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Credit Crisis Solutions That Should Scare The Hell Out Of You

Economics / Credit Crisis 2009 Jan 12, 2009 - 10:03 AM GMT

By: Mike_Shedlock

Economics Best Financial Markets Analysis ArticleThings are looking pretty bleak. There is bad news in housing, the stock market, commercial real estate, jobs, and wages . Unfortunately, no matter how bad things are, someone always comes along to propose a "solution" that is guaranteed to make the situation much worse. Please consider the following ideas.

Scary Idea #1

Anatole Kaletsky is proposing to Punish savers and make them spend money .

Near-zero interest rates and even a tax on bank deposits are necessary to force those with cash to use it productively.

Instead of reducing taxes on interest payments, the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets - or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump.

Good Lord. We are in this mess because everyone (the state, corporations, households) went on a reckless spending spree. There is overcapacity in homes, autos, retail stores, nail salons, restaurants, and damn near everything else. Only a complete fool would propose taxing savings. Unfortunately, I have no doubt Bernanke is playing with this idea in his head right now.

Scary Idea # 2

Obama Says 'If Paul Krugman Has a Good Idea … Then We're Going to Do It'

Today in his press conference, a reporter questioned Obama about Krugman's criticisms. Obama said that he is open to the economist's ideas: "If Paul Krugman has a good idea, in terms of how to spend money efficiently and effectively to jump-start the economy, then we're going to do it."

Last month, Krugman told radio host Bill Press that he is "in communications" with the Obama team.

The Obama Gap

Krugman is writing about The Obama Gap

Mr. Obama's prescription doesn't live up to his diagnosis. The economic plan he's offering isn't as strong as his language about the economic threat. In fact, it falls well short of what's needed.

Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it's able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that's not enough.

Krugman is not content with Obama blowing close to a $trillion by himself (more if you count the second installment of $350 billion Obama will blow). Amazingly, Krugman who believe in the free lunch, wants to spend even more.

My Rebuttal for Krugman's Keynesian claptrap, can be found in Krugman Still Wrong After All These Years and also in Fiscal Insanity Virus Rapidly Spreading The Globe .

If Obama listens to anything Krugman says, which now seems likely, it is going to be a disaster. Actually, I mean a bigger disaster.

Scary Idea # 3

Time Magazine is making The Case for Bigger Government .

Thirty years ago, Americans were told that government was part of the problem, not the solution. We bet on the magic of the marketplace, but the magic proved illusory. Every major part of the economy — health care, energy, transportation, food and finance — is deeply troubled. Now we are ready to invite government back in to help solve our problems, if the price is right and the strategies are convincing. By spending more through government and treating government as a partner rather than an enemy of the private sector, we can potentially save vast sums in the long run through a more efficient health-care system, safer climate, more competitive economy and more secure country.

Although Obama's tax cuts might stimulate consumer spending — and placate Republicans — any permanent cut would be a huge error, and even short-term tax cuts are an unnecessary risk. Obama's long-term success will depend on his ability to lead Americans to a new, even revolutionary consensus that the U.S. government can offer value for money.

The Times article contains some of the most ridiculous blather to date. Please read it in entirety as a monumental testimony to stupidity. Here is a short rebuttal.

What Hath Big Government Wrought?

  • It was big government that brought us Fannie Mae and Freddie Mac.
  • It was big government that sponsored the war in Vietnam and the war in Iraq.
  • It was big government that gave us nightmare problems we face with Medicaid and Medicare.
  • It was big government that gave us overlapping hundred billion dollar systems in the Army, Navy, and Air Force.
  • It is big government that sponsored 10's of thousands of pork barrel projects and bridges to nowhere.
  • It is big government that gave us the Davis Bacon Act and the insanity pf prevailing wages.
  • It was big government sponsorship of the rating agencies that created the "AAA" rated securities that went to zero.
  • It was big government that took us off the gold standard and illegally confiscated citizen's money.
  • It was big government that allowed fractional reserve lending and theft by inflation this is the root cause of a shrinking middle class today.
  • It was big government that created the Fed, and it was the Greenspan Fed that blew serial bubble after bubble culminating in the housing crash we are in today.

Big government either created or made worse every problem we have today. Yet Time Magazine and free lunch proponents like Krugman propose an even bigger government is necessary to fix the enormous problems of an already too big government.

Obama for his part, is listening to this madness. If that does not scare you, nothing will.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

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