Chris Tomaras / Straight Talk / January 10, 2009

It has just been a couple months since the presidential campaign was going on and politicians were harpooning one another. Now the election is over and they’re still throwing their poison darts. What a total waste of time and energy.  Transitioning from 2008 to 2009 we have not missed a beat from where we left off.

Politicians continue their blame game and posturing, while the economy is about to fall off the edge of a cliff. Do they not realize that it’s not about them and that they need to unite to even have a chance to save our economy. They get so caught up in their party politics that they can’t see the forest through the trees.

I’ve often related what is currently going on in the economy to a critically ill patient. After a few months the cause  of the patient’s illness has been diagnosed, yet the condition of the patient is still critical. We’ve gone from figuring out the problem to needing to find a cure for the problem. Imagine sitting in the glassed-in observation area outside of the OR watching what is going on and this is what you see. A bunch of doctors, nurses, family members, their lawyers and their accountants all standing over the critically ill patient frantically arguing with one another as to how to save the patient’s life and who is to blame for the patient’s illness.

As the patient continues to worsen, all of a sudden the doors of the OR swing open and in comes President elect Obama expected to save the day. I can just see him standing there in his scrubs.  Unfortunately those with hidden agendas not agreeing with his prognosis will now start to criticize him if he doesn’t go along with their desires and again it becomes all about ugly politics while the patient is trying not to die.      

Frankly I for one am sick and tired of hearing politicians constantly bludgeoning one another and it makes it so difficult for the average person to decipher right from wrong. It has been just a few months and now they are going at each other, over how the TARP money has been spent, instead of having taken the time to have better thought out their plan before they voted yes. If you remember, the economy was about to collapse so the treasury secretary immediately needed 750B. The House and the Senate went along with the plan.

And at the same time, while we’re being constantly reminded about the seriousness of the financial crisis, and the threat of possible terrorist attacks, the now house impeached IL Gov. Blagoyevich has been joined by the recently Obama-appointed Commerce Secretary and NM Governor Richardson who stepped down for likely improprieties. Then we have the scandalous Minnesota senate election between Norm Coleman and  Al Franken burning up more taxpayer money, and lets don’t forget about Ted  Stevens,  the Alaskan Senator with the best home addition political cronyism can buy and of course Rahm Emanuel, Barack Obamas’s supposed chief of staff also stepping down.  And all of this has happened and President-elect Obama hasn’t even been sworn in yet. I can’t wait to see what happens after the inauguration. If you are an honest politician, will you please stand up.

You would think that being an elected governmental official, integrity and honesty would be part of the job description.  I must have missed something.

OK, so let me lend some perspective as to what is going on and where we are at the moment regarding the economy.

The original problem was that prior to the presidential election the financial meltdown occurred and everyone ran to Washington to put in their two cents as to a solution as if they had a clue.

It was then determined well after the fact that for many years our financial system was being undermined and corrupted by faulty mortgage lending by the banks, further leveraged by artificial demand from Wall Street firms to purchase mortgages in order to package them and resell them to investment portfolios. Everyone from the top to the bottom involved in the process was profiting and as a result were fat and happy. Since Wall Street had this huge appetite for mortgages, the banks just kept writing them at any cost. Well, not at just any cost any longer.
So we had a financial meltdown but how do we solve it, since we‘ve never experienced anything like it before in our lifetime.

Let’s first dissect  the problems that we are facing as a result of the housing bubble.
1)We have sharply growing unemployment and a large reduction of legitimate, decent paying jobs
2)We have 4.2 million homes for sale –
3)We don’t have millions of buyers for those homes causing prices to continue to decline
4)Because unemployment is growing we have even more and more homes needing to be sold
5)Foreclosures and bankruptcies are at record highs and continuing to increase
6)Trillions of dollars have been lost in the stock market
7)Trillions of dollars have been lost in home values
8)People cannot afford to spend money
9)Companies are going out of business
10)Those who have money are scared to spend it for obvious reasons
10)Banks have bad loans on their books of which they must reserve capital freezing their ability to lend
11)As people are scared to spend, banks are scared to lend
11)As the value of the homes continue to decrease, it creates even greater problems for the banks
So two things have happened thus far in an attempt to stop the bleeding

 First, The Government and the Fed Res have tried to stimulate the economy by providing money to the banks in order for them to lend – by lending, the borrowers will then take that money and spend it, helping the economy – wrong!

Second, lowering interest rates to make it more attractive for people to borrow money to help the economy – wrong!
At no time can I ever remember having  seen more opposing views and questions as to what is right and what is wrong when it comes to the handling of the US economy. And that’s because we never been faced the magnitude of our current problems in our lifetime. I would have actually been surprised if consumer confidence was not at an all time low. People are very scared and confused as their lives are being so negatively impacted. Government officials, Federal reserve governors, Congressional members, and economists have different theories and agendas at a time when things are so critical. After lengthy debates they have finally diagnosed what caused the problem but now are polar opposites when it comes to the solution, putting the economy at risk or causing even more serious problems in the future related to rampant inflation.

Okay, so we have everyone arguing about how to solve a very serious problem admitting that they’re not sure their solution will work. We have politicians committing all sorts of improprieties and dropping like flies. It will be interesting to see who goes over the cliff next.

So what is all the finger pointing, blame  and criticism about? Well follow me carefully on this.

In a normal business cycle we go through somewhat normal fluctuations that start with periods of economic expansion, then a period of overheating of the economy and then recession and then the cycle begins again. That has gone on for decades and as long as it can be held within normal ranges and the Government and the Federal Reserve can control the highs and lows, everything’s great.

Unfortunately what has happened is that a few times in our country’s history because of external circumstances such as the housing bubble, the pendulum has been caused to swing well beyond the norm.

When we reach a state of severity  like we are experiencing  currently, it doesn’t help when you have all of these power crazy people constantly fighting and criticizing one another and also corrupt officials being busted for their deceit . That just creates more confusion and fear on the part of consumers at a time when they’re already scared to death.

This past week, the Federal Reserve Governor from San Francisco stated that she expects to see an extended period of stagnation in the US economy. She continued to say that

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Janet Yellen, who became chief of the San Francisco Fed in 2004, said in a speech. “If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now.”

So what does this mean?

Well the first thing you need to know is that there are 2 primary methods of controlling the economy and those are fiscal and monetary policy. To keep things simple, the approach to fiscal policy is made up of  taxing and spending by the Federal Government. It’s meant to either increase or decrease aggregate demand. If  the economy is overheated and inflation is increasing, the government increases taxes and reduces spending. If they want to control a recession, which is what we are dealing with, they do the opposite. They increase spending and reduce taxes which is what is currently happening. This can be done through the federal budget process. The problem with fiscal policy is that it’s tough to gage so by the time it kicks in, the economy can be moving strongly in the other direction and it causes a rebound effect that also ends up out of control to the opposite extreme.

Because the economy is so fragile they feel extreme fiscal stimulus is required. The problem is that with the kind of numbers we’re talking about they will have a very hard time controlling the inflation that will eventually occur and our kids and grandkids if not ourselves will inherit a whole set of other problems.

Talk about being between a rock and a hard place.

Heads I lose, Tails you win.

Monetary policy Monetary policy comes under the control of the Federal Reserve System (our central bank) and is completely discretionary. It is the changes in interest rates and money supply to expand or contract aggregate demand. In a recession, the Fed will lower interest rates and increase the money supply. In an overheated expansion, the Fed will raise interest rates and decrease the money supply.

So just remember that Fiscal policy is the Government controlling the economy with taxes and spending and Monetary policy is the Federal Reserve controlling the economy with interest rates and the money supply.
What we are currently seeing is a little bit of both fiscal and monetary policy.

Monetary – The Fed has been lowering interest rates in order to increase aggregate demand. In other words if they can make it more attractive for people to borrow money they will be able to spend more.

Fiscal – The Treasury is spending money in the way of their bailouts and stimulus packages. This puts money into the economy again to hopefully increase aggregate demand meaning lenders will lend money, people will borrow money and then spend it so businesses will thrive and jobs will be more plentiful.

OK with this in mind as I have said on numerous occasions, because of the magnitude of job losses and future job losses and the lack of demand and huge and growing supply of homes it is like a runaway freight train. The other problem is that many of the people out of jobs worked in the real estate industry.

We have been lowering interest rates into a vacuum where there are not nearly enough people who can afford to buy a home relative to the huge and growing number of homes for sale.

I am pretty certain that we will see some form of nationalization of the mortgage markets and it will mean that the housing market when all is said and done will never be the same. I also suspect that the Government will have to permanently take over FNMA and Freddie Mac sometime in the next 6 months and we will probably not recognize our country as we have known it in the past. That does not necessarily have to be a bad thing but there sure is going to be a lot of pain in the process.

And that’s this week’s straight talk.