The Ultimate Stimulus Pro and Con thread

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purpleoscar

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In this thread I'll post pro and con stimulus articles to keep it less messy and having the subject spill over to other threads. Feel free to post your economic opinions and articles from any side of the political spectrum.
 
Krugman would be a good place to start:

http://www.nytimes.com/2008/12/15/opinion/15krugman.html?_r=1

European Crass Warfare
By PAUL KRUGMAN
So here’s the situation: the economy is facing its worst slump in decades. The usual response to an economic downturn, cutting interest rates, isn’t working. Large-scale government aid looks like the only way to end the economic nosedive.

But there’s a problem: conservative politicians, clinging to an out-of-date ideology — and, perhaps, betting (wrongly) that their constituents are relatively well positioned to ride out the storm — are standing in the way of action.

No, I’m not talking about Bob Corker, the Senator from Nissan — I mean Tennessee — and his fellow Republicans, who torpedoed last week’s attempt to buy some time for the U.S. auto industry. (Why was the plan blocked? An e-mail message circulated among Senate Republicans declared that denying the auto industry a loan was an opportunity for Republicans to “take their first shot against organized labor.”)

I am, instead, talking about Angela Merkel, the German chancellor, and her economic officials, who have become the biggest obstacles to a much-needed European rescue plan.

The European economic mess isn’t getting very much attention here, because we’re understandably focused on our own problems. But the world’s other economic superpower — America and the European Union have roughly the same G.D.P. — is arguably in as much trouble as we are.

The most acute problems are on Europe’s periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina; Ukraine is the new Indonesia. But the pain has also reached the big economies of Western Europe: Britain, France, Italy and, the biggest of all, Germany.

As in the United States, monetary policy — cutting interest rates in an effort to perk up the economy — is rapidly reaching its limit. That leaves, as the only way to avert the worst slump since the Great Depression, the aggressive use of fiscal policy: increasing spending or cutting taxes to boost demand. Right now everyone sees the need for a large, pan-European fiscal stimulus.

Everyone, that is, except the Germans. Mrs. Merkel has become Frau Nein: if there is to be a rescue of the European economy, she wants no part of it, telling a party meeting that “we’re not going to participate in this senseless race for billions.”

Last week Peer Steinbrück, Mrs. Merkel’s finance minister, went even further. Not content with refusing to develop a serious stimulus plan for his own country, he denounced the plans of other European nations. He accused Britain, in particular, of engaging in “crass Keynesianism.”

Germany’s leaders seem to believe that their own economy is in good shape, and in no need of major help. They’re almost certainly wrong about that. The really bad thing, however, isn’t their misjudgment of their own situation; it’s the way Germany’s opposition is preventing a common European approach to the economic crisis.

To understand the problem, think of what would happen if, say, New Jersey were to attempt to boost its economy through tax cuts or public works, without this state-level stimulus being part of a nationwide program. Clearly, much of the stimulus would “leak” away to neighboring states, so that New Jersey would end up with all of the debt while other states got many if not most of the jobs.

Individual European countries are in much the same situation. Any one government acting unilaterally faces the strong possibility that it will run up a lot of debt without creating much domestic employment.

For the European economy as a whole, however, this kind of leakage is much less of a problem: two-thirds of the average European Union member’s imports come from other European nations, so that the continent as a whole is no more import-dependent than the United States. This means that a coordinated stimulus effort, in which each country counts on its neighbors to match its own efforts, would offer much more bang for the euro than individual, uncoordinated efforts.

But you can’t have a coordinated European effort if Europe’s biggest economy not only refuses to go along, but heaps scorn on its neighbors’ attempts to contain the crisis.

Germany’s big Nein won’t last forever. Last week Ifo, a highly respected research institute, warned that Germany will soon be facing its worst economic crisis since the 1940s. If and when this happens, Mrs. Merkel and her ministers will surely reconsider their position.

But in Europe, as in the United States, the issue is time. Across the world, economies are sinking fast, while we wait for someone, anyone, to offer an effective policy response. How much damage will be done before that response finally comes?
 
The ugly spectre of 'new Keynesianism'

The ugly spectre of 'new Keynesianism'
Peter Foster, Financial Post
Published: Wednesday, December 17, 2008

Zombie Keynesianism, with its promise of 10,000-volt stimulus, continues to lurch around the political scene, while John Maynard Keynes' acolytes struggle to gussy up his policy Frankenstein for another prime time appearance.

Chief among Lord Keynes' public proponents are economist Joseph Stiglitz and his biographer, Robert (Lord) Skidelsky.

Professor Stiglitz recently wrote in Vanity Fair of the importance of understanding the roots of the present crisis. "The battle for the past will determine the battle for the present," he wrote, reflecting communications strategy from Nineteen Eighty-Four. "So it's crucial to get the history straight."

It is indeed crucial to understand the past, but rather than clarifying Keynesian history, both Messrs. Skidelsky and Stiglitz seem intent on shoving inconvenient truths down the memory hole, and engaging in rhetoric rather than objective analysis.

There is an old economic joke: "Sure, it fails in practice but does it work in theory?" The approach of Messrs. Stiglitz and Skidelsky is to bury the evidence of practice, demonize straw-man opposition and not so much establish the theory as simply assert its moral credentials.

No comment has been more eagerly leapt upon by interventionists than Alan Greenspan's mea culpa about his misplaced faith in markets. In a piece in last Sunday's New York Times, Lord

Skidelsky suggested that since the case for light regulation lies in the market "efficiency" that Mr. Greenspan found wanting, then the free-market capitalism jig is up.

In fact, the case for free markets since Adam Smith has not been that they are perfect, but that they represent an astonishing co-ordinating mechanism that government attempts to improve -- beyond the protection of property, and the enforcement of contracts -- at everybody's peril.

If Mr. Skidelsky is interested in mea culpas, meanwhile, a more relevant one is that of former British prime minister James Callaghan, who said, in 1976, "We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists; and that insofar as it ever did exist, it only worked by injecting bigger doses of inflation into the economy followed by higher levels of unemployment as the next step. That is the history of the past 20 years."

Lord Keynes was concerned about a very real problem in the 1930s: that economies might be "stuck" at a low level of output and a high level of unemployment, which he saw as a failure of classical economic theory. His analysis was contained in his book, The General Theory of Employment, Interest and Money, which was published in 1936. Keynes claimed that such a phenomenon -- when individuals were, in their irrational fear, allegedly socking away cash in their mattresses -- required government expenditure to keep up "aggregate demand." It didn't matter where the government spent -- be it roads, pyramids or even wars -- such expenditure was needed to jolt the economy back to full employment.

Adam Smith had observed that "What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom." Keynes' version, as economist James Buchanan pointed out, turned this wisdom on its head: "What is folly in the conduct of a private family may be prudence in the conduct of the affairs of a great nation."

Spend yourself rich!

But how could government inject anything into an economy that it did not take out, either currently via taxes, or by taking on the burden of debt? In fact Keynes said that government deficits should be matched by corresponding surpluses in good times, but Keynesianism inevitably proved a one-way pendulum, as Professor Buchanan had warned. Meanwhile Friedrich Hayek, who was both Keynes' friend and rival, had pointed out that there was an even greater danger in any policy system that implied that governments knew best; it was called The Road to Serfdom.

Significantly, both Hayek and Buchanan were stigmatized for their apostasy, not least because Keynesianism -- with its stratospheric world-view and its promotion of "macroeconomics" -- proved wildly popular with both politicians and policy wonks.

As Milton Friedman, wrote: "Here was one of the most famous and respected economists in the world informing governments that the way to full employment was paved with higher spending and lower taxes. What more attractive advice could politicians wish for?"

Keynes was at least vaguely aware of the potential dangers of his policies, but chose to believe that the politicians to whom he gave advice shared his own sense of noblesse oblige.

In a famous letter congratulating him upon the publication of The Road to Serfdom, Keynes wrote to Hayek: "Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the way to hell if they were executed by those who think and feel wrongly."

As Professor Friedman mischievously pointed out, Keynes' agreement with "virtually the whole" of The Road to Serfdom obviously did not extend to the chapter titled "Why the Worst Get on Top"!

Meanwhile Keynes' theories had other purely economic flaws, a major one of which was pointed out by Robert Lucas. Professor Lucas's theory of "rational expectations" pointed out that the success of Keynesian stimulus depended essentially on fooling all of the people all of the time. In fact, businessmen would tailor their decisions to government policies, thus neutralizing them.

Keynesianism has thus been found fatally wanting in both theory and practice, so why is it back? One reason is sheer political desperation, or as Professor Lucas put it, "I guess everyone is a Keynesian in a foxhole."

However, the support of Messrs Stiglitz, Skidelsky and other modern liberals, such as Paul Krugman, is also based on a fundamental distaste for free-market capitalism as the rule of greed and materialism(not to mention a system that deprives them of their rightful role as society's guardians).

Professor Stiglitz looks at the doughnut and sees only a hole: the economy in his eyes is everywhere plagued by "market failure." Lord Skidelsky's moralistic approach is on flagrant display in an article in the current Prospect magazine. He fulminates against materialism and "the corruption of money." He denigrates "off-shoring." He bemoans globalization and the "rape of nature." Above all, he projects a world in which a race of omniscient Keynesian geniuses make markets "well-behaved" and render globalization "efficient and acceptable."

Lord Skidelsky stresses with approval that Keynes was "a moralist as well as an economist. He believed that material wellbeing is a necessary condition of the good life, but that beyond a certain standard of comfort, its pursuit can produce corruption, both for the individual and for society."

So a guardian class must decide, presumably, what an acceptable dividing line between "comfort" and "corruption" will be. Otherwise, as Keynes hysterically suggested, "We are capable of shutting off the sun and the stars because they do not pay a dividend."

Such is the thinking behind the "new" Keynsianism. High moralism. Desperate politics. Terrible economics.
 
Everyone, that is, except the Germans. Mrs. Merkel has become Frau Nein: if there is to be a rescue of the European economy, she wants no part of it, telling a party meeting that “we’re not going to participate in this senseless race for billions.”

Last week Peer Steinbrück, Mrs. Merkel’s finance minister, went even further. Not content with refusing to develop a serious stimulus plan for his own country, he denounced the plans of other European nations. He accused Britain, in particular, of engaging in “crass Keynesianism.”

Germany’s leaders seem to believe that their own economy is in good shape, and in no need of major help. They’re almost certainly wrong about that. The really bad thing, however, isn’t their misjudgment of their own situation; it’s the way Germany’s opposition is preventing a common European approach to the economic crisis.

I agree with them to not develop a stimulus plan. It wouldn't work imo...so I think saying that they misjudge the situation is just wrong.
But I agree with him that this behaviour is preventing common european plans. Honestly I don't know if I should find that good or bad.
 
Anyone who thought the dollar, or capitalism wouldn't fail in some way is a fool and hasn't paid attention to history...

The government controls interest rates and stoked borrowing by having low interest rates for a long time. Economists know that people save less and borrow more with very low interest rates. I would say the government created a moral hazard and greedy people dived in. Recessions are the necessary lessons to bring the economy back to an equilibrium of saving and spending. The government's role to me is to help move people from unproductive industries to productive ones but it would have been less painful to not have lowered the interest rates as low as they did in the past 20 years.

This generation will probably start saving more but you know future generations might get spoiled again and the government will manipulate to low interest rates again for too long and greedy people will start again with flipping assets. It happens every generation at least once. Those people who know what that means will save during the next boom and when the bust comes they will handle it better each time.

In the end there may not be a run on the dollar because the U.S. will have to raise interest rates if in a year from now deflation turns into inflation from all the printed money that's being created now. It all depends on when China wants to sell U.S. bonds. Until that point the world keeps looking at the U.S. dollar like it's a gold standard. The question will be to see which will happen first.
 
This generation will probably start saving more but you know future generations might get spoiled again and the government will manipulate to low interest rates again for too long and greedy people will start again with flipping assets. It happens every generation at least once.

that's why I'm for a redistribution of taxes, otherwise I'll have to pay for all that's going on right now when I retire and sure my kids will...
 
that's why I'm for a redistribution of taxes, otherwise I'll have to pay for all that's going on right now when I retire and sure my kids will...

Well we've had redistributionism for a long time anyways and there will always be some, but I understand your frustration.

Now that there are bailouts all kinds of industries and lobby groups are standing up and and saying "me too". Industries that are left out will feel cheated. This is why I'm against bailouts. It punishes those who did the right thing and creates more moral hazards.
 
Well we've had redistributionism for a long time anyways and there will always be some, but I understand your frustration.

ok, but imo that's not enough... the whole welfare system could be a lot better, if those who have the money would pay just a little more than others. :shrug:

A bailout would not only help a specific lobby. Everyone depends on each other in a way. So, I think I can't really say who gets punished and who would benefit from it.
 
http://www.nytimes.com/2008/12/29/opinion/29krugman.html?_r=1

December 29, 2008
Op-Ed Columnist
Fifty Herbert Hoovers
By PAUL KRUGMAN
No modern American president would repeat the fiscal mistake of 1932, in which the federal government tried to balance its budget in the face of a severe recession. The Obama administration will put deficit concerns on hold while it fights the economic crisis.

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future.

These state-level cutbacks range from small acts of cruelty to giant acts of panic — from cuts in South Carolina’s juvenile justice program, which will force young offenders out of group homes and into prison, to the decision by a committee that manages California state spending to halt all construction outlays for six months.

Now, state governors aren’t stupid (not all of them, anyway). They’re cutting back because they have to — because they’re caught in a fiscal trap. But let’s step back for a moment and contemplate just how crazy it is, from a national point of view, to be cutting public services and public investment right now.

Think about it: is America — not state governments, but the nation as a whole — less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago? Of course not. Our capacity hasn’t been diminished; our workers haven’t lost their skills; our technological know-how is intact. Why can’t we keep doing good things?

It’s true that the economy is currently shrinking. But that’s the result of a slump in private spending. It makes no sense to add to the problem by cutting public spending, too.

In fact, the true cost of government programs, especially public investment, is much lower now than in more prosperous times. When the economy is booming, public investment competes with the private sector for scarce resources — for skilled construction workers, for capital. But right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle.

And shredding the social safety net at a moment when many more Americans need help isn’t just cruel. It adds to the sense of insecurity that is one important factor driving the economy down.

So why are we doing this to ourselves?

The answer, of course, is that state and local government revenues are plunging along with the economy — and unlike the federal government, lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

Are governors responsible for their own predicament? To some extent. Arnold Schwarzenegger, in particular, deserves some jeers. He became governor in the first place because voters were outraged over his predecessor’s budget problems, but he did nothing to secure the state’s fiscal future — and he now faces a projected budget deficit bigger than the one that did in Gray Davis.

But even the best-run states are in deep trouble. Anyway, we shouldn’t punish our fellow citizens and our economy to spite a few local politicians.

What can be done? Ted Strickland, the governor of Ohio, is pushing for federal aid to the states on three fronts: help for the neediest, in the form of funding for food stamps and Medicaid; federal funding of state- and local-level infrastructure projects; and federal aid to education. That sounds right — and if the numbers Mr. Strickland proposes are huge, so is the crisis.

And once the crisis is behind us, we should rethink the way we pay for key public services.

As a nation, we don’t believe that our fellow citizens should go without essential health care. Why, then, does a large share of funding for Medicaid come from state governments, which are forced to cut the program precisely when it’s needed most?

An educated population is a national resource. Why, then, is basic education mainly paid for by local governments, which are forced to neglect the next generation every time the economy hits a rough patch?

And why should investments in infrastructure, which will serve the nation for decades, be at the mercy of short-run fluctuations in local budgets?

That’s for later. The priority right now is to fight off the attack of the 50 Herbert Hoovers, and make sure that the fiscal problems of the states don’t make the economic crisis even worse.
 
http://www.europac.net/externalframeset.asp?from=home&id=15036

December 29, 2008

There's No Pain-Free Cure for Recession: Peter Schiff's Editorial in Wall Street Journal

As recession fears cause the nation to embrace greater state control of the economy and unimaginable federal deficits, one searches in vain for debate worthy of the moment. Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug.

With faith in the free markets now taking a back seat to fear and expediency, nearly the entire political spectrum agrees that the federal government must spend whatever amount is necessary to stabilize the housing market, bail out financial firms, liquefy the credit markets, create jobs and make the recession as shallow and brief as possible. The few who maintain free-market views have been largely marginalized.

Taking the theories of economist John Maynard Keynes as gospel, our most highly respected contemporary economists imagine a complex world in which economics at the personal, corporate and municipal levels are governed by laws far different from those in effect at the national level.

Individuals, companies or cities with heavy debt and shrinking revenues instinctively know that they must reduce spending, tighten their belts, pay down debt and live within their means. But it is axiomatic in Keynesianism that national governments can create and sustain economic activity by injecting printed money into the financial system. In their view, absent the stimuli of the New Deal and World War II, the Depression would never have ended.

On a gut level, we have a hard time with this concept. There is a vague sense of smoke and mirrors, of something being magically created out of nothing. But economics, we are told, is complicated.

It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.

I believe these ideas hold sway largely because they promise happy, pain-free solutions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice.

As a follower of the Austrian School of economics I believe that market forces apply equally to people and nations. The problems we face collectively are no different from those we face individually. Belt tightening is required by all, including government.

Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn't have a surplus, then it must come from taxes. If taxes don't go up, then it must come from increased borrowing. If lenders won't lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation. Something cannot be effortlessly created from nothing.

Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.

If we look at government market interventions through this pragmatic lens, what can we expect from the coming avalanche of federal activism?

By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired. For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation.

The good news is that economics is not all that complicated. The bad news is that our economy is broken and there is nothing the government can do to fix it. However, the free market does have a cure: it's called a recession, and it's not fun, easy or quick. But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.

Mr. Schiff is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets"
 
In this thread I'll post pro and con stimulus articles to keep it less messy and having the subject spill over

I won't discuss 'pros and cons' or "less messy" or 'spill over' aspects


but. I will contribute this much,
for the best result, a stimulus plan should start
with some lotion
 
But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.

Too bad the New Deal worked. Neoliberals trying to make us wet our pants at the idea of government intervention will wail and gnash their teeth trying to avoid that point.
 
Too bad the New Deal worked. Neoliberals trying to make us wet our pants at the idea of government intervention will wail and gnash their teeth trying to avoid that point.

Not all economists think the New Deal worked. Many feel it didn't and exacerbated the recession into a depression, especially with trade barriers.

It's nice though to have some people all for the stimulus because the proof is in the pudding.

I actually think we were doing the stimulus for over a decade when the fed decided that core inflation is all that mattered when it came to interest rates and the result is what's happening now. If printing money was the solution why don't we just keep printing money all the time? Zimbabwe should be rich by now. :wink:
 
Not all economists think the New Deal worked. Many feel it didn't and exacerbated the recession into a depression, especially with trade barriers.

It's nice though to have some people all for the stimulus because the proof is in the pudding.

I actually think we were doing the stimulus for over a decade when the fed decided that core inflation is all that mattered when it came to interest rates and the result is what's happening now. If printing money was the solution why don't we just keep printing money all the time? Zimbabwe should be rich by now. :wink:

I'm not an expert but the most commonly cited trade barrier that exacerbated the Depression was the Hawley-Smoot Tariff Act, which was passed in 1930. FDR didn't take office until 1932.

Graph! The second shaded area is around 1937 when Roosevelt did the "responsible thing" and tried to balance the budget.

depression_gdp.png
 
I'm not an expert but the most commonly cited trade barrier that exacerbated the Depression was the Hawley-Smoot Tariff Act, which was passed in 1930. FDR didn't take office until 1932.

Graph! The second shaded area is around 1937 when Roosevelt did the "responsible thing" and tried to balance the budget.

Yeah but wouldn't it be nice if he removed the trade barriers and everyone else? I think the problem people are worried about is that the U.S. already has a huge deficit and overall debt and with Obama wanting to add more it's just going to be a short-term spurt for those who can still borrow. The rest of the population won't because they have enough debt already. Even if there is a recovery the problem of paying off the debt (which is what Keynes wanted) is the unpopular thing to do for politicians because raising taxes or cutting spending would have to happen for a balanced budget. The U.S. can't afford to default like Argentina. If there is a run on the dollar the U.S. maybe forced to raise interest rates when they don't want to just to keep foreign investment.

Bush lowered taxes and increased entitlement spending leading to this fiscal problem by bridging the difference with debt. Investors in the U.S. will have to have confidence that the U.S. can pay it back.

It will be interesting to see what Volker does. He was there during Carter and Reagan eras when the interest rates were raised very high. It takes 6 - 9 months for a stimulus to start showing up on statistics so we'll have to wait and see.
 
It will be interesting to see what Volker does. He was there during Carter and Reagan eras when the interest rates were raised very high. It takes 6 - 9 months for a stimulus to start showing up on statistics so we'll have to wait and see.


Just started reading this months Vanity Fair Magazine, actually you can read this article online.

From "Capitalist Fools article:

Joseph E. Stiglitz on capitalist fools: About Us: vanityfair.com

No. 1: Firing the Chairman

In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.

Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000–2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown—as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation—or “liar”—loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn’t have the tools, he could have gone to Congress and asked for them.



Let's hope Volker/Obama and any other great strategic minds, can pull this economy up sometime in the near future.
 
U.S. Debt Set to Soar in This Year - washingtonpost.com

U.S. Debt Expected To Soar This Year
$2 Trillion Increase May Test Federal Ability to Borrow

By Lori Montgomery
Washington Post Staff Writer
Saturday, January 3, 2009; A01



With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world's appetite for financing U.S. government spending.

For now, investors are frantically stuffing money into the relative safety of the U.S. Treasury, which has come to serve as the world's mattress in troubled times. Interest rates on Treasury bills have plummeted to historic lows, with some short-term investors literally giving the government money for free.

But about 40 percent of the debt held by private investors will mature in a year or less, according to Treasury officials. When those loans come due, the Treasury will have to borrow more money to repay them, even as it launches perhaps the most aggressive expansion of U.S. debt in modern history.

With the government planning to roll over its short-term loans into more stable, long-term securities, experts say investors are likely to demand a greater return on their money, saddling taxpayers with huge new interest payments for years to come. Some analysts also worry that foreign investors, the largest U.S. creditors, may prove unable to absorb the skyrocketing debt, undermining confidence in the United States as the bedrock of the global financial system.

While the current market for Treasurys is booming, it's unclear whether demand for debt can be sustained, said Lou Crandall, chief economist at Wrightson ICAP, which analyzes Treasury financing trends.

"There's a time bomb in there somewhere," Crandall said, "but we don't know exactly where on the calendar it's planted."

The government's hunger for cash began growing exponentially as the nation slipped into recession in the wake of a housing foreclosure crisis a year ago. Washington has since approved $168 billion in spending to stimulate economic activity, $700 billion to prevent the collapse of the U.S. financial system, and multibillion-dollar bailouts for a variety of financial institutions, including insurance giant American International Group and mortgage financiers Fannie Mae and Freddie Mac.

Despite those actions, the economic outlook has continued to darken. Now, Obama and congressional Democrats are debating as much as $850 billion in new federal spending and tax cuts to create or preserve jobs and slow the grim, upward march of unemployment, which stood in November at 6.7 percent.

Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.

Some of the borrowing was done during the fiscal year that ended in September, when the Treasury added nearly $720 billion to the national debt. But the big borrowing binge will come during the current fiscal year, when the cost of the bailouts plus another stimulus package combined with slowing tax revenues will force the government to increase the debt by as much as $2 trillion to finance its obligations, according to a Treasury survey of bond dealers and other market analysts.

As of yesterday, the debt stood at nearly $10.7 trillion, of which about $4.3 trillion is owed to other government institutions, such as the Social Security trust fund. Debt held by private investors totals nearly $6.4 trillion, or a little over 40 percent of gross domestic product.

According to the most recent figures, foreign investors held about $3 trillion in U.S. debt at the end of October. China, which in October replaced Japan as the United States' largest creditor, has increased its holdings by 42 percent over the past year; Britain and the Caribbean banking countries more than doubled their holdings.

Economists from across the political spectrum have endorsed the idea of going deeper into debt to combat what many call the most dangerous economic conditions since the Great Depression. The United States is in relatively good financial shape compared with other industrial nations, such as Japan, where the public debt equaled 182 percent of GDP in 2007, or Germany, where the debt was 65 percent of GDP, according to a forthcoming report by Scott Lilly, a senior fellow at the Center for American Progress.

Even a $2 trillion increase would push the U.S. debt to about 53 percent of the overall economy, "only a few percentage points above where it was in the early 1990s," Lilly writes, noting that plummeting interest rates show that "much of the world seems not only willing but anxious to invest in U.S. Treasurys, which are seen as the safest security that an investor can own in a risky world economy."

Still, some analysts are concerned that the deepening global recession will force some of the largest U.S. creditors to divert cash to domestic needs, such as investing in their own banks and economies. Even if demand for U.S. debt keeps pace with supply, investors are likely to demand higher interest rates, these analysts said, driving up debt-service payments, which last year stood at $250 billion.

"When you accumulate this amount of debt that we're moving into, it's not a given that our foreign friends are going to continue on the path they've been on," said G. William Hoagland, a longtime Republican budget analyst who now serves as vice president for public policy at the health insurer Cigna. "There's going to come a time when we can't even pay the interest on the money we've borrowed. That's default."

Others say those fears are overblown. The market for U.S. Treasurys is by far the largest and most liquid bond market in the world, and big institutional investors have few other places to safely invest large sums of reserve cash.

Despite their growing domestic needs, "China and the oil countries are going to continue running large surpluses," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "They certainly will be using money elsewhere, but I don't think that means they won't give it to us."

As for the specter of default, Steven Hess, lead U.S. analyst for Moody's Investors Service, said even a $2 trillion increase in borrowing would not greatly diminish the U.S. financial condition. "It's not alarmingly high by our AAA standards," he said. "So we don't think there's pressure on the rating yet."

But that could change, Hess said. Nearly a year ago, Moody's raised an alarm about the skyrocketing costs of Social Security and Medicare as the baby-boom generation retires, saying the resulting budget deficits could endanger the U.S. bond rating. Even as the nation sinks deeper into debt to finance its own economic recovery, several analysts said it will be critical for Obama to begin to address the looming costs of the entitlement programs and signal that he has no intention of letting the debt spiral out of control.

Failure to do so, Bergsten said, would "create dangers . . . in market psychology and continued confidence in the dollar."
 
I'm not an expert but the most commonly cited trade barrier that exacerbated the Depression was the Hawley-Smoot Tariff Act, which was passed in 1930. FDR didn't take office until 1932.

Graph! The second shaded area is around 1937 when Roosevelt did the "responsible thing" and tried to balance the budget.

depression_gdp.png

don't overlook the affects of ww2 on the economy. i think the graph starts trending consistently upward around 1939 for multiple reasons.
 
consumers continue to heed oscar's warnings.

http://www.nytimes.com/2009/01/09/business/economy/09shop.html?pagewanted=1&_r=1

Retail sales fell 2.2 percent for the holiday shopping season, the biggest decline since at least 1970, according to the International Council of Shopping Centers. December sales dropped 1.7 percent on top of even-weaker November sales, when chains posted a 2.7 percent decline, the council said.

...

Retailing analysts said the economy, rising unemployment, winter storms and a dearth of compelling fashions hurt sales in December. And they noted that Thursday’s figures all but ensured a rash of bankruptcies in the next few months.
 
What Obama Must Do : Rolling Stone

What Obama Must Do

A Letter to the New President
PAUL KRUGMAN

Dear Mr. President:

Like FDR three-quarters of a century ago, you're taking charge at a moment when all the old certainties have vanished, all the conventional wisdom been proved wrong. We're not living in a world you or anyone else expected to see. Many presidents have to deal with crises, but very few have been forced to deal from Day One with a crisis on the scale America now faces.

So, what should you do?
In this letter I won't try to offer advice about everything. For the most part I'll stick to economics, or matters that bear on economics. I'll also focus on things I think you can or should achieve in your first year in office. The extent to which your administration succeeds or fails will depend, to a large extent, on what happens in the first year — and above all, on whether you manage to get a grip on the current economic crisis.

The Economic Crisis
How bad is the economic outlook? Worse than almost anyone imagined.
The economic growth of the Bush years, such as it was, was fueled by an explosion of private debt; now credit markets are in disarray, businesses and consumers are pulling back and the economy is in free-fall. What we're facing, in essence, is a yawning job gap. The U.S. economy needs to add more than a million jobs a year just to keep up with a growing population. Even before the crisis, job growth under Bush averaged only 800,000 a year — and over the past year, instead of gaining a million-plus jobs, we lost 2 million. Today we're continuing to lose jobs at the rate of a half million a month.

There's nothing in either the data or the underlying situation to suggest that the plunge in employment will slow anytime soon, which means that by late this year we could be 10 million or more jobs short of where we should be. This, in turn, would mean an unemployment rate of more than nine percent. Add in those who aren't counted in the standard rate because they've given up looking for work, plus those forced to take part-time jobs when they want to work full-time, and we're probably looking at a real-world unemployment rate of around 15 percent — more than 20 million Americans frustrated in their efforts to find work.

The human cost of a slump that severe would be enormous. The Center on Budget and Policy Priorities, a nonpartisan research group that analyzes government programs, recently estimated the effects of a rise in the unemployment rate to nine percent — a worst-case scenario that now seems all too likely. So what will happen if unemployment rises to nine percent or more? As many as 10 million middle-class Americans would be pushed into poverty, and another 6 million would be pushed into "deep poverty," the severe deprivation that happens when your income is less than half the poverty level. Many of the Americans losing their jobs would lose their health insurance too, worsening the already grim state of U.S. health care and crowding emergency rooms with those who have nowhere else to go. Meanwhile, millions more Americans would lose their homes. State and local governments, deprived of much of their revenue, would have to cut back on even the most essential services.

If things continue on their current trajectory, Mr. President, we will soon be facing a great national catastrophe. And it's your job — a job no other president has had to do since World War II — to head off that catastrophe.
Wait a second, you may say. Didn't other presidents also face troubled economies? Yes, they did — but when it came to economic policy, your predecessors weren't actually running the show. For the past half century the Federal Reserve — a more or less independent institution, run by technocrats and deliberately designed to be independent of whoever happens to occupy the White House — has been taking care of day-to-day, and even year-to-year, economic management. Your fellow presidents were just along for the ride.

Remember the economic boom of 1984, which let Ronald Reagan run on the slogan "It's morning again in America"? Well, Reagan had absolutely nothing to do with that boom. It was, instead, the work of Paul Volcker, whom Jimmy Carter appointed as chairman of the Federal Reserve Board in 1979 (and who's now the head of your economic advisory panel). First Volcker broke the back of inflation, at the cost of a recession that probably doomed Carter's re-election chances in 1980. Then Volcker engineered an economic bounce-back. In effect, Reagan dressed up in a flight suit and pretended to be a hotshot economic pilot, but Volcker was the guy who actually flew the plane and landed it safely.

You, on the other hand, have to pull this plane out of its nose dive yourself, because the Fed has lost its mojo. Compare the situation right now with the one back in the 1980s, when Volcker turned the economy around. All the Fed had to do back then was print a bunch of dollars (OK, it actually credited the money to the accounts of private banks, but it amounts to the same thing) and then use those dollars to buy up U.S. government debt. This drove interest rates down: When Volcker decided that the economy needed a pick-me-up, he was quickly able to drive the interest rate on Treasury bills from 13 percent down to eight percent. Lower interest rates on government debt, in turn, quickly drove down rates on mortgages and business borrowing. People started spending again, and within a few months the economy had gone from slump to boom. Economists call this process — from the Fed's decision to print more money to the resulting pickup in spending, jobs and incomes — the "monetary transmission mechanism." And in the 1980s that mechanism worked just fine.

This time, however, the transmission mechanism is broken. First of all, while the Fed can still print money, it can't drive interest rates down. Why? Because those interest rates are already about as low as they can go. As I write this letter, the interest rate on Treasury bills is 0.005 percent — that is, zero. And you can't push rates lower than that. Now, you might think that zero interest rates would lead to an orgy of borrowing. But while the U.S. government can borrow money for free, the rest of us can't. Fear rules the financial markets, so over the past year and a half, as the interest rates on government debt have plunged, the interest rates that Main Street has to pay have mostly gone up. In particular, many businesses are paying much higher interest rates now than they were a year and a half ago, before the Fed started cutting. And they're lucky compared to the many businesses that can't get credit at all.

Besides, even if more people could borrow, would they really want to spend? There's a glut of unsold homes on the market, so there's very little incentive to build more houses, no matter how low mortgage rates go. The same goes for business investment: With office buildings standing empty, shopping malls begging for tenants and factories sitting idle, who wants to spend on new capacity? And with workers everywhere worried about job security, people trying to save a few dollars may stampede into stores that offer deep discounts, but not many people want to buy the big-ticket items, like cars, that normally fuel an economic recovery.

So as I said, the Fed has lost its mojo. Ben Bernanke and his colleagues are trying everything they can think of to unfreeze the credit markets — the alphabet soup of new "lending facilities," with acronyms nobody can remember, is growing by the hour. Any day now, the joke goes, everyone will have a Visa card bearing the Fed logo. But at best, all this activity only serves to limit the damage. There's no realistic prospect that the Fed can pull the economy out of its nose dive.
So it's up to you.

Rescuing The Economy
The last president to face a similar mess was Franklin Delano Roosevelt, and you can learn a lot from his example. That doesn't mean, however, that you should do everything FDR did. On the contrary, you have to take care to emulate his successes, but avoid repeating his mistakes.
About those successes: The way FDR dealt with his own era's financial mess offers a very good model. Then, as now, the government had to deploy taxpayer money in order to rescue the financial system. In particular, the Reconstruction Finance Corporation initially played a role similar to that of the Bush administration's Troubled Assets Relief Program (the $700 billion program everyone knows about). Like the TARP, the RFC bulked up the cash position of troubled banks by using public funds to buy up stock in those banks.
There was, however, a big difference between FDR's approach to taxpayer-subsidized financial rescue and that of the Bush administration: Namely, FDR wasn't shy about demanding that the public's money be used to serve the public good. By 1935 the U.S. government owned about a third of the banking system, and the Roosevelt administration used that ownership stake to insist that banks actually help the economy, pressuring them to lend out the money they were getting from Washington. Beyond that, the New Deal went out and lent a lot of money directly to businesses, to home buyers and to people who already owned homes, helping them restructure their mortgages so they could stay in their houses.

Can you do anything like that today? Yes, you can. The Bush administration may have refused to attach any strings to the aid it has provided to financial firms, but you can change all that. If banks need federal funds to survive, provide them — but demand that the banks do their part by lending those funds out to the rest of the economy. Provide more help to homeowners. Use Fannie Mae and Freddie Mac, the home-lending agencies, to pass the government's low borrowing costs on to qualified home buyers. (Fannie and Freddie were seized by federal regulators in September, but the Bush administration, bizarrely, has kept their borrowing costs high by refusing to declare that their bonds are backed by the full faith and credit of the taxpayer.)

Conservatives will accuse you of nationalizing the financial system, and some will call you a Marxist. (It happens to me all the time.) And the truth is that you will, in a way, be engaging in temporary nationalization. But that's OK: In the long run we don't want the government running financial institutions, but for now we need to do whatever it takes to get credit flowing again.
All of this will help — but not enough. By all means you should try to fix the problems of banks and other financial institutions. But to pull the economy out of its slide, you need to go beyond funneling money to banks and other financial institutions. You need to give the real economy of work and wages a boost. In other words, you have to get job creation right — which FDR never did.

This may sound like a strange thing to say. After all, what we remember from the 1930s is the Works Progress Administration, which at its peak employed millions of Americans building roads, schools and dams. But the New Deal's job-creation programs, while they certainly helped, were neither big enough nor sustained enough to end the Great Depression. When the economy is deeply depressed, you have to put normal concerns about budget deficits aside; FDR never managed to do that. As a result, he was too cautious: The boost he gave the economy between 1933 and 1936 was enough to get unemployment down, but not back to pre-Depression levels. And in 1937 he let the deficit worriers get to him: Even though the economy was still weak, he let himself be talked into slashing spending while raising taxes. This led to a severe recession that undid much of the progress the economy had made to that point. It took the giant public works project known as World War II — a project that finally silenced the penny pinchers — to bring the Depression to an end.

The lesson from FDR's limited success on the employment front, then, is that you have to be really bold in your job-creation plans. Basically, businesses and consumers are cutting way back on spending, leaving the economy with a huge shortfall in demand, which will lead to a huge fall in employment — unless you stop it. To stop it, however, you have to spend enough to fill the hole left by the private sector's retrenchment.

How much spending are we talking about? You might want to be seated before you read this. OK, here goes: "Full employment" means a jobless rate of five percent at most, and probably less. Meanwhile, we're currently on a trajectory that will push the unemployment rate to nine percent or more. Even the most optimistic estimates suggest that it takes at least $200 billion a year in government spending to cut the unemployment rate by one percentage point. Do the math: You probably have to spend $800 billion a year to achieve a full economic recovery. Anything less than $500 billion a year will be much too little to produce an economic turnaround.
Spending on that scale, at a time when the weakening economy is driving down tax collection, will produce some really scary deficit numbers. But the consequences of too much caution — of a failure on your part to do enough to stop the economy's nose dive — will be even scarier than the coming ocean of red ink.

In fact, the biggest problem you're going to face as you try to rescue the economy will be finding enough job-creation projects that can be started quickly. Traditional WPA-type programs — spending on roads, government buildings, ports and other infrastructure — are a very effective tool for creating employment. But America probably has less than $150 billion worth of such projects that are "shovel-ready" right now, projects that can be started in six months or less. So you'll have to be creative: You'll have to find lots of other ways to push funds into the economy.

As much as possible, you should spend on things of lasting value, things that, like roads and bridges, will make us a richer nation. Upgrade the infrastructure behind the Internet; upgrade the electrical grid; improve information technology in the health care sector, a crucial part of any health care reform. Provide aid to state and local governments, to prevent them from cutting investment spending at precisely the wrong moment. And remember, as you do this, that all this spending does double duty: It serves the future, but it also helps in the present, by providing jobs and income to offset the slump.

You can also do well by doing good. The Americans hit hardest by the slump — the long-term unemployed, families without health insurance — are also the Americans most likely to spend any aid they receive, and thereby help sustain the economy as a whole. So aid to the distressed — enhanced unemployment insurance, food stamps, health-insurance subsidies — is both the fair thing to do and a desirable part of your short-term economic plan.
Even if you do all this, however, it won't be enough to offset the awesome slump in private spending. So yes, it also makes sense to cut taxes on a temporary basis. The tax cuts should go primarily to lower- and middle-income Americans — again, both because that's the fair thing to do, and because they're more likely to spend their windfall than the affluent. The tax break for working families you outlined in your campaign plan looks like a reasonable vehicle.

But let's be clear: Tax cuts are not the tool of choice for fighting an economic slump. For one thing, they deliver less bang for the buck than infrastructure spending, because there's no guarantee that consumers will spend their tax cuts or rebates. As a result, it probably takes more than $300 billion of tax cuts, compared with $200 billion of public works, to shave a point off the unemployment rate. Furthermore, in the long run you're going to need more tax revenue, not less, to pay for health care reform. So tax cuts shouldn't be the core of your economic recovery program. They should, instead, be a way to "bulk up" your job-creation program, which otherwise won't be big enough.

Now my honest opinion is that even with all this, you won't be able to prevent 2009 from being a very bad year. If you manage to keep the unemployment rate from going above eight percent, I'll consider that a major success. But by 2010 you should be able to have the economy on the road to recovery. What should you do to prepare for that recovery?

Beyond the Crisis
Crisis management is one thing, but America needs much more than that. FDR rebuilt America not just by getting us through depression and war, but by making us a more just and secure society. On one side, he created social-insurance programs, above all Social Security, that protect working Americans to this day. On the other, he oversaw the creation of a much more equal economy, creating a middle-class society that lasted for decades, until conservative economic policies ushered in the new age of inequality that prevails today. You have a chance to emulate FDR's achievements, and the ultimate judgment on your presidency will rest on whether you seize that chance.

The biggest, most important legacy you can leave to the nation will be to give us, finally, what every other advanced nation already has: guaranteed health care for all our citizens. The current crisis has given us an object lesson in the need for universal health care, in two ways. It has highlighted the vulnerability of Americans whose health insurance is tied to jobs that can so easily disappear. And it has made it clear that our current system is bad for business, too — the Big Three automakers wouldn't be in nearly as much trouble if they weren't trying to pay the medical bills of their former employees as well as their current workers. You have a mandate for change; the economic crisis has shown just how much the system needs change. So now is the time to pass legislation establishing a system that covers everyone.

What should this system look like? Some progressives insist that we should move immediately to a single-payer system — Medicare for all. Although this would be both the fairest and most efficient way to ensure that all Americans get the health care they need, let's be frank: Single-payer probably isn't politically achievable right now, simply because it would represent too great a change. At least at first, Americans who have good private health insurance will be reluctant to trade that insurance for a public program, even if that program will ultimately prove better.

So the thing to do in your first year in office is pass a compromise plan — one that establishes, for the first time, the principle of universal access to care. Your campaign proposals provide the blueprint. Let people keep their private insurance if they choose, subsidize insurance for lower-income families, require that all children be covered, and give everyone the option to buy into a public plan — one that will probably end up being cheaper and better than private insurance. Pass legislation doing all that, and we'll have universal health coverage up and running by the end of your first term. And that will be an achievement that, like FDR's creation of Social Security, will permanently change America for the better.

All this will cost money, mainly to pay for those insurance subsidies, and some people will tell you that the nation can't afford major health care reform given the costs of the economic recovery program. Let's talk about why you should ignore the naysayers.

First, let's put the costs of the economic-recovery program in perspective. It's possible that reviving the economy might cost as much as a trillion dollars over the course of your first term. But the Bush administration wasted at least twice that much on an unnecessary war and tax cuts for the wealthiest; the recovery plan will be intense but temporary, and won't place all that much burden on future budgets. Put it this way: With long-term federal debt paying the lowest interest rates in half a century, the interest costs on a trillion dollars in new debt will amount to only $30 billion a year, about 1.2 percent of the current federal budget.

Second, there's good reason to believe that health care reform will save money in the long run. Our system isn't just full of holes in coverage, it's also grossly inefficient, with huge bureaucratic costs — such as the immense resources that insurance companies devote to making sure they don't cover the people who need health care the most. And under a universal system it will be much easier to use our health care dollars wisely, to spend money only on medical procedures that work and not on those that don't. Since rising health care costs are the main source of the grim, long-run projections for the federal budget, the truth is that we can't afford not to move forward on health care reform.

And let's not ignore the long-term political effects. Back in 1993, when the Clintons tried and failed to create a universal health care system, Republican strategists like William Kristol (now my colleague at The New York Times) urged their party to oppose any reform on political grounds; they argued that a successful health care program, by conveying the message that government can actually serve the public interest, would fundamentally shift American politics in a progressive direction. They were right — and the same considerations that made conservatives so opposed to health care reform should make you determined to make it happen.

Universal health care, then, should be your biggest priority after rescuing the economy. Providing coverage for all Americans can be for your administration what Social Security was for the New Deal. But the New Deal achieved something else: It made America a middle-class society. Under FDR, America went through what labor historians call the Great Compression, a dramatic rise in wages for ordinary workers that greatly reduced income inequality. Before the Great Compression, America was a society of rich and poor; afterward it was a society in which most people, rightly, considered themselves middle class. It may be hard to match that achievement today, but you can, at least, move the country in the right direction.

What caused the Great Compression? That's a complicated story, but one important factor was the rise of organized labor: Union membership tripled between 1935 and 1945. Unions not only negotiated better wages for their own members, they also enhanced the bargaining power of workers throughout the economy. At the time, conservatives warned that wage gains would have disastrous economic effects — that the rise of unions would cripple employment and economic growth. But in fact, the Great Compression was followed by the great postwar boom, which doubled American living standards over the course of a generation.

Unfortunately, the Great Compression was reversed starting in the 1970s, as American workers once again lost much of their bargaining power. This loss was partly due to changes in the world economy, as major U.S. manufacturing corporations started facing more international competition. But it also had a lot to do with politics, as first the Reagan administration, then the Bush administration, did all they could to undermine the ability of workers to organize.

You can make a start on reversing that process. Clearly, you won't be able to oversee a tripling of union membership anytime soon. But you can do a lot to enhance workers' rights. One is to start laying the groundwork to pass the Employee Free Choice Act, which would make it much harder for employers to intimidate workers who want to join a union. I know it probably won't happen in your first year, but if and when it does, the legislation will enable America to take a huge step toward recapturing the middle-class society we've lost.

Truth & Reconciliation
There are many other issues you'll need to deal with, of course. In particular, I haven't said a word about environmental policy, which is ultimately the most important issue of all. That's because I suspect that it won't be possible to pass a comprehensive plan for dealing with climate change in your first year. By all means, put as much environmentally friendly investment as possible — such as spending to enhance energy efficiency — into the initial recovery plan. But I'm guessing that 2009 won't be the year to introduce cap-and-trade measures to reduce greenhouse gas emissions. If I'm wrong, that's great — but I'm not counting on big environmental policy moves right away.
I also haven't said anything about foreign policy. Your team is well aware of the need to wind down the war in Iraq — which is, by the way, costing about as much each year as the insurance subsidies we need to implement universal health care. You're also aware of the need to find the least bad solution for the mess in Afghanistan. And I don't even want to think about Pakistan — but you have to. Good luck.

There is, however, one area where I feel the need to break discipline. I'm an economist, but I'm also an American citizen — and like many citizens, I spent the past eight years watching in horror as the Bush administration betrayed the nation's ideals. And I don't believe we can put those terrible years behind us unless we have a full accounting of what really happened. I know that most of the inside-the-Beltway crowd is urging you to let bygones be bygones, just as they urged Bill Clinton to let the truth about scandals from the Reagan-Bush years, in particular the Iran-Contra affair, remain hidden. But we know how that turned out: The same people who abused power in the name of national security 20 years ago returned as part of the team that, under the second George Bush, did it all over again, on a much larger scale. It was an object lesson in the truth of George Santayana's dictum: Those who refuse to learn from the past are condemned to repeat it.
That's why this time we need a full accounting. Not a witch hunt, maybe not even prosecutions, but something like the Truth and Reconciliation Commission that helped South Africa come to terms with what happened under apartheid. We need to know how America ended up fighting a war to eliminate nonexistent weapons, how torture became a routine instrument of U.S. policy, how the Justice Department became an instrument of political persecution, how brazen corruption flourished not only in Iraq, but throughout Congress and the administration. We know that these evils were not, whatever the apologists say, the result of honest error or a few bad apples: The White House created a climate in which abuse became commonplace, and in many cases probably took the lead in instigating these abuses. But it's not enough to leave this reality in the realm of things "everybody knows" — because soon enough they'll be denied or forgotten, and the cycle of abuse will begin again. The whole sordid tale needs to be brought out into the sunlight.

It's probably best if Congress takes the lead in investigations of the Bush years, but your administration can do its part, both by not using its influence to discourage the investigations and by bringing an end to the Bush administration's stonewalling. Let Congress have access to records and witnesses, and let the truth be told.

That said, the future is what matters most. This month we celebrate your arrival in the White House; at a time of great national crisis, you bring the hope of a better future. It's now up to you to deliver on that hope. By enacting a recovery plan even bolder and more comprehensive than the New Deal, you can not only turn the economy around — you can put America on a path toward greater equality for generations to come.

Respectfully,

Paul Krugman
 
Be Good and Grow Rich: Reversing the Economic Meltdown

By FRANK KAUFMANN
Published: December 30, 2008

EVERYTHING THAT breaks does so because essentials are violated, basic elements collapse under the strain. Analyses and proposed remedies must start with clear-headed investigation of what fundamentally broke. What basic laws and rules were stretched to the breaking point?

"Insanity is doing the same thing over and over again and expecting different results." - Albert Einstein.

Why is it that suddenly everyone seems lost? Only weeks ago, the pantheon of cable news finance wizards flooded our lives around the clock with pride, bluster, and "expertise." And while they frothed and "explained," lust and frenzy infected world markets like bone cancer. A financial world was built with bedrock institutions packaging, selling, and buying less than nothing.

When natural laws of economics finally tore though the mirage, financial meltdown fell on us like a flesh-eating virus that continues relentlessly and with a vengeance. Extreme responses arose in all sectors with leaders scurrying about like those on the deck of the stricken Titanic. Makeshift measures to stanch hemorrhaging in this spot or that were passed in panic, but none brought about a settling, stabilizing, or passing of the distress. We wait with baited breath to see if, when, and how great the carnage, pain, and suffering finally will be. Fully one-third of savings have evaporated.

But those working on fixes are not working on a level that matches the depth and nature of the crisis. Everything that breaks does so because essentials are violated, basic elements collapse under the strain. Analyses and proposed remedies must start with clear-headed investigation of what fundamentally broke. What was violated? What snapped? What basic laws and rules were stretched to the breaking point?

Current recommended remedies stem from and remain mired in this mentality of violation and untruth. The slide will pause now at 35 percent loss, giving us the opportunity to awaken, change, and begin to recover. If we do not acknowledge what we have wrought, the economy will drop its next third, leaving none from this generation to see recovery.

Three sectors are responsible for failures comprising the global economic crisis: the business and financial sector, the political arena, and the media. Great wrong, great greed, and great dysfunction took place under the watch of each of these three sectors, each having failed in their respective responsibilities to be sure that such things never happen. The reform of the economy cannot be achieved through the application of mere "economic" fixes. Recovery requires reform, acknowledgement of wrongdoing, taking responsibility for harm done, and commitment to change in each of these three areas.

The economic crisis happened by violating two basics: 1.Self-interest cannot evolve into greed to the degree that personal, material lust is sated without regard for the human condition of "the neighbor"; and 2. Production and consumption may not persist in a manner and degree that outstrips nature's capacity to repair and rejuvenate herself. The economic meltdown is not merely the fruit of greed. It more accurately occurred through the deadening of the heart.

According to the U.N. Food and Agriculture Organization (FAO), almost 1 billion people suffer in this year's global food shortages. The number of undernourished, the FAO said, rose by 40 million, following a 75 million jump the previous year. This is simply forbidden. Prosperity and suffering in such magnitude are not coterminous.

Growth of value (perceived by many as growth of capital) cannot continue unchecked when doing so happens in ways that violate basic human norms and morality. The meltdown will not relent nor subside until approaches at resolution address real causes. Lust for personal profit and consumerist excess may not be sought in anti-human and anti-environment structures and patterns.

The way to genuine recovery, growth, and the return of wealth will come to enterprises oriented specifically to the causal factors of the meltdown. Industries that fit this bill will experience genuine growth and profit. These will produce jobs and wealth aplenty. On the other hand, proposals based on the persistent breaking of natural rules and rectitude not only will fail to rescue the economy, but will drive the meltdown further. If we snap the 35 percent loss barrier through obstinately not learning, the collapse will become irreparable.

What is needed now for recovery is the very opposite of current approaches seeking desperately to resuscitate overheated self-gratification and debt-fueled consumerist materialism.

Real solutions that will turn the tide to recovery will be led by industries and entrepreneurs devoted to the restoration of balance in human affairs, balance such that acquisitiveness is no longer admired if it fails to be coupled with minimum concern for vast numbers of suffering people, the millions who starve and die without hope. Industry that retools itself to create opportunity, housing, education, and work for the needy will prosper.

Secondly, everything entrepreneurial that is devoted to restoring nature's capacity to repair and sustain herself while keeping apace with non-excessive human consumption will prosper.

In short, consumption, growth, and wealth are fine. But gluttonous, consumerist materialism cannot be celebrated and encouraged, when: 1. able-bodied men and women with families cannot eat or lead lives with minimal opportunity and dignity; and 2. consumption happens in ways that break Mother Nature's ability to repair herself and sustain environmental balance and health.

In the present moment, industries designed to fix these abuses and violations naturally will inherit and enjoy the privilege of growth and profitability.
 
In short, consumption, growth, and wealth are fine. But gluttonous, consumerist materialism cannot be celebrated and encouraged, when: 1. able-bodied men and women with families cannot eat or lead lives with minimal opportunity and dignity; and 2. consumption happens in ways that break Mother Nature's ability to repair herself and sustain environmental balance and health.

I agree with much of this, though as a conservative I cringe at the environmental statements because I think some of the economic systems environmentalists created in my university classes would ruin the economy. Consumption definately has to be curtailed so debt is used as a tool and not a strategy. For the environment the only economically feasible technology that has been taken up with some success that I know of is nuclear power.
 
Here's a libertarian response to those who want to create a WWII size stimulus without the war:

http://mises.org/journals/rae/pdf/rae2_1_14.pdf

The Impact of Higher Savings Rates
Based on the preceding concept, I wish to add an addition to Smiley's analysis by proposing another plausible explanation for the economic recovery during World War II. Increased government spending, assisted by an extremely accommodating monetary policy, does not alone explain the economic recovery in the early 1940s. Instead, I suggest that the World War II economic boom was in large part the result of a third major factor, often ignored by most economists. This factor is the unprecedented rise in personal and business saving rates during 1941-45. The spectacular rise in private savings provided the billions of dollars necessary to support the war, and without this quasi-voluntary stimulus to the capital markets, the world conflict may have been prolonged beyond 1945 and would have had a far more deleterious effect on the U.S. economy. Certainly, interest rates would have been substantially higher, making it much more difficult for the Treasury to finance the war.

What took place in the early 1940s is unmistakable. The rate of savings by both individuals and businesses increased to historically unprecedented levels in the United States. Personal savings climbed from $3.8 billion in 1940 to a high of $37.3 billion in 1944, an incredible tenfold increase in five years. As a percentage of disposable personal income, the figures for personal savings are even more spectacular, increasing from a meager 5 percent in 1940 to almost 26 percent in 1944. (See table 4 and figure 8.) Such high rates of individual saving have not been observed in the United States before or since World War II, and they have only been approached in percentage terms by Japan in the postwar period.

Business savings also increased during the war, although not as much as personal savings did. Gross business savings (which include undistributed corporate profits, corporate inventory adjustments, and capital consumption allowances) increased from $10.5 billion in 1940 to a high of $17.1 billion in 1944. Over all, total household and business savings grew from $14.3 billion in 1940 to $54.3 billion by 1944.

In sum, we must not conclude that war is "good" for the economy or, in a more generic sense, that increased government spending or monetary inflation is the countercyclical cure for a depression. Ultimately, economic malaise can only be permanently overcome by a noninterventionist policy, by freeing the human spirit, and by adopting a long-range time horizon through the virtues of thrift, hard work, entrepreneurship, and capital formation. Regarding the World War II case, Stuart Chase said it best in 1946: "The conclusion here is not that chronic warfare is the cure for chronic depression, but a more hopeful one. People must have a goal to stir them to activity; something big to do, to make sacrifices for. Then their latent powers really come out."

I would personally add that there are also people who have job opportunities but choose not to have lower wages so they stay unemployed until they change their minds. When there are lower prices lower wages will have to be gotten used to while adjusting to the new prices.
 
Frugal Americans Hurt Economic Recovery - Presidential Politics | Political News - FOXNews.com

Frugal Americans Hurt Economic Recovery
The paradox of thrift -- Americans are saving more in tough times but that's no good for the economy.

Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.

Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.

On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.

Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.

The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.

Grace Case, 38, of Syracuse, N.Y., is a self-described recovering creditaholic. For 13 years, she charged it all -- cars, clothes, repairs, vacations. She'd make only the minimum card payments to sustain her buying spree for her and her family, which includes her husband and two children.

But after being laid off 2 1/2 years ago from her job as an accountant, she landed another accounting job that cut her salary from $60,000 to $40,000. It was impossible to meet minimum payments on her card balances.

Now, the Cases are on a strict budget. They take "staycations," grow their own vegetables, buy only used cars and pre-pay cell phones. Case hasn't used a credit card in two years. And she's saving more.

"It's really a liberating feeling," she said. "If you want something, you have to have the money for it."

Many economists think the savings rate will keep rising, perhaps as high as 6 percent or more.

So where's the money going? To savings accounts? To debt reduction?

No one knows for sure. But Robert Frank, Cornell University economist, says it doesn't much matter.

"For economic purposes, paying off debt and saving are the same," he said. "Incurring debt is negative savings; paying down debt is savings."

He sees a long-term behavioral shift. He calls the spending of the past decade or more unsustainable.

"The only way people were able to (spend heavily) was by harvesting cash out of their home equity, which was just an illusion," Frank said.

The ripple effect has been brutal. The economy shrank at a 3.8 percent annual rate in the final three months of 2008, the worst showing in 26 years. The biggest reason was that consumer spending fell for a second straight quarter, something that hasn't happened since the 1990-91 recession.

Analysts believe the hard times will persist in 2009 as consumers, squeezed by layoffs and tighter credit, delay purchases of cars and other big-ticket items.

Some experts say consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever.

"People are not saving; they are building financial bomb shelters," said Mark Stevens, who runs a management consulting firm, MSCO, in Rye Brook, N.Y.

Matthew Conrad, a financial manager at Complete Wealth Management in Orange County, Calif., says he knows of people who drive a BMW or Mercedes and eat macaroni and cheese for dinner several nights a week. That suggests some are making an awkward shift from free-spending habits and are reluctant to give them up.

Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.

"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."

More economists bitching that Americans are saving too much money. :blahblah: The Paradox of Thrift is a mental disease with Keynesian economists. People save because they feel uncomfortable. When they have enough savings they will feel more comfortable with spending. Until then the stimulus money will be saved mostly instead of spent.
 
Save money. And stay put. Follow the law and squat in your own home.

:applaud:

Wall Street and its co-conspirators on Main Street had a great plan.

Step 1: Ram predatory loans down the market with fraud and deceptive marketing.

Step 2: Some of the loans will blow up, but in the aggregate it will all work out and besides, the loans will be bundled and sold off to investors (spreading the toxic waste), so who cares?

Great plan, but it had a few problems.

Problem #1: It destroyed the world financial system (minor detail)

Problem #2 (And he's where it get VERY interesting...) For a loan to be valid, the lender needs to be able to produce the paperwork.

Guess what?

In their mad greed to screw the American people and line their own pockets, Wall Street forgot that little detail.

Many of these loans and been sliced and diced and sold and re-sold so many times that not only is the paperwork not easy to lay hands on, in some cases, it's not clear who actually owns the loan.

Here's where property law comes in.

If the bank can't produce the documents and the real owner of the loan can't be identified, the contract is null and void.


You've got to hand it to Congresswoman Marcy Kaptur (and Ohio which produces a lot of great Congresspeople.)

By telling a bank to "produce the note," a homeowner can delay foreclosure by forcing the lender to prove the suing institution is actually the same which owns the debt.

Now, the banks own sloth and disorganization (and inherent dishonesty) can be used against it.

Final word: The media (and Wall Street and its criminal partners in Congress and the former Bush White House) love to call these loans sup-prime.

Here's the old fashioned word: predatory.

Many of the loans that were made in the past five years that have created so many problems would have been illegal until Bush & Co not only gutted lending laws, but also literally sued states to stop them from enforcing their own lending laws.

Former governor Elliott Spitzer was the ring leader of the state movement to enforce local lending laws...and you saw what happened to him.

He's no saint (and truth be told, he's kind of a jerk) but if every politician who went to hookers was busted, Washington and all the state capitals would be ghost towns.
 
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