Seven Sons

The Financial Times carried an article this week that suggests tracking tick-by-tick stock market transactions for the purpose of predicting financial bubbles. I suspect that if this is done with elegant simplicity (for example, just putting all the data out there on the web in real time and letting investors and academics manipulate the data) it could possibly work. I also suspect it would change the dynamics of the market. A more transparent market should tend towards less volatility, and over a long period of time that should mean fewer recessions.

I would love to apply the same analytical strategy to figuring out how governments can apply inverse financial pressure to the economy without relying solely on the federal funds rate or a central bank. It is obvious today that in a recession the demand for government services goes up at exactly the same time that revenues go down. Furthermore, while additional public spending is exactly what is needed, most governments below the federal level can’t run a deficit or print money. This leads to a vicious cycle and constant downward pressure on the economy.

How about these ideas to get rid of this cycle once and for all?

- Bongo Bucks: In a recession, have state and local governments print their own money, legal tender within their borders.  It has been done before. Unemployment benefits, tax refunds and other government remittances can be paid partially in local currency. People will spend a higher percentage of their disposable income locally (big box stores don’t count) and stimulate the economy on a more local scale, which can have a multiplier effect.

- Hedge Nationalization: If governments were to enter the markets (including stocks, real estate, commodities) and trade in quantities invesely proportional to the changing price of the instrument, it would have the effect of smoothing out the markets. This would be a kindof strategic petroleum reserve, but for other types of commodities. Obviously dedicated capitalists don’t want the markets smoothed out when they are going up, but wouldn’t that be better in the long run? Or maybe the government just starts kicking in a buying when the market trends down? I see lots of problems with this idea of course, but I wanted to throw it out there for a discussion starter.