To the people in Washington, it wasn’t supposed to happen this way. In the last 3 years certain groups have been saying the wrong things about the recession and the possible solutions. All have made an attempt.
Republicans in Congress The recession happened because of too much spending. So we have to cut spending to get people back to work and the economy growing again.
Obama administration: The recession was caused from a collapse in the housing market and low capital requirements. With mortgage relief and higher requirements, providing a small, 2 year stimulus with an immediate pivot to deficit reduction is the proper economic action for growth.
Federal Reserve: The long-term growth prospects for the US are strong. Inflation is the greater worry over large unemployment. Any further quantitative easing would bring risk of inflation out if proportion to growth in productivity.
Well, the establishment’s solutions have all been tried and their views haven’t panned out. We had a temporary small-scale stimulus that provided economic growth until it ended in 2010. Now we have tepid growth.
We tried significant deficit reduction with health care reform and the debt ceiling deal. The long-term savings of health care reform were lambasted by the very people who claim to be most concerned about it and the demand of the Tea Party to tie the debt ceiling to significant spending cuts was judged by S&P to be handled so improperly and the cuts so inappropriate to the underlying causes that it downgraded America’s credit rating.
Quantitative easing worked the first time, was weaker the second time, but the Fed’s assumption in resumed growth is unlikely to occur now.
The Bond Market and the Slump
Bond yields are now at record lows. They have never been safer to purchase.
So why the sell off?
The market is no longer speculating about where the growth is going to come from, but that it is not coming. The establishment – all parts of it – have been wrong. The long-term growth prospects are not strong. Spending cuts are not the source of Finance’s concerns.
The Real Problem and the Solution
The middle class funded the last decade of growth on loans for houses they couldn’t afford. A long-term government stimulus program is the only policy tool left to take its place. Private finance does not have the resources to fund it. There isn’t much of a middle class left or new job holders to sell houses to.
The stimulus program should have three goals:
One, write off mortgage debt for the lower and middle classes.
Two, invest in employment grants for businesses, basically spend government money so private businesses can afford to hire new workers.
Three, implement as many infrastructure projects as is possible.
We should spend something like a trillion dollars a year for five years trying to do this. If we spend now, the bond market will reward us with an inverted interest rate on loans. We’ll have a better shot at saving our economy and make a return doing it.
There are other things we have to do to fix our long-term growth potential, but we have to move for stronger immediate and mid-term government financing first.
Obama was wrong, the Tea Party was wrong, let’s try the last alternative.