The recent discussions about the current financial crisis and subsequent policies by the FED and treasury secretary Paulson have not addressed one of the main reasons for its debacle. GAAP - General Accepted Accounting Practices. We all know that for every debit there is a credit and vice-versa. What many people do not realize is that if I lend you money, that money shows up on my books as a future asset complete with interest, thus showing an immediate profit (at least on paper). I can now take that asset and borrow up to 90% against it. Now I can lend that money out to someone else and do it again and again and again. My ledger is legal and true, yet shows I have millions, even billions in assets that only virtually exist.

There are two things wrong with this approach. First there is the obvious problem of creating a false economy, which, by the way, it is.  What is our economy really based on? The idea of money is desire. The ink is hope and the paper is trust.  I know it says; “in God we trust”, but as long as we think a one dollar bill will still buy a set of spatulas at the 99 Cent Store, it is the paper we trust in. We’ll turn to God when it becomes the $2.99 Store and we still only have the one dollar…but I digress.

Then there is the fact that the individual did not authorize the lender to use his or her contract to repay a debt as collateral for a loan to benefit the lender. Of course none of this is disclosed, if it was, the lender would have to share the interest they get from the unauthorized loan with the original debtor for it is his promise to pay that makes the second loan possible. Add that to the law that disallows the public to deduct consumer interest, which led to more home equity loans in order to get around the interest loop hole and you can see the middle class playing the staring role in “The Incredible Shrinking Man”.

This practice is universal among all lending institutions including credit card companies such as Citibank, Discover, etc. Everything thing that is happening with the economy right now can be attributed to this practice, but as usual, every side-stepping law and regulation is being proposed without seeing the root of the evil.

The FED can raise and lower interest rates, Congress can throw billions at the problem and pile on rule upon rule, but until this fiat money is carefully looked at, these remedies are merely band aids on an amputated leg. We know the leg isn’t there, but we still keep reaching for it.

Note: The diagram was drawn by my friend Phil Stearns as I explain my theory to him for the first time.