Having read the FT (my favourite media at the moment for obvious reasons) http://www.ft.com/cms/s/0/3d89a930-220d-11de-8380-00144feabdc0.html I realised that everyone including Obama are healing the wrong symptom. Or at least they are missing one on their to-do lists.
They are looking into healing the banking system so that it can finance industry. While this may be necessary they are neglecting one huge area: household income which is the second of the root causes (behind or maybe also alongside the first one, greed) and the reason we are seeing deflation. i.e. helping the man on the street is something I cannot see in anybody’s policies.
The problem is that I cannot see the economies catching up again until the normal households (that’s you and me) can start spending again. The FT piece is fantastic although it doesn’t thoroughly explain this effect. But basically we are becoming paralysed (at least house owners whose property is now below the value they bought it for. I don’t think mine is there yet but it is, I suppose, on the way).
I am actually still waiting for one or all of visa, mastercard, amex … to collapse as defaults start rising. Now this would be fun to see how the internet’s online shopping world would then continue… I thought initially this would happen in the first wave but I think now that it will happen as the second stage hits us which will happen around the time inflation transforms from close to zero to double figures. I guess early 2010.
So anyway, I digress. So how could the man on the street have been helped? Well, some of these ideas are radical but basically the same principle: do not give the banks the money but bypass them and go straight to the people. I still think the best approach for Obama would have been to simply give everyone their houses – i.e. the state buys them off the banks at the reduced market value. Reduces all this toxicity immediately. And probably costs the same. With much more understandable effects (i.e. instead of introducing a new crazy toxics market!). And not just the rich banks benefit… People’s money being spent for once on the people and not on the rich. Maybe not giving them but offering LOW (1%) fixed rate interest loans to existing mortgage owners.
Another topic here which annoys me incredibly is the exposure that normal people have had to the risks and costs transferred to them automatically by their financial institutions. Of course there is a risk that shares and investments could lose money but this risk should not have been increased by banks doing a bad job. There seems to be insurance for the banks but none for the customers.
The taxpayers money could have also been used at least to cover bad bank practise for the customers. To me it appears that currently the banks are being rewarded for making disastrous decisions (with even Lehmann Brothers back in the black) but the man on the street punished in more than one way: once he has lost his savings and twice he may lose his job (as the banks still continue to hoard this money).
The money could have been used in a much better manner: paid in part back to the investors with this then imposed as a fine on the banks that had to be paid back over time – i.e. a complete reversal of what has happened now. In this manner the investors are protected and reimbursed and would then maybe even be willing to reinvest in a newly regulated system. This would have also indirectly cleaned up the bad banks, some would have failed as the man on the street could then decide which had cleaned up their act enough to warrant their custom.
The option may of course be that we will not spend our way out of this recession and that truly a new world is coming not based on consumerism & infinite growth. Maybe Obama has already this plan in mind. Now this would be a nice surprise…
In part 2 of this I will discuss what would happen to the money that the man on the street would get and how this would stimulate the real economy.