The financial sector ignited the global financial crisis with their excessive risk taking, poor lending standards and general disregard for responsible business/investment practices.  Of course, being “too big to fail” did contribute this crisis and that was a result of decades of de-regulation.  But those who are responsible for the global financial crisis have not been held to account for their actions in any shape or form.  If anything, they were ‘rewarded’ with trillions of dollars of taxpayer money. 

1)  “Too Big to Fail” Financial Conglomerates still exist and are some cases getting even bigger through purchases of other struggling banks.  There are no plans by the Obama Administration or serious legislative proposals to break them up.

2)  Huge bonuses continue.  Ken Lewis, former of CEO of Bank of America, retired with $83 million.  This after: 1) receiving $45 billion bailout and 2) possibly lying about Bank of America’s purchase of Merrill Lynch.  But Lewis is not alone, bonuses were still flowing across Wall Street despite $12 trillion taxpayer bailout.  The bonuses never stopped - Dick Fuld, CEO of now bankrupt Lehman Brothers, crashes his company and gets $22 million bonus in the process. 

3)  Credit Rating Agencies.  This is a big one.  Companies, like Moody’s Investment Services, were paid by securities issuers to issue credit ratings on the securities.  A very lucrative business for Credit Rating Agencies and an inherent conflict of interest - would you pay for a service if they are going to rip on your product?  Moody’s and S&P were glorified investment promoters.  Their credit ratings on many occasions were inflated and possibly misleading.  Unfortunately, too many investors (even experienced ones) relied heavily on these credit ratings. 

McClatchy News did a story back in October 2009 about Moody’s: How Moody’s sold its ratings.  This story didn’t get enough attention.  In it were some serious allegations made by former employees. Two of the same former employees quoted in the above story testified in a Congressional Hearing on the credit rating agencies: “Credit Rating Agencies and the Next Financial Crisis”, where they reiterated their allegations on the record and under oath. 

We are now hearing about pension funds and various state attorney generals suing the Credit Rating Agencies but these are civil lawsuits and are very difficult because the Credit Rating Agencies are using the “Freedom of Speech” as a defense.  But where are the criminal investigations particularly by the U.S. Attorney General’s Office?  Certainly these allegation raise the specter of mail/wire fraud under RICO Act or some other criminal fraud statute. 

Again, NO ACCOUNTABILITY.

First, investing in stocks is not for the faint of heart.  It can be a risky proposition and as quickly as you can make money is as quickly as you can lose it (I am speaking from experience).  There is no quick and easy way to start investing in stocks.  It takes time and a lot of research to do it right.

What is a stock or what is it that you are buying?  It is an ownership interest in a company - typically a very small fraction of ownership but it’s still ownership.  With this stock or ownership comes certain rights.  In the case of “common stock”, it’s typically voting for board of directors and some other very important corporate governing decisions.  Some companies pay (typically paid quarterly) dividends on stocks.  Dividends are a portion of the companies earnings and a company is not required to pay dividends.

Just like any other investment, what is the plan and the strategy for achieving the objectives of the plan?  This where the time and research starts.  We have to understand what we are buying? Why are we buying it? 

This requires a lot of reading and time.  Again, investing in stocks is not easy.  However, losing money in stocks is very easy. 

Where to start:

Websites:
Yahoo! Finance
Motley Fool

Books:
Stock Investing For Dummies - a good start.

Alternatives to Stocks:

There are alternatives to stocks but even these require some research:

1) Exchange Traded Funds (ETFs) - these are similar to mutual funds in terms of investment mixes but very different in terms of how they are priced.  An ETF is traded on a stock exchange and price changes very similar to a common stock traded on stock exchange where as a mutual fund has what is called a net asset value (NAV) that is not determined until the close of business or markets close.

2) Mutual funds - particularly stock index mutual funds such as S&P 500 Index Fund. 

Bottomline:  there is no such thing as easy money when it comes to investing in stocks or even investing in general. 

Good luck.

Here are some more numbers to chew on (HT Calculated Risk)

The economy has lost almost 3.3 million jobs over the last year, and 8.43 million jobs since the beginning of the current employment recession.

(emphasis added)

But the long-term job prospects are not any better.  This from the President’s own Office of Management and Budget projects the following Unemployment Rate:

2010   9.8%
2011   8.6%
2012   7.7%
2013   6.8%
2014   5.9%
2015   5.6%

First, President Obama can kiss his re-election hopes good-bye if unemployment is that high in 2011-2012.  Second, it is absolutely pathetic that this Administration would accept such horrible unemployment rate projections without offering much much stronger solutions.  They could do something about it but unfortunately won’t because this President lacks the courage and leadership to do it.

A Jobs Crisis like this one requires “overwhelming force” to be used.  We are in the hole - 8.43 million jobs.  The effectiveness of the weak and poorly designed American Reinvestment and Recovery Act of 2009 is wearing off and the $15 billion Jobs Bill currently in Congress is too weak as well.  We need something much stronger.

The deficit be damned.  We are facing significant long term consequences and social costs with high long term unemployment.  Now is not the time to be worried about the deficit.  With the private sector not producing jobs that leaves one sector left to fill the huge void - government sector.  Think about this: private sector is pulling back - cutting costs & jobs then have the government sector do the same (it already is happening at state and municipal level).  What do you think will happen?  This is NOT rocket science.

We need the following:

1)  Full payroll tax holiday - both employer and employee (new and existing) until economy starts growing;

2)  A cash infusion to state’s - $150 billion - to be distributed on a per capita basis; and

3)  A direct jobs program, followed by a Job Guarantee.

Good luck.

Further reading sources: Warren Mosler’s Proposals

PRIVATE SECTOR DEBT

1)  Households/Families (Debt is Evil for Families)

Mortgage debt - this is debt that is secured by or “borrowed against” the real property - home and land.  The actual mortgage document which is recorded with applicable local governmental authority represents that lenders interest in the real property

Credit card debt - this debt (vicious) is typically unsecured meaning the line of credit is not extended against any property - real or personal.

Auto loans - typically this loan is secured by the automobile. 

2)  Corporations/businesses

Commercial paper and notes - typically short term in nature and used to finance short term cash needs.

Bonds - long term debt typically used to finance capital projects.

Asset backed securities - debt that secured by a pool of assets such as mortgages or some other asset that offers a stream of cash

Corporate/business debt can be unsecured and secured.  There can be various layers of “claims” or priorities to payment on debt.  Corporate/business can be very straight forward or very complicated.

GOVERNMENT SECTOR DEBT

1) Municipal, state and local agencies - typically these entities issue debt in the form of long-term bonds that are either “general obligation” or “revenue”.  “General obligation” bonds means that the payment of the bonds is backed by the credit and taxing authority of the entity.  “Revenue” bonds means payment of bonds is backed by a certain revenue source such water/sewer fees or toll road revenue.

2) U.S. Treasury Securities - U.S. Treasury Department issues Treasury Bills (1 year or less), Treasury Notes (2 to 10 years) and Treasury Bonds (20 and 30 years).  The payment of these debt instruments is backed by the “full faith and credit” of the U.S. Federal Government

WHAT’S THE DIFFERENCE?

Private Sector vs. U.S. Federal Government - The reason why the debt is different is that private sector debt has limitations on sources of payment - meaning limited resources.  If the private sector exhausts those resources or has negative “net worth” (liabilities are greater than assets) it will be declared insolvent and may be forced into bankruptcy.  Federal government does not have such a limitation and NO ONE can force the federal government into bankruptcy.  In fact, there is no legal procedure for bankruptcy of federal government - it’s just not possible.

Municipal & state Sector vs. U.S. Federal Government - Similar to above.  Municipal and states have limited resources and there is a bankruptcy procedure for municipal bodies - Chapter 9 of U.S. Bankruptcy Code.

U.S. Federal Government vs. Greece, Spain or most EU Countries - the difference is huge.  U.S. has a monopoly over issuance of currency.  EU countries do NOT - they belong to a “monetary union” - based on the Euro (except for England which still has its own currency) and the issuance of Euro is determined by the European Central Bank.  The other major difference is that U.S. issues debt in its own currency (dollar) and again because of the “monetary union” Greece, Spain, Ireland and Portugal do not have such benefit.

All debt is not the same.  Any one who is claiming otherwise either is clueless as to how our financial system functions, a neoliberal/conservative economist (but are also clueless) or has a financial position in some securities that they are trying to protect (ie. - short selling U.S. Treasury futures or owns sovereign debt credit default swaps). 

Good luck. 

Senator Judd Gregg trotted out this whiny statement regarding the economic stimulus in an interview with Financial Times:

The facts are wrong.  I can understand how a Keynesian would make that argument.  I find them absurd on their face.

 
LOL. Senator Gregg and other conservatives will whine like this but will not provide any evidence to the contrary.  But it’s not just Keynesians that are making the argument that ARRA helped the economy.  A majority of economist surveyed by USA Today said that ARRA helped the economy when it needed it. The Congressional Budget Office even estimated that in 4th quarter 2009 ARRA had the following impact:

• Raised real GDP by between 1.5 percent and 3.5 percent,


• Lowered the unemployment rate by between 0.5 percentage points and 1.1 percentage points,


• Increased the number of people employed by between 1.0 million and 2.1 million,
and

• Increased the number of full-time-equivalent jobs by 1.4 million to 3.0 million compared with what those amounts would have been otherwise.

Oh, BTW, the least effective aspects of ARRA according to CBO report: tax credits for first-time homebuyers and tax cuts for higher-income people.

Just think if the ARRA was designed properly and its goal was Full Employment instead of just to get something done.  What would a better designed economic stimulus look like.  First, no money for tax cuts - there is not a lot “bang for the buck” with them.  Second, more money on infrastructure investment - especially new schools.  Third, a Direct Jobs Program like the New Deal Era WPA and CCC which would lead to a Job Guarantee Program.  An economic stimulus plan along these lines would eliminate the need to ask for more like Democrats are doing now with this new “Jobs Bill”. 

And as for the federal budget deficit - economic growth does wonders for people’s concern about the budget deficit.  The biggest thing affecting the budget deficit right now is the lack of tax revenue.  We can address this with FULL EMPLOYMENT economic policies. 

Good luck. 

As a little review: this is what the Consumer Financial Protection Agency (CFPA) should be. 

Today (2/25), there are reports in the media (here and here)that the Obama Administration is ready to ‘compromise’ on the CFPA and not insist that CFPA be an independent agency and instead make it part of another department or another agency.  Financial conglomerates/lobbyists will be very happy with that because it makes it much easier to render CFPA ineffective.  This is what Elizabeth Warren, a long-time advocate for CFPA said:

“The CFPA is the heart of what makes regulatory reform work,” Warren said in an interview with the Huffington Post. “The consumer credit market is where the biggest abuses were. It is where families will be most directly affected and it is where the American people will see change. CFPA is how to make clear that regulatory reform is for them, and that it isn’t a game among insiders.

“We just can’t pass a regulatory reform bill that acquiesces to the industry on every front and where everything is so watered down that nobody has to take a hard vote,” she said.

“It’s not ok to weaken the agency so much that, while everyone can vote yes and pretend to support consumers’ right to a fair deal, nothing really changes. I want a strong agency, and if there’s not going to be a strong agency, then I at least want to see an up-or-down vote on it. Let’s see a vote.”

The “compromise” the Obama Administration is considering would weaken the CFPA to the point that “nothing really changes”. 

But this has become a very disturbing pattern on the part of this White House.  It either, campaigns on, talks about, or proposes ‘progressive’ or ‘populist’ ideas but when push comes shove - forget about it.  This administration won’t fight for what they talk about - instead we see more “compromise”. 

Examples:

1)  2009 Stimulus - Christina Romer, Chairwoman of President’s Council of Economic Advisers, advised back in November-December 2008 that it would take $1.2 trillion in stimulus to have an effect on economy.  Guess what, Obama proposes and much smaller stimulus bill then compromises even further by agreeing to more tax cuts (least bang for buck) than job creating programs such as infrastructure building.  Oh, BTW, it looks like we are getting a second stimulus - in the form of a “jobs bill”.  Why didn’t they did it right the first time?

2)  Health care reform - Obama campaigns on public option (despite what he says now) then during the spring and summer sends all kinds of mix messages about whether he still supports public option or even is willing to fight for health care reform meanwhile a vocal minority grows more influential.  Today, Obama is not willing to fight for the public option and instead is willing to FORCE (by law) working class families to buy over priced and expensive private health insurance.

3)  Financial regulatory reform - besides CFPA, as a means to appear like it was not favoring Wall Street too much - it proposes the “Volcker Rule” - very late in the game.  It was all show - now comes word that it will even “compromise” on that proposal. 

These are three huge agenda items - all with significant ‘compromises’ to them.  He is certainly not doing anything to help us with these compromises.  Question: is there anything this Administration is not willing to compromise on? 

Good luck.

We are much to blame for allowing financial conglomerate/big banks to suck the money from our pockets.  There are alternatives - community banks and credit unions.  We really don’t need them.

Besides, continuing to do business with this vampires we also are to blame for allowing them to gouge us with overdraft fees.  Overdraft fees are a huge money maker for financial conglomerates/big banks.  With proper budgeting, monthly balancing of check book, and knowing where our money is going we should NOT be giving our money to these vampires in the form of overdraft fees.

Now, comes word that financial conglomerates/big banks, in there quest to maintain their ginormous, ‘too big to fail’, size they are pulling out the stops to defend their sucking of overdraft fees from us.  First, this from the New York Times:

As the government cracks down on the way banks charge fees for overspending on debit cards, the industry is mounting an aggressive campaign aimed at keeping billions of dollars in penalty income flowing into its coffers. Chase and other banks are preparing a full-court marketing blitz, which is likely to include filling mailboxes with various aggressive and persuasive letters, calling account holders directly, and sending a steady stream of e-mail to urge consumers to keep their overdraft service turned on.

Starting this summer, banks must get consumers to agree, or “opt in,” to a service covering purchases on a debit card when there is not enough money in their account. The Federal Reserve has ordered the same restriction for banks that want to let people withdraw more than their balance at an automated teller machine. Many banks now automatically provide such coverage for fees of up to $35 or more.

This graph, from the above NYT article, give you an idea of what they are defending:

Then comes word of an even more insidious move by big banks: Banks May Use Payday-Style Loans to Replace Lost Overdraft Fees:

U.S. banks may expand their short- term lending at interest rates of 120 percent or more as they seek to replace more than $15 billion in lost revenue because of regulations limiting overdraft fees.

“The smarter banks are trying to resell overdraft protection to consumers as a different product,” said Elizabeth Rowe, group director of banking advisory services at Mercator Advisory Group in Maynard, Massachusetts.

Guess what, they are not going to call them “payday loans” because of the “tarnished negative brand” of these predatory financial products.  “Payday loans” are not different than the a juice loan from a loan shark.  Interest rates anywhere from 120% to over 300% per annum. 

Every day these financial conglomerates/big banks give us a reason to move our money.  If Congress and the White House are too scared to take on the financial conglomerates/big banks then it is up to us to do by changing our banking relationships.  But, even if we do that there are things we still must do:

1) Monthly Budgets and stick to them; and

2) Balancing our check books.

Good luck.

The following Huffington Post article provides a good summary of what we should know about the new law:  New Credit Card Laws: What You Need About Rates and Fees.  The changes center on disclosure, rate changes, service fees, grace periods, treatment of credit card defaults and college students.  It’s a good read.  Please check it out.

For a good article about how the credit card industry is dodging reforms, check this one out by the Center for Responsible Lending:

Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate

Remember: DEBT IS EVIL

Good luck.

We have been conditioned through the media and politicians that all three are the same.  They are NOT.  Why?:

1)  Federal government has a monopoly over issuing its own currency.  Don’t you wish you can print money or credit bank accounts at will - for us that’s illegal?

2)  Federal government has the power to tax.  Sure, we can work for wages or earn profits but there are surely more constraints on the two than federal government’s ability to tax.

3)  Federal government cannot go INSOLVENT.  I know, I know, as much as we hear it in the media about the looming insolvency of the federal government - IT CAN’T HAPPEN.  Sure there are other things that could happen like severe devaluation of U.S. dollar or severe inflation but insolvency - NOT POSSIBLE.  But insolvency is a real possibility for households and businesses as we are sadly all to familiar with during this Great Recession.

Did you know the following fact courtesy of Prof. L. Randall Wray:

The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.

Got that - significant reductions in debt and budget deficits PRECEDED every depression period in the U.S. and still may happen again - particularly if the deficit hawks have their way.  Now, this may be very hard to digest for many people but here is another fact:  the U.S. has been in debt every year since 1776 - that’s added for some perspective.

There will be someone who reads this and accuse me of being “a tax and spend ‘libural’”.  To that I respond: your intellectual capacity is severely limited and bullshit.  Distinguishing between the federal government, households and businesses is important to understand if we are going to see a real economic recovery with job growth.

What this does NOT mean is that all government spending is useful or not wasteful.  The federal government should NOT just spend to spend.  The following are very important standards for government spending:

1)  That it should advance a public purpose - bailing out the financial oligarchy without regard to homeowners is NOT advancing a public purpose; and

2)  The goal for government spending should be to generate Full Employment - yes that means jobs, jobs, jobs for anyone capable, old enough and willing to work - either in private sector or more likely in the public sector.

Sure, these statistics or ratios comparing debt to GDP or budget deficit to GDP are ugly and scary but they are only scary because GDP (a measure of our economy’s strength) has tanked and the Wall Street bailout has helped.  Economic growth, as reflected in an GDP increase, has a way of curing a lot of concerns.  The federal government’s emphasis should be on economic growth and putting people back to work instead of concerns over the budget deficit.

I leave you with the following from Prof. Wray:

I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?

Good luck.

First, it's a matter of principal and accountability. The big financial conglomerates acted irresponsibly by 1) relaxing loan underwriting standards in an insatiable quest for more mortgage loans to securitize; and 2) ignoring, in the quest for higher profits and higher returns, the concepts of risk management. Then policy makers in Washington fearing a complete economic collapse bail them out (essentially, reward them) with trillions of dollars with "NO STRINGS ATTACHED." And what do these financial conglomerates do? Do they do what is in the best interest of the country? No, they plow/leverage the taxpayer money into more risky trading schemes to earn them record profits. A good thing right? Not really, these "Too big to Fail" financial conglomerates get even bigger post-financial crisis and possibly even riskier with trading schemes. The right thing to do would have been to shed the toxic assets on their books as quickly as possible so that they can start lending again. But noooo.

Since policy makers are either fearful to oppose the financial conglomerates or are owned by them, it is up to us to send the message of accountability. One big way to hold financial conglomerates accountable is by moving our money - changing our banking relationship. Again, Move Your Money website provides very useful information, particularly a Checklist, on moving our money.

Second, move for a better experience. Small financial institutions can offer a much better customer experience than an impersonal financial conglomerates (they really don't need our money anyway). In the case of credit unions, and based on experience, they can offer much lower fees, better rates, and same services than a financial conglomerate.

Well, these financial conglomerates are typically "Bank Holding Companies". A Bank Holding Company is a bank that is allowed to own more than one bank. As a result of de-regulation, starting with Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 with allowed Bank Holding Companies to own and operate banks in different states and Gramm-Leach-Bliley Act of 1999 which allowed Bank Holding Companies to own non-depository institutions such as investment banks, securities brokerages and insurance companies, "Too Big to Fail" institutions began to form.

The following are the Top 10 Bank Holding Companies based on total assets (as of 9/30/2009):

And how much taxpayer bailout money did these financial conglomerates receive (note - only 6 of 10 are listed - HSBC, Taunus & Barclays are foreign bank holding companies, Metlife didn't take any):

Cititgroup is the only one that has NOT paid back the bailout money. Also, there were other government programs in forms of bond guarantees and low interest rate loans that greatly benefited the financial conglomerates and are not reflected in the above numbers. This was a multi-TRILLION Dollar effort on the part of the federal government.

Here are two videos I did a couple of years ago:

This depends several factors. First, proximity or access to alternatives such as community banks or credit unions. Move your Money website has a directory INCLUDING a list of "most sound" community banks. Second, quality of services provided such as free online banking and ATM networks. Third, the fee structures - what are the various service charges. Shopping around and asking questions are absolutely important.

Moving your money could be a rewarding experience on two levels: 1) sending a message that financial conglomerates must be held accountable and 2) saving money on bank fees, particularly in the case of credit unions.

Good luck.

How does government do it?

Through the tax code, international trade agreements and helping keep wage growth to minimum.  Look how effective government policies have been at redirecting income upward (graphs courtesy of the Center for Budget and Policy Priorities):

The choice is do we want a government to redirect income upward or downward?  How would government redirect income downward?  One way is a more progressive tax code.  Second way is through social programs such as ones that help make college more affordable for working class families and access to affordable health care.  For those in the middle consider this: redirecting income downward usually means strengthening the social safety net (not the welfare programs of 1970s & 1980s).  So if you lose your job or small business fails there would be a social safety net to help you and your family.  The challenge is making government work in the most efficient and productive manner and in favor of the most people as possible.

There are those who believe the government should not be in the business of redirecting income.  These people believe that government’s sole purpose should be to protect private property interests - basically providing law enforcement and national defense only.  Sure, and the ‘free market’ will take care of the rest.  Right, and I have ocean front property to sell you in Nebraska.  Leaving the government out is a sure way to a caste system - a system with no economic mobility (“climbing the ladder”). 

Good luck.

The economic policy is called “neoliberalism” or “neoliberal”.  Those who were proselytize neoliberalism do not want to destroy or intentionally harm lower and middle class families but that has been the result of this flawed ideology.  An ideology that believes that “markets” and private enterprise are perfect and should be free from government intervention.  Neoliberals have used euphemisms such as “Trickle Down Economics” and “Supply side Economics” to promote their policies. 

The major flaw of neoliberalism is the notion that markets are perfect and should be ‘free’.  We, meaning people, create markets.  We operate in markets and as we all know we are far far from perfect.  Markets and private enterprise reflect our imperfections and government does as well.  Human nature is very prone to destructive forces such greed.  This utopian belief may work well if we all started out as equal - that we all had an equal opportunities to succeed.  We don’t.

There are other terrible flaws to neoliberalism: Efficient Market Hypothesis, markets tend to equilibrium, Capital Asset Price Model, Monetarism - basically much of the economic philosophy and theories that have emerged from the University of Chicago.  Neoliberalism has been a destructive force in our economy.  It has resulted in economic policies that redirected income upward and reconsolidated wealth and power at the top. 

The consequences of Neoliberalism can be best described in terms of the Neoliberal Policy Box that Dr. Thomas Palley has described:

Globalization, as exercised by ‘free trade’ agreements and free movement of capital across the globe, has resulted in American workers competing with lower-paid foreign workers many with lower standards of living than Americans.  The emergence and growth of multinational corporations (MNCs) has resulted in the exploitation of natural resources and human resources without paying for the social costs they create.  Neoliberal policies, through globalization, created a means to put downward (deflationary) pressure on wage growth for American workers.

Small government “policies undermine the legitimacy of government and push privatization, deregulation, and light-touch regulation.”  Sound familiar and what has resulted - huge no-bid contracts to companies such as Halliburton and Blackwater just to name a few, the calls for privatization of Social Security and Medicare, and a mortgage/financial crisis.  How easily we forget?  Now, we are hearing more talk of ‘small government’ and “freedom”.  For what, so that people with money and power have the freedom to do what they wish including crashing the entire global financial system.  And who is left to pick up the pieces and suffer the consequences - lower and middle income tax payers. 

Let’s be clear what “small government” really means.  It means the decimation of what meager social safety net we have in this country.  It means the destruction of government programs that invest in people whether through health care or education. 

“Small government” doesn’t necessarily mean less taxes.  There is a “trickle down” effect to neoliberal policies but it was not as intended or was it?  Cuts in social programs and even law enforcement programs at the federal level has a trickle down effect that gets magnified in bad economic times.  Less money flowing from federal level to state and municipal level for needed education, law enforcement, training programs or even small business assistance means those burdens fall on state and municipalities.  The states and municipalities are faced with either cutting these programs or keeping them and raising local taxes.  In the end, lower and middle class families pay a price whether through higher local taxes or the loss of needed programs.

Labor market flexibility,

involves attacking unions, the minimum wage, unemployment benefits, employment protections, and employee rights. This is justified in the name of creating labor market flexibility, including downward wage flexibility, which according to neoliberal economic theory is supposed to generate full employment. Instead, it has led to wage stagnation and widening income inequality.

And how has this labor market flexibility fared in our current economic crisis:  U6 unemployment at 16.5% with duration of unemployment increasing - not too good, actually that’s horrible.

Less than FULL EMPLOYMENT.  According to the Federal Reserve Act:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

It’s possible to achieve FULL EMPLOYMENT and stable prices but the Federal Reserve abandoned the goal of FULL EMPLOYMENT and instead emphasized keeping inflation low:

This switch was promoted by the economics profession’s adoption of Milton Friedman’s notion of a natural rate of unemployment.  The theoretical claim is that monetary policy cannot affect long-run equilibrium employment and unemployment, so it should instead aim for a low and stable inflation rate. In recent years, that argument has been used to push the adoption of formal inflation targets. However, the key real-world effect of natural rate theory has been to provide the Federal Reserve and policymakers with political cover for higher actual unemployment, which has undermined workers’ bargaining power regarding wages.

What is needed?

The best economic policies provide a good balance between government participation in economy whether in the form of regulation, fiscal policy or monetary policy and private sector participation in the economy.  Too much or too little participation of government or private sectors is not good.  Right now, we have a private sector that is not producing jobs and we know through fiscal policy that the government can help (contrary to neoliberal theories). 

Our current economic crisis is the result of neoliberal economic policies that pushed deregulation, wage deflation and unfettered globalization.  This led to powerful and influential MNCs and huge financial conglomerates.  It resulted in huge bailouts for financial conglomerate and very little help to low and middle class families.  How easily we forget?

First, let’s look at our current economic situation:  9.3% unemployment (reported), 16.5% REAL unemployment (U6),  economy is not operating at full capacity, and interest rates are relatively low.  A pretty weak economy overall.  Basically, we have a private sector that is still not generating jobs and the demand for products/services is not high enough for private sector to create jobs.

If we want to jump start the economy so that private sector can start creating jobs what can we do?  That’s right the only other player in the economy that is in a position to do something is the Federal Government through the use of fiscal policy.  It’s not the first time that Federal Government did this.

The Federal Government is a very unique entity.  It has a fiat currency system and the ability to issue debt in its own currency.  It is NOT like a business.  The Federal Government cannot go bankrupt or be forced into insolvency.  These are legal fictions that Deficit Hawks and gold bugs like to use to scary people. 

This doesn’t mean that everything is A OK.  Yes, there still can be wasteful government spending and inefficient programs.  Yes, budget deficits can be a problem IF, and big IF, our economy is operating at full capacity and at FULL EMPLOYMENT.  This is when government spending becomes inflationary.  But, we are far far far from FULL EMPLOYMENT and we are not operating at full capacity. 

Read what Nobel Prize winning economist Prof. Paul Krugman said about this deficit hysteria:

The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.

Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.

Here is the thing.  The biggest problem right now with the budget deficit is the effects from the Great Recession - primarily a huge decrease in tax revenue and of course bailout of Wall Street didn’t help.  Check this out:

The above graph is total tax receipts.  Not a good picture.  But how does this picture and the overall budget deficit situation improve - that’s right - by putting people back to work.  But that will require more government spending either in the form of tax incentives such as Full Payroll Holiday or a direct jobs program.  As Prof. Krugman says:

The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.

Our government is in a unique situation to do this until the private sector can start generating more jobs. 

But why the hysteria?  One, politics, the Republicans will do anything to prevent the Obama Administration from succeeding even if this means hurting the rest of us.  Consider this, how many of these Republicans who are doing their impressions of Chicken Little regarding the budget deficit voted in favor of the Bush’s huge tax cuts to the wealthiest Americans that added hundreds of billions to the federal budget deficit back in early 2000s.  Even worse, who oppose strong health care reform which would help rein in medicare costs and reduce the budget deficit in the future.

Second, there are those Deficit Hawks in both political parties that are driven by the destruction and privatization of Social Security and Medicare.  The calls are already starting:

New GOP Agenda Debuts
Game On?

Believe me, there are Democrats who would like to privatize Social Security and Medicare in order to benefit Wall Street and insurance industry campaign contributors.  Just beware when these Chicken Littles start crowing about the deficit.  It usually means that they really don’t have our interests in mind.

Good luck.

Well, guess what?  These triggers have NEVER been adjusted for inflation!  My modest proposal is that it’s time to do so, as a way of helping the very lowest income seniors. 

Of course, this would slightly reduce federal income, but the small extra amounts going into the pockets of low-income seniors would be an excellent stimulus because it would probably all get spent on basics.  By contrast, the $250 payment that all social security recipients received in May, 2009 was not means tested and it went to plenty of people who didn’t need it at all.  To compound the absurdity, the Social Security Administration already has on file the adjusted gross income of all benefit recipients 65 and older because they use this to determine the amount of the Part B Medicare premium.

Bottom line: While the $250 giveaway was designed to reduce political heat, it was basically irrational, but the more effective help for truly needy seniors in the form of inflation indexing of the income tax triggers goes unconsidered.

The true costs of unemployment include economic, social and personal costs.  The economic costs are very tangible: loss of aggregate demand (GDP), loss of income, increased income inequality, higher bankruptcy rates and foreclosure rates, even more debt both formal and informal, and underemployment are some that come to mind.  The economic costs are fairly quantifiable.  Then there are social and personal costs:

1) Increase crime
2) Political instability
3) Mental health issues including increase in suicides
4) Diminished health standards due to loss of employer provided health insurance
5) Skill loss
6) Negative effects on family life and community interactions

These costs are harder to quantify but they definitely are present.  The problem for U.S. economy is that the true cost of unemployment has been accumulating since 2000:

The above graph shows the upward/increasing trend of median duration of unemployment in weeks.  In 1999, median duration of unemployment was 5.8 weeks.  Today, it is 20.5 weeks.  No surprise, the number of people who have been unemployed for longer periods of time has been increasing as well:

This is a very desperate picture for our labor force and millions of families across the U.S.A.

Contrary to what the dominant economic policy preaches, federal government’s fiscal policy can have an impact on the economy and unemployment.  According to USA Today’s exclusive report, a majority of “Top 50” economists surveyed said that the economic stimulus passed in February 2009 had a positive impact on the economy. 

Unemployment would have hit 10.8% — higher than December’s 10% rate — without Obama’s $787 billion stimulus program, according to the economists’ median estimate. The difference would translate into another 1.2 million lost jobs.

Also from this USA Today report, two-thirds of the economists surveyed believed that the government should do more to spur job growth.  The federal government can do more.  It did it in response to the Great Depression in 1930’s.  We are not talking half-ass, weak and poorly designed economic stimulus from February 2009.  We need fiscal policies that have a goal of FULL EMPLOYMENT - a full out war on unemployment.  We are talking direct jobs programs that address our needs, such as WPA or CCC, and a full payroll tax holiday.

In terms of fiscal policies, we are not getting anything close to FULL EMPLOYMENT from the Obama Administration.  Take a look at the Office of Management and Budget unemployment projections:

(H/T to Prof. Paul Krugman: A Depressing Budget)

The above graph shows the administration expects high unemployment for years to come.  It doesn’t have to be this way.  This graph shows the Obama Administration is choosing to ignore the true cost of unemployment. 

Why the choice?  A weak attempt at budget deficit reduction.  So, we have the business sector and households cutting back and now, the government sector.  This doesn’t bode well for a strong recovery or much of any kind of recovery.

Good luck.