By George Washington of Washington’s Blog.
Inside the beltway and among mainstream economists, Larry Summers has the reputation of being a genius.
But Australian PhD economist Steve Keen points out a huge gap in the thinking of Summers – and all neoclassical economists.
Specifically, in an essay written today, Keen explains the weakness in the Obama administration’s approach to the economic crisis:
Following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.In explaining his recovery program in April, President Obama noted that:
“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.
He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:
the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)
This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.
This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.
So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.
What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? …
If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375%—more than twice the level that ushered in the Great Depression…
But the amount of consumer credit outstanding has plummeted:
Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July 2009 alone. Credit-card debt fell $6.11 billion, or 8.5%, to $905.58 billion. This is the record 11th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell a record $15.44 billion or 11.7% to $1.57 trillion.
As many people have pointed out, the reduction in American consumer spending is a long-term trend. For example, Alix Partners finds that:
While American industry is struggling to get through what could become the worst recession since the Great Depression, Americans say that even after the recession ends, their spending will return to just 86% of pre-recession levels, which would take a trillion dollars per year out of the U.S. economy for years to come. According to this in-depth survey of more than 5,000 people, Americans plan to save (and therefore not spend) an astounding 14% of their total earnings post-recession, with the replenishment of their 401(k) and other retirement savings leading the way among their biggest long-term concern.
“There will be a fundamental shift in the kind of cars we buy, a fundamental shift in the homes we buy, and a fundamental shift in consumption generally,” says Matt Murray, an economist at the University of Tennessee. “And that is not something that took place in the 1980s.”
So consumers will borrow less, and the Summers’ plan of multiplying the trillions thrown at the banks by the government won’t result in any meaningful multiplier effect.
Keen continues:
I’ve recently developed a genuinely monetary, credit-driven model of the economy, and one of its first insights is that Obama has been sold a pup on the right way to stimulate the economy: he would have got far more bang for his buck by giving the stimulus to the debtors rather than the creditors.
The following figure shows three simulations of this model in which a change in the willingness of lenders to lend and borrowers to borrow causes a “credit crunch” in year 25. In year 26, the government injects $100 billion into the economy—which at that stage has output of about $1,000 billion, so it’s a pretty huge injection, in two different ways: it injects $100 million into bank reserves, or it puts $100 billion into the bank accounts of firms, who are the debtors in this model.
The model shows that you get far more “bang for your buck” by giving the money to firms, rather than banks. Unemployment falls in both case below the level that would have applied in the absence of the stimulus, but the reduction in unemployment is far greater when the firms get the stimulus, not the banks: unemployment peaks at over 18 percent without the stimulus, just over 13 percent with the stimulus going to the banks, but under 11 percent with the stimulus being given to the firms.
The time path of the recession is also greatly altered. The recession is shorter with the stimulus, but there’s actually a mini-boom in the middle of it with the firm-directed stimulus, versus a simply lower peak to unemployment with the bank-directed stimulus.
Keen concludes simply:
So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers…
Obama has been sold a pup [i.e. tricked into buying something that is not worth anything] by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.
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Why is Keen taking as given the idea that Summers is anything more than a tribal hack who’s first priority is his Wall Street business associates? Why this assumption that Summers cares a whit about the rest of America? It seems clear to me that Summers sees that his mission is to divert as much wealth from normal Americans towards his friends on Walls Street. And why shouldn’t he? Until the vast sea of normal Americans wakes up they should indeed be taken to the cleaners by the corrupt cabal who currently lead them; and by that I mean both parties and the wealthy elite these parties serve.
And the biggest issue of all is how do we wake up Americans? The private health insurance industry vis a vis health reform is just the latest episode of capitalism gone awry. Episodes I, II and III were the stimulus packages/bailouts. The recently released senate ‘health reform’ bill aims to fill the health insurance coffers all the more. Until Americans become more self sufficient — saving money, depending on their actual cash flow versus credit and taking more responsibility for their health, which will dramatically lower health care costs, the future looks dim indeed.
What multiplier effect. Oh, the government means money jumping from stimulus beneficiaries’ pockets straight to China and emerging market economies.
Steve Keen’s model does not look so smart to me. Unless it includes the effect of moral hazard on the next cycle (which it does not seem to), channelling help via debtors will just make matters worse in the not so long run. I know: “in the long run we’re all dead, yadda yadda”. I remember hearing the same thing in 2001.
If Keen outthinks Larry Summers, and Larry Summers is in office, God help us!
To be fair neither stimulus works if you don’t have a banking system and the assumption is that firms and consumers are not getting a stimulus which is not exactly true. All that agency debt buying, commercial paper buying and the tax rebate checks are really stimulus. I do however agree with Keen that continued support to banks won’t have any long term effect for all the reasons he explained. Keen does not touch on the moral hazard implications of bailing out firms who actually took on too much debt and expanded too fast. My opinion is that the stimulus should have been directed to those who are neither debtor nor creditor. Probably the best way to do that it is to let bad firms collapse and the good ones get there assets for next to nothing.
“Steve Keen’s model does not look so smart to me. Unless it includes the effect of moral hazard on the next cycle (which it does not seem to)”
So keen is not an austrian – so what? The effect of moral hazard cannot be modeled objectively and in any case unless things like future spending pattern changes due to demographics or perhaps energy price inflation are taken into account, such modeling would be impossible.
Also, keen is a professional economist, although an unusual one, and if he engages in accusing summers of being a criminal it will lessen the credibility of the important content his message carries, amongst those whom we most need to listen to what he is saying.
Keen’s analysis on this point is quite incorrect.
Obama was talking about a multiplier in the sense of a “capital multiplier”, which is the inverse of required capital ratios. This is a reference to the effect of Treasury TARP injections. It has nothing to do with the central bank “reserve multiplier”, which Keen has correctly criticized as an erroneous neoclassical economic concept, but incorrectly used in the Obama/Summers context.
Moreover, the capital multiplier must be judged in the context of the counterfactual. The counterfactual is that the bank’s remained undercapitalized, and in that sense prone to going into collapsing credit rather than growing or even renewing it. So the reference to another $ 8 to $ 10 trillion in loans is absolute nonsense.
(It is also pure nonsense in the sense of the erroneous central bank reserve multiplier concept, but that is a separate story, and one on which Keen is quite correct. But he is incorrect here in applying it to the Obama/Summers context.)
You may be correct, but that suggests the President or his speech-writer did not understand what you understand. Mr. Keen appears to be quoting the President (stars appended): “the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of **loans** to families and businesses.”
Separately, there seems an odd harmony between Mr. Keen’s argument in favor of real granular debt relief and the infamous comment for which Mr. Bernanke became known as Helicopter Ben. Did Bernanke fail to follow his own instincts (and Keen’s) when he led the Fed to give ‘free money’ to the banks instead of to households?
The President’s statement is quite correct relative to the counterfactual, which was a scenario of even greater bank deleveraging (i.e. negative loan growth) in the face of inadequate capital levels. The household versus banks argument is an important one, but separate. I have less patience for that argument when the premise for it is false.
Following up on the helpful comments from JKH, I just wanted to clarify some other hazy details from the post.
TARP or the Troubled Asset Relief Program is a Bush Administration program to purchase or insure up to $700 billion in troubled assets. Granted, around $350 billion was still available when Obama came into office, but its still unfair to pin the entire wall street bailout fiasco on the Obama Administration.
The $787 billion stimulus or recovery package, officially called the American Recovery and Reinvestment Act (ARRA) is an Obama administration program including federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including the energy sector. No bank stimulus included. In many ways, it is a “people’s bailout.”
Excellent analysis of Bush’s disastrous TARP program here:
http://www.vanityfair.com/politics/features/2009/10/bailout200910
People fail (or selectively choose) to remember that Obama was a Senator, and voted for TARP, against the wishes of the electorate at large…for all intents and purposes, its as much his bailout as it is Bush’s.
The “people’s bailout” primarily went to firms, both foreign and domestic, in cushy no-bid contracts, tax cuts for the upper crust, and “throw away” money bringing demand artificially forward for things like C4L, first-time home buyer stimuli, private airports, and Harley Davidson tax credits. Yeah, Harley Davidson got its own bailout thrown in there for motorcycle manufacturers. Wish my company had the lobbyists to pull a move like that.
A much better solution would have been to give the money to individual citizens that were actually working in 2007/2008 (although may be unemployed today) to “shore up” their “credit facilities.” Allow people to get a chunk of money for debt paydowns, direct consumption, and the biggest chunk for direct investment.
You may not have seen such a ridiculous crash and ramp-up on the stock market if retail investors were involved, instead of the GSs of the world manipulating liquidity and equity prices.
The battle of the model’s continue though those with close ties to political power are declared the winners.
Much of the assumption has been that Americans have wanted to build up debt over the past couple of decades. Speaking as a middle-aged, probably upper middle class-income(don’t know the boundaries these days but we pay AMT) peerson with four kids, I can assure you that much of our family debt comes from the costs of putting mutiple kids through college. Only a third or so of the total college debt is in the form of student loans, so the statisticians won’t know that.
With our third kid just strarting, we have learned a lot of lessons on how to get a good college education much cheaper than when we sent our first one through. That is allowing us to borrow less ast this time.
I can assure you that once the college thing is done, they can offer us all the loans that they want and we won’t be takers. Instead, we will be doing more saving and paying off loans. Since we are at the tail end of the baby boom, I assume that many other people are already at that point and won’t want to borrow ever again.
Personally, I have felt that they should halve the corporate income tax for an extended period to encourage offshore cash to come back which should benefit hiring while pushing the capital gains tax up 5% or so to encourage people to hold the stocks of those companies longer and compensate for the corporate tax reduction.
Government stimulus through infrastructure takes a while to get going, but much of the government stimulus money should still be put there since it is a long-term investment and most of the money goes right back into local economies (sewers don’t have many components made in the Far East) which will help to support employment which will probably lag as badly as it did over the past decade.
And the whole “Death Tax” thing has been nonsensical, as bad as the health care “Death Panels” because the real issue is that there are embedded untaxed capital gains in an estate. It should be handled with an even hand by setting some reasonably large non-taxable deduction ($500k – $1M), passing cash equivalents on tax free, and then dividing the remaining estate value in two as a relatively arbitrary division between cost basis and untaxed capital gains and taxing the remaining half at the current capital gains rate. Very simple and equitable which should allow for more productive use of capital in the system.
I appreciate the point of much of your post, except that the reduction in corporate taxes will result in hiring. In addition to unemployment contributing to a reduction in demand, as many have pointed our consumer spending is down, and saving is on an upward trend. Businesses are not going to hire unless there is sufficient demand for their product. I just don’t see a top down solution as being viable. Until demand increases, unemployment is going to be a big problem, and any recovery temporary.
It will be difficult to see much gain from your cutting corporate taxes. Half of the Fortune 500 already pay nothing in income taxes. You have been sold a bill of goods if you think America’s corporate taxes are high.
Second, why treat inheritance any different than income? When a person dies, if they have an estate, that estate is handed over to someone else. That someone else has just received income, just as if they had earned income or income from stock sale or dividends. Why give them special treatment because the deceased wanted to?
Generous loans from the taxpayers to the taxpayers (interest free in time of crisis). A solution that does not distort the economy. A solution that is politically acceptable. A solution that is not easily corrupted by Washington insiders. IRS knows how much taxes you have paid in the last some years. IRS knows how to get the loans back. IRS can start the program fast. A solution that can be scaled up or down, can be scaled quickly, scaled to whatever size is needed.
At the onset of the crisis any tax payer should have been able to borrow money interest free from the federal government. Amount limited to taxes paid over the last three years. Repay at a rate of 10%/year. Who needs a “multiplier” for a politically neutral program that can be scaled up fast?
I think I have a better idea. Fannie Mae and Freddie Mac should take over all owner occupied home mortgages at their current value (Perhaps some premium would be OK). Those mortgages would be reset to 3% interest.
The advantages here are 1) Tens of millions of homeowners would see their mortgage payments reduced dramatically, having the same effect as a massive tax cut, mostly for the middle class. 2) Money from paying off the mortgages would go to the lenders, paying off their toxic assets. 3) Foreclosures would end almost immediately. 4) Housing values would stop declining. 5) Homeowners would see the value of their single largest investment stabilize, and they would have a better chance of paying it off. 6) As the mortgages are paid off, the government would pay back the principle (to itself) and pocket the 3% interest as profit, hopefully to pay down debt.
Many of us have been pointing out since the TARP last year that bank bailouts were funneling money into the least productive area of the economy at the expense of all other sectors. We noted both the contraction in bank lending and later that high debt levels were causing individuals to save more and avoid taking on more debt.
So I can’t see what there is to be surprised here or that Keen has done something terribly new. As for Summers and Geithner, their bubbles in stocks and commodities will last about as long as they are able to keep pumping money into them. My problem with Keen modeling is not just that it doesn’t factor in moral hazard but all the other externalities which the economy may be subjected to. This is a problem with all such long time lines going out 5, 10, 30 years. I am not sure what will happen next year, how it being an election year will play out in terms of what is or isn’t done with the economy. I can make an educated guess, based on past experience, that it won’t be sufficient or well directed enough to make much of a difference or last much beyond the election. And taking that into account I can forecast a likely depression in 2011, but this is only 24 months out and there are lots of caveats even here. Keen’s projections go out much further and I don’t think are justifiable. His take home message remains a good one however because it takes only common sense. Money spent to aid the real economy is better spent than money going to the paper economy and its bubbles.
Finally! Some of this stuff is sticking and turning into prescience.
I’m going to see if I can get both feet in my mouth now.
Since a very large amount of debt is being retired each month and a large amount is being written off each month, I doubt that Summers is much in error.
You’re fooling yourself if you think for a second that the rich care about you.
That we should still think moral hazard is really a concern of these people is laughable.
The other problem is the that for the first time the President of the United States has not shown he’s legally President. Not one shred of proof that Obama was born the U.S., him using 100’s of fake social security numbers and him spending $916 million in legal fees hiding his past suggests we have been put under the rule of a foreigner. We need to get Republicans back in office to clean up this mess. It’s 2010 or bust. Maybe BO can be impeached in time.
Calling Mothership Zeta… Please beam down evidence of this claim… Over.
Remember, the whole TARP program began to take effect during the last three months of Bush’s administration.
Bush is Texan by way of Connecticut.
No, Obama won’t be impeached. We only impeach presidents for having consensual sex in the Oval Office, not for serious crimes, like starting wars under false pretenses or shredding the Constitution.
President Obama was born in Hawaii. There is a real birth certificate which is a matter of public record, meaning you yourself can actually go and see it.
AND, Hawaii was a state in the Union at the time of his birth.
Usually, a birth certificate is considered more than “not a shred of proof.”
Please return to planet earth. Your country needs you.
No, dude, we don’t need him.
Crazies not welcome. We’re struggling enough with the loonies we already have. Have you seen video of the teabaggers? We don’t need more of these geniuses.
The ” multiplier effect ” can be translated into ” gigantic theft ” . It’s called ” fractional banking “. A Goldsmith has one bar of gold in the safe . He loans out 10 I.O.U.’s conning people into thinking he has 10 bars in the safe .The “multiplier effect ” is a blatant scam to rob the people , loaning something they don’t have , and than having the gaul to charge interest on it . People should refuse to pay back loans and credit card debts until the Fed and Bank of America are forced by Congress to come clean. Support Ron Paul’s Bill to audit the Fed .Then end the Fed and issue currency directly to the American People . Obama , Bernanke , Bush , Greenspan, and the rest are nothing but Ivy League crooks .
You are in need of some very basic understanding of banking. A bank does not hold bars of gold. They have currency. When they make a loan, they require collateral. They have traded their currency for a securitized interest in an asset. That asset, and the security they hold have a value. The bank can borrow money against that security interest, since it has value. Once they borrow the money against the security interest, they can loan that money out and get a security interest in another asset.
You have a child’s understanding of banking. Please, catch up, we need your to contribute to society.
ANY “MULTIPLIER EFFECT” WOULD INDEED BE LOANS/DEBT.
And a bailout to a bank would NOT be “worth” up to 8 times what a bailout for individuals/small businesses would be.
Why? Because money is worth MORE the SOONER you get it.
A loan costs WAY MORE for an individual over time. Remember interest? And how it takes up to 30 years to pay off a credit card if you only pay the minimu? Or how a 30+year mortage doubles or triples the actual cost of a house???
This entire “recovery” BS is driving me insane. If the majority of Americans CANNOT PAY THEIR BILLS TO COVER THE BASIC NEEDS OF FOOD, SHELTER, etc. do you REALLY think they will be able to take on loans to go buy more crap they don’t need???
If individuals were given a substantial bailout, while it would absolutely contribute to inflation, it would at least help stablize a catastrophe. As it is, the country is in crisis, but the media prefer to focus on the upper half/banks and investors, as opposed to the WORKING CLASS!@!)#$&@p*#$y@#)(*$&!!!!!!!!!!!!!!!!!!!!
For the love of all that makes sense, let’s PLEASE help the middle class for ONCE!!!
BOY, DO I AGREE WITH YOU….IF THE MIDDLE CLASS GOES, EVERYTHING AND EVERYBODY GOES…HOW CAN WE REBUILD THIS COUNTRY IF WE HAVE NO MONEY WHEN ARE THE LAW MAKERS AND WALL STREET UNDERSTAND THIS…NOTHING WILL EVER GET BETTER IN THIS COUNTRY UNTIL A HUMAN BEING CAN LIVE OFF OF MIN. WAGE ….AND I MEAN ENOUGH FOR FOOD, SHELTER AND MEDS…BUT IT WILL NOT CHANGE…SAD BUT TRUE….
The only reason a middle class bailout might contribute to inflation is due to speculators.
During the recent catastrophe, the middle class lost around $3 trillion in assets. Prior to the collapse of that bubble, inflation was moderate.
Why would simply replacing the lost wealth contribute to inflation? Isn’t the cause of inflation an increase of money? Since you’re not increasing money beyond what it was pre-collapse levels, why would that absolutely cause inflation beyond pre-collapse levels?
I suppose that some of those beltway insiders may think that Larry Summers is a genius but then they think that Gillian Geithner is pretty sharp too. No…..those of us that have been around long enough don’t think Summers is a genius but we do think he is fat.
Fat Larry (as we call him at work) is the same Fat Larry who voted against regulating hedge funds during the Clinton administration. Fat Larry loves Credit Default Swaps and a host of risky derivatives. Fat Larry helped cause the biggest financial debacle since the Great Depression. Fat Larry was a genius in lining his and his cronies pockets with your money but that’s where his genius ends.
When using the multiplier effect it has to be applied to amount left over from banks plugging gaping holes in their balance sheets and the willingness of a debtor to take on debt to stimulate the economy. Consumer debt is dropping but my bet is that it’s more due to bankruptcy filings and walk-aways then people doing any voluntary reduction. Not when banks are hitting the debtors with nose bleed interest rates and fees.
The question should have been would stimulus money have been better spent on multipliers like underwriting of a new economic engine with buildouts infrastructure like broadband, reduction in health care costs by streamlining the system instead of paying off credit default swaps for AIG and many of the other banks who bet the wrong way.
It seems to that if they used the money to have a controlled implosion of the TBTF banks who played the derivative game, then raised up Glass Steagull to prevent repeats. The assets of the 118 Banks that own 77% of the nations loans would most likely have found their way into bankruptcy court and sold for pennies on the dollar which in and of itself would have hastened the deleveraging of the US consumer by bringing housing prices in line with reduced income and eliminating systemic risk by allowing banks to bid on the assets at 15 cents on the dollar as long as the reduced the loan amount by 50% if they held it and 60% for a cash pay out.
That would have let thousands of smaller banks raise their capital level without lying on their financial statements to get the stock market running again while cutting consumer debt to shreds all at the expense of the people who are currently laughing at the stupidity of the American people. That would have offset the loss of wealth from the market and housing prices. Not all of it, but enough that people would at least have spare cash at the end of the month to save and consume. That would have meant a recession but not nearly as severe and without and possibility of us slipping into a major depression.
As far as moral hazard, it’ still not to late to let the people at GoldMan Sachs and other fine institutions like that spend some quality time in the for-profit prison system they helped finance for securities fraud and market manipualtion.
Instead they are paying out an average of 700G a employee in bonuses. That’s goes way beyond the pale. I have big problems with the way Obama handled this. All he needed to do was to pull Volcker in who would have happily told him that Geithener and Summers were full of it.
But he didn’t so now he owns it as a US citizen…
Good article. Thanks for bringing this to our attention.
Great point of view.
In keeping with getting the money to the people,.why not have mandated to the banks that a certain amount of money be allocated to pay off credit card debt at %6 up to a ten year period? Treat the debt like a housing loan.
The point of the bailout was to stop the banks from going bankrupt, Keen deliberately misrepresents to point. This is called “bullshit”.
This is not a comment on whether it is better to give the money to banks or people.
So … the emperor has no clothes.
http://www.vanityfair.com/politics/features/2009/10/bailout200910
An very different new economic analysis can be found and downloaded without charge at http://www.aesopinstitute.org
It is contained in the paper describing a Human Investment Tax Credit Program.
This is designed to generate up to 6 million jobs and create up to 4 million new entrepreneurs in the U.S.
An earlier version was reflected to a small degree in the Jobs Tax Credit Act of 1977. That generated almost a million jobs, 20% of all jobs created just afterwards.
Only a few of the suggested incentives were included.
The new analysis expands on the earlier work, which can also be found through a link on the site.
Revolutionary new energy breakthroughs are also outlined in articles on that site. They could potentially provide a major boost to the global economy.
Give a trillion dollars to consumer with the stipulation that they must pay off dept with it. For consumers who have no dept, give them time to buy and create dept knowing that they will receive a stimulus check -a big one. The consumers pay off debt thereby improving their financial position to and willingness and ability to take on additional future debt; and the banks receive these payments and can lend these additional dollars with all of the aforementioned benefits of the multiplier effect. The difference? Well, either way the government has borrowed to fund the proposal but now consumers have been allowed to reduce their dept.
Obama did not get the best bang for his buck only if we assume that helping average Americans was his real motive. If his real motive was re-election, and those banks again give him the bulk of their campaign contributions like last time as a result of him looking out for them this year, he will have gotten a huge return. Too bad it was our money and not his though.
Yes it sounds like a great idea. just give the money to the people, but it fails on so many levels.
I’m a progressive so I am supposed to be furious that we bailed out the banks. I am still furious we got in the situation that we needed to bail out the banks.
This was a bitter pill to swallow for sure, but there were no good options and this one just made the most sense.
If we let banks fail it would have caused massive damage to the world economy, businesses and consumers that did business with these banks. On top of that “WE WOULD HAVE HAD TO PAY UP BECAUSE OF FDIC INSURANCE ANYWAY”.
So lets see… we give the money to the people, the credit markets crash because of failing banks, and then we have to pay back lost monies because of FDIC, and we are still in the same situation we’re in now… only worse.
At least by bailing out the banks, we have stabalized the credit markets, recieved common stock in the banks and have a shot at getting a return on our investment. Several banks have already paid back the TARP funds, and bank stocks have risen which the tax payers own as a result of the bail-outs.
We did a similar thing during the Savings & loan scandal and ended up making a profit!
I think this makes alot more sense than just giving the money to the people with no hope of any return, and no hope helping the credit markets.
Everyone should study the Graham, Leech, Bliley act which is directly responsible for getting us into this mess by creating the companies that have become ” to big to fail “. Hopefully we’ll be smart enough to re-establish some of the regulations that were elimated as a result of that bill.
One thing missing from this whole debate is taxes.
Eliminate the cap on FICA and the SS problem goes away.
Next, income tax. Return to a 50% (or higher) tax on income over 5 million. Sounds high right? If you are a business owner making 20 million in profit, are you going to take that other 15 million and pay 50% tax? Not likely. You’ll most likely keep the money in the business and invest it in expansion and job creation.
Now what happens if the tax is 20% or lower? A lot of it gets taken out and leaves the business.
If you do some homework and track economic stability and sustained growth – that means no bubbles – you’ll find they match periods of “high” top tax rates. Not what we are told by the corporate media…
Yeah, really, enough is enough. We don’t need no more road or public schools. Public hospitals? Who cares… Government should really stop paying anything with our tax money. It only makes sense… Heck, we don’t even need no government. We are all so loving and kind, no one needs policemen to police back guys, or emergency rooms for we believe only the value of after life, not this one that is overrun by big government-good-for-no-nothing.
And as a follow up, have the government borrow another trillion dollars with additional payouts directly to households with the stipulation that it must be spent on solar panels that must be manufactured in the United States, and must be installed on each residence). Imagine the return on investment.
Businesses, seeing this massive surge in future DEMAND would immediately begin mass production causing solar panel prices to plummet. Each family, apartment owner or small business would become an energy producer (real capitalism with many producers); unemployment would fall because of the required resources need to produce and install these panels; and the demand for foreign energy would probably be halved in five years. Now thats an energy policy that makes sense to me.
To ChicagoBigfoot- I agree. But giving another trillion dollars relative to and based opon our current debt would just be like implementation of the second half of the stimulus package- the first trillion to banks to prevent a credit collapse, the second to reduce consumer dept and generate further demand.
Remember, the first big wave of TARP money began on Bush’s watch.
“In the last months of the Bush administration, the Treasury Department frantically pumped more than a quarter of a trillion dollars into the financial system—without bothering to track how it was spent. But Donald L. Barlett and James B. Steele dug into the records, following bailout money to banks that prey on consumers, banks that cater to the rich, and banks that never wanted it in the first place.”
http://www.vanityfair.com/politics/features/2009/10/bailout200910
Massive lending to banks and other financial institution was necessary to stop a financial panic. The original plan to purchase the so-called toxic assets would have been close to a give away, but the government was smart enough not to do that. Instead it injected capital via equity investment. In addition virtually all the programs that have lent money to or invested in banks are Bush administration programs that have been continued by the Obama administration.
On the other hand ARRA (the stimulus) and earlier acts (including the ESSA (TARP) bill) included over $550 billion that was given directly to consumers in the form of tax reductions, unemployment benefits and health insurance subsidies. A great deal of this money, as opposed to infrastructure spending, has already been disbursed. This is money injected into the economy that has prevented a collapse in consumer spending despite the contraction in consumer borrowing. I personally collected (and spent) $24,500 in unemployment benefits that would not have been available without Federal legislative action.
As to the idea you modeled to put $100 billion in the bank accounts of debtor firms, the Bush and Obama administrations have done that as well. My brother, unemployed for many months starts a new government job tomorrow funded by ARRA, making ARRA authorized loans to private, non-bank firms. Just in his small program about $5 billion in lending is authorized. And don’t forget the government put $50 billion directly into GM in exchange for 61% of the company and $14 billion into Chrysler for a much smaller share. I’m sure the total amount of funds directly injected into non-bank firms will far exceed $100 billion.
As to consumers announcing they have learned their lesson and will be net savers from here on, we said the same things in each of the last four recessions and once the recovery was underway consumer spending resumed its climb.
The key is that all of these spending measures, especially the
measures directed at helping the most vulnerable in our country were necessary. But none of these, it seems, will provide the real long term CHANGE that our president has discussed. Real change means real investment in true alternatives. Education, healthcare, community services, retirement investment, clean, residentially owned solar power and the associated dependence on low cost electricity as an alternative to oil, gas, coal, (note global warming) is the only true freely competitive alternative. The current solar energy technology and the internet are the means to an intelligent, healthy, and wealthy future for this nation and others who are willing to step away from past paradigms.
If the bailout money had gone to “the people” instead of the banks, it would have ended up in the banks’ coffers anyway. That is because the problem started when “the people” bought houses that they couldn’t afford in the first place, and that dropped in value to below the amount of the loans on their houses. If the banks foreclose on those properties, most of those people just walk away from the houses they could not afford in the first place with nothing worse than damage to their credit. But if the taxpayers had helped people stay in those houses, all that money would just have gone to pay the mortgages on those houses. Instead, banks got a capital infusion that enabled them to lend the money more efficiently. The net result was more lending to people and businesses who could actually afford to pay back their loans instead of artificially propping up mortgages that never made economic sense in the first place.
The problem is that the banks WON’T use the money they got from the Treasury or Fed (except to lock in returns on things like Australian bonds – get free or cheap money and make 5%, not a bad deal).
NOBODY id forcing banks to lend money, NOBODY is forcing banks to rewrite mortgages at affordable rates. They COULD have rewritten EVERY owner occcupied mortgage in the country at 5% – locked in returns for banks, let people stay in houses and avoided thosands of foreclosures…… but NO>>>>> banks are making more money on fees, could care less about foreclosures because their losses are covered…… there’s absolutely NO incentive to do the ‘right thing’.
Meanwhile small businesses are failing because they can’t borrow working capital.
We SHOULD have followed the Sweedish model – NATIONALIZE the banks, throw out the management that made the mess and save the borrowers that were getting screwed…. homeowners and businesses… you let the speculators implode – risk/reward is the capitalist way, right?
Sweden recovered and the government MADE MONEY after reprivatizing banks.
We’re rewarding the bankers and Wall Street types that created this mess.
Yes, Mr. Keen is right expresing a valid economic theory with many proven applications. A economic recovery plan by definition would only work if the money gets to the end-user(the AMerican people), especially those who were hurt by the recession-the many who have no purchasing power now. A valid recovery plan has to increase the purchasing power of all Americans. The one used -only gave money to large banks, so it increased the purchasing power of institutions that already had enormous purchaing power. A effective recovery plan has get people out of extreme debit, put stregent caps on interest rates on all loans and other consumer protection regulations. Also, it has to give money to Americans so they have money to buy things. The consumers themselves chose what goods and services are important to them and the ones they do not chose DIE (go out of business). This is capitalism my friends. Summers and the banks want FEUDalism. Money for rich people. It’s a huge problem!!!
How naive.
Unfortunately, with $US+60 trillion [conservative estimate] invested in CDS alone, an aggressive bailout of homeowners and consumers (call it a recovery driven by employment) would have crashed the values of CDS worldwide which go up only on widespread mortgage default. Inflaming a critical “teachable” moment, the Chinese would have gone ballistic, Japan and EU, crushed, and US banks would have crashed into receivership with consumer runs on the banks. Our US currency would be valued to the Canadian loonie by now, and we would be facing a winter of fuel oil crises with people freezing to death in the Northeast and no money for gasoline or electricity.
The problem is still price support for CDS without foreclosures. Turning this gigantic sea-size economic ship around will take another two to three years. All the while, foreclosures will continue with unemployment unabated, and US mortality rate climbing into a moral crisis of hundreds of thousands. And that, death from poverty, suicide and un-insurance will provide the key impetus for “bank reform” driven by consumer debt which is starting to go down and more new jobs net against job losses. This is a depression, not a great depression, but a depression nonetheless. And upon rising out of it in 2012 will be the challenge of a deflationary spiral. We are all supply-siders now.
“The Home Loan, Ownership and Recovery Executive Order and Congressional ACT of 2009”
For reference see:
http://mortgagecrisissolutions.blogspot.com/
Dear Mr. President, Members of Congress and
Citizens of the United States of America,
This no longer a time for partial measures.
This is now a time for complete solutions.
We can no longer help just some of the people who are in housing and economic difficulties and distress. We must now help all of the people, even those who do not need our help, in the hope that they can and will better help those that cannot help themselves.
We, all citizens of the United States of America, are most concerned and want to provide for our neighbors and families, for and because we are all families and neighbors of one another.
I therefore respectfully request that you authorize this proposed Presidential Executive Order and subsequently enact this Congressional Legislative ACT, “The Home Loan, Ownership and Recovery Executive Order and Congressional ACT of 2009”, to readily and immediately support our inalienable right to shelter, compassion and opportunity of economic equality for every man, woman and child in America.
Thank you and sincerely,
Tony Horwath
Dear Citizens of the United States of America,
Members of Congress,
The House of Representatives and the Senate;
Treasury Secretary Tim Geithner,
John M. Reich, Director of the Office of Thrift Supervision (OTS),
Shaun Donovan, Secretary of the Department of Housing and Urban Development (HUD,
Sheila C. Bair, Chairwoman of the Federal Deposit Insurance Corporation (FDIC),
Members of the Executive Branch,
the Obama administration and
President Barak Obama,
The enactment and administration of the Economic Stimulus Program (ESP), the Financial Stability Plan (FSP / TARP II), and the Homeowner Affordability and Stability Plan (HASP) have not been and ARE NOW NOT enough to avert a housing and economic catastrophe.
Nevertheless, please administer these programs and plans for the limited effect they offer.
However, we need:
BOTH a “top down” solution for financial institutions, real estate lenders and “Wall Street” as being worked by the Congress and the Administration; AND we need a “BOTTOM UP” solution for homeowners, real estate borrowers and “Main Street” as I propose to you below with “The Home Loan, Ownership and Recovery Executive Order and Congressional ACT of 2009”.
By Presidential executive order and Congressional legislative act, please authorize the following orders and pass the following legislation with its components and respectfully proposed as:
“The Home Loan, Ownership and Recovery Executive Order and Congressional ACT of 2009”.
(The Homes Order and Act)
1) Whereby all existing home loan borrowers may defer the principal and interest owed on their existing mortgage to the principal balance for a period of up to five (5) years. At any time within the five (5) years the borrower (mortgagor) and the lender (mortgagee) by mutual agreement may modify the existing terms and conditions of the loan, including recasting the loan to a longer term; and the borrower may re-start their loan payments and be in “good standing”.
2) Whereby and until further notice:
a) all existing home loans and new home loans will have an interest rate of 1% and an amortization period of no less than 30 years. And such terms and condition shall be instituted without any further qualification of the borrower by the lender in the case of an existing home loan.
Any existing home loan borrower and any buyer of a home, may at their election hereby immediately avail themselves of this term and condition.
All existing home loans and new home loans are included in the provisions of this Executive Order and subsequent Act of Congress and the lender shall immediately and forthwith issue these loans, loan modifications and corresponding mortgage statements to this effect to all home loan borrowers.
b) Additionally, any state laws, county and municipal ordinances prohibiting subdivision and condominium conversion of existing multi-family properties of 2 or more units are hereby suspended until further notice hereby and therefore allowing the owners of multi-family properties at their election, to sell the dwelling units to the existing residents or should the existing resident decline ownership then sell the units to another buyer.
c) per this Executive Order and Congressional Act the existing residents of a multi-family property of 2 or more units or other buyers of these units may purchase their dwelling unit as may be offered for sale by the owner and do so with a mortgage payment from a lender with a 1% interest rate and amortization period of no less than 30 years and do so at the existing resident’s or buyer’s election.
3) Whereby this Executive Order and Act of Congress is to provide home loans, ownership, recovery, stimulate and create economic stability in the United States of America within 90 days.
I am available for questions, answers and discussions.
Please call me at 650-799-1001 or email me at tonyhorwath@gmail.com and I can talk with you about the details of “The Home Loan, Ownership and Recovery Executive Order and Congressional Act of 2009”.
Please forward this proposal to the good people of:
The Wall Street Journal, CNN Money
The staff of the Obama Administration
The speaker of the House of Representatives
The Senate majority leader
The House and Senate Finance and Banking Committee
Treasury Secretary Timothy Geithner
John M. Reich, Director of the Office of Thrift Supervision (OTS)
Shaun Donovan, Secretary of the Department of Housing and Urban Development(HUD)
Sheila C. Bair, Chairwoman of the Federal Deposit Insurance Corporation (FDIC)
The Honorable Barak Obama, President.
And any members of the US Congress, politicians, agency administrators and lobbyists who could make a difference by supporting and enacting legislation, authorizing and enabling the The Home Loan, Ownership and Recovery Executive Order and Congressional ACT of 2009:
I urge ALL Citizens of the United States of America to support a Home Loan, Ownership and Recovery Executive Order and Congressional ACT of 2009; so we may all save and affordably keep our homes, economy and American way of life and to do so NOW!
Please see reference item:
“America’s Emptiest Cities”
By Forbes and Zack O’Malley Greenburg, 02.12.09, 11:20 AM EST
or copy and paste the hotlink below.
http://www.forbes.com/2009/02/12/cities-ten-top-lifestyle-real-estate_0212_cities.html
Thank you and sincerely,
Tony
Tony Horwath, CEO
Chief Executive Officer
TonyHorwath@gmail.com
O ~ )!(
Sun Water Food.
Solar Terrestrial Reformation Systems and Technologies for homes, businesses and governments.
A division of California OptoElectronics Industries.
Palo Alto and Monterey County, California, USA.
650-799-1001 mobile direct
Obviously giving more money to the bankers who screwed up the economy was dumb. You don’t need to be an economist to understand that.
It’s equivalent to an employer firing all of the productive workers and giving raises to all the deadbeats.
The clearest, quickest way to jumpstart the economy would have been putting money in the hands of workers and consumers. Some of that money would have been used to pay off debt, which is a good thing, but a lot would have been used to buy things. Most people, including myself, have been going without things I normally wouldn’t go without because of the recession.
A sizable tax break for small businesses would have had immediate economic boost too. More people would be hired, hours not cut and those businesses would purchase things.
But giving the money to the bankers? Please, just like the wars in Iraq and Afghanistan serve no purpose other than to line the pockets of defense contractors, the so-called “bailout” is cash and carry government at its worst. Well, actually the wars are probably worst since people are actually dying so corporations can rob the treasury.
If you’re surprised by any of this, you haven’t been reading your history books. This is what our government does. Its sole purpose is to keep wealthy people wealthy and the rest of us just happy enough that we don’t overthrow the government. They’ll distract us with war, give us the feeble right-to-vote and blow sunshine up our asses about how taxcuts for the rich and outright dumping money into the wealthiest of the wealthy’s bank account is great for everyone. Trickle down economics. Uh huh.
Enough of us fall for it and the rest don’t want to risk a real revolution because we know what will happen. If we succeed we’ll either end up dead or in prison. The federal government has a long history of violently crushing uprisings. Shays’ Rebellion was one of many outbursts that lead to the Philadelphia Convention and calls by the Elite for a much stronger central government. The result is our much heralded Constitution that certainly does more to protect the wealthy than the average Joe or Jane.
Yes. Once again, this blog is playing “Bail Out Arithmetic” when we should be thinking about the TRANSFORMATION to a NEW POLITICAL ECONOMY. I am sure that exercises such as these no longer have any value.
The IMMEDIATE SUBSIDIZATION of citizens who can no longer bear the hardship of this failed system and the IMMEDIATE investment, production and implementation of NEW
TECHNOLOGIES that will drive US into a very prosperous, democratic and humane future: A MODEL FOR THE REST OF THE WORLD.
Keen’s views coincide exactly with mine.
One of the confirming variables is unemployment transitioning from a lagging indicator to a leading indicator, as we are starting to witness right now….
I don’t know what Summers, Geithner and Bernanke are doing up in D C, when they have an appointment with me tomorrow to detail my car……
WHY I OTTA……!
Best regards,
Econolicious
Inside the beltway and among mainstream economists, Larry Summers has the reputation of being a genius…
Huh, when did that happen?
If the the money had gone to theoretical bankers who theoretically put the money back into lending then Obama’s plan would have given some life to the economy and the multiplier effect might have been real. However the bankers simply used the money to hoard so they could bolster their own horribly mismanaged books. Who knew bankers would take the president’s gift of rescue money and use it selfishly for their own survival and absolutely nobody else’s benefit? Now, who wants their undeserved bank bonus?
What happened was corrupt politicians helping corrupt bankers raid the US treasury. Why is it so hard for the mainstream press to speak the truth?
Let the Fed buy existing mortgages (first trust only) up to 500K each, reduce the debt on each to 80% of each home’s current market value, reset payments based on 30 year amortization, and have IRS waive any tax on debt forgivemess resulting from this. Mortgages are then repackaged as a safer product and fed back into the private market. If the taxpayer is going to be on the hook, let it be to clean up the corruption and greed caused by the financial sector, and then let the government recover as much as they can from that industry. This is fairer to the middle class, and cleans up a lot of balance sheets. Let the banks sort out what is left, and get back to what banks are supposed to be for.
The “multiplier effect” is just another term for trickle down economics, and we know how well that worked. I am not an economist, neither is Obama, but I can clearly see what he can’t or doesn’t want to see—the only way to stimulate our consumer-driver economy is to put money in people’s pockets where it will be spent. Giving money to the corrupt, insolvent banks, is like throwing it into a black hole.
RE: Reduction in consumer spending long term. My grandparents and most other adults who lived thru the great depression of the 1930s spent the rest of their lives living frugally. My parents who were children during the depression were much less frugal. Babyboomers like me who grew up in the land of plenty (or so we thought) have gone into debt and spent freely. We have learned a lesson. So if human nature remains unchanged, it will take another generation before consumers start spending freely again.
TARP really means Taxpayers Are Really Pissed
Vanity Fair had a great article on Paulson’s giveaway to the banks. What a boondoggle for us.
Whether Keen is correct or not, the fact is that the banks loaded with stimulus money are not lending!
The ‘multiplier’ only works when it multiplies and what has multiplied is not loans but gimmicks. Gimmicks like increase in loan costs and limitations like reduction in allowed credit and a days wait for credit to cashed checks.
Interesting on how these are ‘industry wide’!
And the banks are banking on the increased rates they will be applying to the outstanding debt, just as soon as the ‘stimulus’ putts out.
Hmm… I wrote stuff like that last year, that the government should aid in the reduction of debts, not propping up bank holding companies. RTC 2, vouchers to consumers for debt repayment, etc.
Good article.
Jon Stewart made just this argument, albeit in less detail, on the Daily Show last Fall in discussing the mortgage crisis. Perhaps we could draft him for Treasury Secretary.
Anyone with any common sense knows that money trickles UP much faster than it trickles down.
The bank bailout funds had precisely zero to do with stimulating the economy and everything to do with preventing the total collapse of the banking system. The TARP (Troubled Asset Relief Program) was developed by the Treasury to prevent banks from failing.. The Bush Admin created the program, and Congress (including both Sens. Obama and McCain) passed it (Sept of 2008) in such an enormous rush that many problems were not dealt with, such as putting some measure of accountability on the banks. As such, many of the people did not and currently do not approve of the way the crisis was handled. Much has been learned as a result, and should such a thing happen again, it will probably be handled differently.
The stimulus package, American Recovery and Relief Act (Feb 2009), was Obama’s first piece of legislation as President and was designed to pump capital directly into the economy, not via banks and loans, through various methods such as tax cuts, propping-up of state and local governments to both save jobs such as teachers and police officers that were on the chopping block due to the states’ budget crises, lengthen unemployment benefits to individuals out of work, and create jobs by funding infrastructure programs.
To equate the stimulus with the bank bailout is disingenuous at best, as they are not the same program, did not have the same impetus, and do not have the same goals or outcomes. In short, it seems as though Keen, who has claimed to out-think Larry Summers, has, far from out-thinking anyone, actually confused the two drastically different programs for one another.
The merits of either program are debatable, but they are NOT interchangeable.
“Babyboomers like me who grew up in the land of plenty (or so we thought) have gone into debt and spent freely. We have learned a lesson. So if human nature remains unchanged, it will take another generation before consumers start spending freely again.”
Human nature has not choice but to change because Babyboomers, like you, have screwed everything up for us so badly with your wanton spending, increasing debt-load, and lack of savings, that you have literally forced the mortgaging of the future for the rest of us. You all were in such a hurry to earn more money than you possibly could that you championed the deregulation and privatization of every industry coming and going, resulting in ever increasing costs, stagnation of wages, loss of a huge portion of the manufacturing sector due to outsourcing, and and overall feeling of “I’ve got mine, screw you” greed.
Be proud of yourself. You managed to take the lessons that your parents and grandparents learned and toss them to the side in such a spoiled-brat way that your children and grandchildren get to clean up the mess, if we ever can. What we WON’T be able to do is live the same quality of life you did. The “me me me” attitude of your generation has effectively screwed everyone else, and for the first time in numerous generations, the next one won’t be better off than their parents.
> Times awastin’! While you are sitting on your fat ass, the country
> is going to Hell. We need to act now. We need to get money to consumers
> fast. Start with the unemployed and then those too poor to afford the
> subprime mortgages they bought and give them money to cover their
> premiums so that they can own and live in their houses.Give money to
> collges and universities to cover tuition. Then give everyone a thousand
> dollars a month for sppending. This will take us out of the doldrums and
> put us back in business with full employment and a prosperous economy.
> The money is there. Trust me. Just write it off. In the meantime stop
> the Federa Resrve bank from issuing invstment money to banks and
> corporations. Ask Walter Williams, the columnist for the Intelligncer
> newspaper. He will tell you it is wrong and causes inflation. Check
> his commentary wednesday September 9th. What President Obama and
> Congress are doing will not stimulate the economy but cause inflation
> and make matters worse.
> As I have discovered and told you before: There are two economic
> systems each with their own money. There is too much mercantile
> investment money and not enough industrial consumer money, which is the
> fuel that runs the economy. There is a shortage of that fuel. We
> need more consumer dollars to give to the people to spend. There is
> plenty of money there to spend but you do not see it. Let me open your
> eyes and illuminate it. The industrial systeem is different from what
> you know and you will think it very strange. It is not like mercantile
> capitlism at all. In the industrial system the paycheck you get for
> working is a loan and has to be paid back by spending it all on Friday
> at the retail store. The money you get as wage or salary goes out and
> comes back and when it does your boss cancells the debt. Money in the
> industrial system does not circulate, it has a two step cycle.
> When people save and put part of their paycheck in the bank in their
> savings account which is later invested and the cycle is never completed
> and creates a credit the government can spend to stimulate the economy
> and when they pay income taxes the amount of money available for
> spending in consumption is reduced and this is the amount that can be
> spent and just written off. It is equal to the total wages paid out
> minus what is available for consumer spending. That is howmuch the
> government can in fact must spend. . Over the years it amounts to
> hundreds of trillions of dollars. This money is available to fuel the
> economy. However, non should be given to pay for anything like
> entitlements or budgets or pork. The fuel will pump up the economy and
> the economy will provide the money through normal channels. They will
> get their money through their ususual sources. And there will be plenty
> because the economy wll be prosperous once again.
> Now, if you don’t spend this money, it is like getting a loan from
> the bank and not paying it back. You are now in big trouble. In the
> mean time inflation has to be kept under control, maybe a temporary
> price freeze or a threat of a public audit if they should raise their
> prices. The consumer dollars fuel money should be fed to the people
> slowly with an eye on how fast the econmy is pmped up. At some point
> everyone could receive a thousand dollas a month to spend and when full
> economy becomes sufficient ease off to the current displacenent in
> available consumption..
> So, while you guys are taking your time, time is awastin’! You are
> like Nero fiddling away while Rome was burning. . Don’t be like Nero,
> hurry up and get some money out to the people. Right away! First make
> unemployment benefits payaments unlmited and possibly doubled. Then
> give money to those who bought sub-prime mortgages they could not afford
> to cover their premiums so that they can own and live in their houses.
> Then give money to colleges and universities to cover all tuition
> costs. Now you are ready to give everyone a thousand dollars a month to
> spend in consumption. This should stimulate the economy. OKAY ? and
> don’t be like Nero and fiddle while rome burns.
>
> Charles H. Seitz
> 628 topsfield road
> Hatboro, Pa 19040-4513
> (215) 675-5524
> chseitz@voicenet.com
> http://www.voienet.com/~chseitz
But the “Multiplier Effect” actually DID do what it was REALLY supposed to do – put big bonus buck in the pockets of Summers’ banker friends. Just as planned.
Hii !
Guest Opinion
Economic solution
The solution to the economic problem is simple but
It it is difficult to explain. We live in the fantacy that our economy is mercantile when in fact we live in an industrial society with an industrial economic system. These two systems are as differnet as night and day, or baseball and football. The trouble is that the industrial economy is made to follow the rules of the mercantile system and therefore our economy is a mess. Suppose that you went to a baseball game and the umpire and refereess went by the rules of football, what kind of a game would it be ? Right, a mess and so is our economy. The answer is simple, treat our economy as it really is, an industrial economy. In an industrial economy that is allowed to operate with its own rules and with its own institutions everyone would be rich and affluent.
In the meantime, we can do a few simple things that will make the dual system work until the full industrial society comes into its own. These are stop-gap methods so bear with me. First, the fuel that runs the economy is consumer dollars in the hands of individual citizens, not investment dollars given as bailout money to banks, corporations, manufacturing companies or financial institutions. Without consumption there is nothing in which to invest and once the economy is going investment money comes out of the woodwork like Niagra falls. So, we have to infuse ready cash into the hands of the buying public. The government, both the state and federal, should issue money or credit to the middle and lower classes, increase and extent indefinitely unemployment benefit checks, increase Social Security and money should be given to all those who bought sub-prime mortgages and could not afford them to pay their premiums so that they can own their homes and live in them. and give everyonr ten thousand dollars to spend.
To prevent inflation a government agency should be set up to threaten any company that raises their prices with an audit. The Industrial economy has no inflatoion because it is based on distribution rather than trade or buying and selling.
Where the money is coming from to fund this infusion of money to the general public is the difficult part to expain. Because our economy is a dual mixture of both the mercantile and the industrial ssystems they interact such that a credit has accumulated over the years well into the hundreds of trillions of dollars that can be used. Money to pay for this does not have to be borrowed nor taxes raised In fact the deficit can be erased and treasury notes paid off.. The truth is that every time the government tries to balance the budget or erase the deficit it causes a recession. In an indust5rial economy all money earned as wages and salarary has to be spent in consumption to equal production. Whenever money is saved or income taxed that takes consumer dollars away from the full consumptipon of production it puts a brake on economic activity and prevents economic growth. This causes fits and starts in economic growth known as the business cycle.
Money in the Industrial Economic System is not backed by gold but by the goods and wealth it produces. It has a two step cycle, it goes out and it comes back. You get paid and you spend it, and the money comes back to your boss and he cancels the debt. You get paid money you created by working. You created your own money which your boss issues tto you, When it comes back it is cancelled
The void between production and available consumer dollars can be made up by issuing availablle credit dollars, based on thhe void, to consumers which I said before runs into the trillions. . I give a full account of how the void occurs and what to do about it to fix the economy and make us all rich.and prosperous in my just published book, “Revenge at High Tor,.” a dramatic novel that explains how the industrial economic system works and is available at http://www.amazon.com.
Charles H. Seitz
628 Topsfield Road
Hatboro, PA 19040-4513
(215) 675-5524
chseitz@voicenet.c
http://www.voicenet.com/~chseitz
US economy, can anyone say PONZI!
Boy oh boy, arent vets going to upset when they come home
to live in tents, cold and hungry.
Me thinks the U.S is going to experience an insurgeny that
will have no precedent in human history.