The New York Times published an article the other day, and the AP has followed, declaring that consumers are now beginning to save more and spend less. Finally, after years and years of unsustainable debt-spending and other atrocious family budgeting practices, Americans are biting the bullet in the short-term and are doing what’s best for them. Of course, the NYT and AP see it completely different:
Putting away money and paying down debt may be good for one family’s kitchen-table economics, but the broader economy suffers in the short term when millions of families do it… A dollar saved does not circulate through the economy and higher savings rates translate into fewer sales and lower revenue for struggling businesses. As Congress considers an $800 billion package of tax cuts and spending plans, policy makers said that the most effective stimulus was money that would be spent quickly.
The solution to our economic problems is staring everyone in the face, even beginning to happen, and yet officials and bureaucrats feel the need to subvert it by artificially low interest rates, easy money and interventions to increase debt – the exact reckless policies that got us here. The solution is an increase in capital to liquidate debt and reinvest in profitable, sustainable industries – which comes from, what? Savings.
Short-term bursts of new money, funded by debt, invested in industries and sectors of the economy that have proven themselves to be worthless is suicide. The media, of course, is completely ignorant of basic economic principles and instead relies on pundits and politicians to tell them what to write:
The Federal Reserve cut interest rates to stimulate growth, and Americans took advantage of easy credit to finance trips to the mall, remodeling projects and new cars. Consumer spending accounts for about 70 percent of growth.
Good idea! We can pretend that we aren’t tens of thousands of dollars in debt per person and take a quick trip to the mall. Going shopping always makes us feel good! The prevailing wisdom is that we should all act like those irresponsible people we all know with three maxed-out credit cards, a high mortgage and two cars who still will go buy overpriced retail goods at the mall. See, this is just “kitchen table” thinking – we need the experts to tell us that really we should continue to spend money we have no way to pay back – for our own good.
The problem here is that mainstream economics teaches that the laws that govern economics on the individual level are completely different on a larger scale. We all know that families who increase their debt-spending while raking in less money will go broke very quickly. But somehow governments can engage in the same behaviour, by increasing spending and lowering taxes, and it will be good for all of us? Incredible!
The fact is that industries and investments which never should have happened are being wiped out. This is a good thing! We don’t want any more resources being wasted on stuff no one wants to buy. The economy needs to shift and invest in new technologies, goods and services that are more reliable, cheaper, faster, more productive and so on. This, by definition, has to be done responsibly from the beginning – with real capital: savings. An increased rate of savings is the first sign of rebuilding. Real capital with real wealth that has been earned and saved provides incentives to invest wisely and patiently in sectors of the economy that have more reliable returns.
Quite frankly, I’m shocked. I did not expect American to rise to the occasion. I figured they would keep buying cars, boats and consumer crap even while their houses were getting repossessed and their creditors harassing them. If the politicians will get out of the way for a moment and stop trying to “help”- maybe we can make it out of this one.
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Obviously saving money is a good thing, and it may very precede recovery, but to say that the economy is recovering…I’m not so sure.
Another good sign, Obama is putting a $500,000 salary limit on executives from companies receiving future bailouts. This will make is massively painful to executives accepting additional money, who might not be able to pay their basic living expenses with only $500,000. My hope is that this will cause fewer to come to the trough. Unfortunately, given the nature of government I’m sure they’ll find another way to waste the money.
“Another good sign, Obama is putting a $500,000 salary limit on executives from companies receiving future bailouts. This will make is massively painful to executives accepting additional money, who might not be able to pay their basic living expenses with only $500,000.”
Yeah, its hard to argue with measures like this that seem to encourage responsibility and limit abuse, but I think this is too little too late. And really I see it as more of a way to pacify the public, and help them forget the role Washington has played in making things significantly worse.
It isn’t too late so long as it stops future handouts of cash. This will affect the “second half” of the financial industry bailout.
Another bright point, McCain has decided he wants to become a fiscal conservative:
http://blogs.reuters.com/frontrow/2009/02/04/mccain-urges-republican-party-to-clean-up-its-act/
“We just lost an election and I will take the responsibility for that,” said the former Vietnam war fighter pilot and prisoner.
“But I can assure my colleagues on this side of the aisle that one of the reasons why Republicans lost … is because our base, who are concerned about the stewardship of their tax dollars, believe that we got on a spending spree (in recent years) which has mortgaged our children’s future.”
It would be really nice if one of the major parties would actually support fiscal responsibility. Even if this is just lip service, that’s better than we heard during the recent presidential campaign.
Here is the real deal about Obama’s so-called salary caps.
http://www.msnbc.msn.com/id/29021232/
The rules just have to make things uncomfortable enough for executives to seek to avoid taking the bailout. If the following is a real possibility, then the rules will have served their purpose:
“The salary caps could also have other consequences — sending would-be U.S. bank executives fleeing to foreign firms or hedge funds, or discouraging banks from tapping into the bailout money.”
Yeah, my concern is the vagueness of the terms and whether they will apply to those who have already taken TARP money and are coming back for seconds. That is still unclear to me. In the case of Bank of America, the government almost forced them to take TARP money and very recently gave them another $20 billion – and this was supposed to be the one bank that didn’t need any help. Turns out that was never true. We’ll see what happens, but I smell a rat.
I think the funny/ironic thing is that the MSNBC article about loopholes in the salary cap mentions that the “star performers” might leave just when they are needed most. OK, I’m not expert in economics, but if a corporation has done so poorly that it needs these “emergency funds,” I’d say the star performer is nothing more than a “Casey at Bat.” If one fails so horribly to run a company so much that it needs a government bailout, then that person isn’t really a “star performer.” Those type of people tend to succeed while under pressure and market constraints. Let’s use sports as an example: the teams that make it far into the playoffs are the good teams because they succeed, especially if they have a tough season. Teams like the New Orleans Saints (yes, I get to pick on my home team) aren’t star performers because they routinely disappoint and fail. It took them 30 years to win a playoff game and they still haven’t gone further than the second round of playoffs. In most people’s books, that’s not the markings of a great team.
Precisely. When the bailouts were first being discussed, I was of the opinion that the taxpayer expense might be worth it if those in charge of the banks being bailed out would sign a binding contract to never work in the finance industry again. Banks exist for the sole purpose of taking deposits and making smarter decisions about who to loan it to than the investor would have been able to make. They calculate risks and balance their investments. For them to fail in this way is simply a company failing to achieve its primary purpose.
In the case of Bank of America, its stockholders are very rightly filing lawsuits against the CEO. These executives don’t like being forced to remember who they work for, but if they are doing a crappy job they need to be fired. I think the “loophole” of delayed compensation is a good one. Any incoming CEO should be given huge incentives to get the bank back in the black, and the best way to do that is to delay compensation until the bank has paid its debts. Anyone able to take on a challenge like this DESERVES insane compensation. At least as long as they really fix the problem rather than more of the coverups that got us into this mess.
Another link saying that the Bank of America CEO will lose his job.
Also, yet more evidence that our government doesn’t care what the people want:
“The latest Rasmussen Reports national telephone survey found that 37% favor the legislation, 43% are opposed, and 20% are not sure. “