Tuesday, February 10, 2009

A Fix That Isn't

No doubt we have a problem, but is the Government plan the one to fix it? The idea that cheap money, via sharp reductions in interest rates, and flooding failing banks and brokerage houses with capital will fix the problem is plain wrong. Here's why: In this steep economic decline, who wants to borrow money? Who wants to take a gamble on a new idea, a business expansion or a new large purchase? Especially in a recession that President Obama says puts the country, or the world, on the brink of catastrophe? At any interest rate! Only the desperate want this money, and we all know that the desperate don't get loans.... unless it's from their local pawnshop. The problem is not one of "credit liquidity" as we hear repeatedly. Cheaper interest rates will play a role, but that role is still down stream. Easy credit was part of the problem that got us here and is not a good policy to continue.

The problem is lack of money; money in the hands of consumers. The problem is fear. Fear of losing a job, fear of losing a business. In short, there is no confidence in the governments ability to deal with a problem they have incorrectly identified. The solution lies in getting money in the hands of consumers. A cessation of the payroll tax would be a step in the right direction. Stopping the payroll tax gives an immediate pay raise of approximately 7.5% to every worker... overnight. A cessation of payroll taxes gives every business a "raise" of the the same size... overnight. With a pay raise a worker "feels" better, feels wealthier, and has an immediate increase in confidence. With a lower cost of doing business, an employer is less likely to lay-off an employee and more likely to improve operating efficiencies with new capital investment. With a pay raise in every worker's pocket, every worker has an instantaneous improvement in credit scores, and more spendable dollars at the end of everyday. This is the moment that lower interest rates plays its part, this is when large purchases and plant expansions and the introduction of greater efficiencies become feasible. And here's the best part: The plan can be put into effect without long drawn-out congressional hearings and studies. This plan can be put into effect with the stroke of a pen, and without the creation of a single new bureaucracy.

This leads one to ask why this is not done? Certainly its been thought of. As Rahm Emmanuel said, this economic disaster is really an "opportunity" for social "change." If the problem gets deep enough the government will have free hand in introducing sociatial change, and this was President Obama's singular promise... "Change."

Until institutions that have gone astray are allowed to fail and their assets are bought by those that have not, or newly formed ones taking advantage of liquidation prices, until homeowners, who should have never purchased a home on poor, or nonexistent, credit have lost their homes through foreclosure thus allowing a new buyer to acquire that asset at a favorable and affordable price, we will never know the true value of those assets or the depth of the problem. Putting ones finger in the hole in the dike will work only so long. The dike is going to break, it's just a question of when. When the "fix" of a finger in the dike takes place it simply allows the water behind the dike to rise higher. When it gets to the next hole the problem starts again, only this time there is even more pressure behind the dike; when the pressure gets too great the dike will burst. Are we nearing the bursting point or just reaching with another finger?

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