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Sunday, May 3, 2009

World Financial Crisis Solved


World Financial Crisis Solved ! Wall Street off the hook.

You’ve all seen the e-mail making the rounds with the above title. I really enjoyed it because it all seemed so simple. In case you haven’t actually seen it this is what it says: To fix America’s economic problems government should not give so much money to the banks, who seem to be putting it into their pockets in the form of what they call a bonus, instead government should do the following:

There are about forty million people over 50 in the work force. Government should pay each person $1 million in severance pay to take early retirement. That would create 40 million jobs.
Those people must buy a new American car. That would fix the American auto industry.
They must either buy a new house or pay off their mortgage. That would solve the housing crisis.
If more money is required have all members in Congress and their constituents actually pay their income taxes.

Sounds great! What’s right about it, and what’s wrong with it.
Firstly, as always, the devil is in the details.

Take those 40 million people who are now struggling to save up for their retirement and to pay off their mortgages. A windfall of one million dollars in most cases would go a long way to resolving their concerns. Once they have retired, hopefully some of that money could go towards starting their own business that could become an employer. Of course, there will be some people who would actually lose money by taking the million, but overall, it would probably meet with favour by a majority.

The American auto industry is perhaps the largest employer, so to increase demand for their products by 40 million units would in itself put a great many people back to work. Of course, many of those same workers would have been beneficiaries of the payout, so younger people would go into their vacant jobs. So far, so good!

Those forty million people would have to buy a house or retire their mortgages. For many people this would be a reprieve from near death as they are losing their homes because they have lost their job. This solution would bring lots of new workers into the market to meet the demand. Even those people who have a home that is paid for would be required to buy a new home, so presumably they could do so, then later when the country is stable they could sell it in the normal manner.

These steps seem solid to me, except that America’s unemployed number far fewer than 40 million. To make up the additional workers needed America could always bring in Mexicans, who are going to come anyway.

Hopefully, such a programme would address the toxic assets on the books of the lending institutions, but if it did the question then becomes whether the bankers will go back to their old habits and give too much credit too freely, in the interest of their bonus’.

The major problem with this idea is that it feel socialist, and in America that just does not sell. You can “give” as much money to the banks as you wish, and not all will be recovered. We speak of giving, but government thinks in terms of investment, however a lot of money will be lost in the process. The other thing that’s wrong is that 40 million times one million dollars is so much money my calculator has just had a heart attack.

Copyright © 2009 Eugene Carmichael