|Resolution of financial crisis by abolishment of securitization.
Amount of money, average number of use of money (= one year / average money holding period), and economic scale have following relations.
(Amount of money) * (Average number of use of money)
= (Economic scale) (a)
(Average number of use of money)
= (Economic scale) / (Amount of money) (b)
(Average holding period of money)
= (Amount of money) / (Economic scale) (c)
- Securities etc. are included in total amount of money.
- Average number of use of money means average number of times money is
used in a year.
- Economic scale means total amount of economic transactions in a year.
The cause of present financial crisis is that holding period of money is prolonged and the number of debtors who can’t fulfill obligations.is increased. Therefore, it is necessary to shorten holding period of money to overcome the situation.
As described in calculating formula (c), strategy to shorten holding period
of money falls roughly into two categories as follows.
1. Decrease of amount of money.
(Decrease of issue amount of securities, interest rate cut)
2. Economic scale expansion. (Raise the rate of nominal economic growth)
If amount of money is decreased, holding period of money is shortened,
so period to receive money is shortened. It leads to shortening of the
repayment period and resolution of credit insecurity.
Level of interest rate and rate of nominal economic growth needs to agree.
(Please refer to “Introduction of minus interest” in my book). As for higher
level of interest rate, holding period of money is prolonged. (It leads
to occurrence of bad debt)
Cut of level of Interest rate shows a low increase rate of amount of money (debt, deposit).
Debtors fall into a state of excessive loan and deficiency of amount of
deposit. Interest rate cut reduces increase rate of debt loan and makes
debtors pay back easier. (As debtors have more loan than deposit, influence
of deposit interest rate cut has small effect relatively.).
To expand Economic scale means shortening of average holding period of
money. It means that period to receive money is shortened, so it leads
to shortening of the repayment period. As debt is reduced, credit insecurity
Economic scale expansion through increasing public spending leads to issuance of national bonds and so on. As it is contrary to decrease of amount of money of 1, it decreases effect of resolution of financial insecurity.
Issuance of national bonds causes a decrease in national credit. Issuance
of national bonds should be regarded as action to decrease national credit
to save debtors (to increase credit of debtors). Therefore, national credit
as a whole doesn’t change. In addition, national bonds need interest payment.
If repayment period is lengthened, huge amount of interest payment is needed,
so tax increase is needed. As tax increase causes decline in consumption,
it is obstructive factor of expansion of economic scale. Therefore, Issuance
of national bonds is not root solution.
Present financial insecurity has been started from subprime loan (housing
loan) problems. The causes for the problem are both high interest rate
Bad debt occurs at higher level of interest rate than rate of nominal economic
growth. Rate of nominal economic growth in America is about 6% per year
(2006 - 2008), but interest rate of subprime loan that has passed 2 - 3
years since borrowing is over 10 % per year. Difference between rate of
nominal economic growth and interest rate can not be paid back, therefore
bad debt has been occurred.
Essential meaning of interest rate is to be able to use money whenever one wants to use it. But interest rate is unfair system in that merit is returned only to debtee. If interest rate is abolished and such system, in that debt should be paid back without interest, is established, problems like subprime loan will not happen.
The cause of bad debt in Japan in the 1990s is much higher interest rate
than rate of nominal economic growth. If this truth had been spread in
financial circles in America, bad debt occurrence caused by subprime loan
might be prevented. As the information had not been spread sufficiently,
same fault was repeated.
It is a theory proposed for the first time in “Introduction of minus interest”
published in 2003 that interest rate and rate of nominal economic growth
agree. It seems that this concept is not introduced in present risk management
theory. Therefore risk management in financial institution is not sufficient.
(Risk is not evaluated in case of mistake in level of interest rate in
monetary policy and so on.). I think subprime loan problem is only one
example of mistakes in level of interest rate.
To spread accurate information leads to both prevention of mistakes of
interest control and stabilization / development of finance / economy.
Securitization of subprime loan adds to the problem.
As subprime loan had been securitized and sold, revolving between future
money and present money occurred and amount of money was increased. It
led to risk expansion. Default of payment of loan led to decrease of value
of money multiplied by (number of rotations +1), so worldwide credit uncertainty
Increase of amount of money can be controlled to abolish securitization.
It leads to preventation of risk expansion of whole financial system. Therefore,
abolishment of securitization system is extremely efficient policy for
this financial insecurity.