Washington's Problem Is Poor Economic Solutions

The Fed observes the banking system has a deleveraging problem. So what does it do? It increases liquidity. Deleveraging and liquidity don’t really cancel each other out. In fact liquidity creates the leveraging problems that later call for deleveraging.

Another example. The Fed wants to lower mortgage rates. Instead of opening a window and making mortgage loans available at low rates to help the housing slump, what does it do? It decides to pursue a zero interest rate policy and quantitative easing, which lower most interest rates, including those for mortgages a bit, and it thereby creates a worldwide asset bubble and increases asset prices in the U.S., in part by lowering the rate of interest used to discount assets’ returns and increase their value.

Now, we have asset price inflation in the U.S., but are verging on price deflation for goods and services, while a worldwide asset bubble is also building from the carry trade and people moving their money to distant areas providing higher returns. The Fed has obviously never heard of the medical maxim of “Do no harm.”

The Fed and our national government want to increase GDP and get us back to where we were, so what do they do? The Fed does what it has done and our federal government engages in multiple stimuli programs which don’t really fix our underlying problems and give us only temporary increases in GDP, at considerable expense. The approach ignores how we got to where we are and has the Fed and Washington putting their collective heads in the sand. Our short history, for these purposes, is easy enough.

China and the Pacific Rim arose economically, and we shipped many labor intensive jobs in the manufacturing sector overseas and made capital intensive the production of those products we could continue to manufacture here, the net result being additional unemployment from that portion of our manufacturing sector too, over and above the jobs shipped overseas. And we wonder why our unemployment is high. Manufacturing in the U.S. and employment in that sector have been substantially gutted, relative to where we would have been.

Our unaddressed problems beyond that include our in part resulting huge trade deficit. As Keynes said, countries which persistently run large trade deficits will persistently stay in a depressed state.

The other major problem we ignore is the very badly skewed distribution of income which lowers the average propensity to buy consumer goods and services and reroutes that money, via the top households in the income distribution, into the secondary financial markets, driving prices up further. Do you ever wonder how it is we can have the DOW pushing over 10,000 at the same time the recovery is faltering and going nowhere fast and unemployment is also shooting up? I just provided the answer.

The approaches of the Fed and federal government are too oblique. They are not direct enough. If you want low mortgage rates, offer to make mortgage loans directly at low rates. Don’t drag down interest rates generally and create a global asset price bubble. If you want to deleverage the banking system, do that, but don’t drown the banks in liquidity. Instead run the bad boy and troubled banks through FDIC or similar proceedings that scrape off their bad debt, along with their stockholders, bondholders and management, and then sell them off to new buyers for fresh and balanced starts.

The new, proposed regulatory reform bill, which is really in large measure a proposed banking system reorganization act wants to do just that, but after pouring billions down the drain on TARP programs used to maintain top executive salaries and bonuses in the banking industry and to expand bank trading programs.

Aside from pulling us back from the brink during the credit crisis, the Fed´s and Washington’s approach to our problems has been either misdirected, backwards or to ignore them. This is not a good way for us to dig out of our recession and get back on our feet. Instead, we now face additional problems created by the bad solutions adopted by policy makers.

This is not a good situation, but the regulatory reform bill does offer some hope, if it can just get past the political muscle of the money center banks. I worry that Congress does not realize how important the reform bill is. Congress likewise has been too much out to lunch on economic matters of late.

Disclosures: none

Comments

[MJE_PDX:]

Apparently Congress has lost it's dictionary. They don't know that there is a difference between the word "spend" and the word "invest."

If they would invest in something for the future instead of just printing money and giving it away, we would be better off.

You can give a person an unemployment check (spend) or a job that creates a longterm asset (invest).

The program in this country that was started in the 1930s to build dams invested in the future (sorry salmon). It created low cost hydro-electric power which first helped win WWII, and then powered the post-war boom of the late 1940s and 1950s. It started controlling the massive flooding problems that farmers had. It brought low cost irrigation to thousands of farms. It made America the greatest food producer in the world (low cost food production and electricity did as much to bring down the Soviet Union as anything else). It made our steel and aluminum factories the lowest cost producers and envy of the rest of the world. I am not saying it was perfect, but it was a long term investment that paid off nicely.

Where is a program like that now? Where is a trillion dollar investment instead of a trillion dollar spending spree?

Why don't we have a national rail program to straighten curves and flatten grades and increase locomotion technology to the point where the average fright speeds can be increased by 50% or doubled at lower energy cost? The savings would go to ALL Americans, poor, middle-class (what's left), the rich, corporations, and governments across the board.

Why don't we spend a trillion dollars on building nuclear power plants, and cut everybody's electric bill in half? Where would all that money go? People would spend it. And we need to fix the grid anyway, lets get on with it.

Why don't we spend a trillion dollars on converting gasoline vehicles to natural gas (CNG & LNG)? Cut our foreign dependency on oil in half and go to a lower-priced and more abundant temporary fuel source to band-aid us to the next step of electric and hydrogen.

These ideas create jobs now, and invest for the future.

But the trucking industry creates more jobs (votes), the coal lobby is more powerful than the nuclear lobby, the countries of the Middle-East give more to the people from Pennsylvania Avenue to Wall & Broad than do the NG producers of Oklahoma, New Mexico, and Alberta.

Somebody needs to take a long-term point of view and invest for the future at the risk of losing the next election.

Pure spending goes nowhere but in circles. Investing for the long-term is the key.

Nov 09 05:53 AM

[MJE_PDX:]

PS: If we gave the poor and middle-class free electricity, we could then turn around and tell the truth that Social Security and Medicare/Medicaid is broke and then fix it. Image if everybody's electric bill went from $100.00 to ZERO a month (average), then the government charged everybody $25 for health care and $25 for Social Security. The net gain would still be $50 to the household. But, three major problems would get worked on in the process.

Only a long-term investment will offset both the downturn now (job creation) and the inflation that will come from "spending" (sending money to Wall Street banks).

The government needs to invest too. What if all that TARP money would have been used to buy crude at $33.00 a barrel? They could sell it now and have paid for the bailout without wrecking the Dollar and the taxpayers in the process. For supposedly "bright" Wall Street men and women in Washington, they sure are dumb.

Nov 09 06:07 AM

[Ricard:]

"If you want to deleverage the banking system, do that, but don’t drown the banks in liquidity. Instead run the bad boy and troubled banks through FDIC or similar proceedings that scrape off their bad debt, along with their stockholders, bondholders and management, and then sell them off to new buyers for fresh and balanced starts."

At least with Citigroup, it seems the govt is taking this advice through 'similar proceedings'.

Nov 09 08:00 AM

[jerrydd:]

Here is how to do this better for jobs. We can have a stimulus that costs almost nothing to the taxpayer, in fact paid a lot by Iran, Russia, oil dictators!!

How is start up loans for RE companies and energy eff ones. Let most anyone with a good business plan through the SBA get start up loans to build or install homes. small business size windgenerators, solar CSP unit, CHP, small lightweight, aero 3 wheel EV's, etc. Then loans to buy, install, etc these.

Loans for home, building eff upgrades from windows, insulation, etc are next. This would put construction, material workers back to work.

Banks have shown they won't loan so other methods may be needed.

All these can be paid for in energy savings in 5 yrs so no new income costs either. This will create about 3 million jobs directly and probably 6 million indirectly of people supporting them.

Next is a fossil fuel tax to pay their full cost of the direct, indirect subsidies we already pay in our income tax, health care, etc. it's time those who make, benefit from those costs to pay them It should be a $1.50/gal on oil and about double the price of coal.

But you say a tax will kill the economy. Not if it's put in over 2 yrs at 4% each month and loans given to buy more eff cars, etc to cut people's costs. Switching trucks, semi's to NG is very cost effective now being under 50% of the cost of diesel/gasoline. This can in 5 yrs cut imported oil needs.

The beauty of this is oil, coal will drop in price making Iran, Russia, oil dictators pay most of the oil tax, coal is only 25% of your electric bill so it won't go up much.

But new, more eff cars, trucks, EV's, PHEV's and mass transit will create more new jobs too.

The fossil fuel tax revenue, 1/3 would go to a tax cut so those people paying it have the extra money needed if they continue to use the same amount or better, use less and have extra income, the more likely outcome. 1/3 to to help switching to more eff cars, trucks, homes, buildings and 1/3 to balance the budget fossil fuels have been a large part in making.

So this program would have a net increase of about 8-10 million jobs of both direct and supporting those who have the new jobs, solve our imported oil problem, let us leave the Persian gulf between the 2 are about $1T/yr in a few yrs if we don't, stop subsidizing our enemies, oil/coal corporations and balance the budget.. All at little cost to the gov, in fact get rid of our debt on our children and make our country strong again.

Or we will be broke, at war, our enemies strong and we will be weak. To me it's the only real patriotic way to go

NG is good for trucks but not cars. Nukes are too costly/kw for new ones. Don't confuse old paid off ones with new costs as they are far higher.

For RR the gov needs to condemn the tracks from all the fiefdoms that control it now and build good double rail sets that everyone can use for a fee just like the interstate highway system.

Nov 09 10:56 AM

[MJE_PDX:]

RE: Railroads:
Wow, I thought I was the only person who thought that the rail should be owned by one company and the locomotives by another.

For years now I have thought the two should be broken into two parts so the locomotion companies can run their trains anywhere in North America.

So, now I know there are two of us.


RE: Transmission lines:
I have looked at proposals over the past few years to build new transmission lines. One was from Four Corners to Phoenix via Tucson. Another was into the L.A. area or Las Vegas. In both proposals it would cost about $1.billion per 50,000-to-100,000 homes served per 500 miles of lines. By the time you by right-of-way, go through all the red tape, etc. That comes to $20,000-40,000 per home.

For that same amount (maybe a little bit more), they could put combo solar-wind units on the roofs of the homes in Phoenix or Tucson, or Las Vegas and save doing all that building of new lines, shifting the existing capacity for new growth.

(This is for new capacity, not to upgrade existing lines with modern technology.)


RE: High-Speed Rail
Why do we let France, Germany, Spain, Japan, South Korea, etc., beat us with high-speed rail? Why have the kicked our butts on this? Germany, The Netherlands, Denmark, etc., are also way ahead of us on renewables (wind, solar, tidal, etc.,) Can't we at least catch up?

We have let GM, Ford, and Chrysler use Madison Avenue to keep us "loving" our cars for way too long. We are long over due for a divorce. Needs some balls in the DofC.

On Nov 09 10:56 AM jerrydd wrote:

> How is start up loans for RE companies and energy eff ones. Let most
> anyone with a good business plan through the SBA get start up loans
> to build or install homes. small business size windgenerators, solar
> CSP unit, CHP, small lightweight, aero 3 wheel EV's, etc. Then loans
> to buy, install, etc these.

> For RR the gov needs to condemn the tracks from all the fiefdoms
> that control it now and build good double rail sets that everyone
> can use for a fee just like the interstate highway system.

Nov 09 06:25 PM