On March 26th, The Institute’s Journal of Economics published an article entitled “Any Bonds Today?” Now the government is promoting Bailout Bonds. We wonder if the Journal had any influence?
We’ll let you decide whether our article had any influence on the effort government is undertaking to create bailout bonds. Here’s the article published in our Journal.
Any Bonds Today?
It is becoming clear to the investor community that the volume of bonds issued by governments around the world is far greater than they are willing to initially invest in an untested model operated by government. While the plans put forth by U.S. Treasury Secretary Tim Geithner to share the burden of toxic assets with private investors is fundamentally sound, many investors and political or economic leaders world-wide are questioning the small nuances of the program and wondering whether it will succeed.
On inspection, the program seems quite sensible, however, there are some valid questions being raised for which few, including Treasury officials have answers simply because it is far too early. Our major question is what happens when the banks fail to improve or properly police their underwriting standards and more high-risk loans filter into the securitization markets? We continue to believe that such conditions would create a far longer negative impact on the confidence of investors and repeat this entire mess for potentially a decade or more. Without the capital from investors in Mortgage Backed Securities, banks will not have sufficient flow of capital to meet the needs of an economy dependent on growth for survival.
There is always an alternative that no-one is discussing. For the Treasury to issue a new generation of Liberty Bonds, similar to the ones sold to finance World War II. During that period, with no sovereign funds to help finance the war effort, government turned to the people and sold billions of dollars in small denomination bonds directly to the public. They worked with the film and radio industries, celebrities and publishers alike to bombard the American public with the patriotic virtues of buying Liberty Bonds. We see reminders of this in the trailers or preface of films of the era shown on television. Older Americans will tell us of songs by the Andrews Sisters with the same name as the title of this article.
Putting the bond offering into the direct hands of the American public has many excellent benefits. One is to increase the savings rate of our citizens, which until this crisis unfolded, was very low. Bonds force one to save over time and help create a long-term cashflow as bonds mature. Another benefit is that bonds can easily be made tax-exempt, allowing citizens to shelter cash without sending it offshore.
A major benefit of selling such bonds would be to keep the debt domestic; so that the interest government would pay on the bonds issued to help the recovery would stay within the U.S. economy. That is not isolationist thinking, it is pure economics. If a high percentage of cash eventually flows out of the American economy to foreign economies as we pay off the high debt of recovery, there will not be much recovery because there will be less money flowing in the United States. That has us very concerned for the future. Yet one more great benefit could come of this method… to inspire Americans to fight collectively towards a sound recovery.
Getting the public to participate in the recovery and helping to build towards a brighter future for the next generation would be nothing less than positive. The reason they call those who lived through World War II “the greatest generation” was that they all had a common purpose. So do we today, but we have yet to realize it.
One of the best justifications for this concept is that all the laws needed to execute this model are already on the books. There may be no need to legislate a single word of new laws to make this function. None of the laws creating the process or Liberty Bonds have ever expired except the budget authorizations, so this process could be implemented as soon as the bonds are printed. Now that is nice to hear!
Selling bonds ranging between $25 and $5,000 each would allow individuals to buy a stake in the future of the nation. If banks charged a small fee per bond (as low as one single dollar), and post offices did the same, these institutions could earn some much needed income in the process. After all, shifting the burden of capitalizing the nation from the hyper-wealthy investor class to the working class insures that the needs of the Nation will be met. Any bonds today? Buy a share of freedom today!