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Staving Off Another Great Depression
The Washington policy debates of the last week would almost make a casual observer believe that the nation's political leadership is in fact nostalgic for the good old days of the Great Depression when the country suffered double-digit unemployment for a decade.
The two big news items last week were a batch of absolutely horrible economic reports and the release of President Barack Obama's budget. The media almost completely ignored the former and focused its attention primarily on the latter. So, let's start with the bad news.
As can be expected, much of the bad news centred on housing. The National Association of Realtors reported that existing home sales fell below 4.5 million for the first time since the mid-90s. They also reported that the median house price dropped another $5,400 in January or 3.1%.
Since July, this series shows a drop in the median home price of 18.9%. Other data also showed house prices in a free fall, most notable the commerce department's series on new home sales, which showed a drop of 10% in the median price between December and January. With vacant housing units at record levels, and many potential home buyers no longer having the equity in their current homes for a down payment, it is difficult to see how this free fall stops any time soon.
Housing isn't the only sector that's plummeting. Investment fell at a 28% rate in the fourth quarter, the sharpest rate of decline in more than 50 years. New orders have fallen more than 5% in each of the last two months.
Along with the collapse of these sectors, the number of new unemployment claims just keeps rising. Last week, it was 667,000 new claims. February may show more than 700,000 jobs lost for the month in the report released on Friday. The unemployment rate is likely to hit 8% for the month, and it could well be over 9% by the summer.
While this bad news was flowing, President Obama released the first budget of his presidency. It is an ambitious document. The proposal calls for directly confronting powerful interest groups in order to eliminate important sources of waste in the budget. For example, the budget eliminates subsidies to private insurers in Medicare and drug companies in Medicaid. The saving will go toward financing healthcare reform.
He also proposes to eliminate the fund managers' tax break that allowed managers of hedge and equity funds (some of the richest people in the country) to pay tax at just a 15% rate. Obama proposes to have these Wall Street tycoons subject to the same tax rates as everyone else.
There are many other areas where the budget turns to long-neglected areas, most importantly a proposal to establish a cap and trade system to provide incentives to reduce greenhouse gas emissions. It is not clear that Obama can accomplish the full agenda laid out in his budget, but there is no doubt that he hopes to accomplish a great deal in his term in office.
Remarkably, much of the discussion of the budget did not focus on Obama's agenda, but rather his deficit targets. In particular, many commentators questioned whether he would reach his deficit target for 2012 because the economy might be weaker than his budget assumes.
The pundits' concern on this point should have caused people to throw their television sets, radios and newspapers out the window. Let's suppose that the pundits are correct and the economy sinks farther and later grows more slowly than the Obama administration assumed in planning its budget.
Would the pundits have Obama therefore cut more spending and raise more taxes? This would be close to crazy. With the economy plummeting, the first priority of the administration and Congress must be to boost the economy.
If the unemployment rate is 12% when Obama's first term ends, he can forget about getting re-elected, even if the budget is balanced. On the other hand, if he has managed to bring the unemployment rate down to a reasonable level, no one other than a few Washington pundits will be bothered by the deficit that might have been necessary to achieve this result.
The electorate is well ahead of the punditry on this issue. The federal government is the only force capable of turning the economy around in the near future and sustaining growth. The public recognises this fact and will demand good economic policy even as the punditry continue to push policies that would throw the economy into another depression. Even if they have very large megaphones, the punditry are thankfully still a very small minority and unlikely to get their dream.
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18 Comments so far
Show All"[if obama succeeds], no one other than a few Washington pundits will be bothered by the deficit that might have been necessary to achieve this result."
unless inflation goes thru the roof. unless our foreign creditors come knockin'.
One thing at a time. Worry about deflation first.
Well at this point de-flation is the problem: It's harder and harder to get a dollar to spend or invest but the debts remain and therefore paying them off becomes more and more expensive. Defaults, bankruptcies, foreclosures and falls in prices multiply. Investment is reduced, nobody wants to take a risk, production continues to stagnate and the demand for social services increases. It becomes a vicious cycle.
The question is does the Fed. and Treasury have sufficient resource to provide sufficient liquidity and guarentees to jump start the economy however willing our foreign creditors are to spend down their reserves to feed their export markets? Will a helicopter drop of freshly minted dollars do the trick if they don't?
The problem- stagnating production supervised by an out-of-control financial system bloated with profits- has been mounting for years. This very well may be the big bang.
Now, if the bailout somehow suceeds and our imperial brother with feet of clay finally gets going, then inflation could very well become a big problem, for which hefty taxes are the only solution- to absorb the pent-up surplus of dollars now held in reserve and steadily pay-off the debts incurred to stabilize the system enough to permit an orderly dispatch of toxic assets.
Obama seems to be laying a groundwork to defend against inflation at the back end of the crisis but he should probably do more to end wasteful subsidies, extend transparency into the corrupt banking system, get financial regulation working on an international scale and prevent the entire burden of the downturn from falling too exclusively on the heads of middle to low-income wage earners.
"Big-wigs" should start understanding that under such circumstances they cannot expect Americans to remain passive and accepting forever- some measures to establish a better balance of economic justice has to be acted upon or they're in for "long-hot summer".
The pundits are simply following the line they have been fed for the last sixteen or so years. As our problems mount they will become increasingly irrelevant and unable to use their usual diversions to distract people from real solutions to real problems.
The economic freefall will not bottom out until the financial industry is re-regulated. The trillions of private investment dollars sitting on the sidelines will not be invested until re-regulation occurs.
Obama's "team" of insiders were complicit in the meltdown and are not lkely to pursue meaningful reregulation.
The further we fall the longer recovery will take. If we fall far enough, recovery may be impossible and the US will be a third world nation...just as the neocons planned.
The Sunlight Foundation is fielding a petion called
READ THE BILL !!
OVER 2300 PEOPLE HAVE SIGNED IN THE FIRST 72 HOURS.
http://readthebill.org/petition/
pass the word...
Staving off another Great Depression? We can try. I fear this downturn will be very, very bad and the worst hasn't hit yet, still a ways off.
Millions of jobs gone, nothing on the horizon to replace them besides a few 'shovel-ready's for the dwindling hard labor crowd and a few more in the 'green' category.
I'd worry about that first...
Too late. The cure for a recession is a recession. The cure for a bubble is not to prop it up with government spending when it pops, the cure is to allow the bubble to pop and then begin a period of profitable, sustainable investment. Why do libs believe actions are without consequences? Why do you think you will have as high a standard of living as you did when the foreigners were giving you all your toys for free?
AMERICA MADE ITS BED. AMERICA WILL LIE IN IT. No law and no spending will prevent the market from purging malinvestment. You can give AIG a hundred trillion dollars and they will find a way to lose it all, then you and your kids will pay back the debt by purchasing $200 loaves of bread at the grocery store. Let failure fail, let the bubble pop, endure a year long recession, then allow sustainable investment and profitable business to pick us back up.
You haven't a clue if you think doing nothing would have us out of the woods in a year.
Dude you don't get it. There's NOTHING the government can do that will keep the bubble inflated. It was an economy built on a foundation of sand. Let's start digging to bedrock instead of building rube goldberg contraptions to keep it up.
The US is already Insolvent - as is most of the bank sector and many of our Large Corporations. Add to that the out-sourcing of tens of millions of jobs over the last 30 years, and the in-sourcing of middle-class jobs by H1-b visas - hahahahaah -time to pay the piper, or should I say the grim-reaper. We are gone bust by our own deeds. Time to plant a garden.
Nobody seems to want to ever admit that capitalism delivers these downturns as a norm. Why not? Capitalism seems to be so steady in the upswings, but it doesn't look that way now at all, does it? And capitalism is not a viable system for long term human economic activity as it simply has to destroy the ecology of the planet to function. Capitalism simply kills.
for whatever it' worth (zero), i admit it.
Usury has been, and will continue to destroy the world economy. Note that I did not say "world financial system". Usury IS the world financial system. It has to go. Debt free money can be created by governments. But that won't happen without eliminating the bankers' control of politicians.
d.k.shaw
PS - Staving Off Another Great Depression? Sorry, folks, its WAY too late for that.
"It is not clear that Obama can accomplish the full agenda laid out in his budget, but there is no doubt that he hopes to accomplish a great deal in his term in office."
Thank you President Obama
Did you remember to thank him today for massacring civilians in Pakistan?
Deflation isn't a problem. It's part of the solution. Prices should deflate from the inflated prices of the gilded speculation frenzy of the past eight years, deflated accordingly with the shifting of the people's production surplus from the elites back to the people. You can legitimately demand the costs of education, healthcare and transportation be cut by two thirds. Help keep the LOCAL economy running by doing business only with the locals. Let the national/global economies collapse as they should. Tell the elites the truth: they simply failed to meet your demands.