OF NOTHING THROUGH WHAT IS TERMED FRACTIONAL RESERVE BANKING. Meaning that the government or financial authorities can wipe away any amount of loaned finance, and the banks would still be able to make up the lost amount by simply producing more of it.

I asked: How can they do that?

The answer is as follows. A certain amount of "real" money is kept in reserve. Based on this banks can create new money as loans, or credit to their customers by simply writing down the amounts onto paper, and computer. In other words, it is produced "out of thin air" as already mentioned. It is as simple as that. Of course, the banks create super-normal profit from all this, and now, virtually the entire money supply is created in this way.

On the other hand, the governments create "real" money as coins, and paper. Yet, it only makes up a virtually non-existent percentage of the worlds entire money supply. This is all implemented through the Federal Reserve, which is responsible for the creation of all the money and credit. I think this means that the Federal Reserve provided the financing that enabled speculators to create the "credit bubble" in the stock market, the bond market and the housing market. Now you can begin to understand how banks ran into trouble when they were issuing mortgages in an overpriced housing market.

Many of my blog readers are now contemplating logging off, but stick with me, this gets better.

The banker points out that when this economic crisis hit, and Congress bailed out some banks. During the same period they bailed out the insurance firm of AIG. The banker explained that, AIG INSURES THE PENSION TRUST OF THE UNITED STATES CONGRESS. So while your 401K was decimated, your congressmen and women were protecting theirs.

The banker also questioned how Obama's Stimulus Plan which will create money and credit on a $2 trillion dollar scale will solve the problems caused by the creation of money and credit on a lesser, although still damaging scale. How will this work without producing even more inflation and unemployment?

According to the banker, that amounts to around $20,000 for each person holding a non-government job in the country. SO, if I understand this correctly, the government is giving the banks and automotive industries twenty grand for each of us.

Why not just give the money directly to the taxpayers? Even vouchers good for $20,000 towards buying an American made car or paying off a mortgage or credit card debt.

Okay, so I am still confused, and this information could be both biased and flawed, but I think if I am deciphering this correctly, my plan makes more sense. Banks, automakers and mortgage brokers would still get bailed out, but instead of the taxpayers paying for all of this and getting higher interest rates, taxes and gas prices in return, we could actually get something in return, a car, debt relief, or 20 Grand to spend and thereby stimulate the economy. It seems like a win-win to this weary tax payer.


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