WHAT DO WE DO NOW?
I was recently reading an on-line forum following the latest news from AIG wherein they demanded more TARP (bail-out) funds because of dire consequences which they predicted would occur should they not get the money. A comm0n, even overwhelming reaction was "let them fail," and most people saying we should let them all go down the tubes. While this would lead to some emotional satisfaction, it would be devastating for the economy. This is like blowing up your house to get rid of a cockroach infestation (which, by the way doesn't work, the roaches usually manage to survive). I agree the TARP has been a bad deal in many ways, especially poorly administered by Paulsen; we'll see how Obama and Geithner do, the jury is still out. The unpleasant fact is that we can't allow these big corporations to go under because if they do they will drag the rest of us with them (this includes General Motors). Even with TARP, massive infusions by the Federal Reserve, and the stimulus bill, we see the unemployment rate steadily rising, the number of bank failures increasing and almost every other economic indicator going downward. Even if the stimulus plan works as hoped, I think it's likely that it will take until 2010 before we see the beginning of a turn around. I don't think most people recognize just how serious the problem is. When you study the Great Depression which began in October, 1929 and compare it to the problems we are having now, it looks to me like the originating causes of the economic crash in 2008 are more serious in scope than those in 1929. Remember, in 1929 there was no unemployment insurance, no FDIC, and the Hoover administration did practically nothing until FDR took over in March, 1933. Hoover believed in cutting business taxes and balancing the budget. If we had those same conditions now, I think that this crisis would be as bad or maybe even worse than the Great Depression.
I agree with Nobel Prize winning economist Paul Krugman that the stimulus bill is too small. We need to do more. When you consider how much money has been sucked out of the economy (see my previous post) and how much more may be lost, even $1 trillion is grossly inadequate. As Obama seems to be trying to do with his new budget, we need to redress the balance between rich and poor so that the lower and middle classes have more to spend because 70% of our economy depends on consumer spending. Giving tax breaks to businesses is meaningless if they aren't making a profit. Likewise, no one will invest in new equipment or inventory unless there is demand.
We need to consider new ideas, too. Since TARP hasn't yet done much toward improving credit, one economist has suggested using the remaining $350 billion in TARP funds and chartering a government bank. With $350 billion, the new bank could lend up to $3.5 trillion. A conservative columnist I read suggested using the stimulus money in the form of vouchers to be given to every taxpayer which could be redeemed for major purchases such as cars or appliances. I would suggest modifying this so that those at the lower end of the scale got more and those earning above $100,000 a year got little. If, for example, money were to be given out to 100 million families, you could give an average of $10,000 per family for $1 trillion and it would have to be spent on major products for the voucher to be any good. Those earning less than $50,000 per year (the median among taxpayers) would get more than $10,000 and those earning more than $50,000 would get less than $10,000. And, there needs to be even more spent on infrastructure. The national organization for civil engineers has estimated that the US has a blacklog of approximately $2 trillion in repairs/replacement needed for roads, bridges, sewers, water plants, and other public facilities. Because of the size of this need, perhaps the US should use some of the methods employed by local governments. Sell construction bonds, with the money doled out to the states with strict requirements so that it would go for only needed repairs. Like local redevelopment agencies, create a dedicated funding source for paying off these bonds so that it doesn't adversely impact the budget deficit. An income tax surcharge on the super-rich and a raise in the capital gains tax rate are two possible sources for this dedicated fund. Another possible source, put a transaction fee/tax on sold shares of stock. Anytime a share of stock is sold, 1 or 2% of the proceeds would go to the Federal government. This could have the additional benefit of reducing both short selling and panic selling.
Finally, regulation should be reimposed on the financial markets and the Sherman and Clayton Anti-Trust Acts should be vigorously enforced, even strengthened. George Santayana famously said that those who fail to learn from history are bound to repeat it. I have seen this statement: one thing we learn from history is that people don't learn from history. There seems to have been this common belief that government regulation was the product of left wingers who imposed it as a matter of ideology. Government regulations, if you bother to learn any history, were a response to past abuses. Remove those regulations and the abuses will reappear. This is clearly borne out by the history of this current economic crisis. For anyone over 40, remember when a bank and its branches could only exist in one state? Remember when only savings and loans made home loans and banks made commercial loans? And banking was all that banks did and bankers were conservative and careful with our money? Then, if a bank did fail, the damage was limited. We need to return to those times.
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