A Bottom-Up Bailout Rather Than Trickle-Down
Hank Paulson has just about burned through $300 billion, and it's not clear what the public has got out of it. Perhaps things would be worse without the bailout but they're certainly no better. Wall Street banks have not significantly stepped up their loans to small businesses, college students, car buyers, or distressed homeowners. Much of the auto industry is on the verge of bankruptcy. And the rate of foreclosures is rising.
What happened to all the money? About a third has gone into dividends the banks are paying their shareholders. Some of the rest into executive salaries and bonuses. Another portion toward acquisitions designed to raise share values. Another chunk for bailing out giant insurer, AIG.
That's not what taxpayers bargained for. Paulson originally told Congress he'd use the money to buy mortgage-backed securities that were clogging the financial system. He'd create a market for them by holding a kind of reverse auction, buying them from the banks at the lowest prices they'd be willing to sell them for.
But Paulson has abandoned that strategy and is now just handing the money directly to the big banks, and AIG -- all of which are using the money for their own purposes. It's the worst type of trickle-down economics. Taxpayers are sending the money upward, and almost none of it is trickling back down.
The lame-duck Congress should amend the so-called Troubled Asset Relief Program to prohibit banks that are receiving the money from paying dividends, executive bonuses or deferred compensation, or doing acquisitions.
And Congress should save the rest of the $700 billion program for a new administration that will put it to better uses. For example, as FDIC Chair Sheila Bair has suggested, use the money to guarantee payment of mortgages whose terms are eased by lenders. Use it also to restructure automobile companies whose creditors, executives, shareholders, and workers agree to put up money as well. Use it to guarantee loans made to credit-worthy small businesses, college students, car buyers, and others who at this moment cannot get credit -- and who therefore cannot keep this economy moving forward.
In other words, use it for a bottom-up bailout, rather than trickle down.
What happened to all the money? About a third has gone into dividends the banks are paying their shareholders. Some of the rest into executive salaries and bonuses. Another portion toward acquisitions designed to raise share values. Another chunk for bailing out giant insurer, AIG.
That's not what taxpayers bargained for. Paulson originally told Congress he'd use the money to buy mortgage-backed securities that were clogging the financial system. He'd create a market for them by holding a kind of reverse auction, buying them from the banks at the lowest prices they'd be willing to sell them for.
But Paulson has abandoned that strategy and is now just handing the money directly to the big banks, and AIG -- all of which are using the money for their own purposes. It's the worst type of trickle-down economics. Taxpayers are sending the money upward, and almost none of it is trickling back down.
The lame-duck Congress should amend the so-called Troubled Asset Relief Program to prohibit banks that are receiving the money from paying dividends, executive bonuses or deferred compensation, or doing acquisitions.
And Congress should save the rest of the $700 billion program for a new administration that will put it to better uses. For example, as FDIC Chair Sheila Bair has suggested, use the money to guarantee payment of mortgages whose terms are eased by lenders. Use it also to restructure automobile companies whose creditors, executives, shareholders, and workers agree to put up money as well. Use it to guarantee loans made to credit-worthy small businesses, college students, car buyers, and others who at this moment cannot get credit -- and who therefore cannot keep this economy moving forward.
In other words, use it for a bottom-up bailout, rather than trickle down.
posted by Robert Reich | 1:33 PM
91 Comments:
70% of the economy is consumer spending. The lower middle class spends more of their income if not all of their income. Let's give them a stimulus and let them spend all of it instead of a wider cast stimulus where the top income earners will just save it.
Thanks for saying this which so needs to be said. Do you agree with Naomi Klein
http://www.naomiklein.org/articles/2008/11/praise-rocky-transition
that
"Now that it is clear that the Bush administration is violating the terms to which both parties agreed, the Democrats have not just the right but a grave responsibility to intervene forcefully."
?
I think she makes a strong case that this isn't just bad policy or odious ideology but very likely criminal.
It seems like Paulson's flailing around has not accomplished anything that he set out to do. Banks are hoarding the bailout money or using it for everything but new loans and helping out mortgagees. Possibly the banks know something we don't know - that there are other shoes to drop like a lot of ARMs resetting over the next few years which will produce even more foreclosures. Also there are a lot of credit default swaps (CDSs)that will trigger due to events still to happen such as people defaulting on the ARMs which have yet to reset.
I would think that the Treasury Department would try to get a handle on all these future events - both resetting ARMs and event triggering CDSs. Until then we will all be just at the mercy of events that have been set in stone but are yet to happen.
They don't want to help mortgagees because they want to preserve as many mortgages on favorable terms for investors as possible on which the mortgagees are still likely to pay. Helping some mortgagees and not others creates resentment among those not helped and causes them to head for the exits in terms of paying on their mortgages so that they too can take advantage of government help. That's the dilemma Paulson is in.
A better solution might be to convert all exotic mortgages to 30 year fixed at a reasonable interest rate. That way no one feels left out or unfairly treated. Investors would not get their expected rate of return, but they would get at least the same rate of return as banks used to get when most mortgages were 30 year fixed.
At the same time cancel all CDSs which could be a bottomless pit requiring trillions of dollars in bailouts. Investors would have to take a hit here too but too bad. They were purchased with incredible leverage so the hits would be correspondingly diminished.
The problem with new loans now is that applicants need to have gold plated credit ratings in order to qualify so of necessity fewer loans will be made. But that's not necessarily a bad thing. Living within our means is something the American consumers need to learn how to do, and that means taking out fewer loans not more.
From that point of view we needn't be so concerned about whether huge amounts of money are being loaned out. We need be concerned in a trickle up economy that the people at the bottom have money to buy what they need and that means job creation, extended unemployment benefits and restructured mortgages. And they should be saving not borrowing more money.
I would think that some lawsuits are in order to recover the funds after things settle down. Somehow we need this money returned even if it is being wrongly applied within this bailed out entities.
These Bush-Paulson recovery missteps are extending our country's recession and opportunity pain.
We have roughly 64 days until “accountability and reconciliation” can begin a new life for the average American family.
I am a little confused on the statements of many that credit is drying up and stalling the economy. Last week I walked into a Home Depot and they had people near the entrance pushing their own credit card. You could sign up at the counter and get qualified immediately. A few days later at a Sears I was offered a credit card when I checked out a cash purchase. Similar unsolicited offers came as I entered several big name department stores in the local Mall. Than a couple of days ago I received an unsolicited credit card in the mail from Citigroup. Oh, and within that 2 week time span there was a telephone offer of a new credit card too. So all in all I could have signed up for 5 credit cards, all unasked for. Since I don't walk around with hundred dollar bills handing out of all my pockets, all these folks offering me credit had no idea at all whether I was a good or bad credit risk. They just wanted me to borrow their money.
Bob! I just found out you are part of Obama's economic transition team. So glad to hear it. You have one of the soundest economic minds in Washington (or Berkeley, my alma mater, as the case may be). SO- why don't you take it a step further, and put yourself in contention for Labor Sec? You presided over one of the biggest job booms in the last 40 years, maybe you could help stimulate another...?
I just thought of a new term for this: tinkle-down economics. Taxpayers send the money up to the big banks and, yup, they tinkle down on us.
Before the rescue package was approved by congress, Paulson and others stated repeatedly that the taxpayers were protected and may even make a profit from the eventual resale of those toxic mortgage-backed securities. I always thought the likelihood of selling those securities at a profit was remote, but it was given as one of the reasons why the congress should feel good about giving Treasury so much power.
Is there any attempt, in the newly revised program, to get any portion of this money back from the banks, or is it simply a tax-free gift to the officers and shareholders of certain financial institutions?
If no provision is being made for the money to return to the taxpayers, wouldn't that put Paulson in something akin to breach of contract? Is there any way that congress can take control of this situation, which seems to be out of control?
There is one way that money should be used. We should invest in reestablishing the manufacture of the factors of production. China manufactures 5 times as much steel as we do, Japan 3 times as much. We no longer manufacture sufficient iron, aluminum or even cement. This is a matter of national security. There are two reasons for this: first, if we got into hostilities, could we be sure China would sell us steel, or if they did they could get it to us? and second: How long would it take to ramp up manufacturing for hostilities if we don't make anything?
The auto industry is also important from a national security perspective. The reason we were able to ramp up for WWII was that we had a thriving auto industry that could convert to military vehicles. Could we do that if our auto industry goes under?
Finally - real national product is the result of actually making something or serving someone. It consists in tangible results. Rebundling loans does not make for production any more than rebundling hay makes more for the cows to eat. We need to return to a full manufacturing nation including making the factors of production that make things.
Dr. Reich,
How about this: Let's stop giving out money to people who are obviously criminals. Let's cap interest rates on credit cards at 2% for the next 5 years, stop all the loan shark fees, and give people a chance to pay off or down their credit card debt. Let's make the (criminal) banks/mortgage companies give anyone who is upside down on their primary mortgage (1 home), a 5%, 30 year fixed loan and have the government give all other families (renters, people who own a home with no mortgage debt), a $5,000 stimulus check.
That, Dr. Reich, would help the middle, working and poor class of folks out here. It would cost a lot of money, but look, it seems like these days we're beyond talking about what is a lot of money. These moves would directly help people while punishing the institutions that got us in this mess in the first place.
All of this other stuff is just stuffing the Christmas stockings of the already rich and well off in America.
Dr. Reich, we're just a few days after the election, and already people are running out of hope. We need real change and real help.
You people aren't nearly cynical enough! The bank bailout is doing EXACTLY what Paulson intended. It's paying off bets that favoured hedge funds made on CDOs, SIVs, CDSs, etc. on the aplhabet soup of junk vomited forth by the bank maggots. Don't think for a minute that this was intended to do anything to help America's economy. Only Hank was never going to tell you that up front.
Who's getting the billions? That's not for you to know, Bunky. The goal is for the Friends of Paulson to get paid off with as much made-from-thin-air imaginary money as possible, before the rest of the world starts treating American dollars like cheques written by your alky brother-in-law.
But don't worry about paying for it in taxes, Americans. You'll never pay it off DIRECTLY. You'll pay it back in poverty, when the very money you use to finance your life becomes worthless. No, there will be no belt-tightening to pay new taxes. If your belt is leather, you'll be boiling it to chew on, like South African biltong. And if it's fabric, you'll be using it to hang yourself when you've lost everything.
Robert,
Today's NYT article by Paulson sure told a different story. So my question is, "How can we create metrics of the financial institutions so we can nail down the facts a little better to tell the story?" People are too partisan today to just accept one side of the story. It seems a stronger case of data would sure help track the money.
http://thepost-partisan.blogspot.com/
Robert -
This site used to bring on the lamest 'anonymice' comments in all of blogdom. Looks like the stuff coming off of the fan has brought out a better class of commentologists here.
At any rate your ideas certainly beat the hell out of Paulson's et als'. Meantime, the short sale of the U.S. goes on.
'john lawrence' says below "Possibly the banks know something we don't know - that there are other shoes to drop like a lot of ARMs resetting over the next few years which will produce even more foreclosures." Actually, we do know that there are lots of resets coming up. And, yes, a mandated reset of mortgage terms to some common, low-interest level would be an obvious short-term improvement.
What's the chance that Paulson can't spend any more, because he can't sell the bonds to support it?
GE Capital Finance loans money to RV dealerships. They recently pulled the plug and will no longer loan the capital to dealers who sell recreational vehicles. I have been trying to see how much money GE got from the bailout. It is a big secret. I read that they asked for 140 billion. If they got the money and they are not loaning the money, they should have to answer to Congress. GE is going to cause the collapse of the RV industry, something that hits close to home for me. This is a Wall Street made crisis, that was started by JP Morgan executives and has infected the entire economy. There never was a shortage of gas, but Wall Street had every excuse in the book to raise the price. I think Wall Street has become too big and it obviously has failed.
Dr. Reich, cc: John Lawrence
Huge risk problems remain with the more than $1.5 trillion in loans bundled into pools of securities. These securitizations are very difficult to restructure and include Subprime and ARM loans.
At least 25% of these loans are already delinquent as reported by the Securities Industry and Financial Markets Association.
Furthemore, loan terms on $1 trillion of these securitized mortgages that are not delinquent now will be reset at onerous interest rates in 2009, 2010 and beyond ... so here lies a ticking financial time bomb (in addition to CDSs) threatening millions more of borrowers with foreclosures in near future.
The over $50 trillion of CDSs that have been sold as insurance against mortgage defaults and even against commercial loan defaults are another ticking financial time bomb.
As John Lawrence is recommending, ways must be found soon to close out these securitizations and CDSs
which pose ominously destructive and giant bailout risks. Ideas must be found to eliminate these existing pools of securitizations and exotic CDSs and spread the losses among investors and financial institutions in a way that is far less costly then just waiting for them to explode in our nation's face ... delivering the final Coup d'état to our hopes of avoiding a Depression.
Supposedly, the deposition given to Congressional leaders scareing them to agree to the terms given by Sec. Paulson is a state secret. Could it be that it was so bad that Paulson's giving banks munificent funding was necessary?
Then again many Congressional Democrats esp. here in the NE are dependent for election funds from Wall Street (NY, Conn, MA) and have themselves 'skin in the game'. Paulson (imo) will live in history as an amazing pickpocket who robbed working people to keep billionaires secure. He is also a big supporter of the Nature Conservancy.
I am thinking we rural people w/o jobs might have to hole up on Nature Conservancy land and jack deer for a living next.
Again, I say over and over again...this is the death of 'supply-side' economic theory and a return to demand and supply fundementals where "demand" is reconsidered. That Paulson agrees to Republican boilerplate that monetary supply is all important and that the people live on credit is a given. His ignorance of what's going on on Main Street is obvious. People in general don't want credit...they want Income! But Republican philosophy is to cut wages, reduce income and to pay savings to shareholders who are generally the upper one percent (people like Paulson). Listen to CNBC commenters who relish cutting pensions and income for Detroit's workers.
John M. at the top has got the picture: return income to those who work for a living so that demand is allowed to come back.....or else it'll be a Depression bringing down Obama and democracy with it.
Robert:
There is so much speculation, misinformation, guess work ,propaganda, etc. going on about the extent of the financial crisis that it is almost impossible for the average person to form a reasonably intelligent understanding of just exactly what is going on. As the Founding Fathers expressed a couple hundred years ago, a stable democracy depends on an informed public.
Can we prevail upon you to lay out some view of the potential long term economic status we face over the next four, five or more years?
Are there more shoes to drop ? What is the real risk in all these credit default swaps? What kinds of stimulous in billions of dollars will be needed, and how often over the next few years? I have heard and read opinions that this situation will last as short as mid next year and as long as ten years. I realize you do not have a magic crystal ball, but your previous government experience and education ought to allow your projections to have a far greater value that those readily available from questionable sources. And I am certain all who follow your blog will be highly appreciative of whatever enlightment you can provide.
Thanks Bob, I really needed to read this at 6:30 am. You have made my day Sir and that isn't a good thing.
"There is one way that money should be used. We should invest in reestablishing the manufacture of the factors of production."
You are joking, right? We are living in the machine age not the pick and shovel economy of the the past. Only faster more effiecent industrial machines are created and sold which replaces direct labor. Our economy and employment base is demand side that is financial,marketing,sales,advertising and all the service sector's related. It doesn't matter any longer where the manufacturing machines are located as they will continue to replace labor. We are stuck with a consumer driven economy based on waves of financial bubbles used to stoke demand.
Reich and others have made a great lifestyle selling manufacturing automation to the masses and the great benefits for a demand side employment base via retraining but its basically coming to a great halt now as the American consumer loaded with debt no longer responds to demand side calls for greater spending.
If all these hundreds of billions have been thrown at big business and we have nothing to show for it, why don't the powers that be throw it to EVERY citizen in the US instead. That would be a proper Bottom-up Bailout!
Within a trice people would be employed, mortgages would be paid, cars bought and other goods and services put back on their feet again.
Why do economists have to complicate things with funny money printed out of nowhere to implement ideas and actions that do not work. Is this idea really any more stupid than the Paulson/Bernanke one in action at the moment?
In the end, a disgruntled, unemployed citizenry causes problems too hideous to contemplate. Pacify people rather than things such as Banks, auto makers, or insurers whose managers have already proven their incompetency.
We need to oil the wheels of social stability - nothing else will do. A huge INTELLIGENT class of people are being put out of work, they will not go quietly into the sunset nor will they get easily absorbed into this bankrupted workforce again.
I agree 100% with you Mr. Reich.
I want to know why this has been allowed to happen?
I think the Bush administration is really hates the middle classes.
This bailout was for the rich.
Why we are not manning the barricades is beyond me.
"Another portion toward acquisitions designed to raise share values". Are you kidding me? Can anybody provide an example of this? Some people are saying that Paulson earned his money by manipulating the system, just like the douche bags (please pardon my French here) who got us into this mess. And this guy is our treasury secretary?
nce more the Bush Administration fails to keep faith with the electorate. Is it small wonder that a large number of the electorate feel that the GOP is only interested in "The Few, The Privileged, The Elite".
What is truly amazing is the incredible maladroitnesses that all of this helping out "those who matter" is being done. Do they think we are not looking? Or do they just not care?
As a small businessman I say tell us just exactly what your going to do for us. I want to know what will be done for the really small business', the ones with ten(10) or fewer people. Most of my local chamber of commerce is made up of business' of that size and we did not see one thing in the actions of anyone in Washington that will directly help us.
Since New Hampshire everyone running for office was talking about just how important Small Business' are to the American Economy. An then, when the bottom falls out in September they rush to help the business' who's budget is counted in ten(10) or more figures and not a word, not an action for the business' whose budget can be counted in five(5) or six(6) figures.
My apologizes for the rant, but it was from the hart.
P.S. My apologies to the U.S. Marines for corrupting their wonderful slogan.
Dr. Reich, point of clarification. When you say, "The lame-duck Congress should amend the so-called Troubled Asset Relief Program..." do you mean the Congress in this plane of reality or one in an alternate universe where Democrats have spines, they care about the little guy, and the Obama administration hasn't appointed status quo thinkers like Rahm Emmanual, Robert Rubin, and Larry Summers to key executive posts?
Please point out to Barack that getting banks to make more loans to consumers is not even close to the right solution. They are already up to their eyeballs in debt. In fact, the whole world is up to its eyeballs. That's what's gotten us into this mess in the first place. There has got to be a fundamental realignment of income distribution in this country. Too much is going to too few at the top of the heap. The working class has had to borrow their way to a decent standard of living.
The bailout plan needs to include relief for homeowners during these historical (hysterical) times.
I just received notice of our company's layoff.
Unemployment benefits will not cover all living costs.
Average Americans need a bridge loan (special deal) to face this extraordinary and challenging recession.
Can the government provide a "reverse mortgage" program and take equity ownership of my house for the next 3 years. We can then treat this as an equity loan to be paid back over a 5-year period.
WE NEED A BAILOUT "BRIDGE LOAN" FOR GETTING THROUGH BUSH'S FUC___ UP AMERICA.
If they can't beat us, I guess they'll crush us..What a mess...
Totally agree with your suggested further restrictions. Additionally, increase the warrant rates to 10%, limit total compensation to <1$M, eliminate company jets.
Also, stop the world from claiming that they're turning into banks to get Fed money.
Stop ALL bailouts, and use our money to make NEW jobs. Saving GM/Ford/Chrysler will only save FOREIGN jobs, not that many US jobs. Make sure any jobs we save or create are American jobs.
John Lawrence:
I fear we are seeing the American psyche at work here. Everything has to happen yesterday.
I have assumed from the get go that there was much information being withheld from the public regarding this whole fiasco. As much as many of us dislike that, more than likely it is a good thing. Creating even more panic will not enhance the possible solutions.
There are many here and probably around the world who have serious questions about Paulson's integrity. Cannot argue that their doubts are unfounded but somebody has to be in charge and while many would prefer a Dr. Reich instead believe me we would be raking him over the coals as well. It is highly likely that Paulson is more aware than most of us of the potentially greater problems still awaiting out there. Could that be why he is reluctant to release funds for mortgage bailouts or loans to the auto industry? He, and Dr. Reich and a multitude of others have no idea of the potential scope of these problems because there is no transparency. Even the owners of some of the CDOs don't know for sure what they have and the long term value of them. CDS's are even more invisible. No one seems to know if the $50+ trillion number is the total population of both buyers and sellers, thereby netting the exposure to only half of that, or if it represents the net dollar impact to the system. Would be interesting to know how many CDS's exist for GM or Ford bonds. It's fairly simple to guess that AIG is at risk for huge amounts of whatever the total CDS liability is which is likely why additional funds have been used to keep shoring them up.
At the same time you're correct in that there are many more ARMS, etc., about to explode in the next few years. I agree with the Doc that the FDIC has come up with a reasonable plan, at this point, but they're getting hung up trying to get funds from the TARP bank. Not an unreasonable request but if Paulson is acting on more info than the rest he may be right to withstand a steady stream of borrowers from funds he knows will be hard to replenish.
I thought there were restrictions in the TARP legislation regarding the use of funds that private corporations would receive, regardless the basis for injecting those funds. I don't understand why those restrictions would not be in play and am as upset as many others that they aren't. I am less worried about the acquisitions expenditures because while it slows the process, bigger balance sheets will eventually require more profits and banks make profits by loaning not investing. Bonuses and dividends I find absurd and they should be stopped if all the brouhaha is valid.
Recent articles have also stated that the demand for loans has all but disappeared. This will slow down a return to normalcy. Dr. Reich wrote, emphatically, in a previous post that this was a problem of trust; not insolvency or liquidity. I believe he stated, if not many others did, that trust doesn't revive from even more liquidity. It takes time and those fearful of risk are not going to rush to take on more just because they have more dollars to take it with.
All the harangue about the shift from buying toxic assets to making investments is also confusing. This decision was announced, somewhat mutely, right after TARP was passed. Again, I haven't gone back and looked but I thought Dr. Reich agreed that buying toxic assets was not going to impact the trust problem. All you would be doing is shifting numbers on a balance sheet. Granted the stability and sufficiency of the new assets (cash) would be comforting, but were lenders going to forget that yesterday these borrowers were in bad shape because they made dumb decisions?
I may be terribly naive but it doesn't make sense to me that Paulson or any other government officials would want to reward their buddies and watch the system die. Bringing the system back to life, even with tighter regulations, will allow for far greater wealth accumulation in the future than a few million dollars right now. The wealthy, in this country, have never wanted for opportunities to acquire more wealth. These kinds of arguments seem to me to be sophomoric bitching; a remander to the great American pastime of conspiracy theories.
There are all kinds of resources conjuring up ways to resolve the mortgage issues. Funding is the stonewall in front of all of them. To your oft mentioned point, now is not the time to find fiscal prudence. Though I can appreciate Frank's thoughts on differentiating between "Daring solutions" versus "Cautious solutions", I'm inclined to go more with "Daring" today and worry about "Caution" tomorrow.
The other gorilla rearing its ugly head is that future mortgage defaults may not be limited to subprime or ARM mortgages. As unemployment rises, taking into account that most of us are extended quite a bit, even those who had no problem with mortgage terms or payments now become at risk for defaults. Ergo, your conversion to 30 year fixed mortgages has less impact. It is also conceivable that many of those taking out subprime mortgages would not be able to make the payments on a 30 year fixed mortgage, depending on the new value of their homes. More than likely 40 or 50 year fixed mortgages will be necessary.
Can't disagree that solutions to CDS's need to be in the offing but your suggestion of just cancelling will possibly leave many more than just greedy investors hanging out. Very prudent investors may have purchased corporate bonds or mutual bonds and then purchased a CDS as protection. This is not bad strategy nor is it imprudent. Many of these might have been pension funds and state and municipal treasury funds. The premiums they paid would now inure to the sellers of the CDS, yet the sellers would be let off the hook at a time when default looms much more likely. Methinks that solution leads to the rich get richer.
Many here pose increasing wages as the answer. Would not argue that stagnant wages are not at the root of many of our economic problems but how do we do that? Do we mandate that all employers have to raise wages by 50% or 10% or 25%? What is the correct wage level? Do we have faith in our government to calculate what a satisfactory level of income is? Should the Janitor make as much as the Controller? It's a nice thought but truly, you cannot get there from here. Again, it's the American psyche; give me a pill that makes it all better. No matter how well or how fast we can turn this all around there will be pain for many of us. As is the case in nature, likely the most pain will be visited on the least of us.
You close with an appeal to more saving and less spending. Wise counsel. I would proffer that our saving habits are obscure and the current formulas for calculating savings rates are flawed and faulty. Had a dialogue going with Frank over this with no real final decision. If we look at how we determine savings in the US we find aggregate disposable income minus aggregate consumer spending equals consumer savings (ignoring corporate and government savings). There is no factor for offsetting credit spending, via cards or home equity loans and this credit spending has been occurring at astronomical rates. There is also no accounting for cash received in mortgage refinancing which had been occurring with great frequency as mortgage rates declined. Capital gains are not included unless actually recognized via sales of capital assets. For those who have gains in their investment portfolios who do not chose to close them out that represents savings in their mind and they can spend more of their paychecks because they have those savings. The wealthy in that scenario would be inclined to borrow more for further investments, the interest could be deductible, again distorting the real picture.
To the best of my knowledge this formula has been around for eons and not that many years ago credit was not as plentiful or as easy to secure. Today, with easy credit and more and more people having 401Ks and mutual fund investments and the fantastic reduction in investment transaction costs there are a lot of folks with investment portfolios of varying values. Add the number of investments in college funds and other provisions for their childrens future welfare, health expense accounts, etc., and I would bet that we save much more now than we ever did. The problem is in the calculation and the use of credit to maintain spending levels after we have put money aside. Given the various options for investing savings we will likely never see a return to savings being invested soley in bank accounts which helps feed the funds available for lending. As I see it the problem is less about saving than abusing credit.
Notwithstanding the current dilemma, it is absurd to suggest improved savings in the face of stagnant or declining wages and annual inflation rates of even 2 or 3%. If we want to improve savings we need to improve wages, and then hope the American public gains some sense of sound fiscal managment.
Unless the masses are willing to endure extreme pain now is not the time to try and right all previous wrongs. The target should be to get us back to where we were and then take the lessons learned and apply them to a better way. Trying to rebuild Rome while it's still burning is futile.
No, your proposal is also top down. Its YOUR advice about what GOVERNMENT ought to do FOR the economy.
No, dummy. I realize you have to legal background, but the only thing which will save the country now is to expand individually enforceable rights.
Housing enjoys only minimum scrutiny (Lindsey v. Normet). That has to be raised in order to give people individually enforceable rights. So their housing is not dependent on your largesse, or anyone else's, but instead, on their own RIGHTS which they can enforce.
Wake up to the reality that the West Coast Hotel v. Parrish scrutiny regime is in the process of being replaced by the maintenance regime, which says that law maintains important facts. That means MANY new individually enforceable rights.
I discuss this shift in my book, The Eminent Domain Revolt.
Cheers,
John Ryskamp
But I like "the trickle down theory", I'm a Bull and I believe it works. Feed me enough hay and it will trickle down. I can assure you of that.
Best regards,
Econolicious
John, cc: Art, Dr. Reich
I would like to add my own thoughts to Art's response to your petition for greater personal Savings in our society.
In my and Art's prior lengthy discussion on this topic, I gave a definition of Savings and went on to say why I believed improved Savings are critically needed in the US for many reasons.
First Household Saving, as Art mentions, is the difference between what households receive in after-tax income -- including, wages, salaries, fringe benefits, interest, and dividends -- and what a household spends on goods and services.
Those Savings can take the form of financial assets such as stocks and bonds; bank deposits; or investments in real assets such as homes and unincorporated businesses; IRA contributions and 401(k) plans as well as employer contributions to defined-benefit pension plans; money used to pay down a mortgage. Borrowing is counted against Saving (such as credit card debt, refinancing ... unless borrowed funds are used to purchase financial assets or are converted into other types of Savings noted above).
Now why did Savings stand as a percent of GDP at +8% in 80s and at respectable 7% or higher until mid-90s -- adequate to finance most investment in business infrastructure and equipment -- and then decline to low 1.7% in 2004 and then to a negative -1% to -2%in 2005-07?
It was due to a combination of people Saving Less and Dissaving More. First, people saw their homes values and stock portfolios constantly go up. For example, total Net Worth of the household sector increased $7 trillion or more than 50% from 2000 to 2005. So many individuals in their 40s and 50s concluded they could afford to Save Less considering the value of their homes, IRAs and 401(k)s. So they saved much less for their retirement while the "Bubble" was deluding everyone into the feeling of infinite prosperity.
Secondly, there was the phenomenon of Dissaving More by retirees who also decided on basis of their enormous leap in stock market and housing wealth to Dissave much more than retirees of times past.
This combination of Dissaving More and Saving Less caused the sharp decline in Savings between the late 90s and 2007.
Of course, when people save less they also borrow more including maxing the credit cards and taking out equity on their homes to keep up their standard of living in the face of a long period of stagnant wage growth.
Art concludes this all means that Saving is impossible unless wages go up. I respectfully disagree as that is only one factor contributing to a Zero Savings rate today. As I've been saying on this blog since last January, our Consumption fever at 72% of GDP has been way out-of-balance. With a more sensible Consumption rate at around 65% of GDP in stable economic times, this alone will contribute to greater Savings -- especially if also accompanied with some tax incentives, even though some Savings returns may not be so exciting. As Art rightly says, a culture of borrowing Less, e.g., so that monthly principle and interest payments are no more than more than one-third of one´s monthly gross salary deposits, for example, will also contribute to greater Savings.
Given the extreme Wakeup Shock of this financial crisis and concern to have much stronger regulations on lending practices, I think the general public will finally follow more prudent, responsible debt borrowing practices. It has to. This must be supported by public education programs on TV and equally responsible lending rules by financial institutions.
If I, to Art´s dismay, may come back to credit practices in the Netherlands. First, the average number of credit cards in Holland is TWO (same for Europe excluding the UK) compared to FIVE in the US. Two to three percent of the credit card original principal balance must be paid each month. So a pre-approved balance is reduced at least 24% in one year. The banks know all of one´s credit card and other loan payment indebedness. Thus, a borrower can´t violate the one-third rule mentioned above, which also takes applies to home mortgage loans.
If the US can adopt even half of the prudent lending and borrowing practices here, in addition to lower Consumption, this would have a major effect on increasing Savings in the States over long-term ... back to the healthy 7-8% of GDP levels of the 80s and early 90s. It would allow banks to support Investment in businesses more actively even in slow times.
Today, Investment as a driver of GDP in the US is at relatively low level of 4% compared to +7% in the Netherlands. At latter level, the overall contribution of Consumption, Saving, Exports, and Investment to GDP growth would be in far better balance ... as well as our cultural obsession with excessive and personally Destructive Debt buildup. Then there is the added plus of Obama's plan to reduce taxes for 95% of households earning less than $200,000 a year. Over time, all these factors can stimulate Savings to return to more healthy levels for a stable economy and secure personal lifestyle.
Obviously, this requires public and private initiatives, education, and leadership at many societal levels. If we are unable to learn some permanent lessons on prudent saving and borrowing after this mini-depression, we will get what we deserve in the next financial maelstrom.
In short, I think you are on target, John, with your plea for a return (granted not overnight) to a culture of greater household Savings and living within our means ... recognizing Main Street has endured the brutal inequity of historical wage growth being below the rate of inflation for some time. As mentioned, however, Obama's Administration plans to improve things here in a number of ways. I hope he succeeds in the interest of our nation.
I think the best way to bailout Detroit is to pass universal health care.
Just heard your NPR commentary today. Very nice.
One request: is there any way you could use your bully pulpit to hammer away the point that "trickle down" is a total fraud? Money moves toward concentrations of money and has for centuries.
Wealth gets sucked up in a society and, absent enlightened social policies, never makes it back down. Go to anywhere in the world where civil society is poorly developed: masses of poor, a thin strata of super-rich.
That's what "trickle down" economic theories produce.
John,
It's important to note that now is a perfect time to start getting our Economic Model in better structural balance over next 6years with the three main Drivers of GDP, nameley, Consumption Investment, Savings (and Dr. Reich's inclusion of Exports) by a DARING major job generating Investment stimulus package for our social infrastructure and alternate fuels.
Art:
You misunderstood my use of terms DARING and CAUTION in referring to the GM or Big Three crisis. I said clearly in my post we need DARING to immediately provide Intensive Care aid in PHASE I to BUY 2 or 3 months time (that's the CAUTION part) for the auto-makers to complete Viable Plans supporting more permanent and serious PHASE II financial Bailout strategy.
Distance between us and different styles sometimes mixes up our communication on these complex subjects, Art.
An article today in the IHT by Andrew Ross Sorkin entitled, "Bankruptcy Is the Best Cure for GM," is almost exact verbatim argumentation I made to you in a few posts back on Dr. Reich's prior essay about how to approach bailout decisions concerning the Big Three ... especially focusing on the weaker firms and systemic management failures of GM and Chrysler. It hits most of the key points about the Bailout crisis, what the options are, and what should the tough conditions should be before any `major´ government (i.e., taxpayer) assistance is offered.
Gasoline should remain at $4.50 to $5.00 per gallon with a gasoline tax and the money goes to infrastructure. It would discourage people from buying larger vehicles and discourage auto makers from continuing to make large vehicles. We need to make a change in driving tanks and we need to keep the gas prices high with a tax.
Boy, there are a couple of insider blog discussions in here containing impressive compound sentences. Feel like I got sucked into a dust devil vacuum and couldn't get out.
Dr. Reich, cc: John, Art
It´s good to see Mitt Romney rise above his programmed ideological mind to say something sensible about how to go about rescuing the Big Three ... integrated, pragmatic thoughts you and other contributors to this blog have been already making from similar or different perspectives. (See, Mitt Romney, "Let Detroit Go Bankrupt")
A managed bankruptcy for GM and Chrysler, for example, will allow a proper reorganization for big changes, and restructure of short-term (liquidity) and long-term (solvency) Debt piles and partly written off BEFORE putting more significant taxpayer Investment monies into GM or the Big Three pre-based on Viable Plans for long-term survival. Interim monies will probably be required while the reorganizing is taking place given the poor liquidity positions of GM as well as Chrysler and Ford. The total bailout cost is much more than is being discussed now and includes four cash requirements:
1. Immediate funds to stay alive until Viable Plans are completed and approved post haste
2. Interim liquidity funds for operations while a reorganiztion is being executed
3. Permanent loan funds or sale of stock or preferred share interests to improve Balance Sheet Solvency
4. Investment funds for plant closings, new tooling, remodeling designs and efficient engine refinements, etc.
Ineffective management and all bureaucratic overload must make way for fresh thinking and leadership. Romney makes a good point to consider bringing in proven, innovative, operational talent from industries other than the auto-industry.
The goal is to reorganize into effective entrepreneurial auto-maker businesses with a bare minimum of Good Money chasing Bad Money ... what I have been calling an endless, costly, piecemealed bailout breadline going nowhere.
Good to hear Romney come to his senses about the constructive stimulus role government can play in these situations ... and hopefully in other societal areas like extended unemployment compensation, health care, and new job generating investments in infrastructure, alternate green fuels, education etc.
Welcome MITT to the club of the non-ideologically dogmatized ... who favor, fair, creative and pragmatic approaches to such fundamental social-economic problems; where the preferred aim is a more "Balanced Capitalism" offering mutual opportunities for all Stakeholders in following order of priority:
-Employees
-Customers
-Shareholders
... a philosophy sworn to by Warren Buffet as the essence of consistent business success for his many companies over the past 50years.
Frank Thomas, The Netherlands
Frank, Art:
Frank said:
Huge risk problems remain with the more than $1.5 trillion in loans bundled into pools of securities. These securitizations are very difficult to restructure and include Subprime and ARM loans.
I don't think the securitizations need to be restructured - only the original mortgages. Obviously, how the monthly payments are distributed among the tranches is known; otherwise, how would the principle plus interest get to the investors if things were left unchanged. I'm just proposing changing the terms of the original mortgage on the front end and keeping the distributioon channels, as complex as they might be, in place. The original bond investors would still get returns on their investments - just not as great returns as they would if the original ARMs reset.
Your points about credit cards in Holland I find most interesting. Here, the credit card companies encourage you to make low monthly payments so they can keep you paying interest forever, and they force feed you credit cards. (I get several offers a month.) Is it the government in Holland that mandates that everyone has to pay off so much on their credit cards every month? This is very prudent. I'd like to see something like that here, but in the present go-go, wild and wooly financial system we have, corporate America does all it can to sucker the average consumer into doing things that are beneficial for corporate America and not for the avergae consumer. And that includes encouraging the consumer to go into debt and remain in debt. Credit card reform would be most welcome.
As for Henry Paulson, it's obvious that his paramount concern is to protect wealthy investors and not the average American mortgage holder or even the economic system taken as a whole. He has turned the Troubled Asset Relief Program (TARP) into the Troubled Wealthy Investor Relief Program or TWIRP.
I think some money should be used for a stack of clue-by-fours to smack the government into investigating the over 1 trillion AIG has stashed offshore...
http://spitfirelist.com/?p=2945
Walktodd,
"Boy, there are a couple of insider blog discussions in here.."
You said it! Bloggers, listen up. OLD rule. If you want to carry on a LONG, EXTENDED exchange with one of your infatuated buddies, get their email and do it away from this blog, or any other blog for that matter.
Okay? Be nice, and blog properly.
I try to assess the causes for the wrongdoings in the automobile industry and I don't know who carrries most of the blame. The incompetent managers (flying in Lear Jets in order to beg for money? Jesus....) or the labor union leaders?
I watched the labor union leaders in my own country contribute their fair share to the stagnation of our economy... I somehow thought in the US this would never happen...
I suppose Horace would not mind allowing either boss/leader exclaiming "Exegi monumentum aere perennius."
Consultant:
There is available on most computers a scroll key, use it!
Your impressive blog manners I find listed nowhere else. Nor do I find any blog ethics that suggest you must read every post.
Paulson and his ilk can't get far enough away from their perspective (that financial institutions make the world go around, not productivity and consumption), and they are trying too hard to justify the existence of these large institutions. Please help Obama to get some minds from outside the realm of mere money movement. They can't see past their years of work.
Art Layman,
Thanks!
John M, the top earners also don't want to pay taxes. Giving them a pass on capital gains makes this even worse, as stocks, options, etc. are the bulk of their compensation (talking salaries in the category is dishonest). So basically you're just saying give the lower middle class some money from their future pockets. But we're actually so far in the hole, it's more like their grandchildren's pockets. Oh, and let's guarantee that the lower middle class stays lower middle class since we're strip-mining future prosperity. Or, like the good doctor, do you think this money somehow isn't real?
But let's get right to the point. The kind of thinking Dr. Reich is advocating is more of the same. The implicit hope is that we will get some air into a new bubble built on credit. When this happens, we can all stop worrying about our houses getting under water... forever?
George Mattingly, actually the Democrats permitted the no-strings-attached terms. Remember that this was the veto threat. Now the game is to pretend to be outraged and surprised while still doing nothing.
> I would think that some lawsuits are in order to recover the funds after things settle down.
More like indictments, and now. If I stormed a bank with guns and stole the kind of money we're talking about here, I'd most likely be lying in a pool of blood on the sidewalk on my way out. Credit Default Swaps are a massive fraud. Paulson participated in this crime before moving into the driver's seat.
But since we're talking about blame, did any of you contact your representatives prior to the passing of this bill? Are we, the American Public, going to constantly whine when in hindsight the actions taken by Congress look like a bad idea?
For that matter, do you think more of the same will solve anything (as seems to be the general idea on this blog)? More of the same might buy time long enough for us to calm down and pretend this never happened, yes. But is that a solution?
Bukko the Australian is the only one of the chatterers who has it right. DOOMED! COLLAPSE! You can speculate, wonder, prophesy, hand wring, do the shoulda, woulda, coulda, oughta game but the problem is there. The currency is going to collapse. We have no allies. No one will use our currency even for toilet paper. We had better learned to be independent with everything we need and we had better do it right away. Mr. Obama has no magic tricks. He is surrounding himself with the old cronies who have the same view of things. My favorite Vietnam song by Martha Vandella obtains: NOWHERE TO RUN TO.
How about we stop bailing out failure (businesses & people, period. Doing so only rewards the unproductive at the expense of the producers and savers.
There will be pain either way, whether we unwind slowly or quickly. So why don't we let the economy rebalance its resources towards greater productivity as quickly as possible, and get on with it.
Promptus,
You could have asked the same question, "Are we going to get more of the same" with the gigantic fall in the oil price from $147 per barrel two months ago to below $50 per barrel today?
"The same" is that we suddenly forget about the urgency for energy alternatives and the necessity to subsidize them because of that marvelous return to low fossil fuel prices at the pump. It's called short-term thinking ... better termed shooting yourself in the foot, a skill we Americans excel at when it comes to social-economic issues!
No one wants more of the same, including Dr. Reich -- except indeed he's stuck on the economic panacea of high Consumption (encouraging high Debt cocaine) as the savior of our society. Deep down, he still seems out-of-touch with reality on this point, as are the majority of US economists.
Bailouts, wealth transfers...its all the same. It sounds real great to help the less fortunate, but we must remember that the only economic system that will work in the long term is a system in which productivity is rewarded, and failure is costly. Productivity, which is the only thing that will increase our standard of living, has to be rewarded in linear fashion. If unproductive endeavors are bailed out, then before you know it, every unproductive endeavor will come to ask to be bailed out. This is happening now. Of course the only ones who can afford to do the bailing out are the productive endeavors. Wealth is therby transferd from the productive to the unproductive. This is a terrible system of allocating resources, one which will diminish everyone's standard of living in the long term.
So, do we want to shift our mistakes to future generations, or will we make sacrifices now, and fashion a productive economic system for future generations?
Let the oil Companies bail out the car companies.
Frank Thomas, I completely agree. Well, except about what Dr. Reich wants. It's more of the same with a different name so long as consumption and debt are the answer (the problem that is the solution).
2 previous Anonymouses, great stuff.
I declared myself a bank today. I'll only need about a half billion-- peanuts.
Frank,
You are correct. The core of our current problem is that we have been living beyond our means for too long. This is about to change.
We can only consume more than we produce for so long. Eventually, we have to pay for that excess consumption. This process is painful; there’s no getting around that. Dr. Reich and our government leaders need to realize that to get healthy again, we must get back to living within our means. As individuals, we do this by increasing our production and/or reducing our consumption to levels where current consumption is below current production, so that we can pay for our earlier excess consumption. Dr. Reich & the rest of our government leaders need to realize that the government, when it spends our output (i.e. tax revenue), must do the same. This means the government should not pour money into huge infrastructure “stimulus” programs, if the projects do not return more benefit than the initial cost. By definition, doing so would simply consume more resources than would be produced, and is a continuation of the same core problem that has led us to our current situation.
Frank:
Rather than propose a bunch of assumptions let's look at some statistics and see if we can't derive some kind of portrait of what has happened to "savings" in the US.
ERISA, the legislation that created 401Ks, went into effect in 1980. By 1984 there were 17,303 companies offering 401K programs. By 2003 there were 438,000 companies offering 401Ks.
According to one study, total assets in 401Ks equalled $2.1 trillion at the end of 2004 (can't find an update but would have been considerably higher until the recent stock market debacle). This would be equal to 15% of current GDP.
From the Fed:
Between 1989 and 2001 credit card debt in America almost tripled from $238
billion to $692 billion. Worse, the savings rate steadily declined and the number
of personal bankruptcies filed climbed 125%.
BTW, 401Ks are untouchable in bankruptcy.
From creditcards.com:
Total U.S. consumer debt (which includes credit-card debt and non-credit-card debt but not mortgage debt) reached $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006. (Source: The Nilson Report)
Total U.S. consumer revolving debt reached $962 billion in May 2008, up from $879 billion at the end of 2006. About 98 percent of that debt was credit card debt. (Source: Federal Reserve)
Note the increase in May 2008 from the 2001 number from the Fed; 269 billion a 40 % increase. Is it any wonder that the "savings" rate is distorted?
Am a little confused about whether "savings" is based on "personal consumption expenditures" or "personal outlays". If "personal outlays", though it makes sense, it's kind of a double whammy because interest payments on credit card debt would be included in "outlays" but the use of the credit would not be counted as income.
Add to the increased credit usage the funds derived from home equity loans, likely included in the 2008 numbers, and refinancing mortgages, not necessarily included in the above numbers, and you get huge numbers of funds, other than incomes, available for consumption. That will drive down reported "savings" rates, based on the current algortihm, while in fact they may not have declined at all or may have increased.
In all, I find the simplistic definition of "savings" far from an accurate, meaningful number. It worked well for years when options, on both sides of the equation, were not available, or were not material.
In order to fulfill your desire for "savings" to provide more funds for capital investment the "savings" need to be held, generally, where banks can use them. Funds tied up in 401Ks or mutual funds or stocks would not fulfill that requirement, thus increased "savings" held in those forms would not provide additional funds available for loaning out. Have no idea how that compares to Europe.
The other irony here is that increased "savings" rates, by definition, would lower GDP growth rates, unless offset by increased production of final goods and services.
The current stock market irrationality will conceivably alter the manner in which funds are "saved", at least in the short term, but the old paradigm is not apt to come back strongly over the longer term.
I would have to no more about how the Netherlands calculates Investment to make sense out of the difference with the US. Having said that, we are all aware that capital investment, that included in GDP, has been declining significantly in the US in recent years and it has had nothing to do with a lack of funds. With interest rates at the lows they have been during the Bush years, funding was plentiful. The problem is that most of the capital investment by US businesses has been overseas. Many US companies, including the Big Three, have been divesting capital assets in the US, not acquiring them.
In that vain your "savings" cure is akin to rubbing analgesic balm on your abdomen to cure a stomach ache (some slight humor here).
Granted any increase in "personal disposable income", via wage increases or tax cuts, whatever, if not spent on consumption, will increase "savings". Currently that is the least of our problems. Our consumption percent in GDP is also greatly affected by the fact that we don't produce much of what is being purchased. If we went back to prior years US production our personal consumption rate would decline. Not arguing that we shouldn't be more frugal but you need to scan all the details behind the numbers when positing your cures. Right now we need more consumption not less, but there are no resources.
Exports is almost a none factor since if we are successful in turning around our economy the dollar will likely gain strength which will reduce exports.
I'm not quite as enamored with Obama's tax plans as you. His proposed tax cuts for the middle class (under $200,000/year) are meager, at best. He should really be much more aggressive but that would mean raising tax rates on the upper class by more than just a return to Clinton's rates. At this time, probably political un-viable.
I also believe that his plan to motivate companies to keep jobs in the US by offering tax breaks will produce little result. Taxes are predicated on profits and currently, corporate rates max out at 35% of profits. Not a lot of room to incentivize, especially considering the total cost of employees. Tax penalties might work better but ain't no way that would pass and defining and identifying abusers would be difficult.
Am shocked at your euphoria over Mitt but will get to that later.
Nobody trusts a broken market... it will continue to fall until investors see some systematic changes in regulation and oversight ...
so far, only knee jerk reactions are thrown at the economy to slow the market melt down...
fix the market and turst may slowly rebuild..
"it is the broken market, stupid"
I don't think anyone in "power" has any idea what is really going on right now. Go take a look at Karl Deninger's blog, or listen to Peter Schiff. The economy is tanking, and feeding more money toward a system to induce more debt... the very thing that caused the mess we're in... will not fix it. Hello... the system is broken, leaders. You may have a bunch of impressive degrees but it's pretty obvious the light is not on upstairs, and both oars and not in the water.
Great! let's bail out GM! We can store all the new cars they make in the desert somewhere, because no one will be able to buy them – look at the unemployment figures. I'm so sick of hearing a garbage disposal mix of untruths and ignorance coming out of the mouths of people who are leading this country.
I'm coming to the conclusion that the only solution is politically incorrect one... we need leaders who will talk straight up and say the things we don't want to hear, but must if we expect to slog our way out of this.
Step up to the plate... don't play a partisan game. Listen to the people who have seen this coming for a long time and continue to sound the alarm instead of listening to the Know-Nothings' solutions who had no idea this was going to happen.
If anyone can pull this off, Obama probably can. I believe in him. He has the ability to inspire people, but only if both he and his administration are starkly honest and courageous.
My two cents – well.. soon it'll be worth only one cent if we keep creating money out of nothing.
It all comes back to value creation and cotrols. We can print all the money and offer all the stimuli we want, but in a long run, until we improve our educational system and infrastructure, we are going to continuing to experience the same problems that led us up to where we are today.
"It's the worst type of trickle-down economics."
Just WHAT can one say???
Horrible, horrible.
tt
It would seem to be reasonable to demand that companies receiving the government assistance would not pay dividends and would use the money to loan to credit worthy businesses and that would be necessary in the short-term. In the longer term, what would entice shareholders to invest in banks that cannot grow and cannot pay dividends? There would have to be a transition from one state to the other and the criteria for this transition would need to be clearly spelt out. Every path seems to lead to more problems.
This has gone from farce to magnum-farce. Some one should bind and gag Paulson before he does any more damage.
I have an idea about Detroit: why don't we give them the $25B allocated by the Energy Dept for re-tooling for fuel efficient vehicles and get that going, then give them another $25B out of the Paulson pot as a loan, with repayment notes starting in 18 months at around 5%?
Oh, Ivan, "magnum farce", I LIKE it!
You have an idea there. And gagging Paulson is a good idea, too. He's the damage czar.
tt
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At $1 Trillion what does that work out to? about $75,000 for every taxpayer in the the US. What kind of economic boom do you think you would see if that got passed out? The auto companies would be swamped, airlines would be packed, mortgages would be paid, houses would be bought and there wouldn't be a store in town with a flat screen for sale! That is stimulus. Read more at www.cosmicdogma.blogspot.com
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Unless we tackle the problem of foreclosures the problem will snowball since every foreclosure drives down housing prices further and puts more people into the position where they do not have any equity in their houses.
Simply renegotiating the mortgages to be in line with what they can afford would not be fair to those who are paying their bills. Therefore some other alternative which accomplishes the same aim is needed.
Renting the houses out at affordable rates to those currently in them, or failing that to other willing renters, could probably accomplish the goal of reducing the number of foreclosures with their negative impact on house prices, while accomplishing a socially desirable goal.
So, remind me...why do we need Wall Street, exactly?
So many thoughts...
1) Renting out the foreclosed houses at affordable rates would simply depress the rental housing market, also.
Not such a bad thing, since I am a renter.
2) @ Chad Slate: Sure, you could hand out $75,000 to every tax payer, but how are they going to pay it back. About all you'd see from that move is more debt and inflated prices as everyone payed premium prices for everything simply because they can.
3) @ Visual Voice: "we need leaders who will talk straight up and say the things we don't want to hear, but must if we expect to slog our way out of this."
Lovely idea, but political suicide. If most voters were mature enough to hear/do the unpleasant, we wouldnt be in this mess in the first place.
And since the Democrats would be the ones delivering this unpleasant medicine, the Republicans would just end up back in power as they soothed unhappy voters with their pretty, empty words.
Obama et al have an nasty, narrow path to walk, because I dont think our hands have been burnt enough to teach us the right lessons, yet.
4) A repeating theme in every economic crisis is "speculation". I'd propose that the capital gains tax be charged on a curve, rather than the current two-tier system, ranging from, say, 50% (or more) for gains made on an item in 30 minutes to 5% (or less) for gains made on an item over 30 years. With the level of record-keeping made possible by computers these days, I see no reason why programs cannot be created that assess taxes on any transaction that goes through a financial institution.
I think that a system of this type would go a long ways towards encouraging long-term investment and penalizing speculation.
5) This isnt so much a solution to solving the woes of the auto industry, but a suggestion for something to do while we've got them over a barrel:
As part of any bailout, make it a condition that automakers start offering electric retro-fitting kits for older models (in the 10-20 year range), along with the financing to do the job (shoot for $4-5000?). No, this wont sell any new cars (not right away), but it will provide a source of income in a time when people are holding onto their money too tightly to buy new cars anyway (I'd also suggest that while a lot of people might be reluctant to pay $25,000 for a car that'll only go 40-50 miles at a time, they wont be so reluctant to drive electric if they can convert their kid's car for 5 grand or so).
Sweeten the pot by allowing the retro-fits to count towards their overall company MPG. It would also be a boost to dealerships which, after all, derive most of their income from service anyway.
I think it would be good for automakers, provided they did it well, especially since it would provide a chance to rehabilitate some cars with less than sterling reputations, and provide a test bed for mechanical design without having to build a whole car around it.
And really, while it may not solve the problems of the Big 3, it'll help solve our problem of oil dependancy, which was a heavy contributor to the overall crisis.
daveawayfromhome, Yes, it would depress the rental housing market if it were offered to people not already living in those houses. I would argue that it would be at worst neutral. When you think about it, what should we do - knock the houses down?
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daveawayfromhome, I agree that it would potentially depress the rental housing market if it were offered to people not currently living in those houses. However, I would argue that offering the ability to rent those houses to people already living in them would be at worst neutral, compared to the current rental situation, whatever that is.
If we do not do something, this problem will snowball dramatically. Should we knock the houses down? Should we leave them vacant and keep them off the market? There does not seem to be a neat and tidy way out of this, but renting them to people already living in them would seem to offer the best balance of anything that I can think of.
That said, the impact on the rental housing market is something that has to be considered, so your point is well taken.
Perhaps I am missing something in your proposal, but how does the bank raise new equity if it cannot pay dividends and if its ability to grow is constrained?
Art, cc; Dr. Reich
As stated previously, my discussions about correcting our out-of-balance Economic Model with its very high Consumption, Zero Savings, and low Investment mix as drivers of GDP refer to systemic changes over time given NORMAL Economic Conditions. Today´s situation calls for other priorities to ward off a more serious economic collapse.
The crisis challenge now is Jobs, Jobs, Jobs, to stir Consumption from sinking from extremely past highs of 70-72% of GDP to below 65%of GDP. In concert with the credit crunch fiasco, Consumer spending is being cut sharply by those concerned about their jobs and by the hundreds of thousands who are losing their jobs.
Thank God current price deflation is helping to reduce some of the economic pain ... so long as it doesn´t turn into a self-perpetuating destructive spiral as happened to Japan during its 1992-2004 stagnating collapse.
But, as most would agree, the only way now to break the spiral downward is to come up near term with a DARING job stimulus package of the order of Paul Krugman´s ±$700 billion for: unemployment benefits; Investments in roads, transit systems, sewer and water systems; alternate fuels; assistance to restructure, streamline the auto industry thereby minimizing job losses (which will be substantial no matter what happens regarding survival strategies of Big Three).
I would like to come back to my prior posts about the underlying reasons our nation gets into these repeat financial disasters. I site one of the key -- if not most important -- cause is a culture of extremely high Consumption as a % of GDP and resultant 20 year descent to Zero Savings ... in recent years facilitated by Greenspan's 2002-07 regime of cheap money policies and irresponsible bank lending practices on a scale unimaginable.
Tragically, we continue to learn the hard way that the economic culture of recurring Bubbles from higher real estate and stock prices does not translate into resources for business investment. Much of it is converted into Consumption.
Latter in turn encourages more personal debt expansion and low to non-existent Savings ... forcing US in just two decades to covert from a Creditor to a massive Debtor nation to finance domestic business development and consumer-driven huge trade deficits.
For example, in 2006, US purchases from other countries exceeded exports by over $680 billion excluding ±$58 billion in transfers of US capital abroad (much smaller than you suggest, Art) resulting in a total Current Account Deficit of over $740 billion.
Furthermore, according to Martin Feldstein, in recent years our Deficits are mostly being financed by foreign purchases of US Debt rather than foreign private investments in enterprises, projects, and equities. This doesn´t help.
It´s obvious that past recurring large trade deficits and related capital outflows are due to the fast rise in Consumer Spending over last 15-20 years and consequent deterioration in Savings rate. A growing reliance on funds from foreign governments that have Current Account Surpluses (e.g., China) makes up for the lack of US Savings. But, how long will this foreign financing benevolence go on ... considering US Treasuries yield a terrible return to foreign purchasers? Let´s hope a little longer!
The ironic, hard reality of such diverging imbalances in fund inflows/outflows and Savings (within and among countries) is that the Piper must be paid eventually. The forces promoting rapid Consumption and zero Savings are simply not sustainable. The magic of double-digit growth in home and share price increases has now bitten the dust. We are hopefully just beginning to recognize (out of dire necessity) that household wealth for our retirement and standard of living can only increase by reducing spending to levels less than after-tax income. Otherwise, the Debt explosion mania, speculation, and subsequent financial breakdown scenario repeats all over again ... each time with more distastrous results. These recurring breakdown cycles appear much less frequently in the more mature countries of Europe due to relatively lower Consumption as a driver of GDP and higher Savings.
Once the current crisis recedes, a culture of more prudent spending and borrowing will increase US Savings and a contribute to a stronger dollar ... hence on a macro-economic basis making the US less dependent on foreign capital ... and on a microeconomic basis enabling US businesses to more actively invest in projects, equipment, software that will increase national productivity.
Meanwhile, there is a gap problem between slowly rising Savings and reduced Consumption versus GDP growth. The latter will certainly decline for a while. This decline will persist until our nation puts into play DARING productivity-improving Investments in extremely Vulnerble and Weak parts of our society, namely: social infrastructure, extreme dependence on polluting-costly fossil fuels, grossly inefficient and oversized vehicles , deterioration in education system, and third-class health care system. This is a great opportunity for critical, constructive change and job renewal. You are right, Art, that Obama´s tax incentive for spurring jobs is likely insufficient.
The gap I refer to above will also be exacerbated by time wasted in taking advantage of dollar´s more competitive readjustment to expand our exports of knowhow and new products.
Of course, latter brings up another interim negative Catch 22. A gradual change to less Consumption and increased Savings with reduced debt levels will hurt foreign exports to the US. This means countries like China and India must start focusing much more investment of their Current Account savings internally as exemplified by China´s recently announced $589 billion stimulus package -- an equivelent of over $1.5 trillion for our economy! This is probably going to happen more and more anyway given rapidly accelerating income-wealth gaps in those countries.
It´s a subtle, significant warning signal why the US must begin reducing its dependence on foreign capital to finance profligate Destructive Debt expansion (i.e., in pyramiding, exotic financial products) resulting in large bailouts and Deficits.
In combination with productivity improvement Investments using Constructive Debt to stimulate economic opportunities in areas noted above, only a structural slowdown in Consumption spending (not caused by current financial abnormal crisis) and an eventual real rise in household income will ultimately reduce dependence on foreign capital over the long term.
In summary, an economic-policy assisted transition over next eight years to a much sounder balance in our Economic model among the drivers of GDP -- i.e., Consumption at 64-65% vs. past ±70-72%; Investment at 7-8% vs. past less than 4%; Savings at 6-8% vs. recent ZERO level -- should bring greater economic stability through critical productivity and knowhow improvements ... and revitalized job growth, albeit perhaps at a slightly slower pace than we´ve been accustomed.
Art, cc: Dr. Reich
Correction: 2nd paragraph, 1st sentence:...to stop Consumption...
Art,
I'm not a great admirer of Mitt Romney but I think he made a lot of common sense in his recent IHT article about the Big Three crisis ... although I disagree here and there with him. His admission government can be a cause for constructive good in resolving the crisis I found as quite a promising change of philosophy. But I give you credit, Art, I may be indulging my European openness of mind to noble intents way too naively here.
Jim said:
Simply renegotiating the mortgages to be in line with what they can afford would not be fair to those who are paying their bills. Therefore some other alternative which accomplishes the same aim is needed.
Don't necessarily agree. Life isn't always fair. It's a question of what is the least unfair thing to do to save the entire economic system. I would hope that people who have a comfortable 30 year fixed rate loan would not be envious of those who have their mortgage converted to a similar comfortable loan. If they are, God help them. But I don't think that only those loans in crisis should be converted. All ARMs and other exotic loans should be converted to 30 year fixed; then everyone is on the same playing field. As long as everyone is within the same guidelines regarding income/mortgage ratio, I don't see why anyone would have cause or reason to be jealous of someone whose family got a break in order to stay in their home. And it would bail out the entire economic system or have a better chance of doing so than Paulson's not-so-trickle-down approach. I agree with FDIC Chairwoman Sheila Bair's approach as does Dr. Reich. I would also consider others with 30 year fixed mortgages with an onerous income/mortgage ratio.
Art and Frank:
I agree with Art that the word "savings" needs to be reconsidered. Are 401ks savings? Is equity in a home savings? Money in a FDIC insured account is definitely savings, but as we've seen, these investments can lose their values rather quickly and probably should not be considered savings. On the other hand, who wants to put their money in a bank savings account at 2% interest? Money markets are a reasonable investment vehicle. Although not FDIC insured, as we've seen recently, government will not let these deposits fail.
Probably a whole restructuring needs to occur that would create safe savings vehicles that are FDIC insured at a reasonable rate of interest. Then I think savers would flock to them instead of stock mutual funds. Risky investment vehicles are not for the average person who is only saving for retirement and/or a rainy day. 401k investments in mutual funds have been oversold. Stock and bond investments should really only be for the more sopisticated and wealthy investor, and that leaves out 90% of the American people. The average worker needs ironclad assurances about his/her money. That's why the shift from defined benefit to defined contribution pensions has been a colossal shell game perpetrated by the same financial interests that the Bush administration and other free marketers before them represent.
Frank:
The point of my last post was to try and suggest that framing the issue as a "zero savings" rate tends to focus on the wrong aspect. As my numbers point out we are "saving", possibly at higher levels than ever before. The problem is consumption based on credit which obscures true "savings". Further, I reiterate, in the longer term, after the recoil from the current mess, "savings" will not likely be manifested through the banking system. If companies continue or return to offering matching funds for 401K investments the return,generally, far exceeds any interest one could earn from a bank "savings" account, so banks will see little of the "savings" money.
Again, the lack of GDP Investment in the US in recent years has not been due to a lack of funds availability. The money supply, potentially, has been sufficient to support almost any amount of Investment anyone would want to make. No one wants to invest in plant and equipment and new businesses in the US. Additionally, many of the funds available have been cornered by the financial markets in support of the latest "exotic" highly leveraged bubble. It is the financial markets who create bubbles not the general public. Would that we could see a manufacturing bubble created.
To a great extent you and I are in agreement. We're merely describing the problems in different terms. My experience is that if you use the wrong terms you can often head down the wrong solutions alley. "Savings", in my mind is not the problem. Overconsumption, especially via credit, certainly is. You are also right that reduced consumption will, by virtue of the formula, result in a greater "savings" rate, with one proviso. If we have learned anything at all from all this, in the near term, additonal funds, be it increased wages or tax cuts, will be used to pay down debt, primarily revolving credit. Paying off credit is still an outlay and therefore will, based on the formula, reflect in lower "savings" rates. Reducing debt is not defined as "savings" but is it not, really?
In all your suggestions for improvement in a variety of things in the US you want to point to Europe as an example. Not whimsical, nor without merit, but I keep trying to tell you that we are talking cultural differences here. Though, perhaps there should be, there is little commonality in the perspectives of European citizens versus American citizens, especially as concerns government interventions. In the first place, governments in Europe are much more in tune to the weakest in their societies. Thus Europeans are more inclined to accept government interference in the private markets. In our culture that is anathema.
I have oft mentioned that despite the fact that it's myopic, insane, lacking foresight, foolish, and on and on, proposing a solution in the US and labeling it as based on a European model, is a deathknell here. That's a cultural thing that politician's are not going to let go away. Despite the latest election results we are still a 50/50 nation, politically speaking, and if Dems push programs, attempting to sell them as derived from our European brethren, their tenure will be short lived. Not what should be, what is.
There are many things wrong with our economic/social model but changing it, if ever, will take generations. In the interim, government fiats attempting to force those changes will create a merry-go-round in Capitals all around the country.
Universal health care is a prime example. Clearly creating a model based on those in Europe seems a good idea to me. I would argue that we might be able to improve on those models but they are a very good starting point. If we try to sell the idea as a xerox of Europe it will die a quick death. If we focus on John's suggestion, selling it as a truly valuable savings for businesses, coupled with helping out the uninsured and driving down medical costs in the long term, it very well might fly with little resistance. I, again, feel Obama's plan falls short of what we really need but political viability is always the barrier to optimal solutions.
Art,
We are still talking at crossroads with each other. The definition of Savings is NOT just bank Savings as you keep saying. Savings include all elements I stated in my definition and Savings are DECREASED by Borrowings. Since average Borrowings are generally lower in Europe, the Savings rates are reported at relatively higher levels.
Got to go to a client business party now (it's 6PM), but still am at OTHERS PARTS OF THE BALLPARK with you on key some points, but perhaps we should both throw our hats in on this one ... as we are only boring others on this blog!
Best....
John Lawrence:
I do agree, basically, with your conversion idea. I still think 40 or 50 year fixed rate mortgages might be necessary for some. I'm also not all that concerned that banks or the government share in any eventual price appreciation, since the homeowner is bearing the brunt of the risk.
I also shout, hear! hear!, to your statements regarding those who did what they were supposed to do and now get no benefit. My parents, teachers, etc., when I was growing up taught me you don't get special rewards for doing what you should do. You get rewards in that you usually avoid the trials and tribulations of those who don't. Barring all else you get rewards in heaven, should you buy into all that.
I would agree with many here that there is a potpourri of fault in many of the bad mortgage situations, some bankers and some consumers but so what? Many of these folks have kids to raise, medical expenses and other bills to pay so when the situation becomes so dire as to inflict pain on all of us does not helping those less fortunate, even if resulting from their own naivete or ignorance make sense? In net we all also benefit from helping them out.
It is part and parcel of our culture of self as opposed to community. We have also been bombarded for years about how the government's money is really our money. Technically true, but it comes from us to the government so that it can be spent in the best interests of our entire society. We have roughly 300 million people in this country and I'd bet you could get at least 200 million arguments for any spending decision the government makes.
As I and many have posted here, a successful democracy depends on an informed public. Implicit in that phrase is that the informed is not made up of disinformation.
Have we given Bush's Tax Stimulus Plan enough time to work yet?
Perhaps these things take a few decades to get rolling?
/Snark Off
SilverFox... You're not supposed to peek behind the curtain.
I think a big part of the problem is that people like you and I don't want to take on more debt.
And people that don't mind borrowing, can't afford to borrow more.
John Lawrence:
Disagree with your 401K distrust. As with all things financial, the decision should not be frivilous. Most 401K plans offer a variety, some more limited than others, of investment options, ranging from highly risky mutual funds down to money market accounts. The get rich quick syndrome could have many making poor choices. On the other hand, for those where employers offer matching funds, from 5% to 50 or 100% matching, that immediate return is not to be sneezed at. Alone it is worth the price of admission. Getting the match and then leaving your money in money market funds still gets you ahead of the game.
Two other advantages: Pre-tax treatment, a median income family might enjoy an additional 10 to 15% tax benefit, depending on their effective tax rate. Payroll withholding is another advantage. Granted many companies offer savings account automatic payroll deductions but a safe 401K investment seems wiser. There are so many folks out there who won't save or invest if the money gets into their hands but if taken out of their paycheck they don't tend to miss it.
My gut feel is that your conclusion on defined benefit versus define contribution plans is correct but I have never done the math.
Hello Dr. Reich:
Robert Reich for Treasury Secretary! The BEST choice, by far. I hope that PE Obama can see this, too. I hope that you are doing everything possible to put yourself forward for the position.
I have a personal question that I would greatly appreciate a response. Many other people are in the same situation.
My SEP-IRA is invested in a mutual fund portfolio of stocks. (I'm 47 years old) It has lost 50% of its value in the last 2 months. I am sick to my stomach when I think of how much money has evaporated.
Should I get out now, locking in the losses?
Do you think that if I leave the funds in place that they will recover in the next 5 years? I'm in no hurry, since I can't access the funds anyway. But part of me worries that the funds will evaporate to nothing, as more and more companies go bankrupt.
I've read several of your books and have great respect for your intellect and knowledge. I would GREATLY appreciate your thoughts.
Thank you.
Frank:
Mitt's op-ed sounded more like an advertisement for his services to me.
Granted he had some good ideas but others were, again, punitive, and/or approached bait and switch tactics.
His "prepackaged bankruptcy", not necessarily original with him, is somewhat smoke and mirrors. The only advantage is that it may make the actual court process shorter. It's predicated on the company and the creditors hashing out their settlements before entering court. But the creditors are not bound by the pre-arranged agreement once into court so it could all unravel into a long protracted court proceeding.
I would also think that though the courts give great credence to the creditors, the company may, in trying to settle issues outside court, lose the advantage of a valuable mediator in a judge. Whether before court or during, the process still will take time and valuable resources. Likely it would minimize the risk of vendors/creditors driving COD basis transactions but maybe not. It will also intensify the sale of assets and prices under duress and in the current economy are not going to get you top dollar.
His suggestion of adding new blood, especially from outside the industry, really smacks of self-promotion. First he doesn't make it clear whether this would be replacing current management or in addition too. The automotive industry is not just any business, it is complicated and to your point very capital intensive, the brightest innovators will not hit the ground running. Experience in dealing with unions is critical and that's not in every executive's portfolio in this age. This is true of Ford and Mulally, although Mulally had prior union experience. It took him a year or so to get up to speed and while he seems to be doing a good job, the jury was still out prior to the current fiasco.
If you notice, one of Mitt's first cures was getting rid of legacy costs and reducing labor, both wages and headcount. Rocket science? Far from it! It may be that the only salvation is to attack those two issues but it violates the hell out of a decades long social contract between workers and management. Its not what I would expect Europe to do nor Jesus. And if we shed the pension plans the government has to pick them up so how much does the government end up saving? Eliminating the health insurance coverage, especially if pension payments are reduced, almost a given if the goverment inherits them, will mean many more uninsured, who the taxpayers end up supporting anyway. Some might even end up on Medicaid with a more immediate impact on government out of pocket expenses.
Now Mitt suggests getting rid of high pays for execs and all the attendent perks, both as cost savings and morale boosting, breaking the historical resentment between management and labor. Hard to disagree with those ideas but do not the Big Three compete with other US industry for the best and brightest? How do you attract those best and brightest when competitors are still offering, huge pay, bonuses and all the wonderful accouterments?
Mitt doesn't even go there regarding a cascading bankruptcy of dealers and suppliers. Probably brilliantly so. It is the huge gorilla in the room. Admittedly, there is an element of speculation as to how bad it would be, but it's a roll of the dice and should the worst case scenario prevail, you can't put humpty together again, at that point even with government money.
Going into bankruptcy will drive car sales down even further for those involved. Its even possible that if GM were the first to go that Ford and Chrysler would suffer declining sales due to a concern that they are next. It could be Pearl Harbor all over again without the bombs and bloodshed. Mitt didn't mention it but many have suggested that warranties would be the big problem in bankruptcy. It has even been suggested that the government could guarantee the warranties. If you look closely the government is ending up, here and there, bailing these companies out through the back door with none of the real benefits of a direct bailout.
Warranties are a problem but there are bigger issues that will drive down car sales. Ever notice the resale or trade-in value of a discontinued car model? Yea, a few become collectors items, the Edsel, and they end up worth more later than when they were sold originally but those who need a vehicle for everyday transportation don't generally drive collectors items. And those same those rely on trade-in or resale values to get them to their next vehicle. You don't tend to sell collector's items until you feel their price has reached an anticipated level.
Future parts availability will also be a concern. If one or all of the Big Three should fail in or out of bankruptcy there will be parts available for a period of time but parts sellers are going to want to replace their inventories with rapid turnover items for cars still selling, they aren't going to want to tie up inventory dollars on hope.
If sales drop, dealers will be the first to go out of business. That will also reduce available service options. There will be some offset by entrepreneurial mechanics but all in all getting your bankrupt company car repaired will be much more troublesome. Would the government need to underwrite these service providers to ensure ongoing warranty and repair work? If so, you ain't seen wasteful spending yet. If not, in our current credit environment, where do you propose they go to get loans to start or continue their businesses?
Much more could be presented in this scenario but suffice it to say that a cascade of bankruptcies for related dealers and suppliers is more probable than not. That gets you to the 3.5 million to 5 million jobs lost. That many more unemployed almost guarantees that the recession will last for a long time; Walmart can't build super centers fast enough.
Mitt also demands getting away from focusing on quarterly earnings and short term stock appreciation. Does he have another op-ed demanding the same thing of the Wall Street analysts who determine the prices of stocks? Many of Mitt's suggestions are germane to our entire economic operating paradigm and the adherence of only one industry to his advice will merely make them uncompetitive on the bigger stage. What he's really arguing for is for GM and/or Ford to go private, Chrysler is already there, and this puts them right into his baileywick.
Mitt and the other conservatives rail about bailing out the auto companies. This is about salvaging jobs not executives or shareholders or bondholders or company names. The government and we taxpayers are going to pay for whatever the final answer turns out to be. It is the old Fram commercial at work.
Ah, someone said the magic, fix it all words: "improve the education system". But as usual, there are no specifics. It is akin to the mantra that everyone needs to go to college--blah, blah, blah. To do what? It is "brilliant" college graduates (mainly from Ivy League Schools)that have sunk our economy. Well done elitist snots!!!!
So, tell me, how does "improving the school system" do anything? There won't be an answer of course.
What is needed is jobs for people able to work and a requirement that they work. We must rebuild our manufacturing sector and quickly and shut off our shopping cart mentality in China.
Next, we cut all Social Security benefits by 20% minimum and immediately STOP paying for office visits for Medicare types.
And, we stop this nonsense of preserving the lives of old people no matter how ill they are. If we can abort babies, we can make the tough decisions with the old who are sucking the system dry.
How's that for ideas? Improve our education system. Good grief! China has tens of millions of brilliant people and we are alive with dummies stuck to their IPODS and computer screens. Nuts!
@ oliversnit: We dont need to "improve" the educational system (not higher education, anyway) we just need to make it affordable.
The primary "educational" problem in the U.S. is not the system, but our attitude about the education itself, which, if it is valued at all, is mostly wanted for the access that the sheepskin gives you.
This is about OUR BIG HOBGOBLIN.
Mr. Reich says that we may need to
spend over $600 Billion on stimulus
in 2009 to reverse the contraction.
I'm sure he's right. But DOING that is harder than it sounds.
Lets say, for example, that the new
Obama regime passes a $600 Billion
stimulus bill before February. How
is ALL that money spent in 2009?
Much of that money would have to be
infrastructure spending -- a wise
investment, indeed. ...But that
type of spending takes time to get going. Lots of time.
That's what I meant by the term
HOBGOBLIN.
There is, however, another way to
stimulate growth IMMEDIATELY which
would make the deficit SMALLER. It
would also deal with a FUNDAMENTAL
problem in our economy caused by
the Bush 43 regime: so much money has been redistributed upwards into the wallets of wealthy people who sit on their money, that we don't have enough consumer demand to have another business cycle.
(And thus the need for stimulus.)
Here is a quote from page 195 of
"The Preditor State" by James K.
Galbraith:
"You want higher wages? Raise them."
So, if most workers got (say) a
20% raise starting in March, many
good things would come of this:
(1) Begin to undo the FUNDAMENTAL
damage of Bush 43.
(2) Debt reduction.
(3) More jobs created via more
consumer demand.
(4) More efficient use of labor.
(5) Smaller deficit.
(6) More consumer confidence = more
consumer spending.
And yes, It would still be wise to
have a $600 Billion stimulus with
all that infrastructure investing.
This is so simple and nobody gets it.
The problem is not entirely vertical in nature (trickle down). It is a horizontal shift share problem. We are now a consumer nation sending our wealth to emerging nations. If the citizens of our nation send the money that trickle downs to them over seas, the investor class will follow the money and invest overseas. Viewing this thing as vertical makes the poor feel less responsible and guilty, but the fact remains that if you borrow money to China to give to people that will in turn buy products from China, all you've done is accelerate the problem and increase the trade deficit and national debt. You can't win an election by asking the citizens to take responsiblity for spending/giving their wealth to China for mp-3s and flat screen t.v.s, it is easier to scapegoat the rich.
If you Google the "inverted pyramid of liquidity" and Wikipedia the "money supply" or "m3" you'll see that 75% of liquidity is in the form of derivatives and very little is cash. Part of the reason why trickle down economics didn't work was of course the siphon of emerging markets and us being a consumer but also the expansion of derivatives. This outward expansion of this derivatives atmosphere kept the liquid in a gaseous state and we never got the pressure of the vapor to form the rain drops to fall on the crops below. The politicans won't tell the people that the oil future's traders were the ones that drove up the price of gas, it was too complicated and the oil companies were an easier political target.
As far as "regulation" after Arthur Anderson and Enron, people now have to fill out time sheets every day, but the regulations never addressed meaningful issues. We've got the wrong regulations. Engineers have to do continuing education credits but we don't know the name of the engineer who designed and put their Massachusetts Engineering Professional Engineer Stamp and signature on the detail of the Big Dig tunnel ceiling (the concrete ceiling that collapsed on and killed my friend's children's babysitter). We don't know if that engineer is even practicing today do we. We've got the wrong regulations. "Regulations" is a negative political buzzword now. The word is kind of like "Change", it can be good or bad.
Lastly, individuals are like load bearing capacity; we either have weak lightweights or the "going get's tough" honorable and shrewd capitalists. Alan Greenspan underestimated the "Greed" in the markets. I believe the greed existed because we underestimated the "weakness and stupidity" of the market. Why are we so prone to asset bubbles? It is our weak disposition and delusional disdain for capitalism that makes us easy prey. We can control prices if we are shrewd consumer, and we can vote out the less skilled politicians who can't restrain spending. Someone show me any politican or liberal bleeding heart group that was out there trying to help new home buyers during the boom years. I was looking at the time and there wasn't any Harvard Report or community group that helped regular folk be better capitalists. Capitalism is a bad word to some, yet being a good capitalist empowers the individual. People need a self defense course in capitalism so they are not such easy prey.
The Arthur Anderson for journalism took place in this election. Just as Arthur Anderson did not audit with due diligence, the Press did not kick the tires either. Charles Gibson said just before the election "It is surprising how little we know about Barack Obama". That would be like Arthur Anderson saying, it is surprising that we know so little about Enron. There is no difference, and the public didn't demand more.
Lastly, every time we have injected bleeding heart socialism into capitalism, we just mess up the natural affordability limits which ends up driving up costs for colleges and housing. These programs like the Community Reinvestment Act, and extensive Guaranteed Student Loans just increase the afforability reach and the colleges and home sellers just increase their prices accordingly. These programs always hurt those they were intended to help.
Related to that is delusion. Certain unions and politicans have fed delusions to their followers. There was no way someone could continue to make $90k a year stamping out bumpers when someone would do it for the price of rice in China. These workers only listened to those that said what they wanted to hear, and politicans did not want to make them upset and tell them the truth. They made too much all along, charged us too much for our cars, they didn't put away enough for their retirment and they expect us to subsidize that? It is also irresponsible to feed the delusion of entitlement. When the bottom 50% of wage earners only pay 3% of the cost of government, it is already too unbalanced and people ought to be a little more grateful versus have disdain for those that are paying the freight. The long term affects of this delusion lead to a very dire state of affairs. Aristotle warned about how the poor could weaken a democracy by voting their best interest by making the rich pay everything for them.
The big question is whether Obama wants weak followers that he feeds fish so that they worship him or does he want to strengthen his followers and teach them to fish and feed them for life?
This is the first Presidental Election I didn't vote Democrat. President Kennedy asked his countrymen "Ask not what you're country can do for you, ask what you can do for your country". Obama was a cheerleader for failure in Iraq and with the Economy. We know the negative sentiment towards the market is a self fulfilling prophecy, yet Obama's "Hope" theme didn't make sense when he was telling us that the "fundamentals" of the economy were broken. We were a healthy body passing a virus caused by subprime mortgages that were securitized, loans made to those that shouldn't have qualified for mortgages in the first place based on free market affordability fundamentals. The truth, the fundamental that was flawed Obama didn't admit to, he fanned the flames of entitlement and delusion with the Big 3 automakers, that was a fundamentally flawed model and Obama wants taxpayers to bail out their flawed business model. You know, Detroit did make the energy efficient cars like Government asked them to, but guess what, the American Citizens didn't buy them, they bought SUV's. So let's see, Democrats make the oil companies the boogey man and Republicans don't like the Unions who overcharge and play politicans like puppets. Who asks the American citizen to pitch in and do the right thing? Today's politican doesn't ask Americans to ask what they can do for their country, they offer "tax credits" to those that don't pay any taxes, a handout. I hope Obama isn't going to be the pied piper for the weak, selfish, delusional "Give Me" Generation. Trying to build a society on a weak value structure can not be done. We need to build industrious values because it is through these values that bears the fruits and abundance we need to survive in the next decades when there will be more retirees and fewer sled dogs to pull the load. Obama's campaign to give able bodied people handouts hurts the country's ability to care for those that have paid into the system already and those that actually need it. The best part about a President Obama is that he will be the only person that could actually get through to some of these folks that are delusional with an entitlement mentality. Can Obama get his followers to embrace capitalism? Capitalism bleaches out corruption of politics in society, you see it in public bidding laws; without them the politicans would give jobs to their friends i.e. Tony Rezko. A touch of capitalism self defense and some healthy social populism might help turn these weakling elite worshipers of "the best brains in the World". In a "Government of the People" every individual takes on the load bearing capacity, and if they become weak little schoolgirls that fall in love with a superhero they aren't taking their civic duty seriously. We are Americans, we don't believe in kings, or fairy tales. It is just us and the Harvard sheepskins aren't as smart as they think. Ask George W. Bush, a Harvard Business School Master.
John Pesa
"Ineffective management and all bureaucratic overload must make way for fresh thinking and leadership." Everyone at the top seems intent on thinking that a foundered old Clydsdale can run faster than a quarterhorse if you just can figure out the right combination of whip, bridle, knee-action, spurs and whispering in its ear. Ain't going to happen. Converting ARMs to 40 or 50 year fixeds, conversions to rent (an empty house does no one any good, especially considering the destruction of foreclosed houses this time around) and a real education on credit card con jobs for the consumer (with some "teethful" regulations in the credit card industry) will all help. But if you want this economy to get moving, stop worshipping the college degree. Promote the people who KNOW how to do the job, not just the people who are "confident" they "can do the job". The "confident" types are "confidence" types--con artists, no matter what college or university they "successfully" attended. The non-degreed worker who knows where the products, product parts, supplier contacts, shipping method particulars, and necessary destinations the product needs to arrive at IS the person to promote to manager. The person KNOWS. The MBA is just a person who is "educated" to "guess", and make that "guess" look as "professional" as possible. Best definition of "con artist" I know.
ALL OF THE BAILOUT MONEY SHOULD BE SPENT TO CREATE OR SUPPORT AMERICAN JOBS!!
This money belongs to WE THE PEOPLE!! We the tax payers and our children are putting this money on the line. Not one dime should go to corporations that have more than 10 percent of their current operations outside the US, or to corporations that are moving their operations out of the US! Anyone receiving these funds should be required by law to keep this money HERE!
This is being done to stimulate our recovery not to enrich a few CEOs.
^^ nice blog!! ^@^
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