The Cure to the Depression of 2008

By John Galt

December 10, 2008

Sometimes you have to accept the premise that being the “first” in some things is not always the best. President-Elect and Grand Poobah of the United States, His Honorable Eminence, the Almighty Supreme Leader, Barrack Huessein Obama has the privilege of being the first black President of America. With privileges, come problems as he is now discovering thanks to twenty years of irresponsible banking and financial policies by his predecessors in that office, the Legislative Branches from this period, and the inept ideas engaged in by the Club of 300 (aka. The Federal Reserve).

As he is sworn in to office, President Obama has the opportunity to execute the dreams and hopes of FDR, Woodrow Wilson, Eugene V. Debs, and numerous other Marxist extremists who have failed to modify our capitalist system and alter the mindset of the American people. For once, the left has the best of everything: an economic collapse and a de facto mandate with opposition party cooperation to expand government into every aspect of corporate America should they desire to do so. With the Baby Boomers retiring at an accelerating pace and then some returning to the work force due to their personal economic situation, the desire for government solutions by the people is expanding, not contracting.

While the professional and academic economists will spend months to debate, hem, haw and pontificate on the severity of the current recession, I’ll subscribe to the idea that the contraction in business conditions merit calling our current frame of reference an economic depression for the purposes of this paper. Since the ability of our government agencies to provide accurate data to reflect actual business conditions in our nation is highly tainted with antiquated methodologies and subjective political influences, we may not know the truth for years to come. The assumption that economic conditions have deteriorated to the point of a depression are not hard to make but since the definition is subjective or in the eyes of the beholder as the National Bureau of Economic Research does not make a determination on economic depressions. The contraction in credit expansion, continuing declines in the real estate markets (commercial and residential), and the decline in consumer spending with the corresponding increase in savings are some of the indicators that I am reviewing for this consideration.

The last data set available showed consumer spending increased only 2.6% in 2007 versus 4.3% in 2006, yet if you look at the entire table (BLS Consumer Expenditures Survey ), you will note that some of these increases appear to be the result of inflation. The noticeable exception in that table would be the increase in “entertainment” expenditures but that is somewhat offset by the decline in “other expenditures” at the bottom of the table. The 2008 data will probably reflect a larger decline especially since ten percent of all homeowners are in some level of foreclosure or default.

For the purposes of this discussion, let us assume that we are in a depression which started in October of 2008 and barring further deterioration, the deleveraging process would end or moderate by the late Spring of 2009. Thus the window for inserting a permanent bureaucracy into the corporate board rooms is very small and expanding the citizen’s desire for dependency on the Federal government will wane also.

Thus, the new administration and the incoming Congress should act to insure that consumer spending is not only expanded but act in such a manner that the savings rate does not increase while encouraging an increase in personal expenditures. The solution to this problem is obvious and frightening because it means I must climb into my closet and dress in my Keynesian Drag Queen outfit to obtain the same thought patterns or brain wave pattern. Ugh. I’m going to be one ugly you know what.

As my brain pattern is now altered, I shall hurriedly try to complete this paper as the desire to go deep into debt and buy lots of useless things is seeping into my mind. The government, should they want a guaranteed restart of retail, auto and housing sales holds the solution in the keyboards they own and the relationships with the companies who could benefit from my bold plan.

Imagine if you would the “GO CARD”……

That’s right, every household that has combined earnings of $150,000.00 or less would be eligible and for very good reasons. The card would have a staggered valuation on it that would be accepted for any purchases as follows:

$2500.00 – Retail purchases, medical purchases, mortgage or property tax payments, utility payments, or other services. The card could not be used for cash back transactions.

$5000.00 – The card doubles in value when used for the down payment of any new automobile manufactured with over 50% of the vehicle’s content originating inside the United States. This would give the soon to be government managed automakers a needed boost in sales and flush old inventory off of the lots.

$10,000.00 – The card accelerates to the maximum as a down payment for first time home buyers under a new purchasing program using the Federal Home Loan Banks as the mortgage originators unless the servicing institutions at the local level agree to hold the paper for a minimum of ten years on the term. This might help to inspire some buyers to get off of their wallets and in the long run would be far cheaper than the process of buying securitized obligations from the banks via Fannie or Freddie or banks absorbing a greater inventory of unsold and foreclosed properties.

To insure that the government debit card would be used in an expeditious manner, the expiration date, as displayed in the photo above, would be at the end of 2009, thus forcing the public to use them or lose them, with all unused balances to be returned to the U.S. Treasury. Knowing the American mindset and desire to shop, the program would immediately assist almost every aspect of our economy with a surge in expenditures and prevent the savings rate from increasing at the same time.

Why doesn’t this sound insane? Well, it is from a purely anti-Keynesian point of view, because the resulting expansion of the monetary base and deficits is inherently inflationary but it would at least offer the promise of reducing automobile and housing inventory overhangs. This would also be the most expedient manner to get the economy going again (Thus the “GO” card theme) as the infrastructure for dispersing these cards to all qualifying citizens exists already. The idea of using debit cards for purchases has become embedded into the psyche of almost all citizens at every income level. The poor use Federal welfare cards for purchases as well as the middle class addicted to buying everything from a $1.59 cup of coffee to flat panel LCD televisions. The manufacturing facilities of all VISA and Master Card could be contracted out and that would expedite the process instead of depending on a new manufacturing procedure to be developed within the Internal Revenue Service.

This is not the panacea to prevent an implosion of the commercial real estate markets but suspension of capital gains provisions in the tax code would assist in helping to maintain the status quo as opposed to the oncoming wave of foreclosures and defaults about to exacerbate the current banking crisis. There are other solutions, but that is for a discussion when I wish to go insane again and promote solutions to insure the Federal Reserve’s balance sheet exceeds $10 trillion before mine does.

The consequences of this “cure” are obvious and inflationary. The mindset I displayed above is not my personal ideal solution; I would prefer a deep recession with total deleveraging without massive government intervention to remove the weak players from the field and allow new, more innovative competitors to succeed in their place. The problem is the mindset of the average American is now set in the “no losers left behind” mentality which will insure that the laissez-faire capitalist souls who once knew of a free land called “America” will become dinosaurs within the exhibit they built from scratch over the last two hundred plus years before this decade ends.

Let’s see what solutions our new administration creates and judge him from that point forward. It is my fear that there will be an expansion of government to a new level, removing responsibility and purchasing power further from the consumer and structuring a new economy where manufacturing and personal tastes must conform to the whims of a technocrat far removed from reality.

Perhaps the residents and employees of Washington, DC should take a trip out to that other nation in the hinterlands to get some idea as to how the people feel.

Where the rest of us reside.

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