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-- The new Obama Budget thread
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Originally posted by Capitalizt DING DING DING! Exactly..and this is what the Keynesians fail to realize. They think spending/consumption must always be on an upward trajectory and their policies that encourage this are what create asset bubbles in the first place. They blow up a bubble until it pops and starts to deflate, then rather than considering whether it should have been so big to begin with, they proceed to blow harder than ever and attempt to make it bigger than ever.

You are deceiving yourself if you actually believe asset bubbles can be avoided by following some radical libertarian ideology. Asset bubbles have been occurring for centuries under Austrian economics, Keynesian economics...it doesn't matter. There will always be asset bubbles in any economy. Even communist ones.

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Originally posted by jerZ07002 the point is that when consumers decide to stop spending, government does the spending indirectly for the consumers. so, in reality, the consumers are still spending, just not based on individual decisions. when the consumers (viewed as an aggregate) reduce spending, the government should adjust its spending to fill the void since its actions represent the indirect actions of the consumers. the relevant question is whether we were spending too much in the first place. it is not in the long term interest of the country for the government to sustain spending that is in excess of the capacity of the population (since the government debt is really the debt of the people who pay taxes). it appears that the debt burden of the average consumer was so high that the spending habits were too much in the first place. while i agree on a spending package, it must be narrowly directed for future growth given the massive amount of debt needed to fund the projects. I can't agree that this package is the best or even a good package. the only thing the package should have focused on were energy, education, infrastructure improvement, and scientific advances. tax cuts and all that other bullshit should have been left out.

It's extremely hard to deduce a limit to what the government should spend. The fact if the matter is...if banks and consumers aren't going to spend, the government takes their place, to stimulate the economy by increasing confidence and provide an example that if the government is spending, everyone should spend too. Money saved is money wasted in my opinion. Money should always be at work. Best invested than outright spent, but working nonetheless. Liquidity is the life blood of the economy. The government, at this point, is playing the role of a blood transfusion to a patient whose lost half of blood volume.

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Originally posted by Krypton It's extremely hard to deduce a limit to what the government should spend. The fact if the matter is...if banks and consumers aren't going to spend, the government takes their place, to stimulate the economy by increasing confidence and provide an example that if the government is spending, everyone should spend too. Money saved is money wasted in my opinion. Money should always be at work. Best invested than outright spent, but working nonetheless. Liquidity is the life blood of the economy. The government, at this point, is playing the role of a blood transfusion to a patient whose lost half of blood volume.

money saved is not money wasted. unless you keep your money in a bag in your bedroom, the money you save is put to use by someone else (e.g., loans made by the bank in which you deposit your money.)

in fact, putting money in a bank account is a better use of money than purchasing issued stock of a corporation. The reason being your investment in the stock won't directly product any real economic activity. the most your investment does to produce economic activity is increase the value of stock, which could help the liquidity of a corporation (using stock as an acquisition vehicle, pledging stock for bank loans, etc...).

in any event, noone should spend beyond their means, including governments. you are correct that it is difficult to determine the point at which spending is too much, however, when the annual deficit is over 10% of GDP that is likely too much. If every year an individual increased its debt by 10% in the not-so-distant future creditors would stop lending to that individual.

quote:

Originally posted by Capitalizt DING DING DING! Exactly..and this is what the Keynesians fail to realize. They think spending/consumption must always be on an upward trajectory and their policies that encourage this are what create asset bubbles in the first place. They blow up a bubble until it pops and starts to deflate, then rather than considering whether it should have been so big to begin with, they proceed to blow harder than ever and attempt to make it bigger than ever.

while i agree that government policies help produce asset bubbles, what caused the tech stock asset bubble of the late 90s and early 2000s? That certainly wasn't because the government policy favored the purchase of these stocks or that the government actually purchased these stocks.

you also discount the role played in this by banks and individuals. the banks were allowing people to cash in the potential 'equity' built into the value of their homes. In my opinon most of the overvaluation of housing during the past 5-10 years occurred for the following reason:

(i) the ability of purchasers to take out loans with large principal balances because of low initial teaser interest rates (the principal balance being the value of the home - at the end of the day the purchaser doesn't care as much about the principal as the total payments. Nevertheless, the principal balance is the number used to determine the FMV of the home.);

(ii) the reliance on mortage brokers and real estate agents to value homes. valuing homes on the valuation of a real estate agent who likely has no financial background is ridiculous - homes should be valued based on a multiple of potential annual rent, and not the potential price a real estate agent could extract from another purchaser. Unfortunately, most people are not well versed in finance. It's a rather easy calculation to perform, however, the assumptions are difficult to nail down (nothing makes me laugh more than the shows about house flipping, etc... in which the house flipper glibbly proclaims that tile floors would add 20K to the value of the house even though it was only a 5K expenditure - in what world do they live?) ; and

(iii) the presence of a huge number of RE speculators each of whom increased the competitive bidding on a particular house (this is bad because the homes weren't being valued on by end-users, rather, the value was being distorted by the inclusion of a large group that never intended to remain on the property).

capitalizt will try to tell you that the the federal reserve's decisions on interest rates were the single biggest contributing factor to, well, pretty much everything except cancer.

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Originally posted by pkcRAISTLIN capitalizt will try to tell you that the the federal reserve's decisions on interest rates were the single biggest contributing factor to, well, pretty much everything except cancer.

They were.

The fed cut rates dramatically in the 90's..boom, nasdaq bubble.
They raise rates.. Bubble bursts..

The fed cut rates dramatically in the early 2000's..boom, housing
bubble.
They raise rates.. Bubble bursts..

The fed cut rates dramatically in late 2000's..
Next bubble soon to follow.. What will it be? Treasuries?..commodities?...We don't know yet.

Our entire economy is going to be reflated yet again on debt and cheap credit.. More artificial prosperity will take hold and many more malinvestments will be made ..but it won't last as long this time. It's been a good game for the fed. The party has lasted 80 years.. But people are slowly waking to the fact that America is bankrupt, and once foreign faith in the paper dollar evaporates, the game is up. It's only a matter of time.

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Originally posted by Capitalizt They were. The fed cut rates dramatically in the 90's..boom, nasdaq bubble. They raise rates.. Bubble bursts.. The fed cut rates dramatically in the early 2000's..boom, housing bubble. They raise rates.. Bubble bursts.. The fed cut rates dramatically in late 2000's.. Next bubble soon to follow.. What will it be? Treasuries?..commodities?...We don't know yet. Our entire economy is going to be reflated yet again on debt and cheap credit.. More artificial prosperity will take hold and many more malinvestments will be made ..but it won't last as long this time. It's been a good game for the fed. The party has lasted 80 years.. But people are slowly waking to the fact that America is bankrupt, and once foreign faith in the paper dollar evaporates, the game is up. It's only a matter of time.

So you blame the rampant fraud of mortgage originators and stupidity of investors on the Federal Reserves interest rates? Must be easy when we can blame it all on the Fed.

The Fed is not solely responsible--that much is obvious. However, if you can't see that they were complicit (intentionally or not), you are delusional. Here's a great Greenspan quote I read today, courtesy of Marc Faber.

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. These improvements have led to rapid growth in subprime mortgage lending...fostering constructive innovation that is both responsive to market demand and beneficial to consumers."

-Greenspan. April 28, 2005

all the while speaking up the benefits of interest only loans, adjustable rate mortgages, etc.

You forget that the Fed has a lot of oversight and enabled many of those fraudsters by overlooking the bad behavior that was going on.

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Opportunity of a lifetime ... lost Originally published March 01, 2009 President Barack Obama signed the stimulus bill into law on Feb. 17. At that moment, he stood up and uttered, "It's done." In reality, he should have stood up and repeated what he had said seconds earlier: "We're done." He lost the opportunity of a lifetime. He passed the high-water mark of his presidency in less than four weeks. How fitting it was that he signed the bill into law in a museum. The national treasure of the free-market economy of our forefathers was neatly put to bed as a relic of times gone by. If he had just vetoed the bill and proclaimed to America that a new day has arrived. If he had told us to tell our elected leaders that the days of pork, special interests, and reckless spending were over, we would have rallied to his cause. He would have become our president! His day as a future Lincoln, Washington and Reagan would have been set. A new dawn would have emerged. Instead, he chose the popular path, the path of least resistance. He squandered the opportunity of a lifetime. He has defined his presidency, solidified his opposition and guaranteed four more years of business as usual. The nation needed a leader on Feb. 17. Instead, we were greeted by the head of the Democratic Party, who happens to be president. Unfortunately, I am not sure if he understands what he did on that fateful day. By signing the stimulus bill into law, he reaffirmed financial irresponsibility as an American dream. He told the entire world that we no longer value hard work, fiscal responsibility and the right of self-determination. He institutionalized a national victim mentality. The true victims in this debacle are the good, decent workers and managers who saved their entire lives and have seen their retirement plans destroyed overnight. They have seen greed rewarded with multimillion-dollar payouts to CEOs who failed. These victims have seen multi-billion-dollar payments to GM and Chrysler to shore up pension plans of the UAW while their own pensions were destroyed. Yet, these decent folks did nothing wrong! In reality, though, we did do something wrong. We did not understand that our responsibilities as citizens did not stop when we elected a new president. Only when we decide we want our nation back will we regain our position of leadership in the world. Then, and only then, will our markets stabilize and grow. Only by our getting involved and demanding our government to represent what we as a people stand for will the American dream be assured for the future generations. President Obama's campaign theme of "Yes, we can" and the message of hope are quickly fading into the sunset. To have to restore a legacy at this early stage of his presidency is a travesty, but restore it he must. In order to move forward we need a multipartisan approach to our problems. Government solutions and bipartisanship rhetoric imply that government alone can solve these issues. Now is the time for all American citizens, labor and management to unite with our elected officials to solve these economic problems and crisis of leadership. Now is the time for our elected leaders to stop wasteful spending, restore fiscal discipline, and demand accountability. If our leaders will not lead, we must lead for them. The choice is yours. Will you choose the path of least resistance or will you choose to do the right thing? Let your voice be heard. Frank Ryan, CPA, specializes in corporate restructuring and lectures on ethics and corporate governance. He is on the boards of numerous nonprofit and publicly traded companies. E-mail him at [email protected].

http://www.fredericknewspost.com/se...m?StoryID=87062

What shakka said 2 posts up.

Of course the fed isn't 100% responsible.. but it's like the analogy I used a few months back. If a kindergarten teacher drops a bag of candy on the table in front of her students and leaves the room, she can't be held 100% responsible for the kids getting sugar highs and tearing shit up in her absence..but she certainly shoulders a large part of the blame for the mess created.

As you know Krypt, all market systems depend on price levels to determine profit and loss..supply and demand. When you have an institution of central planning that controls the price of something as vital as MONEY, it's foolish to assume it doesn't play a huge role in the boom/bust cycle.

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Originally posted by Capitalizt What shakka said 2 posts up. Of course the fed isn't 100% responsible.. but it's like the analogy I used a few months back. If a kindergarten teacher drops a bag of candy on the table in front of her students and leaves the room, she can't be held 100% responsible for the kids getting sugar highs and tearing shit up in her absence..but she certainly shoulders a large part of the blame for the mess created.

Is it right to assume you want to abolish the Federal Reserve? Who is going to be that "teacher" then. The Fed messed up, that much is true, but what would have happened if they did crack down? No new subprime loans. Ok, well, we had the president and Congress talking up the record home ownership numbers, and how spectacular the economy was going at the time. I wonder how the conversation between Greenspan and Bush would have been say,..."Mr. President, we need to drastically raise interest rates, and shut down Countrywide, New Century, and many other mortgage origination companies."

Additionally, nobody forced either the banks nor the borrowers to sign on the dotted line...Which brings me to the obvious solution to avoid this in the future. Much more stringent regulation which requires...government legislation! The free market won't police itself!

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As you know Krypt, all market systems depend on price levels to determine profit and loss..supply and demand. When you have an institution of central planning that controls the price of something as vital as MONEY, it's foolish to assume it doesn't play a huge role in the boom/bust cycle.

The Federal Reserve does not control prices. As I said in a previous post, booms and busts occur in any economy, from laissez-faire capitalist to marxist-leninist economies. Whether the money is the gold standard or fiat. With or without a Federal Reserve. It is inevitable.

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Originally posted by Krypton Is it right to assume you want to abolish the Federal Reserve? Who is going to be that "teacher" then. The Fed messed up, that much is true, but what would have happened if they did crack down? No new subprime loans. Ok, well, we had the president and Congress talking up the record home ownership numbers, and how spectacular the economy was going at the time. I wonder how the conversation between Greenspan and Bush would have been say,..."Mr. President, we need to drastically raise interest rates, and shut down Countrywide, New Century, and many other mortgage origination companies."

The Fed is independent of the office of the President. That is how it should be. It is done that way to ensure that political involvement in monetary policy is kept to a minimum. The Fed still has to testify before Congress from time to time, and it's usually not pretty. However, they follow their own agenda so I'd imagine the conversation would've been something like...

"Mr. President, we need to tighten monetary policy to reign in loose lending before this thing gets out of control."

"But home ownership is on the rise! I forbid you to do that!"

"Mr. President, I appreciate your input, but you can go fuck yourself--it's not your call."

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The Federal Reserve does not control prices. As I said in a previous post, booms and busts occur in any economy, from laissez-faire capitalist to marxist-leninist economies. Whether the money is the gold standard or fiat. With or without a Federal Reserve. It is inevitable.

They are the biggest influencer of the price of money and money supply. If you follow Friedman's definition of inflation (i.e. too much money chasing too few goods = loss of purchasing power), you'd understand that increasing the money supply can dramatically affect prices. Maybe I'm jumping in without reading your whole exchange, but the business cycle doesn't necessarily go hand in hand with price fluctuations. i.e. expansions aren't by definition inflationary and contractions aren't deflationary/disinflationary, particularly if monetary policy is properly implemented.

the fed didn't force banks to loan stupid sums of money to people that would have no chance of paying it back though.

capitalizt just desperately wants to see some government intervention at the heart of the meltdown, when in reality most of the issues came from private decision-making.

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Originally posted by pkcRAISTLIN the fed didn't force banks to loan stupid sums of money to people that would have no chance of paying it back though.

Begging to differ sir.

"A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply. "

SOURCE

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Originally posted by Spam Begging to differ sir. "A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply. " SOURCE

Did you read the post above the one that you quoted? You know, the one about the Fed not being part of the office of the President?

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Originally posted by jerZ07002 where do you people find these obscure links to the blogs of these unknown people? furthermore, why should we care about the opinions of these unimportant people?

Like the so-called "important people" were able to warn us about and take steps to prevent the current meltdown?
Max Keiser developed many of the proprietary trading programs back in the 80s that are used on Wall St. So he isn't important? Look at his videos on www.maxkeiser.com that warned us of very many of the things that are happening today, such as the collapse of Iceland.
Catherine Fitts was Assistant Secretary of Housing under Bush I and Clinton as well as investment banker for Dillon Reed. So she isn't important?

Just because someone doesn't have name recognition doesn't mean they don't have something valuable to say.

Also I want to point out that businesses cycles such as these don't happen because people overconsume or underconsume. They happen because the government makes cheap credit available for speculation rather than real production. Bubbles don't need to blow up and burst to the extent they have been the last 30 years. The revolving door between government and industry as well as lobbyists plays a big role in this. Just look at Goldman Sachs for instance. Goldman Sachs is the largest beneficiary to all the money being given to AIG ($165 billion now?). Goldman Sachs benefited the most from the failure of Lehman. Oh and Hanky Panky Paulson gives Goldman Sachs magical depository institution status even though to this day they have no deposits! What a scam!

Here are a few good articles below

[�The Last Picture Show� was a 1971 film depicting the decay of small town America . It took place in the fictitious town of Anarene , Texas .]

We hear a distant tune reminiscent of America �s high and lonely places and the sound of a dry wind blowing. It�s March 2010 in the tiny West Texas town of Anarene . Nothing much happens here any more. The last business shut down a couple of years ago. It was a cement plant that went broke after the housing bubble burst and the banks stopped lending. The kids out of high school drive their jalopies from one end of Main Street to the other past boarded-up storefronts.

Some of the grown-ups carpool to low-wage jobs in a city 50 miles down the road. The elderly have had their Social Security eaten up by the high price of food but still get by on Spam and Kool-Aid. There used to be a movie theater, but it too closed a few months ago. Not a single person went to the �Last Picture Show.�

But there is change in the air! President Barack Obama, who was elected president a couple of years ago, is in the middle of his fiscal year 2010 budget. The 2009 budget had a deficit of $1.75 trillion, a number no fool could even have imagined before the crash of 2008. The projection for 2010 is $1.17 trillion, due to the government�s hopes for an economic recovery. But the jury is out on whether a recovery will ever happen.

Some say the banks are starting to lend again, though no one at the Anarene State Bank knows anything about it. Some say the city down the road is getting a plant to make blades for those new wind turbines. The Anarene high school got funding for an adult training course on writing resumes. The Nightly News says, � America is coming back.�

I wish!

So what is really going on here?

Well, President Obama�s 2010 budget has attracted a lot of attention. $1.75 trillion? That�s not federal spending. That�s new federal debt!

A good measure of fiscal policy is federal government tax revenues. Revenues for 2010 are projected at $2.19 trillion, off 13 percent from a year ago, due to the recession. With the huge bank bailouts and Obama�s $787 billion economic recovery program, 2010 expenditures are estimated at $3.94 trillion, an increase of 33 percent over 2008.

Then there�s the interest taxpayers must pay on the national debt, which will likely reach $600 billion in 2010. Of course almost 100 percent of all new federal debt is financed by foreigners, mainly China .

But don�t worry, the recovery program will succeed, and the economy will start growing again. THE GOVERNMENT PROMISES! Obama�s budget forecasts such a strong upsurge in economic activity by the end of 2009 that the net for the year will be GDP growth of 1 percent. (Yes, that�s what it says.)

Is it a contradiction that the government is conducting �stress tests� on the nation�s banks in which it is predicting that the recession will last at least until 2011 to see if those banks are strong enough to weather the storm? Yes, it is a contradiction. Even the Federal Reserve does not see recovery coming as quickly as Obama�s budget. Neither do any economists. The budget is not an honest document.

It gets worse. The budget says growth will then continue as far as the eye can see�the projections go out to 2019, when we�ll have a GDP of $22.86 trillion, 61 percent higher than 2008. Happy days will be here again!

So go back to sleep, America . It�s official. The recession we are in right now will end soon and is the last one ever.

This means that the financial industry will soon be fixed, plenty of good jobs will be available, climate change and drought will be overcome, the government budget will be right-sized, and America and the world will be content and at peace. All because of the decisions being made by the Obama administration and approved by Congress during these few critical weeks we�re in the middle of right now.

But there are a whole swarm of flies in the ointment. I�ll mention just two.

One is that according to University of Massachusetts economist Thomas Ferguson, who spoke at last weekend�s Eastern Economic Conference national conference in New York , the Bush/Obama bank bailouts alone will cause a permanent addition of interest payments on the national debt of $100 billion a year forever. That means every American will pay, during the course of his or her lifetime, over $20,000 to rescue the banks from their bad loans. To put that number in perspective, it equates to 2-1/2 years of tuition at a state university that instead will be paid to the government of China or a similar foreign investor.

Yes, America , that is what your elected government just decided you will do.

Another is that the U.S. has had virtually no real economic growth since the early 1970s, because since then we�ve lived in a bubble economy. Look it up. Most of our industrial output has been flat or has declined. Whole industries, such as steel, are shadows of their former greatness. The automobile industry is on life support. We�ve imported huge amounts of foreign capital by selling them our real estate and businesses. As stated on the Economy in Crisis website:

�The United States now no longer controls many of its domestic industries. Over the last 10 years alone foreigners have spent $1.2 trillion to acquire more than 8,000 key US companies. Already as of 2002, foreigners owned fully 20 percent of American manufacturing. In many high-tech and defense-related industries, the proportion is far higher. Such US industries as mining, cement, publishing, engine and power transmission equipment, rubber and plastics, and sound recording and motion pictures are now largely foreign owned. Even in industries like pharmaceuticals, chemicals, industrial machinery, transportation equipment, electronics, metal industries, and coal and petroleum industries, foreign ownership has recently become very high.�

Until the last year, the biggest growth industry within the U.S. had been the financial sector, producing profits of over $500 billion as late as 2006. In other words, the U.S. has replaced working for a living with the manipulation of money and the extraction of interest, either by lending it or by brokering the lending and investment by foreigners. In order to enrich themselves, the financiers, with a lot of help from the government, created the merger/buyout bubble of the 1980s, the dot.com bubble of the 1990s, and the housing/equity/hedge fund/derivative bubble of the 2000s.

All this time, the federal, state, and local governments have tried to keep up by taxing every financial transaction they can get their hands on, including by raising property taxes on the inflated value of family homes. But now, with the last of the bubbles deflating, the tax base is vanishing. So governments, along with the private sector economy, which has been living on capital gains in the absence of job income for all but the very rich, have gone into the tank as well.

President Barack Obama�s economic recovery program, along with the budget just released, is an attempt to substitute a federal government bubble for the failed private sector ones. Like the private sector bubbles, this one is also based on debt. This is because debt is the only way anyone in the U.S. can any longer think of when it comes to creating a national money supply. It includes the president�s proposed $5 billion federal infrastructure bank for lending to state and local governments. This bank will probably offer better interest rates than the bond markets, but it�s still debt.

There was a time in U.S. history when other ways were known to create money; for instance, during the Civil War, when Congress authorized the Lincoln administration to spend Greenbacks directly into existence. The banks hated the Greenbacks, of course, so they got Congress to pass the National Banking Acts of 1863-64, which were the prelude to the Federal Reserve Act of 1913. Today, Greenback-type funding for the federal government is one of the chief provisions of the American Monetary Act drafted by the American Monetary Institute (www.monetary.org).

Another way to introduce debt-free money into the economy is through a dividend, such as the Alaska Permanent Fund, which in 2008 paid every resident $3,269 tax-free out of the state�s resource revenues. There is no good reason why such a dividend could not be paid by every state or by the federal government.

Greenbacks and programs like the Alaska Permanent Fund are part of what I call Dividend Economics. It�s why I�ve proposed the �Cook Plan,� which would be a system of vouchers for the necessities of life in the amount of $1,000 a month for any adult citizen who applied. A smaller amount would be provided as an allowance for children.

The vouchers would be taxed like any other income and would supplement other entitlements such as unemployment compensation, Social Security, etc. But taxes would be low for those who would use the vouchers as a main source of income. Under the plan, the vouchers would then be accepted as deposits at a new network of community savings banks that would lend at one percent interest to consumers, students, small businesses, local manufacturing establishments, and family farms.

This would introduce over $2.5 trillion of debt-free money into the economy over the next year, because under the �Cook Plan,� the dividend would be paid directly by the U.S. Treasury without borrowing or taxation. It would not be inflationary, because it would replace money from public bank lending and would result in new goods and services being created within the U.S. producing economy. In fact, we would see a renaissance of local and regional economic activity that would eventually transform the national economy as well.

You may ask, should we just be �giving away money?� My answer is that if the banks can create trillions of dollars in credit out of thin air for lending, why can�t the government create it for the people? The same goes with the trillions the government is borrowing to pay to the banks to reinflate the bubble economy. Give it to the people instead. Look at Obama�s economic recovery program that equates to $225,000 for each new job it hopes to create and probably won�t. Give that to the people too. Let them use the money as a dividend to live on during this emergency and create new jobs as well.

Right now there is nothing further from the minds of President Obama and his advisers than such ideas. That�s why his new bubble budget is America �s �Last Picture Show.�

Richard C. Cook is a former U.S. federal government analyst. His book on monetary reform, We Hold These Truths: The Hope of Monetary Reform, is now available at http://www.amazon.com. He is also the author of Challenger Revealed: An Insider�s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age. He can be contacted through his website at http://www.richardccook.com.



No One Seems To Know Or Be Willing To Say How Bad Things Are

Pilot Chesley 'Sully' Sullenberger has been given his own Facebook page which may be the equivalent these days to being inducted in some heroes hall of fame. He became the rescuer who knew where he was, saw where he was going, and touched his huge plane down into what he calculated correctly would be a safe landing on the Hudson River.

Will President Obama be able to rescue us from the ongoing economic collapse that has put the country and his plans at risk? Is he flying blind or does he know how to achieve a safe landing even in the absence of flight controllers and people who know what is going on. Is he going far enough?

Does anyone even know how bad the economy is, or how much worse it will get? Can anyone see the "bottom" the way Sully saw the water rushing up at him in the cockpit of his distressed aircraft? He handled his crash; can we handle ours?

On Friday, after a crisis that's been going in full panic mode since August 2007, the people who are supposedly in the know don't "seem" to be. This AP report from late last week made that clear:

"WASHINGTON - The economy's downhill slide at the end of last year was likely much steeper than the government initially thought and it is probably doing just as poorly now - if not worse - as a relentless slew of negative forces feed on each other, pushing the country deeper into recession."

Reread the sentence and you can see, as a famous Hollywood Screen writer wrote years ago "nobody knows nothing." The operative phrases are "likely much steeper than the government initially thought" and "it is probably doing just as poorly now." What? Duh?

The self-styled experts had what they call a "revision" of the numbers. At first they thought the economy only dropped or "contracted" by 3% but when they looked again, it had more than doubled to 6.2%. Oops! These new fourth-quarter figures showed the economy shrinking at the fastest rate in a quarter century, were far worse than expected.

There is a reason economics is called "the dismal science" although the science part of all this is very shaky and may have to be separated from the "dismal" part. There were economists like Nouriel Roubini forecasting these trends but he was marginalized by agencies that thought they were so much smarter than the man they called "Dr. Doom."

Someone needs to take a deep breath and figure out what all of economic stimulus efforts are stimulating, General Motors and many banks have received and lost billions. Insurance companies are lining up for more moolah. Fannie Mae needs another $15 biliion.

It seems endless, and we are not even touching the surface of the real economic time bombs on the horizon from credit default swaps, derivatives and credit cards. Nomi Prins who worked for as an analyst for Bear Stearns and a managing partner for Goldman Sachs says the official math is totally fuzzy:

"The media, like Washington hasn't a clue as to the way in which the system leveraged itself. It talks about the home loans. It talks about the homeowners. It talks about asset securities and packaging and slicing and dicing as if it really understands what happened with these securities. And it really doesn't talk about the 10, 20, 30 percent or what ever amount of leverage or borrowing that was done on the back of them.

"And the fact that even the treasury, the Oval Office, no one in Congress has actually been able to present an accurate description or evaluation of the loss of the value these securities used to be, the borrowing that was done on top of them and the way this nothing set of loans - remember there was only 1 � trillion dollars worth of sub loans - subprime loans created - became $14 trillion worth of asset backs and 140 minimum trillion dollars worth of just stuff.

"And there is no way to quantify that because they're not asking questions of the banks that created this stuff. They're not saying 'you know what? Give us an accurate picture, every single one of you.' Which is most of the banks in the country. Certainly ones participated more than others and throughout the world. 'Tell us what you own. Tell us what you borrow. Tell us what your loss is. Give us exact numbers. Don't tell us you don't know how to evaluate it.'

Political Scientist Ben Barber amplifies:

"There is somewhere between 50 and $600 trillion, nobody knows how much, of that paper around. But that's because nobody even knows what the paper is. Here's what happens. There are three defaults on mortgages. The bank that holds those sells those at 10 cents on the dollar to a second bank. That bank puts those together with three other defaults and three other defaults and makes a second package and sells it to a third Bank. The third Bank sells 6 of these things from 10 different -- from five different banks to a hedge fund. The hedge fund repackages them, bundles them and sells them to some investor who has no idea what he has. And now we have a world of bad debt and no one can even tell you what it's -- you know, what it's worth."

How did this happen? Was anyone paying attention? Mo Sacirbey, a former investment banker and Vice President at Standard and Poors, says behind all of this is that the financial system itself changed with more and more people making money from money, not investing in companies that make things. He says the system became predatory and markets and prices were manipulated:

"I think we had a transition from what truly was a free-market system to something now that is out of control and probably what I would define as a predatory system where we are not so much dealing anymore about the notion of fair prices, and the notion of markets that -- that work transparently an open late but in fact frequently markets that are manipulated for the end of maybe a few out there -- a few investors, mega-investors. It's even -- even that's very difficult to tell. We still don't know who in fact is making money while so many are losing money on Wall Street right now."

Years ago, right after the American civil war, there was a bearded prophet in Europe, who studied the system and demystified it. While his predictions were off, his analysis still seems on target. Anyone remember Karl "Das Kapital" Marx?

"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism."

Today long trips are taken not by road but by air, so we may need Captain Sully to fly us away on some magic carpet. The right is mobilizing against the sprectre of a phony socialism while the government is pumping money into the economy to save capitalism. They are back to red-baiting falsely claiming the USA is becoming the next USSR. We don't need more neo-cons or for that matter, neo-coms.

Wake up: government funding and private control do not socialism make. A broader mobilization is needed to stop the "Big C's" system meltdown.

News Dissector Danny Schechter wrote PLUNDER: Investigating Our Economic Calamity (Cosimo Books) and blogs for Mediachannel.org. Comments to [email protected]


Danny Schechter is a frequent contributor to Global Research. Global Research Articles by Danny Schechter

quote:

Originally posted by Groundhog Boy Did you read the post above the one that you quoted? You know, the one about the Fed not being part of the office of the President?

Lol woops, misread his post Just kinda quickly read it and took it to mean "No one" not, "the fed".

quote:

Originally posted by tonybologna Like the so-called "important people" were able to warn us about and take steps to prevent the current meltdown?

You really should use quotes around other material--it makes it easier to read (and easier to skim if, say, I'm more interested in your comments, rather than the other stuff you're posting)

quote:

Originally posted by tonybologna ............

no chance in hell i was reading that post. i was only refering to the obscure blogs that are consistently quoted. don't people have jobs?

quote:

Originally posted by Spam Begging to differ sir. "A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage loans among low- and moderate-income people and that the corporation loosened its lending requirements to comply. " SOURCE

which has exactly zero to do with the fed, and such loans only made up a tiny percentage of the overall subprime debacle. the problem was much much bigger than clinton, despite what people like capitalizt are driven to believe.

ah pk, it boggles my mind how you can be so blind to this situation and it's root causes. Just sit back and take in what is happening. We are witnessing the culmination of 70 years of Keynesian policies right now. The recession "cure" from the government never changes...borrow, inflate, borrow more. We have done this to an extreme since 1971 when the dollar/gold connection was completely severed..and it has resulted in larger and larger asset bubbles every successive time. Look where this economic philosophy has landed us today...great depression #2 on an international scale. Governments are in your face every day with more of the same..more interventions and bailouts..more debt and currency devaluation..capital infusions and zero interest loans to prop up incompetent bankers.. How you can blame individual companies when the main culprit and enabler of this mess is making headline news every day is beyond me.. This nonsense being pulled by every government around the world is going to make things much worse over the next few years. Things are going to be so bad that I won't be able to take any pleasure in saying I told you so.

blah blah blah. come speak to us when you have that economics degree champ. edit: do they offer a degree in austrian economics? no? oh, that must be because its not real economics. unlucky.

Some interesting economic history from Paul Kasriel.

quote:

February 09, 2009 The Great Depression - Just the Facts, Ma'am by Paul Kasriel Contrary to what you might believe, the Great Depression of the 1930s was not a decade-long era of economic decline. Rather, the Great Depression was made up of two distinct economic slumps - August 1929 through March 1933 and May 1937 through June 1938. As Chart 1 shows, the first recessionary period of the Great Depression was not only longer in duration, but more severe in magnitude. Notice, however, that a quite robust economic recovery/expansion occurred between the two recessions. In the four years ended 1937, real GDP grew at a compound annual rate of 9.4%. Lest you think that all of the increase in real GDP growth in the four years ended 1937 was accounted for by federal government spending, Chart 2 should dissuade you of this notion. In the four years ended 1937, real GDP excluding real federal government expenditures grew at a compound annual rate of growth of 9.0%. In the four years ended 1937, industrial production grew at a compound annual rate of 12.9% (see Chart 3). Although this vigorous real economic recovery did not bring the unemployment rate back down to anywhere near where it was before the 1929 recession commenced, the unemployment rate did fall from a cycle high of 25.6% in May 1933 to a cycle low of 11.0% in July 1937 (see Chart 4). Given some of the economic policy decisions made in 1930, 1931 and 1932, it is quite remarkable that a recovery commenced in April 1933. To wit, in 1930, Congress passed the Smoot-Hawley tariff legislation, effectively a large tax increase on imported goods. In response to this, a number of other foreign governments retaliated by passing their own tariff legislation. As a result, global trade collapsed. After the stock market crashed in October 1929, the New York Fed cut its discount rate by 100 basis points to a level of 5% on November 1. The New York Fed continued reducing its discount rate through May 8, 1931, when the level came to rest at 1-1/2%. Then in two 100 basis point steps - on October 9, 1931 and on October 16, 1931 - the New York Fed increased its discount rate. So, the discount rate went from 1-1/2% on October 8, 1931 to 3-1/2% on October 16, 1931 - a two percentage point increase in approximately a one-week time span. On February 26, 1932, the discount rate was reduced to 3% and then reduced to 2-1/2% on June 24, 1932. In 1932, marginal income tax rates on personal income were raised. In 1931, the highest marginal tax rate was 25% on incomes in excess of $100,000. In 1932, the marginal tax rate on incomes between $100,000 and $150,000 was increased to 56% - more than a 100% increase in this marginal tax rate. What's more, the top marginal tax rate went to 63% on incomes in excess of $1,000,000. So, if you were a million-dollar earner in 1931 and 1932, your marginal income tax rate increased by over 150%. Starting in 1930 and continuing through 1933, almost 9,100 commercial banks failed with deposits of $6.8 billion. The deposits of these failed banks represented 13.3% of total commercial bank deposits as of 1929. Net losses to depositors of these failed banks were about $1.3 billion, or approximately 19% of the deposits of failed commercial banks. Between December 31, 1929 and December 31, 1933, commercial bank deposits, net of interbank deposits, contracted by 37%. Despite protective tariffs, Fed discount rate increases, personal income tax rate increases and massive bank failures, the first recession of the Great Depression ended in March 1933, the same month in which Franklin D. Roosevelt was inaugurated as president. That is, the business cycle trough occurred before the "New Deal" policies were implemented. In 1936, marginal personal income tax rates were increased again. For incomes between $100,000 and 150,000, the tax rate went from 56% to 62%, a 10.7% increase in the tax rate; for incomes between $1,000,000 and $2,000,000, the tax rate went from 63% to 77%, a 22.2% increase; and for incomes in excess of $5,000,000, the marginal tax rate became 79%, an increase of 25.4% from the previous top marginal tax rate of 63%. Between August 1936 and May 1937, the Federal Reserve doubled the percentage of reserves commercial banks were required to hold relative to their deposits. The economic expansion that commenced in April 1933 then peaked in May 1937. The economy entered the second recession of the Great Depression, which lasted through June 1938. There is much discussion in the media of late that FDR's "New Deal" policies were detrimental to economic growth during the 1930s. But we need to make a distinction between New Deal policies that dealt with increased federal government spending and those that dealt with the direct interference in markets. Perhaps the New Deal policies that directly interfered with markets were responsible for keeping the unemployment rate from falling as much as it otherwise would have. But as was discussed at the outset of this commentary, real GDP grew at a compound annual rate of growth of 9.4% in the four years ended 1937. Chart 5 shows the behavior of the percentage change in annual average real GDP and the percentage change in annual average real federal government expenditures. Perhaps it is coincidental that real GDP contracted by significantly less in 1933 and grew in 1934 through 1937 as the rate of growth in real federal government expenditures increased significantly in 1933, 1934 and 1936. Perhaps, had it not been for the stepped up increases in real federal government expenditures, the compound annual rate of growth in real GDP in the four years ended 1937 would have been even higher than 9.4%. Perhaps. I have argued that increased government spending without the monetization of the increased federal debt has little impact on aggregate demand - real or nominal. That is, if increased federal government spending is funded by increased taxes or increased sales of Treasury securities to the nonbank public that are not monetized by the Fed and the banking system, then spending "power" is merely transferred from the private sector to the government sector, the net result of which is little if any increase in total spending in the economy. In this regard, it is interesting to observe the behavior of commercial bank reserves, which are, in effect, credit created by the Fed figuratively "out of thin air," during the 1930s. This is shown in Chart 6. The change in bank reserves was negative from 1929 through 1932. Then rapid growth in reserves commenced in 1933. In the four years ended 1936, bank reserves grew at a compound annual rate of 25.9%. Then, in 1937, reserves contracted by 18.9% along with a contraction in nominal federal government expenditures. What does this review of historical facts have to do with the current economic environment? For starters, the policy hurdles that were put in front of an economic recovery in the early 1930s are absent today. The "Buy American" proposal related to the fiscal stimulus program seems to have gone by the wayside. The Fed has no intention of raising interest rates until it is sure the economy has begun to recover. Personal income tax rates are not likely to be raised until 2011. If the top marginal rate is increased then, the increase will be considerably smaller in absolute and relative terms than the tax increases of 1932 or 1936. Today, we have federal deposit insurance, so, for the most part, bank and thrift depositors will not incur losses if institutions fail. In addition, we have income maintenance programs such as Social Security, Medicare, Medicaid, food stamps and unemployment insurance. So, the hurdles that today's economy has to jump over to enter a recovery would appear to be much lower than the hurdles that were erected between 1930 and 1932. In addition, the federal government is about to embark on a massive fiscal stimulus program. Will the Fed monetize much of the new debt issued to fund this program? We do not know yet. But if recent history is any guide, the answer is yes. Chart 7 shows that the growth in bank reserves in 2008 was almost 149% - an unprecedented increase. If the federal government embarks on a large spending spree and the Fed "prints" the money to fund the spending, then the pace of real economic activity is bound to increase. How long it will take for higher prices to begin to erode real activity is another question. But never underestimate the initial positive impact on aggregate demand of that powerful combination of increased federal government spending/tax cuts and a central bank running the monetary printing press at a high speed. It is not my role to endorse government policies. It is my role to forecast the impact of government policies on the economy. I believe that large increases in federal government spending that are monetized by the Fed and the banking system will result in a recovery in real economic activity. When that recovery sets in depends on how quickly the federal government increases its spending and by the magnitude of that increase. We can debate whether tax rates should be cut or federal spending should be increased. We can debate what kinds of spending should be increased. We can debate whether the federal government should increase any of its spending. But the facts of the 1930s appear to be pretty clear - monetized increased federal government spending does result in increased real economic activity in the short run. The economic data are likely to be abysmal through the first half of this year. The popular media will reinforce the gloom of the data. The same pundits who did not see this downturn coming will not see the recovery coming either. My advice to you is to keep your eye on the index of Leading Economic Indicators. If history is any guide, the LEI will signal a recovery well ahead of the pundits. Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

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