Economic stimulus plan.

George Bernard Shaw once wittily quipped that "if you took all the economists in the world and laid them end to end, they would still not reach a conclusion." Fortunately for us, there is one issue for which this quote does not apply. According to the Associated Press of February 4, 2008, an economic aid plan to send rebates of $600-$1,200 to most American taxpayers passed in both the House and Senate. Now, all the remains is for both legislatures to kink out the differences between the two versions of the bill and put the law into effect. At a time when the Federal Reserve has reduced the interest rate by three times within the past two months and the stock market has now been classified as a "bear market," meaning a twenty percent fall in value from its last peak, and the economy of the United States is officially entering into a recession, the government's fiscal aid plan is welcome news to all. Nevertheless, will this plan succeed? I would answer no.

First, the economic aid package's indirect nature makes it ineffective at stimulating the economy. As Daniel Deneen of the Bloomington wrote on February 3, 2008, an economic stimulus plan in the form of tax rebates is indirect at best. The government's expectation that American's will spend the money on Americans goods and thus stimulate the economy is flawed because it does not necessarily ensure that goal. The Business Week of the same date also notes that Americans tend to save in times of economic hardship. However, this trend is the exact opposite of what is needed to get the economy back and running. Furthermore, even if Americans spend them money saved from the tax rebates, there is no guarantee that that money will be retained by American companies. The Pantagraph believes that "the majority of the funds will probably end up being spent on electronic goods from Asia, oil from the Mideast or Venezuela, the lottery, riverboats or exorbitant charge card interest and fees." The only way for the government to truly stimulate the economy is for the government to pass a "New Deal"-like bill, to directly pump money into the American economy. Thus, the current stimulus bill fails because it does not directly ensure that it will stimulate our economy.

Second, the stimulus plan will not fix the economy because it is only a temporary fix to a problem that needs a permanent fix. As the Economist of February 3, 2008 notes, the current recession and economic crisis America is facing primarily stems from the credit crunch. The only real way, the magazine argues, to solve the economic problem we are facing is not to pass temporary measures, but to target the structural deficiencies in the market. The Forbes of February 5, 2008 reports that current Secretary of the Treasury, Henry M. Paulson said while a stimulus bill might be a temporary solution, it does not provide a real solution: "My apprehension is that with unemployment at 4.9 pct, to extend benefits would be unprecedented and would send a message to the world that I think would be the wrong message." Furthermore, Paulson claims that simply giving off tax rebates and other forms of savings to Americans will only make them dependant on government funds and the economy will continue "to worsen to the point that it stops growing and the problem becomes more severe."

Which leads me to my third point, this bill could potentially worsen the current economic situation of America. As previously mentioned, the root of the problem is too much credit. However, part of the economic stimulus package increases to the maximum loan limit eligible for purchase by Fannie Mae and Freddie Mac to $729,750. While the point of this section is to encourage businesses to invest money easily, it ignores the root of the problem. Thus, the seed for another credit crunch has been replanted by this economic stimulus package. Investor Morgan Housel of the Motley Fool wrote on February 5, 2008, "The reason we're in this mess has nothing to do with consumers not spending enough money. If anything, it's that we spend far too much money and finance it with fictitious real estate valuations." The problem, thus, with this economic stimulus package is that it could potentially worsen the economy is another credit crunch is allowed to manifest.

Recession?!?!?!!

oh no! a recession? That's not so good....

On November 5th, billionaire investor George Soros stated on November 4^th that the U.S. economy is "on the verge of a very serious economic correction" because of the credit crunch and other economic problems in our nation. He elaborated his belief at a lecture at New York University. Are we really on the verge of a recession? Let's look first to how the businesses of our nation are responding to our current economic situation.

Business reactions indicate that businesses are not confident in America’s economy in the near run and that many predict a recession on the loom. At the Reuters Finance Summit in New York earlier today, Howard Lutnick, CEO of Cantor Fitzgerald, told fellow business peers that “ there is a serious risk to the economy" that a recession will occurs because of the credit crunch. The CNN Money of October 20, 2007 notes that the credit crunch has already severely weakened the mortgage industry and by extrapolation, the housing market. The Wall Street Journal further explains by saying that this crisis is slowly spilling into other sectors and has weakened the economy to the point where widespread defaulting is occurring. In fact, the credit crunch has forced many businesses to absorb the defaults of hundreds of thousands of Americans, with a current bill of up to $700 billion. Given such economic factors, it’s no wonder why John Duffy, current chairman and CEO of stock brokerage Keefe, Bruyette & Woods, said believes out economic status in the near future to be "In the toilet."

How about the consumers? Consumer confidence has been dropping as well, indicating that the economy is not doing as strongly either from a consumer perspective. Indeed, the October 30, 2007 Retuer’s headline was “Consumers gloomiest after Katrina aftermath.” In the article, it notes that the consumer confidence index dropped about 4% below what was estimated by leading economists at the time, even when such economists believed they had taken the current credit crunch and housing bubble woes. This finding has shocked many investors into believing that other consumers are losing faith in the current state of our economy, which is one of the first steps to a recession. Pierre Ellis, a senior economist at research firm Decision Economics is fearful that this statistic reflects the fact that more Americans are saving and that less are spending: "Consumers are definitely getting more gloomy. The question is whether that will be reflected in their spending." If consumers are spending less because of their decreased confidence in the economy, then a vicious cycle will begin that will inevitably lead to a recession. This statement links me to my third and final point.

But of course, nothing is as important as demand in predicting our economic situation. Consumer demand is decreasing, which is a sign of a looming recession. It seems that Mr. Ellis’ fears are coming true and that Americans are spending less. The Reuters of October 25, 2007 reports that a recent study found that demand of long-lasting manufactured goods dropped unexpectedly in September continuing into October. Such goods include cars, computers, machines, tables, and other goods that are non-consumable. The Economist of November 5, 2007 notes that such an indicator might suggest that our economy is on the verge of a recession since a recession, by definition, is when the economy slows down due to decreased demand for goods. However, the Fox News of the same date noted that the study did not necessarily indicate the threat of a recession because consumable goods were still faring strong. The problem with this analysis though is that since consumable goods are elastic on balance, meaning consumers must buy them in order to survive, the non-durable goods market typically is second to decline in demand in the face of a recession. However, the fact that the demand for durable goods is declining is reason enough to be suspicious of an impending recession.

While economists have certainly been wrong before and where sunny weather was to be, torrents of rain came instead, given enough information, their predictions will be right. Thus, when we ask ourselves the vital question: “Are we looming on the verge of a recession?” the answer is a firm yes. Unfortunately, based on the three key market factors of business reaction, consumer confidence, and consumer demand, it is clear to see that our economy is on the verge of a recession.

Credit in America: Part 2

While the housing bubble has not entirely popped and the negative effects of the rapid overheating of the housing market will still be felt for sometime, the worst of the the popping of the bubble is over.

However, the credit crunch is an entirely different beast. The article here is about the credit crunch and it re-sparked my interest in the current credit situation.

What can we do to solve the credit crunch? Obviously, credit has become all too easy to get, with so may different types of credit options such as neg-am, subprime, etc that allow even people of lower socioeconomic and thus lower credit scores to obtain loans. While I believe that credit should be available to people of all socioeconomic statuses, credit is too easy to obtain.

The Federal Reserve of last year noted that consumer credit debt is around 11 trillion dollars. That's a lot of money not being paid back. This strain is felt by the families in debt possibly going to bankruptcy, by the lending institutions who have to pay the costs, and the economy as a whole.

It's a lose-lose situation.

So what do we do?

1. Enact usury laws.
2. Actually enforce our the pre-existing laws we have to prevent corrupt lending techniques
3. Tighten credit standards so that consumers who won't be able to pay back won't get the loans to begin with.
4. Install a government program to give credit with little to no interest topeople with lower socioeconomic status based on willingness to work so that they can get the basic necesities to establish themselves in a location.
5. Make a law so that banks and lending institutions better explain their loan programs to consumers and help them plan a fiscal plan to make sure they can pay back the loan in a timely fashion.

Credit in America: Part 1.5

Oh and also, don't get me wrong when I'm saying the worst of the housing bubble's over. It doesn't mean I believe the credit crunch in America is over. Ohhh no.

Credit in America: Part 1

Well, after all the chaos that's been present in my life has somewhat subsided, I can finally begin to write a new post on this blog. =]

Here is part one of my diatribe on credit in America... after this section, I plan to go to address the issue of organic food.

So, today's question on credit relates to the industry hit hardest by the rapid and easy growth of credit in America- the housing industry. Earlier this summer, our stock market took a huge hit in on day. Economic analysts attributed this plunge to a bursting of the housing bubble. The question now is... is the worst of this bubble over?

To a large degree, I'd have to say yes. Here are three reasons why I feel this way.

First, the response of lending institutions to the housing bubble reveals that the housing bubble is starting to rescind. As the CBS News of September 20, 2007 reports the current housing market was largely in part created by the reckless and lax lending policies of lending institutions, namely the subprime lending branch of such institutions: “Banks used to … be careful (often too careful) not to issue a mortgage the borrower could not pay. In the current market [banks spew them out].” Furthermore, as the Wall Street Journal of August 21, 2007 adds, the lending institutions of today hardly even bother to do a background check on the people who are requesting to borrow money from them. All of these factors contributed to the overheating of the housing market, as consumers were able to obtain record-high amounts of money on credit and use that money to buy houses. A Federal Reserve report of March 2007 noted that in 2006, total outstanding consumer credit totally around 11 trillion dollars, which is larger than the current federal debt. However, with the housing bubble popping in summer of 2007, lending institutions have begun to reverse this trend. As the Fox News of CNN of October 2, 2007 reports, lending institutions have already lost 10% of all their subprime loans due to consumer delinquencies and bankruptcies resulting in banks having to foot around $346 billion in defaults. The article also notes that around $700 billion in loans are in risk of going sour for banks and that’s a lot of money. In the face of so many loans potentially going south, banks and lending institutions are tightening their credit standards to ensure that only credit-worthy consumers can get loans. The significance of this trend, as the Fox News of October 3, 2007 notes, is that the housing bubble will start to rescind as less credit is being pumped into the housing market, thereby cooling the industry and decreasing the bubble.

Second, government response to the housing bubble will ensure that the worst of this crisis is over. As the Economist of March 20, 2007 reports, the US federal government had hearing in the Senate Committee on Finance regarding usury laws and credit practices to solve the housing bubble. The primary preliminary result of this hearing was a stern commitment by the government to reduce credit to decrease the housing bubble. One example of this policy can be seen in Freddie Mac and Fannie Mae’s, two government-sponsored lending powerhouses, decision to cut support of subprime mortgage lending. In addition, as the CNN of October 2, 2007 reports, the federal government has been considering enacting stricter regulations upon banks to make sure they do a more though investigation of potential borrowers and their credit score before approving loans to decrease the number of loans given to consumers. Furthermore, the Washington Post of March 15, 2007 notes that the government has enacted new criteria on consumer bankruptcy laws to discourage consumers from obtaining loans they know they will not be able to afford. All of these policies indicate the federal government’s attempt to reduce credit in the economy to cool off the housing bubble. Since these policies have been implemented or are in the process of being implemented, the US economy will being to recover from the housing bubble.

Lastly, current market indicators show that the market once again has confidence in our economy and thus the worst of the housing bubble is over. As the International Herald Tribune of October 4, 2007 reports, consumer confidence in the US economy rose by almost nine percent this past month, indicating a widespread belief on the part of investors and consumers that the worst of the housing bubble is over. Peter Morici, an economist and business professor at the University of Maryland said that "consumers are cautiously more optimistic than a month ago. There is a growing sense that the credit crisis is resolving. It is not wholly resolved but it is resolving." Furthermore, the Federal Reserve’s decision to cut interest rates by a half percentage rate is another market indicator revealing a belief that the worst of the housing bubble is over. As the Economist of September 30, 2007 reports, a decrease in federal fund rate, the first time the Federal Reserve had done so in four years, indicates that the Federal Reserve is trying to spend the economy by promoting investment. If the Federal Reserve believe that the hosing bubble was still a serious problem, then it would be trying to cool the economy to decrease the bubble. However, by pursing an expansionary monetary policy, the Federal Reserve is indirectly asserting its belief that the worst of the housing bubble is over and that increasing inflationary factors would not inflame the housing bubble and cause it to overheat again.

Of course, I'm not an economist. So don't take this as golden advice. Then again, economists can never agree on anything, so it doesn't matter what you think, you'll always be able to find an economist to back you up on it.

Credit Crunch Reponse: Hold your horses!

I plan to respond to this story within the near future on the credit crunch/housing bubble...

This story, by Jennifer Ablen of the Reuters seems like a good attack point for my discussion of our credit situation.

Update: After homecoming...