So far the US stimulus package and bail out of its banking system amounts to a $7 trillion attempt by the Government to buy its way out of recession. What is more, it isn’t over yet. Obama is asking for more, the auto companies will need app. $100 billion to survive and other things are in the works. Plus there is no evidence that this is working, which usually fosters demands to do more of the same. It’s a field day for liberal fascists, who simply love the idea of state control and big government. It’s a bad day for people who like evidence based decisions and the idea of small government being good for communities and people (a.k.a. as conservatives or republicans, depending on where you live).
It is a similar story in the UK, where bail outs, tax cuts and other measures are valued at (app.) $1.4 trillion of future debts. There too it’s not working. High street stores are closing, people are being laid off and no one can see any glimmers of optimism. Gordon Brown – once the superhero of the economy in October/November 2008 – is now seen as the Captain of the Titanic (or, more accurately, the Marie Celeste).
Canada is off to the races on spending, tax cuts and other stimulus arrangements – tax credits for house repairs, money for “green projects” and action on infrastructure.
This is an example of groupthink. Where is the evidence that any of this will begin to tackle the fundamental problem>? Why are all behaving as if someone has an answer?
What’s more, what is the problem? Employment is still very high in both the US and Canada at over 94%. Credit is tight, it needs to be in the US where “innovative banking” and “credit without responsibility” were the norm until mid 2008, Firms are “rightsizing” and realizing that constant plans for growth make no sense – as any decent strategic planner will tell them.
What is the problem? One aspect of the problem is the feeding frenzy for gloom and despair fed by politicians, pundits and the media. This is creating anxiety and uncertainty, leading to hesitancy by buyers of goods and services. What’s more, saving money is a bit of a joke. I out $10,000 into two personal savings accounts this week (the Canadian government lets you leverage this kind of cash to gain interest tax free) and got 3% over 24 months. Big deal. So people are sitting on their cash and not spending. This leads employers to cut jobs, since demand for goods and services is down. This in turn feeds the doom and gloom.
The second aspect of the problem is the regulatory mechanisms in the US are about as tight as a the Detroit football teams defense – you can run a cart and horses through them. If you don’t believe me, have a chat with Bernie Madoff who made-off (sorry for the pun) with $50 billion of investors cash, including some from Larry King (who normally only parts with it when he gets divorced). These regulators also permitted the banks to have mortgage backed assets spins and paper which are now so complex that no one really knows who really owns a foreclosed property. As Greenspan said, he never thought that the principle of utility in decision making would be completely abandoned.
The third aspect of this problem is debt. The US Government total debt is $10,629,265,336,062 and rising at $3.2 billion a day, with close to 23$ of this being owned by China. Each US citizen carries a debt of close to $35,000 on behalf of his or her Government. But this is not the full picture. The Government of the US has a number of unfunded liabilities – health and social service payments being two, but there are others. These amount to an additional $43 trillion. So, the American economy is in debt to $10 trillion and has additional risks of a further $43 trillion for a total liability risk of $53 trillion. Serious stuff!
Then there is US personal debt. Household debt reached $13.8 trillion in 2007, with $10.5 trillion of that mortgage debt. It has risen every quartr fothe last fifty years, except the last quarter of 2008 when it fell by a modest 3%. Savings in many countries were not low - for many it was zero. Debt has fuelled the American dream, which turned into a nightmare of foreclosure and job loss.
(It is not much better in the UK, where personal debt at the end of November 2008 stood at £1,456 billion (app. $2,070 trillion US))
The last aspect of this problem is government. In particular, the fantasy that Government can get the country out of recession. It can’t. It does need to do some things, but the last thing it needs to do is to make the problem worse.
One Nobel economists who knows about this stuff if Paul Krugman. He is strongly in favour of supporting banks so as to maintain their ability to manage credit. He is a historian too. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country's GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets. And this is what the Bush administration sought to do.
But this is not enough. They need to prop up spending to some degree, but in a targeted way to quickly create jobs and stimulate spending. This is why some infrastructure spending is needed. But governments also need to focus on fiscal reform (which no one seems to be talking about) and personal responsibility (also very quiet).
It will be interesting to watch all of this unfold, but it looks like a wet dream for liberals. Big public spending, a mood that says that government should do more, a start on wealth redistribution, government role in business (in the UK the nationalization of banks is almost complete). Fascists took years to gain this level of control both of the mechanisms of capitalism and the minds of the people – the current crop of Liberals have done it in months.