Not So Stimulating, Part II

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Unsurprisingly, Obama's stimulus plan has gone through. With a Democratic majority in Congress and the Republicans virtually impotent, it was just a matter of when, not how. Never mind that it is an unnecessary bill, laden with thinly-disguised special interest projects that will not do much to fix the current depression in the short term, and will hurt the economy in the long term. Also, please ignore the fact that the Dow Jones dropped 400 points the day Geithner revealed the 'new' bailout plan that will occur alongside the stimulus. Or that any company run the way Obama and the Democrats run the country would end in bankruptcy and long prison terms. Oh, yes, and that executive pay cap? It was gone, quietly dropped by Obama and vigorously re-inserted by Senator Dodd, a pleasant surprise that I discovered only minutes before publishing this blog. There are already efforts to undo that, however. Regardless of how tempted I am to screech in protest, I think I will at least attempt to be dignified. Instead, I will produce my own alternate economic plan that will be ignored by the enlightened (read as: pigheaded and blind) lawmakers of Washington DC.

I will begin my alternate economic plan by dismantling the entirety of Obama's stimulus plan. Sincerely speaking, the only part of the entire plan that is acceptable – barely- happens to be the tax breaks to the people. Businesses are soulless entities, and any tax breaks given to them will not be passed on to their workers or to the consumer. Look at the price of oil, which is once again on the rise, though supply is at an all-time high, with demand at an all-time low. Not only that, but labor these days is a depressingly specialized affair. Even if you go ahead and throw money at construction work, you are just as capable of diluting the labor pool of say, heavy equipment operators, as you are to create new jobs, especially since most jobs require years of training nowadays. So honestly, the best plan there would be to do nothing.

Anyway, the tax breaks that directly help the taxpayer can and should be kept on for the next four years. In fact, I propose an even more radical route by removing the application of the sales tax toward food. People spend a large portion of their budgets on buying food. That is an inescapable fact of life. However, as you go down from the upper classes, the proportion of a family's budget that is dedicated to purchasing food increases. Therefore, a 7 or 8% cut in the food budget represents a real saving for people who now have a little more money available without having to choose between starvation and necessity. Not only that, I suggest the exemption of food items from the sales tax be permanent – if an immoral law like FOCA can get it, so should something that helps the common man.

With aid given to the people, I now move to deal with the government. When GAAP rules of accounting are applied to the government and its assets and liabilities, we discover that the United States owes 65.5 trillion dollars, a horrifying sum of money that exceeds the GDP of the planet, let alone the United States. As I mentioned in an earlier article, there is no infinite upward movement. Eventually, the United States will be called upon to pay this terrifying sum, and an IOU will not cover it. My first step to begin preventative measures is the most radical: cut the federal budget 5% across the board. Period. Actually, that measure seems a bit mild. Cut the budgets of the federal government, states, and local municipalities 5% across the board, and protect useful education and social welfare programs from the cuts. Slash the fat and lard that fills the budget, produce a leaner budget that spends less, and you have a stronger country better able to meet its obligations from the bottom up without having to screw its people.

The government has not received my full set of reforms, however. Government cannot spend money in excess of the recently cut budget for ten years, adjusted for inflation. In fact, it would be required to cut another percent of budget every two years. Not only that, the act passing the initial 5% cut and the subsequent 1% cut every two years cannot be repealed or overturned without a unanimous vote in both House and Senate. Any surplus money would have to go toward servicing debt and other obligations. Not only that, the government would be forced to maintain a tight, anti-inflationary monetary policy. The interest rates on saving and checking accounts are so paltry that they do not even keep up with inflation, and since I have a special set of cutting reforms in mind for the banks and their system, I prefer to go the source and force the government to keep inflation under control, and encourage economic adjustment for a reasonably strong dollar. At least that way, your money is actually worth something if you prefer to avoid the ups and downs of the stock system.

Finally, I come to the banking system and the changes necessary to save it from itself. However, like old Shylock, I fully intend to extract my pound of flesh from the bankers, spilled blood be damned. Before the banks get a dime from the government, they are required to write out their losses promptly and immediately. No free-rides, no foisting off the bad assets on the government, nothing. The government gains ownership stakes in the banks that give it the same benefits as being an owner of the banks. In effect, give the government equity in exchange for rescuing the banks. From there, impose the discarded pay cap system, and make it retroactive and air tight. All the executives let go from places like Merill Lynch since September 2008 would be obliged to return everything they received after termination except for $500,000. Those millions of dollars in undeserved bonuses would then be used to help recapitalize. Not only that, the government would be obliged to close insolvent banks and move good assets into banks that were wise enough to avoid the morass.

Nationalization may bring out huge outcries, but if the system screws up so much that the government, the holders of the public good, has to step in, the private sector has no right to complain about being held responsible, cultural inclinations be damned. However, if the banks can arrange to recapitalize on their own, they can opt out of government assistance. Regardless, after the banks become open to the public again, the government can (and will) sell their shares in the various banks to recoup the initial recapitalization checks.

There are more changes, however, all of them equally unpleasant for the banks. First, the Glass-Steagall Act would be restored. This once again would divide banking into two types: investment and commercial. That means that places like Bank of America get rolled back to their pre-1999 operations, with deposits and loans, and simple operations anyone can understand, rather than the complex incomprehensible financial Rubik's cubes that were so vogue prior to the meltdown. First step toward preventing a reversion is eliminating the conditions that encouraged the greed that resulted in today's massive instability.

The next step is just as unilateral: an across the board cut in mortgage payments by 30%. That provides immediate relief to every American homeowner, whether he was responsible and read his loan agreement or not, and does not create an atmosphere of resentment from the responsible consumer toward the foolish one. However, this is merely a temporary measure to buy time for the more permanent fix of getting new appraisals of property. This means keeping a sharp knife on the neck of the Appraisal Management Companies that have been designated middlemen between lenders and the actual house appraisers. This is doubly important because many of the ravenous subprime wolves that helped spark the crisis have chosen to become AMCs, and those same wolves were responsible for the inflated house values in the first place. After the houses are appraised, mortgage payments can be adjusted for those who paid far more than they could afford (and than the house was worth) to a more equitable sum, while those consumers who were responsible in their mortgages will be rewarded by returning to their original mortgage payment after a short bonus of enjoying a lower payment.

Finally, the watchdog that is supposed to be the Securities Exchange Committee (SEC) should have its teeth sharpened. The SEC was asleep at the job, and ignored many tips and warnings from whistleblowers regarding not only the Madoff fraud, but other criminal and shady activities throughout the financial world. The SEC had the power to challenge everyone from Madoff to Lehman Brothers and Merill Lynch, but declined to do so. While the SEC should be disciplined for their lax enforcement of the law, for now, I would prefer they do their jobs, and continue to do so.

The economic plan I have offered is longer-term and targeted, not only to fix the mess we are in, but to prevent a similar one from happening. It avoids throwing money at problems, and instead, focuses on maximizing return on investment and security and avoids fiscal waste. It acknowledges that there is no such thing as infinite upward expansion, and works to reduce future adjustment pains. The market will correct itself and the depression will end by 2010. The stimulus plan will not accelerate that process, and in fact, promises to sabotage it, especially since none of the stimulus money will begin to be spent until 2011. It is not the fault of the market that it has to correct itself so painfully nor that people are so shortsighted. Nor will it be the market's fault when Obama's stimulus plan drops us into a bigger hole when my economic plan would have gotten us out of the mess quicker and less painfully. So here's the trillion dollar question: why should we be paying the village idiots in Washington DC when we can get their same disservices for free?

Sources
Dodd banker pay cap one-ups Obama
25 People to Blame for the Financial Crisis
SEC pummeled as Madoff tipster testifies
Housing Appraisals: Still Blowing Bubbles?
How Banking Diversification Steered Us Wrong
Analyst: Gas price jump makes no sense
Federal obligations exceed world GDP
Lawmakers' Goal to Cap Executive Pay Meets Resistance
Five Reasons the Markets Don't Like the Bank Bailout
Stopping a Financial Crisis, the Swedish Way
Reaganomics vs. Obamanomics
Vote of No Confidence
FACT CHECK: Obama has it both ways on pork
An interview with Robert Barro