I don’t believe that the subprime issue can be solved with phenomenologically-based symptomatic therapy. This is because this issue is a typical structural problem.
The subprime issue is a sort of collapse of the currency system, and financial unrest is only the result thereof. The cause of this issue lies in the credit system. Without fixing the cause, the issue cannot be completely cured.
The keywords for the subprime issue are housing loans, securitization and credit systems. Originally, bills developed from securities. When a bill is created, the bill produces monetary value as well as a debt/receivable of the same value. Since bills are a sort of security, they circulate on the market and become operative backed by receivables. Securities originally have the concept of debt, i.e., borrowing at the base. Thus, securities function as receivables based on confidence in the debt. While there is confidence in the debt, bills act as a currency. But once confidence in the debt is lost, the credit system collapses from its very foundation.
The subprime issue is a collapse of the credit system based on a form of debt called housing loans. To fix this, it is necessary to rebuild the credit system itself.
In the structure of the subprime issue, confidence in debt in the form of housing loans was lost at first. Another important factor is the circulation of malicious securities. It is true that bad money drives out good. The ground subsided and the pillars collapsed.
Accordingly, first of all, it is necessary to strengthen the foundation. The keyword for this is credit. This means restoring confidence in debt.
Restoring confidence in debt means restoring confidence in housing loans. To do that, it is necessary to reorganize the housing market which is a substructure for housing loans. However, even if the housing problem is solved, it will not necessarily result in restoring confidence in debt.
Rather, it may make more sense to put priority on restoring confidence in credit. To do that, I believe it is necessary to guarantee the repayment of debt itself through purchase or assumption of debt. Anyway, the cause of the subprime issue is not the housing market conditions but the problem of the credit of debt, which is the foundation of the credit system.
Another approach is to separate malicious securities, i.e., to separate bad money from good money. Since securities are originally a product of mathematical formulas, it would be possible to draw up criteria for such judgment using mathematical formulas.
As for finance, it is necessary to minimize the spread of financial unrest. It is dangerous when financial unrest extends to affect other credit systems. To stop unrest from spreading, I believe that emergency procedures are unavoidable.
Why is business still bad? Because corporations cannot earn profits and the system does not allow them to make a profit.
Not only corporations but also nations and households are in deficit. Nations, households and corporations are heavily in debt. The economy is in an extremely poor state. Why are corporations, nations and households in debt? The problem is the system.
If the situation is left as it is, the free economy will undoubtedly collapse, leaving environment and energy issues behind as a parting gift. This is because the present system denies the market, rather than because capitalism is wrong.
Though we have benefited from the market, we have given it little courtesy and so are now paying the price.
As to the future direction, should we choose the NFL or MLB? NFL is the world’s best economic system that the U.S. has created.
Laissez-faire means to let the market go unchecked. On the other hand, controlling and planning deny the market.
If the market goes unchecked, monopoly or oligopoly would result, which would signal the end of the market. The market is a human-induced system, and is maintained by finely-balanced mechanisms. Leaving the market in its natural state is like abandoning control of the market.
Conversely, if the market is controlled, its functions will not work.
The market should be protected, which means it should be regulated and controlled.
People sometimes have the wrong idea about planning. Planning does not mean to plan economic activities directly; rather, it means to construct and control the market system according to a program.
What the economy needs now is not a sponsor or controller, but a judge and a guardian.
There is a problem not in the ability, but in the system. Even now, the ability of the U.S. is the best in the world, and there is no other county that has the ability to replace the U.S. The problem lies in the system of the market.
Structure Economy aims to create, in a well-planned manner, such a system that allows nations, corporations and households to earn profits.
A problem in strengthening the foundation of the credit system is refund guarantee. The key point is not the purchase of bad debts but refund guarantee. Namely, the focus should be on the contents of debt. This concerns the housing issue and those on low incomes.
If bad debts are simply purchased and released on the market, the housing market might slump. We must remember there is a shortage of houses for low-income earners.
It is necessary to reconsider the original purpose of subprime loans, which was a shortage of houses for low-income earners. The keywords here are low-income earners and shortage of houses. In addition, ability to pay, shortage of mortgages, and means of payment are three important elements.
The keywords are aggregate liabilities, profit and loss, and cash flow. Annual income and expenditure, and the eventual loss, are important rather than aggregate liabilities. The problem is how much can be recovered. The problem is not the mere reduction of liabilities of financial institutions. Profit and loss should be set up in line with the cash flow, and also based on the capitalization method.
If there is a shortage of houses and problems in ability to pay, one solution is to purchase houses and shift them from bulk sale to rent.
It is also important to try to raise the incomes of those on low incomes. The best solution is a policy of turning around the overall economy rather than launching public work projects or taking guarantee measures.
When the market matures, it should be converted from quantity-oriented to quality-oriented. Accordingly, it is necessary to strengthen the restrictions and monitoring.
The market should be changed from mass production and mass consumption to limited production of diversified products, well-planned consumption and consumption that meets demand.
Let me show the example of the hotel industry. Hotels used to accommodate many guests at reasonable prices. But now, it is necessary to allow customers to select the quality of the hotel facilities and equipment depending on the income, requests and objectives of individuals.
For that purpose, pursuit of better quality is required. It is expensive to maintain high quality, so securing profit has priority.
Accordingly, in order to maintain quality, it is important to strengthen the restrictions as well as to keep a closer watch on dumping.
The economy is the product of human consciousness. The consciousness recognizes an object only against a relative standard. A relative standard means comparison and contrast. Comparison and contrast come into effect by the position, move and relation. The position and move mean the distance between objects and time difference and difference in change. That is to say, they come into effect based on the premise of making a difference.
Therefore, in order to make the economy come into effect, rational and structural differentiation and distinction are necessary. Rational and structural differentiation and distinction means differentiation based on competence and performance as well as distinction depending on the functions and roles of individuals. Namely, this is a merit system.
Discrimination based on other attributes such as race, religion, sex and place of origin should be eliminated, because it makes society rigid.
Distinction should be made rationally and structurally depending on the income, requests and application of the object.
In professional sports, players are divided into first category and second category depending on their skill. And, depending on their competence, skill and performance, it is possible for players to move from the first category to the second category and vice versa. Thanks to this system, the quality of professional sports has been maintained.
If any factor other than ability were to be added, the system itself would be rigid. Professional sports cannot stand as professional sports.
Next, let me talk about correction of disparities. Considerable disparities distort the distribution structure and make organizations more stressful. In the worst case, it would destroy the social structure itself. Therefore, it is necessary to confine the social disparities within a certain range. To do this, redistribution of income and minimum life security will become necessary.
Also, it is necessary to establish economic units and guarantee autonomous activities by multiple management entities. Establishment of economic units means to have a number of economic entities (communities) have a divided autonomous function as needed. In terms of professional baseball, it corresponds to a baseball team.
Dividing an organization into units is expected to lead to the following:
First, freedom of choice is ensured to individuals.
Second, the autonomy of the organization can be maintained.
Third, functions are decentralized to restrain dictatorial power.
Fourth, the divided organization aims to maintain an appropriate scale.
Fifth, it makes market principles work and brings a mutual supervisory effect.
Sixth, disparity may be restrained.
This is the structure economy.
It is important to identify economic crimes. If it was wrong to manipulate accounting to cope with a decline of profit, then every corporation would have done the wrong thing. An economic crime is a violation of market rules for the sake of oneself, i.e. an act to obtain profit illegally by deceiving, deluding or destroying the market.
It is not right to regard an act of generating no profit while following the market rules as a crime. But, receiving unreasonably high pay is close to criminal behavior.
In fact, the modern era began when government bonds could not be repaid. Democracy and capitalism began when a ruler borrowed money from his people. I think the process of disposal among nations can be applied to the process of bad debt.
What should we do if public bonds cannot be repaid? The first option is to replace them with something that need not be repaid. The second is to reduce the value of money. The third is to reduce the value of borrowing. The fourth is debt default. The fifth is to freeze borrowing. And the sixth is to change the system drastically.
In the first option, what is something that need not be repaid?
First, it is paper currencies and securities. Second, it is capital, i.e., stocks. Third, it is tax. Fourth, it is assets. Fifth, it is debt, i.e., transfer of borrowing.
In fact, these five measures were taken at the dawn of the capitalist economy, thus setting up the bubble.
Borrowing consists of the following elements. The first is the principal, namely the body of the borrowing. The second is the interest, which is the value generated as time elapses. The third is time. The fourth is a lender. The fifth is a borrower. The sixth is collateral. The seventh is payment method. The means of settling borrowing is hidden in these seven elements.
The history of public bonds started with the question: what should we do if bonds cannot be repaid, rather than be repaid steadily? This question created parliaments and caused wars and revolutions.
We reach a standstill if we are obsessed with the idea of having to repay public bonds. If they cannot be repaid, there is no solution other than to recognize that they cannot be repaid. But, it is not good to defiantly declare that the bonds cannot be repaid. It would be necessary to clearly identify the reasons for default.
In the past, some organizations decided to purchase bad debts using long-term national bonds or perpetual bonds and capitalize them at the same time.
p.s. The present financial system is just like a bucket of which bottom has been
fallen out of. Therefore, I think we should fix the bottom rather than stop the
flow of water.