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The Tentacle


September 9, 2011

Enough Blame To Go Around…

Patrick Kjellberg

What do you do when you have no past from which to learn? Well, it might actually be a good position because it would free you from making the same mistakes that were made in the past.

 

Using an idea of the same broken solution to the problem wouldn’t be available to use. To borrow from an old adage, you don’t have the hammer to solve all of your problems.

 

Unfortunately, our leaders in Washington don’t understand that the problem with the economy is different. What we have today is different than any economic problem we had in the past. The problem – in broad brush strokes – is that we have a collapsed real-estate market without a production engine to pick up the slack in the economy.

 

It may be a bit simplistic, and it may seem that everybody understands; yet humpty dumpty is in so many pieces the king’s men don’t know how to put it back together.

 

In previous real-estate crashes, milder ones, we threw money at the economy and the increase demand solved the problem. Yet we have thrown $4 trillion at the problem and still the economy is puttering along. So, it should be clear that money is not going to solve this problem. But both Republicans and Democrats are looking for another satchel of money to attempt to put out the flames of this burning recession.

 

President Barack Obama wants to throw $300 billion at the problem. It would seem to make sense that if $4 trillion didn’t stimulate the economy, it’s unlikely another $300 billion dollars will do much of anything, just as the additional blood lettings didn’t really help George Washington overcome a bacterial infection.

 

Well, $300 billion has to do something, right? Sure, it will give President Obama an opportunity to transfer the problem or give him something to talk about on the campaign trail so that he won’t look like George H. W. Bush, who looked out of touch when he listened to his advisers who told him that the economy was fine, which it was. But perception is everything. If Bush 41 had have thrown just $10 billion at the economy, he wouldn’t have looked so out of touch.

 

Now President Obama doesn’t look too out of touch, playing golf, and vacationing in Martha’s Vineyard. Never mind that it does look out of touch. None the less, his plan is simple: put up an offer to spend $300 billion. If the Republicans do grant the spending, then it now becomes their economy. If they do allow the spending then President Obama can say on the campaign trail that he spent money on the problem.

 

The solution and problem takes a careful examination of the problem, which is not easy to do because it is carried around in an attachés’ by……… (enter new villain)…. Ben Bernanke.

 

Wait! How did he get in this play? Well, it was he who behind the scene caused all that spending and interest rate reductions to be lame. Early on, when the real-estate bust began, there was pressure on the Fed to lower rates and stimulate the economy.

 

Mr. Bernanke, the chairman of the Federal Reserve, did what he was told and he lowered interest rates. They are still at record lows. What happened was that while he lowered interest rates, he raised the capital reserve requirements for the banks to make loans.

 

To explain, banks have to have certain cash reserves, most everybody is aware of this. However, the banks also have to have capital reserves, not deposits, but investments that they raised by selling stock. Most people - and certainly no politicians -are aware of this; if they are, they certainly aren’t willing to talk about it.

 

By lowering interest rates with one hand and raising the reserve requirements with the other, the Fed effectively increased the incentives for banks to make loans while at the same time decreasing their ability to make loans. In fact, many banks had to diminish the loans because of the new requirements.

 

Now why would Mr. Bernanke do such a thing? The Federal Reserve is supposed to foster a strong economy and his actions had the opposite effect. Well, history won’t look kindly on good ole boy Ben Bernanke, but history would have burned him at the stake if the banking system had collapsed.

 

So, the answer to this broken economy lies within real-estate lending. Some sort of intervention is needed to refinance and cram down some of the bloated values of real estate, perhaps a federal loan program that would stimulate real estate values.

 

I said over three years ago that the slowdown in the economy wasn’t going to be the big problem, that being an economy with positive gross domestic product and an unemployment rate over 10 percent. That’s a problem Washington doesn’t know how to fix.

 

It’s similar to advise I give my friends who are wishing for more money. I tell them to be happy with what they have because if you work a little harder or catch a break, the extra money will solve your problems. Once you have an abundance of money, it will only leave you with a whole new set of problems that money can’t fix.

 



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