PeakTrader.com

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PeakTrader:

Monetary policy hasn’t been the problem. Fiscal policy and economic policies out of Washington were both positive and negative on economic growth. For example, the tax cuts were too small and too slow to spur and sustain economic growth. Also, rather than deregulating to unleash growth, more regulations were added.

Fiscal policy and economic policies out of Washington caused the economy to spin its wheels very fast, and burn cash, to make little progress. Certainly, the progress was not enough to jolt the economy into a self-sustaining cycle of consumption-employment. There are still over 20 million Americans unemployed or underemployed, which, of course, lowers (labor) income.

Americans were willing to work longer and harder to pay for the overconsumption, and strengthen household balance sheets, which would add to future economic growth, including over the past few years. Instead, they were forced into early retirements, collected government benefits, including disability, attended school, lived with their parents, etc..

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I stated in Feb ’09:

1. Obama should change his stimulus plan to a $5,000 tax cut per worker [or $750 billion for the 150 million workers at the time], along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.

2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

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Basically, Krugman was correct that a housing "bubble," was needed to replace the tech bubble.

A bubble is needed in a depression, although the country wasn’t in a depression in the early 2000s. The U.S. had a mild recovery, because the 2001 recession was mild, which followed the huge economic boom of the ’90s.

The housing bubble was needed. However, lending standards should’ve began to tighten when the Fed began the tightening cycle in 2004.

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Mike, it would’ve been very expensive for the government to buy mortgages and give them away.

Also, it would be unfair. For example, a homeowner who almost had his mortgage paid-off, because he didn’t extract equity compared to a homeowner who spent over a hundred thousand dollars of equity.

A large tax cut would be most effective and flexible. Each individual would use the tax cut to improve his or her financial position, e.g. pay-off highest interest rate debt first, e.g. credit card debt, to increase monthly discretionary income.

And, a large tax cut was needed, because increasingly larger U.S. trade deficits meant U.S. consumers were buying foreign goods and foreigners were buying U.S. Treasury bonds.

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