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Michael M. Thomas’ Solution to the Crisis

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Now, if only anyone had listened….

By Michael M. Thomas, who figured out Wall Street was not all it was cracked up to be before most of you were born. Originally published at his Midas Watch column at the New York Observer, March 10, 2009

A trillion here, a trillion there.

A trillion for TARP, a trillion for TALF.

Throw in what’s in the “stimulus” package and you’re probably at close to $3 trillion.

So why not simply distribute $25,000 tax free to every U.S. taxpayer? There are 100 million of us, in round figures, so we’re talking about $2.5 trillion, give or take.

This is what two friends and I asked each other over lunch a Three Guys last week. After we got through the usual preliminaries, such as where can one buy hemlock these days, given that our actuarial matchup (two of us are over 70) with our resources leaves us as upside-down as the most strapped Corona del Mar mortgage victim, we started talking about the economy and how to rescue it.

Clearly, these institutional rescue plans are going nowhere. The pricing dichotomy – Uncle Sam either pays too little or too much – seems intractable and the recipients are surely undeserving. Even though there have been two big distress sales of toxic assets – by Merrill Lynch last fall and Legg Mason last week – at around 20 cents on the dollar, which might represent a pricing benchmark, I just don’t think the taxpayer should be put in the business of writing a “make whole” for either pigs or vultures, who in many cases may now be one ad the same. That is capitalism’s tragic paradox, unseen by Adam Smith, probably understood by Marx: the people who cause crashes frequently profit from them.

The problem is, everyone’s hanging around looking for a deal from the government that’ll yield a deal that’s better than fair to everyone except the taxpayer, and Geithner and his small and doughty band know it (the Treasury increasingly reminds me of Fort Zinderneuf in Beau Geste, with dead bodies propped up in the gun ports and Gary Cooper scuttling from post to post, firing at a superior force of Bedouins.) And the “infrastructure” solution, as I see it, is simply open-ended flapdoodle capable of inciting limitless political foolishness and private-sector thievery. Let’s not import Iraq back home.

Institutionally, what should be done immediately is to separate the good assets from the dubious. In the case of the “banks,” hive off depositary operations and wealth management from trading and arbitrage. At AIG, put a fence around the real insurance operations and let the CDS commitments go. Wipe out derivatives contracts that had no real third-party assets at risk (possibly as much as $30 trillion of “naked” puts,) that were nothing more or less than bets against the solvency and credit rating of insurers like AIG and Lehman, and let the rest negotiate settlements as best they can. All the crap can go into what I heard one English financial analyst on WNYC call “a giant international cesspit,” and let the scavengers fight over it like rats in a garbage dump. Isn’t this the kind of market solution propounded by (speaking of rats) the likes of Larry Kudlow?

The more I see what’s going on now, the better I think I grasp what really happened in the Depression. Why, by late 1940, there was so little trading and deal volume on Wall Street that people like my father, a 34-year-old partner at Lehman Brothers, enlisted in the U.S. Navy, figuring that FDR was going to get us into a war with Hitler and he might as well have a commission.

History proved Joe Thomas right in his assessment of his President’s intentions. By then, FDR probably understood that there was only one solution to the nation’s precarious economic condition: jobs, jobs, jobs. And that nothing would provide jobs – in the military, on the home front – more efficaciously than a war. And so it proved. Moreover, when the war was won, Washington grasped that millions of disemployed service people and defense workers might represent a brand new social and economic crisis and came up with the G.I.Bill. As opposed to the U.K., which sent its newly-demobbed Tommies back down the pits and got a Labor Government for its pains. I know of no more powerful example of the difference between the way a capitalist democracy is supposed to work and the way it isn’t . I should add my opinion that Ms. Pelosi (surely there can never have been a worse Speaker!) and other Capitol Hill idiots would never have devised a G.I. Bill, not in a millennium!

So let’s go back to the “Three Guys” scheme, as history will doubtless christen it. At $2.5 trillion, the money’s about the same as Washington plans to spend. Any way you cut it, relief is going to be funded in the people’s money, so why not let the people decide how to spend it? To some taxpayers, $25,000 will be a lot of money and will be spent on life’s necessities or to ease household financial crises: to pay off debts, to pay tuition, to catch up on mortgages. Others may use a sum like this as a down payment on a house. Businesses can be launched on $25K. To some, $25K won’t be that big a deal, so they’ll invest it or put it into a bank. Along the way, as it passes from hand to hand, as one person’s expenditure becomes another’s revenue and profit, it will become taxable, and Uncle will start to recapture his investment.

It really doesn’t matter how and where it gets spent and saved, because never forget, children, that every dollar spent is somewhere saved. The key is to keep that money hopping. To keep breaking it up into pieces, and moving those pieces along. If it coagulates in financial companies anxious to build up capital to support their CDO/CDS garbage, the main if not the entire purpose of the exercise is defeated. And this is exactly what is happening now.

It has got to stop. Parents of my generation were raised to understand that children are not to be rewarded for bad behaviors. Sadly, that view has faded. It’s time to turn back the clock and give the money to the 99,000,000 of us that had nothing to do with this mess!

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38 comments

  1. Doesn't Work

    Given that there is about 1 trillion in student loans and 1 trillion in credit card debt and god knows in stressed mortgage debt I can tell you where the $ from the 3 guys plan would go – right back to bank balance sheets baby. No stimulus, no jobs, any way you slice it the banks are gonna grab it, because we are a serf nation and I don’t know how you ever get things back to a virtuous cycle.

    1. F. Beard

      Sure the banks will get a lot of it but the people will be that much less in debt. And don’t forget that just as bank “loans create deposits”, bank loan repayment destroys deposits so the the principal part of those loans will just vanish as it is repaid. As for the interest, which is profit for the banks, the prepayment of those loans would greatly reduce that.

    2. Pokey

      Why not simply extinguish student and credit card debt? Might be hard on banks and other parasites, but that is where the greatest benefit would lie. Young people could start buying homes, and the end the usurious rates would stop or slow the downward spiral of crushing debt that often ends with a 5 year period of servitude called Chapter 13.

      1. augas

        Student debt encapsulates the utter moral decay of our system. Not only have we strapped our future generations with a crushing debt load, we have used all the resources of our own govenment so as to structure our childrens’ future into one of servitude.

        It is widely accepted that government interference is the single largest cause of the escalating costs for higher education. Interests rates used to be reasonable, now for the vast majority of the outstanding debt, those rates are at or near double digits. We have passed laws that makes this debt unlawful to discharge through bankruptcy proceedings, absent any semblance of a moral foundation for it. We have capped the lifetime interest rate deduction on income taxes to a mere $25,000, which the average borrower today reaches in the early stages of their loan repayments.

        These instruments are specifically designed to ensure the debt servitude of our future generations and to make it more difficult for our young to start families of their own. Such outcome is not happenstance.

        1. jake chase

          I too would wipe away the student debt and deal with university administrations the way medicare deals with doctors. Each college gets $3000 per year per student and is free to spend it however it chooses. Faculties would earn less, but those people are so smart they can figure out something productive to do for money. Schools depending upon football or basketball teams would probably shut down, but American men can probably learn to watch something else on television. I recommend the cooking channels. Mario Battalia was great this morning!

          I read Michael M. Thomas’s novel, Hanover Place, years ago and figured him for an anti-Semite. I may owe him an apology. Sorry Michael.

        2. Nathanael

          Student loan debt is the crisis which will overthrow the government.

          What happens when you have a lot of young, college-educated people who can’t get a job and can’t get ahead?

          Well, typically they become the leaders of the revolution.

          If you’re an elite oppressor looking to maintain a stable position, it is in your interest to keep the oppressed uneducated, and to buy off the educated. For some insane reason our elite has not seen fit to do this.

          1. Nathanael

            (Also, age brackets. Recent college graduates are in the “military age” or “revolutionary” age bracket.)

  2. Can't Help It

    But, but, there’s no crisis!!!
    1. Europe is fixed or on the way to being fixed.
    2. The US unemployment is on the downward trend with occasional hiccups. Stock market is roaring with some small pop and mom participating even.
    3. Asia is predicted to grow 7% plus this year.

    All hail the central bankers!!

  3. vlade

    I’ve proposed this in about 2008, although my plan included some “required” waterfall (say if you have a mortgage, it has to be – fee free – used to reduce it). Giving to a few entities is easier, but if you can’t control the entities, your money is wasted. Scattergun approach is much better (it would even have been better to distribute random funds to random people to the tune of a few t$ than giving it all to a few hundreds of recipients). Of course, that presumes that the goal is to solve the real crisis, not to bailout a few chaps here and there.

    1. digi_owl

      Sounds very similar to what Steve Keen have been talking about as “quantitative easing for the public”. Drop a sum of money into the hands of every person in the nation, with one stipulation: If you have any debt, you need to use the money to pay said debt down before spending it elsewhere (if anything is left).

  4. financial matters

    This is a great idea and so much better than austerity (and our austerity is even being self-imposed, rather than being mandated by the IMF). Even better if this money is created MMT style to jumpstart the economy. The banks demands on taxpayers to fill their black holes as they continue to pay large bonuses simply has to be realized for what it is and stopped.

    Related, another part of Yanis Varoufakis’s plan for Europe is for the banks to write off a significant portion of the deficit countries’ debt to them (the ECB has ample bargaining to effect this , as it is constantly keeping Europe’s effectively bankrupt banks liquid.)

    Congress has control of the Fed and could take similar methods here with our reckless banks that are eating into our productivity with their relentless credit demands on fraudulent products. We have to have some politicos who will recognize the problem for what it is. This may end up being forced by our unsustainable levels of unemployment and poor levels of industrial investment as global money is being sucked into the financial system.

  5. Eric Patton

    Proposals are irrelevant. You should be discussing how to build power. The best ideas mean nothing without the power to implement them.

    1. different clue

      But perhaps it takes inspiring proposals to inspire individually near-powerless people to organize to turn their little bits of power into a big mass of power.

      1. Nathanael

        Exactly. This proposal would work. And it is very simple. Perhaps it is the idea which will catch on, the idea which will drive people to organize and to take power.

        People won’t organize without an idea or a person to organize behind. And a person… can betray you. An idea is merely good or bad.

  6. H. Alexander Ivey

    “The pricing dichotomy – Uncle Sam either pays too little or too much – seems intractable and the recipients are surely undeserving.”

    Well, hell yeah, US pays the wrong price when Uncle Sam is not functioning as a government but as a aid and abetter of looting of private and public institutions. Nobody gets punished for doing wrong, nothing will change for the “better”.

    “History proved Joe Thomas right in his assessment of his President’s intentions.”
    With all due repect to your father, and mine for that matter, WWII was not FDR’s intention. The US was dragged, kicking and screaming into that conflict. And the war did not “help” the economy, it simply created a demand, and a demand is the basis of economic growth, not suppyly. After the war the demand continued but fortunately, it was a demand for domestic, productive items, not death and destruction weapons.
     
    “It really doesn’t matter how and where it gets spent and saved, because never forget, children, that every dollar spent is somewhere saved”

    It does matter, it is the key of the whole system. The money (fiat and credit) must be spent on socially productive, uplifting purposes, not be wasted and hoarded. One of the few points I agree with is that in a capitalistic system, the money must move, else it isn’t capitalistic, it is feudal.

    At the end of the day, you three guys are well behind the curve, about 4 years too late to joke about getting any kind of economic aid from the “system”. The system now is oriented for money extraction, not innovation, for enslaving the individual, not empowering him (or her, Caucasian, Afro-American, Latino, Asian, whatever label you think of yourself), for the rule of iron, not the rule of law.

    1. Susan the other

      “The US was dragged kicking and screaming” into WW2. Maybe not. If Pearl Harbor had not happened we would have devised another way in. Our sights were not set on Europe, that is true enough, but they were set firmly on China. The US already had a long of history of commerce with China, our merchants went to China for the British East India Company in the early 1700s. The D in FDR stands for Delano, also a big merchant family. FDR was personally enthralled with the idea of controlling trade with China and when it looked like Japan was cutting out grass, and doing it in such an efficient manner, FDR and his class wanted to get into the war in the worst way. And conveniently, after we cut Japan off from oil, they bombed us. Or so the story goes.

    2. jake chase

      There is no doubt whatsoever that Roosevelt induced Japan to attack Pearl Harbor and in order to outflank the America First lobby. I doubt he expected 2500 casualties, but people are always expendable when war is desired.

      You might also want to reexamine WWI (the Lusitania), Viet Nam (the Gulf of Tonkin explosion), even the WTC attack. Or do you think 20 Arabs associated with nobody identifiable planned and executed the whole thing? IMHO, foreign affairs do not just happen for no reason.

      There is no historical reason to think big money and its minions ever cease planning profitable surprise events.

    3. rob

      Yes, there is no doubt that roosevelts administration steered the course for war in the pacific.
      Even the treasury dept(before the war they did the risk assesment the later oss and cia would eventually do.) had done reports(in june 1941) that with japans oil shipments curtailed in june of 1941,they only had 6 mos of oil supply.And it was a certainty that within 6 mos, they would have to attack, so as to try to gain access to embargoed oil.So, by december of 1941,there wasn’t really any time left for the japanese.Not to mention everyone knew the japanese strategy for a forced war with a superior adversary.Suprise attack.Just like their attack on the russians in port arthur in 1904.
      It was just a played hand.

    4. Tim

      Uh, the article is a repost from 2009. They were right on time. But like the other guy said. An idea without power is worthless. Indeed.

      1. H. Alexander Ivey

        Damm, good catch! Missed the reposting in the heading. Okay, will retract the remarks about being behind the curve. Thanks.

  7. Paul W

    It is more fair to give taxpayer money to the taxpayers but it is an unrealistic idea because it ignores the fact that the people running America(or other western countries) are never going to do it. Those in power are owned by financial entities, therefore they will serve their masters’ interest so they can remain in power.

    Even if we assume they are not corrupt/criminal and actually care about the average person the idea is still flawed. You’re talking about $25 trillion, created from thin air, being added to an already over indebted economy. Is that not going to be massively inflationary? Yes the $25,000 can go to paying some personal debt, meanwhile basic necessities double then triple in price. What’s been gained? As for incresed spending incresing government revenue, so what. Government debt is too large to ever be paid back. There simple isn’t enough real, tangible wealth around to cover 40 years of endless money creation.

    For an economy based on credit, rather than capital, we are exactly where we should be. Excessive creation of debt has created this situation. Adding more credit will not fix the problem.

    1. F. Beard

      Is that not going to be massively inflationary? Paul W

      Not necessarily. A temporary ban on new credit creation would be massively DEFLATIONARY as existing credit was paid off with no new credit to replace it. So ban on new credit creation plus a carefully metered universal bailout could exactly offset each other for no net change in the total money supply.

  8. Susan the other

    I like Michael Thomas’ Pigs and Vultures metaphor. He is very sensible and his recommendation is almost as good as Sheila Bair’s half-serious proposal that the best way out of the recession is to give every adult a 10m line of interest-free credit at the Fed and just let them invest their way back to prosperity. But even if we did something as logical as this, it would all happen again. Because it is the tragic paradox of capitalism, as Thomas puts it, that the pigs cause the crash and the vultures profit from it and they are in fact the same beast. A pigvulture. A gargoyle. I get the feeling that capitalism has done itself in this time. We should be finding a new way at this point. We need a new economy and new economic assumptions. We also need a functioning legal system. WW2 wiped the slate clean. How will we?

  9. diptherio

    The key is to keep that money hopping. To keep breaking it up into pieces, and moving those pieces along. If it coagulates in financial companies anxious to build up capital to support their CDO/CDS garbage, the main if not the entire purpose of the exercise is defeated.~Michael M. Thomas (MMT)

    My guru, Kalinath Aghori Baba, one day turned to me while we were sitting in his kuti (hut) smoking cigarettes and, out of the blue, said this to me, in his adorable broken English:

    “Money is like water, needs to move. Money tank no good. Money should be a flow, not a stock.”

    No shit…this 70+, illiterate saddhu, sitting on top of a non-descript hill in Nepal understands more about macroeconomics than all the neo-classical economists in Chicago put together. What really blew my mind is that he actually used the words “flow” and “stock.”

    If Kali Baba can understand this, I don’t know what Ben Bernanke’s problem is. On the one hand he claims that QE will somehow lower unemployment, while at the same time claiming that QE will not lead to inflation since that money just “sits on the Fed’s balance sheet and doesn’t do much.” Ben would no doubt make better decisions if he went and sat down with Kali Baba before every FOMC meeting, instead of just meeting with the bankers.

    1. Chauncey Gardiner

      Thanks for your salient observation regarding that second to last paragraph, diptherio. I agree.

      I so appreciated this Michael Thomas’ piece from 2009, too. Made me rethink what might have happened with a different set of political and monetary system leaders. The FRBNY, the Fed, Geithner, their fellow travelers in the executive branch, on both sides of the aisle and on the Court have cost us dearly in both time and resources as a result of their damaging efforts to salvage and perpetuate the status quo on behalf of a small sliver of society and to enable them to avoid criminal and personal civil liability penalties for their behavior.

      Further, although it is deeply troubling, the damage has not been limited to the impairment of the rule of law.

      Again, I particularly appreciated the second to last paragraph of Thomas’ post:

      … “It really doesn’t matter how and where it gets spent and saved, because never forget, children, that every dollar spent is somewhere saved. The key is to keep that money hopping. To keep breaking it up into pieces, and moving those pieces along. If it coagulates in financial companies anxious to build up capital to support their CDO/CDS garbage, the main if not the entire purpose of the exercise is defeated. And this is exactly what is happening now.”

      However, I’m optimistic. I’m optimistic about what I believe is going to happen in the real economy despite the ongoing fiscal policy and monetary distribution/wealth concentration efforts of this small group and their enablers. After all, it’s People who make the numbahs!

      We will wrest away control of the Three M’s: Money (both issuance and distribution), Markets, and Media… and tax the accumulated wealth they have taken from us in order to defund their power over and control of our political system and to fund our public educational system; restore, maintain and improve our infrastructure; develop and conserve clean sources of energy and transport systems; reverse our global footprint; … It’s just a matter of time and will.

      1. EconCCX

        “It really doesn’t matter how and where it gets spent and saved, because never forget, children, that every dollar spent is somewhere saved.” @Chauncey Gardiner quoting MM Thomas.

        That’s a circuitist model, and not accurate under a fractional reserve banking system. If you pay a fee to your own bank, that amount is simply and permanently extinguished from M1. If you write a check to a bank, drawn on another bank, that amount is cleared bank-to-bank via reserves (MB). Aggregate reserves remain unchanged. But your own M1, and aggregate M1, is, again, extinguished. This scheme of accelerating extraction continues unto foreclosure — and ultimate surrender of liberty — or repudiation.

        1. Chauncey Gardiner

          Thanks for your observation, EconCCX. Yes, money can be and has been destroyed. I have wondered about the MBS purchased by the Fed for new Cash, for example.

        2. diptherio

          If people didn’t save their money in the first place there would be no need for borrowing from fractional-reserve bankers (or any other kind of bankers) to fund spending.

          Of course, that would imply a world where people didn’t have to worry that a personal financial crisis might leave them homeless (and hopeless), which is to say a world where people helped one another as a matter of course. But since we don’t live in that world we are all forced to try to give less than we have been given (i.e. spend less than we make), and so acquire a personal buffer against hard times.

          Unfortunately, the creation such a buffer by one person leads necessarily to hard times for another, unless additional debt free money is continually being added to the system. $20,000 sounds good to me (for a start).

    2. ohmyheck

      Fortunately, one doesn’t need to trek to Nepal to find such obvious wisdom (though I would certainly love to do so).

      You can hear such wise observations at your latest local theater production of “Hello, Dolly!”

      “My late husband, Ephraim Levi, used to say, “Money, pardon the expression, is like manure. It’s not worth a thing unless it’s spread around, encouraging young things to grow.”

      Ephraim Levi, economic permaculturist…who knew!

      1. jonboinAR

        I’ve never forgotten those lines as spoken by Walter Mathau in the movie version. Donno why not, maybe the events and discussions of the past several years have refreshed my memory.

  10. Schofield

    But the Bankster’s money doesn’t just sit in tanks it’s used to artificially goose up prices for a quick profit wherever that can be achieved and to hell with the effects on the real economy! Goosing is the Game and Bankster is My Name!

  11. tracy coyle

    Why not cut out the middleman: have a 1 year federal tax holiday. That would net about $2t to the consumer and $500b to business. Take the intergovernmental funds debt, sell it to the public – it would not change the overall government debt and use the proceeds to fund a year of the government. Much of the extra money will go towards debt reduction on the consumer side but the rest would stimulate the economy and businesses would have the funds to hire and invest. No new government debt, no austerity and a direct to the consumer stimulus with no bureaucrats picking and choosing where to spend ‘stimulus’ money to benefit their friends.

    1. Nathanael

      A “tax holiday” wouldn’t give any money to most Americans. Particularly the unemployed, who need the money the most.

      No, you have to cut out the middleman. Just print money and give it to people. That’s as simple as it gets.

  12. chicagogal

    Oh, no, no, no!!! We certainly cannot give any taxpayer money to the taxpayers and their families because there is that whole “moral hazard” problem. All of the unemployed, working poor, destitute and homeless peoples will just go buy drugs, alcohol, cigarettes and lottery tickets with it.

    OTOH – even if Washington would do something intelligent to actually help people, they would then turn around and tax it – especially for those poor slobs who would get pushed into the next higher tax bracket because of it!

  13. Emperor Wang of Market Mongo

    Ah, yes. HaHa. This reminds me of the “Bagholder Society” promoted by my disposed predecessor, Ming the Merciless. Ming envisioned his debt-slaves buying ownership in a metaphorical “bag” which could consist of overpriced and/or decrepit real estate, or toxic waste financial paper created by his banking minions.

    When the debt-slaves realized they traded their whole future working lives away for a bunch of worthless crap, 99% of the population of Mongo volunteered for my Liberation Army.

    Mongo “suffered” a quick 1% drop in population, banking and credit disappeared, and Ming e-money was nowhere to be found.

    The Sun Emperor, Wang of Market Mongo, laid out his vision of a new and glorious future – not of debt-slaves – but paygo Residents of Mongo enjoying the security of employment at Mongopoly, Inc. and receiving compensation in photon credits, redeemable at the Mongopoly, Inc. Online Catalog.

    These photon credits expire one year from date of issue. This insures adequate aggregate demand, with no chance of inflation. Keeps the Mongo economy running smoothly. Your Emperor reserves the right to either raise or lower photon credit compensation or Mongopoly, Inc. Online Catalog prices – depending on whether he deems it necessary to either raise or lower the residents standard of living. Anything else is BS, as we found out under Ming the Merciless.

  14. Linus Huber

    It is a rather old idea that, if I remember correctly, I have mentioned in comments like 2 years ago.

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