How to Fly a Money Helicopter

Free market forces are causing credit to contract in an attempt to reign in years of excess borrowing and spending, purge malinvestment and liquidate bad debt so that the economy will be cleansed of these imbalances. Even though this would be a painful process, resulting in a sharp recession, it is ultimately preferable to government’s alternative. If the government would stay out of the way and allow and allow the free market to work, the recession would be brief and America would regain its economic strength on sound footing, allowing for real economic growth to take place. However, the government is telling voters that by interviewing in the economy, the government will be able to prevent the recession from happening. The government is correct that this course of action will prevent a recession, but only at the cost of causing a much longer and harsher inflationary depression. Choosing between a recession and a depression is like trying to choose between the lesser of two evils (a lot like the current presidential election). Even though both choices are bad and will cause significant suffering, a short recession is far more favourable. But politicians do not want to be accused of doing nothing while their constituents suffer, so they will take action that ensures the suffering lasts a lot longer than it has too.

Bernanke is trying to fight the free market forces that are causing credit to contract and is attempting to reinflate the bubble by printing money. He is touted as a student of the Great Depression and is under the false belief that a contracting money supply is what caused the Great Depression, when in fact, it was the expantion of the money supply during the 1920's that ultimately lead to the bust. Bernanke will therefore battle the credit crunch by finding ways to increase the supply of money and credit to get Americans to continue to borrow and consume. There is an incredible amount of liquidity (inflation) being pumped into the system in order to try to keep the boom going. The US government even resorted to mailing out $160 billion worth of checks a few months back and now has plans to mail out an even bigger one. These types of policies are wildly inflationary and fit the definition of a helicopter drop. Continued helicopter drops will eventually lead to hyperinflation, which seems to be the road that Bernake and Paulson are leading us down.

So if money printing and helicopter drops are designed to keep the phony borrow and spend economy going, there are much more effective ways to do this. To really get the credit flowing that will result in the spending that drives the GDP figures, the government needs control of the credit card companies.

Credit cards are what enabled the reckless consumption that drove the consumer economy. And the illusion of home equity allowed banks to lend money to bankrupt individuals who were then able to pay off their credit cards with home equity loans. Now that there is no more home equity to extract, credit card bills cannot be paid, causing credit card companies to reduce spending limits or cut off service to risky customers, leaving the consumer with no where else to turn to borrow money. The credit card is the last line of defense for Americans and many are simply running their cards to the limit in order to maintain their lifestyles. When the credit cards get cut off, Americans will no longer be able to consume anymore and the majority of the consumer spending based economy will collapse. Even though consumption in the United States has already fallen dramatically, I believe that most of the remaining consumption is only made possible through credit cards.

As more and more people default on their credit card loans, the credit card companies will eventually go bankrupt. The scary thing about credit card default is that people are defaulting on the minimum payment. Credit card debt can be enormous, but the monthly payments may be very small in comparison. Therefore, when people default, it is not because they are unable to pay back the full balance, it is because they are unable to pay back only a small fraction of their total debt. This will translate into enormous losses for the credit card companies which should push most of them into bankruptcy. If credit card companies actually tried to collect payment on the full amount that they were owed, virtually no one would be able to pay back the full balance within a short time period. As credit card debt compounds with interest, it is unlikely that Americans would ever be able to completely pay off their credit cards and so they simply continue to run up more debt until minimum payments cannot be made.

If the government wants to keep the helicopter flying and continue to fight the credit crunch, the government should take control of all the credit card companies. Politicians can sell this plan to the public by blaming the greedy credit card companies for charging too much interest and requiring unreasonable monthly payments. The next President could explain that the government action would lower the interest rate and monthly payments, allowing struggling families to get more time to get back on their feet, and reduce the anxiety of trying to make these payments every month. It should be easy to convince the public to support this plan because everyone hates credit card companies and the plan can be packaged in a way that makes it seem that government is protecting the public from the evil corporations that are destroying American families.

Once the government has control of all the credit cards and all the credit card debt that is attached to it, they can consolidate all this debt, which is now owed to the federal government. The government will then reduce the monthly payments to something very affordable. The government then sends everyone a new government credit card with a very high limit, low interest rates, and low monthly payments. People are then free to use this new credit card to pay the monthly payments of their previously consolidated debt, as well as use the card for new spending. A second credit card is then sent to everyone, which also has a very low monthly payment. The second card is used to pay the minimum monthly payments on the first card.

Example: Joe the Plumber and his family have a total of $100,000 of credit card debt. His combine monthly payments have reached $2000 a month. Times just keep getting tougher for Joe ever since he was fired from his job for not having the proper certification. Joe cannot afford to make these minimum monthly payments and has no money or credit that he can spend to put food on the table. The government then comes to the rescues of Joe the Plumber! The government buys up all his bad debt, bailing out the lenders who made the bad loans, and reduce his monthly payments to only $200 a month. The government then gives Joe his two new credit cards. After he gets this new credit card, he uses it to pay off his first $200 payment on his old debt, and then goes out and spends $4800 over the course of the month. So he still owes $200 per month on his old debt, and has now accumulated $5000 of new debt on the first credit card. The bill for his new credit card comes and he finds out that he owes a minimum of $10 for this month on his $5000 balance, which he can pay using his second government credit card.

With low interest rates and small monthly payments, people can continue to pay off credit card debt, with more credit card debt. And as long as limits are continually increased, people can keep spending money into the economy virtually without limit.

With government book keeping, it would appear Joe the Plumber is a very low credit risk because he is always making his minimum payments on time. Therefore, it is justified to increase his line of credit, because he has been so responsible with making his payments. And as the interest on the principle increases, the government can actually claim to have made a profit. The debt can be packaged up with a full guarantee of the government and sold aboard. These securities could have very high yields because it is possible to allow for the interest on the principle debt to be high, as long as minimum payments are low. And even though it is impossible to repay the principle without going into more debt, the value of the security will increase at the rate of interest on the principle. There will be no risk of default, since Americans can always pay the minimum payment with a new credit card, and foreigners would prefer these securitized assets to treasuries because they are backed by the government and pay a higher yield.

The problem with this plan is that when people figure out that they can spend unlimited amounts of money then everyone will go out and spend as much as possible. Therefore, the government will have to ensure that a small percentage default in order to prevent reckless spending. If people realize they can spend a reasonable amount of money for the foreseeable future, they will have an incentive to not run their cards up to the limit. The government could fix the default rate at 2%, and therefore the most reckless two percent of the population will go broke and no longer qualify for the government credit cards. People will realize that if they run up more debt than their neighbour, they could be out on the street. This way, everyone will spend relatively similar amounts, and only those who spend to excess will be eliminated from the program. But because the 2% of the population that will be defaulting will likely be poor minorities, there will be plenty of sympathy to help them through government welfare. So if people cannot be responsible to spend within their limits using the government credit cards, the government will regulate how much they can spend by adjusting the value of the welfare check they receive.