Heinz Aeschbach, M.D.  
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Ethics, Economics and the Future of the World


  Economic Crisis

January 2009
   To solve the present economic crisis, we must evaluate the basic structural problems of our economy and correct them. Banks create money by issuing loans. When loans are paid back and the banks do not issue further loans, that money disappears, and the money supply shrinks (as described in economics text books, e.g. by Paul A. Samuelson). Bankers appear paralyzed by ignorance when their earnings drop: rather than cutting interests of existing loans and lending their assets to maintain economic functions. They stop lending. The money supply shrinks rapidly and vicious cycles develop.
   There is a major misunderstanding by many economists and politicians:  when there is an economic downturn and the money supply shrinks, the government does not need to borrow money from future generations to "stimulate the economy." It simply has to issue money and later prevent inflation by irresponsible further growth of the money supply.
   There are multiple reasons for the present crisis. As banks agreed with a misguided overvaluation of houses and lent accordingly, they created a bubble of unjustifiable value and debt money. When people cannot pay their mortgages (which are mostly interests), banks panicked, even though they hold the title to the houses. Most businesses keep going even if their income temporarily drops, but banks remove families from their houses and sell them quickly at a low price. Bankers appear paralyzed by ignorance: rather than cutting interests of existing loans and lending their assets to maintain economic functions, they stop lending. The functional money supply shrinks rapidly and vicious cycles develop.
   Obviously there are other reasons for economic problems. If an area primarily produces luxury goods, and their goods go out of fashion, its economy suffers. Millions of suburban houses may lose their objective value when, due to congested highways and high gas prices, access becomes very time consuming and expensive.  The financial institutions have become extremely sophisticated, or rather greedy and irresponsible. Credit card issuing spread out of control. Many forms of assets and financial instruments were invented. Forms of speculative investments became so complex that nobody understood how to assess and value them.
   In modern economies, financial institutions, not governments, create and allocate money and money-like media. However, banks are businesses which are not concerned with what is good for society, the environment, and future generations. Furthermore, loan officers are not qualified to determine what loans are reasonable. They are guided by the past but hardly understand changed needs of present and future. Economists and academicians studying likely consequences of trends and developments have no influence on banks. It is incredible that bankers were given the power to allocate much of the money supply and to regulate how much money is in circulation within their area of operation. The interests banks charge are not justifiable: they are like a tax for the convenience of having a money supply.
   The obvious solution to a failed economic system: restrict banks' and other financial institutions' activities, particularly decreasing bank money created by lending, while greatly expanding the supply of federal reserve money. As commercial banks failed to lend responsibly, governments must establish socially responsible development banks offering low-interest loans and grants to support what is good for society, for instance weatherizing old houses; improving, education and health care; expanding the production and marketing of vegetarian foods; creating and staffing libraries and parks; expanding and modernizing infrastructure, particularly rail systems and other public transportation. There must be a clear goal that any dollar put into circulation creates a limited and predictable amount of loans, and that most of these loans benefit society.

March 7, 2009
Letter to President Barack Obama

Dear Mr. President:

   Regarding the economy and the collapse of the money supply:  We must deal with the basic problem. While the economy grew, the U. S. government failed to adequately increase the money supply. Rather than governments issuing money to people who created our wealth, banks lent money. The money supply grew mainly by the creation of debts to financial institutions; with limited reserves, banks lent more and more. Private for-profit banks not only receive a "taxation" (interests) for their service of providing a medium of exchange. They also determine where new money is allocated, and they can abandon their function whenever they feel uneasy. It is as if our human bodies depended on a quasi-symbiotic relationship with parasites to bring oxygen to the organs. Our government is relegated to merely influence the functional money supply. It lost control. The organism responds as if suffering from malaria.
   The obvious solution:

  1. Nationalizing banks (banks may also be owned by states and communities).
  2. Restricting banks' and other financial institutions' activities, particularly increasing reserve requirements and effectively decreasing bank money created by lending.
  3. Greatly expanding the supply of federal reserve money, printing new money and putting it into circulation in a meaningful process. 

   Governments do not need to borrow. They may issue new money; if done responsibly, this will not cause inflation. Since banks have failed to lend responsibly, the government may offer low-interest and/or interest-free loans and grants to support what is good for our society: weatherizing old houses, building railroads and improving infrastructure, investments in education and health care, subsidies and micro-credit for labor-intensive work places in Third World countries, particularly rural areas of Latin America, etc. There must be a clear goal that any dollar put into circulation creates a limited and predictable amount of loans, and that our money supply is largely allocated to advance our society's needs. Additionally, speculative investments must be highly regulated and transparent.
   It is not clear why people trusted our financial institutions. Banks are businesses who are not concerned with what is good for society, the environment, and future generations. Loan officers are not qualified to determine what loans are reasonable. They are guided by the past but hardly understand changed needs of present and future. Creditworthiness is determined by previous loan payments, not ability to save. Economists and academicians studying likely consequences of trends and developments have no influence on financial institutions.
   In the present mortgage crisis, misguided bankers agreed with an overvaluation of houses and lent accordingly; they created a bubble of unjustifiable value and debt money. This seemed good for the banks since they earned more interests. When people defaulted on their mortgages (which are mostly interest), banks panicked, even though they held the titles to the houses. Most businesses keep going and adapt, even if their income temporarily drops, but banks remove families from their homes and sell them quickly, often far below their value, thus decreasing real estate values further. Rather than lending to maintain economic functions, bankers stopped issuing loans. Consequently, the money supply is shrinking rapidly and vicious cycles develop.
   Naturally, there are many economic problems. Millions of suburban houses lost value when, due to congested highways and high gas prices, access became expensive and cumbersome. Spending more on advertising than research and development, some corporations lost their competitiveness. Financial institutions acted irresponsibly in many ways:  Credit card issuing spread out of control, increasing the functional money supply while decreasing the rate of saving. New forms of financial instruments were invented to extract profits without adding productivity. Speculative investments became so complex that investors could not assess them.
   In my opinion, it was mainly a lack of understanding that lead people and their governments to encourage the development of today's greedy and dysfunctional financial institutions  Explaining what went wrong with our money and why banks must be nationalized, will assist in resolving divergent views and political conflicts.

Sincerely yours,
Heinz Aeschbach, MD   





      H. Aeschbach, M.D.:   About the Principal Author
We may have different talents and temperaments, but we all experience grave inherent and cultural conflicts, and it is our environment, the social institutions of a civilization, which is to bring out the best of human nature.
If we have no vision of more ethical and humane institutions, our civilizations may destroy themselves or drift toward anarchy.
   If we do not trust our government, is this not an indictment of our constitution? Is this not a challenge to rethink the structure of the government?
   A humane civilization promotes small communities that support all inhabitants, individuals and families. Its government is a decentralized democracy. Natural ethics and efficiency are guiding principles of all institutions.
   In a humane, democratic economy, money is allocated by elected representatives of credit unions and development banks, not by profit-driven financial institutions and investors. Bank lending is limited but consistent, thus avoiding business cycles and large fluctuations in the functional money supply. Development banks' primary function is to advance quality of life for present and future generations, rather than material growth. Production and service organizations are decentralized, adapted to local conditions and needs. A function of taxation is to discourage what is recognized as bad for society, ecology and future generations.
   Instead of equal rights and justice, humane conditions for all is the primary goal. Families, schools, communities and service organizations help prevent unethical acts and criminal careers. People who are dangerous to self or others are treated, if necessary, in safe, structured long-term residential facilities. Natural ethics is the guiding principle of all institutions.