Once the Covid19 horror has entered the medical history the way tuberculosis, smallpox, typhoid and the 1918-1919 flu have done then we can re-focus on improving the economy.
A simple method, easily applied in the credit markets, would reduce the chances of another ‘08 Subprime Mess and, lo and behold, another ’80-‘84 farm crisis. Overall, it would stabilize economic processes.
Forever, the financial markets have used current collateral prices for granting credit. But that engenders the potential of causing serious harm when current prices collapse. This happened catastrophically in the farm crisis of '80 to '84 when farm values were cut in half, causing horrible problems. Future economic tragedies can easily be prevented or at least mitigated by using the original collateral price or cost in granting credit.
To some extent, the Savings and Loan catastrophe of the late '70s and early '80s and the global Subprime Mess of 2008, as well as minor economic downturns in between, all involved directly or indirectly credit based upon current collateral prices. Had they been based on original price and cost the problems would have been either prevented or at least mitigated.
Interestingly enough, German law requires basing credit upon the original price or cost and not the current value of the collateral and that has served the German economy quite well. All through our nationwide Subprime Mortgage Mess, which reverberated globally, it pulled off a stunning first in all of modern economic history: l. its government budget deficit went into surplus, 2. unemployment went down substantially and 3. its trade surplus continued into the stratosphere. On top of this, using original costs and prices also restrained to some extent inflationary pressures.
Though it may surprise Nobel economists, had we enacted in the 1920s a strict policy of granting credit only on the original price or cost of the collateral and not its current value, we could have, lo and behold, reduced substantially, if not prevented the stock market crash of '29 and the gargantuan burden of the Great Depression. Widespread speculation on Wall Street was based upon pyramiding credit upon leveraged credit.
Somewhat similar, the Collateralized Debt Obligations (CDOs), which were sold on Wall Street and which derived from local and regional Subprime Mortgages exploded the mechanism of maximizing vacuous collateral values. It was a transitioning from local and regional current collateral value to even more vacuous value. It also transitioned from those who knew the risk the most to those who knew it the least.
Of course, this method must be adjusted and tweaked here and there. One cannot harm farmers and others by using original prices. Hence, some time limit for setting the original cost or price, such as 20 to 30 years (and not 100 for century farms), would be appropriate.
If this method had been applied to real estate taxes imposed on our homes it would have also prevented slumerica from expanding as it did in a classical horrible fashion in South Chicago and in subtle ways all across the nation.
Again, in contrast to us, German real estate taxes are only imposed on the original cost and prices, the historical value and on top of this only on the lot and not the current market value of a home, hence eliminating constant re-assessments. No surprise that taxes on our homes are 10 to 20 times higher.
In the final analysis, if a political support base would enact this proposal, we could transition from frequent financial instability to more certainty and long term stability which facilitate the flourishing of economic processes.