Tuesday, February 24, 2009

Elites and Economics

The general public doesn't understand economics beyond the most basic micro level. Therefore the political and economic elite have a tough job of making big decisions acceptable to people especially when they're counter-intuitive.

Right now, President Obama is in one of those periods where he has to pursue policies that can easily be demagogued by his opponents, and misunderstood by friends.

Obama has to deal with unsustainable health-care costs, social security retirement benefits, a failing banking system, and much more. There is potential deflation now (falling prices that lead to hoarding of cash and more falling prices), and rampant inflationary pressures down the road from excess borrowing.

Through all of this, Obama has to deal with a public (the ultimate deciders) who can be convinced that "we are spending our grandchildren's money" or "we're bailing out the banks but not mainstreet".

Of course there may be some, usually small kernel of truth in every political attack, but the gap between the serious choices and the political rhethoric is really too wide.

For instance, in order to fix our banking system, the government can in one form or another:

a. let the market work on it's own, which would mean incredible instability in terms of bank failures, credit disruptions, possible stock market crash, etc. It could also mean a quick fix that wipes out the bad actors and leaves only strong banks standing. It would be a big bet.

b. let the government take all the downside risk for bad loans and assets currently owned by banks so they can get a "fresh start". This is the typical bailout model.

c. encourage and fund a new system that meets our 21st century needs. This would require major rewrites of current law.

For each choice there are obvious downsides and political risks. The Obama team seems determined not to be too "leftwing" in their approach and are therefore being very cautious in trying to find public/private mechanisms to strengthen the system.

These half-measures are dangerous because they are expensive both in real and political capital, but can fail completely with no benefits to the nation.

I propose a simple solution: Do what is right.

Just Sit in a room, figure out what you think is right, and do it.

In my mind, that means:

-force the firing of anyone who made bad loans and investments that we have to deal with now.
-the government buy up all the "toxic assets" in the banking system at a price that makes the banks whole on that investment.
-leave the market alone to work on it's own.

-develop a housing plan that offers a deal to anyone who can make 75% of their payment an affordable mortage. Place any aid received in a lien on the home if/when it is sold at a profit. This can be done by the government guaranteeing all loans as with Fannie Mae and Freddie Mac.

The Obama team needs to act and stop talking about acting.

Craig Farmer
making the word "liberal" safe again!

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