Can the Fed rescue the economy by making money even cheaper than it already is? A debate is being played out in the Fed about whether it should return to so-called "quantitative easing" -- buying more mortgage-backed securities, Treasury bills, and other bonds -- in order to lower the cost of capital still further.
The sad reality is that cheaper money won't work. Individuals aren't borrowing because they're still under a huge debt load. And as their homes drop in value and their jobs and wages continue to disappear, they're not in a position to borrow. Small businesses aren't borrowing because they have no reason to expand. Retail business is down, construction is down, even manufacturing suppliers are losing ground.
That leaves large corporations. They'll be happy to borrow more at even lower rates than now -- even though they're already sitting on mountains of money.
But this big-business borrowing won't create new jobs. To the contrary, large corporations have been investing their cash to pare back their payrolls. They've been buying new factories and facilities abroad (China, Brazil, India), and new labor-replacing software at home.
If Bernanke and company make it even cheaper to borrow, they'll be unleashing a third corporate strategy for creating more profits but fewer jobs -- mergers and acquisitions.
The M&A wave has already started. Continental and United Airlines just got approval to merge. Biotech giant Genzyme is on the auction block after Sanofi-Aventis announced a $18.5 billion bid. On Friday, 3Par, a data storage company, accepted a $1.8 billion takeover offer from Dell -- one day after Hewlett-Packard raised its offer. Campbell's Soup is eying parts of United Biscuits, BHP Billiton has put in a takeover bid for Potash, Oracle or H-P are likely to pay up to $1.5 billion for security software maker ArcSight. Bain Capital is expected to acquire Air Medical Group for almost $1 billion. The insurance industry is headed for the biggest merger boom in recent history.
Who wins from all this? If history is a guide, shareholders of acquired companies do better than shareholders of companies doing the acquiring. Top executives who end up running bigger corporations get fatter pay packages. And Wall Street and big-name corporate law firms who engineer the M&As reap a bundle.
Who loses? Large numbers of ordinary workers will lose their jobs. After all, the purpose M&As is to create greater economies of scale and more "synergies." Translated: More pink slips.
Last week in Jackson Hole, Ben Bernanke insisted the Fed will do what's necessary to increase consumer and business spending in order to keep the economy growing. But cheaper money won't necessarily create the kind of spending that generates more jobs. In fact, right now it's having the opposite effect. When consumers and small businesses can't and won't borrow more, big businesses use cheap money to bid up the prices of corporate assets and cut payrolls.
What we need now is more jobs, not bigger corporations.
This post originally appeared at RobertReich.org
So you might consider a new round of antitrust laws, banks included, to get corporate monopolistic power under control again. And it will be a big fight because companies have gone global and have the power of whole countries. But if you persevere, then you can go as low as you want with interest rates. and then all that companies could do with the cheap cash is enhance productivity - which is exactly what you want to keep ahead of foreign factories who are basically running our older equipment!
How would you get the banks to lend to Mainstreet or better yet renegotiate to reduce the debt burden?
How would you tackle the Middle Class terminal debt?
How would you keep interests rates low so that adjustable equity line rates do not cause more foreclosures?
How would you increase the middle class wages to living wages and bridge the gap between working class and CEO?
I am under the firm impression that when America is at the "break even" level we will prosper again. What I fail to see is any catalyst that will appreciate the assets of America to the level of debt. As far as I can see as long as the loan to value ratio of America is so high we will will remain in a Recession or micro Depression.
You've been one of my heroes since your days with the Clinton administration. Your grasp of economics coupled with simple human decency is both refreshing and inspiring.
But the $64,0000 question is: Can you get this administration to listen? Call Bill, perhaps? Something.....we need someone to talk sense into these guys. Slip it under the White House door?
For all of those people who think government can do nothing right, they are smiling a toothy grin right now. In the face of this disaster we have a government paralized.
The Temple of Usury (the "Fed") is a poor excuse for a monetary base for the real economy. Congress should reclaim its constitutional powers to issue and regulate currency and the government should issue credit directly. Bonds to finance public works are just more debt and interest. A little real competititon in the old Fed Monopoly would put things right. It would be more democratic, too.
Instead, jobs are being outsourched and special visas are given for labor to come here. There are no public works projects or even infrastructure maintenance. It's all about bonuses for bankers.
This is a cracking piece precisely on the money.
Just look at the last fortnight: bankers falling over their knickers to help huge whales get swallowed by gigantic sharks....but swearing blind they have no money for entrepreneurs. Bloomberg headline last week: 'M&A back to boom times'.
Like computer geek below, I still cannot grasp why the West wound rates down to zero: how do banks rebuild balance sheets when rates are zero? Buy Govt bonds at 3%. Everyone's a winner.....except the People. But why have 0% rates when there's no demand for loans anyway?
The old lines of Left and Right are being redrawn to become Big State & Business v Small folks.
What's happening is a scandal - but the signs are disturbingly in place now for Crash 2...
http://nbyslog.blogspot.com/2010/08/breaking-gold-breakthrough-forecast-as.html
http://nbyslog.blogspot.com/2010/08/breaking-gold-breakthrough-forecast-as.html
Because the American people, buy and large, are still thinking of Henry Ford and the making of products they don't realize that we've moved way beyond the producing economy into the meta-business economy or the business of buying and selling businesses. Thus the huge tax breaks the Republicans want to dole out may actually work against the best interests of the American people not for them.
Let's face it, for the economy to recover, people, ordinary people have to buy stuff. If you want the economy to recover find a way to get people to buy stuff. Otherwise, we're going to remain in the tank.
In 1912, Roosevelt's platform on the Progressive ticket was: "To destroy this invisible Government, to dissolve the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of the day." He fought the very same battle 98 years ago, that we are still fighting today. Americans are notoriously slow to make changes. Remember Health Care? That too took 109 years for Americans to get off the pot and get it instituted by congressional action. America needs leaders like Roosevelt, because they can't seem to do it on their own!
I'm still awaiting the day when an American economist like your Prof. Reich will knock on his faculty dean's door and breathlessly proclaim -
"Dean, dean...I've got a fantastic idea - no need to pay me 150 grand a year! Just invest $5.000
to install a large videoconferencing screen in my hall and from tomorrow we can get tectures as
good as mine delivered into our university from Asia for only 15 grand a year!"
Hmmm?
"Dean, I'm serious... In a few years our university could save a fortune by leveraging the world's
comparative academic advantages - that's while increasing the totality of global wealth!"
America's economics professors - as of tomorrow I want you to start saving your univesities a fortune by leveraging the world's comparative academic advantages - that's while increasing the
totality of global wealth, of course...
Guys, you know the script; "Dean, dean...I've got a fantastic idea - no neeed to pay me, etc..."
Sincerely,
Mark Gendala
Melbourne, Australia
www.ssotu.com
$300 million is a lot less than than the billions we bailed out big biz with and this time we'll know where all the money went.
If it were me, I'd do it in an instant.
Until a business knows what tax ramifications are attached to their fiscal budget decisions, they're just going to sit in cash. What, hire 20 people only to have to lay them off because the deduction for capital expenditures was slashed to 1/5 of what it was under Bush? No one will take that risk. Just give us an answer on what you're going to do with taxes. You'll see businesses starting to make investment again. It is really that simple.
Banks were not loaning to high risk credit. They were trading in the market. Trading derivatives!
Small businesses can't invest without loans.
The problem is spending. No one is spending. That's what Bush meant when, after 9-11, he said that we couldn't stop spending or the terrorists would have won. That leadership is what we need. Did people go out and spend like Bush said? Yes they did. They're not doing that for Obama. There's no confidence in his leadership, and no positive results after 2 years. People aren't stupid.
Investment decisions and the underlying financial models are based on expected economic returns, qualitative reasons and known facts.
ROI, ROA, IRR et al are calculated exclusive of tax effect.
If the investment makes economic sense and the expected return can meet or exceed whatever hurdle the company has (cost of capital etc.) then it's moved forward.
It's the only thing that matters, as if each investment decision is expected to make a certain return in excess of the internal hurdle rate then the company will be profitable, exclusive of any exigible tax.
An example:
If the Federal government allowed you to write off 100% (tax depreciation) for the purchase of a new tow-motor [$30,000] in the year of acquisition.
The usual rules would only allow you to write off 10% of the original cost each year for 10 years.
Your effective tax rate is 25 %
Would you buy one ?
Maybe, if you needed it, in which case you would buy it anyway.
But if you didn't need it you would spend
$30,000 to reap a tax benefit of ($30,000 x %25) = $7,500
So you would be out of pocked ($30,000 - $7,500) = $22.500
You made the decision to buy the tow-motor for tax reasons and the result is that instead of having $30,000 cash on hand, you now have $7,500 and a tow-motor that you don't use.