re: Europe's Bank Bailout: Is It Enough?

tico — Tue, 14 Oct 2008 18:08:53 GMT

The financial crisis is consumer driven. Bank problems are merely symptoms, but not the root cause. Hence, bailing out Wall Street Fat Cats is unlikely to resolve the protracted crisis. Whether, the Bush Administration and Congress want to acknowledge it or not; the root cause of the crisis was high energy prices. Rising energy prices, particularly as it relates to transportation, caused a significant reallocation of consumers’ outlays to cover the cost of energy. As a result, many consumers could not keep up with mortgage and other payments.

Given money to banks will not increase consumers' income. Therefore, demand, which is a function of income and prices, will not increase, except if the price of crude keeps falling.

The solution to the crisis is less complicated that politicians have made it to be, mainly because they failed to properly diagnose the root cause of the crisis. The solution is to first ensure that speculators cannot bid up the price of crude oil on the futures market and secondly temporarily restore the income of homeowners in foreclosure and mortgage problems to their pre-2003 levels. That is, prior to the invasion of Iraq when crude oil prices were low.

By enabling homeowners in foreclosure and mortgage problems to resume payments to banks and recoup their home via time-limited vouchers, flow of funds would be restored to financial institutions and confidence to the housing market, see http://www.jethroproject.com/tjpecon_solution.htm.