As I write this post, the government of USA has pledged about $780 Billion US Dollars (USD) for stimulating the economy. Treasury secretary Timothy Geithner is asking congress to approve about a Trillion USD for bank rescue. Add to this amount 1 trillion that Ben Bernanke (Federal Reserve chairman) is planning to use for TALF and for buying other housing related debts. Government has already approved $700 billion for TARP funds. When you add all this (along with the unemployment benefits for 4 million unemployed), the total comes to a staggering 4 trillion dollar. (The Mere repetition of the word ‘Trillion’ in news might devalue the US dollar!).
If we analyze President Obama’s promising spending plan carefully, it is not as promising as he advocates. There is a lot of criticism from Republican aisle that we all hear in the news. To cut short the rant, I would say the spending plan will not bear any fruit for next 2 years at least. The infrastructure projects do not start overnight. This defeats the very purpose for which the ‘stimulus’ was designed. Apart from this, most of the planned projects are not even critically useful and at least to me it seems like spending for the sake of it.
The bank bailout money is an indirect way of putting toxic assets on Govt.’s balance sheet. I am not advocating that banks should be left alone to deal with this, but there is no use of stuffing money in a feared entity either. With so much money at hand, banks have failed to lend due to their own fears. Stuffing money in bank at this time is like asking a scared child to go in dark. The interest spreads are skyrocketing despite the easy availability of money. In Ludwig Von Mises's words: “As the confidence wanes, the entrepreneurial component of Gross Market Interest spikes to a great height”. It is like a man who escaped from bunch of robbers, he will view every other man with suspicion. The bailout is like asking such a man to be friendly with strangers and lend them money with confidence.
Bernanke’s plan is more sensible than the other two. The problem however is that he realized it a lot later than he should have. He approached the problem with traditional monetary tool like: lowering feds funds rate, putting money in the banking system etc. After seeing them fail (and frankly too late) he realized that the need of the hour is for the Govt. agencies to be more direct in dealing with consumer lending and main-street businesses. Fed will now back securities for consumer and small businesses. It even plans to target securitized loans for larger manufacturing businesses. But all this has come after a year of economic downturn when fear has completely taken over the financial system.
The arrogance of Capitalism lies in failure to acknowledge the fact that sometimes govt. has to take charge of financial sector directly. The current crisis would not have turned out this way if the lawmakers (specially the Conservative Republicans and Libertarians wing) have not considered Capitalism to be a divine system. If the govt. started to directly act as a lender to consumer, things would have been a lot better. This idea may seem eerie (if not ludicrous) to many people in US who are raised with the notion that Capitalism is a sacred system and any govt. interference tantamount to heresy. So much so that any reference to nationalization is viewed as a threat to US itself.
The following things would have happened if Feds started lending directly:
1) It would have eased the credit market.
2) The private sector would have felt challenged in not lending and would have participated alongside the Federal Reserve. The relationship between the two would have been that of comperation (i.e. competition + cooperation).
3) A number of jobs would have been created and many job losses would have stopped. Jobs creation would be due to govt. acquiring people who could interface with the borrowers and participate in consumer lending. Banking sector was the most to suffer during this downturn and many jobs would have been preserved if Feds decided to act boldly. The private sector would not have laid-off so many people due to lack of capital, waning demand (due to economic worries).
I feel that govt. is so altruistic towards Capitalism that they can let the economy collapse and common man suffer. Thosaunds of jobs are being lost everyday, people are losing home but the officials don't want to concede the deficiency in the system.
Let me add, the cost for this logical action would have been far less than 4 trillion USD.
If we analyze President Obama’s promising spending plan carefully, it is not as promising as he advocates. There is a lot of criticism from Republican aisle that we all hear in the news. To cut short the rant, I would say the spending plan will not bear any fruit for next 2 years at least. The infrastructure projects do not start overnight. This defeats the very purpose for which the ‘stimulus’ was designed. Apart from this, most of the planned projects are not even critically useful and at least to me it seems like spending for the sake of it.
The bank bailout money is an indirect way of putting toxic assets on Govt.’s balance sheet. I am not advocating that banks should be left alone to deal with this, but there is no use of stuffing money in a feared entity either. With so much money at hand, banks have failed to lend due to their own fears. Stuffing money in bank at this time is like asking a scared child to go in dark. The interest spreads are skyrocketing despite the easy availability of money. In Ludwig Von Mises's words: “As the confidence wanes, the entrepreneurial component of Gross Market Interest spikes to a great height”. It is like a man who escaped from bunch of robbers, he will view every other man with suspicion. The bailout is like asking such a man to be friendly with strangers and lend them money with confidence.
Bernanke’s plan is more sensible than the other two. The problem however is that he realized it a lot later than he should have. He approached the problem with traditional monetary tool like: lowering feds funds rate, putting money in the banking system etc. After seeing them fail (and frankly too late) he realized that the need of the hour is for the Govt. agencies to be more direct in dealing with consumer lending and main-street businesses. Fed will now back securities for consumer and small businesses. It even plans to target securitized loans for larger manufacturing businesses. But all this has come after a year of economic downturn when fear has completely taken over the financial system.
The arrogance of Capitalism lies in failure to acknowledge the fact that sometimes govt. has to take charge of financial sector directly. The current crisis would not have turned out this way if the lawmakers (specially the Conservative Republicans and Libertarians wing) have not considered Capitalism to be a divine system. If the govt. started to directly act as a lender to consumer, things would have been a lot better. This idea may seem eerie (if not ludicrous) to many people in US who are raised with the notion that Capitalism is a sacred system and any govt. interference tantamount to heresy. So much so that any reference to nationalization is viewed as a threat to US itself.
The following things would have happened if Feds started lending directly:
1) It would have eased the credit market.
2) The private sector would have felt challenged in not lending and would have participated alongside the Federal Reserve. The relationship between the two would have been that of comperation (i.e. competition + cooperation).
3) A number of jobs would have been created and many job losses would have stopped. Jobs creation would be due to govt. acquiring people who could interface with the borrowers and participate in consumer lending. Banking sector was the most to suffer during this downturn and many jobs would have been preserved if Feds decided to act boldly. The private sector would not have laid-off so many people due to lack of capital, waning demand (due to economic worries).
I feel that govt. is so altruistic towards Capitalism that they can let the economy collapse and common man suffer. Thosaunds of jobs are being lost everyday, people are losing home but the officials don't want to concede the deficiency in the system.
Let me add, the cost for this logical action would have been far less than 4 trillion USD.
