How to Get From Here to There
Posted by Michael A. Kamperman on May 10, 2009
No doubt President Obama inherited these problems and is not the cause of them. But many people run for the presidency with an idea of what they would like their tenure to be like and wind up with a presidency dictated by unforeseen events out of their control. Like it or not President Obama is responsible for fixing the economic crisis. Additionally, Washington does not mean liberal, moderate, nor conservative. It also does not mean Democrat or Republican. It means collectively the will of the representatives of the people whether they align themselves with the Democratic or Republican Party. My economic ideas are not aligned with any group whether Democratic or Republican. They do not fit into sound bites like Capitalism or Socialism. My ideas are designed to benefit all Americans and not pick winners and losers. I am simply observing the economic facts on the ground and describing the solutions that I believe are necessary. However, the solutions I am about to briefly mention are highly controversial. If you want a complete response you can find it in my book linked above on this site. I will not attempt to recreate all 160 plus pages in this post.
I first diagnosed the cause of the economic crisis and then I formulated the solutions necessary to solve the problem. I wound up down a path rarely traveled and not planned or foreseen by me. The cause of this crisis is the credit rating agencies rated garbage loans pooled into asset-backed securities AAA. The loss of faith and trust created by this massive fraud killed the non-federal government backed asset-backed securities market. This market was the key cog supporting the shadow banking system which accounted for up to 75% of the credit extended in the U.S. in the last few years. It doesn’t matter if the banks stay the same if they only supplied a quarter of the credit. What about the other three quarters. If you have a subprime credit score you will have an extremely difficult time getting a mortgage even if you have a job and a little money down. This catapult of a giant stone was hurled at a financial system built of glass. The financial system was built on massive leverage, improper risk/reward lending structures and flawed mathematical models that led to flawed perceptions about the economic world we lived in. We are no longer in the post World War II inflationary economic expansion. That period of history, from which all of us gather our personal experience from, ended in August of 2007. We are now in a new debt-induced deflationary depression akin to the 1930’s. Unless the federal government takes much more drastic action than it has to date we will see the 1931 economic situation we are now in turn into a 1933 economic situation in a year or two.
How do you solve a problem of a huge hole in purchasing power and large scale permanent unemployment? You have to think way outside the box. If this crisis was solvable by an existing theory championed by the left or the right it would already have been solved. First and foremost purchasing power has to be returned to the bond market. There are three ways to get there from here. First, take the time to earn and save the trillions and trillions of dollars that have been lost. This will take a very long time in a depression. Second could be to return to a system of a highly risky financial system supporting 30 to 1 leverage. Finally, the federal government could create more money by printing it. By my calculations the federal government needs quantitative easing of at least $10 trillion focused on purchasing U.S. Treasury bonds. No this will not create hyper-inflation despite the cries of the sky will be falling crowd as informed on history as Chicken Little.
Next, the U.S. government needs to replace the lost trust in AAA ratings by explicitly backing the asset-backed securities markets for jumbo mortgages up to at least $2 million and auto paper. They also need to include proper loans to subprime borrowers that have a job and can make a small down payment.
We need a real solution to the banking crisis by creating a “bad bank” that will take the troubled assets off of the books of the banks and we need unlimited FDIC insurance. This is because the banks need to absorb a large portion of the creation of credit formerly done by the shadow banking system, much of which has been lost for good.
Finally, we need a real solution for the millions that will remain unemployed. We should lower the eligibility age for full Social Security and Medicare to 60 and give everyone on Social Security a 20% raise. Rather than having millions of 30 year olds unemployed we should let millions of 60 year olds retire and open up the jobs for the younger people. This will be the ultimate form of stimulus for the economy. Yes, despite what you’ve been told the country can afford it. It will cost less than $400 billion per year which is paid for from the savings from interest payments on the national debt. The inflation in health care costs will need to be brought in line with the overall inflation rate whether or not the age of eligibility for Medicare is lowered.
World War II ended the Great Depression. The U.S. government generated spending in the economy equivalent to an $8 trillion stimulus plan for 4 years in a row. Unless something similarly large is carried out a downward path comparable to the 1930’s is inevitable. Despite the New Deal unemployment in the U.S. at the end of 1939 was still over 15%. Now does the political will exist in Washington to face this crisis head on?
