Ken Nelson

Our economy crashed… What should we do?  Who hasn’t asked that? Who hasn’t been asked that? Here is my take.

First… understand why it crashed.

Do you? Really?  Here it is one paragraph:

Leverage works both ways. We let banks make money off money they printed themselves. They did so with abandon. At each point of leverage the cost of unwinding grew exponentially. Our debt service costs became too high, “popping” the bubble, and we’ve unwound some of the leverage.  47 trillion dollars, or so, of it.  Ouch.

Second… Dig no further. 

Adding debt to an already bubble popping amount of debt service can’t help. But we’ve done just that for the last year.  Politicians spent and prayed. Economists in their service, prayed. Stop digging!

Third….   Reform financial system.

Banks must NOT be allowed to make money off speculative lending. They should only be permitted to loan to productive activities.  Banks should be more like insurance companies. The simplest way to do this, BTW, is to NOT have deposit insurance. Government must not back or influence private debt. No Fannie Mae, Freddie Mac, CRIS, or any of the other debt incenting schemes.

Fourth…  Reduce the debt.

Here it gets ugly – as if above wasn’t hard enough.  Reducing debt creates winners and losers and could reward those that caused the problem.  You can reduce debt by inflating wages, making debt service less of a burden. You can reduce debt by simply reducing the debt – waive it. The problem with this is that you are waiving largely unproductive debt and penalizing those that saved or had taken on productive debt.

Here, perhaps, South Africa, oddly enough could be the model to follow. Heinous crimes were forgiven to make the country able to move forward.

We are stuck until the debt service moves. So start waiving.

Fifth…  Make it permanent

We now have two examples of great misery caused by debt bubbles.  Constitutional and legal frameworks must be put in place to act as a barrier to crazy debt. Perhaps a debt to GNP limit can be enshrined in our legal framework. Our grandkids will thank us.