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:
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
The obvious solution:
- Nationalizing banks (banks may also be owned by states and communities).
- Restricting banks' and other financial institutions' activities,
particularly increasing reserve requirements and effectively decreasing
bank money created by lending.
- 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.
Heinz Aeschbach, MD