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Video transcript
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 inflationary. 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.