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It is a very challenging question. I certainly admit that I am not an expert on commenting upon economic downturns and suggesting way-outs or bail-outs. Certainly not as genius as the advisers in the Obama administration or else where. But with such huge knowledge and experience, why these advisers have failed to change the scenario? In a scenario when a person like me, having a reasonably short banking tenure can easily understand where the trouble is.

I may be too narrow in my approach, but I am of the view that our current banking system should be abolished in order to bring some momentum back to the economy and job market.

And as an ex-banker myself, I have my reasons to believe as why the fresh stimulus has failed to boost the economy.

1- Central Bank must not be the primary lender of the Federal Government. This is because when a currency printing authority is directly in charge of negotiating a loan with the government, it prints more currency in order to meet borrower demands, in turn increasing inflation and creating pressure on consumer markets.

2- Currency has to be backed by a physical commodity. Why in the world currency is backed by promises and bonds? Promises backed by promises? Nothing practical to deliver and redeem in case of collateral damage? America lost its rating because it showed its inability to keep its promise of paying back. And last time it was willing to pay, but had no capacity to pay. That is why bonds lost their value. Even smallest of the banks keep collateral in shape of gold or land or something else against a loan. Backing a currency against a commodity eventually kills any chances of unnatural change in currency rate.

3- Our banking system believes that lending money to anyone else allows them to sit back and enjoy profits. While they can simply multiply their profits, they are not helping in building economy, they are simply destroying it through creating more pressure on the borrowers to pay back more than something they borrowed originally. Wrong Idea!

4- Profits can be calculated through a simple formula i.e. Labor x Capital = Products/services -> Profits. Which means that Capital alone cannot create profit. If it is 10 dollars today, it will remain 10 dollars tomorrow unless there is no labor involved. This is where the Job market plays its role.

5- Point number 4 establishes another fact. Interest based banking is a killing machine. Why do I have to pay 103 dollars, when I borrowed 100 dollars for my personal use. And the bank knows that I have no intention of doing any business with that money. I just want to buy a new gadget for my personal use. Although loans disbursed by any bank are considered as bank’s asset, but these assets have to be tangible in nature – not on balance sheet only. Even if I cannot repay my loan, bank can take the item back to sell it and redeem its loss rather than degrading my credit rating. This will enable genuine business activity in the market.

6- Why banks simply lend the money and let the borrowers enjoy? Poor monitoring of loans cannot create a healthy business activity. Easy lending must be followed by strong monitoring. And the profit/loss should be calculated realistically. There can be several changes adopted for monitoring. Above all, banks should hire competent individuals to work in collaboration with the borrower’s management to make the loans available for more productive use. Again, terms should be revised from interest based banking to profit/loss based banking. This shall eventually create more pressure on the banks to monitor and take care of their money.

7- Jobs are vital for any economy. When the government is bailing out banks and financial institutions, it is not considering actual players. It is noteworthy that banks face trouble when there is a liquidity problem. Which essentially means that loans are not being repaid as swiftly as banks anticipated. Rather than bailing out a bank, government should check the list of borrowers who face the downturn. We must know that when banks do bad lending, they play with depositors’ money, creating a liquidity problem and hurting depositors’ interest. Therefore, those institutions must be held responsible for their own mistakes. Chapter 11 bankruptcy should not be applicable on banks and financial institutions. In fact management should be prosecuted under applicable criminal laws.

8- Wall Street itself  is not a problem. It is a symbol of strength for American nation. But the fact of the matter is that powerful men and women at Wall Street often forget a quote, “With great power, comes great responsibility”. Don’t you feel that stock market can get you bankrupt in 10 minutes? So just thinking for a minute; What is wrong with creating a mechanism that allows you to trade shares only after holding them for a certain period of time? What is wrong with buying a commodity and getting its possession before selling it? What troubles you to avoid dealing in futures? Nothing. It will almost nullify the impact of speculation over trading and will bring business and jobs in the economy.

9- Government has a right to collect tax. But what if that tax money is being used for unproductive projects? Wars cannot simply get an economy rolling. It can only destroy economies. Same is happening to US economy – under huge pressure of 3 wars.

10- Mortgages should not be swappable. If I own a house and I have it mortgaged through a bank, the property should only be sold to any potential buyer in case of consecutive repayment failures so that the loss can be recovered. Swapped mortgages create no benefit for any of the parties.

Original Post at: http://www.etutslive.com/2011/10/07/what-is-wrong-with-us-economy-ethically-a...