Bailout 15: More on the solution More on the "Plutsky Plan".
Bailout 15: More on the solution
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- Let's talk a little bit about what I'll call the Plutsky
- Plan, because it came from my friend, Todd Plutsky.
- But I think it's a good plan.
- But let's think about a little bit of its repercussions and
- see if it's more or less likely to actually work.
- Well first of all, you know, I threw out in the last video 50
- banks, maybe that's logistically difficult.
- Instead of having 50 banks with $14 billion initial
- capital, maybe you do five banks with $140 forty billion
- initial capital.
- But the point being is that you should have more than one
- bank, it shouldn't be too big to fail, and you should try to
- instill some type of competition there.
- But because they have pristine balance sheets, all of these
- banks are going to be able to lever 10:1, which we know
- isn't crazy.
- Merrill Lynch and Morgan Stanley and all the likes have
- been leveraging up 30 to 40:1.
- So 10:1 is normal for a bank.
- And frankly, they're probably going to be able to attract a
- lot more-- you know we said foreign governments probably
- would be willing to lend to them, the private sector is
- willing to lend to them.
- If these are commercial banks, which means that they can take
- deposits, a lot of people are going to be willing to
- essentially put their money with this bank because it has
- a clean balance sheet, and essentially it'll be owned
- individually by the American people, and it will have the
- federal backstop above and beyond the FDIC insurance
- limit and all that.
- Although I do like the one provision to
- increase the FDIC caps.
- Maybe I'll do the insurance caps on deposits.
- But it will actually be able attract a lot of deposits from
- everyday people.
- They'll feel safer with these banks.
- So in terms of whether you'll be able to capitalize these
- banks and lever up 10:1, I don't think
- there's an issue there.
- Then there's a question, will it solve the fundamental
- problem of keeping credit markets flowing to those
- people that it needs to keep credit to?
- Well we already said it'll have no trouble being able to
- have access to funds above and beyond how much the government
- capitalizes it with.
- It'll be able to attract deposits, it'll be able to
- attract investment from the private sector and from
- international money, especially with this five year
- government backstop.
- So it will be able to essentially put 10 times this
- money back into the system.
- So if you take $700 billion collectively, this will
- introduce 10 times as much.
- So $7 trillion of new loans.
- So this $7 trillion -- I mean that's literally half of the
- American GDP.
- I mean you might argue that is too much -- that might provide
- too much credit, and it might go from, you know, thawing to
- overheating credit markets.
- So then you might say well if $7 trillion is too much
- liquidity, well why don't we just reduce this number a
- little bit.
- Instead of saying $700 billion, why don't you make it
- a $100 billion, right?
- Because then $100 billion, if you do 10 banks with $10
- billion each, so you introduce $100 billion.
- They all lever up because it's all new liabilities and new
- assets, clean balance sheets, it'll introduce $1 trillion of
- new loans that it can go put to work for people building
- factories and doing real things.
- And because their incentive is not to bail out their friends,
- it's not to help out the companies they used to work
- for, the companies that are donating to them in some way
- or contributing to them, or promising jobs in some way.
- It won't go -- this $1 trillion is not going to go to
- buy assets at higher prices than they should.
- You know it could go to buy assets at discount prices if
- the new managers of these banks do see a good return.
- But most probably they'll invest it in areas of the
- economy where they do see a positive return on investment.
- And one person had sent me a note and said, hey, wouldn't
- introducing all of this liquidity into the financial
- system, whether it's $7 trillion or $1 trillion,
- wouldn't that lead to hyperinflation?
- And I'll probably do a whole series on inflation.
- I think there's a lot of misunderstanding around it.
- In general, if anyone makes a positive investment -- so if I
- have $1 and I make it an investment where it generates
- $1.20 of benefit, that by definition is not
- Because I had $1 in the world and I created $1.20 of wealth.
- So actually, the pie gets bigger.
- A good way to think about inflation -- I'll do a lot
- about this because it is a very abstract concept.
- Let's say this is the pie of goods and
- services in the world.
- Or let's just say a country right?
- Goods and services.
- Goods and services in a year.
- You could say it's our GDP, or however you
- want to measure it.
- Goods and services in a year, right?
- That's the goods and services in a year.
- And let's say I have another pool of the amount of money
- there is in a given year.
- So money.
- And the money supply is an interesting thing, because
- it's not just dependent on the amount of
- physical coins or dollars.
- It also is a function of how quickly those transact and how
- much leverage there is in the system.
- So you can actually have a whole economy where everyone
- just has one dollar bill, but every time someone needs
- something from someone else, they exchange
- that one dollar bill.
- So that one dollar bill gets used, you know, 15 trillion
- times a year.
- So you'd actually have $15 trillion of money, because the
- velocity would be so high.
- But anyway let's just say that this is the pool of money.
- If this pool, the pool of money grows faster than the
- actual goods and services and the actual productive capacity
- of that country, then you have inflation.
- So if this circle grows faster than this
- one you have inflation.
- If this circle grows faster than this
- circle, you have deflation.
- You have the same, or you have some amount of money
- representing more goods and services, so goods and
- services actually become cheaper.
- And the problem that we're talking about right now, this
- credit crisis, this is a problem of deleveraging, where
- the government injects a dollar into this current
- broken banking system, and instead of that dollar -- you
- know, the normal system is you lend a dollar to a bank, so
- you lend $1 to a bank, and then, let's say
- this is the Fed right?
- This is how they inject liquidity.
- They lend a dollar to a bank.
- Let me draw a bank here.
- Then that bank has to keep -- it can only lever 10:1-- so it
- essentially has to keep in reserve $0.10 of that dollar,
- but then it lends $0.90 to somebody else, to another
- bank, right?
- Then that other bank has to keep 10% of that, so it lends
- $0.81 to someone else.
- And then that someone else can lend whatever $0.81 times 0.9
- is, so I don't know, seventy-something cents to
- someone else.
- But you get the idea, that in a normal, functioning banking
- system, one dollar injected into the system has this
- multiplier effect, so it actually
- creates a lot of money.
- And that's what people are implicitly talking about when
- they talk about the printing press.
- But what's going on right now is the Fed lends $1 to Bank A,
- but Bank A is so scared that it doesn't lend out to anyone
- else, it just keeps that dollar.
- Because right now their main priority isn't to try to get a
- little bit of incremental interest on whatever money
- they have, their main priority is survival.
- So that dollar just goes into a black hole.
- And so that's what the Fed's frustration is.
- It keeps lending money into the system but that money
- keeps disappearing.
- And actually as the economy slows, the velocity of money
- is going to slow down as well.
- So the main problem when you have a credit crisis and when
- you have a recession is actually the
- money supply shrinks.
- The amount of goods and services probably shrinks as
- well, but the money supply shrinks even more.
- So your main problem is deflation.
- And you know, that was the main problem in the Great
- Depression, and that was the main problem in
- the Japanese crisis.
- And you know, Ben Bernanke, he's written papers about this
- and he's like, well you can always cure deflation by
- printing money and dropping money from a helicopter.
- Well to some degree that's what they've already been
- trying to do.
- They've already been-- the Fed's been willing to take
- pretty large credit risks on bank and lending money into
- the system.
- But the problem is, if this multiplier effect is
- disappearing at a faster rate than you are dropping money
- from a helicopter, you still have deflation, right?
- Before when you not only let people lever 10:1, you let
- them lever 30:1 and 40:1, every dollar you put in the
- system became $40 that was given to someone else, and
- then they could lever up.
- So you had this huge explosion of money.
- And frankly, the only reason why we didn't have inflation--
- I mean the last 5, 10 years we had this huge
- explosion of money.
- And the only reason why it didn't, at least in measurable
- inflation, show up, is that on the other side of the
- equation, you had all of this new productive capacity come
- on line in China and India.
- And so manufactured goods got a lot cheaper.
- But in things that were not manufactured goods, like
- commodities, like homes, you had this huge asset inflation.
- Or even college tuition, or healthcare-- things that are
- dependent on American labor-- became hugely expensive, and
- that's because you had this huge, huge infusion-- you
- know, there's different ways to measure money, but the
- broadest indicator, which is called M3-- and I know I'm
- kind of going out of the domain, but I'll make a bunch
- of videos on this.
- The broadest indicator, M3, which the government stopped
- officially reporting, exploded because there was so much
- leverage in the system.
- Now things are-- the exact opposite is happening.
- The leverage is disappearing from the system.
- There's no lending to each other.
- Everyone is going from 1:30 leverage to 1:10 leverage.
- So money is actually disappearing in the system.
- The velocity is slowing.
- This is shrinking, but this is shrinking more, no matter what
- the Fed is doing.
- And frankly, this new $700 billion bail out, I personally
- think this is the helicopter that Ben Bernanke always
- talked about using.
- And whenever you're going to drop money from a helicopter,
- the question is, where do you drop it?
- And they think they should drop it into an already broken
- banking system.
- The point of this video and the last is maybe you should
- just drop it into a new banking system, or maybe you
- just drop it into everyone's pockets and see what happens.
- And you let new banks form where they can.
- Anyway, that's all for this video.
- I know it was a little bit rambling.
- But hopefully you learned a little bit.
- See you in the next video.
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