Letter from a Loony Economist

I hesitated to write because I needed to complete the research backing my bold proposals[i]. Then difficulties hit us and there is a scramble to the trough by all types of pigs. On the floor of the congress, some member was jumping up and down waiving a 5 page letter signed by 200 economists in support of his position[ii] . There indeed is a nearly total disjunct between words as used by economists and words as used by normal adults in talking about the economy. I have done lots of the research necessary for the proposals I make. It will take a lot of time to write up but I thought I would get it to you as soon as possible. I write this as a critic of economics, as an economist, but first and foremost as a citizen of this great country which IS the only realistic hope of humanity and which is THE country that not only espouses but continues to make progress living up to them.
So please receive this, a brief letter from an old economist who does not agree with many other economists because he [iii]never uses theory to refute facts.
Money and Banking. What to do Now
And we must do something now. The financial problem we face is that liquidity is crunched[iv]. Brokerage firms and Investment Banks have propagated the myth that trading in Wall Street is the same as INVESTMENT in the sense of creating additional capacity to produce goods and services in the economy. In fact just about the sum total of activity simply means transactions among holders of financial paper with hardly any money going to the creation of capacity to produce. You buy stocks from a holder of stock and you sell to another participant in the market for a capital gain or loss. The capital gain or loss is a misnomer because the actual physical stock of capital good is nearly untouched. So Wall Street is about churning money and hardly affects the economy. Yes it affects itself but the number of people working in Wall Street is insignificant and the income generated for the important players (who make incomes in the hundreds of millions) does not matter to the economy one ant’s earful of sawdust. I claim that if all the income(to investment bakers and brokerage houses)and jobs generated by wall street were to evaporate tomorrow then the effect on the economy as a whole is negligible[v].
Don’t bail out Wall Street Brokerage houses. Don’t bail out investment banks or any banks for that matter. And don’t nationalize them either. It is capitalism and let the market in financial services fix itself.
There is a liquidity crisis. And if we did not let JP Morgan have his way the last time around, then we would have been in a good position to fix things now. The Europeans, the Asians, the Africans, even the appendage called Australia HAVE proper central banks. We do Not. The Monstrosity called the Federal Reserve System is a joke[vi]. Now is not the time to fix it. Here is what we do.
I. Short term:
Create a Central Bank which eventually (in three years will take over the management of the US Monetary Policy)[vii]. For now it has only one function: Provide liquidity for all sectors except the financial sector. Bypass the fake failed false (other Fs available on demand) financial system. And let the embryonic central bank be CENTRAL. Existing commercial banks can borrow from central bank at a good interest rate. If that means they can’t function then new ones will spring up. If there is money in it, American entrepreneurs will do it. After things settle down, we sell the banking operation of the central bank to bidders. Privatize the banking operation of the central bank intelligently. The winning bidder should not win only on the basis of price, but must be qualified to run a bank (pray that they are new vigorous bank managers, where the qualification needed to be a banker is more than marrying a banker’s spinster daughter).
II. Long Term:
After things settle down we need to do the following:
1. Reform the management of monetary policy by going to a standard free standing Central Bank such as the one in European countries. Germany, France, and the UK have good models. It is insane to have the Fed owned by the member banks . Logic: Credit creation is infrastructural and can best be produced cooperatively. Confidence in the integrity of the financial system similar to national security. Bank regulation does not confiscate private property. It takes over something which is produced in common (confidence in money so it can be exchanged for assets) and manages it for the benefit of all. The Central Bank Governor should be a serious banker who got there by other means than marrying a banker’s spinster daughter. JP Morgan won’t like it but he was not the one that saved us this time. Warren Buffet made a good start, and he would like my suggestion because he loves his country more than he loves his money.
2. Reform the Management of Fiscal policy. Consolidate into one powerful department, all fiscal policy components: OMB, IRS, and Tresury Operations into one department responsible for producing and following up on a unified fiscal policy proposal for the President and for Congress. Entrust the new department to a powerful secretary (certainly, not an academic). The logic is that revenue and expenditure should be strongly connected and coordinated. While we are on the subject of reforming Treasury, move Tobacco and Fire Arms to Home Land Security so that the secretary of Treasury can focus on economic fiscal policy and leave the fighting of terrorists to the specialists. does not l
3. Reform Taxes: Go to a flat Federal tax which balances the budget with a 2 year lag. Each year we find out what we spent two years ago. Every economic agent (physiological or corporate) sends a post card to The New Department of Finance stating their income (no exceptions, no deductions, no mention of sources, no nothing). Add up all incomes. The tax rate is the ratio of what we spent two years ago to income last year. People with income below the poverty line get refunded the total amount paid. The cost of refund is added to the current year’s expenditures. All the energy of tax establishment will be spent on insuring the accurate reporting of income.
4. Enhance Transparency and Accountability. Enhance the post audit function of the GAO and insulate that process from political machination by making the chief post auditor’s appointment for life with a possibility of impeachment by 2/3 majority of both houses. Or establish an accounting chamber such as the one which we (Barents group with myself as project director) with help and guidance of Rudy Penner helped set up for the Russian Federation.


[i] Indeed, a lot of research has yet to be done so please think of the ideas I present for the short run as qukick fixes that need to be revisited when time allows
[ii] Let us see now, they are a dime a dozen so that will be two bucks and the letter waiver can keep the change. And they will say anything that they are paid to say because they have no rules of evidence and no external validation procedure. And they routinely use theory to refute facts. The exceptions are Veblenian heterodox economists.
[iii] My name is Mohamed A. El-Hodiri. Born in Egypt 1937. Educated in Egypt, Russia, and the US, I have taught economics and have been a working economist (not a comfort peddler) for the last 50 years in Egypt, Minnesota, Indiana Sudan, Russia, Kansas , and Kazakhstan. As a working economist I dealt with budgets. I am by training , an applied mathematician. I apply mathematics to economics. BY nature and training, I am an Institutional ist economist of the Veblenian Variety. So I am an Institutionalist mathematical economist. Spiritually I am a disciple of Rav Zalman Shachter. Academically I am a proud student of Leonid Hurwicz. My teachers (directly and indirectly via Hurwicz and Takayama) include Pontriagin, Kolmogorov, Uzawa, Oscar Lange, Lionel Mckenzie and Paul Anthony Samuelson. I have chaired the PhD dissertations of 40 wonderful economists and that is what I am most proud of.
[iv] There is a liquidity shortage because credit is a public good that can not and should not be privately supplied without strict regulation.
[v] Please remember that if all of wall street was to disappear tomorrow, the shares in productive firms and the and securities backed by bona fide firms are still going to be there. You only lose the cashier, NOT the cash unless they stole as they packed their satchels.
[vi] And to make matters even more hilarious, it is headed by an academic who is an ideologue
[vii] If the idea of a new bank does not appeal to you the authorize the secretary of Treasury to be the banker for now.