Originally written as a comment, this diary refers to two other diaries I wrote on the subject.
Our Entire Economy IS NOT in Danger
Cancel all Mortgages
Critics have asked me to stop writing about this, saying they are "embarrassed" seeing such writing on Dailykos. Yet, they will not debate me on the issue. They raise objections, and I answer the objections, and then they quit.
The people who like the ideas I present are very supportive, however. So, I won't stop writing about it. I'm simply writing commentary now, but that doesn't mean I can't scoop up links and back up what I have to say. IMO, though, that's not really necessary, since the points I'm making are so bleeding obvious for anyone with even a rudimentary understanding of the subject.
So, over the jump, a commentary on "The Magical Thinking of Fractional Lending"
The bank has 10% in capital.
(Actually, I think that was reduced to 5 or 6 % recently, but I just have a vague memory of a news story that the "on-hand capital" requirement was reduced a few years ago)
But I digress.
The bank has 10% capital. That means they can loan out nine times that amount.
Why? Well, real money (backed in value from sale of assets, labor, capital gains, etc) is paid in increments, over time, to make the magical 90% of the loan into real money. That's how fractional lending works.
So, the only real money , when we are talking about mortgages, is the equity of the person paying the mortgage.
(and also the down payment, but, in reality, that down payment is actually a fee that keeps the system greased. You aren't guaranteed to get it back.)
So, I wrote two diaries proposing that we cancel all mortgages and send out the property titles, vesting the only persons who have real money with a title to it.
OMG! You should have heard the screams of protest!
"You're just a silly person who doesn't understand finance!" and "All the banks would crash! All the credit would disappear!"
There were other hysterical cries, which I won't address.
Canceling mortgages would not abolish fractional lending. Nor would it "destroy credit" since everything else, every other aspect of the economy, would still function as it does now.
I also proposed a better, and more republican method, of effecting both reform of the financial system (and the corporate system in general), and an end to the crisis.
The bailout is a fascist solution to a fascist problem. That's not name-calling, it's an ideological definition of the bailout policy. It's a brazen merger of government and corporate power, and the power holders, ultimately, are unaccountable corporate leaders who will do as they please with the money and just try to stop them! Want fascism? And the inevitable collapse of the republic and the economy? We'll get it with this bailout.
The federal government is the wrong actor to solve this problem. It's the right source of money to solve the problem, but it's the wrong institution to deal with the problem. The states have the power to revoke corporate charters, and to reform the corporate system. The states are the only actors who can constitutionally solve this problem.
I asked people to imagine what would happen if mortgages were canceled. Most of the critics didn't seem to realize that fractional lending would still be intact. They can't seem to grasp that every other kind of loan would still be in effect, still driving the economy, and that, after a brief moratorium, we would go back to writing mortgages using fractional lending.
The difference between the world before mortgage cancellation (and corporate reform) and after mortgage cancellation is that lending would begin with the assumption of a known quantity of equity and assets after the cancellation process.
You try to throw a trillion dollars at this byzantine mess the corporate leadership has created with corrupt overlapping authorities and "magical" and inscrutable overlapping securities, and you won't get solvency. You'll get a bigger mess. And more corruption. And less accountability. This situation would create a situation similar to the historical battle between President Andrew Jackson and The Bank of the United States (a corporation). Jackson solved the problem by empowering the states, generally speaking.
Not only that, but this crisis isn't just about bad loans. It's a fundamental failure of leadership by corporate leaders across the board for the last 25 years. It's not just mortgage policy. It's every policy pursued by an anti-republican power structure that views republican government as an impediment to the establishment of aristocratic sovereignty. Which, incidently, is prohibited by the constitution. Model Act and Delaware Law be damned.
There is a "magical thinking" involved in our faith in fractional lending. This is hardly the first time since the founding of the republic that we've had a financial meltdown. But while the magical thinking of fractional lending does work if properly regulated, that is not proof positive that all magical thinking works.
The magical thinking involved in assuming that government-granted charters are a basis for aristocratic sovereignty is an example of unworkable thinking, magical or otherwise. We don't need to preserve that in order to preserve incorporation generally, or fractional lending specifically.