Friday, January 16, 2009

Bailouts and Nationalization

marjorie says...

The $825 billion federal stimulus proposal presented by House Democrats this week proposed $275 billion in tax cuts and $550 billion in spending.

The summary, by the way, is excellent reading.
The economy lost 2 million jobs in the last four months and is projected to lose another 3 million to 5 million in the coming year.
Unemployment is going to continue to rise, they say, even with this stimulus package. But without the infusion of federal cash, it will soar into the double digits — and that doesn’t count the numbers who’ve been shifted from full-time work to part time.
And while the deficit will grow dramatically, the Democrats say that without the stimulus spending the growing deficit “…will be devastating and we face the risk of economic chaos.”
While it might seem counter-intuitive that the deficit will grow more if we don’t spend close to a trillion dollars, the Democrats contend that the spending will lead to more economic activity, which will decrease the payment of unemployment benefits and increase tax revenue.
The economic crisis is laid at the feet of consumer debt, which was propelled by stagnant wages while the rich got a heck of a lot richer during the recent economic boom.
The figures given are stunning: 96 percent of income growth in this country since 2001 went to the wealthiest 10 percent, while the rest of the country sustained its standard of living by "...borrowing...and borrowing...and borrowing":
Since 2001, as worker productivity went up, 96% of the income growth in this country went to the wealthiest 10% of society. While they were benefiting from record high worker productivity, the remaining 90% of American’s were struggling to sustain their standard of living. They sustained it by borrowing… and borrowing… and borrowing, and when they couldn’t borrow anymore, the bottom fell out.
The result is that the credit market eventually froze up because of a consumer base stretched beyond its ability to pay debt--including mortgages, a subsequent lack of consumer spending, and businesses consequently laying off workers or simply shutting down.
The document also gives the rationale behind the bulk of the stimulus package being designated for direct spending rather than tax cuts.
In a nutshell, Americans are so strapped by debt that they're more likely to spend any tax cut or stimulus check on paying down their debt, rather than consuming new goods and services:
The tax rebates last spring showed that Americans have become so concerned about
their debt and saving that they will not spend a large fraction of any tax cut. Over the last two decades, Americans’ saving rate went from 8 percent of income to near zero. ... As we saw in the spring [when the federal government issued stimulus checks], a sizable fraction of any tax cut to them will be used to pay down debts and not be spent. The same logic applies to tax cuts for corporations who have become more obsessed with reducing their excessive leverage than in hiring or investing.
On the other hand, the authors state, direct federal spending will have nearly complete "pass through" to new goods and services.
Other interesting reading today was this article in the New York Times about the fact that we are nationalizing the banks, although we don't want to call it that. It seems some of these banks are "too big to fail" but can't get their act together enough to survive on their own. End result: we--as in, "the public"--buy them.
We knew we were doing this anyway last year when they passed the bail-out package. But because nationalization is such a dirty word, it seems there was a lack of oversight and accountability built into the cash transfers to the banks--something that has been protested loudly ever since. There's no transparency hardly at all.

The outcome is pressure on Obama, et al, to build accountability into the government. That's, you know, basically kind of sort of maybe "nationalization." The NYT calls it "a hint."
Choice quotes:
“We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “We are going to go back to a time when the government controlled the banking system.”

Christopher Whalen, a managing partner at Institutional Risk Analytics, said the approach also covers up the underlying reality that the government is already essentially the majority shareholder in Citigroup.
“There’s nobody else out there to invest in them,” Mr. Whalen said. “We already own them.”