I --hate-- 'bipartisan'., page 1

Originally posted by simonecharisse
There are 300million people in the US. If --I-- was president, I would give everyone who had filed and recieved that pathetic $300 last year, EACH ONE of you 1-or-2 million dollars each. Just think how many people would be out buying themselves new homes and vehicles, getting themselves 'Extreme Home Improvement Makeovers', buying new appliances, computers, food, etc.

As has already been pointed out, you'd have to print $300 trillion. Inflation would run out of control, money would lose its value and you would be back where you started from.

Shall we make it $900 billion instead? That's close to the cost of your President's proposed stimulus package, so we know it's money that can be found. Let's divide that up between the roughly 100 milllion households in the USA. That's $9,000 per household.

Now let's see if I can answer your question,

WHY IS THIS NOT A GOOD IDEA?

What triggered the financial crisis? I don't mean the long-term causes. I mean the immediate cause. It was the sudden inability of many financial institutions to pay their debts, which caused several of them, notably Lehman Brothers, to collapse.

What were those debts? They were promises to compensate people holding the mortgages if the mortagees defaulted. But the mortgages were turned into 'collateralized debt obligations' (CDOs) - tiny pieces of mortgages, hundreds of these little bits bundled together into one. There were millions and millions of these CDOs. They were freely traded and there was even a derivatives market based on them.

When those defaults started coming, the liability for them was spread all over the financial system. Nobody really knew who was owed for what, or how much they owed. People didn't even know what the true value of their own assets was. So nobody knew whether anybody else's credit was good enough.

Banks no longer knew whether their customers were creditworthy. They didin't even know whether they themselves were creditworthy. So they stopped lending.

That's how the financial crisis started.

It isn't enough just to hand out money to consumers. First of all, it may not raise consumer demand the way you anticipate. Everyone is scared spratless right now, so it's far more likely they'll just stash the cash under the mattress and keep their heads down till the towers stop crashing. And even if they do spend it, money going into retailers' tills doesn't translate into working capital for industry and services. To serve the demand, businesses will have to borrow money.

From banks.

Which aren't lending.

Do you see the problem? It's not primarily a shortage of money; it's a shortage of credit. Frankly, it wouldn't help much even if you could give every man, woman and child a million. You can't turn people into financiers and venture capitalists overnight, which is what would have to happen for that cool million bucks per head to translate into economic recovery. In reality, though, all a cash handout like that would do is cause instant, Zimbabwe-style hyperinflation.

[edit on 10-2-2009 by Astyanax]