In case you haven’t noticed, the economy is teetering on recession, unemployment is at a five-year high, and home foreclosures are at an all-time high. And for once, it’s not only the little guy who’s feeling the pain. The largest corporations on the planet – Citibank, Washington Mutual, and Merril Lynch, to name but a few — have had to turn to foreign governments to bail them out. And these same banks have dramatically scaled back their lending practices to shore up their balance sheets.
The problem is, the US economy and everyday people desperately need the banks to lend money. Banks are the lubrication that drives the US economy. They not only finance large and small businesses, which in turn hire and pay millions of workers in the US, but they also provide mortgages and personal loans to everyday people like you and me. And over the past 12 months, they have dramatically tightened their practices, more or less shutting down the mortgage market while driving home prices lower. With less housing demand, builders have collapsed, laying off their workers. With less equity in their homes and higher interest rates, defaults have skyrocketed, with many people walking away from their homes.
That has had a ripple effect on the overall US and world economies. In fact, we are on the verge of wide scale economic recession and corporate collapse, which could take an economic toll never seen before (e.g., Trillions of dollars!). Without government intervention, the US economy could see a downturn on the order of the depression of the 30s.
Who the Heck is Freddie Mac and Fannie May Anyway?
Freddie Mac (“The Federal Home Loan Mortgage Corporation”) and Fannie Mae (aka “the Federal National Mortgage Corporation”) are private corporations formed by the US government to add “liquidity” … Read the rest
As much as GM, Ford and Chrysler claim the recent crisis is the result of nothing more than the short-term credit crunch, that claim is pure spin. The truth is much colder and harder than that.
- Fact: GM market share peaked 40 years ago when they controlled over half of all vehicles sold in the US. They have lost market share nearly every single year since then, to the low 20s today.
- Fact: Despite near unanimous agreement that fossil fuels are causing global warming, and the fact that the US was sending hundreds of billions of dollars a year to repressive middle eastern governments, some of which covertly funneled funds to terrorists, the “big three” automakers steadfastly opposed tighter fuel efficiency standards.
- Fact: If GM, Ford and Chrysler had adopted stricter fuel efficiency standards, they would have a fleet of more competitive cars instead of huge gas-guzzling cars that nobody wants to drive, and they wouldn’t need this bailout.
- Fact: Executives from the big three showed up to congressional hearings on their own private jets. When asked to raise their hands if they would give up their private for the benefit of their company, not one of them raised their hands. This is more symbolic than anything, but it shows how out of touch with public opinion they are.
So while the automakers like to blame unions, the credit crunch, or basically anything except their own mismanagement for the current crisis, the blame lies firmly and directly at the executive management’s feet. After decades of building cars that nobody wanted, the chickens have come home to roost.
Should GM be allowed to go bankrupt?
Yes. GM, Ford and Chrysler all deserve the situation they are in. In fact, in normal economic conditions, they should be allowed to fail completely. But … Read the rest
If you listen carefully, you can hear Milton Friedman – the father of neo-conservative economic theory – turning over in his grave. Milton, who believed markets to be rational, perfectly transparent, and generally smart enough to look after their own interests argued vigorously against government regulation or government intervention in economic policy. In Milton’s world, corporations would be smart enough to avoid an economic crisis, and if one occurred, they would be able to pull themselves out of it. Alas, the 2008 economic crisis seems to have successfully unsettled his basic premises and derailed a half century neo-conservative economic policy and dogma.
Friedman’s onetime idol and conceptual opposite was John Maynard Keynes. Keynes was the most influential economist of the 30s and argued that in cases of catastrophic economic crises, corporations and markets may not be capable of pulling themselves out of the “death spiral”, resulting in a recession or even depression much deeper with more severe societal dislocation than would otherwise be necessary. In the direst cases, strong government intervention was the only solution to ending economic collapse. In fact, massive government spending and employment did successfully end the great depression.
So who is ultimately right?
They both were in a sense. The challenge with Keynes was that he argued for consistent and regular government meddling in short-term economic swings, which ultimately led to the stagflation of the 70s. Ultimately, Friedman was correct in the respect that short term meddling in unemployment rates and economic growth lead to unintended consequences. But he – like Allan Greenspan – was wrong to think that corporations can operate at optimal efficiency without government regulation. This being proven by the failure of:
- AIG: One of the largest insurers of the world
- Fannie Mae and Freddie Mac : The largest mortgage originators of the
… Read the rest
Virtually all economists agree that a massive economic stimulus package is necessary to prevent one of the most severe recessions (and potentially depressions) since the Great Depression of the 1930s. However, the $800 billion stimulus bill working its way through Congress is fatally flawed.
This battle must be won on two fronts. First, we must fix the root of the problem, which is the housing crisis. And second, we must stimulate spending which accounts for 2/3 of the US economic output.
The challenge with the current bill is that it spreads out the money over too many areas without addressing these two core investments. There is but a small amount pledged to help homeowners (which does help address the root but insufficiently). At the same time, there is a massive amount of spending to bail out the states, but that money isn’t going to into incremental programs that would stimulate the economy. It’ll just help plug the massive state deficits without any incremental spending there.
Additionally, there are massive tax breaks spread across broad income brackets. That’s frankly just a massive waste of money. Do you really think someone is going to go out and have the confidence to start spending again because they have an extra $20 in their paycheck every 2 weeks? That’s just absurd.
Rather, the stimulus spending should be solely on getting unemployment down or extending benefits for unemployed:
- People without jobs are not going to spend (obviously).
- People collecting unemployment will spend since they have no choice. That helps the economy, but it’s not sustainable long term.
- People who get a new job created through government spending will not only create value for society through product work, but they will then have the confidence to spend their earnings and even finance some of their spending
… Read the rest
The biggest enemy to the end of the financial crisis and the beginning of an economic recovery is Treasury Secretary Henry Paulson himself. Let’s forget for a minute that the decision by Paulson and Bernanke to let Lehman Brothers fail was the precipitating event leading to credit markets freezing up and the first round of financial panic. Since then, the two have been working diligently to correct this colossal mistake. But separating actions from words, we see that words are in fact much more potent.
Since the end of September, every time Henry Paulson has opened his month, the Dow has dropped on average 196 points. On days when he was silent, the Dow has dropped on average 28 points.
September 26, 2008 to December 1, 2008
|Paulson Silent (Dow Change)
||Paulson Speaks (Dow Change)
So whats going on here? When the crisis started spiraling out of control after the Lehman failure, Henry Paulson and Ben Bernanke swiftly stepped in with bold action, taking over AIG, preventing further failures, and proposing an unprecedented bailout fund of $700 billion. That was all somewhat re-assuring. But when congress waivered, Henry Paulsons second monumental mistake was appealing directly to the public, telling them if he didn’t get the package the US would face the next great depression.
And the world responded. “Great depression?” they gasped. Consumer confidence plummeted, as did consumer spending (which accounts for a stunning 2/3 of US GDP). Corporations, in a mass panic, swiftly switched into a mode of panicked layoffs and cost cutting. The banks, already spooked, continued to tighten their lending not just to consumers but to corporations and other banks as well. And ditto for the rest of the world.
Economics is as much or more about confidence and psychology than it … Read the rest