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Bailout is no solution: A simple accounting procedure fixes this whole thing

This whole thing can be fixed by simply allowing the banks that hold these bad mortgages to write them down to zero (if necessary) and take the loss. Then the money will flow again as the banks will now be within their reserve requirement limits. This won't be wanted by the bank execs however as they are paid BIG BONUSES on profits, not on losses.

Again, we can save $700,000,000,000 (yes that is what 700 billion looks like) by urging our government to make a short term accounting rule modification that will free up the credit markets. A simply stroke of the pen will save us billions , probably trillions.

Call your senators today and urge them to vote "No".

If you want a short further explanation for this see below.

The banks are allowed to lend up to 10 times the money they hold in reserves. That means that for every dollar you deposit, the bank can lend out $10. This $1 is know as the reserves that must be held by the banks in cash so you can get cash back out of the bank. (When you hear of banks going insolvent, it is because their cash on hand has fallen below the 10% reserve requirement. In short, they don't have the money to give back to their customers. SO the FDIC steps in to return the deposits to the banks customer.)

In good times the banks make these loans on the 10 to 1 ratio (loans to reserves) on mortgages etc. They in turn get a piece of paper call a promissory note and mortgage that is their guarantee of either getting paid their mortgage or getting the home. The banks would then sell this paper to investors who wanted the interest rate return (say 6%). The bank then received money for the loan and could then loan out the money again.

What has happened is that the investors are not buying the loans anymore because the loans are not sound investments. Thus the banks are stuck with them. Since they are stuck with them, they can no longer turn this note and mortgage into cash. If the banks don't have the cash, they can't loan it out. Thus a credit crunch occurs. Which is where we are today.

THE FIX:

The EASY way to fix this is as follows. Temporarily change the accounting rules to allow the banks to write off these bad loans. Down to zero if necessary. Then the banks will have money again to make loans and free up the credit. The banks could then sell these loans at a much reduced price and the market would open up again as the price for the note and mortgage fell. Problem solved without any tax payers dollars.

Where does the money to loan out again come from is we are just writing this off on the books. The same place the banks got the money from in the first place...out of thin air. It is all on paper. It is not real cash, because the banks are allowed to lend out 10 times the amount they take in from deposits. It is money created out of thin air. And it happens all time since 1913.

Personally, I would like to see that if the accounting rules were changed, that the banks would have to give these zero value loans to the taxpayers, who would then collect interest on the loans and act in the capacity of Fannie Mae. Everyone makes out except the shareholders (as no dividends would be issued) and the execs that are paid bonuses on profits. :)

October 1, 2008 in Current Affairs | Permalink

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