Volumn 1 Issue 2
February 16, 2009
A Review of Fiscal Economics – Past vs. Present Page 5
House Grills Top Bankers Pseudo Economics and the Riskless Society on Bailout Progress Page 16
Page 10
We provide the services needed to ensure all your linguistic communication needs are well taken care of...
A Full-Service Translation Agency Argo Translation, Inc. speaks directly to your customers, communicating your message in their language. With a worldwide network of over 500 translation professionals, Argo is committed to localizing your message. Argo’s expertise in localization means your words will make sense to customers wherever you do business. Or plan to do more.
Specialists in every topic and language are matched to your our specific projects:
services for all Argo Translation, Inc. provides ser communication needs: your language and communica Translation T Interpretation Inte -V Voice-overs localization Software lo Desktop publishing CD-ROM publishing -
- Technical - Marketing and advertising - Finance and d accounting - Scientific and d medical - Manufacturing ing - Legal
2420 Ravine Way, Suite 200 • Glenview, IL 60025 U.S.A. Phone: 847.901.4070 • Fax: 847.901.4075 • Toll-Free: 888.961.9291 • www.argotrans.com
We’re ready to help you in any way we can! Call us today! 1-888-961-9291
CONTENTS
Global Economist Review Is published FREE bi-weekly
Publisher and Editor Timothy LuCarelli
Economic HeartBeat
Associate Editor
A Review of Fiscal Economics - Past vs. Present
Karen Smith
By Jackie Arrgondizzo - Global Economist Review
Webmaster
Page 5
Edgar Patel Contributing Writers Jackie Arrgondizzo
Investment Markets Technician’s Corner Answers from Last Issue’s Questions By Frank McGuire - Global Economist Review
Thomas Rehberger Frank McGuire Steve Evans For Subscription Information Please visit the website www.globaleconomistreview.com/
Page 8
subscribe.html
Trader’s Perspective Pseudo Economics and the Riskless Society
Contact Information 244 Fifth Avenue, Suite 1846 New York, NY 10001-7604 646-350-0089
By Thomas Rehberger
Editor’s Office ext. 100
Page 10
editor@globaleconomistreview.com Advertising ext. 120
Political Influences House Grills Top Bankers on Bailout Progress By Steve Evans
advertising@globaleconomistreview.com Subscriptions & Technical ext. 150 subscriptions@globaleconomistreview.com Accounting ext. 180 accounting@globaleconomistreview.com
Page 16
Editorial
Advertisements in the Global Economist Review are the sole responsibility of the advertiser. Consumer complaints should be directed to the individual advertiser.
Stimulus – Schmimulus ……. Print Cash
ALL RIGHTS RESERVED ON ENTIRE CONTENT
Page 19 Global Economist Review (ISSN 1946-7230) is published bi-weekly (two times in a calendar month period) by Timothy LuCarelli and is free of charge by viewing online or in downloaded PDF format. Reproduction of content, articles or advertisements, is strictly prohibited without the express written consent of the Publisher. All information is provided as is and has been checked for validity to the best the writers’ abilities. Any third party information has been reprinted with permission of the content owner and may not be reproduced from this publication without the owner’s consent.
Global Economist Review
February 16, 2009
Page 2
From The Editor
Welcome to another issue of the Global Economist review. In our continuing effort to bring information and unique opinions to our readers this issue presents articles about the latest stimulus package, fiscal policy and trading opinions. We have also included an editorial providing our take on an economic stimulus solution; much different than anything proposed by any politician or banker. We invite you to read it and post your comments on our blog. I am sure many people will find much to agree or disagree within the article. The purpose is to promote critical thinking and hopefully spark meaningful solutions other than the usual responses. As we continue to build the magazine and website it is vitally important for us to fulfill our readers’ expectations. Therefore, we request your suggestions and patience as we progress; it will only serve to make this publication great. Please contact me directly with any questions or suggestions.
Timothy LuCarelli Timothy LuCarelli Editor-In-Chief and Publisher Global Economist Review tlucarelli@globaleconomistreview.com
Page 3
Global Economist Review
February 16, 2009
Economic HeartBeat
“Tough times never last but tough people do.�
Robert H. Schuller
Global Economist Review
February 16, 2009
Page 4
A Review of Fiscal Economics – Past vs. Present By Jackie Argondizzo - Global Economist Review
We know that the U.S. Government, and other governments, are spending a lot of money to stimulate the economy, but what about the flip-side? Where does that money come from and historically how does spending now compare with the past? The money initially comes from the government issuing bonds, notes, bills or some other type of debt instrument. These debt instruments are purchased by individuals, companies, institutions or other governments. For instance, we hear from time to time about China owning the most U.S. debt of any country. The Chinese government, Chinese investment companies and Chinese businesses buy U.S. treasuries. They do this to hold their money in a safe place. U.S. Government securities (debt instruments) are considered the safest in the world because the U.S. has the means to collect the necessary taxes and the country is rich enough to pay back the debt instruments through tax revenues.
trillion of that was collected directly from U.S. tax payers as income tax. At the end of 2008, the total debt owed by the U.S Government was just about $10 trillion. To draw a comparison this would be like an individual making $50,000 per year and owing $200,000 in debt; credit cards, car payments, house mortgage, etc. Debt equals approximately 4 times income or income is , 25% of debt; either way you look at it if there was no new debt it would take 4 years to pay off at that yearly income rate. During the 1930’s, President Franklin D. Roosevelt instituted the “New Deal” to stimulate the then depressed economy. Total revenue collected was 13% to 19% of the national debt until 1942 when it rose to 22%. Understandably, World War II had started and manufacturing picked up to support the war and the country could afford to pay more taxes. This equated to about a 4 to 7year payoff during the 1930’s and early 1940’s; given no decrease in revenues and no increase in debt. We are currently running a 4-year payoff and as the stimulus packages are acted upon they will require more debt increasing the overall debt. Additionally, the shrinking economy will also shrink government revenues. Combing these two scenarios will likely lead to a payoff timeframe longer than the current 4 years.
Below is a chart of data displaying the two time periods; 1933-1942 and then 19992008. The debt ratio column is the number of years it would take to pay off that year’s total In fiscal year 2008, the U.S. Govern- debt given that years total revenues. The data ment had revenues of about $2.5 trillion, $1.6 has been compiled from the U.S. Census Bureau and the Government Printing Office. GER Page 5
Global Economist Review
February 16, 2009
Global Economist Review
February 16, 2009
Page 6
Investment Markets
“Men are like steel. When they lose their temper, they lose their worth.� Chuck Norris
Page 7
Global Economist Review
February 16, 2009
Technician’s Corner By Frank McGuire
Global Economist Review
February 16, 2009
11/2/2008
11/2/2007
11/2/2006
11/2/2005
11/2/2004
11/2/2003
11/2/2002
11/2/2001
11/2/2000
11/2/1999
11/2/1998
11/2/1997
11/2/1996
11/2/1995
11/2/1994
11/2/1993
11/2/1992
11/2/1991
11/2/1990
11/2/1989
11/2/1988
GER
11/2/1987
In the last is14% sue we presented two charts asking for opin12% ions as to what they represented and 10% technically how they 8% are tradable. Well, to give the unknowns, 6% the first chart is the Fed Discount Rate 4% yearly data charted all the way back to 1914. 2% The volatility over the past 35 years has been 0% tremendous. Prior to 1914 1924 1934 1944 1954 1964 1974 1984 1994 2004 the mid-seventies the Discount Rate, while moving higher in the longer term, was not raised or lowered in very dramatic steps. In the 1930’s, 40’s and 50’s the Fed made very gradual moves in interest rates. Given that the Fed Discount Rate is not tradable it is none the less important as it does influence the short and longer term interest rate markets; bonds notes and bills which are tradable. The second chart is the S&P 500, guessed correctly by one blogger. It is the monthly data going back to November 1987; the month after the 1987 correction. At this very point in time the chart has a very good 1800 double top forming. 1600 If the market closes much below 800 for a 1400 several week period of 1200 time, then the double 1000 top will be confirmed. Technically speaking, 800 if that were to happen, 600 450 is the next stabil400 ity point. 450 would also be about a 66% 200 (2/3rds) re-tracement 0 from the S&P highs of over 1500.
Page 8
Calendar of Economic Events for Remaining Period in February
Page 9
Global Economist Review
February 16, 2009
Trader’s Perspective
Pseudo Economics and the Riskless Society By Tom Rehberger
How did we get here? There are many different factors that lead to the largest economic downturn since the Great Depression. We all know that housing, subprime, Fannie and Freddie, the banks, lending practices, the rating agencies, CEO’s, Wall street, mortgage brokers, Congress, the Fed, the Fed policy and the President’s policies are all accessories. They were all in the car when the crime was committed. Who was the driver or the triggerman? It will be hard to say, since they all seem to have alibis. The only thing we know for sure is that the American people are going to pay for one of the greatest economic debacles of the century. Added to that, the banks and brokers sold toxic paper to many countries around the world. The rest of the world is going to pay as well, not only for the bad notes we sold them, but for the recessions and declining economies to come. It is true; we have to act quickly to stem the tide of red ink hitting almost all sectors of our economy. We need to slow the descent and give people and companies time to react to the problems. The government will become the economic driver for the next three to five years as business restructures and defaults and failures occur. But maybe more importantly, the government has to restore some clarity to the future progress of our economy. Clarity is the most important factor in making decisions about committing capital. Investing, the ability to make a judgment about a company or municipality rests on the fact that we can turn to metrics to give us a clear view Global Economist Review
February 16, 2009
Page 10
of how secure that company or municipality is. There are two factors in judging risk, the risk of the asset and the overall economic risk. We can usually look at a stock or bond and determine how secure it is versus other companies in the same sector. But right now, the uncertainties of the overall economy are making all assets look bad because the economic risk is high. What can be done to change all of that? Clarity. We need the government and business to step up and set a course that we can understand, will offer some clarity. They need to bring confidence to the party, and fast. What caused all the obscurity? It is easy to point to a number of major factors that are causing people to feel a low degree of confidence in the economy. Here are just a few. • Out of at least 15,000 professional economists, “10 or 12 foresaw the mortgage crisis.” * Economists have low credibility.
• Congress was involved in changing the rules on banks and brokers to give them more access to leverage and pushed for more low income people to buy houses. Congress now has low credibility. • The Fed’s models missed the downturn and possible deflation until late in the game. The Fed now has low credibility. • The same people are still in charge of most of the financial institutions from when they created the products that got us here. The CEOs and management have low credibility. • The financial institutions played fast and loose with home mortgages. Mortgages were and still need to be the bedrock of investing. Mortgages have low credibility as investments. • The SEC turned a blind eye to the largest ponzi scam in the history of this country. They have low credibility.
• Rating agencies in many cases gave high These are all opinions of mine, shared ratings to the toxic financial products and by many. We count on all of these people and now have low credibility. institutions to set the conditions for economic • Banks and brokers needed a bailout and growth. They are the underpinnings of the economy and they all got it wrong. We have not yet now they have low credibility. Page 11
Global Economist Review
February 16, 2009
reached the point; if ever, where the government and business will accept the responsibility and make the necessary changes to bring back the checks and balances that keep outrageous behavior from taking over. The incentives were too great and are still at the center of the bailouts. The stock market, on the other hand, is telling us with a great deal of certainty that we had better get a plan. The market is saying that we will continue in a downtrend until we get clarity. It is also saying that the financial sector will shrink and some of the large banks and brokers must be nationalized, dismantled and restructured as smaller, more efficient companies, or sold. Capitalism will force the change if we don’t do it.
vive clarity and confidence. They will then remain in place and the economy will grow until we forget them again, in the next cycle. Next time let’s go for 100 years! Why do I call it pseudo economics and the riskless society? You can’t have reward without risk! We wanted easy money, high leverage and high returns with low risk. In order to get things so wrong, we had to build up many wrong assumptions (pseudo economics) that people came to believe in. Think about all of the people involved in this debacle. Some of them are college professors and businessmen and women, some of them congressmen and senators who all slowly bent the rules. The economists and rating agencies built models and gave opinions based on misguided data and incentive. The fog of the pseudo economics has been building up over a long period of time. We are mired in it now, and it will not lift until many of the misguided rules and laws are dissected and discarded. We cannot hedge, structure, legislate, or wish away risk. Capitalism is supposed to work this way. Failure means the restructuring of damaged businesses and bankruptcy of broken ones. Success means buying or taking market share from those who fail. Democracy is the peaceful change of governments, some good and some bad. You can’t create a riskless society. If reward is present, then remember that risk is being shouldered by someone. Companies should never be too big to fail and governments should never perpetuate themselves,
What will cause the institutions and financial sector to restore some confidence and get the economy moving again?
What will cure the low confidence in government and business? Is Nero fiddling while Rome is burning? Will the peasants eventually burn down the castle? While it is nice to speculate that the people will eventually right the ship that our leaders cannot, this correction takes a long time. We as Americans will change our leadership a number of times until the leaders get it right. Along the way, social upheaval and war are a normal consequence of this type of market debacle (see WWII). Plan for difficult times ahead! What will cause the institutions and financial sector to restore some confidence and get the economy moving again? Sad to say, we will return to many of the rules and laws that were in place from the last downturn. Those old rules, coupled with new checks and balances, will reGlobal Economist Review
February 16, 2009
Page 12
and change is good. There is risk in capitalism and Democracy for a reason: the rewards. Success and failure are both grand opportunities for somebody, and both should be embraced. Capitalism comes with booms and busts. We dropped our guard and believed in the hype. Huge rewards were taken by a few and the risks were allowed to be spread over the rest of us. This pseudo economics must never be allowed to happen again. Risk must not fall on society because a few prospered. We had safeguards in place and they were removed. The system is not broken; it is just being distorted until the financial sector shrinks.
We all must realize that we will never achieve true capitalism or true democracy. We live in the gray areas of both, but these are still great goals. We will restructure the failed businesses and shrink those that are too big to fail. We will reelect governments until they get it right. A few heads will roll. We will reinstitute checks and balances that will get us back on track. Clarity and confidence will return and then the economy will boom. We will learn from this economic debacle and then, hopefully, create a longer period of growth then the last 80 years that we have enjoyed. GER
The road back to growth will be painful, but it will be quicker if the Obama administration gets it right and swiftly moves us back into the realm of clarity. If they continue to perpetuate the pseudo economics, expect a long four years!
Tom Rehberger President Private Asset Group LLC www.INVESTpag.com *James K. Galbraith economist - excerpts from NY times interview.
Disclaimer: This letter is the opinion of Tom Rehberger and is not the opinion of Private Asset group. It may contain forward looking statements. This release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E the Securities Exchange Act of 1934, as amended and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. “Forward-looking statements” describe future expectations, plans, results, or strategies and are generally preceded by words such as “may”, “future”, “plan” or “planned”, “will” or “should”, “expected,” “anticipates”, “draft”, “eventually” or “projected”. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors, and other risks. This article shall not be construed or interpreted as a solicitation to sell or offer to sell any financial assets or investment advisory services by Private Asset Group or Tom Rehberger. Please contact Private Asset Group LLC for information about our services. There is risk of loss in investing. Please read the complete disclosure page available at www.INVESTpag.com. Past performance is not indicative of future results. Do not invest without discussing any investment with your investment advisor. The Adviser does not attempt to furnish personalized investment advice or services through this publication. Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, the Adviser does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness and makes no warranties with respect to results to be obtained from its use. Page 13
Global Economist Review
February 16, 2009
Political Influences
“Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.� Sir Winston Churchill, Hansard, 1947
Page 15
Global Economist Review
February 16, 2009
House Grills Top Bankers on Bailout Progress by Steve Evans The chief executives of eight major US ers than whether the taxpayer-funded program banks tried to reassure a doubting Congres- is actually benefitting the U.S. economy. And sional committee last week that all’s well with there was little evidence to support an affirmatheir oversight of federal bailout funding for fi- tive answer to their question. nancial institutions. Meanwhile, the U.S. Trea“There’s a great deal of anger in the counsury is considering whether $1.5 trillion in new try, much of it justified,” Committee Chairman taxpayer funding may be needed to shore up the Barney Frank, D-MA, told the executives as US financial sector and resuscithe hearing began. “There’s a great deal tate the economy. Citigroup’s Vikram Panof anger in the There is no consensus on dit vowed his bank would pay whether the bailout plan is acthe U.S treasury $3.4 billion country, much of tually working. in annual dividends, saying he it justifi ed,” intends “to make this a profitExecutives with Citigroup, Bank of America, JP Committee Chairman able investment” for the government. Pandit said he asked Morgan Chase, Wells Fargo Barney Frank, D-MA, for an annual salary of $1 with and others told the House committee they had used bailout told the executives as no bonus until Citigroup is dollars to increase lending in the hearing began. profitable again. He also told the committee that his bank the last quarter, while relieving had helped 440,000 homeown“hundreds of thousands” of homeowners from looming foreclosure. The eight ers avoid foreclosure since the bailout program banks have received $166 billion of the $700 began in October. “The American people are billion in the Troubled Asset Relief Program right to expect that we use the funds responsi(TARP) developed last fall by the Bush Admin- bly, quickly and transparently,” Pandit said. istration. JP Morgan Chase CEO Jamie Dimon Members of the House committee grilled the bankers on the extent of their lending, their accountability for taxpayers’ money, and demanded an explanation for bonus pay and incentives for top executives in a time of financial crisis. Citigroup and Bank of America have each received $45 billion, making them the largest beneficiaries of the government’s bailout plan. The dollar amount of lending since the bailout began was of less interest to lawmakGlobal Economist Review
February 16, 2009
said the $25 billion his bank had received enabled it to delay repossession proceedings on mortgages of more than $22 billion held by about 80,000 homeowners. “Today’s economic crisis is a result of a lot of mistakes by a lot of people,” he told the committee. Perhaps in a move to deflect criticism before the House hearing even began, Goldman Sachs CEO Lloyd Blankfein had proposed greater regulation of the financial sector and Page 16
tighter limits on executive compensation pack- of commercial real estate and corporate loans, and a large portfolio of at-risk home mortgagages. But committee member Gresham Barrett es. The acquisition was largely responsible for R-SC, scolded the bankers anyway, saying, “My Wells Fargo’s precipitous forth-quarter loss. Lawmakers also asked the bankers to folks simply haven’t seen the evidence that the money you were given is working or making disclose much of their own money they had invested in their companies since August. Dimon their lives better.” Lawmakers asked Bank of America CEO testified he had invested $12 million of his own Kenneth Lewis to explain why investment bank money in JP Morgan Chase, Pandit said he had Merrill Lynch gave billions in bonuses to top pumped $8.4 million into Citigroup, and Lewis executives and mid-level management just as it said he had bought 400,000 shares in Bank of was in negotiations to be acquired by Bank of America. The other executives said they did America – in effect, to be saved from bankrupt- not make investments in their banks. cy. Earlier reports revealed that four top Merrill Lynch executives took home $121 million in bonuses mere days before Bank of America received $45 billion of taxpayer funds to buy the troubled investment bank. Merrill gave away $3.6 billion in total bonuses less than a week before the Bank of America merger went through. The bonuses are now under investigation by the New York Attorney General’s Office.
The larger, unresolved issue on Capitol Hill is ongoing criticism of the bailout itself. Critics are essentially divided into two camps on the thrust the bailout ought to take. One side argues that more taxpayer money should be pumped directly into the financial sector so bankers can increase lending. Whether enough lending is taking place since the bailout began is an unanswered question.
Lewis said Bank of America had urged The other camp argues that the U.S. govthe Merrill executives to cut or eliminate bo- ernment ought to buy troubled mortgages innuses. stead of buying securities instruments whose “We had no authority to tell them what to returns are based on the performance of home do; just urge them what to do,” Lewis told the mortgages. This argument may be more politicommittee. He stressed that no one in Bank of cally palatable in the House and Senate, as savAmerica management had received any bonus ing homeowners would likely be seen as more popular than bailing out Wall Street, which package during the Merrill Lynch acquisition. Also appearing at the hearing were Rob- many lawmakers say is to blame for the finanert Kelly of Bank of New York Mellon Corp., cial crisis. Securitized portfolios of subprime Lloyd Blankfein of Goldman Sachs, John Mack loans, shuffled among financial institutions unof Morgan Stanley, Ronald Logue of State aware of the risk they were assuming, are at the heart of the economic meltdown. Street and John Stumpf of Wells Fargo. Stumpf said responsible lending spurred Wells Fargo to profits of $3 billion in 2008 (offset by a $2.55 billion fourth-quarter loss). His bank has since acquired North Carolina-based Wachovia in an $11.7 billion deal. In buying the smaller bank, Wells Fargo absorbed $219 billion Page 17
But economists say U.S. consumers are also to blame. Inadequate consumer savings and households already heavily leveraged with debt are exacerbating the situation as financial institutions clamp down on lending and new credit dries up. Without an adequate savings cushion, Global Economist Review
February 16, 2009
families are avoiding major purchases and cut- an updated report by mid-March. ting back drastically on discretionary spending, As part of the ripple effect on the stock which is further weakening the economy. markets with any new development on Capitol Before the House hearing, Treasury Sec- Hill, U.S. stocks plunged on news of Geithner’s retary Timothy Geithner had announced a new, bank-rescue plan, which Congressional leaders $1.5 trillion bail-out package for financial insti- dismissed for its vague details and uncertain tutions, including a new fund to mop up any re- numbers. maining bad debts on banks’ balance sheets. His “I completely understand the desire for plan calls for at least $100 billion in taxpayer details and commitments, but we’re going to do funds to support up to $1 trillion in consumer, this carefully, consult carefully so we don’t put small business and commercial real estate lend- ourselves in the position again where we’re laying. Geithner also told Congress that a supervi- ing out details ahead of the care and substance sory review of banks would soon tell how much necessary to get it right,” Geithner told Conadditional money is needed to stabilize the U.S. gress. GER financial system. He expects to give Congress
Global Economist Review
February 16, 2009
Page 18
EDITORIAL Stimulus – Schmimulus ……. Print Cash Editorial Provided by Global Economist Review – Online Magazine
While many of us here at the Global Economist Review may not hold key political positions that are capable of making decisions to rectify the economic mess, we are none-theless highly educated, experienced people with intelligent opinions. Since it seems as if everyone else is giving their suggestions to the government on what to do about the financial debacle, we thought we too should throw in our two cents; for what its worth. From our point of view what really needs to happen is cash needs to get into the hands of people that need the cash; if they need it they will spend it, thus increasing economic activity. Additionally, banks need to get bad debt off their books. Most of that bad debt comes from people not being able to pay their mortgages because they are either out of work or they have taken a pay cut. Unemployment insurance has a limited time frame and for many Page 19
the monthly amount does not cover their rent or mortgage payment. Many people never collect unemployment because they are ineligible, waited too long or were self employed. The President and Congress’ answer to economic slowdowns is to throw money at the problem via tax relief or government spending. The Federal Reserve and Treasury use interest rates and financial infusions/guarantees to stimulate economic activity. All of these, with the exception of interest rate adjustments, increase the national debt which eventually has to be re-paid out of taxes, nullifying any long term economic recovery. To break everything down into basics two things need to happen; cash needs to get into the hands of people and there needs to be no further government stimulus programs that will hinder long term economic recovery. So here’s our “New Deal” outline: Global Economist Review
February 16, 2009
1) In our opinion the government was on the right track to create a “bad bank” that would buy up all the existing mortgages that are in default. The problem is they became scared at the sheer size of the debt. The government also felt pressure to not purchase the assets from the banks at the book value but at some sort of discount. Our suggestion is use the money that has been appropriated in TARP and the new stimulus package to buy every mortgage loan (that is greater than 90-days late) possible from the banks at their book value and put it into this “bad bank”. Convert all the mortgages purchased to 30-year fixed rate loans at 5.5%. Some estimate the total amount of delinquent mortgages to be over $4 trillion so, if the “bad bank” acquired a little over $1 trillion it would start the ball rolling. 2) Print cash; real, hard, physical cash. Make the presses work 24 hours a day 7 days a week. Printing cash does not increase national debt and never has to be paid back. Yes, we know that would be inflationary and devalue the dollar. But, we have an answer for that as well, read on! 3) Start a voucher system through bank branches to pass out the cash. The government can set up a secure website for people to sign up. They would have to provide their Social Security number, name and contact information of the bank holding their mortgage (or landlord if renting), the names and contact information of two of their utility companies (this is to verify they still reside at the residence), and a couple of other creative verification procedures that are not too cumbersome and would prove unemployment (or underemGlobal Economist Review
February 16, 2009
ployment); they would have to prove their financial woes were because of the economy and not from criminal or self-inflicted distress. People would then be eligible to receive double their monthly mortgage payment or rent in cash; up to a maximum of $3,000 mortgage payment ($6,000 per month total payout). They would need to choose a local bank that would then accept their bi-weekly voucher. The bank would receive an allocation of cash each week based on the number of registered vouchers to that bank. Upon presentation of the voucher the bank would immediately wire half the funds to the mortgage holder or lease holder and distribute the remaining cash to the voucher holder. 4) As the economy starts to recover keep the program going and, to avoid overheating the economy, start downsizing the government. As GDP increases, tax dollars will increase, then the government can start to cut back and pay off it’s debt. Dramatically cutting back on government spending would have a dampening affect on the economy counteracting the stimulus provided by free-flowing cash. Slowly the voucher system could be eliminated, the government would have substantially less debt and the dollar would increase in value as national debt was paid down. While we acknowledge the devil is in the details and a few hundred words of text cannot sufficiently specify all the intricacies of the program, we do believe the plan warrants consideration and feedback. We have therefore asked several industry experts for their opinions:
We are in a recession. We’ve been in them before, we will be in them again. Nevertheless, our system and laws have resulted in Page 20
the greatest increase in human wealth ever. In the past 25 years, free markets have resulted in raising the largest number, and largest percentage of the world’s population out of poverty, ever. Capitalism entails huge amounts of wealth creation on average, but for poorly understood reasons, a bumpy ride. We are currently on the downside of that bumpy ride and should simply accept it. This too shall pass. Lots of countries over the last 150 years have had financial crises. They’ve recovered. The idea that we have to do something as crazy and drastic as this proposal is, well, crazy. Professor Christopher Phelan Department of Economics University of Minnesota
Initially I found your idea repulsive. It conjured up visions of people living on the dole, queuing up for the monthly check to feed the kids. But giving massive bonus checks to executives of large banks and brokerage firms is really no different. It is compensation for no real work, risk or lasting value when the firm is losing money. The real difference is that the poor will spend it and the rich will invest it. Which is better? While I don’t believe in long term transfer payments, I do think we need more spending right now. We do need to support the middle class, and the working poor. We need consumption! Tom Rehberger President Private Asset Group LLC We recognize the elected politicians feel an obligation to the companies and interest groups that helped pay for their election; however, now that they are elected they need to do what is best for everyone. The top down approach, flooding the banks, investment comPage 21
panies and country’s rich, with cash does not seem to be working. We ask each and every reader; how is this solution any different than unemployment, food stamps or any other type welfare? Is this solution any more wrong than the Socialist progrms we have been practicing since the Depression of the 1930’s? We invite you to post your comments on the Global Economist Review blog. GER
Global Economist Review
February 16, 2009