We’ve had a massive problem with bad mortgages. It caused the stock market to crash along with the housing market. Unfortunately there are still a lot of the original bad mortgages AND some sound mortgages are now underwater (house worth less than the mortgage was written for). The federal government, through Fredddie & Fannie, own a lot of mortgages and there is potentially a huge disaster in that.

Healthcare costs have risen so significantly that General Motors has gone bankrupt and state & local governments have been living on the edge of bankruptcy for some years. The federal government has been inching closer and closer to disaster as their health programs also incur those costs.

The large pile of dollars we’ve been spending on foreign oil is now joined by another large pile going overseas to buy consumer goods of all kinds. Add to that the growing number of American workers who have lost their good paying jobs which were sent overseas and you can see the system has been seriously disrupted and is becoming (if it isn’t already) entirely unsustainable. We can’t simply keep borrowing money and then sending it overseas to pay for oil & consumer goods WITHOUT also producing something of great value which we can export. That credit card is approaching maxed-out status already.

The huge deficits & debt of the federal government make it politically and economically tougher to argue for borrowing money. In a way that might be a good thing as it requires us to really take a hard look at reality and not put it off for another day. There also has to be a realization that the debt size means a large part of our revenues will NOT be paying for health care or other things of use — it will go to paying interest on the debt.

As for the current crisis and how the Obama administration has tried to contain it: they’ve used a relatively light touch (especially considering the size of the problems). The stimulus bill seems large, but many on the Liberal side said it should have been twice as big. The large numbers scare some people, but when you consider how the economy has grown it’s not hard to imagine it would take a very big bandaid to stop the bleeding on a moose as compared to a mouse. In any event the Republicans argued for much less, so the result was the politically acceptable level.

What has been the effect? Well, a lot of the money hasn’t hit the economy yet, so we don’t know it’s effect in totality. What we do know is jobs losses are slowing, but they’re still disappearing at a dangerously fast rate and nobody is happy about it. The public is losing confidence as fast as their wallets are shrinking. Politicians are getting nervous because they know an election will arrive far too soon. That makes their decision-making wrt legislation all too uncertain.

We also know banks aren’t talking a lot about how much money they’re lending, but they are happy to be making huge profits and paying back some of the TARP funds. Where are all the greedy entrepreneurs America is known for?

As far as fixing problems beyond waiting for the economy to revive of it’s own accord while the stimulus keeps the ship afloat there is the political pressure to see results. That raises a very important question which doesn’t get debated very often in America — how much should government be responsible for, and therefore how much should government be allowed to do, to face up to that responsibility.

Republicans say Obama & Congressional Dems spent TOO MUCH on the stimulus, but then turn around and say Obama hasn’t done enough to fix the economy, but then turn around and say he’s done TOO MUCH by taking over banks, AIG and car companies. They’re a spinning top of inconsistency.

Government is mostly to govern. It also offers help to the poor when the system is hard and when mother nature gets mad. The question of how much government should ENABLE people with things like the Small Business Administration or with informational help the Agriculture Dept. offers farmers or with scientific research which helps Pharmaceutical companies develop new drugs is always debated. How about when the entire economy is mangled and slow to return to normal?

Yes, government needs to fix healthcare costs and regulate the financial industry to fix truly broken things, but if all that were in good shape then what, in that situation, should government be allowed or required to do to bump or push along the economy. What kinds of ‘new things’ should government do?

We can’t just borrow tons of cash and hand it out. We’re too far in debt and Conservatives would fight it tooth and nail. Even conservative Democrats would probably balk. They’re already queasy about raising taxes to pay for healthcare reform. Somehow they don’t seem bothered when big business rapes America and breaks the economy, but they don’t like it when government tries to fix things. It’s quite amazing.

So, the challenge to all economists and politicians is to decide what kinds of things government should do in a situation such as this to get the economy going and return us to full employment. Waiting is a dangerous option, but some might go that way — especially Obama’s political opponents who would love to see the economy in the tank come the next election. Surely we can do better than leaving people to fend for themselves.

Is there capital available for lending?
Are banks lending all they can?
How much lower is lending now than 2, 4, 6, 8, 10 or 12 years ago?
Are businesses borrowing?
We know families shouldn’t go further in debt, so I don’t blame them.
What prevents businesses from borrowing?
Are families purchasing all they can afford?
What could we do to help them buy more without using credit?

Somewhere in the linkages there’s a problem or perhaps a place we can inject capital or change rules to enable more activity. Capital’s gotta flow.

See money. See money sitting on it’s butt. Get up money. Run money run.



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