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It should be coming clear that economic recovery has evaded us. If you’re not seeing that just yet, your illusion of recovery will dissolve quickly this fall, just as I’ve said it would. Nothing the Federal Reserve has done has created recovery because it was never possible that such simplistic stimulus — made to appear significant only by its gargantuan size — would correct the enormous faults in our economic system.
We are failing economically due to a hugely flawed system, not do to a lack of money.
It is not fair to criticize unless you can offer alternatives that will actually create true and sustainable economic recovery that works for all citizens. The problem we are facing is in ourselves. People do not want the kinds of reform that sustainable economics require, even though these reforms can happen in entirely capitalistic ways. There is nothing socialist about the cures I’m going to present.
They require, however, the kind of heavy lifting and major political change that we are extremely unlikely to ever see. I present them only because I think it’s important to show that there is another way to live, not because I hold out a lot of hope for such a sea change in politics.
Some basic principles for sustainable economic recovery
Sustainable economic recovery principle number one: Reduce your personal debt. Reduce your nation’s debt. Debt offsets wealth; it is not a foundation for wealth. Stop thinking you can build a healthy economy by endlessly piling up mountains of debt.
Sustainable economic recovery principle number two: This one is based on principle number one. Pay in taxes today for what you spend today. You don’t get to spend other people’s money. Stop thinking you have a right to do so just so you can feel you are part of a society that helps the poor. If you want to help the poor as a Democrat, outstanding; but do it only by taxing yourself right now for every penny your programs cost so that you feel the full weight of your own generosity right away on your own shoulders. If you’re a Republican and want to have a huge military, pay for every bullet now out of your own pocket, not out of your children’s pockets. Whatever your programs are, don’t ever make your children pay for them!
Sustainable economic recovery principle number three: Money bubbles up to the rich much faster than it trickles down to the poor. Trickle-down economics is a major part of what got us to where we are through thirty years of creating bigger bubbles as a means of recovering from the previous bubble. It’s time to go back to demand-side economics (reality economics), rather than supply-side economics (“voodoo economics” as George Bush the First called it when he still had an economic brain). You want to see the economy expand, then focus tax breaks on the middle class. Those people immediately create demand for products the rich are only too happy to manufacture. The fact is that tax breaks stimulate the economy wherever they are give, but they do so much more equitably and quickly if given to the poor and middle classes.
Capital-gains tax breaks, which were the key to trickle-down economics — work solely for the wealthy. People should not pay lower taxes for doing less work or non-productive work, such as being a hedge-fund manager or a stock investor. Capital gains should be taxed at the same rate as all income.
Reducing the capital gains tax did not create more investment in equipment so much as it created higher stock prices and higher prices for the football teams that the wealthy buy. It mostly became a huge investment loops that really contributed very little to the economy. Higher stock prices do not translate into more spending on capital equipment. Higher demand always translates into more spending on equipment because demand is money waiting to be made by those willing to invest. So, put any tax breaks you want to create where they will expand demand, not where they expand supply capacity. The rich will find money to expand their capacity to supply. True economics abhors a vacuum. Demand will not long go unmet. Rather, it becomes a case where short-term loans make sense in order to ramp up supply to meet the demand that is already waiting. That is how debt is meant to be used — as a tool, not as a foundation.
Creating a higher income-tax bracket for the wealthy while keeping capital gains taxes lower than the top income-tax bracket is a smoke-mirrors game. The wealthy make most of their money off of capital gains, so they wind up paying a smaller percentage of their total income in taxes than the middle class. The higher income tax bracket that doesn’t apply to capital gains simply makes it look like they’re being asked to pay a higher portion of their income. They readily approve such measures because they know paychecks are not how they make their money anyway.
Sustainable economic recovery principle number four: This will sound odd after what I’ve said about paying for what you spend by taxing what it takes now and about not tasking the rich, but stop taxing corporations. In spite of what Mitt Romney says, corporations are not people. Taxing corporations only takes money out of businesses right where that money has the most likelihood of being used to expand the economy.
Instead, tax profits at the point where they go to individuals. Tax people. Businesses are your economic engine. Taxing the business just takes fuel out of your engine. Why would you do that. Tax the profits at the point where they are captured by people. That creates an incentive to keep the money invested in business expansion, rather than in expansion of shareholder wealth. Those profits that go to shareholders are the fish that actually landed in the net. Tax the catch, not the net.
Sustainable economic recovery principle number five: Put responsibility directly on the shoulders of CEOs. People who make elaborate amounts of money by being a CEO as well as other top-tier executives should have all of their own money at risk if they lead their company into bankruptcy. In other words, if you lead your company into bankruptcy, your own finances should be directly attainable to help pay off the businesses debts.
If CEOs cannot handle that, who cares? They are not even a fraction as necessary as they believe they are. Fact is, many famous CEOs have made enormously stupid decisions where less famous people would have done much better.
Look at what Netflix did when it lost millions of customers by deciding to charge them separately for DVDs and for streamed videos, charging the same amount for each that they did for the combined package. They quickly had to apologize and backtrad.
Look at what Bank of America did when it went one step too greedy and decided to start charging customers for using their debit cards in their own bank machines as if the customer has no right to access their own money without paying to do so. They quickly had to backtrack.
Look at how many of the most famous CEOs on the planet took massive banks and led them into massive bankruptcy.
Look at how smart the CEOs of major retailers like Sears and J.C. Penny have been in failing to use their massive strength to reposition for today’s buyers. They’ve stumbled blindly through bizarre ideas that lost their remaining regular customers while gaining them scarcely any younger customers.
How smart was the CEO of Hewlett Packard in the decision to stop making personal computers and printers because it took too much work to remain competitive. They were one of the biggest suppliers of such products in the world. Why would they give put that ground because it took constant reinvention to remain relevant?
Throughout the Great Recession CEOs have proven how abundantly stupid they can really be by bankrupting giants of industry that were worth hundreds of billions only to have their mistakes bailed out by people far less wealthy than they are.
If you’re a CEO and don’t have the courage for to be held liable for your decisions, get out. What do I care that you cannot stomach the risk? Leave. You’re not fit for the job. You don’t have the courage to truly lead if you will not shoulder the risk of your own decisions.
Sole proprietors put all of there money at risk all the time. If CEOs cannot do the same, they don’t deserve to make more money than the sole proprietors of small businesses who put all their money at risk, often mortgaging their houses to finance their business.
The principle that needs to be added to corporate law is that the captain goes down with the ship. A responsible leader pays a high cost if he or she fails. That’s supposedly why they deserve the big money. Corporations only exist because laws were created that made them possible. Corporate law can be rewritten to assure a proper risk-reward basis for paying CEOs the big money they make.
Sustainable economic recovery principle number six: Businesses do not break laws, people do. So, put the people who run the business in jail if laws were broken. Fines against the business are not enough because they don’t cost the people who make those decisions anything. They cost the shareholders, and that may indirectly come back against the CEO and other executives, but indirect is simply not good enough.
Sustainable economics (i.e., economic recovery that lasts) requires accountability. Genuine risk-reward equations help assure that people do not take unreasonable risks for ill-gotten gains. If you want to make the big bucks, you also should have to shoulder the big risks you take in the decisions you make.
Sustainable economic recovery principle number seven: End all short-term stock and bond buying and selling as well as other practices that exist primarily for speculation. Put a little time into the equation so that people have to hold when they buy. 99% of the rapid day trading is speculation that makes Wall Street the glorified casino that it is, rather than a marketplace for seriously buying ownership in a business or financing a business. The commodities market needs similar major reform to end the casino. We should not be gambling with our entire economic foundation.
You won’t see such changes without a huge battle, of course, because those who play in the casino love it and own all the influence in Washington. Nevertheless, their gaming with shares as chips is destructive to the economy because businesses that employ real people rest on bets over what other people are going to do with their money that often have nothing to do with how the business is doing.
The explosion of day trades and flurry of speculation is not investment in business. It is simply gambling with businesses as chips. Wall Street needs massive overhaul, and having to hold for awhile after you buy would take a lot of hot air out of the casino balloon. It would move things in the direction of buying because you believe in the value of the company — the Warren Buffet approach — not because you think tomorrows news is going to make people go crazy.
Sustainable economic recovery principle number eight: If you’re rich, know there is a simple mathematical fact that you ignore as a class at your own peril. It is that point of equilibrium beyond which greed becomes the source of its own demise. As the rich reduce their labor costs more and more to increase their profits, they also reduce the power of the working class to buy their products. There is a tipping point where stinginess with labor means the rich have no one left who can afford their products, and their profits began to fall off. You can choke your own wealth by choking the flow of money. Hoarding wealth eventually assures the end of wealth for all.
It takes money to make money, and that means making sure a significant flow goes to the workers who ultimately create the demand for your products. Even if you produce heavy equipment that your workers never buy, that equipment is used by businesses from whom your laborers do buy. Trap wealth at the top, and even the wealthy will become less wealthy in the long term.
A well-off middle class was the bedrock of a healthy and vibrant economy in the US, and we’ve gone far down the path of losing that, thanks largely to trickle-down economics. The erosion of something as vast as the middle class takes a long time, but thirty years shows a lot of damage done, and we are, I think going over the tipping point right now where even the wealthy cannot make money because they have fewer people who can afford their products.
Sustainable economics tries to create a playing field that assures a more balanced distribution of wealth because the economic engine runs in its peak power curve when everyone is well paid for their contribution.
To some, that sounds immediately socialist, but I’m not suggesting we regulate the pay of CEOs, I’m suggesting we hugely load them with the very real capitalist responsibility for their executive decisions if they’re going to justify that pay. Then they’ll be a lot wiser about what they do. There is nothing non-capitalist about making sure that those who experience the lion’s share of rewards are the ones who shoulder the lion’s share of the risk.
There is nothing non-capitalist about putting the focus of stimulus all on the demand side, instead of the supply side. That, in fact, used to be a bedrock of capitalism — the idea that you stimulate business by stimulating demand. The vast (but now diminishing) middle class is best suited for stimulating demand. So, if you’re going to create tax breaks, create them where they expand demand.
You can see now why sustainable recovery has not happened. Nothing has been done to create fundamental changes in how the business world operates because greed rules Washington; but greed contains the seeds of its own destruction, and the greedy are about to find out what that means to their own wealth in the currently unfolding crash.
More reading on sustainable economic recovery:
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If you refuse to blame the Obama administration for the “economic recovery” pictured in these charts, then you’re just a Democrat protecting your own ideology. If, on the other hand, you refuse to blame the Republican congress, you’re just a Republican protecting your own ideology. Either way, you are part of the problem. You are one of the millions of reasons this nation is going nowhere economically.
If you believe those who have told you that we have actually been experiencing economic recovery, you are too easily lulled into sleepwalking. Perhaps you are so easily misled because it is what you want to believe, and your beliefs are about to leave you dumbfounded.
If, on the other hand, you don’t believe any of that, you’re a sign of hope for the nation.
I have been saying for many months that this fall we will enter a period where the world falls apart economically and learns the hard way that the much-talked-about “recovery” has always been just another phony bubble. If you believed in the recovery, you have been believing in a bubble — no different than those who believed in the late nineties that corporations that never made a dime were worth billions of dollars or like those who believed almost religiously that real estate had a kind of intrinsic value that could never go down.
The illusion is ending with the exact timing anticipated. We can see the economy beginning to crumble all around the world. The autumn of our discontent is nearly here, when I’ve said the crashing of stock markets will lead into global economic collapse. The foreshocks have been severe, and the fault lines are already starting to appear on the surface where it becomes harder to deny their reality.
Now that you can see there has been no economic recovery…
Look again at the charts above. Seven years, have given the American middle class no improvement. In every category, we are so much worse off than we were seven years ago that it is ludicrous to even use the word “recovery.” What has recovered? What is finally as good as it was before the Great Recession began?
Fact is, neither Republicans nor Democrats have done anything to create true economic recovery for the middle class. Both parties cling to tired answeres that created this Great Recession:
- Reduce taxes, even if doing so heaps up national debt (always with the vain promise that it won’t add to the debt because it will create economic expansion — something that has proven blatantly untrue for thirty years now).
- Encourage more consumer debt by loosening credit terms, even though households already have more debt than they can handle and (being wiser than their own government) don’t want any more.
- Re-inflate the price of housing, which had become so hideously expensive that almost no one could buy a home without resorting to a thirty-year mortgage (an absurd amount of time, compared to the old standard of twenty years).
- Import boatloads of cheap migrant labor endlessly because it’s the loving thing to do (and, truthfully, because big business wants it). Carry out this loving act at a time when your fellow Americans were losing jobs in great numbers in order to assure that they must compete against abundant cheaper labor if they want to get a replacement job, thus bringing down the cost of doing business while eroding the middle class.
- Save the economy by saving rich bankers first so they can benevolently save the rest of us from their own follies, thus assuring (as we’ve already seen) they will repeat all their sins and follies because we’ve erased the moral hazard of failure.
- Make banks that were too big to fail even bigger by pressing them to buy other big failing banks as a method of saving the failing banks.
- Spend vast sums of money on social programs you cannot and do not pay for because it is noble to be generous with other people’s money (namely with your children’s money); alternately, if you’re not going to force your children to pay for your social generosity, then force them to pay for your present military efforts to reshape the world.
- Pretend like it is inconceivable that you could rewrite corporate law to force overpaid CEOs to be personally responsible for the failure of their companies because that’s expecting too much from the overpaid.
Some of these ideas are Republican, some Democrat. Whatever? Who cares? They’re all stupid. They are all entirely bad for the economy and, in some cases, greedy and corrupt. Both parties work from tattered play books that their followers believe in as dogmatically as if they were religious texts. Until Americans recognize that neither party is even remotely close to comprehending how to create a healthy economy, we will never see true, enduring, economic recovery.
We will see the same recirculated, regurgitated doctrines for as long as millions of Republicans and millions of Democrats continue to dogmatically cherish their party lines because they don’t have the courage to admit that the ideas they’ve held on to are bankrupt in themselves.
In my next article, I’ll talk about how to create sustainable economic recovery with solid capitalist principles.
The following is a job description for a property manager position found in a real job announcement (association name changed to protect those who are not actually innocent). Based on my experience, here is what job descriptions like this actually mean [brackets are my helpful, guiding comments].
Property Manager Job Description for General Manager
Lesson in sustainable economics
There has been a lot of talk in the past decade about sustainable economics, but very little movement in that direction. As you think about micro-economics from a business person’s perspective, think about what you expect and what you say about yourself as an employer versus what you really give and how much you genuinely care about your employees as people. Often employers think of themselves as being a lot better than they really are. (Whereas bad employees know they’re not good and just don’t care!)
Anyone can criticize while having no better ideas. In fact, I would argue that, if you cannot put forward reasonable alternatives, you might not be qualified to criticize those who are, at least, trying something. In that spirit, I want to scope out a new economic recovery program vastly different from the economic plan the U.S. adopted under Bush and Obama or the German austerity program. While it would have created a much rougher ride at the outset, I believe it would have worked to rebuild a sustainable economy that we would now be experiencing. It may be too late, for we have already squandered what little reserve capacity we had — all of which this plan would require — on efforts that have already proven unsustainable. The haunting question is Do we have enough time and reserve capacity at this point to do it?
The German austerity plan is the right economic plan in the wrong season
Austerity can never cause an economy to grow. Even those who despise Keynes, who argued that government spending stimulates economic growth, are unlikely to argue convincingly that austerity creates growth. It has no creative power at all. What austerity can do is prevent the kinds of debt that kill growth. Austerity, in other words, is a brake, not a gas pedal. It can never create acceleration; it can only arrest decline.
The lack of austerity, however, (or, at least, lack of prudent spending) can certainly stack up enormous debt that kills economic growth. The car won’t accelerate when you hit the gas pedal if it has already flown off the road. So, the Germans are only half right. Lack of prudence (called “austerity” when taken to the extreme) certainly killed Europe’s economy; but they will not get the economy back by practicing it now. It’s odd but true that austerity can create poverty as easily as prudence can protect wealth. Germans are a staid bunch who love rigidity and austerity, though, so they keep pushing that lone idea as if it can solve the problems that were created by lack of prudence. Germans, after all, like to eat sour things like rotting cabbage in great quantities 😉
Economist Paul Kruegman is right to argue recently that austerity is what should be practiced during times of plenty. I argued the same thing for years in letters to the editor, but nearly everyone in the U.S. wanted to enjoy the feelings of prosperity on the backs of their children. (Tough medicine to hear, but that is exactly what Americans did for decades, and we are a people who should know better than to think that way … being sons and daughters of pioneers who knew austerity all their lives.) Reaganomics never provided true prosperity for the one simple reason that we were never paying for the good times we enjoyed. We were enjoying the good times by making certain that our children paid for them later on. It is easy to have the world’s most powerful military and to enjoy a juiced-up economy with rocket-like performance when no one is paying for it! We bought our good times by stacking up monumental debts. We did not practice prudence (a better word than austerity, which leans too far to extreme action.)
I argued for years that the United States should be paying down its debt (as it did briefly in the Clinton years) when times were good. Good times are for paying off debts, not compounding them because, if you cannot pay down your debt in the good times (or WILL not), then you certainly cannot and will not during times of shortage. If we’re enjoying times of plenty and are NOT paying down our debt, we can be assured of two things: 1) We’re not paying for our own pleasures, so we don’t deserve to have them. They are truly guilty pleasures, for we’re enjoying them at someone else’s expense down the road. 2) We’re using up our available credit to live high on the hog so that we will not have available credit when we need it. That is where we have now landed. No surprise to me.
If a nation ran a prudent budget when its economy was healthy, it would not buy yachts before paying down debts. In the converse: if a nation can only experience a robust economy by expanding its debt, then its whole economic model is flawed. Common sense would tell you that endless expansion of debt is not likely to be a good longterm plan. Debt is properly managed when it is used to expand the economy in lean times and to decelerate boom economies by paying down debt. Debt is a way of evening out the load. The U.S. miserably failed its obligation to pay back its debts when it had the chance, and that is a lesson we need to carry with firm understanding into our future if we want to avoid repeating the worst of our history.
Now we find ourselves in a situation where we need to juice the economy, but our debts are so high that credit agencies are all saying they will lower our credit ratings if we take out any more debt. Some scoff at that because lowered ratings have not hurt the U.S.; but that is as foolhardy as the profligate living we engaged in over the last forty years. The only reason the downgrade of U.S. credit ratings has not hurt us is that Europe has handed us an unexpected windfall exactly when we needed it most. Money is fleeing from Europe, so the U.S. looks like the lesser of other evils financially. It provides the least-rocky shore for a safe-haven landing during the present storm. In other words, the U.S. got lucky — or blessed. At any rate, it was none of our own doing.
That buys us a little time. If we use this windfall wisely, we will stop adding to our debt now and will finance our entire existing debt on longterm bonds to the fullest extent we can move it in that direction while we have the lowest rates we’ll ever see. That will save us from a world of hurt down the road. If we squander this, too, by thinking we can continue in our profligate spending, we’ll find our interest rates go way up on a mountain of debt that moves far beyond our management the day after Europe recovers from its problems. We have so maxed out our debt over the past decades, and especially recently, that we need to use this windfall with utmost prudence … and we are not doing that.
Here is an economic recovery plan for sustainable economics
I believe we would already have a sustainable recovery in process if we had followed a much different path. I use the word “sustainable” because the word “recovery” doesn’t work without it. An unsustainable recovery eventually becomes no recovery at all. It is the kind of “recovery” that is talked about endlessly today. The present so-called “economic recovery” is created only be government props, such as quantitative easing and enormous debt spending. As soon as the government/Fed support ends, we see the recovery begins to falter. It has no legs under it, and it never will because it does not require exercising legs in a way that builds strength. The current government economic plan is creating another stock market bubble that will pop like all the past ones as soon the government runs out ability to kick in increasing amounts of support.
Here is proof that the Bush-Obama recovery plan is not sustainable: the stock market surges every time it hears rumors about more quantitative easing; it goes flat every time it hears that the Fed plans no intervention right now. Though nothing changes, except what the government says it is going to do, the market surges or plunges. That means the market is addicted to Q.E. and other forms of government economic intervention. They are the air without oxygen that fills the present bubble. Q.E. has become like candy to a baby. The market cries for more and more and always will so long as we keep giving it more and more. It throw a tantrum when the goodies stop, causing the parent (government) to want to give in to more monetary relief. The present stock market is unsustainable without endless talk by the U.S., China or Europe of more quantitative easing or similar measures.
There was one and always only one way that we could have run the deficits we are have been running during the Great Recession without dooming ourselves down the road. Having accumulated a foreboding overhang of debt over the past thirty years, it was/is essential that we make certain any additional debt delivers a clear payoff to the next generation to give them any hope of balancing their books. There was a way of doing that. Instead of spending money bailing out banks, which gives the next generation nothing tangible, the U.S. government should have spent that money on building the kind of infrastructure that government does best. Here’s why:
Infrastructure is the one solid asset we can buy now with money that people in the future will have to repay while giving the future a way to manage its debt. Repairing infrastructure now saves people in the future from having to make those repairs by extending the life of existing infrastructure. Likewise, building infrastructure now (so long as we focus on infrastructure that will be necessary to accommodate the growth of our cities) saves people in the future from having to build that infrastructure. Thus, we would have been handing future generations valuable assets that we built at today’s cost in exchange for today’s debt. We would save them enough in their own time that they could manage the debt we hand them. We’d benefit from the new infrastructure and so would they.
This would hugely goose the present economy as government construction creates all sorts of supply jobs and support jobs in the areas that surround major construction projects. Our job problem would now be completely over if we had started down this path four years ago as there would be so many projects in the works by now. Instead, we bailed out the rich people who caused this mess. It would also lay a sustainable foundation for a good economy in the future, as good infrastructure makes for efficient economic performance.
The other thing we should have done was pay attention to what we were saying and live by our own wisdom. We bailed out banks that were “too big to fail,” but what did we do in order to save them? We made them even bigger! Therefore, again, we have accomplished nothing that is sustainable in our reconstruction of banks. The Fed lured and even coerced banks like Bank of America to swallow ailing institutions like Merrill Lynch. We constantly chose to solve the problem of banks being “too big to fail” by staying with our old ways of thinking and turning them into even bigger failures. Its a sickness we have in our thinking that blinded us from finding real answers. We also didn’t want the pain that would be involved in restructuring into smaller banks.
The right solution was structured bankruptcy. We should have parted down the failing banks into their units that were profitable enough to continue while letting the cancerous parts of the organism die. Instead, we added the cancer of dying banks to banks that were comparatively more healthy, turning the relatively healthy ones into the next ailing patients. We have created ever bigger monstrosities to tower over us and threaten us when they fall.
How absurd is that? We’re not very smart. We don’t even listen to our own wisdom.
There would, of course, be an incalculable cost to an economic recovery program that allows the leviathans to die. No one can know how many depositors would be damaged by their fall, which would cascade into many other banks collapsing. That would put many in the banking industry out of work, and it would leave depositors at those banks without their money. But it would rebalance society, and that is the only sustainable path. The FDIC, for example, would not cover the losses of the rich because its limit is far below what they have in deposits. Just as the government has created money out of thin air to give liquidity to banks, it could have done for depositors once banks failed without creating any inflation because it would not really be injecting any new money into the system. Instead, it would be getting monstrous failing banks out of the way and recreating those deposits in accounts at better-run institutions.
We created money out of thin air anyway and are talking about doing it again with more Q.E. Why do it to save the bankers who created the mess? That was nothing but cronyism and the worst expression of Reagonomics, which believes we are all indebted for our jobs to the rich “job creators.” How would it have created any inflation if we had let the bad institutions crumble or pare down to their only profitable parts and then replaced the lost money in the accounts of depositors at better-run, smaller, more manageable institutions? The money supply would remain the same. It would only be the institutions that would fail while the deposits were entrusted to more worthy parties. Was our government too blind to see that or was it simply more interested in protecting rich bankers?
We could have completely reshaped our banking industry into a leaner machine by letting the fittest survive with the new deposits, and we would have created room for new banks to sprout up and attract these deposits, creating more banking diversity. There is one caveat here, we’d have to mandate that no FDIC insurance money would go to any bank that hired an executive from the failing banks. That would not be just for the sake of being punitive. It would prevent the greedy people who created this mess from simply starting a bank in a new name with the same players. Let them die careerwise. Who cares? They can man a shovel on the road-building jobs of the new infrastructure program.
At the end of the day, we would have transformed our economy, instead of run a dying economy on endless life support. With the implementation of a few regulations, we’d have banks that were no longer too big to fail. Instead, we have created an even less diversified banking structure by keeping the oversized dinosaurs alive.Democrats and Republicans have utterly failed to restructure our economy because they were too busy looking out for the interests of the big banksters. We have more oversized reptilian banks that are too big to fail than we ever had. How is this a transformation of our economic fundamentals into something healthier? In four years, we have accomplished nothing that will prepare us for a better future.
Would there have been catastrophic problems to sort our way through under my sustainable economic development plan? Absolutely. But there are continual catastrophic problems to sort our way through on our present path, too, and what do we have to show for it but endless troubles still in sight? Likewise with Europe on its austerity plan. We have no economic reformation to show for the enormous outlay and risk we’ve taken and no better foundation for the future. We are giving CPR to dinosaurs, rather than seizing the day to evolve more adaptable economic structures.
Had we engaged in such a bold plan, we would never have nationalized the failures of capitalists. George Bush would not have had to announce, as he did, that he was putting his capitalist principles aside. We would have worked in the capitalist way to correct our failures, and we would not have caused the moral risk that is created by rewarding people for stupid and greedy practices. (The fact is, most politicians and business leaders don’t care at all about capitalism. What they care about is money … and lots of it. We ditched capitalism in order to save the rich as soon as capitalism’s failure-correction mechanisms kicked in because we didn’t want to face the austerity of correction.)
The only people we would have bailed out under my alternative economic recovery plan would be the more-or-less innocent individual depositors, not the people who created this disaster, given that the FDIC does not adequately insure the rich. Many retirement funds would have lost a lot of money, but many retirement funds lost a lot of money anyway … and may still lose more because there is no recovery yet in sight — no problems actually resolved for good. If we had let the dinosaurs die, we would have smarter bankers today because those still living would have learned something from seeing their colleagues fall into the ditches. The rapacious and foolish bankers would also be out of their way … no longer competing for limited nourishment. Banks would be much more careful in their practices even ahead of new regulations if they knew the federal government was not going to save their scaly necks.
How would we have survived this terrible fall? Infrastructure. We’d put unemployed bankers to work under the huge expansion of business created by massive development of improved infrastructure. We’d pay for that job-creating infrastructure by applying those trillions of dollars of deficit spending we’re presently engage on. It would cost the future generation the same fortune, but they’d have something to show for it at a price tag would likely seem cheap twenty years from now … just as it always seems cheap when we look back twenty years and see what we could have built a rail system for compared to what we have to pay now. They’d have the rail system, moving their economy at high speeds! They’d have improved school buildings so they could concentrate their money on teaching. They’d have new roads and less economic gridlock. They’d have alternative energy production facilities to power their economy. Etc.
The Keynesian are right, but so are those who disagree with them. There is a time for government spending to stimulate the economy, but it has to be done on construction of things the next generation will need in order to build a foundation for the future. Economic stimulus and austerity both require application at the right time to be effective. The time for Keynesian stimulus (vs austerity) is now. However, we already consumed our credit. The time for austerity was during all the seemingly flourishing economic times of the past thirty years so that we’d have ample credit available today. Had we paid down ALL of the national debt during those roaring times, we’d have the capacity we need now to build a new economy without the slightest risk to our credit ratings or interest rates.
An economic transformation plan
What I’ve outlined above is far more than the economic stimulus plan we have now. It would completely rejuvenate our capitalist economy. Instead, we have a badly patched old economy. It would provide a president with the opportunity to redirect the course of a nation if the president had vision, and that is clearly what our president has lacked. He has known we needed change but has had no idea what change we needed. In exchange for our huge deficit spending, we’d end up with alabaster cities … or, at least, shining infrastructure to leave behind for our grandchildren. We would have done something for them and not just to them for ourselves.
That’s what FDR did once he finally got it right and moved away from the austerity measures that initially deepened the Great Depression. He put people to work building vital assets that we have benefited from throughout our present lives, and the bill for those massive projects and for the huge military build-up seemed entirely manageable when the time came to pay it. We could have learned that from our history, but our polarized way of Democrat-vs-Republican thinking kept us from seeing what worked in the past and applying it today. Instead of learning from history, people spent their time arguing against it in order to retain their political beliefs. The religion of politics.
The projects that led us out of the Great Depression were built well so they have lasted (with normal maintenance and repairs) nearly a hundred years — high schools, dams, the parks and trails that we enjoy. We in the present got something for the debt that our parents handed to us. We benefited from it the entire time we grew up, AND we would have been able to pay down that debt had we be been less profligate, less greedy, less willing to live high at the expense of our grandchildren.
It may be too late now, for we have squandered what little remained of our reserve economic capacity. Still, I think what I’ve presented remains the one solution that does not push the entire problem ahead to the next generation. It still pushes the cost ahead, but, at least, but it solves problems for them by giving them something for their money, and that could have made the cost bearable for them. Using debt for other things like bailing out banks really gets the future generation nothing it needs. They can always create banks out of their own money … if we leave them with any money to save after they pay our bills.
Using debt on huge infrastructure projects would enable us to build around better energy practices. It would also enable us to strengthen old energy practices for the time being, such as by building safer pipelines. The remaining financial institutions would be the smart ones, rather than the big, dumb, rapacious dinosaurs that nearly brought the end of the world as we know it because of their stupid gambles. The downsized institutions that grew out of their remains would no longer threaten to crush the nation if they fell.
But we did not have either the courage or the vision for that kind of economic recovery program. Is that what we want to be remembered for? The people with no vision who lacked courage to create genuine transformation of their society?
(If you liked this article about an economic plan and want to see others as they’re posted each week, please click the RSS feed link in the left sidebar and subscribe. Also, please use the email button to pass it along to friends you think might be interested. They will not get added to any email list.)
I encourage your feedback and ideas below, and here is some additional reading on sustainable economics and economic transformation:
[amazon_image id=”1849713235″ link=”true” target=”_blank” size=”medium” ]Prosperity without Growth: Economics for a Finite Planet[/amazon_image][amazon_image id=”B0056C1V5U” link=”true” target=”_blank” size=”medium” ]The End of Growth: Adapting to Our New Economic Reality[/amazon_image]
Some people predict the economy is going down in order to sell gold. I call them the “gold bears.” Others make economic predictions as a way of guiding people in their stock or bond investments. They are the golden calves of the Wall Street bull. I have completely different agenda than either.
The gold bears and the golden calves
The gold bears constantly predict economic collapse, so that it is always the right time to buy gold bars. When the economy does go down after five to ten years of constant growling, they let you know they told you so. They may just be the broken clock that is right twice a day. They have cried “wolf” so many times, however, that many investors now look at gold as an inferior metal, which only conspiracy theorists buy as bricks to build their radiation-proof bunkers. The heavenly alignments, though, are in favor of the gold bears right now, even though the bears have long been the minority voice.
The problem with the golden calf majority, on the other hand, is that they see stars when they look at Wall Street. Love blinds them from seeing downtimes or Wall Street wrongdoings with any clarity. They are obsessed with Wall Street money and idolize the people who have it due to years of bubble-building that created long runs to success. That success is deemed as proving these people are right, even though they have missed every prediction they’ve made for four years and running now that things aren’t running there way anymore.
The calves are wishful that the long runs continue, so they sing the hallelujah chorus every time the bull raises its head. They are easily convinced by all the easy-money bubbles over the last thirty years that we’re in for another bull run … because that’s what we do. When the bull lays its weary head back on the ground, instead, the golden calves mull about, murmuring amongst themselves about what happened to their “recovery.” They are actually silly enough to believe we’ve done things that could cause a real recovery because we have listened to a lot of their bull.
My self-serving economic agenda
Confidingly, I’ll tell you that I have a somewhat bearish nature. By that, I mean that I often find I am more willing than most to see bad news. I don’t just mean to read or hear it, but to anticipate it and to see why it is coming. I know there are many people who will never have interest in what I write because they are not wiling to hear what they regard as bad news. I’m not a pessimist. It is just that right now, reality happens to look like a bear’s world, and there are a lot of people who don’t want to face such grim facts.
I am not, however, running gold investment services that drive me to predict bearish economic events. I am also not one of the conspiracy lemurs who share the night with the bears. You know them: the ones whose eyes bulge at every possibility of government wrongdoing. (I tend to hold most conspiracies at arm’s length because they smell funny.)
So, while I am brutish regarding the markets, I do not regard myself as one of the bears. I simply have the right nature to be able to see well in this present darkness, which happens to be a good time for bears, as it is for me. The nearsighted bears roam the night because they can follow their noses to the golden honey. I, on the other hand, am more of a lone owl, flying above it all with an eye suited for dark times and really no interest in what gold does. I am more interested in picking out the individual rats that creep through the moonlit fields and lifting them up in my talons to expose them.
You may see ads from time to time on this site for either gold or for stock market investments or bonds, but I do not choose those ads. I only get involved as far as blocking companies if I see them pop up and know they are bad or hate what they stand for. Otherwise, I am too focused on my writing and reading to spend much time selecting ads. The ads rotate all the time based simply on computer algorithms that place them on sites have content best suited for specific ads, so I often do not even know they have been on my site. I DO personally select the book ads based on writing that I think viewers of this site will enjoy or that I think add understanding to our economic situation because providing useful content is my biggest agenda item. This can generate me some income while helping you find more good reading. So, it’s a win/win.
With that said, let’s turn a magnifying glass on my selfish agenda. If I am going to be a purveyor of truth with a clear eye toward reality, as is my goal, I’d better be honest about this: I aim to make a good living off this site, but my goal is to do it by providing rock-solid content. Because I saw very few people writing accurately about what was happening in our economy, I came to believe I could do better. That meant there was a niche I might be able to fill.
In downtimes, such as we are in, my own economic concern was to find a focus for my labors that will continue to bear fruit no matter how bad the economy gets. Being bearish on the economy for many reasons, anyway, I decided there was nothing more suitable for the times than actually writing about the nighttime economy, as few seem to have the eyes to see clearly during this time. One who can, should be able to profit off the times as somewhat of a guide through them.
Fortunately, this selfish agendum also works in your interest: I believe, if one provides interesting content and solid, accurate predictions, there is some hope one can build an audience. A large audience is always enticing to advertisers, so it always has economic potential. Building that audience will not happen as easily or as quickly as many bloggers think it can. I know it will only happen if the economic predictions I venture out on can stand the test of time and if my writing is interesting to people. That’s why I keep my predictions posted long after I’ve made them and point out whenever they become right in order to show they are standing the test of time so far. Because I keep them posted, right or wrong, you can check my track record.
I know that most of the world is not interested in reading about economics and there are numerous economic/financial pages to read everywhere, so success is not assured. I have to keep striving for the goal of useful and interesting content, which is in your interest as well as mine. So, we have a mutual interest. Writing for a down economy may be a niche worth exploiting, but it’s no slam-dunk. Since I have no gold to sell, I will only do well if YOU decide my economic predictions and commentary are worth reading. I can, in other words, only do well by serving your interest.
Why do I boast about my economic predictions so often?
This is where I come to my more interesting agenda, which have nothing to do with making money. I am tired of the many daytime creatures who keep talking as if they can see in the dark. I want to pull their audience away from them because they are misleading the world down the primrose path of destruction.
I underline the failures of the world’s bullish economists in order to undermine the unfortunate influence these narcotically influenced economists have. I do so in hope that the opiated masses might start to see the gravity of our situation as it truly is and not see the economy as they wish it to be. Because I know most people will not listen to bad news, my only hope of getting them to listen is to be accurate in predicting economic events. When these things come to pass, some people may remember where they heard what they didn’t want to hear.
Why is this important? It is vital. Only when we see reality as it is can we deal with our problems in the creative way that will bring about major changes that are needed for a sustainable recovery. Until then, all recovery is a mirage. All talk of it is foolishness because we are far from doing the things we need to do to have a sustainable economic recovery.
The longer it takes the public and our leaders to “get real,” the less likelihood there is that we will be able to manage the changes that are necessary to create a solid economy, for we are consuming our opportunity to do so. We are rapidly expending our economic resources and energy in the wrong directions. We continue to push our problems straight ahead into ever higher mountains of debt, rather than to the side. Thus, we only pile them up ahead of us until they become impossible to push.
The reason I speak so brashly about my own predictions is to fly in the face of the experts — to show people that the experts know very little. I know it looks arrogant, but I keep flagging my predictions for attention, hoping people may start to turn away from the languid voices of the expert economists when it becomes clear that they consistently miss seeing things that should be obvious to them if they are the economic experts everyone believes they are.
Let me give you an example:
Larry Kudlow with his smug little smile is the resident economic expert on CNBC. He hangs with the right crowd and is listened to by millions; but I cannot remember ever hearing Larry predict a major economic downturn accurately. Still, he retains an enormous following. Recently, he spoke for the credentials of another economist who has a large following. Larry was upset on April 27th with the U.S. Treasurer for blasting one of Larry’s colleagues, so Larry came to the rescue:
[Timothy Geithner] recently fired a broadside at top-Romney economist Glenn Hubbard, who is presently dean of the Colombia Business School…. Geithner said, “That’s a completely made-up, remarkably hackish observation for an economist.” Hubbard a hack? Besides running a highly respected Ivy League business school, he was the chairman of President George W. Bush’s council of economic advisors. He also earned his Ph.D. in economics from Harvard. But Hubbard is advising Romney, and before that he counseled Bush, so the very political Mr. Geithner blasted him as a hack.
You see, that is exactly the problem with the way people think. It is all about credentials and alliances. Larry is a Republican to the core, so he defends Hubbard — a Republican’s economist. If Hubbard really knew how to advise, clearly we would not be in this mess, because he had, as Larry almost manages to point out, years as Bush’s chief economic advisor to see this coming and steer us away from it! Obviously, he failed to do so. So much for his advice. Complete failure, however, apparently doesn’t matter. All that matters to economists like Larry Kudlow is the importance of Hubbard’s position, his past credentials, and hist party alliance.
Many people look at things the same way Larry does, placing all their respect in creeds and credentials. I want to break that up by making it really clear how poorly people see when they just follow their party dogma (be it Republican or Democrat) and pay too much respect to pedigrees. Larry has seen poorly. The people he admires have seen very poorly. And the people who follow Larry will see nothing at all. The way to prove that is to make the predictions Larry and his ilk are unable to make and then call attention to how they missed it. That way, they cannot just say, “We are human. You cannot expect us to see the future.” When the future is a freight train screaming down the tracks you’re standing on with its whistle stuck, you should be able to see it!
Another issue I have with economists is their utter lack of courage in a time when we need great courage. Here’s another example from Larry Kudlow’s show:
After declaring that the world was in a state of “late Great Depression” on Tuesday, renowned Yale economist Robert Shiller hedged his words. “Did I say that? Well, I think there are a lot of analogies to what we’ve been going through to that of the Great Depression, but I don’t really think we’re in a depression, so I might have said it slightly wrong.” Shiller, co-developer of the Case-Shiller index on housing trends and author of “Finance and the Great Society,” said that while the United States wasn’t in a recession, certain elements of the economy resembled one.
Shiller was on the show because he has the credentials, but he backs down from calling our economic crisis a “great depression” to saying it is not even really a recession. These guys lack the conviction to stand on their own statements as quickly as they make them, lest they be held accountable. I, on the other hand, have said to friends who regaled me for it, “This IS a depression,” and I’ve said so from the very start. I hold that line, even at times when it appears for a few months that we are recovering.
In this economy, we need people with with clear vision and courage to speak against the flow
The immediate goal of my predictions, then, is to demonstrate that these events that surprise so many experts can be seen before they happen. They have a clear line of cause-and-effect if people are willing to ditch their dogmas and take their truth straight up. Thus, I wave my hands and say, “Notice what is being said over here! I want you to take note of it, even though you won’t believe it.” I say this so that, when it happens, the expert economists are without excuse this time. They can be shamed by someone who is not an economist in terms of credentials but who knows how to see economic reality.
Perhaps a trickle of attention will come this way, which will become a small brook and eventually a noisy stream. The purpose of that is to erode the attention away from the wrong voices. We have for decades now followed economic policies that are driven by greed, waste, short-term, short-sighted focus, and political dogmas that people embrace with religious zeal.
Until people recognize the true nature of this widening, deepening depression that we call “The Great Recession,” they will not yield their vaunted beliefs. I realize people will have to experience the failure of those beliefs before they will turn from them. Even then, many will find other beliefs to blame. Democrats will continue to blame Republicans and Republicans, Democrats. The greed that caused our society to allow banks to become too big to fail will never fall away until the banks do fail. There are too many very wealthy people wanting to keep that corporate gigantism in place for it to give up. It is the way of the world and will continue to be until it utterly fails.
My hope in the middle of that cacophony of greed is that the few small voices that continuously speak from principles that yield accurate predictions as to where the economy is going will eventually find enough of a following to strip the current leaders of the majority audience they need in order to continue with their ways when the old economy lies dying, unable to get up another time.
So, I pound my drums to get a little attention because very few are looking in this direction. Most are mesmerized by the credentials and not interested in a new voice. But have the PhD’s predicted anything right yet? Did they see clearly enough to steer us away from this mess with all their politically correct, tax-break ideals? We’ve had, for example, nearly a decade of the Bush tax cuts, which are solely intended (on the face of every presentation) to help the “job creators” create jobs. When you’re ready to drop your own dogma, you’ll recognize that ten years is more than enough time to know that this clearly has not worked. Where are the jobs? In China?
Bush took a surplus government and bankrupted it. Obama has merely repeated the Bush formula for recovery — bail out the big banksters so they don’t fall on everyone. Why? Because neither have ideas of their own, and they’re both listening to people they deem experts based on credentials. There is no job growth. There is no recovery. My only credentials will be my ability to accurately see (as you can, too) what they have failed to see and to boldly speak it in the face of their rosy pictures of economic recovery … a recovery that somehow always seems to be just a few more months away.
So, if you read something here and go away because you hear what you don’t like, just remember when it comes about where you were when you heard that it would.
See you again soon.
On the other hand, if you already believe the kinds of things you find predicted here, they will seem to you to be self-evident. Just note that they obviously are not for most people, or you’d hear them everywhere. You’ll be glad to have found one of the few voices that is concordant to your own.
See you again soon, too.
Whether right in predicting a plunge in October or not, I am confident that the economy is not in recovery in spite of the convulsions of last week’s stock market. Not even a little bit in recovery. The U.S. economy is merely shored up with additional rotten wood. The original rot in the floor is as bad as it ever has been. Almost no gains have been made that would take us to a re-envisioned economy. The days ahead do not look better just because of an upturn in the stock market last week. People need to see beyond the immediate reactions of the stock market from good and bad news to what is being accomplished with the fundamentals of the global economy.
The economy’s collapse is a structural failure and remains so because…
The U.S. economy is still based on these failed practices:
- Greedy banking allowed to run almost unbridled with few serious regulations restored even now.
- Institutions being allowed to become “too big to fail” to where their failure can jeopardize the entire global economy. (Instead, we “solved” our banking problems by merging failed banks into other “too big to fail” institutions, making even greater giants.)
- Total advocacy on deficit spending by the U.S. government, including the enticement of consumers via low-interest loans to buy on debt in order to accelerate the economy to where citizens have now returned to their deficit-spending ways.
- Not paying for our supposed social generosity as we go, but shouldering it on the backs of future buy placebo ambien generations just so we can feel socially generous now.
- An obsessive focus on housing as the driving engine of a good economy and now as the thing that needs to be repaired in order to restore the economy.
All of those things were wrong practices because they are not sustainable, yet we have not turned from them. In each case, you can see we seek to repeat the practices that led to catastrophic failure in 2008 in order to get the old economy back, rather than work to envision a much healthier basis for genuine growth. (Growth was never growth at all when it was all bought with debt. There is no increase in wealth when it is all owned via debt.) It is, for example, amazing how much “economic growth” you can create when no one is paying for it because our tax cuts result in deficits that others will have to pay for.
We continue to live in denial that our old economy built on those foundations failed catastrophically because the fundamentals, themselves, were seriously flawed. We will never have a sustainable recovery until we learn our lessons and create better fundamentals for the economy to be built on. Thus, we can continue to anticipate a looooong and great recession.
Further reading / viewing on economic failure:
[amazon_enhanced asin=”0765630680″ /][amazon_enhanced asin=”B0041KKYBA” /][amazon_enhanced asin=”B002Q5O6ZW” /][amazon_enhanced asin=”B002PHQB2C” /]
Further reading on sustainable economics:
[amazon_enhanced asin=”0807047090″ /][amazon_enhanced asin=”1849713235″ /][amazon_enhanced asin=”9889894246″ /][amazon_enhanced asin=”B004EPYWCO” /]
Not all the news was Greek.
The U.S. consumer spending report this week showed that consumer spending is up even though consumer confidence is at its lowest point in two and a half years. GDP supposedly returned to pre-recession levels, too. That came with the caveat from Paul Ashworth, an economist at Capital Economics, that the rise was for completely temporary reasons that will give way in the fourth quarter. “We still expect growth to slow again over the next couple of quarters and, while our baseline forecast does not include an outright contraction, we expect GDP growth to average a lacklustre 1.5% in 2012.” Regardless, the report says consumer spending grew 0.6% last month over the month before. That bit of “good news,” following the Greek Solution, kept the stock market on a high.
But is more consumer spending truly good news?
I put the “good news” in quotes because it is only good if you’re an advocate of greater debt and failed economic principles. The stock martket rose in denial of darker information that was also among those statistics: while consumer spending trends went up 0.6%, personal income rose only 0.1% last month. Consumer spending power actually dropped once inflation is factored in, yet spending rose six times faster than income during the past month. Looking year-on-year for the broader trend, consumption has risen at an annualized rate of 2.4%, yet personal disposable income has fallen 1.7%. That means the gap (deficit) between what consumers are spending and their income has broadened by 4.1%.
Fundamentally, this increase in consumer deficit spending means we’re heading down the wrong track AGAIN. If the rise in consumer spending were because incomes had improved, it would be different. Rather, consumers are returning to deficit spending economics by buying things on their credit cards or depleting their limited savings, which had been on the mend after years of the lowest savings on record. That conclusion is born out by this same report, which shows that individual savings fell 1% over the past year. It appears unlikely that a 1% reduction in individual savings would have made up all of that gap between falling income and spending on the rise, so the rest must have been a re-expansion of consumer debt.
Old consumer spending habits die hard
That means we’re already returning to the old spending behavior that created this recession. It is as if nothing has been learned over the last thirty years. It’s more like consumers have said, “Well, we’ve weathered through long enough, so now we can return to our old ways.” That’s just what the doctor ordered, but the doctor is a quack. Both the Bush and Obama administrations have done everything possible to encourage consumers to take out more debt in order to resume spending. The government has lured banks to give more low-interest loans in order to entice consumers to take those loans in order to ramp up the old economy that was built on deficit spending. It is, as I’ve been writing for years, easy to let the good times roll when no one is actually paying for them.
It’s the same old song over and over by people who don’t want to hear the music. They refuse to recognize that debt spending as the path for “economic growth” has reached its logical end. For thirty years I’ve written that our economy was not on a sustainable path, having predicted thirty years ago that the path would reach its end in about twenty-five years. It took only slightly longer than I thought to reach that limit because government has more ability to create debt and create money out of thin air than I gave it credit for; but we are there. Extending the deficit economy any further only makes the eventual correction that much worse by lessening our ability to soften the landing.
Both Republicans and Democrats completely lack the vision and the cooperation to create a sustainable economy built on solid fundamentals. The real deficit here is in ideas. Republicans took a surplus economy — the first in decades – that they inherited from Clinton and turned it into a deficit economy that went bankrupt while Bush was in charge. The second the Bush tax cuts went into effect, the economy went back to deficit spending and never recovered. Their ideas have expired like their tax breaks ought to. They also consistently led the charge for the bank deregulation that made this crisis possible. Under older regulations, this could not have happened. Still, they believe in their expired with near religious zeal.
Obama, the man of change, on the other hand, hasn’t changed a thing. He continued the mega bailouts the Bush administration began because he had no better ideas. No original thought. He also had no better people. He kept and/or put the people who had helped engineer the economic crisis in charge of figuring out a recovery. As a result we have no recovery. The man of change has given us two-and-half years of the same old thing, except that more people are unemployed, and their money doesn’t go as far. His administration has resulted in an opportunity lost to re-invent the nation’s economy.
Last-Minute Outlook for Economic Recovery
As I put the finishing touches on this article that I wrote over the weekend, news on the stock market turns around on Monday morning: Bloomberg Businessweek reports, “Stocks retreated from an almost three-month high as Italian and Spanish bonds fell amid concern European leaders will struggle to raise funds to contain the region’s debt crisis.” You see, rise in the market predicts nothing other than room for another fall.
“The MSCI All-Country World Index lost 2 percent at 11:51 a.m. New York time.” The good news doesn’t last long these days. It was only Thursday that an article on CNBC by Reuters proclaimed, “a suddenly revitalized U.S. economy that a few weeks ago was teetering on the verge of recession and had fueled speculation about another round of quantitative easing. Almost overnight it leaves a whole new global outlook that appears a little more encouraging.”
A suddenly revitalized U.S. economy that looks encouraging, huh? Last week’s market surge and positive economic news only leaves such a rose-tinted outlook if one denies how little has been done to right the fundamentals that are missing in our economic structure. For one who focuses on the the economic principles at play, rather than the meaningless daily bounces of the New York Stock Exchange, there is no overnight improvement in the global outlook.
Nevertheless, it looks like I could miss my prediction that there would be a second market plunge in October following the August crash. Just the opposite happened. I was right when I predicted the August event, but my opinion that problems in Europe would pile on faster than their ability to do something about them has been put aside for the moment. I think, however, it is still such a fragile situation that it could fall apart at any moment.
An example of the fragile nature of the Greek Solution by Europe also comes in the Bloomberg article quoted above, “Stocks declined, led by banks, following the biggest weekly gain since 2009 after China’s official news agency Xinhua said the country can’t play the role of “savior” for Europe…. ‘“Some of that rally that we’ve seen were on comments that China would provide support to Europe,’ Mark Bronzo, who helps manage $23 billion at Security Global Investors in Irvington, New York, said.”
So, there could be an October Surprise yet … that started this very last day of October. Still, if one trumpets his successes, he should also admit his misses, and a downturn on the last day of October is not a plunge unless it develops into something much worse. This blog, after all, is about clarity, truth, and breaking through economic denial. This could turn out to be my first miss so far. If so, it should be noted.
Further reading on consumer economics and sustainable economics:
[amazon_enhanced asin=”B001ODEQ02″ /][amazon_enhanced asin=”189087194X” /][amazon_enhanced asin=”1849713235″ /][amazon_enhanced asin=”B000QWHB8Q” /]
Apparently, experts never learn. Larry Summers writes:
“The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.” (The Financial Post)
What he really means is that the only way to save the old dying economy is to revive the principles that brought it into being in the first place. But who wants it? It was a phony (bubble) economy in the first place — a housing bubble created by exactly the things Larry mentions. Obviously, if you want an economy that is based on ever-rising home prices, then you have to repeat what created that economy in the first place. Some people get so addicted to the sugar of the past that they just can’t live without it. (I notice Larry is looking a little pudgy in the face lately.)
Larry Summers Lays out His Vision to Fix the Economy
Summers goes on to write,
“Most policy failures in the United States stem from a failure to appreciate this truism.”
What truism — the truism that we must create a huge supply of very-low-interest credit with terms so easy that those who cannot ever pay their debt can still get loans if we want to accelerate the economy? Sure it works. We’ve seen it work. It’s like putting gasoline in a diesel engine. It runs real fast! For a short period of time.
It’s a lot of fun while it lasts, though. If you like big bangs.
Some people can’t take the pain of redesigning an economy from the foundations up. They just want the good times back. Larry Summers is such a man. He continues…
“Most significantly, the nation’s housing policies especially with regard to Fannie Mae and Freddie Mac … have become a textbook case of disastrous … policy.”
No, Larry. They already were a textbook case of disastrous policy. That’s how we got here. Now the nation’s housing policies have to be reshaped to a more solid and sustainable policy.
The baby always cries when weened off milk. Such is the case with Larry:
“Annual construction of new single family homes has plummeted from the 1.7 million range in the middle of the last decade to the 450,000 range at present. With housing starts averaging well over a million during the 1990s, the shortfall in housing construction now projected dwarfs the excess of construction during the bubble period and is the largest single component of the shortfall in GDP.”
Of course it has plummeted, Larry. The U.S. could never afford that many new houses in the first place. People bought them with loans that offered low interest up front, followed by more realistic interest down the road — realistic interest that the debtor could never afford. It was guaranteed to default except for one reason — the price of the home would go up enough that the debtor could refinance and get a lower interest loan because of the equity he had in the home or just sell it and buy again. That model assumed housing prices would always go up. They don’t. So, it was guaranteed to crash when the stopped. They did. It crashed.
Secondly, the crash means there are now millions and millions of foreclosed houses on the market. How are banks going to sell all those houses, Larry, if everyone goes back to buying new homes with cheap and easy credit? People don’t want to pay the old and outrageous prices for home, which put them in way over their head (and now, therefore, way underwater). So, they’re going to buy the foreclosed homes, rather than pay to buy a more expensive new one. And we have a lot of foreclosed homes to plow through. So, it’s going to take awhile for new homes sales to climb back up.
Just when you think Larry’s about to get it…
“In retrospect, it obviously would have been better if financial institutions and those involved in regulating them … recognized that house prices can go down as well as up; if more rigor had been applied in providing credit.”
…he fails to grasp anything at all:
“The question now is what should be done to address the housing market, given the drag it represents on the national economy.”
Yes, when an old economy that was based on bankrupt notions of freewheeling fun dies, it does create dead weight on the next economy you want to build. The temptation, then, is to save the old economy from extinction — to start building houses as fast as we were before and loosen credit restrictions again so that can happen. Avoid the pain of real correction. Thus, Larry states,
“FHFA has not acted on its conservatorship mandate to insure that the GSEs act to stabilize the nation’s housing market, and taken no account of the reality that the narrow financial interest of the GSEs depends on a national housing recovery.”
GSE being “Government Sponsored Enterprises,” i.e., Fannie Mae and Freddie Mac. In other words, the only way we can get those good ol’ boys back (Freddie and Fannie, which perhaps should never have existed in the first place) is to start feeding them again. True: the only way to get back to what we had is to do what we did before.
“Unfortunately, for the last several years, policy has been preoccupied with backward-looking attempts to address the consequences of past errors in mortgage extension….”
That is the only way you correct errors, Larry. You look back at the past to figure out what your mistakes were and then resolve not to repeat them. Larry loved the candy and is convinced he needs to get back on his high-sugar diet to be happy again. In other words, now that we have started dieting and eating in a more healthy manner, we feel hunger pains. It would be better, then, in Larry’s mind, to reduce the hunger pains by going back to gorging ourselves. We should, at least, gorge ourselves until the pains are past, and then we can start dieting. Never mind that getting real about our dietary needs will start the pains all over again.
“Instead of focusing on the stabilization of the housing market, its focus has been on reversing its previous policies heedless of changes in the environment”
It is a certainty, Larry, that if you change the policies that created a the old economic environment, the old environment will not stabilize, but will change. The Federal Housing and Finance Authority clearly needed to change because its policies created this catastrophe for the entire world. Change is almost always less comfortable than the status quo. That is why many seek to avoid it. Switching to a healthy diet is rarely as fun as eating all the burritos we want and washing them down by swilling all the beer we want.
The Larry Summers Formula for Fixing the Economy
Here are Larry’s specific complaints in his list of things to be corrected if we are to fix the economy:
“First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and rigorous in America today. This reduces demand for houses.”
Of course, stricter credit standards reduce demand for houses! Why do you think the government lowered credit standards in the first place, Larry? It lowered credit standards to spur demand by increasing the ability of more people to buy through greater debt. If we want fix the old economy so we can have it back, then, yes, we need to return to the principles (or lack of principle) that created it. We need to go back to sloppy loans so more people can buy homes for higher prices. That would be Larry’s preferred solution.
Thus, Larry whines that tightening credit reduces demand for homes:
“This reduces demand for houses, lowers prices and increases foreclosures, leading to further tightening of credit standards and a vicious growth-destroying cycle.”
It is sad to see a world filled with smart people who are so stupid. Of course, tightening credit standards creates more foreclosures because people cannot get out of their adjustable-rate loans by selling their homes for what they had into them. People cannot pay the outlandish original price if credit is no longer as loose and sloppy. If all the non-credit-worthy people cannot get loans and the credit-worthy ones cannot get loans for more than they can afford (as they once so easily did), then demand has to shrink because fewer people have ability to buy at all, and those that can buy have less money to buy with. This shrinkage is the inevitable result of replacing the failed expansionary principles with stronger more sustainable economic principles. You cannot resolve the problem of sloppy credit without ending the economy it created.
Summers wants to solve the old problems by reviving the dinosaurs. The only reason I pick on him is because there are many fat capitalists like him out there suffering the same dietary pains and clamoring to return to the trough of loose credit once again in order to fill their withering bellies. Anything but the pain of correction. Anything!
“Publicly available statistics suggest that the characteristics of the average applicant in 2004 would make an applicant among the most risky today.”
Of course it would, Larry. That is almost a self-evident truth. Those people you have in mind from 2004 were risky back then. That’s why they shouldn’t have been given loans then and certainly shouldn’t be given loans today if we want to put banks back on a solid footing. Larry opines that this risk evaluation is wrong:
“Of course the pattern should be opposite, given that the odds of a further 35% decline in house prices are much lower than they were at past bubble valuations.”
How do you think we got to 2004, Larry? We got there from 2000 when prices were about what they are today. We got to 2004 by giving those risky people of 2000 loose loans until the prices rose to 2004 prices. We employed policies that escalated risk down the road.
You Can’t Fix Stupid
It is not that Larry and those like him are completely stupid or even actually stupid. (He is, after all, a Harvard professor and a former U.S. Treasury Secretary. That explains how we got into this mess in the first place.) Rather, people like Larry suffer from economic denial. Denial blinds us from seeing what we don’t want to see — particularly our own failures. Larry was part of the failure. He helped build the old economy. So, he knows well what it takes to make that old dinosaur live again. There are certain things people don’t want to see because they are not pleasant to acknowledge. The housing market was a bubble that collapsed. Our entire economy was built around housing. So, to expand the economy endlessly, we had to develop real estate endlessly. Larry is for getting that monstrosity up and running again.
There are, of course, many other things an economy can be built on than the endless expansion of new construction in homes. The old economy doesn’t need to be fixed. The economy needs to be changed to an entirely different model that is sustainable.
We will always need some new homes, but we do not need endlessly bigger ones. We need to learn to live within our means — live within debt structures that we can pay off by retirement (not in thirty years) and that we do not have to refinance in five years because of adjustable interest rates. There is no way for the old foolishness to end … except letting it end. You cannot have the old back and create the new.
What we lack now is vision for what the new economy should be. We don’t need to revive the oversized dinosaur that consumed so much and then fell upon so many. Economic recovery needs to come by new thinking — innovation and creativity that realizes a new vision and that seeks to build from this point forward by living within our means.
We spent the last thirty years buying everything with debt … including the welfare we so generously provided to others at the expense of the next generation because we couldn’t afford our own generosity. It feels good to be generous with other people’s money, but it is not sustainable. We must now bear the pain of learning to live within our means.
We need a president who can inspire such a vision. Right now I don’t see any visionary candidates out there. (In 2009, President Obama made Lawrence Summers the Director of the White House National Economic Counsel. No wonder we’re not getting anywhere. Even the man of change picks the same old fools who helped create this mess.)
Further reading for economic idiots like Larry Summers or for those who just need a basic grasp of economics:
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Why the Government Says The Great Recession Ended When it Never Did … and Why the Press Doesn’t Get it
In the statement below, CNBC (Reuters actually) tells us in one breath that we’re worse off than we’ve been in 28 years, but in the next breath, they tell us the recession ended two years ago. How does it not occur to them to ask, “If the Great Recession ended two years ago, why are we worse off now then before it supposedly ended?” I aim to answer that.
“An unofficial gauge of human misery in the United States rose last month to a 28-year high as Americans struggled with rising inflation and high unemployment…. The data underscores the extent that Americans continue to suffer even two years after a deep recession ended, with a weak economic recovery.” (CNBC)
Clearly the gauge economists use to identify a recession is not adequate. Common sense should tell any journalist writing a story like this that things cannot be worse after they have been recovering for two years than they were before recovery. It should lead journalists to ask WHY things are worse if the economy if the economy is no longer “receding,” but it doesn’t because the press is too lazy to think and to investigate. It now likes to take stories as they are fed to it by the government and report that as news.
The government says the recession ended for one reason: gross domestic product (GDP) is expanding. The mere rise and fall of GDP cannot be the only measure of an economy that is in ascension or decline because it misses so much of what an economy is, which is a highly complex system. What the misery index tells us is that the economy is providing fewer jobs, less income, and less buying power with the income that remains. Regardless of GDP, then, the economy is in every humanly meaningful way, worse off, not better than it was two years ago. If those characteristics are getting worse by the month, then the economy is clearly in decline — recession. If the decline drags out long enough, it should be called a “depression,” not a “recovery.”
So, to say the recession ended two years ago is to utter … utter nonsense. And, yet, you see reporters and economists continuing in blithe ignorance to sing the U.S. government’s refrain as if it were a fact.
Is the following light at the end of the tunnel the end of The Great Recession?
Ah, but there is good news we are told in this same article. Inflation cannot get worse:
“While the misery index rose in September, many economists expect some respite in coming months, driven by softer inflation…. Wednesday’s data showed that businesses’ ability to raise prices on clothing, movies and toys was ‘hitting a wall.’ Weak incomes also will make it harder for building owners to raise rents, further dampening inflation.”
In other words, the silver lining on this great recession of ours is that your terrible income is now so overstretched that prices cannot go any higher. With good news like that, who needs an enema?
History, however, does not agree with that reasoning … not when governments are rolling out money as fast as toilet paper production. Prices can go up even when no one can afford more. At the start of the Great Depression, the people of Germany had very little buying power and, yet, saw hyper-inflation that would make today’s inflation look like a Yugo standing next to a Mercedes Benz. The poor in third-world countries have often seen hyper-inflation, regardless of the fact that they already couldn’t buy a thing. Look at Zimbabwe in recent years. People could not afford water, yet uber inflation ran up at something like a thousand percent a month!
Once governments start trying to inflate their way out of debt, as the U.S. has been doing for two years, inflation can spin out of control no matter how poor the citizenry is.
The Christian Science Monitor does a little better job than Reuters of telling the same story:
“Think life is not as good as it used to be, at least in terms of your wallet? You’d be right about that. The standard of living for Americans has fallen longer and more steeply over the past three years than at any time since the US government began recording it five decades ago. Bottom line: The average individual now has $1,315 less in disposable income than he or she did three years ago at the onset of the Great Recession.”
There you have it. We’re worse off now than when The Great Recession began. How, then, can any intelligent person say the recession has ended when it has consistently gotten worse for nearly three years?
And, yet, the very next words from the CSM repeat the same mantra in mental absentia:
“– even though the recession ended, technically speaking, in mid-2009.”
They don’t just say it “supposedly ended.” As with the Reuters article, they regurgitate, as if it were a fact, that it ended in 2009. Almost makes you want to go listen to a dog howl as a better source of good thought.
Then, as if they did not hear themselves over their own baying, they go on to say…
“In short, it means a less vibrant economy, with more Americans spending primarily on necessities. The diminished standard of living, moreover, is squeezing the middle class, whose restlessness and discontent are evident in grass-roots movements such as the tea party and Occupy Wall Street.”
So, an economy that is “less vibrant” than when it was in recession and that is producing a lower standard of living than it did when it was declared in recession is out of recession?
“Real median income is down 9.8 percent since the start of the recession through this June”
Real income is off by almost ten percent since the Great Recession started. Therefore, the recession has ended? And that decline is just for those who are employed. Meanwhile real unemployment is probably at something like 16% since the government does not count any of those who went off the unemployment roll simply because they’ve been unemployed so long that their benefits ran out.
But the recession is over?
Why is the Great Recession over when it clearly ain’t over?
Here is the telling little detail that no one else has sniffed out.
“Many found their jobs gone for good as companies moved production offshore or bought equipment that replaced manpower.”
When the U.S. government says that the recession is over, it bases that on the rate of growth in gross domestic product — essentially the aggregate value of everything produced by U.S. companies. If GDP is growing at a good rate, the government determines that we are not in recession. End of story for them. What the press is not factoring in when it fails to question the government’s statement that the Great Recession ended in June of 2009 is whether or not GDP is even accurately calculated. Then there is the further question of whether gross domestic production fully represents the condition of an economy.
Part of the answer is phantom GDP
The biggest reason GDP has improved above “recession” levels, while employment and income are worse, is that GDP calculations do not adequately adjust for imports. Gross Domestic Production is typically measured by adding up all consumption (purchases) in the United States plus the value of all exports and then subtracting the value of all imports. The assumption is that people can only purchase (consume) something that has been produced, so consumption equals production. To find what portion of all U.S. consumption was produced domestically, one has only to subtract out the value of all imports (both those used by U.S. manufacturers as components of things manufactured in the U.S. and those bought directly by consumers as end sales). To that U.S. consumption of domestic products one has to add exports because those are a part of domestic production, even though they are consumed outside the country. That gives you GDP.
The fly in the ointment is this: When purchases are made in the U.S. (as part of the calculation of total consumption), they are often made at retail level by individual consumers, and that final price is the one used to determine the value of goods produced. Imports and exports, however, are usually bulk purchases that happen at wholesale price levels. So, when consumption is added up, the final price (retail) paid by consumers for imports is used, but when imports are subtracted back out, it is the wholesale price that gets subtracted. That is because no one knows what portion of gross retail sales is due to imported goods (on the consumption side), and no one knows what price all the imported goods coming through port will eventually sell for. We only know they are imports because they entered the country through our ports, and we know their declared value based on what the importer paid for them when they entered the country. That is almost always a wholesale price (plus shipping, etc.), except in the case of small shipments directly to the end consumer.
That’s true for exports, too, which are added to GDP, rather than subtracted. No one knows what the final retail prices will be for goods leaving the country; so the price used is the price paid by the foreign entity that is buying the items, not the end consumer. Exports, being priced at wholesale, would roughly cancel out the pricing imbalance in imports if not for the fact that the U.S. runs a very large trade imbalance stacked toward imports.
Other methods of calculating GDP that try to adjust for inflation have also been discovered to include significant phantom GDP. When the government adjusts GDP to compensate for inflation, it often has no information on which to factor inflation on imported items that were never imported before. As a simplified example, when an American factory has been manufacturing tables for a century, the government can see how the price for a particular style of table has gone up due to inflation and can adjust for that so that GDP today can be compared back to the year 2,000 to see if GDP has improved. In other words, if the rise in consumer spending on tables is due solely to inflation, then that rise is really not an improvement in Gross Domestic Production at all. So, the government tries to factor inflation out of GDP, but what if you are suddenly in a deflationary environment? How do you determine what part of the price came down due to general deflation in that industry and what part came down due to parts being made overseas so that you can properly adjust the table’s end price for deflation? In other words, what is the proper inflator or deflator to adjust a price by when comparing one year to the next when the ground is shifting so much all around you? That’s very hard to get a handle on.
A similar problem happens when the American factory suddenly outsources all production of that exact table to a Chinese factory but sells it domestically at the same price as it did the table it manufactured in the U.S., capturing its savings as a boost in profits for the shareholders. While the shareholders are better off, the factory workers go unemployed. The government sees the end sale to the consumer and adds that to GDP and then subtracts out the declared value of the imported table so that imported tables do not get counted as a domestically produced table. That creates phantom GDP in this case, making the economy look much better than the reality:
Let’s say the table sold retail at $2,000 last year and that the factory produced (domestically) 1,000 tables that sold in the U.S.. That’s $2 million in gross table sales that got legitimately added to the nation’s gross domestic product last year. Now, let’s say this year the factory imports all of its tables at $1,000 each, including shipping, etc. This year, it sells the same number of tables under its label at the same price as last, but they were all made in China. What the government sees is that U.S. consumers again bought $2 million dollars worth of tables this year but that there was a sudden burst of $1 million in imported tables at our ports. It subtracts those with the intention that imports not be included, but that still leaves a million dollars in its GDP figures that came from table sales. It concludes those had to be domestically produced tables, since it subtracted out all the known imports, so it keeps that million dollars as part of GDP. In real fact, the production of domestic tables ended completely. So, the government is over-counting domestic tables by a million dollars.
With so many products once made in the U.S. having been outsourced in recent years, it’s hard to get a accurate picture of changes in GDP, especially when the value figured by customs for imports (and subtracted out of consumption to calculate GDP) is not the same as the price the end consumer paid. The Great Recession, as it turns out, is only great for China and other countries to which U.S. work has been outsourced by the free-trade agreements created during the Bush dynasty.
Other reasons GDP wrongly indicates The Great Recession ended when it did not
GDP is really a poor measure by itself of whether a country is in economic growth or decline because it does not factor how much benefit expenditures are bringing to the populace. It includes all government spending. So, it includes what is being spent on military pursuits outside the country, which may be entirely wasted in the sense that the products are blown up for the sake of getting rid of some despot that was no threat to the country doing the spending. The populace feels no improvement from those expenditures, other than the jobs they create. This is GDP. that is really a transfer of wealth to another nation. It does create jobs, which is beneficial, but that is all it does for the nation doing the spending. The people of that country could be spending themselves into oblivion on foreign wars, yet GDP would not tell you that. On the GDP side, things would look great; but all of that was done with new debt, so it represented no wealth building. It is GDP that is actually a liability — creating jobs now that future people will pay for. It will not build a nation.
On the other hand, if that same amount of money were spent on roads, the populace would be more wealthy because it would live in a land with better roads. It would have something to show for its debt. The future people, who will have to pay for those jobs, will have the benefit of roads built at lower prices, which they do not have to pay to create in their own time. So, their debt is offset by their savings. Thus, one scenario of an increase in GDP creates jobs while the other creates both jobs and more and better roads, which enable faster commerce, which improves job prospects down the road. The latter is economically sustainable growth — REAL growth — because it raises your economic platform for future performance and because people feel a direct benefit. The former is not economically sustainable because the people spending the money are deriving no benefit outside of the jobs they are creating, and the people who will eventually pay the bill have nothing to offset the cost when the bill comes due. It is not sustainable economically.
Because GDP includes all government purchases, it also includes all government waste. So, that is another way that GDP can misrepresent economic growth. The more money the government wastes, the better GDP looks. If the government decides to hire two people to do the same work one was doing, the amount added to GDP for that work doubles. The tax payer gets twice as much taken from him in taxes, but feels no additional benefit. So, GDP goes up, even though the tax payer feels poorer. That may be offset by the fact that one more person has a job, but that benefit is not nearly as great as if the new person were doing additional work that benefited tax payers so they, too, derive the benefit of their higher taxes.
In short, G.D.P can look great even if we blow up everything we create or if we pay people to make nothing!
It turns out that a nation can actually be in serious decline and yet show GDP increases every year of its decline. Thus, GDP should be only one component used to assess whether an economy is rising or receding. Unfortunately, it is the only measure used, and that is why economists and the government are so out of touch in stating that The Great Recession ended two years ago when, in fact, the ravages of a failing economy are clearly worsening as we go.
And that is why the Great Recession never ended when it ended.
More reading on the The Great Recession:
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The main reason this depression is being talked about now as a “second recession” is that the governments of this world propped up the initial phase of this global depression with all the cash they could manufacture — more cash than has ever been pumped into the U.S. economy at any time in history. Thus, we started into a depression, got propped up, have come near the end of that prop, and are now falling back into the depression. It will be a great depression in that it will last a long time. Whether it will be as bad as the Great Depression remains to be seen.
To prop us up near the beginning of this depression, the U.S. Federal Reserve and U.S. Treasury worked in consort to print money with no backing at all — money they did not even fund with bonds sold to other nations because they could not sell bonds fast enough. In essence, the U.S. government incestuously bought its own bonds to finance its own debt. Federal Reserve Chairman Ben Bernanke called this loop “Quantitative Easing.” It was an unprecedented move of creating money with nothing behind it to pump up the deflated economy … and it has utterly failed.
The Unsustainable Illusion of Economic Recovery
When “quantitative easing” was first announced, I predicted in newspaper articles at the time it would prop up the economy for awhile and make it appear that we were recovering. I also predicted it would only make the recovery more painful down the road. We are now down the road. We cannot see the end, but we are past the point of no return as for any hope of a soft recovery.
I stated two years ago (see “Downtime” articles) how long I thought the artificial props would hold before the government would run out of steam and become unable to continue such measures. I stated why quantitative easing (Q.E.) was not sustainable and why it would not create any actual recovery but just an illusion of recovery that would look like a double-dip recession once the Q.E. ran its course. The so-called “recovery” was nothing but a rise in the belly of a great depression caused by artificial supports. It would last only as long as the supports lasted.
I predicted that the government would try a second round of quantitative easing as soon as the first one they approved ended and downward reality began to reappear of a hard road in front of us. I have even stated the government would be strongly tempted to try a third round when the second ended and the ugly reality, again, began to reappear. Anything to avoid this austere reality. Stark realities mean angry voters. Politicians seek by nature to avoid angry voters.
Sooner or later, the government’s ability to do quantitative easing would end … without any sustainable recovery in sight. It is now later.
The Great Recession’s Great Reality Check
That is the bleak landscape we now face (and are still trying to deny). The artificial recovery made it appear for awhile as if we were just going through another bursting economic bubble and were on our way out. In real fact, ALL of those efforts did nothing to correct the underlying problems of the economy. That is why this is the same recession, not a second recession. It is due to continuation of the same cause. It looks like two recessions or a double-dip only because it was falsely propped up in the middle by the unsustainable effort to create funny money.
The worst part of Ben Bernanke’s solution is that he actually perpetuated the problem and even made it worse by using up limited government resources that could have been used to create jobs for the innocent who are swept away by all of this. Now, that credit resource has been used to its maximum capacity. Bernanke (and all the elected officials that follow his lead because they have no solutions of their own) sought to solve the problem of too much debt by doing everything possible to get banks to extend more credit (create more debt). They also sought to solve the problem of banks that were too big to fail by merging them with other failing banks, creating even larger banks that are all-the-more too big to fail. It was like putting a cancerous tumor into a sick patient as a way of getting rid of someone else’s tumor. They should, instead, have broken them down into sustainable parts in a controlled manner (which we call bankruptcy).
Ben Bernanke sought to prop up the failed housing market by expanding debt once again. Yet it was this highly indebted housing economy that led us into this mess. The actions of the U.S. government have been nothing more than a desperate attempt to keep the old economy alive. No one wants to face the arduous task of creating a new economy from the ground up. Nor do they have the vision to know how to do that.
That vision is lacking because ideologues filter everything through their beliefs of what works. Thus, they can only see to do that which is in their view “tried and true” — meaning only that which has been done before. If the problem is that what was done before worked for awhile but has now reached its logical end, they have no solutions. They failed to see that what was working was not sustainable for the longterm, so they keep trying to sustain it.
What Ben Bernanke did (and is still doing) was nothing more than CPR — breathing hot air into a moribund economy. His solution was not sustainable economically for one simple reason that should have been evident to everyone: the U.S. government (as with many other national governments) was already so deep in debt that it could not continue to transfer all of this bad private debt into the government’s debt for very long. Nor could it risk creating more money by taking out more debt. Most of all, economic growth that was financed by debt everywhere could not be sustained once everyone’s debt capacity was maxed out.
Prior to the economic collapse, the U.S. government was already nearing inability to pay its own debt. Many would argue with this, but the simple fact is the U.S. has already reached the point where the interest alone on U.S. debt is greater than all the revenue the government takes in. Therefore, the federal government has reached the point logically where it can take on no more debt. The U.S. was close enough to that point when this economic collapse began that it clearly could not continue with a debt-driven economy much further before hitting a wall. Yet, easing the flow of credit has just about been the government’s sole solution. It is “old think” by old thinkers.
Saving Capitalism from Capitalists
To people like myself, it was clear from the beginning that the actions taken by governments around the world to transfer the massive debts of capitalists to the government (meaning to all taxpayers) could not create sustainable recovery. That’s because the capitalist solution to bad banking is supposed to be that the bad fail. The fittest survive, and the corrupt become extinct.
“Capitalism without bankruptcy is like Christianity without hell.” – Frank Borman
Instead of letting bankruptcy happen and then using government resources to ease the pain of the innocent as much as possible, we shifted all the pain onto the innocent! We shifted the greed of corporate giants onto the backs of average taxpayers and now insist on not raising the taxes of the corporate giants and capitalist titans.
I am not, as some might think at this point, writing an anti-capitalist argument. It is a pro-capitalist argument. The problem we face now is that capitalism was not allowed to function because its staunchest advocates abandoned it. It turns out that many Republicans (and Democrats) love and preach capitalism like a religious savior so long as it is producing bull markets, but they do not like it at all when it is producing corrections to corrupt and greedy markets. They are proponents when capitalism is making them rich, but they seek socialist solutions as soon it does not.
It was none other than free-market champion George Bush II who proclaimed at the very beginning of this economic collapse that he would have to abandon his capitalist principles in order to socialize failing banks for the good of the nation. (In other words, the federal government would have to take ownership in some of the banks and stake out positions on their boards in order to save them with taxpayers’ money.) Thus, Senator Barney Frank said …
For decades, the U.S. government deregulated banks with near abandon in belief that capitalism does best with no regulation of human greed to strangle its aggressive expansion. Alan Greenspan and many others preached that capitalism is self regulating. In fact, the government and capitalist proponents were right in stating that capitalism is inherently self-correcting. What they didn’t say was that it only corrects after the problem occurs. That’s the difference between correction and regulation. Regulation is created to avoid the problem in the first place. (Granted, it can go too far and stifle capitalism.) Had bankers been watched more closely so that the free-wheeling loans of the 90’s and the first decade of 2000 had not been allowed, we would not be in this mess. (But then the 90’s and the first decade of 2000 would not have been as wildly profitable either.)
Capitalism corrects with a heavy hand. If greed spreads broadly enough due to no regulation, capitalism corrects via total economic collapse. (Here we are!) In short, we have regulation to avert the greed before it occurs so as to avoid the painful correction that must, otherwise, happen after. We put a governor on the economic engine in order to prevent it from blowing itself up or to keep people from running the engine too fast and too hot.
The problem with the so-called “economic recovery” has been that the governments of this world all rushed in to avoid the correction. The profligacy of bankers was fostered by deregulation. When the capitalist systems finally did kick in to correct the bad judgements of those bankers, the major capitalists, more than anyone, were ready to abandon their principles in order to avoid their punishment!
Many Republicans, it turns out, want the benefits of unbridled capitalism without its painful corrections. (I single out Republicans in this instance, even though I am an equal-opportunity critic, only because they have been the loudest advocates of deregulation; but Democrats also participated in deregulation.) Republicans who loudly preached deregulation now fight the natural capitalist correction by doing all they can to socialize the cost of failure; i.e., to spread the cost across all of society! It seems Republicans want deregulation without the painful correction that often results when nothing is regulated for the public good.
The Many Must Pay for the Sins of the Few
Corruption, such as known-but-undisclosed risks, became so great under deregulation that the economic correction necessary would consume the entire nation. We sought to avoid that pain by socializing it, making the failures of the greedy few the burden of the many because the greedy few were giants. If they were allowed to fall, they might crush us all.
Yet, their gigantism is also a result of deregulation. Massive banks were allowed to consume other massive banks until they became a corporate colossus “too big to fail.” If allowed to die a natural death for their gluttony, they would fall on all of us. Having allowed that to take place, it became the burden of all of us to save greedy capitalists from themselves, lest they crush us all. So, we have all been told. It would have been more accurate for Barney Frank to turn his phrasing around and say, “We had to save the capitalists from capitalism.” . (The policies for the “recovery” have shared many traits of Economic Fascism).
Let me end with a qualification that, by saying “greedy capitalist,” I am not saying that all capitalists are greedy; nor am I saying that capitalism inevitably or inherently leads to greed. I am only saying that greed exists among capitalists as much as among any human beings, and the only mechanism capitalism has to correct for it is failure after greed has finally run too far. Until that point, it often rewards greed. That is why unbridled capitalism is not a good economic system. Capitalism needs regulation because people need regulation. Capitalism’s correction for bad bankers is bank failure. Failure is its correction for all bad investment. But where banks are not regulated from becoming too big, the failure of one can become the failure of all.
That is what wholesale deregulation got us — massive banks full of unmitigated greed … too big to fail. There are other things the government could have done other than bail out banks — laying a new framework of sustainable economics for a better future after the crash — but that is for other posts to come and has also been dealt with under the “Downtime” topic.
Further reading/viewing on bank failures and bank bailouts:
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Sustainable economics starts at home … in that it starts with homes. It stands to reason that, if the economy can only grow through housing expansion, we will someday have nowhere left to stand.
On February 9th, 2011, I wrote to my friend Stan about sustainable economics:
The entire government is failing to learn. If it had learned, it would not be trying to revive the real-estate-driven economy that just crashed. For many decades I have publicly decried the idea that we must always develop more land in order to keep the economy going. I decried it on the basis that it was not sustainable, even though that word was not in circulation so I was not using that word at the time. I simply said that it was obvious we cannot keep a good economy going (sustain it) on the basis of endless development because land is finite.
I argued many times that, if a good [sustainable] economy means we always have to get bigger, then clearly that will ultimately fail. I argued that you cannot expand forever because you are limited to just the earth. I don’t happen to believe space is a viable alternative [as Newt Gingrich apparently does]. I also argued that clearly the economy could not continue to be based on (be sustained by) the need for housing to rise in value — that sooner or later people would reach the limit of debt they could take out — would hit a natural debt ceiling — and would not be able to go any further.
These things [the nuggets of sustainable economics as a philosophy] I wrote in letters to the editor as far back as my college how to buy zolpidem tartrate 10 mg tablet years. The biggest thing I critiqued in articles back then was the excessive deficits of the Reagan years. I argued that the government could not keep (sustain) increasing its national debt, or in twenty or so years it would go broke. Well, it has taken about thirty years to hit that mark, but we made it! Governments all over the world are now beginning to go broke for this exact reason. The U.S. will go broke, too, unless it manages to pull itself out by the shenanigans of inflating its debt away. In which case, it has put all its debt on the backs of citizens, making them pay for it in endlessly high prices.
The government has no ideas for new economies, so they are trying everything to keep the real-estate market propped up to gain more mileage out of that. No one in government or banking has listened to me for years. Only ten years ago, Ray Gilkerson, as a retired banker, argued vehemently with me that the government could take on all the debt it needed to in order to pay for the services it needed to pay for — that the government is not like the rest of us because it creates money and regulates it so does not have the same limitations that individuals have. I argued just as vehemently back. He got to die before the big collapse came or just after. (Maybe that is what took him down? The crashing of his ideals. Don’t know, but God rest his soul, as he was still a good friend.)
How The Great Recession Blog came into being.
On February 3rd, 2011, I wrote about some ideas to Stan for his own website. As he didn’t take up that focus right away, the idea grew within me to develop my own website on this theme. Many months later I followed through with that and began The Great Recession Blog.
Are there any web “magazines” that bring together the best and more balanced of the ECONOMIC articles you’ve been sharing and that create a forum for discussing them? Find authors … that present the kind of economic criticism you are not hearing in the mainstream media but have been presenting in these various articles that you share with me…. If you take only the best and hardest-hitting writers, you may be able to create something with potency that gets attention.
The economy is the entire world’s achilles heal right now, so articles that hit right to that center can get the world in its solar plexus. The kinds of hard-hitting economic articles we’ve been discussing back and forth for a couple of years will find a ready audience. There are people hungering for good articles that vent their own rage against the recent and ongoing economic excesses. That is a rising tide, which will provide MANY things to write about in the next few years.
You have worked in that arena much through your travels and through your work with APEC, etc. and are somewhat of a critical “insider” in that sense, so you have connections for getting interviews, promoting the magazine, as well as insights, and you come from a perspective few of your APEC colleagues share. I have written somewhat in that arena through the Downtime feature I was syndicating to newspapers for a few months.
I think that, if you narrow your focus to those particular interests of yours, you have something that could become a voice of reason that gains an audience. Create something more potent and build out very slowly from that, always keeping to the center, which is the economic discussion [about the Great Recession]. That is the biggest discussion in the world right now; yet 98% of what is is being published is pablum that reiterates the same tired old thinking, whether from conservative or liberal sources.
People are more apt to respond strongly and positively to finding a motherload of the one thing they are most interested in than in finding broad mix that still requires they sift through to find the few articles they want.
On February 4th, the concept for The Great Recession Blog crystalized a little more:
I think focusing on the economy from the perspective of economic sustainability might be better. I don’t know if there are sites that take the critical stance on the economy rescue efforts that you and I have taken in our exchanges. The present approaches to economic rescue are so UNsustainable. I suppose there would be such sites, but they cannot have been around long, as the whole fiasco has not been around long.
So, I was thinking in terms of a niche that has a lot of interest (BIG niche). Also, this niche has a lot of buried rage that could feed interest in a site that gives voice to that anger. I don’t mean creating an angry magazine site, but putting forward the kind of criticism that those who are angry would like to voice but don’t have a platform from which to be heard … or maybe don’t know how to express their frustration well.
Let good writers say it for them, and they will grab those words and share them with others, building an audience by word-of-mouth.