How to End the Recession
As the country struggles with this vicious recession, we look for ways to rejuvenate the economy and reverse the downturn.
What end recessions are the following:
First, producing and saving, as opposed to spending and borrowing.
Second, economic stimulus in the form of tax cuts and rebates, which are truly stimulative and go to the people that need them most, and not random bailouts nor new massive government bureaucracies.
Alarmingly, both the Bush and Obama policies are on the wrong track.
What should be intuitively clear is that spending is no way to repair our woes. Indeed, spending irresponsibly is exactly what got us in the current lugubrious position. If your family had large debts and annual expenses exceeding its income, would you accept advice from financial experts beseeching you to spend even more, and borrow further? That sounds absurd, and it is. The definition of insanity is doing the same thing again and again, expecting different results. Why then are we trying to get out of this hole by digging further with the same infernal shovels of consumption and debt?
President Bush and his Treasury Secretary have long failed to provide relief. But now, I have a very bad feeling about the incoming administration plans as well. Instead of focusing on cuts of marginal tax rates, President Elect Obama has come up with an economic stimulus plan that is completely misguided. The Obama team proposed a payroll tax credit rather than a real tax reduction. An increase in spending coupled with lower tax collections is an increase in taxes, not a tax cut, because it means the government will have to collect more taxes in the future. And when you don't cut rates but instead give people a lump sum of $500, you create little stimulus and further weaken the country's financial strength by adding to the national debt.
Or take the incoming administration plans to reform healthcare, which comprises 14% of GDP. It is simply not possible to spend $1 trillion so quickly and do it well. This kind of hurried spending is gravid with danger and will not abet the economic recovery.
Or consider the plan to create "green jobs." Not only do we not have the slightest clue how to do that, but we don't even know if there is demand for whatever product those jobs will produce, especially not with oil prices down 54% last year. Moreover, government should not be engaged in creating jobs. Taking resources from the private sector can't possibly be an efficient way to utilize our means.
As stimuli plans go, this one is deeply flawed and will put us on the wrong track, exactly at the time when we need change we can rely on and not another false start.
Meanwhile, the Bush administration has been engaged in a gargantuan endeavor to bail out banks. Thomas Jefferson said that banks are more dangerous than standing armies. Judging by the damage done by Wall Street in the past year, he was correct. Nonetheless, Secretary Paulson has been handing the most abominable banks hundreds of billions of our money. Citigroup alone received a $300 billion guarantee of its debt, a gift, and a very large one at that, from Americans to the shareholders of Citigroup. Many other banks got large sums as well (and to add insult to injury, the banks on the receiving end of all this liquidity have been hoarding the cash rather than lending it).
With this bailout we are saddling the Federal Reserve's balance sheet with toxic assets banks foolishly loaded up on. What we have been doing is replace private credit, which has been destroyed, with the credit of the federal government. But we taxpayers ultimately shoulder that burden. The Fed's balance sheet is really ours, and even if we try to sweep the problems under the carpet in Washington, the day of reckoning will come and we will have to face those losses. More federal debt undermines confidence and compounds the very problem it was meant to fix. It might even create a new crisis in which we will find it hard to pay our social security and healthcare obligations to aging baby boomers. This Mad Hatter tea party approach is good for Alice in Wonderland, not for a prudent economic policy at this crucial time.
If we are going to rescue anyone, we should rescue homeowners and not banks. We can do that by issuing homeowners new government loans based on the current appraised value of their homes, so that they no longer owe more than their house is worth. This will stabilize the value of the collateral underlying all those non-performing loans, allay fears and stop the credit freeze. And if we want the banks to lend, we need to force them to recognize their losses and write off their bad loans, which predictably they have been reluctant to do.
Finally, as far as confidence goes, one can't simply tell people to be confident and expect them to comply. People have a very good reason to be scared, and they won't become panglossians because Washington implores them to. Confidence is created by having consistent policies, not erratic, ad-hoc decisions. The crucial flaw in the Bush administration's actions has been that they actually increased uncertainty by being so unpredictable, with different responses to different institutions, rapidly changing strategies and obscure reasoning that created confusion and drove capital away.
Rather than deal with the source of the problem and drain the swamp, the Treasury department is chasing the individual mosquitoes, engaged in a desperate effort to pump up that atrocious credit bubble again, support the stock market and avoid a recession. That strategy is doomed to fail, especially when so many decisions seem to be made over chaotic weekends, in a bizarre effort to get things done before "markets in Asia open."
Stock prices ultimately reflect reality, and they should not be manipulated. If we deal successfully with the underlying problems, pay down debts, cut taxes and go back to producing and saving, the recession will be over and equity markets will respond accordingly.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.
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It's about time the rich stopped griping. They have a lot to answer for this last year, their greed led to a global economic collapse. Many around the world are feeling real pain, companies going bust, people losing jobs. It's time for them to open their wallet and pay up. Their countrymen are hurting.
The true economic value of persons whose "work" consists solely of transfer of wealth is vastly exaggerated. The single variable most responsible for this crisis is the overpayment of non-production work, especially of financiers. The paradigm of the author, and the Treasury Secretary and the Fed Chairman, is that money drives production. In fact, only specialized production makes money useful as a medium of exchange. It is production which drives the exchange of money, and our most powerful economic "professionals" do not correctly understand the fundamentals of their purview.
if anyone wants to make it out of this mess, attempt the following:
pay off all debt
exit the dollar, invest in foreign currencies/stocks
buy gold and silver
store food, water, energy
hunker down
we need to return to our constitution.
we need to cut our overseas expenditures (before we collapse because of them) drastically and make whole again some of the entitlement systems we have conditioned folks to become dependent upon. those programs are largely bankcrupt already. the largest ponzi scheme we have is the social security system. lets at least make it right for those who have paid into it. from there, we should have "opt out" legislation.
centralized banking, especially a NON government entity (the fed) that operates on fiat currency is really fascism.
Interesting fact: if we cut federal spending to 2000 levels (all departments) and eliminate the federal income tax we would be shortly on our way to a surplus. income tax only represents a third + of our tax revenue.
get rid of the fed. the dollar is worth 4 cents since its inception when calculating for inflation (money supply issues).
the past administrations and current proposals of "stimulus" is a ridiculous concept. the government can't create anything, including wealth. it can only take for somewhere else and put it in another place. and i am not speaking about the philosophical demise of "spreading the wealth". I'm speaking about our currency.
who will lend us the money for these proposals? china? recent articles suggest they are tired of our debt mechanized "securities". the rest of the world is following their actions.
so our "only" other option, in current political meandering is to print more money. the Federal Reserve is running this country now. It wasn't the money, the amount of money, or what the money was to be spent on that was the concern of the Fed in the bailout "debate". It was the fine print: the further authority given to them in the Bill.
we need to do the referenced above. in addition, we need to phase out the federal reserve simply...b
So it is not a 'real tax' cut unless the rich get 98% of the tax cut..of course...H
I was opposed to any bailouts, even home owners. I'm fed up with paying for everyone else's life through my taxes.
I remember this clearly, from Paulson and Bernanke's "End of Days" pitch to get the mortgage backed securities off of the Banks' balance sheets.
Paulson was pontificating to some Jr Representative from somewhere. The representative asked a common sense question, probably based on a bedtime story he was told as a youth. When there is a hole in the dike, you don't start bailing, you put your finger in the hole in the dike.
"Sec Paulson, if the securities are bad because the mortgages aren't being paid, why aren't we considering covering the lost value in the homes, and then support re-mortgaging for real value, at a reasonable rate?
Paulson took a micro-second glance at his supply-side, free-market buddy next to him. As if to say. "Ya see what we have to deal with?"
"Representative X, by next year with expected further devaluation, that would cost us $10 to 12 trillion."
Last count we were at $8.6T committed, with $5T spent or encumbered. With tons more on the way.
Meanwhile, the Fed/government is guaranteeing that any cheap mortgage will be bought in the secondary market, after propping up insolvent companies.
The Market? People don't know which companies are alive, or actually dead being propped up by the government. People need to know market dynamics are working to value. Or they won't buy.
My plan is to sell what the government guarantees. Then buy what I think the government will guarantee next.
They won't buy and us suckers who bought at the top are thinking about bankrupcy.
"The Fed's balance sheet is really ours,"
That's the way it's set up, alright. But it isn't legal, it isn't constitutional, and it could be unwound with one Presidential signing. All that "debt" and the interest it takes to feed it--the interest that a private bank like the FED feeds upon like a cancer--could be wiped away by having the Federal Government disband the FED, forgive itself whatever debt the FED claims, return the right of minting, distributing, and setting the interest on money to the Government as the Constitution requires, and putting the people of this country back in control of their own economy.
What's going on now is a robbery of the People's Treasury, and the robbers are the FED and their partners in crime on Wall Street.
I agree. The best bet of bailout is to give more cash to those who got rich over that last 8 years to get even richer with the new cash, but make even more with the cash as the market and interest shoot up..
These same bandits are going to get as much as they can, then they are going to stop Obama from executing Keynesian economic which is the only way to create jobs and higher wages to get money in the hands of the durable good consumers to turn the economy all around. Once the hand out stop, those who spend and stoll will SHOUT no more spending, the democrat did it. The seed are being planted as we speak
If the banking system seizes up again, it won't matter how many hundreds of billions of dollars the govt provides for fiscal stimulus - the economy will go down anyway. Putting on a new roof or adding a new deck won't mean much if the plumbing and electricity don't work.
The Fed is a private and unnecessary middleman, not only un-Constitutional but also outright usurious. There is NO reason why we should be paying interest on this debt to this institution. In fact, the IRS was created simultaneously with the creation of the Fed expressly to put this debt-interest slavery into process.
I don't know if the Fed can be undone with a Presidential signing statement or if it requires legislation such as Rep. Paul already introduced. There is danger to the President in doing it alone.
But end it we must, if we can. Otherwise, we are destined for a new world economic system, as outlined in this article:
http://www
I wish I knew just how many congress members are bought and paid for (or downright scared to make a change). I do think that if Rep. Paul suddenly stops pushing for the change, it means no hope at the government level.
I hope congress members worldwide realize that if they are bought and paid for now, that this status is likely to be lost when power becomes more centralized - too many of them to support long-term. I hope there are enough enlightened ones planning to make a change.
What gives you the balls to say anything about what will pull us out of this? This is NOT a mere recession. Perhaps for you it is, but for the rest of the world, it is an economic and financial nightmare of unprecedented proportions. So go ahead, save your money and don't spend it. But don't tell us what to do with our government and our money. You didn't see this train wreck coming and you don't have a prescription to get us out of it. You don't have credentials nor history on your side. All you have is the kind of clients that fell for the likes of Madoff who made you rich. Go away and enjoy the money you made, or better yet, spend some of it on charitable pursuits, but no one who reads this should be fooled to believe that you have any better sense than for example, Obama or Krugman, and therefore no one who reads this should value your opinion on this subject. I don't.
LOL--Geez Joe, can you write again when you have a more clearly defined opinion? :)
Yes, more pathetic right wing talking points. The something for nothing strategy, that has worked so well for the last 8 years. It is obvious that we must cut taxes some more, NOT!
Look, we have heard this pathetic mantra for nearly 40 years. Cut taxes and the economy will improve. It has not happened. We cut taxes and every year we cheese pare the budgets for essential services. The end result a $10 Trillion dollar deficit, bridges are falling into rivers and the middle class is now poor.
We need taxes, progressive taxes and lots of them. We could also use the self discipline to impose them.
Taxes have been cut progressive since Reagan cut taxes (including the top rate from 71% to 50%) back in 1981. The economy since 1982 has witnessed a boom 'til 2008 with only two short and shallow recessions in between, that is until a few months ago. That's a 26 year long boom. As far as "paring budgets for essential services", that hasn't happened over the last 28 years. In fact, services have expanded dramatically since the early 80s. Also, a couple bridges collapsing is not indicative of a lack of spending, and to say the middle class is "poor" is just silly. The middle class over the past 28 years has accumulated more wealth and more "stuff" than they know what to do with. From large houses, multiple houses, multiple cars, boats, vacations, big screen TVs, evenings eating out at restaurants, etc, the middle class in the country has seen such a period of abundance, that they will be unhappy if they have to live with anything less -- they (we actually) are spoiled.
You must be on the planet Zenu, buddy. I don't have the stuff you're talking about and according to the IRS, I'm middle class. Maybe you are spoiled, but most of us are serious trouble. Go out and meet your neighbors for a change.
First thing we do is eliminate the FED. Second thing we break up ANY company, but especially banks and financial services/insurance companies so that none of them is too big to fail. Third thing we end the gambling on Wall Street--shut down the stock market and return it to what it was intended to be, a place where you can buy ownership in a company--Period.
You got my vote on this one Lawyer
as far as taxes go.... we should have a 10% flat tax with zero deductions and zero exemptions
typical. i am not professing what the neo-cons have done is correct. nor what the dems have done is correct.
i hardly ever hear a liberal say "CUT SPENDING". tax cuts don't work unless you cut spending while doing it.
conversely, lobby whoring congress has NEVER saved the economy by increasing taxes and expanding spending. sure, new deal the hell out of me...go ahead.
my dollar is worth four cents since 1913, when the federal reserve and IRS came to light.
I am amazed that whoever is discussing "how to stop this downward spiral",not one person has stated the simple fact that if there is real investigations on how these crooks took our countryʻs wealth. Not a single country can survive well with corruption throughout their governments. How about some grand jury investigat
Yes! Finally! Right on!
The problem with the short sightedness of Hedge Fund managers is that the price of Oil may be low today, but in a year when its 100+ again where will this guy be? Will he be saying we need green jobs NOW?
I love this line from his screed:
"Stock prices ultimately reflect reality, and they should not be manipulate
So they can be manipulated? We knew that. Look at oil this past year as Bush's buddies played games with the price and our economy. And that's just one product. Read Jeff Schweitzer's piece--
http://www
The entire system is rotten. Alan's fix just won't work.
This makes way too much sense. Harry Reid is too busy shutting democratic senators out of the vote to worry about ending a recession. Why do people who make sense actually offer their opinions? Try calling your senator instead. Good luck out there. I've had it and I'm getting off the grid as soon as I can.
Hmmm.. A hedge fund manager parrots shopworn right wing talking points.
All spending is of course, irresponsible. Never spend, unless it's to line the pockets of those who get no bid contacts from the people they paid to put in office. The payroll tax is not really a tax, it's merely the largest portion of most people's annual payments to the IRS... Those of us self employed folks- you know- "the wealth creators" pay it at double the rate that employees do. No point in cutting those taxes. They would have a maximal impact on the top 5 percent of the country, (the inverstor class).
Reforming health care , bad idea. The weathy have plenty of acess to heath care.
Green jobs are, naturally, a waste of time. Our grandparents got alog without a green economy just fine, didn't they ? But curiously, a deviation from the talking points... self reliance is no longer a virtue, and homeowners should be bailed out. (I agree here) but I suspect our author only has sympathy in this instance, because foreclosures now have begun affecting the investor class.
I wonder if he championed goverment intervention when only sub prime borrowers were being affected ?
The money one pays into the payroll tax is money they will get back later in life via social security. That money is an investment for retirement. I don't think "wealthy" people are against health care reform. They just don't want the government running it. I've also never heard people be against jobs in the alternative energy sector - the so called "green jobs." Regarding bailing out homeowners, many banks have been working with them to rework the terms of their mortgages. So far, over half those people with reworked mortgages ended up in foreclosure in a matter of months anyway. And the idea that govt can come in and rework the mortgage of every single person in financial trouble, or of every single person that is under-water, simply won't work.
Social Security is a "pay as you go" system. The money I pay into it today is paying my parent's Social Security benefits.
"Wealthy people" don't need SS, so you're whole argument is moot.
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