The Three Missteps in President Obama’s Economic Turnaround Plan
By Martin Hutchinson
Contributing Editor
Money Morning
U.S. President Barack Obama’s speech to the joint session of Congress late Tuesday was a beautiful performance. His language was exquisite, his delivery was superb, his rhetoric – at times – truly uplifting. It no doubt reflects a fault in my makeup that I found it not entirely convincing – but then I’m a math major and a former banker.
The speech – which took the place of the State of the Union address since it’s Obama’s first year in office – concentrated almost entirely on economics, and in particular on the financial and economic crisis currently facing the United States. President Obama’s comments were least convincing when they focused on the financial aspects of the crisis.
That’s probably why he “won overwhelming … approval” on Main Street even as he failed to “wow” Wall Street, such news agencies as the Voice of America and ABC News reported.
But according to my own analysis, President Obama made three notable missteps, including an error in strategy and goal setting serious enough to nudge the U.S. economy back into a recession, should his stimulus plan and banking-rescue program create a near-term economic recovery. Let’s look at all three of the miscues I’ve identified.
Mistake No. 1
President Obama’s first mistake was one of assessment – in that he blamed the entire current situation on Wall Street. That’s attractive, populist rhetoric, but where was the acknowledgement of the U.S. Federal Reserve’s role in the debacle, inflating the money supply 70% faster than gross domestic product (GDP) for more than 13 years, so that asset bubble after asset bubble caused the incentive structures on Wall Street to go haywire?
Where, too, was the (admittedly subsidiary, maybe No. 3 after the feckless Fed and the greedy bankers) role that Congress played over decades, messing up the housing market by creating unregulated irresponsible government guarantee monopolies in Fannie Mae (FNM) and Freddie Mac (FRE), an extra excrescence that no other advanced economy has found necessary to finance housing?
Bashing bankers is good rollicking stuff for a campaign speech, but it is less appropriate here, when the problems must actually be fixed. This rhetoric actually obscures the reality of the current problem, and diverts attention from the still-dangerous presence of U.S. Federal Reserve Chairman Ben S. Bernanke, whose role in creating the disaster is in danger of being exceeded by his role in perpetuating it. If Bernanke’s current rapid expansion of the money supply leads to violent inflation, as is likely, the crisis will indeed be prolonged for a decade, as Obama claimed was possible without government action.
Mistake No. 2
President Obama’s second inaccuracy – or misstep – on the financial side in Tuesday’s speech was in diagnosis. Lending in the U.S. economy has not seized up. It did seize up for about two months after the September crisis, but even by the end of the year loan growth had resumed, as figures from the major banks show. The commercial paper market has reopened and the investment-quality bond market has run at high volumes since the beginning of January.
Only one major source of “easy money” in past lending markets has disappeared – the securitization business: Almost nobody will now invest in securitization structures, and with good reason. However, as my investigative analysis of the nation’s Top 12 banks last week demonstrated, most of the major U.S. banks are in better shape than we believe, and are actually making money.
Their profitability has been greatly increased by the disappearance of competition from securitization – loan margins at the healthy US Bancorp (USB), for example, increased from 3.7% to 3.9% in the fourth quarter of 2008, and will have increased still further now.
Other than a few huge “zombies,” most banks are now making good money the old-fashioned way, through the interest margin between borrowing and lending rates. They will continue to do so, provided the government doesn’t (as President Obama and U.S. Treasury Secretary Timothy F. Geithner are currently readying to) introduce artificial competition, by inventing new taxpayer-funded vehicles to make consumer loans and drive margins down.
Yes, loans need to remain available for houses, automobiles and other purchases, but there’s no reason why they should not be somewhat more expensive – to rebalance the U.S. economy, the U.S. consumer needs to save more, not borrow more.
Mistake No. 3
Given that his first mistake was in assessment, and the second was in diagnosis, it’s no surprise that his third mistake was in goal-setting: One of the central objectives he established in his speech was a promise to pursue multiple objectives – even as he slashed the deficit in a big way.
In fact, as well as appearing to be a bit shaky in his knowledge of banking, President Obama made me question both his math, and his choice of economic objectives.
Reducing the budget deficit from 10% of GDP, its level in 2009, to $500 billion, or about 3% of GDP by 2013, is a hell of a task.
And quite possibly a hell of a risk, too.
That 7% swing in the budget balance is almost double the largest four-year swing ever achieved since the end of World War II – the 3.8% swing achieved from 1996-2000. Even during the 1990s economic cycle as a whole – a period of exceptional economic good fortune and budget thriftiness – the swing in the eight years from 1992 to 2000 was only 7.1% of GDP.
The problem with trying to tighten fiscal policy so rapidly is the negative “stimulus” effect it would cause. If the U.S. economy does anything in mid-2010 but zoom like a Saturn V rocket roaring off the launch pad, sucking 7% of GDP out of government demand over so short a period is likely to abort the recovery and push the economy back into a depression. Furthermore, Obama intends to do this without raising the taxes by one penny on anybody earning less than $250,000, and while increasing the size of the armed forces, their pensions, and spending more on energy, healthcare and education.
Maybe I’m a grouchy old skeptic, but it doesn’t look to me as if the math adds up.
Look, President Obama is a wonderful speaker, he really is, and he gave quite a performance in his address to Congress Tuesday night. As a gnarled old Republican, I’m prepared to admit he’s as good as late President Ronald W. Reagan, I may even nurse a faint suspicion that he’s better than Ronald Reagan.
And don’t forget: Reagan was known as “The Great Communicator.”
But to be a great president, Barack Obama will need to pursue policies that are sufficiently middle of the road so as not to destroy the superb private sector that’s the backbone of the U.S. economy, and that are also cleverly designed to work properly. It’s the math, the economics and the finance, not the language, the arts and the humanities, where there are still doubts.
[Editor's Note: When it comes to either banking or the international financial markets, there's no one better to hear it from than Money Morning Contributing Editor Martin Hutchinson, for he brings to the table the kind of high-level expertise that our readers have come to expect. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo War.
It was Hutchinson who penned most of Money Morning's "Election 2008" presidential election coverage. At the very start of the presidential campaign, Hutchinson personally interviewed the economic advisors for candidates John McCain, Barack Obama and John Edwards, and very early on concluded that out of the entire field of presidential hopefuls, Obama and McCain would offer the best profit opportunities for investors - and correctly predicted they would be the two finalists.
Just last week, Hutchinson published an analysis on the "Top 12 U.S. banks" report. If you missed story, which enjoyed a big response when it was published last Wednesday, please click here to access it and check it out. The report is free of charge. The follow-up story on that story was his analysis of Fifth Third Bancorp (FITB). The report on Fifth Third appeared last Friday. Both reports may be well worth your time to read.]
News and Related Story Links:
- Money Morning News:
Fixing economy to be Focus of Obama’s Address to Congress. - Money Morning Investigative Analysis:
The Top 12 U.S. Banks: From Zombies to Hidden Gems. - Money Morning Market Analysis:
The Top 12 U.S. Banks: From Zombies to Hidden Gems - Money Morning News Analysis:
The Obama Blueprint for Solving the U.S. Financial Crisis - Whitehouse.gov:
Ronald W. Reagan. - ABC News:
Obama’s Speech Didn’t Wow Wall Street. - The Voice of America (VOA News):
Americans Welcome Obama Speech. - Money Morning Investigative Report on Bank Bailouts (Part VIII):
Obama Administration Must Revive “Shadow Financial System” to Revive U.S. Banks.
Comment by Khsirob on 26 February 2009:
You have provided interesting fact that during 1992 -2000 (Clinton era) the budget deficit was lesser than in the previous and the following periods. If you check the curve of the hedge funds growth , you will also see that 1992-2000 were their blast off. The money they produced did not require any work, any industrial development (I mean, financial industry is not any industry, it is overhead on the economy, economy is where the consumable useful product is manufactured, as opposes to manufacturing hedge fluff), but these money produced huge IRS harvest that reduced budget deficit (or growth thereof). When Bush came, he saw all these mad money and spent the pile on military and war expences, etc. Now, it looks like the US President and the Congress had lost that hedge income and need another source…The source is the stimulus money printing… This is as logical as engineering. I mean engineering as in building roads, cars, computers, going to the moon…, quite exact well calculated things. The engineering method opposes to the ssecretive machinations in the world of finance wherein investing in a public companny is a problem of solving a system of 100 algebraic equations with 1000 variables, and nobody gives you the data for writing the needed 900 equations…because that is how THE WE, the most productive part of the society, make money.
Comment by jim on 26 February 2009:
Barry is an IDIOT and the MORONS who put him in office knew that before putting him in office!! NOW we will all have to SUFFER the OBAMAPRESSION!! The ones who caused this MESS are still there, barney and his boyfriend at Fannie Mae who got 95 MILLION dollars and dodd the Countrywide prostitute! Those wretches of human garbage are STILL there, so nothing can get better!!!
Comment by robertsgt40 on 26 February 2009:
Obama also failed to mention that the Federal Reserve is a criminal enterprise. It’s the ultimate ponzi scheme. It is a private corporation that doesn’t pay taxes and has never been audited. It’s primary purpose for being established in 1913 was to do exactly what it has done. Transfer the nation’s wealth into a few greed hands. This can’t stand much longer. Obama=Change? Sure, change from our hands to theirs.
Comment by Frank on 26 February 2009:
Martin
You blame Bernanke for stoking the money supply furnace. Please don’t forget his predecessor, Alan Greenspan, who makes Bernanke look like a child with a piggy bank in comparison.
Comment by Gnarled old DEMOCRAT on 26 February 2009:
So you are a “Gnarled old Republican” – that’s all we need to know Mr. Hutchinson. Republicans are responsible for this mess and are now typically putting their party and failed ideas above country in opposing President Obama’s plans. Get over it and forget about your re-elections in 2010, House Republicans. You, almost all of you, should be toast for supporting Dick Cheney and George W Bush like blind mice for the past eight years. Now just stop voting against everything like spoiled brats. Even if, like most elected politicians with perks and benefits we don’t have, you ARE spoiled brats.
Comment by John Lounsbury on 26 February 2009:
Obama needs to study The Great Depression. One of Roosevelt’s mistakes was to prematurely move to reduce deficits by raising taxes in 1937. The recovery had insufficient traction to absorb this and the country went back into recession through 1938. That is why mistake #3 described by Martin is very significant.
Comment by ANDY on 26 February 2009:
IF YOU PUT A STRIKEOUT ARTIST TO PINCH HIT IN THE WORLD SERIES YOU WOULD SURE LOOSE. THE NEW KID ON THE BLOCK HAS A LINEUP OF STRIKEOUT ARTIST UP TO BAT. GURANTEEING HE WILL SURE LOOSE. IF YOU DO THE SAME THING OVER AND OVER AND EXPECT DIFFERENCE A DIFFERENCE RESULTS YOU WILL SURE LOOSE.
Comment by Ed on 26 February 2009:
I agree with Martin as he again proves himself quite lucid concerning the issue. I would go a bit further with point number one as i lay the blame on the government and our citizens.
As far as the government blame this is two-fold: Easing the lending standards during the 90’s to allow poor and low income (in the name of ending redlining)to qualify for a home loan, 2)moving the rates down during 2001-2003 to get us out of that recession by capturing a huge number of loans, and then reversing the rates to choke these same people out when their mortgages readjusted in 2007, 2008, 2009, and 2010.
It is not a Democratic or Republican issue as both sides seemed ignorant of such consequences. Granted the problem was made worse having Fannie back the paper and pass it along to Wall Street where it was levered excessively to reduce loss potential from the delinquencies…wow did they get that one backwards. But this would never have made possible if not for the government wanting the lending to take place in the first place…so it was a good idea gone bad.
I also think we need to blame ourselves…the American people. We have been irresponsible spenders and it finally seems to have caught up to us. Liar loans, greed, instant gratification, keeping up with the Joneses, credit card debt, unrealistic expectations, marketing trickery, planned obsolescence in the market place, etc.
Generally Americans seem to have chosen mammon as our god. We slave to have have have and then we cannot wiat until we save for it so we purchase on credit. Capitalism has been tweaked to drain our money quicker than we get it and we gladly go along as we upgrade our stuff pile. Kids sleeping outside to get the newest game machines at the worst possible price is a direct result of our national love for mammon. Everyone knows that those game machnes will come down in price significantly over time…but try telling the kids to wait….everyone wants instant gratification and no one seems willing to pay the necessary price to save anymore.
Lastly, if you check the prices of homes 50 years ago you will find the average was $12,500 and today the average price has dropped from $233,000 o around $177,000 now. Even at $177,000 this is 14 times the price of 1959. Compare that with wages…1959 @ $5015 and now @ $53,400. That is an increase of just under 11 times. Now lets equalize income and house prices… first lets move the income up 14 times. This means income wold have to be $70,210.00 to be proportionate to 1959. If we move house prices down to 11 times their 1959 average we have houses @ $137,500.00.
While this is an oversimplification, it does reveal the problem of the widening gap between income and housing prices. The gap cannot widen beyond where people can pay or it will painfully adjust. Hello…when houses were at $233,000 we reached that point and have this current mess that is poisoninig the global economies. So prices went higher faster than income because of greed…our love for mammon.
So rather than explain in further detail i will sum up the problem as being due to the lack of wisdom in our government and our citizens love for mammon.
Comment by William Jones on 26 February 2009:
I like your analysis of President Obama’s speech. Nonetheless, I think the country needed to hear a positive and timely response to where we need to go as a country and as a global citizen. One of my concerns is the process that is put in place to manage it all. Because, as an accountant, the devil is in the detail. There have to be rules of engagement that drive responsibility and accountability, whether it is the government, businesses or individuals. And those rules have not been fully established nor enforced. Of course the business community is fed by buyers who have lost common economics sense at a personal level. Add it all up and you have [1] a market that can be misled because of their business ignorance and either their inability or failure to do their due diligence to preserve their own finances and, most importantly [2] a business community ready to feed upon their ignorance and give them all the rope they will take. And if they run aout of rope, they will find a way of getting more. Eventually you have to pay the piper. It seems as though businessmen in general have the short-term mentality of profit and their own purse strings above all else. Reality has been, senior executives exercised the creativity of exotic complex financial schemes that, given the opportunity, they could not explain to nor convince their grandmother to invest, only feeds the structure of the financial house of cards. Management in this country [whether the government or business community] needs to get back to doing its job: managing the fundamentals and doing their due diligence in the investments they commit to the future of the business or government. And those who abuse their position need to be held accountable; financially and legally. I still do not see where the abusers who feasted at the trough of greed and ignorance are being pursued for accountability. Until you fix the process, feeding more to the beast will not turn the tide.
Comment by shane on 26 February 2009:
I agree with Mark’s analysis. Here’s the catch. He is comming from the standpoint that all of our politicians want the best for our country. Unfortunately they don’t especially politicians like Obama. Their socialist policies and agenda are nothing more than a power grab. We are only free because capitalism is still working(beyond the corruption and huge greed within the system). It’s the intent of the powerful few to control the many. Is this not the way it is in many other parts of the world? If we seriously consider the path that this country has been heading for the past 40 years we can see the loss of personal freedoms and the mega growth of our government.
Is all of this conspiracy? I call it human nature.
Comment by Greg on 26 February 2009:
From your opening comments, I thought you were going to say that you too got a tingly feeling up and down your leg.
Did we watch the same speech? It left me with a picture of a guy who was an oustanding campaigner but now the reality of being President is sinking in – for himself, and unfortunately, for us Americans.
It scares me that this President can talk with such confidence about one ideology while actually implementing something completely different.
Comment by Hal on 26 February 2009:
Martin-
You say, “Obama made three notable missteps, including an error in strategy and goal setting serious enough to nudge the U.S. economy back into a recession” I would prefer getting out of the hole that so-called conservative Republicans got us into over the last 28 years or so. As a fiscal conservative, I must ask, “what planet do you live on?” We are in the midst of the largest downturn since the Great Depression. All out monetary stimulus has been ineffective in creating growth and Paulson and Bernanke’s TARP while it did restart inter-party lending has not even begun to replace the securitization-induced bubble of the last decade.
I am truly trying to understand the logic of Republicans. You say that Obama has misread the crisis since he believes the entire problem stems from Wall Street. Where do you get that from? He has laid out 3 legs to the plan for recovery. Certainly, he recognizes that borrowers took foolish risks and while his mortgage plan makes me very sad, it would be even more foolish to simply let housing precipitate another Depression. That is the consensus from economists including McAin’s advisor, Mark Zandi and Dr. Robert Shiller who have a lot more credibility than any naysayer at this moment. They say that Obama’s stimulus should have been larger and tax cuts would not provide the same “bang for the buck”.
This crisis was caused by unmitigated greed both from Wall Street and Main Street. Your focus on CRA’s contribution distorts the fact that only 6% of foreclosures came from this segment and that percentage will decline as more prime loans default. No, it was securitization and leverage that was the main culprit and bankers could have prevented the dislocation in housing and asset prices, but they would have limited their bonuses. Given the human frailty of greed vs. altruism, they took the money.
Regarding goal setting, we have learned from history that what will be will be which is why I would choose the Swedish model as opposed to the Japanese model for restructuring our banking system and Worldwide capital markets. This is a perfect time to take on SS and Medicare along with the massive infusion that is needed for infrastructure. Incrementalism, as was used by Japan only delayed the inevitable. Banks need to go away and housing prices need to decline to their historic relationship to wages and rents. This will take place regardless of whatever the Fed does. It always does.
Next you say that he believes the credit market has frozen. Again, he and his advisors are well aware that lending is continuing, but if you think we can rebound from this deflationary environment with zombie banks making loans to businesses without established reserve requirements, I think you’re being very short sighted. We need to use the Swedish model to remove the worst of the large banks from the system. The markets will trend lower until and unless we do. Proposals to suspend mark-to-market are foolish. Many of our largest banking institutions grew to unsustainable levels by participating in securitization and, like FRE and FNMA, need to disappear. This makes bankers like you unhappy with Obama’s plan. What a surprise!
Comment by Dave on 26 February 2009:
This whole stimulus bill that was pushed through, and all of this new spending is ridicules. It does nothing to create long term jobs. These are all short term projects that they want to do. What are all of these people working on these projects going to do once everything is fixed? They will be jobless without any where to turn and the economy will go back down. If we are going to throw money around, lets throw some into creating jobs outside of the government. One job resource that could use a jolt of life is our manufacturing industry. I was reading articles over at americanboom.com about how much of this problem could have been avoided if we had not outsourced all of our manufacturing to China. We need to stop relying on the government to bail us out and start bailing each other out. If we support companies that employ Americans then maybe they will not move to China.
Comment by Rayford Brown on 27 February 2009:
You had one oversight in your analysis. Obama was lying the whole time. Nothing he said had anything to do with his real plans or goals. Read his books. He is a socialist one worlder. All he wants to do is destroy the US so we will willingly give up our Constitution, not being followed anyway, and join a one world socialist government. May God help us when we repent and seek again the guidance that created this once wonderful free country.
Comment by George on 27 February 2009:
Mr Hutchinson,
Whilst I do not agree with all that Pres. Obama is doing to supposedly ’save’ the US economy, I agree much less with your assessment of the situation.
First of all your assessments of the twelve largets banks was faulted insofar that you did not list the ‘Exposure’ of these banks to toxic derivatives. These figures are deliberately being kept from the public and you chose to try to do so too.
If you take into account the exposure to derivatives, swaps and other ‘cleverly’ contrived financial vehicles by smart arse financial criminals then the whole bunch of large US banks and many smaller banks would be ’smoke’.
In addition to these false assessments by you , you further completely ignore the fact that the main reason that the whole world banking system is at peril is not because of Greenspan, nor Bernenke but by the US banks who sold criminally created vehicles which were knowingly created based upon faulty banking practices and sold all around the world.
You see they knew what they were doing but like all criminals they didn’t expect to get caught and in fact , so far, they haven’t been caught because nobody in th system wants them to be taken to task , especially when they can hood-wink politicians to cover their backsides with ‘Bailouts’.
Comment by Russ on 27 February 2009:
We are all talkers and/or takers. My deceased friend purchased gold yrs. ago @ $11/troy oz. He also went to Reno, Nevada & traded Federal Reserve toilet paper Notes 1 on 1 for silver $’s. When silver hit $50/troy oz. back in 1980, he sold 300 silver $’s for toilet paper again, to purchase a new Chevy Pickup. When he went to the DMV to register his new Chevy Pickup and they asked him for the price he paid for it, he told them $300. How could he manage to do all this & beat the Gov./Feds at their own game? He merely practiced Greshems’ Law, bcause nobody has or ever will fool this law that governs the value of money. He tried talking but all that got him was a farmer he sold some land to telling him to get a haircut, when he told the farmer he was going to take the toilet paper the farmer was giving for his land and buy gold with it @ $140/troy oz. He didn’t let this farmer get him down. Instead he worked a “gold clause” into his Dr. Office’s lease contract, so the Gov./Fed could pay him for their inflated prices over the life of the lease. He just went on using Greshems’ Law to convert trajedy into profits. He went to visit his uncle in Holland and, when he got back to the states & told me his story he said: “My uncle said the United Snakes would never honor their Bretton Woods Agreement defining the U.S. $ as 1/35th of a troy oz. of gold in an alloy 9/10ths fine”. His uncle was an oil magnate the same as Exon Moble here in the States. I think Ben Laden got turned down also @ our Gold Window back on Aug. 15, 1971. He could have taken all our gold, if Breton Woods woud have been honored and then he would have had the gold in his possession when it went up to around $850/troy oz. pluss the interest on that amount of U.S. $’s sense then or whatever other kinds of investments he would have wanted. After all, in good faith, based upon the Bretton Woods Agreement, the Arab World took our toilet paper we gave them for their oil. The present batch of Shieks are now still willing to take our or anothers’ toilet paper and a world based boilet paper economy should be just as vaible as a worldwide specie based exonomic system coefficient to Bretton Woods but one that proves intrinsically sound instead of suspect? Let’s face it, according to Greshems’ Law, toilet paper is always going to be toilet paper and not matter how much of it we use or how bad it smells. No matter who has how many politicians or economic advisors, nobody can outwid Greshams’ Law. We are too stuborn to learn that little onerous discipline. It’s like we’re saying economically that with a lot of talk we can make water burn in our cars like gasoline and get better milage cheaper. Economically, there’s absolutely no safety in toilet paper; just like there’s no safety in burning water in our automobiles. It’s very hard to face facts isn’t it? If every $ that our officals plan to plant into our economy were each and every one a silver $ instead of toilet paper, how many new deficit $’s would be put in place and how soon? Give Helicopter Ben & Dr. Obama a spade, shovel & pick apiece and turn em loose on the mine, so we can see how sincere they are about our using “sound” money they dig up for us?
Pingback by Obama's Budget Blueprint: What We're Paying for, and How We're Paying for it on 27 February 2009:
[...] ultimate goal is to cut the deficit in more than half to $533 billion by 2013. That could be a challenge, experts [...]
Comment by James Morgan on 1 March 2009:
The financial disaster we are in is 100% due to Democrats in Congress and ACORN who FORCED banks to offer mortgages to people who could not afford to pay for them. This created the housing bubble as the loose terms were used by speculators and higher income buyers and set us up for the eventual housing collapse. Now Obama’s ACORN organization is conspiring to break the law by blocking foreclosure evictions. Read Socialist Saul Alinski’s (Obama’s mentor) book, on how this was done.
Now Obama is emulating FDR with higher taxes (79%, 90% and confistatory tax on busnesses, which STOPPED investments and job creation). The market’s collapse is due to the combination of Fanny/Freddy failure and fear of investors for what excessive taxation will do to investments. Check out the wall street reaction to every Obama speech back to his election.
Obama’s ’stimulus’ legislation is a cruel joke on America – only 15 to 20% of funds to be spent in 2009! Plus socialist projects of the Democrats and redistribution for the majority of money to be spent in 2010 and 2011, just in time to help him get re-elected.
WAKE UP
America and VOTE ALL DEMOCRATS OUT OF OFFICE!
Comment by David on 1 March 2009:
It was Greenspan not Bernake.
Banks and other institutions must put their guarantee on all securitised packages so as to ensure that banks etc are responsible in their future lending policy.
Banks should be allowed NOT to mark to market for say two years.
Comment by Ira Stern on 1 March 2009:
I am an owner of a few small businesses and am intrigued with the opportunities of rebuilding this economy and the “middle class”
Although , I have not run any models, but I’m certain, if they are run, they will bear out and support my thoughts.
My thoughts are as follows.
I know that all of you are busy, but please take a moment, with a clear mind,consider what I’ve written as a portion of a blueprint to re-tool at a very small cost,except for a change of thinking.
Begin to phase out, as we know it, the term “employees”
Require and train “employees ” to be set up as businesses, either as an LLC or S corporations. Let,train and encourage the employee be employed by his own company.
This will create an immediate “multiplier”.
In turn, require banks to lend money to these new entities. For example, target stimulus checks or other funds, be put on deposit with local banks and require the banks to lend against it. This will give, even the beaten, an opportunity at a second chance to build credit .
For example, if you take a company with 10,000 employees and now create an additional 10,000 new businesses,hence a new economy.
Keep in mind that this will open the door for the former “employee” to look at new business options, including addressing the falsehood that one job will sustain a family. To simplify, it is no different then getting two aces in blackjack and splitting them into two independent entities run by one.
New companies need business cards,credit cards,perhaps an additional phone ,maybe a ups account and many more things that get a real economy going and ultimately will “empower” those that had previously relied on others, only, for their livelihood.How about 10,000 new entities ordering checks at the same time from their banks or business cards or flyers from their local printer or local Staples or Office Depot?
Of course, this is but a thumbnail sketch. Much work would have to be done. However, this kind of retooling that I am discussing ,could be a less painful process and can offer long term economic prosperity as it rebuilds the middle class through creating new small businesses..
I welcome your comments,
Comment by Cee Howard on 1 March 2009:
Thank you for your lucid commentary on President Obama’s speech, you ‘gnarled old Republican.’ Please, give us more of the same as this administration takes form. As an aside, we had all best wish this new president well and leave off the mean-spiritedness and cynicism so characteristic of the past administration, which if memory serves had a 76 percent disapproval rating last election day.
Comment by David Spence III on 1 March 2009:
Oh, come on. Don’t tell me you are in on the banking scam. How could you state the ‘normal’ way for banks to make money is borrowing, and lending? It is vastly more profitable for banks to counterfeit money, calling it another pc name-marginal banking. They make 1200% on deposits, and pay depostors a measly 2 or 3%. Loaning out money that they ‘invented’ without actually printing it. Costs less to counterfeit that way. This is the real reason behind the financial implosion. A Scam with your government as willing co-conspirators. None of the politicians dare touch this sacred cows. Lucifer might get angry.
Comment by Jim Thomas on 2 March 2009:
Obama may or may not be right to blame Wall Street for the current recession, but it is equally wrong to try to blame the Fed. Let me ask a simple question: If there were no subprime mortgages, would ANY of this have happened? Ridiculous loans drove up housing prices and set the stage for the real estate collapse and the massive foreclosure problem that ignited this decline. If those loans, which didn’t even exist in the 90s, had not been made, the banks would not be getting killed right now and the massive global securitization problem wouldn’t exist. It is the complete failure of the system to regulate these ridiculous loans out of existence that is at the heart of the problem. Excessive leverage is stupid, of course, but it only causes a problem during a crisis that, in this case, is manmade from start to finish.
Comment by Truthpeeler on 2 March 2009:
Want to see what change looks like? Real change?
Well, here it is. Last week, President Obama unveiled his budget—his blueprint for America—and it’s ambitious, amazing and unapologetically progressive. As Paul Krugman said, it will set America on a “fundamentally new course.” I say it’s about time. Count me among the millions of Americans who are tired of broken campaign promises and middle of the road pablum that gets nothing done.
President Obama called his budget “a threat to the status quo,” and trust me, the status quo noticed. Oil companies, big banks and insurance companies are already mobilizing to stop it.
Here are some really incredible things about Obama’s plan. Check them out and then send them on to your friends and family so that millions of people will have the information they need to fight to make this vision a reality.
10 things you should know about Obama’s plan (but probably don’t)
The plan:
1. Makes a $634 billion down payment on fixing health care that will go a long way toward paying for a more efficient, more affordable health care system that covers every single American.
2. Reduces taxes for 95% of working Americans. And if your family makes less than $250,000, your taxes won’t go up one dime.
3. Invests more than $100 billion in clean energy technology, creating millions of green jobs that can never be outsourced.
4. Brings our troops home from Iraq on a firm timetable, finally bringing the war to a close—and freeing up almost ten billion dollars a month for domestic priorities.
5. Reverses growing income inequality. The plan lets the Bush tax cuts for the wealthiest Americans expire and focuses on strengthening the middle class.
6. Closes multi-billion-dollar tax loopholes for big oil companies.
7. Increases grants to help families pay for college—the largest increase ever.
8. Halves the deficit by 2013. President Obama inherited a legacy of huge deficits and an economy in shambles, but his plan brings the deficit under control as soon as the economy begins to recover.
9. Dramatically increases funding for the SEC and the CFTC—the agencies that police Wall Street.
10. Tells it straight. For years, budgets have used accounting tricks to hide the real costs of the wars in Iraq and Afghanistan, the Bush tax cuts, and too many other programs. Obama’s budget gets rid of the smokescreens and lays out what America’s priorities are, what they cost, and how we’re going to pay for them.
This is the change we voted for. President Obama has done his part, now we need to do ours.
Can you pass this on to your personal network? Just cut and paste into an email.
Here are a few more amazing things in Obama’s budget:
1. Stops unnecessary government subsidies to big banks, health insurance companies and big agribusinesses.
2. Expands access to early childhood education and improves schools by investing in programs that make sure every child has a qualified, strong teacher.
3. Negotiates for better prescription drug prices using Medicaid’s tremendous bargaining power.
4. Expands access to family planning for low-income women.
5. Caps the pollution that causes global warming, and makes polluters pay to support clean energy innovation.
Martin, the author, said it. He is a “grouchy old skeptic” who just doesn’t get it.
Comment by Franklin Delano Roscoe on 2 March 2009:
Well Martin you’ve taken some heat for this article, but as A long time democrat born when FDR took office, I say, right on, you voiced my concerns, though you could lay more of the blame on the previous administration and maybe that’s with an “s”
Comment by Nick Polimeni on 2 March 2009:
Hot topic!
Mistake No. 1
Laying it on the lap of the Fed’s money supply increase is inappropriate. The financial community has and has had for a long time the ability to inflate the system through the creation of any number of financial instruments, many of which are still little understood. Let’s just take leveraging and allowing 5% of an asset as sufficient to control that asset. That’s an increase in money supply since it give money the power to buy 20 times more than if the entire 100% was required. Monetizing future income, such as the Philadelphia school district, is just another way of adding to the purchasing power supply. This was just one of many ways of taking an asset/debt and monetizing it, thus adding to the money supply. So between the Fed and the financial community they did in fact inflate the financial markets.
Then, given the clever ways the financial community avoided reserve requirements rendered large portions of deposits not subject to reserves, thus, these portions could be multiplied at infinitum.
Fannie Mae and Freddie Mac have been a member of the financial community
The public is told that the banking system’s problem is the toxic assets, and for that reason they can’t lend; when they then get TARP money, instead of starting to lend, they buy other banks to heal their balance sheets.
I would expect inflation as the financial community will start lending at about the same time as the Recovery package money starts being released; it’s a good plan to blame inflation on government actions. However, inflation can be managed if the financial communities stop relying on macro-economics as an unworkable control mechanism, and start treating the system more like a gas network, that has to distribute the right proportions fuel to many different communities. Maybe liken the money supply management to an intricate navigation system, with locks, gates, reservoirs, and channels, monitoring the flow, and opening or closing controls, depending on what’s really happening on the ground.
Mistake No. 2
Lending between banks may have improved, but it hasn’t benefited Main Street; companies that have had to close for lack of funds, haven’t reopened, and rehired people as a result of the improved bank lending. That’s what the economy is all about; not just financial markets, which in fact depend on the health of the real economy. The banks maybe in better shape, but they don’t seem to understand their responsibility to the real economy, and keep trading paper on some hope that the real economy will revive on its own, without liquidity from government… The banks aren’t providing it!
Save more versus borrow more: Our financial system is debt based; it seems the only way to increase liquidity is through borrowing. This is probably the fundamental flaw that will fuel the booms and busts, as there’s no way to avoid bankruptcies, defaults, and foreclosures, even with the economy at its best.
Mistake No. 3
Here it is reasonable to agree with your evaluation, which is likely to be the case if the old system of money supply management is applied. Obama talked about different sources to make up the shortfalls. In my “navigation system” scenario, you can say that some of the large reservoirs will start being drained into the navigation system.
I doubt you’re a grouchy old skeptic, but I’m sure that you are only thinking from within the economic box we’ve been in for hundreds of years, particularly the monetary system and method of money creation. As it is, the current system is almost totally in the hands of the financial community; when they’re in trouble, they go to the government (the people) to ask for new money… so they can monetize and multiply more and more.
I think Reagan was not as believable as Obama, which maybe a good thing or a bad thing. We believe Reagan, and see where it got us!
As for “middle of the road” I would quote Hightower, “There’s nothing but yellow lines, and dead opossums in the middle of the road.” I guess we read different opinions and feel different pulses. What I see, hear, and read, tells me the majority of the population is more interested in a progressive agenda, even many who think of themselves as “conservatives.” But today’s definitions fall short of reality, so yesterday’s progressive is today’s right hardliner. Who knows?
Finally, I’m just a 67 year-old student, and Mr. Martin might be able to educate me a bit more.
Comment by Gouranga on 2 March 2009:
Like the President informed from the start this is a new age for new ideas. Do you know what difference it would make financially if we can produce our renewable green own energy? You still think that he is not providig long term solution to jobs or financially? Of course the oil sector will hate him.
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Comment by warrwick on 7 March 2009:
“Maybe I’m a grouchy old skeptic, but it doesn’t look to me as if the math adds up.”
mmmmmm…. that is an emotional response to a mathematical proposition.
Could you rescue your own standing (in my eyes) by presenting a justified critique of the math, in mathematical terms, without which you sound like a, simple……. well, a simple politician casting a net of unsubstantiated hyperbolae.
I dont want to see my subscription commentators going the same way as the elected lot so get your act together and back up what you allege with some coherent thought.
Cheers
W
Comment by Bob Blain on 5 April 2009:
It is a debtor crisis, not a credit crisis. Banks, credit card companies, insurance companies have put debtors in a trap that they cannot escape except by putting other debtors into it. We must stop financing with loans at interest. Debt in the United States has been growing at about six percent annually since 1790 when the money supply itself was based on debt as recommended by Alexander Hamilton. Until we understand that money cannot grow, that interest should be no more than a simple fee for service, we will go ever further into debt while thinking we are getting our of it. That is a first step. The one that will fix this and many other problems is to adopt a metric for money, like every other method of measuring. That metric is an Hour of work. Put the Hour on every money in the world and follow the standard that an hour of money is a fair wage and price for an hour of work. We must unite Time and Money as people already do intuitively. Time Money!
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