Tuesday, September 9, 2008

Place Your Bets: Stocks Rise on News of Federal Mortgage Bailout

According to the Associated Press news report on Yahoo! news early Monday ("Stocks mostly advance on plan for mortgage giants," 09/08/08), "Stocks mostly advanced Monday as investors put down bets that a recovery in the financial and housing sectors is in the offing following the U.S. government's move to bail out mortgage giants Fannie Mae and Freddie Mac. The Dow Jones industrials gained more than 150 points."

Of course the stock market advanced. Any sane gambler will rush to lay down his or her bets in a game where you can only win. Under the current tax code, Wall Street Winnings (i.e., dividends and capital gains) are taxed at very favorable rates under the illusion that this money is necessary for investment . . . overseas, as jobs retreat in the face of high labor costs and a deteriorating balance of trade. In effect, the government pays you to make money. And what happens if you don't make money? The government makes good your losses.

Unfortunately, the powers-that-be erroneously believe that existing pools of savings are absolutely necessary to form capital, despite the findings of Dr. Harold G. Moulton of the Brookings Institution, detailed in The Formation of Capital back in 1935. Lacking savings, most people don't have the wherewithal to get in on this heads-I-win-tails-you-lose game of players take all — win or lose.

Frankly, the only viable solution is to implement Capital Homesteading at the earliest possible date, and use the Federal Reserve as originally intended: to manage a "flexible currency" so that there is always exactly enough liquidity in the system to finance qualified industrial, commercial, and agricultural projects without relying on existing pools of savings.

To make this politically and economically viable, the capital (not consumer) credit needs to be extended in ways that create new owners — owners who will use their dividends and capital gains (both taxed as regular income) to purchase consumption goods and services instead of reinvesting. Why reinvest? Adequate financial capital can be created at will by the commercial banks by discounting qualified loans at the central bank in ways that create more owners out of people who today own little or nothing. This will create more effective demand, greater domestic markets for American goods and services, and relieve the burden on Social Security and Medicare.

If the rich want to gamble, let them go to Las Vegas. Vegas is glad to have them. The only problem is that what they lose in Vegas, stays in Vegas. Jimmy the Greek doesn't bail anybody out.

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