Posted on 02/18/2009 9:41:08 AM PST by library user
There is nearly universal agreement that the opening salvo of the Obama administration’s campaign to restore health to the financial system, delivered last week by new U.S. Treasury Secretary Timothy F. Geithner, fell with a loud and ugly thud. The most common criticism is that the announcement was short on detail.
What is abundantly clear, however, is that the new administration intends to push spending back up to pre-crash levels and to fill the entire credit void that has disappeared into the black hole of the U.S. financial system. Whether or not the prior levels of spending and lending were justified by market conditions then, or now, appears to be largely unexamined.
In the worldview of Geithner, and other like-minded economists, credit, rather than savings, is the central figure in the economic equation. Therefore, the new Treasury secretary sees anything that eases the process of lending to be an effective economic policy. With such a view in mind, the centerpiece of Geithner’s plan is the commitment of as much as $1 trillion to revive the collapsed market for securitized debt. In the run-up to the Crash of 2008, it was securitization - more than anything else - that permitted Americans to borrow more than they had ever borrowed before.
Developed primarily over the last 10 years, securitization permitted loans of all shapes and sizes to be packaged into investment-ready securities. The system worked, fueling unprecedented levels of lending in the home, auto, student, and credit-card sectors. But in the last few years, as the collateral underpinning these securities collapsed in value, the trillions of dollars of securitized debt now in circulation has become the toxic sludge at the bottom of our financial pit. Geithner is making the false assumption that cleaning up and rebuilding the securitization market is a prerequisite for a healthy economy.
Our nation’s short history with wide securitization has simply shown that the process can lead to a massive mispricing of assets and risk. By artificially rebuilding the securitization market, and committing taxpayer funds as collateral, the U.S. economy will be pushed farther and farther out on a leveraged limb, until no amount of market medicine can prevent a total economic collapse.
In truth, the only vital function provided by securitization was that it offered foreign savers a pathway to lend directly to American consumers (as a Money Morning investigative story underscored), and Wall Street executives a new asset class to over-leverage for massive profits. Our economy must dispense with these gimmicks if it hopes to pursue a meaningful recovery.
After more than a decade of unsustainable borrowing and spending, the private sector is currently attempting to restore balance through reduced consumer and mortgage credit, greater savings, and lower asset prices. With its trillions of dollars of credit injections and stimulus programs, the government hopes to allay this process by force-feeding Americans a diet of more borrowing. Government leaders feel that a restored securitization market will help. It won’t. It will just grease the skids for a quicker collapse.
Credit - securitized or not - cannot be created out of thin air. It only comes into existence though savings, which must be preceded by under-consumption. Since savings are scarce, any government guarantees toward consumer credit merely “crowd out” credit that might otherwise have been available to businesses.
During the previous decade, too much credit was extended to consumers and not enough to producers (securitization focused almost exclusively on consumer debt). The market is trying to correct this misallocation, but government policy is standing in the way. When consumers borrow and spend, society gains nothing. When producers borrow and invest, our capital stock is improved, and we all benefit from the increased productivity.
Consumers default on credit much more frequently than businesses. This is because businesses typically use loans to expand, and then have greater cash flow to repay the debt. In contrast, consumers typically borrow to consume and in the process, do not improve their ability to repay. As a result, one would expect consumer credit to be harder and more expensive to obtain. But that is currently not the case. Government guarantees have altered the playing field, so that now consumers are still being offered credit while businesses are being shown the door.
By shifting credit away from producers, fewer goods and services will be produced for consumers to buy and fewer employment opportunities provided for them to earn money with which to buy the goods.
To restore prosperity, credit (derived from real savings rather than a printing press) must flow to producers. Greater liquidity for business will lead to legitimate job creation, increased production, and rising living standards. By further encumbering the economy with burdensome regulation, and by transferring business decisions to vote-seeking politicians who will bail out the irresponsible, reward failure and punish success, the government will create a society destined for misery.
In an interview following his announcement, Treasury Secretary Geithner stated that government should replace the demand lost by the private sector. However, those with even a marginal grasp of economics know that demand is unlimited. It is the ability to spend that is not.
While Americans still want all the things they wanted years ago, they have made the rational choice that they can no longer afford to buy at the same levels they once did. Using a printing press to replace this “lost demand” will simply cause consumer prices to rise. Printed money does not create new purchasing power, but merely redistributes it from savers to borrowers. And since the plan will severely undermine the real productive capacity of our economy, there will not be much purchasing power left to redistribute!
Does a bear sh*t in the woods?
A DAMN BIG DUD!!!
Is the Pope Catholic?
When I first became aware of Geithner's name (before his tax problems), the media told me he was tremendously qualified and exactly the right guy to head up Treasury.
I'm thinking now that he knows less about economics than I do. And I don't know jack.
Isn't that a rhetorical question? Seriously, I know the writer needs a job and everything, but the question doesn't need exploration so why should I bother reading the article?
Unfortunately, about five generations of Americans - most of them not yet born - are going to be paying for this bear’s massive and evil-smelling turd.
It will likely give a burp of a recovery for a very short time . . . then hell will descend.
It’s all about PORK, special interests, Funds for Friends!
The intent is line pockets and tax the masses and future generations.
It is NOT to “help” the people.
It has to be a dud. Liberals propose something, and implement it. It goes south, so they find blame for the failure (or forget what the cause was if it’s been enough time) and then propose something to fix the last failure.
As long as the fix for the current crisis moves everything to the left, it continues.
And it’s always such a crisis that we can’t stop to think about what went wrong or what the causes were.
Let's just say that I'd rather invest $770B with Bernard L. Madoff than $780B with the stimulus package. Besides the same chance of a return on investment, Madoff would do less harm and cost less for the same result.
Does a one legged duck swim in a circle?
“If you do what you’ve always done you’ll get what you’ve always gotten”. Z.Z.
What he says and what he does is not really related.
He tells people what they want to hear ... what he is doing is something else entirely. Shades of George Orwell's 1984.
AND IT IS WORKING.
The majority of dependents, welfare recipients, government employees, liberals/socialists are thinking their ship has come in; and they do not need to be concerned about anything ... as Obama is going to take care of them.
They are happy.
excerpt ...
‘While Americans still want all the things they wanted years ago, they have made the rational choice that they can no longer afford to buy at the same levels they once did. Using a printing press to replace this “lost demand” will simply cause consumer prices to rise. Printed money does not create new purchasing power, but merely redistributes it from savers to borrowers. And since the plan will severely undermine the real productive capacity of our economy, there will not be much purchasing power left to redistribute!”
___________________________________________________________
HE IS ACTING IN FULL VIEW, AND HE IS GETTING AWAY WITH WHAT WE KNOW IS A DISASTER FOR AMERICA.
AS WE WATCH!!!
No welfare, no peace. We just have to sit back and watch our enemies destroy themselves. The only thing we have to be concerned about is staying out of inner cities.
How are you defining winning and what time-frame are you considering?
1. ALL EVIL DOERS WILL LOSE in the next 7-12 years or so. Wholesale. Won’t matter what their label is.
2. America will never be the same.
3. The evil options will be removed from the whole planet.
4. The globalist oligarchic satanic Evil WILL TRIUMPH in large measure. The Bible is clear about that—particularly for the 7 years of the GREAT TRIBULATION AND MOST PARTICULARLY THE LAST 3.5 of those years. There WILL BE AN EVIL WORLD/GLOBAL GOVERNMENT. Scripture is clear. No doubt.
5. It cannot be stopped. It may be hindered slightly and slowed down slightly. Mostly by prayer and right living on the part of Authentic Christians.
6. The PTB do NOT WANT REAL PEACE. THEY WANT CHAOS. THEY WANT to forcefully reduce the world’s population to 200 million slaves/serfs more easily managed.
7. Yes, the forces of evil will destroy a lot of each other. God seems to love making that happen.
8. Certainly the cities will be horrific.
9. ONLY THE ARMS OF GOD WILL BE SAFE IN ANY SENSE.
10. THIS WILL NOT be business as usual. It will not even be GREAT DEPRESSION as usual nor holocaust as usual.
Good analysis.
Ultimately Keynesian economics fails because it forgets the producer in the equation.
The ‘forgotten man’ is the worker and taxpayer and business owner who CREATES wealth. Only from their actual wealth-creating activity can we get savings, investment, returns, etc.
Trying to save homeowners is a waste of money.
Trying to deficit-spend our way into growth is folly.
It takes a Dud to sign a Dud.
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