We're All in This Together - Probation and the Economic Catalysis

If you're like me, the thought of the federal government spending $780 billion dollars does not make you feel better about the economy. That is our money! There are a lot of Americans, like myself, who didn't over-extend themselves during the recent real estate boom. I didn't buy things on credit, didn't buy a second house, and didn't go on vacations that weren't affordable. In fact, I still am driving the same used car I bought over 10 years ago! Why should I have to pay for the excesses of others? Does it make sense?

Let's take this a step further. Since I'm having to pay for other peoples' mistakes, perhaps the government should incarcerate me because someone committed a crime today. That's right. Since we are now sharing economic problems, let us take it one step further. If another American goes to prison for a crime, perhaps I should spend some time in prison too since "We're all in this together." It seems logical. I'm paying for other people's excesses as a taxpayer, so if someone commits a crime, why don't we just share the sentence? It's a concept that works much better in a coming of age play about high school students (High School Musical) than it does in American life. The truth is that many people screwed up; the federal money is going to bail out some of the main parties that screwed up.

Who are the parties? Banks know better than to over-extend themselves. Those that did were trying to make obscene profits. Mortgage companies that allowed people to buy houses that shouldn't have qualified for them are also at fault. The fact that they could sell their mortgages to a third party and abdicate any responsibility for poor decisions is wrong. When lenders make loans, they must be held responsible. People that issue credit cards shouldn't have given credit to anyone with a pulse. Companies that didn't practice discretion in their lending practices should go out of business.

Should people go to prison for their misdeeds? That's a good question. It may be related to how you feel about the tax code. Although debters prison is no longer in fashion, it is still permissible to put people in jail for failure to pay taxes. Actor Wesley Snipes was recently sentenced to three years of prison for failure to pay $15 or $20 million of owed tax money. For people who don't file their taxes or who actively abuse the IRS, one can receive prison time. Some of the people who are targeted by the IRS end on on probation. Probation. That's where one's life is on hold while the government decides what to do. Isn't that what we currently have? Those of us who have been following the rules, saving for retirement, and watching our investments collapse are now on a type of probation. We're not in prison, but who can deny that our present and future hasn't been compromised?

Yep, the government's policies (Federal Reserve) have put our economy in great jeopardy. Low interest rates and monetary policy that encouraged any breathing person to sell dept to anyone else with a pulse (if not a brain) has left us all in prison. The IRS can put people in prison, but we're already there in a way. We're trapped with a mountain of federal dept that is likely to grow over the next few years. Right now, there is no respite from this recession in the $780 billion package that Congress and the President passed. What it's done is left us all on probation. I suppose that's better than putting us all in jail because then the government would more to pay for.

Is our bubble any different?

The graph showing Residential Urban Land Price Index shows a real estate "bubble." If you grew up during the era of the 1980's and your mind wasn't destroyed by listening to the Bee Gees, then you probably heard that the Japanese were going to buy up America. As it turned out, the Japanese were merely in the midst of a real estate bubble, and the effects of that bubble are shown in the graphic above. Note that the six largest cities had a huge bubble while Japan as a whole did not.

Why does this matter? Well, let's take a look at the American real estate "bubble" and see how its affects have been distributed.

What do you notice as similar between the two graphics? You might notice that the cities in Japan had a tremendous increase in land prices, and the values have continued to slide for about 14 years. Japan's central bank has been very active during this period. It has cut interest rates to nothing. Still, Japan has not escaped economic chaos. Like Japan, much of America's rise in real estate wealth was concentrated in major urban areas.

Home prices and land prices tend to follow each other rather closely. The concentration near urban centers is due to wealth created around financial centers. New York, Los Angeles, Boston, and San Francisco all experienced huge increases in home prices during the recent bubble. People flocked to where the money was. What happened in the heartland? Well, if you go to a town in the Rust Belt like Youngstown, Ohio, you can pick up a fine house for about what is charged by a contractor to remodel a kitchen in California.

Japan had a huge trade imbalance in the late 70's and early 80's as the manufacturing sector outperformed every country in the world. However, as Japan's prices increased, it became easier to transfer manufacturing jobs to other countries.

Why did Japan end up going down the tubes? The government created subsidized risk-taking so that restraint wasn't used for business decisions. The American equivalent of this was the transfer of debt via securitization to the market (at large). In both cases, investments or loans were made that were dubious in quality. When financial institutions do not have to be responsible for their actions, they move in the direction of profit.

When there was a decline of asset prices in the Japanese market, bank balance sheets were weakened. There was a general reluctance to extend credit due to increased risk.

The Japanese regulators were unwilling to close down the weakened financial institutions and this prolonged the affect of the recession.

The Japanese introduced fiscal stimulus packages that did little to affect the economy since they were merely pork-barrel projects. The government's spending led to an unprecedented amount of debt. Eventually, the Japanese economy experienced deflation. America has supported banks by giving them public money and now has passed a huge stimulus package that will amount to pork barrel spending.

In 2007, in terms of GDP, at 170% Japan had the third highest public debt of any nation in the world. The public debt of the United States in 2007 was at 61% of GDP. The President and Congress recently approved a 780 billion package. At $13.2 trillion in 2007, the United States' GDP is quite large. Even with the 3 trillion that the Treasury Department is talking about putting into the economy, we won't be in Japan's pitiful condition... or will we?

We're throwing money at the problem, but do we understand the problem? Having listened to the "experts" in Washington and from Wall Street, I would conclude that we do not.

Japan is still having economic problems 14 years after the bubble. What exactly is supposed to make the United States improve the economy? Why will policies that repeated failed to stimulate the Japanese economy be successful in the United States?

Stimulus Package - Sounds like something you use with Viagra.

So, the vapid souls in Washington DC are now supposed to find a way to dig the United States out of economic Armageddon. Guess what their solution is: buy our way out of the problem. So the new President has told everyone to plow more money into the economy. Let's look at this logically.

You have to understand that Congress was supposed to oversee the Treasury Department as well as the Federal Reserve. The Federal Reserve has kept interest rates low and this allowed the economy to move based on borrowed money. Not only were interest rates low, the Fed also sold treasuries like they were going out of style. Cheap money and easy credit led to Americans filling up on consumer goods and inflated housing costs like they were drinking hyper-carbonated Diet Pepsi and Coke (you choose the beverage) and expanding everyone's fat gut. For all the money we spent, what does the country have to show for it?

For the Bush-wackers out there (and I'm not a Bush fan), he didn't control the interest rates, and he didn't control the Fed. It wasn't his job. Of course, he didn't lead us in the right direction either. On the home front, his idea of fighting a war on terror was to have the citizens buy stuff bought in China. In essence, Bush said we could spend our way out of the problem.

Here's President Obama saying that we should throw another $800 billion at the problem. Has there been any fundamental change here? Aren't we still trying to spend our way out of a problem? Aren't we supposed to get some fundamental changes in the way things are done with Obama? It still seems like clueless leadership to me.

A stimulus package is supposed to jump-start the economy. If people in Washington want to make sure that America is humming, it should start with factories putting out products. Americans might pay have to pay more for what we get, but people will have work. Unless that happens, this stimulus package will not work over the long haul. This stimulus package sort of like giving a Viagra to a guy to get him hopped up even though he doesn't have a date. That's what the stimulus package amounts to. For over $800 billion, we have to come up with better ideas. The long-term solution should put Americans to work in decent jobs.