Posted by
Michael Heimlich on Wednesday, January 28, 2009 12:47:32 PM
We keep reading and hearing about how this is the worst economy since the Great Depression. Yes, things are worse than they have been in some time. However, these commentators are conveniently forgetting the Nixon / Carter stagflation of the 1970s.
That being said, we could find ourselves in a situation worse than both of those economies - the inflation of the 1970s AND the high unemployment of the 1930s. How? Pass the so-called "stimulus" bill and have the Fed keep pumping the liquidity.
Let's be clear - this bill will do nothing to improve economic fundamentals, because it does nothing to change the conditions that led to the current problem. However, all of that money from Congress, combined with the continued cheap money from the Fed, will create the next bubble - an inflationary, if not hyper-inflationary economy.
What should we be doing?
1. I submitted a suggestion to the White House in October that since the crisis was due to a credit crunch resulting from non-performing mortgage-backed securities (MBS), there should be an immediate reduction / suspension of income tax withholding from individuals and of the corporate income tax. This would give individuals more cash to pay off mortgages, which would get the MBS performing again. It would also give companies extra cash so that they would not need to draw on their credit lines as much and banks would be more willing to lend to companies that would no longer be perceived to be poor risks.
Needless to say, this idea has not been implemented.
The argument against this proposal is the cost of of lost tax revenue. I would contend that it would force government to rid itself of unnecessary expenses and would wouldn't cost any more than the $2 trillion of useless spending that we are witnessing.
2. INCREASE short-term interest rates and, ideally, abolish the Federal Reserve. Why?
a) Increasing interest rates would provide people with an incentive to save their money in bank accounts, providing the banking system with the much needed liquidity for which it is currently begging the government.
b) Investment capital in a healthy economy should be derived from the pool of savings, NOT from government bailouts.
c) It would provide an income stream for seniors and others living off of fixed income.
d) The Fed has responded to every economic crisis over the past 20 years by lowering interest rates to panic levels, thereby causing an extraordinary increase in liquidity and credit, leading to the next bubble, then raising rates too high, which causes the next crisis. The Fed took risk out of the system and investors leveraged up each time because the Fed was there to save them on the downside. This should be ample evidence of the damage caused by the Fed. The insanity is that the Fed is being relied upon to save us from the crises it creates.
e) We supposedly have a free market economy, with the prices of goods and services set by individuals in the marketplace. Yet the most fundamental price - the price of money as determined by interest rates, is set by an appointed board headed by a chairman.
3. Implement a National Sales Dividend. This will be detailed in a subsequent post.