Learn about Bailout 15: More on the solution Video

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Learn about Bailout 15: More on the solution

Learn about Bailout 15: More on the solution Let’s talk a little bit about what I called the plots key plan because it came with my friend Todd Pasky but I think it’s a good plan but let’s think about it of its repercussions and see if it’s more likely to actually work. Well first of all I knew that I threw that in the last video 50 banks maybe that’s the logistically difficult. Instead of having 50 banks with 14 initial capital maybe you do five banks with the $140 Billion of initial capital but the point being is that you should have more than one bank and it shouldn’t be two 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 to 1 which we know is isn’t crazy and Marilyn and Morgan Stanley and all the like of leveraging up 30 and 40 one. So 10 to 1 is normal for a bank and frankly there are probably going to be able to attract a lot more, you know we said foreign governments probably willing to lend to them the private sectors willing to lend them. A lot of this are commercial banks which means that they can take deposits, a lot of people are going to view willing to essentially put their money with this bank because it has a clean balance sheet. And it is essentially owned and it will owned individually by the American people and I will have this Federal boxed up above and beyond of the FDIC insurance limits and all of that. Although I do like the one provision to increase the FDIC caps and I will do the insurance caps on deposits but it will actually be able to track a lot of deposits from everyday people they’ll feel safer with this bank. So in terms of weather you will be able to capitalize these banks and lever up 10 to 1, I don’t think there’s an issue there. There’s a question we’ll it solved the fundamental problems of keeping credit markets flowing to those people that needs to keep credit too. Well we already said that it will have no trouble being able to have access to funds above and beyond how much the government capitalizes with. And it will be able to track deposits; it will be able to attract investment from the private sector and from international money especially with this five year government boxed up. So it will be able to essentially put ten times this money back into the system. So if you take $700 Billion collectively they’ll be able to this will introduce 7 and 10 times as much. So $7 Trillion of new loans, 7 Trillion of new loans, so if there’s 7 Trillion that’s literally half of the American GTP I mean you might argue that is too much that might provide too much credit and it might go from towing to over heating credit markets so them you might say well I have 7 Trillion and there’s too much equity well why don’t’ we just reduce this number a little bit instead of saying $700 Billions. Why don’t you make it a hundred Billion because in a 100 Billion if you do 10 banks with 10 Billion so you introduce a hundred and let me just say a 100 Billion they all lever up because it’s all new, it’s new liabilities and new assets cleaned balance sheets and it will introduce $1 Trillion of new loans that it can go put to work for people building factories and doing real things. And because there are 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 and some way. It won’t go this Trillion dollars is not going to go to buy assets at higher prices and they should, 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 will invest it in areas of the economy. Where they do see a positive return on an investment and one person had send me notes and they were introducing all of these liquidity into the financial system whether it’s 7 Trillion or 1 Trillion wouldn’t that lead to hyper inflation 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 a dollar and I make an investment where it generates a dollar and 20 of benefit. That by definition is not inflationary because I had a dollar in the world, and I created a dollar 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 kind of, it is a very abstract concept. Let’s say that is the pie of good and service in the world or let’s just say in the country, right good and services in a year, you could say it’s RGTP or however you want to measure it good and services in a year, you could say it’s RGTP however you want to measure it. Goods and services in a year, right that’s a good and services in a year and let’s say I have another pool of the amount of money there as 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 had $1.00 bill. But every time someone needs someone from someone else the exchange that $1.00 bill so that $1.00 bill gets used 15 Trillion times a year so you’d actually have $15 Trillion of money because the velocity will be so high. But anyway let’s just say that this is the pull of money, if this pull, the pull of money grows faster then they actual good and services and the actual productive capacity of that country then you have inflation. So if these circles go fashion in this when you have inflation. If these circles grow faster than this circle you have deflation. You have the same or some amount of money representing more goods and services. So goods and services actually become cheaper and the problem that we’re talking about and this credit crisis, this is a problem of de-leveraging where the government inject a dollar into this current broken banking system. And instead of that dollar the normal system is you lend the dollar to a bank so you lend $1.00 to a bank and then let’s say this is a fad this is how they inject liquidity. They lend the dollar to a bank then that bank has to keep and it can lever 10 to1 so it is essentially. It has to keep in reserve 10 cents of that dollar but then it lends 90 cents to somebody else to another bank and that other bank has to keep 10% of that so that lends 81 cents to someone else and then that someone else can lend whatever 81 x .9 is. 70 something cents is someone else but you get the idea that in the normal functioning and in the normal banking system $1.00 injects in the system has this multiplier facts. So it actually creates a lot of money and that’s what this people are implicitly talking about when you talk about the printing press but what’s going on right now is the fad lends $1.00 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 of whatever money they have there main priority is survival. So that dollar just goes into a black hole and so that’s what the fad 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 supplies shrink even more. So your main problem is deflation and that’s why that was the main problem in the great oppression and that was the main problem in the Japanese crisis and you know Ben Bernanky he’s written papers about this and said 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 fads been willing to take pretty large credit risk on bank and lending money into the system. But the problem is if is 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 levered a lot people levered ten to one you let them lever 30 to 1 and 40 to 1. Every dollar you put in the system became $40.00 that it was given someone else and they could lever up so this huge explosion of money and frankly the only reason why we didn’t have inflation. I mean in the last five to ten years we have this huge explosion of money and the only reason why it didn’t at least in measurable inflation show you is that on the other side of the equation you had all of this new productive capacity come online in China and India. And so manufactured goods got a lot cheaper but in things that were not manufactured like commodities like homes you had this huge asset inflation or even college tuition or health care and things that are dependent on American labor became hugely expensive. And that’s because you had this huge infusion of 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 are so much leverage in this system. Now things are the exact opposite as happening, the leverage is disappearing from the system. There’s no lending to each other. Everyone is going from 31 to 30 leverage to 1 to 10 leverage, so money is actually disappearing in this system, the velocity is slowing. This is shrinking but this shrinking more no matter what the fad is doing and frankly this new $700 Billion bail out. I personally think this is the helicopter that Ben Bernanky always talked about using and whenever you’re going to drop money from a helicopter the question is where you do drop it and they think they should drop it into an already broken banking system. The point of this video in the last is maybe you 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’s a little bit ramping but hopefully you learned a little bit. See you in the next video.

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Learn about Bailout 15: More on the solution

Let’s talk a little bit about what I called the plots key plan because it came with my friend Todd Pasky but I think it’s a good plan but let’s think about it of its repercussions and see if it’s more likely to actually work. Well first of all I knew that I threw that in the last video 50 banks maybe that’s the logistically difficult. Instead of having 50 banks with 14 initial capital maybe you do five banks with the $140 Billion of initial capital but the point being is that you should have more than one bank and it shouldn’t be two 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 to 1 which we know is isn’t crazy and Marilyn and Morgan Stanley and all the like of leveraging up 30 and 40 one. So 10 to 1 is normal for a bank and frankly there are probably going to be able to attract a lot more, you know we said foreign governments probably willing to lend to them the private sectors willing to lend them.

A lot of this are commercial banks which means that they can take deposits, a lot of people are going to view willing to essentially put their money with this bank because it has a clean balance sheet. And it is essentially owned and it will owned individually by the American people and I will have this Federal boxed up above and beyond of the FDIC insurance limits and all of that. Although I do like the one provision to increase the FDIC caps and I will do the insurance caps on deposits but it will actually be able to track a lot of deposits from everyday people they’ll feel safer with this bank. So in terms of weather you will be able to capitalize these banks and lever up 10 to 1, I don’t think there’s an issue there. There’s a question we’ll it solved the fundamental problems of keeping credit markets flowing to those people that needs to keep credit too. Well we already said that it will have no trouble being able to have access to funds above and beyond how much the government capitalizes with. And it will be able to track deposits; it will be able to attract investment from the private sector and from international money especially with this five year government boxed up.

So it will be able to essentially put ten times this money back into the system. So if you take $700 Billion collectively they’ll be able to this will introduce 7 and 10 times as much. So $7 Trillion of new loans, 7 Trillion of new loans, so if there’s 7 Trillion that’s literally half of the American GTP I mean you might argue that is too much that might provide too much credit and it might go from towing to over heating credit markets so them you might say well I have 7 Trillion and there’s too much equity well why don’t’ we just reduce this number a little bit instead of saying $700 Billions. Why don’t you make it a hundred Billion because in a 100 Billion if you do 10 banks with 10 Billion so you introduce a hundred and let me just say a 100 Billion they all lever up because it’s all new, it’s new liabilities and new assets cleaned balance sheets and it will introduce $1 Trillion of new loans that it can go put to work for people building factories and doing real things.

And because there are 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 and some way. It won’t go this Trillion dollars is not going to go to buy assets at higher prices and they should, 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 will invest it in areas of the economy. Where they do see a positive return on an investment and one person had send me notes and they were introducing all of these liquidity into the financial system whether it’s 7 Trillion or 1 Trillion wouldn’t that lead to hyper inflation 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 a dollar and I make an investment where it generates a dollar and 20 of benefit. That by definition is not inflationary because I had a dollar in the world, and I created a dollar 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 kind of, it is a very abstract concept. Let’s say that is the pie of good and service in the world or let’s just say in the country, right good and services in a year, you could say it’s RGTP or however you want to measure it good and services in a year, you could say it’s RGTP however you want to measure it. Goods and services in a year, right that’s a good and services in a year and let’s say I have another pool of the amount of money there as 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 had $1.00 bill.

But every time someone needs someone from someone else the exchange that $1.00 bill so that $1.00 bill gets used 15 Trillion times a year so you’d actually have $15 Trillion of money because the velocity will be so high. But anyway let’s just say that this is the pull of money, if this pull, the pull of money grows faster then they actual good and services and the actual productive capacity of that country then you have inflation. So if these circles go fashion in this when you have inflation.

If these circles grow faster than this circle you have deflation. You have the same or some amount of money representing more goods and services. So goods and services actually become cheaper and the problem that we’re talking about and this credit crisis, this is a problem of de-leveraging where the government inject a dollar into this current broken banking system. And instead of that dollar the normal system is you lend the dollar to a bank so you lend $1.00 to a bank and then let’s say this is a fad this is how they inject liquidity.

They lend the dollar to a bank then that bank has to keep and it can lever 10 to1 so it is essentially. It has to keep in reserve 10 cents of that dollar but then it lends 90 cents to somebody else to another bank and that other bank has to keep 10% of that so that lends 81 cents to someone else and then that someone else can lend whatever 81 x .9 is. 70 something cents is someone else but you get the idea that in the normal functioning and in the normal banking system $1.00 injects in the system has this multiplier facts. So it actually creates a lot of money and that’s what this people are implicitly talking about when you talk about the printing press but what’s going on right now is the fad lends $1.00 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 of whatever money they have there main priority is survival.

So that dollar just goes into a black hole and so that’s what the fad 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 supplies shrink even more. So your main problem is deflation and that’s why that was the main problem in the great oppression and that was the main problem in the Japanese crisis and you know Ben Bernanky he’s written papers about this and said 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 fads been willing to take pretty large credit risk on bank and lending money into the system. But the problem is if is 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 levered a lot people levered ten to one you let them lever 30 to 1 and 40 to 1. Every dollar you put in the system became $40.00 that it was given someone else and they could lever up so this huge explosion of money and frankly the only reason why we didn’t have inflation.

I mean in the last five to ten years we have this huge explosion of money and the only reason why it didn’t at least in measurable inflation show you is that on the other side of the equation you had all of this new productive capacity come online in China and India. And so manufactured goods got a lot cheaper but in things that were not manufactured like commodities like homes you had this huge asset inflation or even college tuition or health care and things that are dependent on American labor became hugely expensive. And that’s because you had this huge infusion of 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 are so much leverage in this system. Now things are the exact opposite as happening, the leverage is disappearing from the system. There’s no lending to each other. Everyone is going from 31 to 30 leverage to 1 to 10 leverage, so money is actually disappearing in this system, the velocity is slowing. This is shrinking but this shrinking more no matter what the fad is doing and frankly this new $700 Billion bail out. I personally think this is the helicopter that Ben Bernanky always talked about using and whenever you’re going to drop money from a helicopter the question is where you do drop it and they think they should drop it into an already broken banking system. The point of this video in the last is maybe you 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’s a little bit ramping but hopefully you learned a little bit. See you in the next video.

Transcription by: Scribe4you Transcription Services