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Economic Stimulus: Real Solutions

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Once you understand how we got into the perilous economic situation we now enjoy you can start to look for ways to get out of it. But to find real solutions you have to approach the situation rationally, and not in a desperate panic. Thus far the reaction of Congress as well as both the Bush administration in passing the TARP bill, and the Obama administration in passing the stimulus package, has been one of irrational panic; throwing money at the problem without thinking about the consequences of their deficit spending or more effective and more responsible alternatives.

What we are faced with is a natural cyclic recession which has been intensified and prolonged by government mismanagement, gross financial irresponsibility, misguided economic policy and poorly conceived attempts at inadequate stimulus. Not to let anyone off the hook, consumers for years we've been spending money we don't have on crap we don't need. We've seen problems with real estate, credit markets and banking before, and we've seen the results of government intervention. When the role of government is limited and primarily that of a caretaker and manager, it can be a great help. When its response is heavy handed and excessive, it can do far more harm than good.

The reality is that the poorly conceived TARP bailout and the equally foolish stimulus plan are working to suppress the economy and prevent recovery by doing all of the wrong things and producing results too slowly. The TARP bailout gave money away to prop up businesses failing because their methods of doing business were unsupportable, when it should have shut those businesses down, quarantined their bad debt, and sold off their assets to more responsible competitors, even if they needed government loans to make those purchases. By giving more money to companies whose basic business models are flawed and have put them on the brink of failure, they are just encouraging those companies to lose more money, but in this case taxpayer money instead of money from their hapless investors.

About half of the TARP money has been spent, but the current behavior of the stock market and the increasingly unstable status of many lending institutions makes it clear that it is not having any positive effect. The perfect example of this is the situation with AIG, which received $80 billion with no strings attached, immediately spent that money to very little positive effect and then came back asking for another $60 billion to keep it solvent. Under what possible scenario would it make sense to give more money to a company which has already proven it couldn't make use of its previous handout responsibly?

In a bizarre example of doublethink, the advocates of stimulus spending are declaring that we were put in these dire straits because of the uncontrolled spending of the Bush administration, on the basis of which they disqualify all conservatives from having an opinion on the subject. Yet they think that the solution to a problem they admit was contributed to by excessive spending, is to spend enormously more money — spending  more in 2 months than FDR spent in his first 4 years . That just makes no sense at all. The idea that you can spend your way out of recession makes no sense when you're getting the money you spend by further enlarging the deficit which is helping to cause the recession in the first place.

The current stimulus plan cannot work because it isn't designed to stimulate the economy directly enough; it wastes money on huge numbers of non-stimulative programs and passes too much money through the hands of bureaucracies which will reduce its impact while covering their own expenses. It spends $800 billion to produce the impact of maybe a quarter of that amount of spending. And it remains a basic truth that government cannot create jobs with the efficiency and permanence of the private sector; this stimulus plan not only does little to help the private sector, but it also comes with tax increases which will have a crushing effect on small businesses and entrepreneurs who really do create jobs.

About Dave Nalle

  • Zedd

    Dave’s pulling a Dan.

    Write a book why don’t you.

    Clav,

    Huuuurrrrrrrrrrrrrrl, eww eww.

  • Zedd

    Cindy you have a husband? I thought you were gay?

  • http://www.republicofdave.com Dave Nalle

    But too many of us spent the better part of two decades thinking that derivatives traders and hedge-fund managers were to be admired, because they ‘created wealth’ in such mind-boggling amounts for themselves and others.

    I wonder who was thinking that, because it’s remarkably stupid. You create wealth by building a business and producing something of value. You don’t create wealth by subdividing and redefining the value of assets.

    Dave

  • http://www.republicofdave.com Dave Nalle

    Write a book why don’t you.

    I will, Zedd. I wouldn’t want to disappoint you.

    Dave

  • Cindy

    #202 — Zedd

    Cindy you have a husband? I thought you were gay?

    Oh, that is funny. Nope Zedd, when I wished to be gay it just didn’t work. Every morning, I woke up hoping I would have turned gay. Alas, I had to settle for straight.

  • Cindy

    Couples therapy needed in the Economic Stimulus aisle. Let’s see we could use some between Clav and Zedd; Dave and bliffle; Dave and Zedd; Dave and…

    well Dave and everyone, but Clav.

  • Clavos

    I tried being gay once.

    But I’m too morose.

  • Cindy

    lol!

  • Cindy

    Just reminded me of a good graffito.

  • http://drdreadful.blogspot.com Dr Dreadful

    The problem with being gay is that boys are just too smelly. I can see where Cindy is coming from on this one.

    ;-)

  • Cindy

    Dr.D is a student of Dr. Love, I see.

    zing and I set that study straight. Either that or everyone is lying.

    (boys smell just fine…girls just don’t want to admit it)

  • http://biggesttent.blogspot.com/ Silas Kain

    Well, being a student of Mae West I have but one comment, “a hard man is a good thing to find.”

  • Cindy

    Oh I C, you think boys are smelly, Dr.D. Well apparently, so do girls. Though it seems they’re lying. Or maybe they were actually lying when they admitted they were lying.

  • http://drdreadful.blogspot.com Dr Dreadful

    Well, Cindy, if they were lying about lying when they were lying, then maybe you’re lying when you say you know that they know they’re lying about lying oh no I’ve gone cross-eyed.

  • http://handyfilm.blogspot.com handyguy

    Dave, re admiring derivatives traders and hedge fund managers:

    I was saying that the collective ‘we’ admired them [when the market was up] before we decided to despise them [when the market crashed]. Very few people called them villains while they were still making money.

    If you were immune to all the hype, bully for you. But while it may have been a distorted, vacuous version of capitalism, it was capitalism all the same. And it made a lot of people rich before it made a lot more people poor.

  • http://www.republicofdave.com Dave Nalle

    Like most people I didn’t think about the whole derivatives issue much at all, except to have a bad feeling about mortgage banks in general and dump my stock in the one I had stock in.

    In retrospect, while I guess I admire the cleverness of the derivatives traders and I don’t see them as villains, I certainly don’t admire them the same way I would someone who created a real business from a good idea and hard work.

    The villains are not the derivatives traders, they’re the regulators, all the way up to the House Banking Committee who didn’t see the obvious problems in what was going on or who for various reasons chose not to act.

    Dave

  • STM

    Handy: “And it made a lot of people rich before it made a lot more people poor.”

    It made a lot of people rich in what turned out to be a ponzi game that has now brought down the entire glopbal financial system, and when it made a lot of people poor, it made a lot of others poor as well. All of it was at our expense.

    There’s nothing great or anything to admire about the kind of greed these guys engaged in, nor the insane schemes they cooked up – the CDS derivatives in particular. Someone gets a payout banking on another party being unable to pay a debt, and we’ll trade those? Great idea … it’s the corporate equivalent of two bush farmers in the pub betting on a couple of flies crawling up a wall.

    CDOs, on the other hand, aren’t a bad idea … unless they’re dodgy debt packaged up with less-risky debt and then sprinkled with some magic AAA-rated sparkly dust – when clearly, that mortgage debt made them a huge risk and everyone involved in packaging up those tranches knew it.

    Besides which, it was the get-rich-quick demand for CDOs that caused such bizarre lending practices in the sub-prime market, and it is sub-prime that continues to be pinpointed as the spark for the firestorm.

    It was all about lining their own pockets.

    Something to admire?

    I admire people who make and sell things and get rich that way, the way America used to, not lunatics taking over the asylum on Wall Street who dream up the equivalent of pyramid games that have the potential to ruin global economies and who think America’s wealth should depend on their ability to talk fast and shuffle bits of paper around.

    If we ever learn anything from this crisis beyond the need for tighter regulation, it should be that no one should admire that kind of thinking.

  • Zedd

    You also tried being funny once but….

    Then you tried being smart, but alas.

  • Zedd

    Boys are smelly and kinda dense but so darn cute. Actually don’t mind the smelly thing so much either.

  • Clavos

    You also tried being funny once but….

    Then you tried being smart, but alas.

    As if you would know the difference…

  • Sceptic

    Good observations you’ve made there STM.For an excellent analysis of how we moved away from making and selling things to making bubbles I heartily recommend this article Wall Street — Cold, Flat, and Broke-C R Sridhar

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Looks like a good piece. But I’d say it goes back at least twenty years – to Reagan and the onset of global type of corporation.

    Outsourcing is just a consequence. Since everyone caught on to the availability of cheap labor, there was less incentive for the American firms to be innovative and competitive. Why bother when you can rake big profits by drastically reducing production costs?

  • Sceptic

    Roger you are right.It does go back atleast as far back as Reagan .

    I’d like to quote …”The main thrust of the articles was to show that the general economic tendency of mature capitalism is toward stagnation. The main challenge of capitalist economy is surplus capital, which has diminishing opportunities for profitable investment. Deploying investment in the mature productive economy yields fewer returns as the markets are saturated. A number of strategies such as military spending, government spending, consumer spending, exploitation of third-world economies as sources of cheap labor, raw materials, and markets are used to counter stagnation in capitalist economies but do not resolve the problem of stagnation. As the authors point out, “The tendency to stagnation is inherent in the system, deeply rooted and in continuous operation. The counter-tendencies, on the other hand, are varied, intermittent, and (most important), self-limiting.”4

    The problem of surplus capital finding suitable avenues for profitable return is sometimes solved by key inventions and technologies, which provide economic stimuli. The invention of automobile in the “early twentieth century led eventually to huge developments that transformed the U.S. economy, even aside from the mass ownership of automobiles: the building of an extensive system of roads, bridges, and tunnels; the need for a network of gas stations, restaurants, automotive parts and repair shops; the efficient and inexpensive movement of goods from any location to any other location.” But the new information technologies such as computers, software, and the Internet do not appear to provide the same epoch making long-term economic stimuli as automobiles did.5

    In the productive economy, money is used to purchase raw materials, machines, and labor to produce commodities, which are sold, with the capitalist receiving back money (M-C-M). While in speculation, money makes more money directly, represented as M-M. A significant change in the way banks and financial institutions operate today as opposed to the past lies in the fact that the massive borrowed money goes into speculative finance and very little is invested in the productive economy. There is practically no stimulatory effect on the economy: there are few jobs created as there are relatively fewer people employed in the speculative economy. The profits generated by speculation are rarely invested in factories or the service sector but finds its way for financing more risky financial schemes creating speculative bubbles.

    The Magdoff -Sweezy hypothesis mentioned in that article goes back to the 70′s .

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    Sceptic,

    I think you can reduce it even further to one simple principle. Allow (some) people to behave immorally – alas, encourage immoral behavior rather than punish it – and for the most part they will. They’ll all take the path of least resistance. Which is precisely what had happened and what the effect was of deregulation and getting lax on controls.

    Which is kind of mind boggling, when you think of it, because “the conservative mind” is reputed to distrust human nature. But no! Here is an arch-conservative, Reagan – still an idol to the many here – throwing all caution to the wind. Why?

    I suppose it must have to do with some kind of blind faith in the inner goodness and workings of capitalism, unchecked and unregulated. They really have a philosophical dilemma on their hands, trying to escape this contradiction.

    No wonder they’re so depleted of ideas that the only recourse which seems left is raving and ranting.

  • Julia Maple

    A definition of insanity is to keep doing the same thing and to believe you’re going to achieve different results… in other words, the government keeps giving the big companies stimulus packages and the companies use the same old mechanisms, hoping and praying everything will be well… Well… it doesn’t work…