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Thursday, August 2, 2012

SIMPLE SOLUTION ESSAYS: Simple Solution for Our Fiscal Mess

The following continues (but brought up to date as indicated) the serialization of SIMPLE SOLUTION ESSAYS.  You need to be an historic economy wonk to even attempt to read this posting, but this is why I no longer treat this subject.  Anyway, this article (published on 29September2008) followed my 25September2012 Huffington Post warning:

Four days later, 29September08, the stock market did, in fact, crash, the Dow Jones Industrial Average dropping 778.  So my simple solution was for Congress and the White House to do nothing, giving good reasons why. 

Simple Solution for Our Fiscal Mess

On 25September2012 my HuffPo feared something terrible happening to our economy.  I repeat:

The presidential election was only a few weeks away, and while our unemployment rate on 25September08 was still 6.1%, it was obvious that something terrible was beginning to happen to our economy.  Some say oil was a key reason for World War II, and that $147/barrel spike in July frightened the investment community.  Many blame housing for triggering the crash, but like the previous serious recession in the early 1980’s, behind this all was the metastability of petroleum.  Here is the unemployment rate since 2008:  

In my two books I suggested SIMPLE SOLUTIONS for virtully everything: energy, environment, crime, war...nameit, I had it. Except for the economy! Today I rectify that omission.

You might ask, what credentials do I have to even comment on the subject? Well, not much, actually, but more than I had in crime, religion and assorted other subjects which made the publications cut list. Plus, at least I once worked for the U.S. Senate, something most pundits just criticize.
Anyway, my simple solution for the bailout is to do nothing. This is in keeping with my samurai philosophy: act swiftly and decisively when you must, but sometimes, no decision is best.
Here is what our House members were thinking: only 40% of Republican voters, 30% of Democrats and 10% of independents are for the bailout plan proposed by President Bush and Treasury Secretary Paulson. In an Associated Press poll, only 30% of Americans said that they supported the Bush package. Yes, adjustments were made in Congress over the weekend, with a sprinkling of clever main street facades, but what is a Congressperson to do: vote for Wall Street and get kicked out of office on November 4? House Republicans, especially, kept to their principles (free market, not get re-elected) and the legislation was defeated 228 to 206.

Then came 29September2008.  Did you see what was happening to the stock market a minute before the debacle and for the rest of the day? The Dow Jones Industrials had already dropped more than 200 points, then suddenly, in a matter of a minute or two, plummeted another 500 points to minus 734 when it looked like the vote looked hopeless, then, within minutes after the voting was supposedly closed (see Lawrence Berra's quote later about it not being over), when there came a reassurance that the House would re-consider and try to twist arms over the next couple of days over the Rosh Hashanah Jewish Holiday (first of ten repentance observances, culminating with Yom Kippur on October 9 this year), a gradual rise back to the minus 300s. The DJI then dropped again, largely in the minus five hundred range, and was at -580 seconds before the trading deadline today, when through a breathtaking few minutes after the bell (yes, Yogi's "It ain't over till it's over" wisdom prevailed again), the market free fell to 10,365, minus 778 for the day, the greatest one day drop in history. A decline of about 200 points AFTER the bell. My HuffPost of last week on the metastable state of our economy is coming all too true.
So what will happen next? The White House will propose another package, the House will act by the weekend, a month before the General Election, and the Senate, at worst, might need to hang in there until next week, although the current plans are for the Senate to now deal first. Is all this dilly-dallying all that bad for getting re-elected? Actually, no, for most campaigns are run on TV and sound bites. Incumbents can be made to look good with their home news channels reporting on the great job they are doing to save the country for their constituents. Plus, they won't need to pay for these self-promoting ads. What a windfall. Looks like our elected national representatives have found another workable ploy. The longer they stay in D.C., the more they will have to gain.
So returning to the DO NOTHING solution, let me ponder over a hypothetical nightmare. The following day, both the U.S. and world stock markets essentially went back to business as usual. Let's say our Congressional members cannot get their act together and leave town about mid-October, all the while blaming President Bush (who does not need to run this year) and the other party. There is enough to go around. Many banks close, but the feds take over, and most of the bank run is covered by the FDIC, anyway. Only the really rich lose bucks, but they caused all this, so no harm there. Gold could surge past $1000 / troy ounce, but no big deal here, because that also happened on January 21, 1980 (the Second Energy Crisis), and, in 2008 dollars, that's worth almost $2500/oz.

Crude oil drops to $75/barrel because demand declines. OPEC countries squabble among themselves to reduce production. Then the price plateaus at $50/bbl, just enough to discourage the financial sector to cancel most large renewable projects. OPEC will love this. You can count of crude oil rising to more than $200/bbl in a couple of years. Paulson's Goldman Sachs predicted this. Then what?

As the stock market, the housing market slowly recovers. No $700 billion bailout package, but our existing financial system does have a certain resilience and flexibility to continue to provide business loans and assist consumer purchases of cars, homes and whatever. What was the emergency, again?
No way John McCain can get elected in this scenario, but Barack Obama will have at least a tiny mess on his hands come January 20. On the other hand, change comes best in time of crisis, and like FDR had Herbert Hoover, Obama will be able to thank George Bush. Doing nothing now might well be the optimal solution. The killing of the Emergency Economic Stabilization Act of 2008 was an early signal that the internet can be the controlling strategy for action. The virtual masses actually said no, and Congress shockingly agreed.

Comments (0):  There were no responses.  Of course, no one listened to me, and the U.S. Congress on October 3 passed the  $700 billion Wall Street bailout package, officially called the Emergency Economic Stabilization Act of 2008.


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