I've written a lot about what a bad idea the so-called Stimulus Package and the trillions of dollars of spending which will follow it are. This has led some of those who are still lulled into complacency by the siren song of "hope and change" to complain that I'm offering complaints but no solutions. Some have even issued a childish "if you're so smart come up with a better idea" kind of challenge.
There's no question that it's a lot easier to identify a problem than it is to come up with a solution, but I'm perfectly willing to do both. If I've focused more on the flaws of the current stimulus and recovery proposals, it's because there's no chance for a better solution if we implement policies which make the situation so dire that it will be too late to change course or introduce some common sense. When you cut your foot on a loose nail in your deck, your priority is on stopping the flow of blood first and you hammer the nail back in later.
To figure out solutions you need to first understand the causes of the current crisis. Right now we are largely reacting in blind panic. We need to stop and look back and react rationally based on the evidence of how we got here. In our current crisis there are basically three main causes.
First, there were natural cyclic forces in the economy which caused a slowing of the sustained and robust economic growth on which our business sector and government had come to rely. This slow-down started in 2002 and was superficially countered by Bush's tax cuts and rebates, which actually had the long-term effect of prolonging or delaying the impact of the economic slowdown and preventing a natural recovery.
Second, there was over-extension of credit in the real estate market in the form of bad loans to unqualified borrowers which was then compounded by utterly irresponsible speculative repackaging and marketing of those debts as derivatives. When the robust economic growth which had allowed lenders to get away with these practices began to slow down causing a decline in real estate values, the speculative house of cards they had created came tumbling down. Blame for this problem is easy to assign, both to government policies which encouraged the bad loans and to the lack of government oversight in setting out rules for banking standards and practices which would limit risk and mandate some level of accountability. But the problem has been decades in the making and it's hard to single anyone out as the real culprit because everyone was at fault.
Article comments
— go to most recent comments1 - Joanne Huspek
Thanks, Dave, for a sensible analysis.
People have to get off the train of thought that blames the previous administration for our problems. This goes back decades, and I think both major parties got their fingers dirty on this one.
2 - Roger Nowosielski
A levelheaded article, Dave, that's my first impression - so much the better for keeping the politics and finger-pointing to a minimum.
Two questions: 1) what is your basis for your claim that consumer spending has not suffered; and 2) you speak of the solution(s) being fairly obvious; could you elaborate.
Roger:
Sorry for misspelling your last name. Is the "e" in "Nalle" silent?
3 - STM
Lol. I was wondering how long it would be before you dropped this one, given all the discussion on this lately. It's pretty damn fair comment though Dave - even with a nice bit of libertarian wriggle room thrown in at the end.
We'll see what happens with the stimulus package. Only time will tell. Unfortunately, none of us has much of that precious commodity when it comes to this rather pressing issue.
4 - Clavos
Dave,
Roger's question in # 2 is a fair one.
We are told that the Christmas shopping season was much below previous ones, and we see retail firms turning in miserable results right on into this year; car sales (foreign and domestic brands) are down precipitously, boat sales ditto, electronics retailers declaring bankruptcy, etc., etc.
5 - FSBO Pro
No matter where you are the real estate market has dropped.
6 - handyguy
Two things:
[1] It's an easy, populist canard that TARP was equivalent to pouring money down a rathole. But as The Economist pointed out just before the Tarp bill passed, it would be impossible to prove the negative, to prove that the bailout worked -- and therefore the bailout was doomed always to be politically unpopular, right or wrong.
It is possible that we were indeed saved from something more catastrophic and immediate. Barney Frank put it this way: "It sucked. But without Tarp it would have sucked a lot worse."
And remember that Hank Paulson was a fierce free-marketer before Bernanke convinced him there was no choice but to intervene.
Which brings me to:
[2] Although Dave is correct in saying the situation was years in the making, with many causes and villains [thanks for finally coming around to that viewpoint - you used to say it was solely Fannie, Freddie and the Dems], the immediate cause of the market collapse/total credit freeze of the last 4 months comes down to two things:
Allowing Lehman Brothers to fail
And less than a week later,
Bailing out AIG
That's when the markets hit a death spiral and banks stopped lending to each other.
So simplistically saying that we should just let banks fail [Citibank?? Bank of America??] is a pretty risky solution to propose. How can you possibly be confident that the failure of another big firm wouldn't cause another panic and downward spiral?
You can't.
7 - Roger Nowosielski
Well, I do believe that their "nationalization" - a dirty word to some - is around the corner. Citybank first, and then BofA.
8 - Roger Nowosielski
The following is a good article, especially as regards further links to analyses of the present crisis:
10 Ways to Survive without a Bailout.
9 - Roger Nowosielski
PS: In particular, see the references cited in point #2.
10 - Dave Nalle
1) what is your basis for your claim that consumer spending has not suffered;
What I was referring to was consumer spending ability. While spending was up 1% last month, what I was actually talking about was disposable income, which is higher than it was last year at this time, but is being saved rather than spent. If consumers spent the fairly enormous amount of money they saved last year that they could have spent that would be more real stimulus than TARP and the current bill put together.
and 2) you speak of the solution(s) being fairly obvious; could you elaborate.
This is part one of a two parter.
Sorry for misspelling your last name. Is the "e" in "Nalle" silent?
Indeed it is.
Dave
11 - Hope and Change?
Speaking of a rat hole....
The United States plans to offer more than $900 million to help rebuild Gaza after Israel's invasion and to strengthen the Western-backed Palestinian Authority, U.S. officials said on Monday. ---
What a joke of a policy by King Barrys henchmen! The real facts are that "Israel's invasion" was due to the scumbag terrorist firing rockets at innocent civilians - main targets children and hospitals!!
How does giving $900,000,000 to Palastinans in Gaza help the average Ameircan gain employment or safety? These are the same scumbags that want to destroy Israel and the US!!! It seems the current administration and the Palestinian Authority now have something in common!
Based upon an average US income of $38,600 these monies could have been used to employ 12-24,000 Americans. Instead we give it to two instutions more corrupt and bloated than ours...
Hey King Barry how many Suicide Murderers can you buy for $900 million? To the American Jews in the audience...I guess what King Barry means by "Hope and Change" is...
I HOPE the Palestinians kill off all the Jews and CHANGE Israel into a parking lot!!!
12 - Roger Nowosielski
"If consumers spent the fairly enormous amount of money they saved last year that they could have spent that would be more real stimulus than TARP and the current bill put together."
That may be so, Dave. But one certain reason why they don't is that they're uncertain of the times ahead. This seems to be the real problem here, which has innumerable consequences.
Roger
13 - Dave Nalle
Although Dave is correct in saying the situation was years in the making, with many causes and villains [thanks for finally coming around to that viewpoint - you used to say it was solely Fannie, Freddie and the Dems],
Not exactly. They were big contributors and one of the elements which could be clearly identified and could have been addressed to prevent further problems
And less than a week later,
Bailing out AIG
Which has now asked for $60 billion more. They should have been allowed to go under and the money given to bail them out could have been used to underwrite their debts and finance a takeover. It's way more efficient to do that than to try to prop up a company which continues to operate at a loss.
So simplistically saying that we should just let banks fail [Citibank?? Bank of America??] is a pretty risky solution to propose. How can you possibly be confident that the failure of another big firm wouldn't cause another panic and downward spiral?
Because we have now seen that even with the bailouts the economy went into panic and downward spiral anyway. These banks do have assets and combining those assets with the bailout money and breaking up the banks and selling their assets clearly would have worked better. I don't like the idea of forced bankruptcy, but it's better than throwing taxpayer money into a bank which clearly cannot operate responsibly.
Dave
14 - Dave Nalle
Quite right, Roger. You can't underestimate the importance of consumer confidence. And it is NOT built up by the fearmongering Obama is engaging in or the clear irresponsibility of government with these bailouts. Consumers want to see people held accountable for their actions. They know they aren't getting a bailout and they'd feel more confident if they knew that companies like AIG weren't going to be kept alive beyond their worthiness using consumer tax dollars.
Dave
15 - Roger Nowosielski
BTW, Dave, in anticipation of your follow up, you might want to look at the references I provided in #8 & #9. The first is a PDF file, the second a book review.
Roger
16 - Roger Nowosielski
Another opinion from WSJ today:
'Nationalize' the Banks.
17 - handyguy
I think Dave misinterprets AIG and other bailouts.
The reason Paulson switched gears so suddenly was the cascading, and worldwide, negative market reaction to letting Lehman Brothers fail. And Lehman was the smallest major Wall St investment bank.
Bailing out AIG less than a week later, saying it's too big to fail, too interconnected with other institutions around the world, reinforced the panic mode....the genie was already out of the bottle. It was too late to reassure investors. But that doesn't mean it wouldn't have been even worse if AIG had failed the same week as Lehman.
I know I get flak for pushing PBS's Frontline, but their program "Inside the Meltdown" lays this all out with crystal clarity. And in only 55 minutes.
Watch it. Today. Before you write another I-know-better-than-these-government-idiots piece.
You're assuming the bailouts have failed. But what if things would have been 10 or 100 or 1000 times worse without them?
It's important to remember that Hank Paulson and Ben Bernanke are Republicans and free marketers. Yet they sincerely believed massive federal intervention was the only way to prevent catastrophe. And it's still entirely possible that they were right.
I'm not so willing to second guess them as Dave is. Just because Paulson is lousy at PR doesn't mean he was wrong.
18 - Dave Nalle
BTW, Dave, in anticipation of your follow up, you might want to look at the references I provided in #8 & #9. The first is a PDF file, the second a book review.
Not so far as I can tell. Are you referring to different posts or a different thread?
'Nationalize' the Banks.
A bad idea that's also unnecessary. The exact same result can be accomplished by letting them go under and subsidizing their obligations and takeover.
The reason Paulson switched gears so suddenly was the cascading, and worldwide, negative market reaction to letting Lehman Brothers fail. And Lehman was the smallest major Wall St investment bank.
Bailing out AIG less than a week later, saying it's too big to fail, too interconnected with other institutions around the world, reinforced the panic mode....the genie was already out of the bottle. It was too late to reassure investors. But that doesn't mean it wouldn't have been even worse if AIG had failed the same week as Lehman.
I've looked at the history of the Lehman brothers bankruptcy. Its assets were of sufficient value that no one involved ultimately took an unsustainable loss. I don't see how it can be blamed in any but the smallest part for the subsequent market decline. More likely the decline was coming and the Lehman collapse was precipitated by weakening economic conditions.
You're assuming the bailouts have failed. But what if things would have been 10 or 100 or 1000 times worse without them?
Technically most of the bailout spending hasn't even happened yet, so that scenario is implausible.
It's important to remember that Hank Paulson and Ben Bernanke are Republicans and free marketers. Yet they sincerely believed massive federal intervention was the only way to prevent catastrophe. And it's still entirely possible that they were right.
I'm not necessarily arguing against federal intervention, I just think that the kinds of bailouts found in the TARP bill are an irresponsible way to deal with these companies. If anything I prefer an approach with more government involvement and oversight, though still short of nationalization.
It would be less expensive to break up the failing companies, sell off their assets, use some federal money to subsidize the companies taking over their liabilities. AIG is a perfect example of why this would have been a better approach. If we had done this with AIG they would not be coming back for $60 billion more now.
Dave
I'm not so willing to second guess them as Dave is. Just because Paulson is lousy at PR doesn't mean he was wrong.
19 - Roger Nowosielski
No, this one, remark #8; (point #2, once you're inside, provides further links).
20 - Silas Kain
In watching the saga unfold in Washington since Mr. Obama took office, I am struck by how dumb we Americans have become. Dave, this economic crisis is the tip of the iceberg as this great Union of ours dissolves. On Bill Maher's show last Friday night, Maxine Waters remarked that Americans do not know how close we are to dissolution. She didn't use those words exactly, but the implication was made.
That Stimulus Package got rammed down our throats. Our Senators and Congresspeople mortgaged the lives of our grandchildren without blinking an eye. How many of those 535 individuals actually read the entire package? I'd venture to say none. But in all fairness to those members of Congress, we tend to elect snapshot of ourselves.
Dave, you are on target about the need for a rational, calm approach to solving this crisis. But there's a problem. We're an irrational society steeped in sound bytes and anagrams. We are a people with short attention spans. Rush Limbaugh boasts that Obama will fail and those on the left are up in arms. The reality is that Obama most probably will fail. But it won't be his fault " it will be ours collectively. You see, Barack Obama and mainstream America share a common enemy " the members of Congress. It's time for a Constitutional Convention.
21 - Roger Nowosielski
That might not be such a bad idea, Silas. The crisis at hand would certainly justify such a move.
22 - Roger Nowosielski
Besides, it would be much more forceful than the present (rather lame) attempt on the part of the states to declare "sovereignty."
I'd second THAT motion.
23 - handyguy
I'm not just pulling this out of a hat. Ask anyone who worked on Wall St or was a journalist covering Wall St: allowing Lehman Brothers to fail [Paulson trying to assert 'moral hazard' in refusing to bail them out] was the catalyst.
The Dow plunged 500 points on Sept. 15, the day Lehman announced bankruptcy. The reason is that it was so interconnected to other banks and companies: this was not just the failure of one poorly run company in isolation.
Its $4 billion in mortgage backed securities affected a lot of other institutions in a major way. It caused two major cash/money market funds to "break the buck" [fall below $1 per share], an important psychological milestone. Freddie Mac was affected, as were banks and companies in London, Japan, Hong Kong, and Korea.
24 - handyguy
Dave's preferred solution for the banks is also Tim Geithner's [government management short of nationalization].
Geithner's critics say this lets the banks off too easily and only postpones the pain.
I'm not taking sides, yet.
25 - STM
Handy's right ... it was Lehman's collapse that sparked the whole thing. Mind you, the entire thing was a house of cards anyway.