URGENT LETTER TO THE PRESIDENT:
Washington, D.C. 20500
Dear President Obama:
I observed with some concern a photo of you and your glum economic team in the White House Rose Garden during your September 3 address on the jobs report.
I am aware that you are gravely concerned about the economy and the employment situation. Understandably so since your policies of fiscal and monetary stimulus have failed to create economic growth or employment. Yet despite such failures you advocate more of the same remedies in the face of their failure.
On Labor Day you announced new spending of $50 billion on infrastructure construction to create “jobs”. This is in addition to the American Recovery and Reinvestment Act commitment of $499 billion for similar projects. According to your web site, Recovery.gov, only $296 billion of that amount has been spent so why do we need more?
Yet the economy is stagnant, if not declining, unemployment is high and going higher, and credit is still largely unavailable to most American businesses even if they were willing to borrow. Home buyer credits have failed to stop the decline in home prices and Cash for Clunkers has had no lasting effect on the auto or appliance industries.
I suggest that since existing policies have failed to revive the economy, your Administration should try something different. I offer you several innovative policies that would actually speed a recovery and lead to higher employment.
The problems that we need to quickly solve are:
- High unemployment.
- Declining output.
- Credit freeze.
- Surplus of housing and commercial real estate.
- High private debt load.
- High federal debt.
Until the economy starts growing again, these problems will persist.
Unless we understand the causes of our problems, solutions are not easy. Because you place great emphasis on “what works” rather than economic theory, I will get to the specific issues straightaway.
Here are some guiding principles for “what works”:
- Economies can repair themselves without a lot of government help. History has proven this time and again.
- Government interference in the repair process can hinder recovery or even make things worse.
- Government spending is very inefficient.
- Individuals can make better choices about what to do with their money than the government.
- Economic growth only comes from private enterprise. The corollary of this is that government can only spend money, not make money.
- Since government produces nothing, then real growth and real jobs can only come from private enterprise.
- If government spending is inefficient and if economic growth comes only from the private sector, then taking vast amounts of money out of private hands and putting it into government hands will hinder growth.
- Government spending to revive an economy has failed wherever and whenever it has been tried.
- More legislation increases uncertainty for businesses, making them reluctant to expand (called “regime uncertainty” in economic terms).
With these time-tested guiding principles in mind, here are some specific policies that you should immediately implement to allow the economy to quickly recover. They will “work.”
Fix the Banks
Cure the credit freeze by eliminating policies that cover up the fact that many of our banks are financially unsound. These policies generally relate to how banks value the assets that secure real estate loans, primarily commercial real estate (CRE) loans. These policies allow banks to overvalue their loan assets. These policies include “mark-to-make-believe” (rather than “mark to market”) and “extend and pretend” each of which allow banks to maintain a fiction. If the actual values of these loans were realized, banks would be required to foreclose on these bad assets. By getting these loans off their books, they would be able to recapitalize and become financial sound.
Why is this important? It is the only way to restore credit to small- and medium-sized businesses and resolve the oversupply of CRE. Big businesses have plenty of credit from the big money center banks. It’s the regional and local banks which finance the rest of us that are in trouble.
We have just gone through the world’s biggest financial bubble. During this bubble, projects that made no sense but for the cheap Fed money and the false appearance of paper prosperity, were hugely over-produced. Now that the bubble has burst, we are in the mopping up stage of recovery. Banks are reluctant to extend credit because they are unsure of their financial future. The longer banks hold on to these malinvestments, their balance sheets will remain clogged up, and credit will remain restricted. Yes, more banks will go out of business; the process is never pretty but it is necessary. It is important to keep in mind that until this done, millions of unemployed Americans will stay jobless longer.
Bring Back the RTC
If you allow banks to fail as did President Bush I (mostly S&Ls actually), then there will be many foreclosed CRE projects that will need to be liquidated by the FDIC. Alan Greenspan, then Fed chairman, for all his faults did the right thing by urging the creation of the Resolution Trust Corporation, a separate entity whose function was to liquidate S&Ls and sell off the foreclosed assets from failed institutions. It actually worked pretty well and a huge slug of bad real estate, mostly apartments, were sold off to investors. The investors got great deals, but, more importantly, the economy recovered sooner.
The RTC dealt with 747 S&Ls with total assets of $394 billion (according to the Wikipedia article). According to the latest FDIC report there are 829 “problem” banks with $403 billion in assets as of Q2 2010. It is conceivable that this idea would work again.
Stop Passing Laws
Surveys reveal that the number one problem for business is uncertainty created by the government. They have been hit with an onslaught of complex legislation the consequences of which they don’t understand. This is called “regime uncertainty” in economic terms. The truth is, according to the surveys, that even if credit was available, businesses aren’t borrowing because they don’t know what the government will do to them next. Consider that three major pieces of legislation have been passed during your administration: the American Recovery and Reinvestment Act, the health care bill, and the Dodd-Frank financial overhaul bill. Further, they are uncertain if taxes on them will be raised.
No new laws are required to allow the economy to recover. I urge you to speak to business and tell them that we Americans trust their ability to drive our economy, and that your Administration will enact no new laws that will create greater burdens on their ability to expand, borrow, hire, and reap profits.
Stop Useless Spending
While your Administration has gamely tried to convince us that you have created jobs, we know that is fiction. The CBO report and claims by prominent economists have no credible evidence that any real jobs were created. If it were the case that government could create jobs then there would be no need for the private sector. Of course you know well that history has proven that policy to be a disaster.
Only private enterprise can create a real job. Having the government pay people to work is not a “job” in the same sense as a job in the private sector. When a business hires an employee, it is because somewhere down the line consumers want the end product of his or her productivity. The job created by the business is generated by economic activity until consumers decide otherwise.
If the government pays someone to do something, it isn’t generated by economic activity. When the money stops, the job stops. That has been the case of all of fiscal stimulus spending. While someone is earning money from the government, the money to pay him or her comes from taxes, which ultimately can only be generated from private enterprise.
If the government takes money out of the economy to pay people to do things it wants done rather than let the economic forces of private enterprise work, then businesses who create real jobs will have less money with which to expand their businesses. You should consider what the person from whom the money was taxed was going to do with the money. It would aid recovery to let private enterprise keep their money.
Encourage Saving Rather Than Spending
With historically high debt loads, job uncertainty, a lack of retirement funds, and declining home values, is it not reasonable for people to increase savings? Urging people to spend at this time runs counter to people’s innate sense to take care of themselves. While people are trying to repair their financial condition after the housing and credit bubble, urging more spending is reckless advice. People are rightly using their common sense.
There are two substantial benefits to saving. It allows families to reduce their debt burdens. Once they pay down their debts, they will be more willing to spend without the fear that they will end up homeless. Saving also creates the new capital that will be required for businesses when they decide to expand. It is not as if the Fed can just print dollars to create wealth and capital; wealth can only come from savings.
Policies that encourage spending such as Cash for Clunkers or home buyer credits or various tax credits for government-favored projects only encourage spending and thus reduce savings. Furthermore, they appear to have no lasting economic impact.
Don’t Raise Taxes
In light of the detriment to the economy of giving the government more of our earnings right now, an increase in taxes would be harmful to a recovery. While we face a serious deficit in the federal budget, the only way to pay down national debt is to have a vigorous growing economy and a reduction of government spending. With the right policies put in place, lower taxes would help create economic growth.
Raise Interest Rates
Fed policies to expand the money supply to create inflation will eventually succeed. Thus they are planting the seeds for perpetual stagnation and inflation. To prevent this new disaster, the Fed should immediately raise the Fed Funds rate and stop new attempts at quantitative easing. This will have an immediate positive impact. First, it will encourage saving as people seek higher, safer returns on their capital. Second, it will unmask malinvested projects, clear away the burden of their related debt load, and allow capital to be redirected to profitable ventures. Third, it will prevent the rise of inflation which robs savers of their wealth. Fourth, it will prevent the creation of a new destructive stagflationary cycle. Fifth, as in the Volcker era, greater savings and low inflation will eventually lead to new economic growth and higher employment.
I strongly urge you to adopt these innovative solutions to solve our nation’s desperate economic problems.
Dr. Jeffrey Harding