Let me begin with an apology with the Nobel Committee which decided to award their economics prize to Paul Krugman - or maybe they should apologize to the rest of us. The assumptions underlying this week's blog are that, in the long run, a person or a society can only consume as much as it produces, and that free markets can make these decisions better than politicians can.
1. Problem I. The Baby boomer generation has grossly overspent, with the federal debt reaching 10 % of the Gross Domestic Product, the highest in the industrialized world. The political answer - an orgy of spending. President Obama seems to understand the problem, but he's a much better speaker than a mathematician, and the new age of responsibility excludes 95% of the population.
2. Problem II. For a decade, people have been ecouraged to buy houses that they cannot afford - by their bankers, Fannie/Freddie, Congress, and the people who bundled and sold mortgages. The political answer - $275 billion (from the 80% who were prudent) to help the risk-takers restructure.
3. Problem III. With the encouragement of Congress and relaxed laws, many banks took on broad risk which has not panned out. The need is to attract capital to the banking sector in terms of stock issues or bonds. The political answer - give the government priority as bondholders, and (if David Axelrod has his way) wipe out the equity position of any stockholder foolish to remain in the game, and require the banks to restructure bad mortgages and expand marginal lending. Oh, and extend this to all banks, just in case - and wonder why private capital flees the financial sector.
4. Problem IV. Two of three remaining domestic car producers have driven into a ditch. The political answer - keep giving them more billions to protect the workers - whether they are working or not.
It is small wonder that the markets have initially shown little confidence in the Obama administration. It's got nothing to do with the abominable personnel selections. It's even got little to do with the abdication of the "stimulus" plan to Nancy Pelosi and Harry Reid. It's got everything to do with uncertainty about how socialism will play out in the financial sector. Bush left a mess, but the disconnect between the obvious economic answers and the politically-driven Obama responses is striking.
Lets hope that the "Responsibility Summit" and the promise (hope?) to cut the deficit in half reflect a victory for Advisor Volker, and a defeat for Advisor Axelrod.
This week's YouTube reflects the new realities.
A double-bonus YouTube is intended for those who missed their tax refund last time.
Bill Bowen - 2/27/09