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?
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Article comments
— go to most recent comments1 - Lumpy
i'm just going to live in a cave, smoke weed and kidnap a MILF for a sex slave and eat twinkies and bbq chips 'til it all blows over.
2 - Doug Hunter
Sound good lumpy. I have a weakness for peanut butter and syrup on white bread though.
Dave, there are some interesting ideas in there. I don't think deflation is a good idea as leveraged as we are now. It's no fun to pay off a house when it's worth half as much as when you bought it, but even moreso when the money you're paying is twice as valuable.
3 - bliffle
Dave says:
"What we are faced with is a natural cyclic recession ..."
What the heck does this mean? Why is there a cycle? Why do you say it's natural?
Are you trying, like a religionist, to explain one mystery in terms of another?
Do you just accept this cyclic thing withot question, as an article of faith? Is it beyond mans understanding?
4 - Baritone
Hey Dave,
Are any of those wild fires around Austin endangering your homestead? Hope you and yours are safe.
B
5 - Dave Nalle
Bliffle, economies do go in cycles. That's one of the things we really do understand about them. When you don't mess with them too much they expand and contract on an identifiable cycle. IIRC the normal cycle is about 6 years from high to high. I don't think it's beyond man's understanding, though I'd be hard put to identify an exact mechanism which causes it.
Market analysts talk about cycles in terms of seasons. Right now we'd be in a pretty damned hard winter. See if you can dig up a copy of H. L. Moore's Economic Cycles. It's a bit dated, but a good, straightforward explanation of the idea.
Dave
6 - peterfedrick
The description about the present and previous economic crises is good and do you think all these real solutions can work to put up the financial crises back.
7 - STM
Doug: "I have a weakness for peanut butter and syrup on white bread though"
When will you philistines on the other side of the big pond learn to eat Vegemite?
Perfect for Lumpy's plan, as it's full of vitamins to keep you going.
8 - bliffle
"Bliffle, economies do go in cycles. That's one of the things we really do understand about them."
That's about the same as a religionist saying that god just exists.
Your incurious attitude is astounding.
9 - Georgio
Dave ...I read your really long article with an open mind and even though I did not agree with much of what you said I give you alot of credit for having the guts to expose your ideas and tackle the stimulus plan with ideas instead of the GOP plan of just say NO..
I am not going to try and go through each item you have laid out but there are two items that I want to talk about ..like just giving each tax payer $5000 and call it a day ...How does this help the millions of others who would get nothing and probaly need it the most..and how does it help to build a battery factory in Mich.or how does it help to build a grid system etc etc..in short it does nothing except to give an individual more money to buy more shit.
The second thing is this 'GET RID OF THE CORPORATE TAX...I have heard this so many times from the GOP side so I am curious ..The Rs had the power for at least six of the last eight years ..so WHY didn't they do it ? just asking.
10 - roger nowosielski
Good points, Georgio, especially about rebuilding that battery factory in Michigan, or the grid system, and so on. We're going to need much more innovative solutions if we're to recover.
11 - roger nowosielski
put that in your pipe and smoke it.
12 - Sceptic
Bliffle...economies do go in cycles and then Americans do go downwardly mobile
13 - roger nowosielski
But these are just human costs. They don't matter in the larger scheme of things of the free-market economy going through its cyclical gyrations.
14 - Sceptic
Bliffle...economies do go in cycles and then Americans Mutiny at the Market
That's how the Nalle hypothesis works....
15 - roger nowosielski
That's a good one.
16 - Sceptic
Lol Roger...good one...
17 - Dave Nalle
I am not going to try and go through each item you have laid out but there are two items that I want to talk about ..like just giving each tax payer $5000 and call it a day ...How does this help the millions of others who would get nothing and probaly need it the most..and how does it help to build a battery factory in Mich.or how does it help to build a grid system etc etc..in short it does nothing except to give an individual more money to buy more shit.
More people buying more shit does more to stimulate the economy directly than anything else we can do. If the purpose of the stimulus package IS stimulus then that's the best way to do it. However, clearly the purpose of the package is not really stimulus. And I agree that infrastructure improvements are important. But that stuff really ought to be in the budget, not in a stimulus bill - as is the case with a lot of the other stuff in this bill.
As for how money given to consumers helps a battery factory, $5000 is more than enough to cover the difference in cost between a regular car and a hybrid, and hybrids use a hell of a lot of advanced batteries made in battery factories. And so on.
The second thing is this 'GET RID OF THE CORPORATE TAX...I have heard this so many times from the GOP side so I am curious ..The Rs had the power for at least six of the last eight years ..so WHY didn't they do it ? just asking.
Those who advocate cutting corporate taxes did NOT in fact have power under Bush. Bush wasn't on board for the idea and they didn't have enough voices in the House or Senate to do it. This ongoing misconception that the Bush administration followed anything like a conservative or free market economic policy needs to be nipped in the bud. It just ain't so.
Dave
18 - Sceptic
well....atleast the feeling is mutual:)
19 - roger nowosielski
So how can you expect Obama to do things that Bush and his clique failed to do, whatever their reason? That's insane to expect this administration to institute policies which, as you argue, should have been put into effect during the past eight years when the Republicans were in power. Where were all those brave voices then?
20 - Sceptic
Excellent point Roger...
21 - roger nowosielski
Well, knowing Dave, he's always got an answer.
22 - Baritone
First, I haven't been able to read Dave's article as yet. I may retire in a few years, so I should be able to carve out some time then. :-)
Just a note though which perhaps magnifies Roger's
link a bit.
A couple of days ago I heard a local news story about how the poor economy has hurt the wedding business. People are still getting married, but they are not spending as much as in better times.
My first response was: Who gives a rat's ass? Big weddings are IMO silly and a waste of money. But in a more reflective moment it occured to me that pretty much everyone is getting hit. Regardless of what one may think of big weddings, it does stand to reason that a downturn there hurts purveyors of wedding apparel, florists, other retailers, reception halls, limo rentals, etc., etc. It is a spiraling domino effect, that like some of those incredible displays of hundreds of thousands of falling dominos, the adverse effects of this economy can lead to any number of areas which we might not even consider.
It would appear that the dominos are still falling, and it may be a while before any end comes to light. While Dave and others are disturbed and skeptical (to say the least) about the possible success of Obama's approach, it is clear, regardless of the outcome, that the paradigm is changing. If it doesn't, we will find ourselves back in this hot broth before we know it.
The way in which we do business, and the manner and extent to which government involves itself in the private sector - mainly in the area of oversite - must change. It is clear that left to its own designs, the private sector will not properly regulate itself. It's just not in our nature not to take advantage of situations which will benefit ourselves, even if it may mean doing harm elsewhere. This is simply an extension of the corrupting influence of power.
Obviously, the power government wields is also often corrupted - the government is peopled by, well, people after all. But, either one - the government or the private sector - left to police itself is a recipe for disaster. They represent, if you will, the yin and yang of commerce and its regulation. Neither will properly serve its constituents without the other to leaven their respective power and influence.
B
23 - roger nowosielski
shit keeps on piling.
24 - roger nowosielski
Wall Street.
25 - Sceptic
That's insane to expect this administration to institute policies which, as you argue, should have been put into effect during the past eight years when the Republicans were in power. Where were all those brave voices then?
Roger...while we are still on that point of brave voices...thesedays Nalle speaks about"how we got into the perilous economic situation we are in"
...here's the BRAVE VOICE OF DAVE NALLE NOT TOO LONG AGO in complete denial that there was even a recession.
"There has always been a certain amount of 'structured finance' even if it took somewhat different forms in the past. I remember the 1980s when people were leveraged way beyond anything you see today. And again, the overextended segment of the financial market is still limited in size. Your average investor is probably less overextended today than at other times in history."
There's almost always some sort of crisis looming. I just don't see this one - which was so obvious and predictable - as being worse than most others.
As for the current real estate cycle, there are many parts of the country like Austin where I live which are still going up. Compared to the down cycle in the late 80s this slump is trivial.
Anand, whatever happens in housing is inherently contained because although housing is important, it is only one element of the economy. There's only so much damage that a drop in housing prices and a few foreclosures can actually do.
And keep in mind that if housing values increased 200% in the last 5 years and drop 20% this year, people overall are still going to be ahead.
Yep, we might have a recession. Recessions happen. IMO it's still a little too soon for one. I'd expect another short-term recovery before we have a real recession.
Again, you're operating on the ridiculous assumption that a decline in housing prices harms everyone, when the truth is that as some suffer a tiny bit from seeing their houses that went up 200% in the last 5 years go down 10% leaving them with only 180% profit, others will benefit from more affordable housing, leaving them with more disposable income, benefitting the economy in general. ...and we can all see for ourselves how well the economy has benefitted.
Turns out that 70% of the US GDP is domestic consumption.That being the case, imagine how well buffered our economy is against the kinds of things Anand keeps bringing up.....
The truth is that foreclosures are declining nationwide...
Oh and wait...the WSJ says that the Subprime Crisis is Over. What on earth will we do if the sky stops falling?
A bunch of real estate trading hands with one group of people losing money and another picking up bargains and making money is hardly a disaster in the long run.
I put the current situation in historical context. In that context it's very clear that while there are certainly problems today, the situation is nowhere near as desperate as it was in the crisis periods of the 70s and 80s.
Perhaps we need to redefine the term 'recession'. Even Mike should be able to admit that our current situation doesn't fit the traditional criteria for a recession since we haven't had two consecutive quarters of negative growth.
The Ford-Carter recession was the worst as a percentage of GDP. Compared to both of those the current recession is much less intense. It looks like it's about half-way through and is going to be about 2/3 as bad as the Clinton recession and half as bad as the Ford-Carter recession, based on the rate of decline and depth of decline over time.
Best guess is that it will start to turn around in the next 6 months and we'll be out of recession sometime in 2009. A very nice break for the next president who will get credit for economic developments he has no actual role in, just as Bush got blamed for the Clinton recession.
and the classic foot in the mouther...
As for the 'housing bubble', it's not bursting. Every expert seems to agree that the adjustments are short-term, and the impact of artifically low interest rates wore off quite a while ago. You can bleat about economic doom and gloom all you want, but the evidence just isn't there to support it