Is Bernanke Keeping too much Money in the Economy for too Long?

The Fed’s main job is to keep the dollar strong with conservative RGDP growth and to keep inflation down. With this in mind, the Fed injected billions of dollars into the American economy to maintain a certain amount of stability. Nearly everyone and their sister was able to receive help from the Fed when the economy was at its worst - and it did keep damage to a minimum (although it can be argued that future Americans will be paying for it.)

Now that it seems consumer confidence is returning, and the American economy is making somewhat of a rebound, Bernanke should consider taking money back out of the economy now. If he waits until a full recovery, the American dollar will see a great amount of inflation. He did mention that in Q1 2010, he will slowly begin to raise interest rates. So far Bernanke’s track record has been a bit lacking, but now that he has been reinstated for four more years of what will hopefully be a recovering economy, he has the opportunity to recover his image.

A Simple Understanding: G-20

In these past few days, the topic of many front page headlines has been the G-20 meeting (it also was the subject of my article "Consumer Power"). Everyone talks about G-20 as if it is common knowledge, when in reality, most people have no idea what G-20 is or means.

G-20 is a group of central bank governors from 20 of the most powerful economies of the world. They meet once a year to discuss, announce, study and review global finance. The goal of a G-20 meeting is to balance and maintain the global economy. Each year the meeting takes place in a different country, for instance this year the meeting is to be held in London.

The G-20 meeting this year is getting so much attention due to the fact of the global recession, which is the number one subject. They will look at and discuss many alternatives on how to solve this global mess.

Consumer Power

It has taken many years for America to transform from a producing nation, to a consumer nation. We now produce nearly nothing. America strives on innovation and intellect instead of labor. In other words: 1) Americans have ideas. 2) These ideas are produced in other countries. 3) Americans buy. It’s a circle that has somehow existed for quite some time.

The problem is that due to this current economic downturn, Americans are no longer buying. Without anyone buying, production in other countries is beginning to slow at an extremely fast pace. The “Big 3”, are no longer the only ones hurting; Toyota has nearly hit a brick wall. Producing countries, such as China, are putting pressure on the American Economic system. America was the anchor to the world economy, and it has slipped.  

Obama is planning his first overseas trip as president to discuss economics in London. He will be faced with an immense amount of pressure. American economics, as we know it, will be put to the test. Government intervention seems to be Obama’s personal belief when it comes to solving economic problems. This, Geithner’s “Newer Deal” and the G-20 meeting this Tuesday sounds like a recipe for economic change.

What are we to expect, not just from this upcoming meeting, but in the near future? The world’s goal will be to minimize the effects of American capitalism (if we can still call it that) upon the world. In fact, many countries would love to see a total nationalization of America’s largest banks. Obama will most likely have to defend as to why a complete nationalization did not take place. One of China’s many goals is to make sure their investments in American loans do not go unpaid. China spent the entire Bush administration buying up old American debts. This will be a large focus for the Chinese. America’s goals, according to what Obama has been preaching, will be to become less reliant on others and bring jobs back to America. These goals will be accomplished by trade tariffs.

Most likely, this meeting will be an over announced and over rated exchange of pleasantries in a room full of demagogues. Get excited. 

#1 Killer of Economies: Emotion

The AIG fiasco has angered everyone. Dems and Repubs have come together, reaching across the aisle, to legislate something in honor of the AIG executives. Yes, like everyone else, I was pissed. How could these execs steal from the American tax-payer in this time of trouble? Was it immoral? Yes.

Before we address the rest of the AIG situation, let’s looks at a different perspective. When Obama and his team were doling out the $840 billion, did they not think someone somewhere would skim off the top? Of course they knew it would happen. About $167m was assigned to the AIG execs, that comes to about .0019% of the total bailout. Could the government possibly be blowing this whole situation out of proportion to keep the spotlight off themselves? I am not saying the AIG executives were being ethical, but is this really something we need to jump straight into legislation? As I said we were all mad, but we cannot legislate due to our emotions.

The contracts for the exec bonuses were made one year ago. Bernanke knew of the contracts as well. This issue should have been dealt with one year ago, but procrastination seems to be the American way. This emotional decision making needs to stop. Ask any successful company president, CEO, etc if they use emotion to direct their companies. America needs to be run as if it were a company. A profit seeking company not a bureaucracy. 

The Invisible Backhand

In his masterpiece The Wealth of Nations, Adam Smith explains and describes many different economic theories. One theory, and arguably his most famous, is known as the Invisible Hand Theory. This is the idea that in a free market society, everything will balance out on its own. For instance a producer will produce only the amount of goods consumers are willing to consume. The alternative idea is that the government will set a number of how much a producer must/can produce. This idea will cause either a shortage or an excess of the good.

The Invisible Hand can be applied to many situations. The stock market is another, more raw, and easily track-able example of where the invisible hand can be applied. According to performance of the industry / company / country / sales / accounting / etc, stock prices vary. For many years, the stock market was being artificially inflated, causing the market to seem to be striving. The Invisible Hand, as Smith described it, is constantly trying to keep things at “equilibrium point”. An inflated market obliviously means that the numbers are above the equilibrium point.

So, all of this introduction for what?

All of this present stock market fluctuation is due to the markets trying to find the balance. It is nearly impossible for any market to be at a balance point because of the many calculations that have to be considered. Nearly everyone has noticed that the Dow Jones has lost over 50% of its points from its all time high of about 14,000. When the market began to fall, a snowball effect took place.

I believe the snowball effect brought the market below the equilibrium point. Many economists believe that the markets will keep tumbling through 2009, but I believe this summer we will begin to see a slight recovery. With this recovery there will be an incline in gas prices as well. But as of right now, we are in a deflated stage. We are being kept artificially below the balance from things such as bailouts and other governmental decisions. This snowball effect will cause a huge loss on money for many corporations, it will slow down growth and development, and it will ruin many retirement portfolios. There will be a recovery as long as free markets will be able to take place.

Same Old

Stocks are down. Detroit wants a bailout. Banks are going under. The housing market is a mess. Some old guy ripped off the country for a billion dollars. Obama wants universal health care. Bernanke blames someone else. Japan’s stock market is falling. The dollar is weak. Clinton is making deals overseas. China is doing well. Wal-Mart is doing well. The Euro weakens.

Have you noticed that the news has not changed in a month? Every day, the same exact stories, written by someone else, with a different title. I understand that these are very important topics, but it seems to me that America is in limbo right now. We cannot seem to get out of this rut. We seem to be sitting right on the edge of total economic collapse, and possibly starting to recover.

Answers are out there, there are people smart enough to solve these problems. Politicians are not the answers to these problems. Bernanke, a man who I once believed in, has turned out to be another politician. People smart enough to solve these problems, are smart enough to stay out of politics. Politicians will push us into total economic collapse; the American people will be the recovery.

Newspeak

For anyone that has read the book 1984, they know the definition of newspeak. For those of you that don’t know, newspeak is the transformation of a language into the governments molding and complete control. The idea is that if the government can control/manipulate how much a person can communicate with his fellow comrades, there would be no uprising or free thinking.

I understand that languages are constantly changing. Just by reading a verse from a King James Bible, I can see that we speak much differently today. I may just be “old school”, but it seems as if we are adopting some newspeak. Did you know that the word “capitalist” did not always mean “greedy, heartless, selfish pig?” Definitions of once, well defined words, now have a completely different meanings.

When some people think “capitalist”, their minds automatically think of the crooks on Wall Street. Let me tell you now, because I have not heard it anywhere else: “THE THIEVES OF WALL STREET ARE NOT CAPITALISTS!” Bernie Madoff is NOT a capitalist. Ken Lay is NOT a capitalist. Bernard Ebbers is NOT a capitalist. Capitalism respects the private property of others. Stealing from people, even if it is through corporate fraud, is not capitalism. It is easy for people to relate capitalism to large corporations, since, in a way, that is the American Dream.

Capitalism stands on three pillars: individualism, free markets and private property. No, thievery is not one of the pillars. This corporate power over the government is a step back from capitalism, back to the mercantilist days of a half century ago.

There is no “perfect” economic system. There will never be a perfect economic system but we cannot fix these present problems by taking steps backwards. Every day, Americans are being spoon fed the idea that “socialism is the key”. “No one deserves to be sick, let’s universalize health care!” In philosophy it is called: ‘an appeal to pity’. We are being told that by not wanting universal health care, we are greedy, we are selfish, we are capitalists.

Newspeak? Don’t let it fool you. Do not be ashamed of the beliefs America was built on. If only there was one moral person in the government that was not in it for power, one person that could lead our country back to sanity. But to expect that person to exist in the American government is a bit too much to ask.

Compare and Contrast

In the quarterly report to the Berkshire Hathaway shareholders, Warren Buffet stated that he expects the U.S. economy to stay in shambles through 2009. His profits in the forth quarter fell by 96% down to $117m. This is the 5th straight quarter of falling profits for the Wall Street giant. The price of Berkshire stocks has fallen 44% this year. In this economic crisis, everyone is being affected. From your billionaires to your first time home buyers, people are feeling the effects.

Constantly people are comparing this economic disaster with the ‘Great Depression’, but one thing needs to be clear. What we are going through now is nothing like the Great Depression of the 30’s. Yes, there are some similarities: It’s hard to find jobs, the stock market is down, housing market is almost a joke and banks are closing, but what we need to remember is that we are a much richer society than we ever were in the 30’s.

There is almost no way our society today could ever get to where we were in the 30’s unless there was a complete collapse of the American Government. Today, we might have to go a few months without our direct TV, in the 30’s they went months without an income. Today we are producing things relatively cheaper than 80 years ago. Also another great difference between then and now, communication is so much faster. I can call or email anyone in the world, and it’s instant. People are not loading up everything they own into vans and driving around the country looking for jobs. We are so much wealthier now, that even our low class is rich compared to the low class of the 30’s.

Be thankful that we are not pulling our kids from school so they can work in factories. History repeats itself? Not quite. We are much better off than back then. Compare, contrast and learn from the 30’s, but what our grandparents and great grandparents went through was much more than we’ll ever know.

Our Slump (Part 2)

Our Slump (Part 2)

Here is a short list of a few elements that put us in this economic crisis:

Housing Industry,
Mortgage Crisis, --> Today’s Topic
Banking Decisions,
The fall of the Dollar.

The people blame the lenders for allowing their loan, the lenders blame the government for not restricting the loan, and the government blames the people for lying about the loan. I call this the tri-fecta-of-unethics. While everyone is sitting around rationalizing reasons as to why they were actually the ethical ones, in reality the correct answer is that all of them are to blame.

People making $30,000 a year were walking into banks and getting approved for $500,000 houses. How? They lied. The banks did not think twice about the family’s income, instead they said: “Have you heard about the adjustable rate mortgage?” Both parties sitting in the office, knowing that they can’t afford a $500,000 house. Everyone knew this was going on, including the government. Is it not the government’s job to protect the citizens, even if it is from themselves? It did not take long till people could not pay, and loans were going bad. To make matters worse, banks were selling and buying bad loans back and forth for years. Ethical?

So the plan is take the tax payers money, give it back to the banks (the same ones that made all these bad loans), because we do not want them to go out of business. On top of that, since the government is giving them tax payer money, they want to own a portion of the bank. Nationalizing the banks is not the way to go about solving this problem.

People say: “The banks shouldn’t go under!?!”

So here is the solution: People should be able to make a ‘tax-free’ private donation to the bank that they feel shouldn’t go under. I bet less people would donate if its money from their pockets, but what these people don’t understand is: taxes do come from their pockets. Theirs. Ours. Mine. Yours. Let me keep MY money that I have worked for. If I do not want to help a bank, I should not have to help a bank. My money and your money, is going to make an investment that will never pay us back! Our taxes are going to help private (although, possibly not much longer) organizations.

To sum everything up: the lender, the government and the lying home buyer are all guilty.

Our Slump

Here is a short list of a few elements that put us in this economic crisis:

Housing Industry, -->Today’s Topic
Mortgage Crisis,
Banking Decisions,
The fall of the Dollar,

Many people would say it was the housing industry that started and solidified this economic slump. One of the ways economists can watch an industry is by job gains/losses, and since a large majority of the house building industry consists of undocumented workers, keeping track of this is nearly impossible. For quite some time, the builders could see that the industry was in a slump. When America finally noticed the housing starts were down, many builders were already considering closing up shop.

According to http://www.census.gov/ “Privately-owned housing starts in January were at a seasonally adjusted annual rate of 466,000. This is 16.8 percent (+/- 11.0%) below the revised December estimate of 560,000 and is 56.2 percent (+/-4.4%) below the revised January 2008 rate of 1,064,000.” It was also just announced that housing starts are at an all time low. People are surprised to read these statistics when in reality, builders could have told us this is where we were headed for years. America feels the slump now, builders started to feel it five years ago.

If people started to notice the beginning of this slump five years ago, it could have been traced to the unethical mortgage industry then. We are now playing catch-up, trying to solve the problems of yesterday by giving handouts to the same banks that gave these mortgages to anyone that walked in their offices. Now don’t go blaming Obama for these problems, he is only doing exactly what he said he would do: More restriction, more handouts and more taxes.

It seems like the only way to have a voice to the government is to have a lobbyist, when in reality the government should the corporation’s voice to the world. In the future, America could avoid these problems by simply asking each industry how they are doing, and what are their largest problems? But that might be asking too much from our hard working, underpaid, under-thanked government.