Not how to create jobs

I was watching a guest on the Nightly Business Report tonight speak about employment not increasing in America the last couple years. He went on to say that the way to increase employment is to make it easy for job creators to get credit and to reduce regulation. You would think that being a business show, the guest would not be so wrong.

Let's break this claim down to see how wrong it is, starting with the idea that extending credit to employers would make them hire more employees. It's possible that it would in some economic environments but not in this one. Right now, businesses are flush with cash, so credit is not what they need. If they really wanted to hire employees, they would just dip into their retained earnings. But they're not because there's not enough demand to make businesses confident about hiring. And the businesses that do need credit don't have retained earnings for the same reason -- there's insufficient demand for their products. So extending credit to them would not make them hire more employees either.

Reducing regulation isn't going to create jobs either, and for pretty much the same reason -- reducing regulation doesn't have any impact on demand. It might make it easier for a company to operate or make more profit but that's not why businesses hire more employees. They hire more employees because sales are going up and they need more staff to make more widgets or provide more service. Again, regulation does not fit into that equation but, again, demand does.

So, even though the guest was on a business show, he was wrong -- making it easy for job creators to get credit and reducing regulation is not how to create jobs. To increase employment, there needs to be an increase in demand, which is accomplished by stimulus in this economic environment.

Newt-land: the mirror image of reality

Newt Gingrich was on the stump today and I saw an excerpt of his speech. He was echoing the same claims he has been making for months now. He was essentially telling the crowd that President Barack Obama has:

• raised taxes
• increased regulation
• is anti-American energy
• wages class warfare

Of course, the crowd probably believed every one of these claims, even though they are all blatant lies.

In fact, Obama has ratified every extension of tax rates brought to his desk on taxes that would have otherwise increased according to law from before he was in office. He requested authority to consolidate federal agencies, which reduces regulation, and has consistently stated support for eliminating obsolete regulations that unnecessarily stifle business. His official energy policy is to develop more energy here at home and reduce our dependency on foreign oil. And he's bailed out bankers and forced millions of Americans to buy health insurance from private corporations, which heavily favors the wealthy.

Basically, Newt is 180-degrees wrong on every count.

Doomsday!

The federal government is rapidly approaching the limit of the amount of debt congress permits it to have. Meanwhile, politicians and the media alike are blustering about a debt ceiling doomsday scenario. They base this assertion on the premise that hitting the debt ceiling means that the federal government goes into default.

I believe this is a non sequitur. What I don't understand is why hitting the debt ceiling necessarily means the federal government goes into default. It has almost $200-billion in monthly revenues -- as I understand it, that's more than enough to service our current debt obligations.

Wouldn't hitting the debt ceiling just mean that the Fed would have to stop issuing new bonds and the government would have to operate without a deficit? As I recall, America was in pretty good fiscal shape the last time we ran a budget surplus -- much better than it is now. I see no problem with spending the same as the federal government did then.

The irony is that the GOP claims federal spending is the least productive application of savings. Yet many of those same Republicans support increasing the debt ceiling. There is a finite amount of savings in the financial markets. If the federal government takes on more debt, it takes the amount of that increase away from private investment. You can't have it both ways.

The most obvious question about this issue is, if congress raises the debt ceiling every time we hit it, what is the point of having a debt ceiling in the first place? If I'm missing something in this equation, please post a comment and explain.

Congress needs to eat humble pie...

...because neither the Democrats nor the GOP are taking much of a bite out of the deficit.

Click the image above to view full-size.

Economic stimulus is just warming up

The Right rails against the stimulus package President Obama signed into law, citing indicators like the high unemployment rate as evidence that the stimulus did not work. Liberals cite the same indicator as evidence that the stimulus bill was inadequate and that we need another jolt of stimulus. The Left fails to recognize that over half of the funds in the $787-billion stimulus package remain to be spent when calling for a new stimulus bill. Conservatives fail to acknowledge the same when they already declare the stimulus bill a failure.

In the face of the evidence that economists have begun to recognize, there is a new consensus that sees the stimulus as a worthy step.



The truth of the matter probably lies somewhere between the two extremes. The stimulus bill has not yet had the full effect it will have had after all of the funding in it has been spent. Nonetheless, we probably do not need another stimulus bill at this time. The American people need to be patient and let the stimulus play out. Looking back in two years, they will see a substantial impact from the initial stimulus bill and decide we do not need the additional debt more stimulus would bring.

In fact, much of the benefit of the stimulus bill will not be realized until well after the last dollar is spent. The stimulus bill funded America's infrastructures with billions of dollars. Although the economy will get an immediate boost from that investment, the full return will be realized over the life of those infrastructures, which will be measured in decades. Furthermore, substantial portions of the stimulus are dedicated to emerging technologies that will require significant research and development before they become profitable sectors. But these are the sectors America will need to lead for her to continue to have a competitive economy.

America was once an agrarian society sustained economically almost entirely on agriculture. But then came the Industrial Age and America changed into an industrial society, leveraging it to become the most powerful nation in the world. When leadership in industry went offshore to Asia, America didn't lose her dominance. Instead she led the world into the Information Age and enjoyed economic prosperity from doing so.

Now America needs to leverage the stimulus package to help her lead the way into entirely new sectors where the competition is still minimal. For example, the US electrical grid gets a $3.4-billion jolt of stimulus funding. Modernizing our electrical grid will not only rebuild one of America's critical infrastructures and make her less dependent on foreign energy but it will also allow her to develop new 'smart' grid technologies that she will be able to sell to the world. Already California is the number one job-creating state for wind, solar, PV, and geothermal energy.

There are other emerging sectors that are bound to see the same long-term benefits from the stimulus package. It funds technologies like electronic health records and broadband with billions of dollars. If America turns these sectors into new markets of which she is the dominant supplier and technology leader, Americans will see returns on the stimulus funding for many years to come.

The "secret process" for economic recovery

The Associated Press released a 'news story' in which it claims that a "secret process" benefits pet projects. Yet when you scrutinize the story closer, you'll find that it's not so much 'news' as it is a distortion clearly biased against the American Recovery and Reinvestment Act of 2009 (13.4 MB PDF) (the Act).

The story claims that "a process that is both secretive and susceptible to political influence" is being used for allocating economic stimulus funds. It gives examples of certain border checkpoints getting funds before other checkpoints of a higher priority for improvements do. However, if you read the article with a critical eye, you discover that it concedes there was justification for the order of allocation which was not so secretive after all. A simple Google search shows that there are millions of pages published about how "shovel-ready projects" would get the highest priority. This was a condition established in the Act that was widely publicized long before it was passed.

The story fails to report that there are numerous factors that must be considered when allocating funds to federal projects besides the single five-year-old report (which pre-dated the Act by years) the author cherry-picked to ground her distortion. While the author concedes that federal officials could similarly justify every decision they've made, she clouds her concession with the provocative and deceitful comment that, "they would not provide those justifications to the AP," as if the Feds were intentionally withholding the information from her. The Feds obviously could not give a laundry list of their justifications for every one of their countless projects to a random journalist. Yet her article makes it clear that they did provide her with information on every project she specifically inquired about.

The author is probably one of those poeple who claim that the economic stimulus funds are not getting into the economy quickly enough. Yet she decries the Administration spending stimulus funds on shovel-ready projects first. She's probably also one of those people who complains that the Act didn't result in economic recovery without acknowledging that it was enacted only six months ago and that the bulk of the $787-billion remains to be disbursed into the economy. Like most critics of the Act, she wants to have it both ways.

As far as the "secret process" is concerned, a visit to Recovery.gov shows that there is more transparency over spending under the Act than there has ever been for any other bill. But that's a fact that the AP apparently doesn't want you to know.

Tax cuts won't do the heavy lifting this time

The GOP believes that tax cuts are the best way to stimulate the economy. Republicans would say that tax cuts are preferable to government spending because the American people know best how to spend their money and that the government has a poor track record for effectively spending tax dollars. But Daniel Gross makes a strong case that the traditional wisdom doesn't apply in this recession.

The whole idea behind tax cuts stimulating the economy is that Americans will spend the newfound discretionary income they have when their taxes are cut. It seems logical that if there are less withholdings, she'll buy that new pair of shoes she's had her eye on with the extra money she finds in her paycheck. Or if his income tax refund is unexpectedly large next year, he'll finally buy that widescreen HD TV that's been tempting him lately. Maybe the simultaneously increasing take-home pay and price of gasoline will convince you to finally buy that hybrid car you've been considering (as long as the desperate Big Three are offering so many incentives nowadays).

It makes sense, right? After all, we Americans love instant gratification and we're certainly not savers. Well, maybe it does not make so much sense this time. There are some factors that make this recession unique.

First of all, there is less job security than ever in today's workplace. There are now fewer career employees than ever and we have the highest rate of unemployment in many years. Worse yet, it's plummeting faster than it has in recent recessions:
(Click chart above to see in full-size from House Speaker Nancy Pelosi's office)
With the large number of unemployed Americans, there are fewer tax payers to spend the tax cuts. This alone reduces the impact the tax cuts will have on the economy.

Add to that the fact that Americans that are still employed lack confidence that they will stay that way long term. Not knowing how long it would take them to find a replacement job in this tight job market, American's feel that they need a larger safety cushion than usual right now. If they would want to have health insurance should they become unemployed, COBRA would be a substantial additional expense that they don't have while employed. Subsequently, Americans are much more likely to save their tax cuts for a rainier day than they are to spend them. While that's fiscally healthy for the individual, it's not stimulating to the economy.

To further exacerbate matters, the housing market is at the root of this economic downturn. During the housing boom, Americans were spending Bush's tax cuts hand over fist on their homes. They improved their homes to accelerate its appreciation. With home values falling like a rock in this recession, homeowners will not be spending their tax cuts at Home Depot because to do so would just be throwing good money after bad. Many homeowners are seeing their ARMs reset, so they will just spend their tax cuts on their higher mortgage installments (to banks likely to go bankrupt anyway). Renters will not likely spend their tax cuts on buying a home because of the concern that their mortgage would just be underwater a few months later.

Finally, there are Americans' retirement accounts to consider. The shrinking Dow reflects Americans' IRAs and 401(k)s. Losing 45% of their nest egg in less than a year, Baby Boomers are postponing the retirement they planned. Instead, they will just have to plow their tax cuts back into their retirement accounts to make up for their recent losses.

Of course, these factors will not completely eliminate the stimulative effect of tax cuts. Nonetheless, they will certainly significantly diminish the tax cuts' impact on this recession. The economic stimulus bill that just passed congress this weekend was the right recipe for this recession. Although it has some tax cuts, it's more heavily weighted to investments in America's future -- monies that we know will be spent.

Maybe the sky really is falling

When Secretary Hank Paulson started running around like Chicken Little telling everyone the sky is falling, I thought it was just hyperbole. After all, former president Bush had been employing scare tactics to control the American people for years. So when the Fed came to the rescue with a $700-billion economic rescue plan, I questioned if it really was necessary.

Then I saw the video of Representative Paul Kanjorski, a Democrat from Pennsylvania, talking about the events that led up to Paulson's histrionics (below). It made me think twice about just how bad things might really have been. Kanjorski said of the day that Paulson visited congress with his dark news:

On Thursday, at about eleven o'clock in the morning, the Federal Reserve noticed a tremendous draw-down of money market accounts in the United States to the tune of $550-billion being drawn out in a matter of an hour or two ... We were having an electronic run on the banks. They decided to ... close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic ... If they had not done that, their estimation was that by two o'clock that afternoon, $5.5-trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Why didn't Paulson tell us about this activity then? Well, obviously because it probably would've scared investors even worse than they already were right in the middle of what turns out was a significant run on the investment banks. But what were these people thinking? Didn't they realize that money market funds don't evaporate in value like the bank securities were doing and that their investment accounts were insured by the feds in the event of a bankruptcy like Lehman Brothers?

Apparently, they didn't. Just watch this video, listening up sharp at 2:10 in, to hear a little told story about what was happening during those days:
Go to source web page>>

Restoring the American dream

I've already admitted to using Peter Schiff as my economic forecaster. He forecasted our current recession while many were still saying the fundamentals of our economy were strong. He was on target when his naysayers were calling him a crackpot. So what does he say about the recession this year?

Unfortunately, Schiff says there's no pain-free cure for the recession. Regarding economic stimulus, Schiff says:

Any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.

So what does this portend for the fiscal policies that both president Bush and president-elect Obama have been pursuing? It means that we can expect higher inflation for years to come. Many of the actions they have been taking to protect the American dream are simply delaying the inevitable.

Please president-elect Obama, don't fall for the next wasteful bailout congress legislates. Don't you see that the current treasury secretary, Hank Paulson, is just another Wall Street banker looking out for the interests of his cohort? The Fed will not be able to rescue us from the predicament the American people have put themselves into. America will see a dramatic redistribution of wealth and widespread hardships sooner or later, regardless of fiscal or monetary policy.

I say rip the bandage off now. We're going to have to suffer through a reduction to intrinsic -- meaning dramatically lower -- values for our real estate. We'll have to see salaries for jobs that do not deliver tangible value to society, such as insurance agents and securities dealers, fall back to five-figures. We're going to have to reduce our collective personal debt and increase our savings, which means fewer flat-screen TVs and SUVs with leather seats. After all that has happened, our economy will again become strong and Americans will again be able to fulfill the American dream!

The role of the government in an economic recovery

I've mentioned that I take my cue from Peter Schiff when it comes to forecasting the economy. It turns out that he was not the only one who many years ago forecasted the economic problems we're experiencing now. Martin Weiss also saw the housing bust coming back in 2005.

So last week, Esquire magazine asked Weiss what he forecast for the housing market over the next few years. In his response, Weiss had some insights regarding the role the government should play in the economy. I agree with him that "the debt problem is far too big for the government to be able to address with its limited resources, so they should back off and let the marketplace resolve the two big problems our economy faces -- too much debt, and prices that are too high." As we all know, the government has instead chosen to do the opposite by trying to fix the economic decline through increasing the debt load on our nation. Weiss said:

I believe we should give up the war we can't win, which is the war against the economic decline. Instead we should fight the battle we must not lose, and that's the battle to protect the health and well-being of the citizens of the country. Right now, for example, hospitals are going broke and the states are running out of money to pay unemployment benefits -- we have already 19 states that are in the red with respect to their unemployment benefit funds, and it could grow to 30 or 40 states very quickly. That's where the government's role has always traditionally been since the New Deal, and that's where our resources need to go.

This viewpoint is not far off from president-elect Obama's position on the right way to recover the economy.

Remortgage America

Yes, I know I've been blogging about the folly of the bailouts lately. I haven't stopped being a free market economist. But I recently discovered a bailout proposal that actually makes a lot of sense. In a nutshell, the plan is that the US government offers every US citizen a 30-year mortgage at a 1½% fixed rate of interest. How this works and why it makes sense I'll leave up to the author to explain.

Given a choice between no federal intervention in private business or this plan, I'd choose no intervention. But our government is hell bent on spending trillions of taxpayer dollars on financial bailouts in spite of the fact that most Americans oppose it. So if secretary Paulson is going to empty our treasury on bailouts whether we like it or not, I think the Remortgage America plan is far superior to any of Paulson's hair-brained "economic recovery" schemes. Plus, the treasury would get paid back the outlay for the plan with interest.

Congress folds on yet another wasteful bailout

Congress is abdicating its authority to president Bush again. As always, they are laying down the law then looking the other way when Bush ignores their legislation. This time it's the Emergency Economic Stabilization Act, the bill that established the $700-billion Troubled Assets Relief Program (TARP). The terms are very specific that "the program will be available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate before 5:00 pm (EDT) on November 14, 2008." Note that there's no mention of automobile manufacturers in that qualifier and that it's now almost a month past the application deadline.

Congress has already betrayed its constituents' trust by authorizing the Emergency Economic Stabilization Act in the first place. Americans overwhelmingly -- almost to unanimity -- opposed a bailout of the financial services sector. Yet congress passed the bill anyway. If congress doesn't rescind the bill, then congress is obligated to ensure that the TARP funds are used as designated in the bill. There is no way that the Act could be construed as to permit TARP funds to be allocated to automobile manufacturers or that it is now before November 14, 2008.

Secretary Paulson insisted that the funds are needed to provide liquidity to financial services firms when he first requested them. He claimed that if the TARP were not immediately implemented, the economy would precipitously collapse. His logic was that the TARP funds would increase availability of credit. But now the Bush administration is talking about bailing out General Motors and Chrysler with TARP funds.

Detroit's Big Three are claiming that a big part of their problem is that potential car buyers are not receiving the credit they need to buy automobiles. If the Bush administration redirects TARP funds from financial institutions to automobile manufacturers, then according to Secretary Paulson's logic, there will be even less credit available for banks to loan to car buyers. That would not only exacerbate the Big Three's problem but it would also enable them to perpetuate their failed business models, thereby only delaying their inevitable position in the market (and risking the collapse of the economy, according to Secretary Paulson's original position).

The Department of the Treasury has already been an abysmal failure at managing the TARP, vacillating wildly from one ineffectual tactic to another. Now it will continue to do so in direct contradiction to what congress has authorized the Treasury to do. No one in congress has voiced any recognition that the Bush administration is yet again acting in contempt of congress.

Making myself at home – but not in The Zone

This Progressive has taken a long time off of blogging. I just bought my own home for the first time and it’s consumed me for the past couple of months. Between escrow, moving, unpacking, and painting, I’ve had no time for blogging … until now.

I’ve been struck by a couple of interesting things going through this process. I opened escrow concurrent with the final meltdown that led Treasury Secretary Paulson to foist his $700-billion bailout plan on congress and the President (no matter that it was resoundingly rejected by the American people). My mortgage was funded weeks after Paulson’s insistence that the credit markets were dried up and no one could get a loan anymore. This was right on the heels of me also getting a very large vehicle loan. How did I manage to get all this credit—at very favorable rates, I might add—when no one is lending money right now?

It’s also interesting where the real estate valuations that I bought into are at right now. There have been many foreclosures lately, so prices have dropped at least 30% off their peak just over a year ago. How much further might they drop before the bottom of this cycle is reached?

I’m prepared for the possibility for the value of my condo to drop to significantly less than the outstanding principal on my mortgage in the next year or two. However, there is one strong indicator that the market in my neighborhood is near the bottom of the cycle. My total cost of ownership for the condo is significantly less than what it would be to rent comparable housing around here.

So I wonder how wise a move it was for me to buy this home at this time. The wisest investors say the best time to buy is when the market looks very negative and everyone else is getting out. It will be interesting to see if the market conditions a year or two from now would even support me being able to buy a home had I instead waited until then to buy.

The minimum down payment for an FHA loan to a first-time home buyer was 3% when I bought but it’s already 3.5% now. There’s even talk of it going up to 5% soon. If the credit market is as dry as Paulson claims, could the minimum down payment get to ten or twenty percent in a year or two? Could I be looking at a 10% APR, or even more, in a year or two rather than the 5.5% rate I got? How high would my FICO score need to be to even qualify for a mortgage in a year or two? Even if the price of a comparable condo next year turns out to be ten or twenty percent lower than what I just paid, it might still be unaffordable to me under the market conditions we’ll have in the near future.

All things considered, I feel pretty good about becoming a homeowner so far. The walls are finally painted and the condo is looking great. Even if my mortgage goes underwater in the next year, I can afford to make my payments. I’m sure five years from now, I’ll have some equity. Most importantly, I’ll have more time to blog in the near future.

Economic forecaster

Lately, I've been taking my cue on the economy from a man named Peter Schiff. Specifically when he talks about the negative impact the $700-billion bailout will have on our economy -- creating rampant inflation and lengthening the impact of the deep recession which is inevitable -- I listen.

Schiff is a securities broker, so why would I listen to him? You'd think he'd say whatever would benefit the industry, right? So why would he oppose the bailout plan?

The only reason I could think of is because he thinks it will be bad for the nation. He should know. In November of 2006 -- almost two years ago -- Peter Schiff told the Western Regional mortgage Bankers Association that, in a couple of years, they would be facing the exact economic environment they are facing now.

He was probably not a very popular speaker that day, telling a group of over 1,000 mortgage brokers that they were about to be out of jobs. Of course, no one believed him then, with the real estate market booming and the brokers getting wealthy selling Alt-A and subprime loans hand over fist. It didn't matter whether or not home buyers who qualified for their loans based on their word about the income they claimed they were making could actually afford the home. After all, homes would forever more appreciate endlessly, right?


To be specific, I'm adopting Peter Schiff as my economic forecaster. If Schiff could make an economic forecast that turned out to be right on target in spite of how unpopular that forecast was, he's the man I'll listen to about what's going to happen next.

Letter to the leadership

I've become convinced that the Fed is going about this "rescue" of our economy all wrong. So I decided to send the following message to the Senate Leader, the Speaker of the House, and the chairmen of the Joint Economic Committee and the Banking, Housing, and Urban Affairs committee, as well as my own senators and congressman:

I am writing to express my opposition to the $700-billion bailout of the financial services firms. All it would do is postpone the inevitable by artificially sustaining the valuations of real estate and mortgage-backed securities above their intrinsic values.

If we didn't bailout the financial services sector, there would be economic repercussions. But it would be mostly localized to those sectors with values that are currently artificially inflated. It would not lead to the collapse of the entire economy.

It seems that secretaries Paulson and Cox forgot everything they learned in economics class. Otherwise, they'd realize that what would actually happen in the economy without the bailout is a redistribution of assets and debt to where they would be put to their highest and best use. This is what we should want to happen in our economy because it would actually lead to the strengthening of our economy in the long run, not the destruction of it.

If you want to put $700-billion dollars to use stimulating our economy, do it from the bottom up. Imagine the boost the economy would realize if we suddenly injected $700-billion dollars into it for things like rebuilding our infrastructure, developing alternative forms of energy, and providing healthcare to the uninsured. With that amount of money being injected into social good, the advancements and benefits the American society and economy would realize would far outweigh and counterbalance the drag that would be created on them from the retraction of the financial services sector.

Even the financial services sector would end up healthier in the long run. Sure, fiscally irresponsible firms would go under if we didn't bail them out. But there are plenty of firms that have put their assets to good use and neither greedily provided subprime loans nor loaded up their balance sheet with mortgage-backed securities. These are the firms that would end up dominating the financial services sector when the others go bankrupt, and Wall Street would be better off for it in the long run.

I ask that, if you must support some kind of economic rescue package, don't make it the one that secretary Paulson and president Bush have presented to you. It simply creates a moral hazard and encourages future irresponsible behavior by Wall Street fat cats. Make it one that will create long-run benefits to the future of the American people.

The media has been reporting that they're being deluged with such messages, with those opposing the bailout ten times as many as those supporting it. It seems the American people are dead-set against bailing out the greedy financial services firms. I hope congress listens to us when it comes time for them to vote. Unfortunately, as of now, it seems the congressional leadership has their collective foot on the gas and they're headed straight at the cliff of this bailout.

Putting out fire with gasoline

The US treasury secretary, Henry Paulson, was on FOX News Sunday today. He was trying to justify his proposed $700-billion bailout of financial institutions. His justification was anything but comforting.

For example, he said that the intent of the bailout is to "minimize risk" to the American taxpayer. Yet his approach to doing so is to purchase only what he called "illiquid assets" from the financial institutions who hold them. "Illiquid assets" is just another way of saying "worthless securities." How could there be anything of higher risk from a fiscal perspective than this?

He went on to say that he's taking this action to "avoid failure." Yet Paulson's approach to avoiding failure is to buy $700-billion worth of failed mortgages. That doesn't sound like avoiding failure. It sounds more like charting a course directly to failure and turning up the screws to full speed.

If Paulson wants to instill confidence in the American people about how he's handling this financial situation, he's going about it all wrong.

Super-Fed to the rescue?

In the wake of the recent upheavals in the financial sector, president Bush has come to the rescue. He and his economic advisors have come up with a Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets. Not willing to rely on the media's descriptions of it, I read the complete text of the actual proposal myself. It strikes me as a unidimensional, monolithic solution to a complex, multidimensional problem.

It's clear to me how this proposal would artificially inflate the valuations of mortgage-backed securities that otherwise lack a foundation of intrinsic value. I can see how this would benefit institutions and investors who own these securities. However, I fail to understand how the proposal rescues the two remaining members of the investment banking oligopoly or how it helps distressed homeowners who purchased homes they could not afford.

This Progressive is no economist but I do grasp economic concepts well enough to understand explanations about the economy. So I invite you to post comments to help me out. Please explain to me how bailing out AIG prevents the collapse of our financial system. I've heard a lot of economists claim that the bankruptcy of AIG would have led to the downfall of the financial system but none of them says why or how.

Bush's proposal permits the purchase of mortgage-related assets only from financial institutions. I understand how this benefits the fat cats on Wall Street who manage firms like AIG that irresponsibly speculated on such securities and how it pays off individual speculators who can now divest their REITs which would otherwise be worthless. But can you explain to me how it alleviates the pain felt by homeowners who irresponsibly obligated themselves to trust deeds that they knew they couldn't possibly afford to pay off when their interest rates reset?

It seems to me that the proposal does nothing for those responsible homeowners who only purchased a home when they knew they could afford to service the loan rather than betting on perpetual appreciation. It does nothing for those renters who recognize that they cannot afford to purchase their own home with an ARM and a leg. It does nothing for middle-class Americans who diversified their retirement accounts rather than investing them purely in REITs, even though they paid substantial returns early in this century. And it does nothing for the small businesses on Main Street that responsibly plow their retained earnings back into assets that they use in operations rather than in risky securities.

When I pull back and take a broad look at this proposal, I simply don't understand the positive macroeconomic impact it would have. I can see an elite cohort that will make out from it but I only see the proposal wreaking further damage on the economy at large. Somehow I can't see how piling an additional $700-billion onto our national debt will rescue us from economic collapse.

Hands off the housing market

Whatever happened to the value of personal (or corporate, for that matter) responsibility in the United States? Since when must the federal government bail out every citizen and every corporation for everything?

The federal government is not obligated to bail out either those losing from the deflation of the housing bubble or those going bankrupt from the meltdown of the subprime mortgage market. It should definitely not be doing so with tax dollars. To do so takes taxpayer dollars to reward irresponsible fiscal activity and encourage such activity in the future.

Obviously, anyone who is a victim of predatory lending should be redeemed. The federal government guaranteeing a refinance for the victim, which they wouldn't be any more able to afford, is not the way to do it. Instead, the victim should be exempted from making payments greater than they can afford to the predatory lender or the holder of the fraudulent note. However, before qualifying for exemption, there needs to be an objective, quantitative, and consistent set of criteria established to validate predation.

The federal government should not be bailing out any other defaulting borrowers. They were irresponsible people who got greedy during the inflation of the housing bubble and purchased a home they knew they wouldn't be able to afford. They did so based on the assumption that real estate always appreciates and that they could resell their homes for a profit when their interest rates reset. Fiscally responsible Americans should not have to pay to bail out those financially damaged by that faulty assumption.

The Fed should not be bailing out the lenders of the defaulting loans either. As previously stated, that would reward making loans to people who cannot pay them back, thereby stimulating more such activity in the future. The American economy is not going to collapse if the lenders who made too many risky loans go out of business. On the contrary, it will be bolstered by becoming dominated by the responsible lenders who declined to make loans that the borrower could not afford to repay.

It's true that many lenders won't lose out because they already resold the risky mortgages on the secondary market. The funds and trusts that bought those notes should no more be bailed out than the lenders should. The owners of the funds and trusts should have read the prospectuses before buying shares so they knew the risk they were getting in to. Taxpayers who invest wisely should not have to pay for the losses of ignorant or greedy investors. The economic system would be churning along just as it is now had Bear Stearns not been bailed out.

People need to take personal responsibility for their actions. Defaulted loans should be foreclosed on, not rescued with tax dollars. The homeowners will lose their homes but they should be renting their homes anyway because they cannot afford to buy. Failing lenders should go bankrupt, not be bailed out by the Fed. There are plenty other responsible lenders to provide mortgages to responsible borrowers. When this happens, property values will drop back to intrinsic levels. Those who are now renting their homes because housing values have been artificially inflated by low interest rates and irresponsible real estate speculators will finally be able to buy their own homes.

Obama's economic plan

Senator Barack Obama has developed a comprehensive economic plan for America. It's more detailed than the plans offered by the other major candidates, albeit not that different from senator Hillary Clinton's plan insofar as you can tell considering that hers is less specific. Senator John McCain's economic plan seems to be the perpetuation of president George W. Bush's failed economic policies -- cut taxes and reform Social Security.

Obama details six principles for modernizing the financial regulatory system:

1. Provide the Federal Reserve with basic supervisory authority over any financial institution to which it may make credit available as a lender of last resort.
2. Capital, liquidity and disclosure requirements should be developed and strengthened for all financial institutions.
3. End our balkanized framework of overlapping and competing regulatory agencies.
4. Regulate financial institutions for what they do, rather than who they are.
5. Crack down on trading activity that crosses the line to market manipulation.
6. Identify systemic risks to the financial system, no matter where they arise.

These are sound principles and Obama elaborated on them in his recent speech on Renewing the American Economy.

Obama also has a plan for Protecting Homeownership & Cracking Down On Mortgage Fraud (PDF). It too is detailed and has some good ideas that could be effective for dealing with the home mortgage crisis at hand. However, there are a couple of questionable components to this plan. He bases his plan to help homeowners facing foreclosure on the claim that:

One of the biggest problems associated with the crisis in the housing market is the decline in house values, which is putting people's mortgages underwater, meaning that their mortgage is worth more than their houses. Many people who find themselves in this situation simply walk away, worsening the foreclosure problem.

There is a basic weakness to this precept. The reason homeowners are facing foreclosure is predominantly because they bought homes they could not really afford using the creative financing instruments that were the hallmark of the real estate bubble. Then when their APR increases, they simply can't afford the new monthly installments, regardless of whether they have equity or not.

It doesn't make sense that homeowners would go into foreclosure simply because their mortgage is "underwater." They would still need a place to live even after foreclosure. They also understand the importance of maintaining a strong credit rating. If they could afford the payments, homeowners would keep their homes even were their valuations less than their outstanding principal. Unfortunately, some of the tactics Obama proposes would not be effective since they're based on the invalid assumption that people face foreclosures because they have negative equity.

Obama also proposes refinancing ARMs with fixed-rate mortgages as a solution to those facing foreclosure. But the reason people got ARMs in the first place is because they couldn't afford the monthly payments on a fixed-rate mortgage with the inflated property valuations that existed at the peak of the housing bubble. The only way to afford a mortgage was using negative amortization loans, and the like, which started out with monthly payments at artificially low rates. These homeowners assumed when the rates got high enough that they could no longer afford the payments, they'd simply flip their house for a big gain that they could use on a down payment for a new home. But with negative equity, how could a financially distressed homeowner be expected to make the payments on a fixed-rate mortgage even if they could refinance?

In spite of these criticisms, Obama's economic plan is fairly good on the whole. There are many good ideas in it. With the next presidential administration still almost a year away, Obama has time to shore up the weaknesses in it before occupying the Oval Office. Besides, most of the unaffordable mortgages could already be foreclosed on by that time.

Federal budget deficit

President Bush is touting his plan to eliminate the budget deficit by 2012. Sure, he'll have to cut many programs to do so, but Bush wants to keep America focused on the end result in 2012.

Why does Bush stay focused on 2012? Perhaps because he'd prefer America doesn't know about what his budget will do in the next fiscal year. Under his plan, the budget deficit will increase almost 150% to $400-billion.

That's just shy of the record $413-billion deficit Bush racked up in 2004. Nonetheless, it seems that with such a substantial increase over last fiscal year, the budget deficit is heading in the wrong direction. With a record like this, how can anyone take the GOP presidential candidates seriously when they talk about the "tax and spend" Democrats?