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Bank CEO Doesn’t Get It

I have a very short lesson for Wells Fargo CEO John Stumpf.  One minus one equals zero.

Quoted in a Bloomberg story about the government’s decision to allow underwater homeowners to refinance, he states:

 “This could really be helpful.  They’ll go out and spend and get this economy going again.”

The White House says the ability to (break their contract) and refinance will reduce their mortgage payments by as much $2500 a year.  But if underwater homeowners now will have an extra $2500 a year doesn’t that mean that someone else will have $2500 less a year?  In the next paragraph we find the answer.

“Following yesterday’s announcement, Fannie Mae’s 6 percent, 30-year fixed-rate bonds led declines, underperforming Treasuries by the most in 20 months.”

Don’t bond holders spend money?  Simply taking money from one group of Americans and giving it to another group of Americans does nothing for economic growth.  The only way that $2500 can produce economic growth is if someone saves it so it can be part of the capital that capitalism requires.  By converting it into investment capital it will lead to production, which is the only real way to grow an economy.  Only an economic ignorant would think that just handing it to someone so they can blow an extra $2500 a year on Chinese-made crap is good economic policy.  Unfortunately, all of the government and most of business and the media are populated by people who think this way.


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