Government Solution: Re-Inflate the Bubble

The end of the recession will not come until the housing market has reached its bottom. The government knows this. Home starts are down. Foreclosures are up. Homes prices continue to fall.

Austrian schoolers warned that the housing bubble would burst, driving the country into a deep recession. They warned that the government had used artificially low interest rates, bank regulations like the Community Reinvestment Act, promotion of moral hazard through FDIC and Fannie/Freddie, and a general movement to expand housing to push up housing prices and ownership rates.

The bubble burst. The recession came.

What is the government solution? Simple. Re-Inflate the bubble.

Post-burst, the government launched what essentially amounted to a smear campaign against banks and other financial institutions. They accused them of being too greedy at the expense of the American citizen. They decried risky lending policies of the banks that brought us here. However, the government encouraged those risky lending policies. This is an entirely different topic, which I've addressed before here and in other mediums. Please see my review of Tom Woods' Meltdown in the new issue of YAR or, better yet, read Meltdown.

But, that is in the past.

It is a good idea to compare government rhetoric and government policy. Government said that lending was too speculative and dangerous. This was far too widespread because of lack of regulation and this caused the market to inflate and burst. Banks are absolutely leveled. Many of them got to the point of bankruptcy and were bought out or bailed out. How do banks respond? Why, naturally of course. They cut lending. This is the prudent thing to do, given that the future of the economy is/was unstable at the very best.

The government, the very same that lectured banks for not being prudent enough, is now doing everything in their power to get banks to lend against their better judgement. They have tried various avenues to accomplish this (primarily TARP). The general strategy is to throw money at them and hope that they lend it out.

Why is the government doing this? For many reasons. However, primary among them is the need to re-inflate the housing bubble, artificially stopping the slide to "save" the economy and end the recession.

This is from a WSJ article on Thursday April 16:

"Builders said sales have been improving in recent weeks due to low mortgage rates and U.S. government efforts to spur purchases by first-time buyers, such as an $8,000 tax credit. However, an indicator of future building resumed falling, according to Thursday's report"

The government is trying desperately to reinflate the housing bubble. The Fed has cut interest rates to zero. The government is throwing hundreds of billions of dollars at banks so that they continue mortgage lending, often to first time buyers (generally less qualified to buy). They are offering gigantic tax cuts to home buyers. They are slashing mortgage rates for homeowners so that less houses enter foreclosure (keeping them out of the market, thus keeping prices high). They know that, if they can push housing back up again, the recession is over.

It hasn't worked yet. However, it might. It might work in that the re-inflated bubble could work for a short time. But bubbles must burst. Prolonging the market correction by reinflating the bubble will only postpone the suffering at very best. The government originally inflated the housing bubble when the tech bubble burst. This postponed the pain of the tech burst, but created the housing monster, which eventually burst. What will happen this time if the government can reinflate the bubble? How badly will the next burst be?

Are We Done Yet? (sans Ice Cube)

After I presented my policy in class on Wednesday, I was met with an interesting question from Mitch. He asked (excuse me for paraphrasing) that, given the fact that the economy is already on the way back up, musn't I conclude that the New Keynesian policies have worked?

To my dismay, I didn't have time to give a full answer. I merely said that, if he were right, perhaps Austrian schoolers would need to rethink many of their objections to Keynesianism. However, that is a big, big if.

There are a series of indicators, both positive and negative, as to the health of our economy.



The positives:
-Q1 profits for firms like Goldman Sachs and Wells Fargo have been stellar. Wells Fargo posted what I believe was their biggest first quarter profit in history, $3 billion.
-The stock market has seemingly leveled out. After months of free fall, the Dow seems to have bottomed out. It has been hovering between 7500-8200 for a few weeks now, rallying for a few days and then taking another dive.
-Builders have marginally renewed confidence.
-New jobless claims fell for the week ending on April 11. This number fell 53,000 to 610,000. This is considered to be a good indicator of recessions' ends

The negatives:
-Unemployment is still on the rise. Unemployment was 8.5% in March and will likely rise again in April. New jobless claims have been volatile. This sharp decrease could have reflected seasonal hiring for a late easter.
-Building permits fell 9.0% for March. They had risen 6.4% for February and were expected to only decrease by 2.5%.
-Retail sales were expected to increase by 0.3% in March. However, they fell 1.1%. Consumer confidence is still low.
-Credit fell as business lending dropped 24 percent at 21 banks that have received more than $211 billion from the government. Auto and student loans have also fell. The only thing that hasn't fallen is mortgage lending.
-Foreclosure filings spiked by 17 percent from February to March. This exacerbates the fear that banks will dump the foreclosed houses on the market, drastically lowering home prices.

So, allow me news a little. Profits from Wells Fargo and Goldman Sachs are encouraging indeed. Hto dissect this owever, these companies were relatively stable before they received bailout money. With the government funds they received plus their already solvent and profitable business, profits were expected (however, not this high). The only real indicator of the recession's end has been the drop in new jobless claims. Economists rely on this data to predict the end of recessions. However, these claims are volatile. They likely reflect both the later Easter and an unwinding of pronounced layoffs in the automobile sector. The housing data is much less promising. February was a fantastic month of statistics for housing. Housing starts were up. Foreclosures weren't too bad. However, foreclosures spiked massively in March. People still aren't buying retail goods. Banks still won't lend to businesses, students, or families. And unemployment is still on the rise.

Recession over?

Not yet, Mitch.

Global Stimulus Rejected

Barack Obama, on a whirlwind rockstar tour around Europe, participated in the G20 conference with the goal of global stimulus. He failed to acheive this goal.

This article provides a good summary of what happened at the G20 meetings:http://www.guardian.co.uk/commentisfree/cifamerica/2009/apr/06/g20-us-economy-obama

However, I shouldn't sell Obama too short. A trillion dollars was pledged to the IMF, mostly to benefit the poorest countries that are suffering through this worldwide recession. However, Obama and US Prime Minister Gordon Brown had been calling for more far-reaching solutions to handle this recession.

Spanish finance minister Pedro Solbes spoke out a few days earlier on a similar package from Gordon Brown:

"In these conditions I and the rest of my colleagues from the eurozone believe there is no room for new fiscal stimulus plans"

German chancellor Angela Merkey had similar sentiments:

"I will not let anyone tell me that we must spend more money"

When numerous European countries sees your policies as too socialist, you're probably pushing it, Obama. lolzjk.

Timothy Geithner pushed for AIG bonuses

Timothy Geithner has done it yet again. First, we found out that he lied about his taxes. That wasn't too bad. It showed he had some character flaws, but it could have been just a really bad mistake. Then, he went in front of Congress and laid out the most vague, idealogical plan for rescue that I have ever heard. In a time where I wanted to hear specific details of how Geithner, entrusted almost soley with hundreds of billions of dollars to give to Wall Street, would boost the economy, we got rhetoric that would have made even Obama blush. But, he was new on the job.

But, I must say, I really think this is the straw the breaks the camel's back.



Yes, that's right folks. Timothy Geithner is the one that fought for AIG to get their bonuses. After days of posturing and rhetoric, Geithner has admitted that he is at fault.

I have been a nay sayer on the bailouts since the very beginning. At every turn, we've seen that giving these companies bailout money cannot and will not work. The banks just kept it without increasing loans. AIG is trying to give it to their executives. 90% of the executives from the bailed out companies are still employed. Yes, 90% of these "captains of sindustry" (did you like what I did there?) are still running their companies.

I've talked about moral hazard incessantly. But this is really taking that concept to the next level.

This is the government saying, directly, "if you run your company into the ground, we will save you. If that wasn't enough, we'll make sure you get a bonus."

Results of Government Bailouts

AIG has received $170 billion in bailouts fromt the government (in 3 separate installments). AIG has announced that it will pay $160 million in bonuses to some of its execs. The Government appointed AIG Chairman, Edward Liddy, has said that these things are necessary to keep top talent.

I feel like I don't even really need to say anything to highlight the lunacy. But, this is a part of my grade so.... here goes.

First of all, I'll issue a simple appeal to reason. Should the executives that brought this gigantic corporation to the point of collapse, to the point of needing $170 billion (at least) to stay afloat, be given extra money while millions of Americans have seen their retirement accounts dwindle to 0? These execs were given bonuses so as to keep the "skilled" execs on board. Call me crazy, but I probably wouldn't consider any of the AIG execs remarkably skillful. You are REWARDING people that are the architects of a corporate failure of enormous proportions. Enough said on that front.

Now, let me highlight several economic... short comings (I'll be nice) with this government sanctioned business decision.

First of all, it is necessary to point out that the US government funded these executive bonuses. What I hear, mainly, from democrats I know is that the collapse was caused by greedy businessmen and bankers. I will save my analysis on that point for another post. However, here is an example of the government providing incentives for businessmen. The government is telling us that, no matter what the execs do, no matter if they succeed or fail miserably, they will be rewarded with millions of dollars.

This is an egregious example of an extremely important concept: moral hazard. Moral hazard was implicit in the security packaging of Fannie and Freddi; moral hazard resulted from the government bailouts of companies like AIG, the banks, the Big Three, telling us that, if you're big enough, we won't let you fail no matter how many poor decisions you make. Essentially, the government has rewarded both individuals and companies that make poor decisions. This sends the message that the government will fund you if you take horrible risks. This is moral hazard.

Secondly, these exec bonuses will keep these people at AIG. If they are truly talented, their expertise could be bought by successful firms on the cheap after the failure of AIG. But, instead, they are tied up managing a "zombie company" (credit to Tom Woods for the apt nick name; READ MELTDOWN). Peter Schiff's earlier video, on the downfalls of TARP, adresses this issue nicely. These talented execs could be bought by emerging firms. But, the government is picking winners, investing in AIG. Behind the rhetoric that this is good for the American people lies the truth: people are hurt by these actions, and not even just the taxpayers. Companies, competitors of AIG, could be benefitting from AIG's downfall. But, because the gov't essentially owns AIG, they really don't have a choice but to support them. This means that the government has a vested interest in the success of AIG. The success of AIG means the loss of benefits (cheap execs, new customers) for competing companies. This, ergo, means that the government has a vested interest in hurting AIG's competitors. This is corporate cronyism at its worst...

Economy worsening, Obama policies are detrimental

The Dow dropped another couple hundred points today. I'm not surprised. Judging the market's wellbeing by the Dow alone, however, is rather foolish. Aditionally, a record number of Americans are behind or in foreclosure on their mortgages (including 48% of subprime mortgages). January unemployment was at 7.6% from 7.2% previously (with February's stat coming soon, likely to be higher). Inflation rose 4 times as much as the Fed predicted it would (surprise, surprise) and the banks still won't bump up the loans.

On a side note, I think it's hilarious that the government criticized the banks for being too lenient in their lending policies, when the government used GSE's, the Community Reinvestment Act, lower interest rates, and etc. to encourage more lending. And now, after too much lending exploded in their faces, the government is now criticizing the banks for not lending enough. It makes sense to not lend when the prospects or quick recovery are increasingly bleak. The government is, again, trying to push banks into extending their lending practices to people that they wouldn't otherwise give loans to. This caused the problem. Doing it again will not fix the problem. Banks are naturally tight in their lending policies because they judge the economic landscape as being very troublesome. It isn't because they're run by horrible rich people who hate the economy... they just don't think that it's a good time to be lending. This is natural. This is what we want as an economy. Too much credit, encouraged by artificially low interest rates, leads to the boom and bust cycle (as argued by Hayek and the Austrian School).

But, back to the whole idea of government intervention. I direct your attention to the oft-forgotten recession of 1920-21.

This is a topic covered at length in Tom Woods' book Meltdown, about which I wrote a review for the YAR. I encourage you all to buy the book (it's fantastic) and check out the review in the next issue of YAR.

This recession is often overlooked by economists. Why? The answer is quite simple... it's because it undermines the policies they are employing.

In this recession, price levels fell far more sharply than in the Great Depression. Prices of retail goods declined by 36.8 percent for 1920-21, which was the the largest one-year decline on record. By many estimates, the economy suffered a decline significantly worse than it suffered at the start of the Great Depression. Why, might you ask, did the economy recover completely only 22 months after the recession's bottom?

In this recession, the government's response was extremely minimal. Unemployment rose from 2.3% in 1919 to 11.9% in 1921. However, government rescue procedures were not enacted, other than marginally increased support for the unemployed.

There are several reasons for this, as explained by Woods and the Austrian School. Firstly, when the government intervenes minimally in the economy, it allows the economy to follow its natural recovery mechanism. Wages are allowed to fall, bad assets are purged, and unproductive business ventures are slashed.

However, in the current crisis, the Obama Administration is doing all that it can to keep these bad assets on the books. This slows the recovery process down to a crawl. Instead of letting bad companies go bankrupt (e.g. Chrysler, GM, AIG, etc.) the government keeps these unprofitable companies afloat. What's wrong with that? Well, isn't it obvious? The government has paid out billions to all of these companies. Did that work???? Absolutely not. Within only a few months, each of them came back to the government to ask for even more money, on occasions even more than the initial recovery. Bad companies, bad assets, bad business procedures (i.e. loose lending, malinvestment) need to be purged. This can only happen if the government lets it happen.

Every single action that the government has enacted has failed. I have illustrated TARP's failures below. I illustrate the failure of the big three bailouts above in extremely small detail (though this failure was already evident). The jury is still out on the bailouts, the new $200 billion consumer credit plan (...yeah), and the continually changing effort to make the banks lend again (buying bad assets, making a government-run bad bank, etc.).

The government has already committed ~$2 TRILLION dollars of taxpayer money to combat these problems. People deserve to know that it's not just the strategies are failing, it's that these strategies are actually slowing down the recovery process.

NOTE: The 1920-1921 recession economy had much more wage flexibility than is present in our economy. This is one of the reasons for the quick recovery. However, we don't have this wage flexibility by government design.

Oxy Weekly Article

Sorry for the inactivity everyone. I've been hard at work on a book review of Tom Woods' Meltdown for the upcoming issue of YAR! So please be on the lookout for that :)

In the meantime, this is an article I wrote for the Oxy Weekly. I regret how little space I had and how vague I had to be, but please check it out everyone. I'll have more substantive posts coming shortly.

you can find the article here: http://media.www.oxyweekly.com/media/storage/paper1200/news/2009/02/25/Opinion/Economic.Stimulus.Plan.Says.No.Money.No.Problem.Just.Keep.Spending-3647067.shtml

Ron Paul on the Floor

My final stimulus blog post will be up soon after I've had a chance to look at the damn thing. All I can find are partial cost reports from appropriations committees and a 100 MB file of the gigantic bill in a rough .pdf copy form. However, while you're waiting I would like you all to watch this video from Congressman Ron Paul.



Foreign policy affects the economy? Yes, it does. What happens to hundreds of billions of dollars in our budget? The taxpayer money goes to overseas bases, pointless wars, troop deployments founded on acute paranoia. The money goes to a foreign policy of imperialism, fear, and warmongering.

Cyril, where are you on this one?

Stimulus passes Senate test vote, may be approved within the week

The stimulus was put to a test vote on Monday, reaching the necessary 60 votes by getting votes after converting three GOP Senators (both from Maine and Arlen Specter from Pennsylvania). The bill passed the test vote 61 to 36. Harry Reid, Senate majority leader, has said that he will hold Senate in session into President's Day weekend if need be to pass this legislation. I say to GOP Senators, begrudgingly... just let them pass the damn thing already. You're not going to be able to stop it and I suppose it's better for them to give it a try now then to wait a week and then implement it. Yes, I think it will be as big of a blunder as you do (Granted, probably for different reasons). But, there's really nothing you can do about it now except try to shave off a few billions more.

That being said, let me synthesize what I've come to learn over the past few weeks about my views of the economy versus those of people that I talk to who are much more supportive of the plan:

I don't think that the United States' economy at present is a viable economy. We are a debtor nation. 70% of our GDP is consumption. We have had a negative trade balance almost every year since 1971. In 1971, the trade balance was only -$1,303 (in US millions). In 2007, the trade balance was -$700,258 (IN US MILLIONS). Sadly, this year was actually a banner improvement, down from -$750,000 (approx.) in 2006. In almost every year since 1971, this trade balance has decreased as imports rise and exports fall. In Lehman's terms, we buy way more than we sell. Some fields that were once American strongholds: automobile manufacturing, electronics, etc. became fields in which our imports dwarfed our exports. We don't make things anymore. Instead, our economy consists of buying all of the things that the world makes. When America goes down, the rest of the world takes a hit too. Why? Because people aren't buying from them as much anymore.

Why is this a problem? Because, at some point in time, if no change is made, other economies will realize that having a consumer nation to buy all their stuff becomes more of a burden than a benefit. Our creditors begin to learn that the money they give us won't ever be repaid. Why? Because we bought TV's and cars with it. We didn't use it to start new companies or invest in technology with which to further our economic well-being. We get money, we spend money. For the time being, countries are luke warm about lending to use because it means a better market for their goods. But, there will come a time when someone puts a stop to the tab and our economy will really be on its ass.

Many proponents of the Obama stimulus believe that the economy must only be stimulated and the investors must only be encouraged. They believe that with renewed market confidence, the US economy will resume what has become its usual charade. But, I believe otherwise. I believe that this economy requires substantial change in the coming years or we may be looking at something more serious than we can imagine.

I believe that the US economy needs a major overhaul. I believe that these staggeringly negative trade balances must disappear. I believe that we must make our industries competitive again. I believe that we must return to an economy that does more than borrow and spend; it produces.

Some great articles on the stimulus

Here are a couple articles that pretty clearly articulate where I'm coming from in the stimulus. Mankiw's article is all about going through the stimulus and making sure each item helps economic well-being. Barro's article is on the fallacy of government spending as a fix to all economic problems and how the main plan of the stimulus should be to provide incentives to work and produce.

(Barro and Mankiw are both Economics professors at Harvard)

"People don’t usually spend their money buying things they don’t want or need, so for private transactions, this kind of inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being." - Mankiw

http://online.wsj.com/article/SB123258618204604599.html - Barro
http://www.economics.harvard.edu/faculty/mankiw/files/Is%20Govt%20Spending%20Too%20Easy.pdf - Mankiw

GOP pushing for changes to Obama Stimulus

GOP Senators presented their alternative stimulus plan today. The plan is $714 billion as opposed to $819 billion. Small changes? Absolutely not. The stimulus plan is completely restructured towards tax cuts and away from government spending. Let's take a look at the numbers:

$430 billion for tax cuts
$114 billion for infrastructure projects
$138 billion for unemployment insurance
$31 billion to "address the housing crisis"

To be frank, this proposal will not help. Yes, it eliminates almost everything that I didn't want in the stimulus (i.e. the insane government spending). In the Obama bill, the one that passed in the House, there was $550 billion in government spending. This is/was a ridiculous amount of money. Furthermore, government spending will NOT create permanent or long lasting jobs in this economy. We need less government, in size and in scope. Creating expanded government departments does absolutely nothing to help the economy except create a temporary decrease in unemployment.

I fear that most of these tax cuts will be used for consumer purposes. I don't believe that these tax cuts will do anything except cause people to pay off debts or buy TV's. This is not the capital that this economy so badly craves.

Also, this plan gets rid of the only thing that excited me about the Obama plan (the large amount of money dedicated to primary and secondary education). I say the economy needs capital: both these bills are very scarce in that regard. The Obama bill will create a HUGE government in size and scope. The GOP bill will, in theory, create a lot of extra money to be used for capital or expenditure to kick the economy out of recession and restore confidence in the market. However, the effect will be light on capital and heavy on spending and debt payoff. The Obama plan will provide money towards human capital in the form of a more educated workforce (assuming throwing money at education will fix things). This encourages me. But it's only a glimmer of hope in a pile of 550 billion pitfalls.

I want to be clear; I DO NOT SUPPORT A STIMULUS PLAN. I want smaller government... the Obama plan will achieve the opposite. I want less consumer spending... the GOP plan will achieve the opposite. I want to see an increase in capital which I think can conceively be bolstered with business tax cuts. Both plans have far too many detractors for me to believe that they will provide any meaningful recovery. Obama's plan is a pork-filled, government-expanding bill the likes of which I don't think we have ever seen before. The GOP plan is the same thing they've been at for 4 years, just bigger.

I hate to be too much of a "doomsday" kind of guy. However, we should all expect there to be huge blowback in terms of inflation and government expansion (into the economy and into all other aspects of life) when the Obama plan is passed in the Senate (which it almost certainly will be after minor revisions).

So.... The stimulus passed in the House

Let's take a look at the numbers...

-$49.1 billion goes to elementary/secondary schools
-another $79 billion is going to the Department of Education through the State Fiscal Stabilization Fund
-$46 billion goes directly to unemployment insurance, with another $27 billion in extended "emergency" unemployment funding. Translation: more money for unemployment insurance and more time you can stay on it.
-$60 billion for transportation works
-$87 billion goes to Medicaid
-$49 billion for energy programs
-$20 billion for health care information technology
-many more billions for college loan programs
-$190 billion in tax cuts

you all can read the bill here:
http://www.cbo.gov/ftpdocs/99xx/doc9968/hr1.pdf


One of the most interesting provisions is the business tax cut: $90 billion (expected) for the first year in immediate write offs. But, here's the weird part.... unprofitable firms can gain access to income taxes they've already paid in previous years. I support the idea of tax cuts for businesses. However, paying money out to unprofitable firms seems like it may be a waste of taxpayer money. It is the companies' previously paid money though. I'm a little conflicted as to how to feel on that.

In my opinion... there is way too much money being pumped into welfare and entitlements and not enough into business tax cuts. When you compare how much of the money is going into government programs to how much is going back to the businesses or individuals... it's kind of astounding. I look forward to see how this will do in the Senate (it will pass, I'm almost sure). I don't know what I was expecting but this is a little bit more of the aggressive, opportunistic expansion of government than I was expecting.

I, however, really do like the large, accross the board investment being made in human capital. I really hope there is a more specific plan than just "throw money at it". But I think that it's a great step to improving our schools and making sure underprivileged students can still go to college even in these trying economic times. I think it's a great move there (though I'll be on the look out for how they're gonna use the money).

So.... good news, bad news. Definitely not what I wanted. But, there are some spots of sunshine.

PLEASE READ MY LAST BLOG TO SEE MY PREFERRED STIMULUS PLAN

Protestant Ethic and the Spirit of Stimuli

Many of my conservative and libertarian friends do not want to see stimulus plans, bailouts, subsidies, etc. You are not alone. I happen to be of the persuasion that less government intervention in the markets is a good thing, a preferred thing, the best thing. But, we've come thus far and we've lost so much money and so many jobs and so we must accept that a stimulus plan is coming. I'm not saying that this is the best course of action, but it will be the course of action. What I'm trying to articulate is WHAT I want to see the stimulus plan doing/encouraging.

In a seemingly irrational and unrelated move, I'm going to direct you all to look at the essays of Max Weber. The Protestant Ethic and the Spirit of Capitalism was a book/series of essays that was compiled after extensive study of political, industrial, economic, and religious history of the world (Western Europe in particular, as this is clearly the focus of the book).

If I may paraphrase my Professor... Weber argued that the Protestant ethic was a NECESSARY condition for the creation of capitalism. Granted, Protestant ethic was not the ONLY condition. Before capitalism could emerge, transportation and communication needed to be made more expedient. However, Weber says that without this Protestant (Puritan/Calvinist) work ethic, capitalism could not have started.

We could spend all day debating his theory. It is a very interesting and convincing piece of literature. Weber was an extremely well-read and intelligent man and he makes a strong case. For my purposes, I will assume that his theory bares significant truth.

The Puritans believed, contrary to many other sects of Christianity, that worldy activities were not devoid of spiritual purpose. The Puritans believed that man was called to a profession by God. They believed that by pursuing their calling (berufsmaβig), they were doing the will of God. They believed that work was salvific and that by being successful in their calling, God was indicating that they would acheive salvation.

This next part is absolutely essential to the point I'm trying to make.... Puritans believed that they must work tremendously hard to achieve salvation while simultaneously abstaining from SPONTANEOUS PLEASURE SEEKING. Capitalism was able to emerge because Puritans believed that saving and reinvesting back into their work was the only proper way to spend their money.

"A penny saved is a penny earned" - Benjamin Franklin. This quote exemplifies Franklin's (and many other Puritans') belief in saving over spending and consuming.

Many argue that Protestant ethic was essential for the founding of capitalism but not it's survival. However, it is crucial to note that without the hardened and (in this case) redemptive philosophy of the importance of PRODUCING AND SAVING, capitalism would not have existed.

We can look around the United States and see that the Protestant ethics of hard work, saving, and reinvesting into that work are almost vanished. The US government and its citizens are ardently subscribed to the idea that an economy based on borrowing and spending is viable. This is a fallacy.

Artificially rising home prices allowed many people to believe in this fairy tale. They believed that they could keep borrowing against their house, investing into their house, spending money on furnishings and new cars and new clothes and still stay strong economically because of the ever-increasing value of their home. But, in 2008, this philosophy proved itself to be a formula for disaster.

Americans gave out and took on billions of dollars of loans so that they could spend. US citizens, under Bush and Clinton, were inundated with the idea that spending money on goods was a good thing for the economy. People thought they were doing their country a service by buying things that they couldn't always afford. This is because we thought that an economy based on consumption could work. An unbelievable 70% of GDP is made up of consumption. Americans spend more money than they earn.

In direct contrast to the Puritans, spontaneous enjoyment of goods is now EXPECTED in the United States. It is no longer a virtue to save, to grow your business, to work hard. These things can be bypassed so quickly by filling out a loan application. However, look at where these things have gotten us: need I point to the financial bailout (covered in my previous blog) and impending $825 billion stimulus plan?

That being said, there needs to be a significant and substantive change in the makeup of our economy. My free market friends argue that these changes can be made painfully through the economy's built in self recovery mechanism. I agree with them. However, that process is long and painful. Although I agree that it is in many ways the best course of action, hundreds of millions of Americans are demanding immediate action from their government. There will be a stimulus, that I guarantee. There will be negotiating over the size, makeup, and timing of the plan. But, it will happen.

Americans, in place of God and salvation, must see producing and spending as the spirtitual craft that makes retirement (salvation) and the prosperity of the United States economy (the glory of God) possible. I'm asking you to take God out of the equation. Retirement is the end, the place where all worldly work pays off. The prosperity of the country is different reward, a patriotic congratulations for hard work. Some may not care about this. That is fine too. But as Americans we should feel, at least in some part, a dutifulness to achieve this end. I want the stimulus plan to encourage this by doing (or not doing) the following things.

THIS IS WHAT I DON'T WANT TO SEE:

I don't want to see the Federal Reserve continuing to lower interest rates so as to encourage lending. Americans are broke. We don't need to buy more things that we can't afford. This is monetary policy, but it is and will likely continue to be a part of the recovery plan. I would rather see them pull a Volcker (which would make Obama's ratings plummet and send the country into an even bigger temporary recession, but would, I think, help the country fix its debt problem). Encouragingly, Volcker is the leader of the newly-formed Economic Recovery Advisory Board.

I don't want to see the Obama team cutting checks and making tax cuts for individuals (honestly, lol to proposed tax cuts for people who don't make enough money to even pay taxes). All they will do with the money is pay off some of their debt or continue to buy products they don't need (which will, in all likelihood, be from foreign producers anyways).

THIS IS WHAT I WOULD LIKE TO SEE:

As a rule, the things that I want to see are things that will create jobs. Not jobs working for the government because the last thing we need is expanded government. Expanded government in no way helps to produce anything. The size and scope of government is big enough already.

I'm encouraged that the Obama plan is all about job creation. However, I'm slightly discouraged that he talks about doing this through government works projects. New roads and bridges are nice, but they only temporarily employ people and don't provide much in terms of economic growth.

I want to see small business tax cuts. You want to employ people? Then give tax cuts to the people whose business it is to employ people. It's not the government's job to employ people. By giving large tax cuts to small businesses, the government encourages growth, innovation and competition among firms. This is great especially as some of these small business are in new or underdeveloped technology that could be the future of the American economy.

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The United States neeeeeeeds to be in the business of production again. This stimulus needs to say, "enough borrowing and spending". The government needs to provide capital to businesses who will use it to produce things, employ people, and then reinvest in their company and expand. THIS is the Protestant work ethic that has been missing. This is the work ethic that I would like to see make a significant comeback in a more secular form.

The stimulus plan is, in itself, a total contradiction for what I want. I want people to see that borrowing and spending is not a feasible means for survival or prosperity. Seeing the government borrow and spend to promote ideals of producing and saving is quite hypocritical and borderline preposterous. However, THE GOVERNMENT NEEDS TO COMMUNICATE THAT THIS IS A ONCE IN A MILLION YEARS KIND OF PLAN. Government is not a safety net. It cannot employ people. It cannot distort market forces. It cannot encourage its citizens to live above their means. This needs to be a one and done deal. Government cannot reach back into our pockets, back to the printing presses to provide more money. We are broke, as a nation and as a people. This injection of capital needs to be to get things going again; it needs to be a spark. People have to see this plan as A SIGN THAT OUR BRAND OF ECONOMY HAS FAILED. We cannot continue to borrow and spend. We must go back to producing and saving.

TARP's effects: for better or for worse?

It has been several months now since the Troubled Asset Relief Program was introduced as part of the proposed solution to the subprime mortgage crisis. TARP was created and implemented as a way to stimulate lending and provide relief for homeowners.

The Congressional Oversight Panel's second report (issued Jan. 9) about TARP indicates that the goals of TARP are to:

1. Stabilize the financial market.

2. Stabilize the housing market.

3. Protect taxpayers.


It was a stated goal of the TARP and the Treasury that this $700 billion in giveaways would cause banks to lend more, providing more credit and support to homeowners, avoiding preventable foreclosures.

HOWEVER, this has not been the case.

There are several, deep fundamental flaws that have not been addressed or changed with the use of the TARP funds.

First of all, the money is not being used to lend more. The money is given out with absolutely no strings attached nor requirements of how to use it. It is extremely unclear how this could bolster more loans. Many TARP banks, financial strategists, and Congressional reports indicate that the banks and firms are not using the money to make more loans. In a recent NYT article, Director of (TARP participant) Whitney National Bank, John C Hope III, said that "We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans".

John C Hope III is not alone. His sentiments represent the general sentiments of most other TARP banks. They are using the money to:

1. Acquire other banks.

2. Fortress their budget sheets with excess capital

And, most importantly, 3. TO SURVIVE THE RECESSION.

So, ultimately, the funds have not been used properly to provide relief in the credit market. But, the funds couldn't possibly do any harm, could they?

Yes, they could.

The other major flaw is that the Treasury has been extremely dodgy and unclear about which banks they decide to include in TARP. I'm sure most of you are thinking, "oh well it's the Treasury, I'm sure they'll decide correctly." BUT THIS VERY FACT UNDERMINES CAPITALISM IN THE UNITED STATES.

The banks and companies that are the recipients of this money are using it to essentially weather the storm. This means that companies that are a part of the TARP program aren't stimulating the economy at all. No, in fact, the only thing that they are doing with the money is amassing it to protect their arse. What about the other banks? What about the other financial institutions that aren't on this list? How is it fair for the Treasury to decide who lives and who dies based on criteria that, so far, seems completely and totally arbitrary?

Peter Schiff, director of Euro Pacific Capital puts it best in this video. EuroPac, his investment company, is not a part of the TARP program. He gets no money. What's wrong with this? Well, the failing and sick banks that are benefitting from TARP as a result of free money thrown their way or as a result of mergers, are being allowed to stay afloat even though they took on billions of dollars in bad loans. They took on these bad loans because of poor management and poor financial strategy. EuroPac, however, did not take on bad loans. This is a time when EuroPac could look to pick up staff, securities, etc. from these failing companies. But, the government is keeping these sick companies afloat. This demolishes the investment opportunities for non-TARP banks and firms.



Start watching at 3:00 for the relevant part of the argument. However, I encourage you to watch the whole video along with the first installment. He presents a series of very interesting points.

What's wrong with this? .... It is completely and totally anti-capitalism. The government is deciding who should benefit and who should gain from this under the guise that their decisions are best for the consumer. However, as has been demonstrated by John C Hope III and other like-minded banks and firms, the TARP funds are NOT being used to provide relief to the consumers.

This situation, in a more free market, would work as follows: the bad banks would likely go under. The banks and firms that made smart decisions would be able to pick up the value from these failed banks and firms on the cheap so as to benefit and grow from the opportunities. However, this is not happening. The gov't is interfering, propping sick banks up, deciding who benefits, and getting rid of the customary investment opportunities that would have otherwise been available to prosperous or healthier investment groups like EuroPac.

How is our tax money being used????
It's simple. The gov't is using it to undermine capitalism.

I don't want to throw out accusations of corporate cronyism or a grand conspiracy theory to nationalize the financial sector or anything of that sort. This is for several reasons. Firstly, God knows that more financial panic is the last thing that we need right now. Secondly, I have no evidence nor belief that this is the case. All I'm saying is that TARP is not only failing to help consumers, but it's hurting financial recovery in this country.

Introduction!

Hey everyone!

I look forward to providing you with insight and criticism of many proposed and active financial recovery plans. My goal is to keep this primarily focused on monetary and fiscal policy, but I may at times explore tangential subjects. Please stay tuned for updates in the near future and let me know what any of you guys think. I hope this will allow for lively debate and new learning opportunities for any readers and also for myself. If you want my opinion on aaaannnnnyyyyyttttthhhhiiiiinnnnggg just send it my way and I'll poke around and tell you what I think.

UPDATES COMING SOON!