Trickle Down Or Trickle Up?

For quite some time now the world’s financial system has been fragile. The Federal Reserve Chairperson, Ben S. Bernanke is inundated with a dilemma in the wide ranged credit freeze surrounding today’s financial institutions. This problem goes far outside what interest rate cuts can mend in the economy.

The exceptionally low interest rates of the early and mid-2000s and the continual bailing out by Alan Greenspan of any Wall Street player that got into trouble created enormous temptations to speculate with borrowed funds and throw caution to the wind, completely ignoring risk. Why worry about risk when it’s not your money and even if you get into trouble you can get bailed out? This problem is called moral hazard.

The derivatives speculated by Wall Street players do not have the value they thought they had. Now we are left in a desperate race to de-leverage regardless of the cost. Naturally the buyers have thinned out and institutional investors do not want to add to the already overvalued package in their portfolio now that the real value can be seen. We are now finding ourselves in a liquidity emergency to the point of which we have not known since before World War II.

Commercial as well as investment banks are sitting on overvalued assets such as mortgages and private equity loans they cannot sell due to being packaged with derivatives of very questionable value. This is a nice way of saying that Wall Street lied about the value and has overpriced them by billions of dollars. Basically this means that they do not have the cash to make new loans and this is killing our credit based economy. For banks and brokers to make their balance sheets stronger by de-leveraging the banks would need to reduce the number of loans on their books. Doing this would overwhelm the economy and turn a bad recession into a long lasting depression.

This is why the Federal Reserve is bailing out banks with long term financing at low prices. What other option is there? Either let the entire financial infrastructure of the world freeze up or they lend money to financial institutions and accept the subprime mortgages and related securities of debatable value as collateral. This is how the Federal Reserve has become the buyer of last resort which is incredibly inflationary. These financial middlemen are projected to take the cash borrowed from the Federal Reserve and lend it out again to higher quality borrowers; unfortunately this is not what is happening. Theoretically, this would be considered the trickle-down effect.

Why not a trickle-up effect? This bailout is going to cost at least $1,000,000,000,000. Yes, that’s one trillion. Instead of giving that one trillion in newly created money to the Wall Street fat cats so they can continue to speculate in derivatives causing more of the same problems that we are facing now, why not give that one trillion to the people of America and let it trickle up to the fat cats on Wall Street? Don’t you think giving every man, woman, and child in the US a check for about $3,200 would help stimulate the economy and get money flowing again? That would be $16,000 for a family of five. Why not help the entire population instead of just a few well-connected, fat cat, white collar criminal insiders? Why should they be given a trillion dollars of new money?

Why can’t we do this to help all of America in this way instead of a few Wall Street fat cats? Why is it they should be given a trillion dollars of new money to throw around like they have in the past?