1. What are they being frugal for? Have they suddenly realized that their spending habits were compromising their future? Have they piled up too much debt and want to pay it down? Have their sources of income decreased (very likely if it was based in part on investments)? Have they decided to establish a savings program in order to pursue some important goal (for instance, retirement if their 401ks and other current plans have decreased)?
If so, then their frugality is useful to the economy in the long run, although it may be harmful in the short term.
If it is solely a response to current social pressures, it is harmful in the short run (by depriving the people they hire or patronize of income), and in the long run. Instead of creating savings to invest, when the current downturn is over, they will simply return to their old ways, and spend any surplus they may have accumulated on other luxuries in a time when there will be no shortage of spending on luxuries.
2. This issue illustrates one of the problems of basing any major part of the economy on the behavior of the rich. It varies so wildly and is so unpredictable. Places that have based a large part of their civic growth on the spending of the rich flourish mightily in good times, and suffer mightily in bad times.
A small, select coterie of purveyors of extreme luxury goods will continue to do well; people who patronize them will not change their lifestyle because instead of a billion and a half dollars, they are now only worth a billion. But the stores, shops, and services whose customers were the "middle rich," such as brokers or traders in Lehman Brothers or AIG, are suddenly finding their stores, restaurants, and shops empty and their phones silent. Of course, they will come back after the economy turns around, but only AFTER, not AS it turns around.
3. This brings up again the question of what kind of economy do we want to have:
--one that is built on the economic power of the few rich, or one based on the economic power of the many middle and working class?
--one based on full time work with appropriate benefits, or one based on part-time work with the social safety net entirely provided by the government?
--one that is based on the idea that every adult must work, no matter what their family responsibilities, or one where a single wage earner can support a family in reasonable security?
Showing posts with label economic crisis. Show all posts
Showing posts with label economic crisis. Show all posts
Wednesday, March 25, 2009
Tuesday, March 3, 2009
What are we leaving our children?
A lot has been said and written about the massive debts we are running up in an effort to stem the economic crisis. The constant complaint is that these debts will be a burden to our grandchildren.
What I think is being overlooked is what we will be leaving our grandchildren if we don't deal with this economic crisis effectively.
In the late 80's and early 90's, Japan went through the same kind of property bubble we have gone through. The Japanese government, afraid of debt, did not move strongly enough. They started a few, very large stimulus projects and propped up the banks, but did not reform them. They did this over and over, putting patch on top of patch, but never dealing with the fundamental weaknesses of their structure. The result has been a period of no growth, followed by very slow growth. As a result, the children of the generation in charge when the bubble burst have inherited a massive debt and inflexible, ineffective system that no longer has the power to respond strongly to the current situation. They dribbled out unused airports and unnecessary bridges, spending slowly what might have worked if they had spent it all at once. They kept zombie banks operating, sucking money from the economy and not passing it on in the forms of loans.
Back in the Second World War II, our government created a massive (for the time and the value of the dollar) national debt. But we won the war; the problem the money was spent on was solved. As a result, we could leave it behind and turn our attention to building our country and the world. So massive debts will not harm our grandchildren provided we solve the problem we ran up the debts to deal with.
That is so important I will say it again: massive debts will not harm our grandchildren provided we solve the problem we ran up the debts to deal with.
As I see it, whe have these choices:
1. Intervene massively and solve the problem, leaving our children free to turn their attention and effort to growth and innovation.
2. Intervene ineffectively and fail to solve the problem, letting it grow until it paralyzes the economy, locking our children into a paralyzed, ineffective system.
3. Do nothing and hope that the invisible hand of the markets will cause everything to work out--without regard to how long it may take for the invisible hand to do its work or how much people may suffer in the interim. And I am not talking about inconvenience in the interim; I am talking about real suffering--hunger, homelessness, and a permanent underclass lacking the very basics to benefit from whatever good outcome the invisible hand may, possibly, produce. Along with the high possibility that the Keynesians are right in this: the invisible hand will not work at all in this case, because when we finish our fall, it will have nothing to work with.
What I think is being overlooked is what we will be leaving our grandchildren if we don't deal with this economic crisis effectively.
In the late 80's and early 90's, Japan went through the same kind of property bubble we have gone through. The Japanese government, afraid of debt, did not move strongly enough. They started a few, very large stimulus projects and propped up the banks, but did not reform them. They did this over and over, putting patch on top of patch, but never dealing with the fundamental weaknesses of their structure. The result has been a period of no growth, followed by very slow growth. As a result, the children of the generation in charge when the bubble burst have inherited a massive debt and inflexible, ineffective system that no longer has the power to respond strongly to the current situation. They dribbled out unused airports and unnecessary bridges, spending slowly what might have worked if they had spent it all at once. They kept zombie banks operating, sucking money from the economy and not passing it on in the forms of loans.
Back in the Second World War II, our government created a massive (for the time and the value of the dollar) national debt. But we won the war; the problem the money was spent on was solved. As a result, we could leave it behind and turn our attention to building our country and the world. So massive debts will not harm our grandchildren provided we solve the problem we ran up the debts to deal with.
That is so important I will say it again: massive debts will not harm our grandchildren provided we solve the problem we ran up the debts to deal with.
As I see it, whe have these choices:
1. Intervene massively and solve the problem, leaving our children free to turn their attention and effort to growth and innovation.
2. Intervene ineffectively and fail to solve the problem, letting it grow until it paralyzes the economy, locking our children into a paralyzed, ineffective system.
3. Do nothing and hope that the invisible hand of the markets will cause everything to work out--without regard to how long it may take for the invisible hand to do its work or how much people may suffer in the interim. And I am not talking about inconvenience in the interim; I am talking about real suffering--hunger, homelessness, and a permanent underclass lacking the very basics to benefit from whatever good outcome the invisible hand may, possibly, produce. Along with the high possibility that the Keynesians are right in this: the invisible hand will not work at all in this case, because when we finish our fall, it will have nothing to work with.
Thursday, February 26, 2009
The poverty effect
During the housing boom (or, as we now know, the housing bubble), many people felt richer than their incomes might have indicated because their house had increased so much in estimated value. They took out home equity loans and other loans to buy things they would not otherwise have considered buying. They felt that, if necessary, they could sell their house at such a profit as to be able to clear their debts and still leave enough to buy another house. Some people even made this a practice, buying a run-down house and refurbishing it and "flipping" it with a profitable resale.
Economic reporters called this feeling that a house was a storehouse of value that you could tap to improve your lifestyle, the wealth effect. It led people to buy more, spend more, and rack up more debts.
Now that we are in a recession, many of those people who enjoyed the wealth effect are suffering from the poverty effect. Some of them are really much poorer than they were, having lost their jobs, their health insurance, and their house to foreclosure.
The poverty effect, however, is spreading beyond this group. Many young people with good and stable jobs have looked at the falling values of their 401k's and gone into panic mode. The fear of losing your job is real; it is wise and reasonable to take precautions. It is wise to revisit your 401k and put whatever is left into more conservative investments for the time being. It is wise to increase savings and decrease waste in your daily expenses. It may be wise to postpone getting that new car or replacing your living room furniture until you are sure of your job situation.
But the poverty effect can lead to irrational behavior as much as the wealth effect. If you are in your 50's and your 401k had sunk like a rock, you are facing serious problems. But if you are in your 30's, you still have thirty more years of work and investment to repair that damage. You may never get back to where you appeared to be at the top of the boom, but you can reach a level of safety. And, in fact, you never really were as well off as you thought at the top of the boom: like the invisible assets of so many toxic bonds, you had imaginary wealth, like the imaginary food in old tales that seemed real, but evaporated when you swallowed it.
It is wise to postpone replacement of a good, reliable car. It is unwise to skimp on its maintenance to save money, or to hold on to it when it has become unsafe.
It is wise to try to take care of minor problems yourself. It is unwise to try to take care of things that are beyond your skill because plumbers or electricians are expensive. The fifty or one hundred dollars you might have saved is nothing to the result of a flooded house or one burned down by an electrical fire.
It is wise to cut back on luxuries, but homeowners and liability insurance is not a luxury. Yes, you've had your house for ten years and never needed it. But that is no guarantee; during Hurricane Floyd, part of North Carolina flooded that had not flooded since before the Civil War. You may be able to save on premiums by raising your deductible, but if you raise it to a point where you don't have the cash to cover it readily available, you are actually worse off than before.
Above all, we all need to remember that this is not going to last forever. We have gone through these situations before. The Great Depression was long and difficult, but it ended. The panics before it ended. The recessions since the Depression ended. And this will end.
I am not being Pollyanna. I know we are in trouble, and that closing our eyes and whistling "Happy Days Are Here Again" is not going to solve the problems we face.
But neither is panic and irrationalism.
Economic reporters called this feeling that a house was a storehouse of value that you could tap to improve your lifestyle, the wealth effect. It led people to buy more, spend more, and rack up more debts.
Now that we are in a recession, many of those people who enjoyed the wealth effect are suffering from the poverty effect. Some of them are really much poorer than they were, having lost their jobs, their health insurance, and their house to foreclosure.
The poverty effect, however, is spreading beyond this group. Many young people with good and stable jobs have looked at the falling values of their 401k's and gone into panic mode. The fear of losing your job is real; it is wise and reasonable to take precautions. It is wise to revisit your 401k and put whatever is left into more conservative investments for the time being. It is wise to increase savings and decrease waste in your daily expenses. It may be wise to postpone getting that new car or replacing your living room furniture until you are sure of your job situation.
But the poverty effect can lead to irrational behavior as much as the wealth effect. If you are in your 50's and your 401k had sunk like a rock, you are facing serious problems. But if you are in your 30's, you still have thirty more years of work and investment to repair that damage. You may never get back to where you appeared to be at the top of the boom, but you can reach a level of safety. And, in fact, you never really were as well off as you thought at the top of the boom: like the invisible assets of so many toxic bonds, you had imaginary wealth, like the imaginary food in old tales that seemed real, but evaporated when you swallowed it.
It is wise to postpone replacement of a good, reliable car. It is unwise to skimp on its maintenance to save money, or to hold on to it when it has become unsafe.
It is wise to try to take care of minor problems yourself. It is unwise to try to take care of things that are beyond your skill because plumbers or electricians are expensive. The fifty or one hundred dollars you might have saved is nothing to the result of a flooded house or one burned down by an electrical fire.
It is wise to cut back on luxuries, but homeowners and liability insurance is not a luxury. Yes, you've had your house for ten years and never needed it. But that is no guarantee; during Hurricane Floyd, part of North Carolina flooded that had not flooded since before the Civil War. You may be able to save on premiums by raising your deductible, but if you raise it to a point where you don't have the cash to cover it readily available, you are actually worse off than before.
Above all, we all need to remember that this is not going to last forever. We have gone through these situations before. The Great Depression was long and difficult, but it ended. The panics before it ended. The recessions since the Depression ended. And this will end.
I am not being Pollyanna. I know we are in trouble, and that closing our eyes and whistling "Happy Days Are Here Again" is not going to solve the problems we face.
But neither is panic and irrationalism.
Friday, February 20, 2009
What I would do about the current economic crisis
I would do what Henry Paulson said he was going to do and did not do, and what still has not been done.
I would create a program to buy the unsalable toxic assets of the banks--mostly collateralized mortgage packages that contain an unknown amount of sub-prime mortgages that cannot be valued. I would buy them at an amount greater midway between their salvage value (8-10 cents on the dollar) and their face value--around 60 cents on the dollar.
I would place them in a fund where, as those mortgages that were sound were paid off, the money could accumulate to repay the government for their initial investment. In the long run (10-15 yrs.), I think the entire cost could be amortized, so that the program would cost the government nothing.
Many banks are resisting the sale of these assets. Some still hope this crisis will be short (4-5 yrs) and they can recoup their investment. More are unwilling, by revealing how much of these assets they have, to reveal how stupidly they behaved during the real estate bubble. I would use the regulatory authority of the government to compel a sale.
From the beginning, the current problems have been caused by the toxic assets that are weighing down the banks and destroying their ability or willingness to lend. Everyone has said this, yet no one seems willing to do anything about it. They remain there, month after month, the recession drags on month after month. We create programs to deal with the consequences of their effects, but we do nothing to deal with the cause.
I would create a program to buy the unsalable toxic assets of the banks--mostly collateralized mortgage packages that contain an unknown amount of sub-prime mortgages that cannot be valued. I would buy them at an amount greater midway between their salvage value (8-10 cents on the dollar) and their face value--around 60 cents on the dollar.
I would place them in a fund where, as those mortgages that were sound were paid off, the money could accumulate to repay the government for their initial investment. In the long run (10-15 yrs.), I think the entire cost could be amortized, so that the program would cost the government nothing.
Many banks are resisting the sale of these assets. Some still hope this crisis will be short (4-5 yrs) and they can recoup their investment. More are unwilling, by revealing how much of these assets they have, to reveal how stupidly they behaved during the real estate bubble. I would use the regulatory authority of the government to compel a sale.
From the beginning, the current problems have been caused by the toxic assets that are weighing down the banks and destroying their ability or willingness to lend. Everyone has said this, yet no one seems willing to do anything about it. They remain there, month after month, the recession drags on month after month. We create programs to deal with the consequences of their effects, but we do nothing to deal with the cause.
Subscribe to:
Posts (Atom)