Tuesday, February 10, 2009

Obama: This is a "Full-Blown Crisis".

Obama has come out fighting against Republican apathy about what to do regarding the economic crisis.

Conventional ideas popular with economic conservatives, like tax cuts, would not work and a failure to act could turn crisis into catastrophe.

"This is no ordinary run of the mill recession," he said.

Obama says that the real danger here is that we create a "negative spiral" and that inaction ignores the fact that we are facing the worst economic crisis since the Great Depression. Three point six million jobs have been lost and more than half of those jobs have been lost in the last three months.

The situation is getting worse by the day.

"If there is anyone out there who still doesn't believe this constitutes a full blown crisis, I suggest speaking to one of the millions of Americans whose lives have been turned upside down because they don't know where their next pay cheque is coming from," Obama said in prepared remarks before taking questions.

I don't know what the Republican answer is to this problem which Obama inherited, but as he makes clear here, "I am happy to get good ideas from across the political spectrum from Democrats and Republicans. What I won't do is return to the failed theories of the last eight years that got us into this fix in the first place. Because those theories have been tested and they have failed. That's part of what the election in November was about."

The Republican theories were rejected by the electorate. And yet they continue to insist that their theories are the only way forward here.

The locations, though chosen to demonstrate Obama's connection to the hardships of ordinary Americans, also contain an implicit threat to Republican hold-outs against the rescue plan.

Indiana and Florida are traditionally Republican states that voted for Obama in November, and his appearance was also intended as a subtle threat that those who stand in the way of the package could face a potential backlash.

In Florida, the message was underscored by the scheduled appearance with Obama of the state's governor, Charlie Crist.

Obama did not hold back from taking a tough line against those Republican opponents, taking advantage of the primetime television audience to lay the responsibility for the economic recession squarely on George Bush and the Republicans.

"I inherited the deficit that we have right now and the economic crisis that we have right now," he said.

"The notion that I just came in here ginned up to spend $800 billion dollars - that wasn't how I envisioned beginning my presidency."

I admit that the Republican position on this simply baffles me. Obama did not set out to be president during the worst economic crisis for decades, he inherited this from a Republican president.

What I hear from McCain and others is a reluctance to accept that their ideas have been tried and that they have failed. Tax cuts, it turns out, are not the answer to everything. And yet that seems to be the only thing the Republicans have in their bag.

Click title for full article.


Steel Phoenix said...

It is a lousy bill. It won't fix the economy because it was never designed to. It is just all the stuff Democrats have wanted to pass for the past eight years but couldn't. Some of it is good stuff, but really unrelated to the crisis at hand.

Fixing this crisis is simple: depreciate the currency. I think this may be what Bush was trying to do when he bailed out big banks, but in his typical ineptness he failed to realize that the banks don't want our currency depreciated, and would not cooperate. The economy will do a 180 by mid summer without external intervention. When it does, they will wish they could unpass the bill and unprint the money.

Kel said...

I agree that they are putting in a lot of things that they have been wanting to do for years but I do think - reading what everyone is saying - that something needs to be done. And I would be very surprised if this is over by the summer.

Steel Phoenix said...

It won't be over, we will just have the opposite set of problems (which strangely enough will still cause the banks to fail again).

Kel said...

SP, My understanding of this - and I admit that I am no expert - is that the worst thing that can happen is if we allow this to go into a spiral.

If even more people become unemployed then they buy less goods, factories then find they are selling less goods so they let even more people go, and the entire thing spirals to the bottom.

Obama's plan, as I understand it, is to use the state to provide employment to prevent this from happening.

I've said it before, but I back this because it, at least, sounds like a plan.

The alternative is to allow this thing to run it's course, which I imagine would result in massive unemployment and the repossession of millions of people's homes.

I'm not sure what you mean when you speak of the "opposite set of problems". What do you see happening in six months?

Steel Phoenix said...

Think of it this way:

Deflationary times are like what you are speaking of. Everyone is afraid things are going to get worse, so they don't spend, they don't invest, banks don't lend, businesses don't make sales, and thus lower prices to encourage sales and lower wages in order to be able to do so. This continues the spiral of deflation.

In inflationary times, people see prices going up faster than interest rates. They see reason to get rid of money as fast as possible in exchange for goods and investments that will not lose value like money. They take out loans to make investments. Demand outstrips supply and prices, wages, etc. go up. This continues inflation.

It is like there is a headwind trying to go from one to the other. It isn't that it is far away, it is that there is resistance. All we need to get from one to the other is an opinion change. A shock to the system. We don't need a big, complicated, anticipated, slow moving stimulus to make the transition. We went from inflation to the appearance of deflation with a simple change in lending rules. The transition back is just as easy.

I'm not going to say the fundamentals of the economy are strong, but they are mostly unchanged from a couple years ago. I'm not saying we are in a 'mental recession', but it is in many ways all in our heads. We need to change the indicators we see as important, and define what it is we really want.

The stock market is not a gauge for whether the economy, or a specific trigger event are good or bad. Watch the market. It will dip whenever major, anticipated news happens. It isn't because the news was bad, it is because it was an investment tactic. All stocks really measure is how the investor class (people like you and me but with more money) think a given indicator will move in the near future.

Jobs are not what is important right now. For perhaps the first time in history, the world has a productivity surplus. They don't realize it, because it isn't in any of their historical data. Too many people working too much have made enough product that there are no longer enough customers willing to buy it. The answer is not to get more people working to make more stuff. They still won't want to buy it. China didn't exist in anything like its current form in the global market a decade ago. We are not in deflation.

Deflation is a contraction of the money supply. We just doubled the money supply last year. If you think about it you will see that a glut of supply has the same set of effects we are seeing, but does not require the money supply to drop.

I like the furlough idea that California workers are now under. They take two additional unpaid days off a month. If we all did that, I think we would be better off. Supply drops, demand rises, prices rise, wages rise, people make more money and have more free time, no one was fired. At some point, you have to look up from your work and realize that your new backhoe dug all the holes you needed and you can go home now. Backhoes don't unemploy ditch diggers, they just allow them to go work in other fields, thus reducing the total labor needed to get the total demand filled.

The government can't give us money, because they get their money from us. It doesn't matter how much currency they print or how much busy work they invent, their base wealth remains the same. If the job they create is truly going to create more value than the people they take the tax money from to pay for it, then perhaps it is a good thing. Creating jobs for the sake of creating jobs only fuels the supply boom, and thus the demand bust. Fueling the boom and then encouraging the bust is exactly what got us into this mess in the first place; it won't get us out. It would be like trying to buy up your employers product in order to keep enough demand for them to not lay you off. Demand needs to be external to be valid.

Six months?
I expect the natural inflation that comes with summertime to give people the illusion of change. When gas goes up to $5 a gallon again this summer, enough people will believe that deflation is gone, that it will be gone.

Democrats believe that government can solve the worlds problems. That means they have to prove it in order to get votes. In order to fix the housing market, they need lending to happen. They will find a way to make it happen.

The resulting surge in talk of inflation from rising energy prices, coupled with the return of lending will panic the banks into using the funds created since November. They don't want to sit on money that will rapidly lose value under inflation. Flushing this money into the system will create that very inflation, causing them to collapse again as the interest on their assets is now below rate of inflation. The government will be slow to boost interest rates to compensate due to fears of sub-prime defaults and jinxing the boom.

In the next three years:
I see a coming short term boom on gold and oil. That will be followed by a stock boom and a leveling housing market. Then a gold bust, the unpinning of the Yuan, a social revolution in China and a return of manufacturing to America.

I may be wrong, but hey, a chimp and a dart board could beat the average economist these days nine out of ten. You can't get the right answers when you are misinterpreting data and asking the wrong questions.

Kel said...

I may be wrong, but hey, a chimp and a dart board could beat the average economist these days nine out of ten.


And thanks SP for such a long and thoughtful post. I agree that what needs to change here is everyone's attitude.

And that's not a bad idea for everyone to take two unpaid days off a month. However, I think what the Democrats are really challenging here is the Reagan - and the Republicans in general - belief that big government is automatically bad.

I think they lost that argument at the time of Katrina and that the Democrats are using this change in public mood to push for many of the things that they have long wanted to do.

Steel Phoenix said...

"the Democrats are really challenging here is the Reagan - and the Republicans in general - belief that big government is automatically bad. I think they lost that argument at the time of Katrina"

How did they lose it during Katrina? When the FEDERAL Emergency Management Agency didn't show up? It may be an argument against cronyism, but it in no way vindicates big government.

An important distinction is that both of the major parties are comprised of several factions, all vying for control. This lack of unity is arguably what lost each party the elections they lost, while excess unity is what made them screw up after they won. For the past several Republican presidents, the party has been controlled by neocons. From what I've seen, neocons are a crazy bunch of bible thumping centrists; the kind of people who watch too much daytime television and confuse emotion with thought. They are also Keynesians. Which basically means that the economists that are advising Obama are of the same school as those who advised Bush, with a few differences in things like tax distribution. There are several schools of economic thought, but they both subscribe to essentially the same one. About the only D or R presidential candidates that weren't Keynesians this cycle were Ron Paul, and perhaps Gravel (who later switched affiliation from D to Libertarian). Ron Paul believes in methodological individualism, as do I.

Kel said...

How did they lose it during Katrina? When the FEDERAL Emergency Management Agency didn't show up? It may be an argument against cronyism, but it in no way vindicates big government.

I'm talking about perceptions and I think the perception which the Republicans had played upon - that big government was automatically bad - was eroded when there was no national response to a national emergency. Had a disaster on that scale took place in the UK it is unthinkable that one would have expected it to be dealt with at a local level.

At that point, and this is only my opinion, the concept of big government suddenly doesn't seem so scary.

You might disagree but I think it is that wave which Obama is riding.

Ron Paul believes in methodological individualism, as do I.

I like Ron Paul as I find that he at least sticks to his principles, even if I don't always agree with him.

However, unlike yourself, I am an old European leftie so I believe in the concept of the collective much more than you do. And I suspect Obama believes in the collective as well. I think that's why he's so fond of quoting Lincoln that governments are there to do what people can't do as individuals.