Problem Summary:

Roughly once every ten years there is a recession. Rarely is it caused by anything which reduces our ability to produce goods and services over the long run. Generally it is something which spooks the markets. In response, some businesses lay people off. This rightfully spooks some people who stop spending. This is turn spooks more businesses which likewise lay more people off. This keeps going until both people & businesses have tightened their belts as much as possible and start to slowly spend money again.

An economist explaining it better than I do.

If you are laid off or run a company which has customers, this is bad. It also isn’t necessary. Robustness can be built into the economy in such a way as to reduce the fear and uncertainty which drives both businesses and consumers to partake in the very belt tightening which drives recessions.

Decision makers:

  • Congress & President
  • Large companies who donate to political campaigns
  • Brokerage firms / Hedge funds / others who derive profit from economic instability

Proposal(s):

  • Move the market from short term investment to long term investment
    • Shift a portion of the revenue derived from capital gains taxes on the sale of stocks to a sales tax on the purchase of stocks.
    • This will cause buying & holding to have a preferential tax treatment to rapid trading.
    • As investors shift investment towards a company’s long profitability, the need to manage weekly stock prices will fall and so will the drive for reactionary decisions by companies.
  • Allow the creation of a tax deferred rainy-day fund equal to six months of employee salaries based on the number of full time benefit receiving employees times the median annual wages of all employees. This may be used to cover salaries during economic downturns without incurring a tax burden.
    • This allows companies to defer some taxes in return for reducing the companies’ profit motive to lay off large swaths of employees at the first sign of financial troubles.
  • Create a loan reserve requirement for loan originators, much like the existing deposit reserve requirement places on banks. This reserve would be phased in over several years, overseen by the Federal Reserve and would require the loan originator to keep the 5% most junior portion of the debt (get paid back last if a default occurs) with no risk premium.
    • This would reduce speculative/risky lending as the banks would be required to maintain a significant portfolio of the risk. Currently, most debt is sold to the markets shorty after being created.
  • Require all loan originators to sell to the Federal Reserve the senior most 5% of newly generated loans (get paid back first if a default occurs) with no risk discount. The Fed will phase in the purchase requirement over several years. During times of recessions, on a category by category basis the Fed may choose to defer payment requirements to the end term of the loan thereby lengthening the loan duration while reducing loan servicing expenditures. Likewise during times of economic growth and on a category by category basis, the Fed may choose to shorten the term of a loan by requiring accelerated principal repayment which would be directed to them. Any profits derived from this trading must be returned to the federal government.
    • This ability should only be managed by the Fed as they care deeply for the stability of the financial markets and are the among most knowledgeable people alive when it comes to the financial markets.
    • This would allow the Fed to in a very targeted way inject or extract liquidity from specific elements of the financial markets. Currently is the Fed decides the markets need more money, they make money available at a very good price for the richest in the country and hope that it trickles down to everyone else. This would allow the Fed to reduce mortgage payments during a crises such as our current one without requiring a homeowner to refinance. A similar targeted easing could be inferred upon small business owners or other economic segments as the Fed saw as necessary.
  • Have 100% of the revenues of the sin taxes I will discuss in within the website be returned evenly to all Americans in biweekly installments over the ten years following their collection.
    • This will provide some income stability to all Americans thereby reducing the fear and reaction associated with signs of an impending recession.

In Control Theory, this is called increasing the Damping ratio. It is used to reduce wild oscillations in a system like the cruise control in a car or the autopilot in a plane.

Obviously this would have these would have the effect of reducing monetary velocity, but that can readily be addressed by increasing the supply.

I would love to hear your comments on these ideas or others you might have. Additionally, if you provide us your contact information via signing up and/or logging in, we would love to be able to reach out you to either take part in policy discussions or to join the team. My goal isn’t to push a specific policy solution, but to solve a problem. If you have a better solution which can be implemented and works, I would love to be wrong and use your approach.

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2 Replies to “Are Recessions Needed?”

  1. Hello Rick,

    I too have been an Electronics Engineer for about 2 years now so I like the approaches you take on many of the current issues. I have been reading into this recession craze quite extensively as well.
    The clearest and most profound research I have discovered on this topic is layed out in a recently published book titled “Struggling Amidst Plenty”. You can download the ebook for free here: https://gumroad.com/l/iIZJM or you can order the paperback version on Amazon. I highly recommend the latter.
    Essentially, it makes the case of migrating towards a Full Reserve (AKA 100% Reserve) Monetary System as opposed to our current model: the Fractional Reserve System (AKA a debt-based banking system). This is similar to what was proposed in the Chicago Plan in 1933 as a response to the great depression. An extensive model based study of this plan was conducted in 2012 with exceptional results: https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf .

    I would love to hear your thoughts on the ideas presented in this research.

    Thanks,
    Max

    1. The full reserve system clearly has its advantages and the current over dependence on debt financing is a huge problem. As I understand the full reserve system doesn’t have the flexibility to ensure that there is a sufficient but not excessive supply of money with which to facilitate trade. That after all is the value of money, facilitating trade. Unless you are a full reserve proponent in which storing value is of paramount importance. The full reserve system is great in that regards, so is the gold standard. getting the best of both systems is the trick. I don’t know fully how to do that, but I think we can readily make progress on the right path.

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