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View Diary: An Economy cannot be based on CONSUMPTION (285 comments)

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  •  I have a quibble (28+ / 0-)

    with, among other things, this:

    People will CONSUME as much as they can when given unlimited resources - something responsible for the housing crisis.  You had people buying houses larger than they needed or could rationally afford - because banks LET THEM.
    That, too, is right out of "the EIB microphone" as you so aptly put it.  This is a non sequitur; that people with unlimited resources will consume is without question but "as much as they can" is empirically false.  Otherwise, the economy would be doing great right now.  If all those wealthy people that got those huge tax tax breaks actually took that money and consumed with it, that money would flow back into the economy, which would be less bleak as a result.

    The statement would be closer to being accurate if it said that "people will consume as much as they need given the resources to do so" adding that many people conflate "want" and "need."

    And while many bought houses bigger than they could rationally afford, few did so with the understanding that they could not rationally afford it.  The banks didn't "let them" do anything, the banks actively sought out anyone they could sucker into signing on the dotted line to keep their Ponzi scheme going of then betting against their ability to pay the mortgage.  It didn't matter to the banks whether or not they could pay for it because they won either way.  The banks misled those people into believing that they could afford it because they don't win at all if there is no mortgage.

    The framing that the problem that caused the housing bubble is all those poor people going out and buying houses they couldn't afford is as right wing as it comes.  It isn't true - empirically - and it cleverly shifts the blame for the mess onto the victims ignoring the perpetrators (except passively, noting that the banks "let" this happen rather than "actively encouraged by means of deception").

    Furthermore, "production" = supply-side in RW parlance.  "Consumption" = demand-side.  But neither can exist without the other.  We can "produce" all we want but if no one is "consuming" what is produced, there is no point in producing it in the first place.  Without "demand" there is no need for "supply."

    They are yin and yang and we've been too focused on the supply-side for entirely too long.  The concept of a federal WPA-style federal jobs program is a good one but not as a replacement for unemployment, as a supplement, giving the unemployed preference in hiring.

    I have other quibbles, more than I have the patience at the moment to spell them out as I've done with this one.

    Arrrr, the laws of science be a harsh mistress. -Bender B. Rodriguez

    by democracy inaction on Thu Sep 29, 2011 at 07:25:02 AM PDT

    [ Parent ]

    •  Thank you. especially for this: (14+ / 0-)
      The framing that the problem that caused the housing bubble is all those poor people going out and buying houses they couldn't afford is as right wing as it comes.  It isn't true - empirically - and it cleverly shifts the blame for the mess onto the victims ignoring the perpetrators (except passively, noting that the banks "let" this happen rather than "actively encouraged by means of deception").
    •  Well said! (9+ / 0-)
      And while many bought houses bigger than they could rationally afford, few did so with the understanding that they could not rationally afford it.  The banks didn't "let them" do anything, the banks actively sought out anyone they could sucker into signing on the dotted line to keep their Ponzi scheme going of then betting against their ability to pay the mortgage.

      We had a bank mortgage officer diary on this site about his son, with an MBA, bringing one of those massive loan agreements to him and they couldn't understand it!

      It was outright fraud on the part of the banks and the Wall Streeters... and their enablers in the White House and congress.

      Phil Gramm's Culpability, Acknowledged

      —By Jonathan Stein
      | Fri Feb. 20, 2009 2:25 PM PST

      Phil Gramm won't be able to wash this stink off of him.

      Time magazine has published a list called "25 People to Blame for the Financial Crisis" and second on the list is our buddy Phil, the man who headed the Senate Banking Committee during the federal government's deregulatory bonanza in the late '90s. Gramm passed or affected two key pieces of legislation that eventually helped create the financial meltdown we are experiencing today. The first of the two was the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, which repealed the Depression-era Glass-Steagall Act and allowed financial institutions to merge like crazy and ignore longtime regulations and limitations. The second was something that Mother Jones uncovered in summer 2008. Here's Time:

       

       [Gramm] also inserted a key provision into the 2000 Commodity Futures Modernization Act that exempted over-the-counter derivatives like credit-default swaps from regulation by the Commodity Futures Trading Commission. Credit-default swaps took down AIG, which has cost the U.S. $150 billion thus far.

      Right. As David Corn reported for Mother Jones, Gramm's sly move gave rise to an entire industry of financial products, like credit default swaps, that acted like insurance for the toxic mortgage-backed securities that got passed around Wall Street. Investors who thought they were protected made more and more and worse and worse financial bets, all away from regulatory oversight. Eventually, it caught up with them.

      More...

      http://motherjones.com/...

      Lest we forget... Bush used an 1863 law to nullify the states predatory lending laws!

      Predatory Lenders' Partner in Crime
      By Eliot Spitzer
      Thursday, February 14, 2008

      Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

      Snip!

      In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

      But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

      More...

      http://www.washingtonpost.com/...

      Where I fault Obama in all of this was he ignored economists like Roubini, Krugman, and Stieglitz who recommended that the US:

      1. Form a new version of the HOLC or RTC.

      2. Break up the too big to fail banks and triage the smaller ones and enforce capital requirements.

      Having said that though... the systemic problems at the root cause of this are way beyond the scope of the President...

      Is Capitalism Doomed?
      Nouriel Roubini

      So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.

      Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities.

      To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

      The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.

      More...

      http://www.project-syndicate.org/...

      That Last graph is a real kicker!

      After criticizing Obama I feel I should also give him his due...

      Obama Jobs Plan Prevents 2012 Recession in Survey of Economists

      President Barack Obama’s $447 billion jobs plan would help avoid a return to recession by maintaining growth and pushing down the unemployment rate next year, according to economists surveyed by Bloomberg News.

      The legislation, submitted to Congress this month, would increase gross domestic product by 0.6 percent next year and add or keep 275,000 workers on payrolls, the median estimates in the survey of 34 economists showed. The program would also lower the jobless rate by 0.2 percentage point in 2012, economists said.

      Economists in the survey are less optimistic than Treasury Secretary Timothy F. Geithner, who has cited estimates for a 1.5 percent boost to gross domestic product. Even so, the program may bolster Obama’s re-election prospects by lowering a jobless rate that has stayed near 9 percent or more since April 2009.

      Lots more...

      http://www.bloomberg.com/...

      Obama gets it now... just hope it isn't too late.

      •  Short version (2+ / 0-)
        Recommended by:
        Flint, The Nose
        And the way people have the means to buy goods is to PRODUCE goods.

        Seems the diarist has a chicken and egg problem.

        Companies will only increase production when there is increased demand for their product.  How is this going to happen?

        I'm a fucking retard.

        by Helpless on Thu Sep 29, 2011 at 10:11:24 AM PDT

        [ Parent ]

        •  Yes and NO... (5+ / 0-)
          Recommended by:
          Catte Nappe, Hirodog, Justus, MKinTN, The Nose

          Henry Ford realized the problem when he started making cars and he found out none of his employees could not afford them... so he increased their wages!

          So there is your YES... and now your NO...

          Germany had a different approach to unemployment than we have... rather than let companies lay-off workers their government asked the companies to reduce their hours as demand fell off... but paid the companies to keep them working and made up the difference in their salaries.

          This accomplished several things...

          1. Companies kept their manufacturing workforce intact, protecting their industrial capabilities.

          2. Workers kept their skills sharp and they didn't suffer degradation of their skills as American workers have in the case of the long term unemployed... as we now often hear... (witness the unemployed need not apply debate)

          3. Their companies could rebound more quickly when demand increased than American companies could  and at one point their GDP jumped to +6.5PP after the recession.

          4. Workers self esteem wasn't trashed.

          I would argue that very few workers on unemployment like getting paid to do nothing.

          I know I didn't... I wanted to work, I wanted a job, I wanted to continue to take pride in my work and ability to provide for my family.

          I didn't want to worry about having unemployment run out or coping with COBRA's price gouging my savings away.

          •  Didn't companies end up with products they (0+ / 0-)

            couldn't sell?

            How could they make a profit that way?  They're losing money on each widget, but making it up with the volume?

            I heard an NPR piece on Germany that said the program was very unpopular -- that it promoted companies hiring temp part time workers at reduced wages.

            I'm a fucking retard.

            by Helpless on Fri Sep 30, 2011 at 09:08:54 AM PDT

            [ Parent ]

            •  No... in a word. (0+ / 0-)
              Germany reports 14.7 percent rise in exports
              September 15, 2011

              German exports rose by 14.7 percent in the first half of 2011 compared to the same time period the previous year, driven in part by a healthy increase in the value of goods shipped outside the European Union, official figures showed Thursday.

              January-June 2011 exports came in at euro525.6 billion ($721.60 billion), up from euro458.3 billion in the first six months of 2010. When adjusted for prices, the rise was 10.1 percent.

              Second-quarter exports rose an unadjusted 10.8 percent to euro264.7 billion compared to euro238.8 billion in the same quarter last year.

              Germany, Europe’s largest economy, is the world’s second largest exporter behind China.

              The Federal Statistical Office said there was particularly strong growth in exports to non-European Union countries, which were up 16.7 percent in the first half of 2011 to euro208.3 billion.

              More...

              http://articles.boston.com/...

    •  not to mention (0+ / 0-)

      the emphasis that has been promoted and encouraged to consume and acquire the trappings of wealth by the media.

      I sometimes watch a programs called "Till Debt do us Part".  I believe it originates from Canada.  It involves a counselor/advisor named Gail Vaz -Oxlade who works with couples facing overwhelming debt.  One of the things that strikes me about the program is how many people seem to think that it is necessary, appropriate and doable to live far beyond their means.  It's like they seems to have some delusion that they have to live like the Kardashians on an often reasonable but modest budget.  I know we've probably always had the "keeping up with the Jones'" attitude --  there were probably cave men flaunting the best fur-- but this seems so out of control and out of touch with reality...

      I like that you point out the necessary relationship between production and consumption-- "you can't have one without..." and that you clarified the bank's role in the housing collapse.  I do think that people getting loans share some of the responsibility for taking on a financial burden they just couldn't afford....but only some of it..  After all, if you had a, well, possibly substandard, education and the BANK said you could afford this...who would they be to question.  And, you are right that the Banks didn't "let them" ...they were the very active architects of the meltdown.  Thanks Democracy

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