Obama's current stimulus package is destined to fail.
Obama's current stimulus package is freighted with tax cuts that will do little to give the economy the needed lift and contains far too little infrastructure investment to pull the economy out of its tailspin.
Tax cuts are an indirect and, in this day and age, a wholely inefficient means of affording the needed stimulus. This is because it is entirely predictable that, to the degree the tax cuts are weighted toward the bottom of the income spectrum, the money is far more likely to go into savings and to retire consumer debt than to realize much benefit in sparking additional growth in the economy or freeing up credit markets. To the degree the tax cuts may be scewed toward the wealthy, more often than not, the additional money will go toward the same type of rank speculative investments that have been the rule throughout the last twenty years. Such investments promise very little in the way of constructive stimulus needed.
To the degree that the money from the prior stimulus package (under Bush)was used to bail out banks, this also did very little to unfreeze credit markets. The reason is that virtually all the banks are, in reality, underwater due to a vast default on credit instruments the banks have issued already. Banks are required to maintain 10-12% equity levels against outstanding loans in order to issue new loans. In addition, banks are also required to maintain at least 8-10 percent in cash reserves to continue lending. The problem is all banks function with a fractional reserve system in which, when the economy is functioning normally, banks can literally create vast sums of circulating money by lending it into existence as long as they continue to maintain the equity and reserve requirements. For each dollar on deposit, the banks are free to lend nine times that amount. Unfortunately, when vast numbers of loans go into default as they have recently done, the same exponential increase in the money supply created when loans are being issued works in the opposite direction and causes a similar exponetial decline in the real money supply as more and more loans go into default. Not only that, banks cannot meet their equity retention and reserve requirements and therefore cannot issue ANY new credit. Worse still is that the bailout money already spent by the Bush administration was provided "no stings attached" and rather than unloading defaulting and/or high-risk debt instruments, most banks have used the money to buy other banks thereby further concentrating the overarching problem whereby these banks become "too big to fail" rather than doing anything to free up credit markets.
The only way this problem can be addressed at this point is to have the FDIC go in and do its job and close those banks that are insolvent and take them over. Rather than close them to the public, the government should use them in the short-run as a ready-made conduit for advancing credit to get the economy moving again. In advancing such credit, all available resources should be pointed toward increasing the availablility of jobs. Infrastructure investments and improvements should be funded first and foremost. Increasing investment on clean energy, energy independence and in improving our broken-down, antiquated energy grid is a must. Transportation projects, bridge-building and replacement and road resurfacing should also take high priority. Investments in health care availablility and bailing out State and local governments are also essential and absolutely imperative to avoid a disastrous failure of the entire health care system. Such investments are a far more direct and efficient way of stimulating the economy than tax cuts which almost certainly would not be used as needed.
An additional and rather radical approach is needed to avoid spending future generations into oblivion in a sea of red ink. That is to nationalize the Federal Reserve Banking system.
Most of you reading this are probably unaware that the Federal Reserve Banking system is actually not a government function at all. The Federal Reserve Bank is actually a privately-held entity that is responsible to its shareholders just like any other major corporation. The shareholders are a group of twelve also privately-held Federal Reserve Banks whose heads sit on the national Federal Reserve Board. These twelve banks are not a group of equals and in fact the New York Federal Reserve Bank has enormous influence over what is done with regard to national monetary policy. Indeed, national monetary policy is not a public function at all. Rather it is run exclusively through the private Federal Reserve Bank.
When the Federal Reserve Bank decides in its wisdom to infuse money into the economy, it loans money to the federal government by creating it out of thin air with a bookkeeping entry and then swaps this book-entry "money" for government debt instraments (Treasury bills). It then uses these debt instruments to meet its reserve requirements in loaning up to nine times that amount into the economy through cash infusions into private banks with a very special preference for shoring up megabanks such as J.P.Morgan, Citigroup and Goldman Sachs. These banks in turn are used as the Fed's conduit for funneling money into a sink fund to buy up stocks and futures contracts with the idea of preventing large-scale shifts in the stock and futures markets. The problem with all this is that it has the effect of destroying smaller investors and other participants in these markets who are not privy to the inside information that these conduit banks are able to use to their great profit.
When the original money is loaned by the Federal Reserve Bank to the federal government through the swap of Treasury bills, it is merely swapping one non-interest bearing medium of exchange (money) for another interest-bearing medium of exchange (Treasury bills, also money in another form). In doing so, the overall increase in the money supply is actually two times the amount actually created through the original bookkeeping entry because it creates two separate media of exchange simulataneously (the "money" as well as the Treasury bills which is also "money" by another name. This system also contributes to the national debt, a burden that is passed down through succeeding generations.
All of this could be brought to a very quick and effective halt by nationaizing the Federal Reserve and taking back the national government's Constitutionally-created role of generating the country's money supply by issuing currency or book entry infusions backed by the full faith and credit of the United States. By doing so, in one fell swoop, the country's money supply would no longer be loaned into existence as it is now, thereby not adding to the already swollen national debt. This would afford a non-debt based way of funding the needed stimulus package.
The standard line typically used to oppose such an approach is that pouring liquidity into the economy by simply funding public ventures through fiat money infusions is inflationary. In reality it is less inflationary than the approach we have been using which loans book-entry money into existence through the federal reserve system. Under the current system, whenever money is borrowed into existence, not only is "money" produced but also a simultaneous debt instrument is also produced of equal value that is also used as a medium of exchange in our economy. In addition, the debt instrument so created is an interest bearing instrument which also effectively jacks up the money supply as interest is paid.
The reality is that inflation is a function of demand for a given good or service exceeding supply. Right now we are actually in severe danger of deflation due to inadequate money supply (liquidity) in the economy. The banking system is for all practical purposes defunct and incapable of filling the needed liquidity to fund economic expansion. Theerfore, the only available means of accomplishing this end is for government to step in as efficiently as possible. Stimulus through tax cuts is horribly inefficient at moving liquidity into those areas of the economy that have the best chance of getting the economy moving again. Moreover, we're likely not going to get a second chance at this without causing enormous and lasting economic harm. We have to take our best shot NOW with the resources available.
The horse-trading I see going on between President Obama and the Republicans in Congress is pathetic. He started out with a "stimulus" package already heavily freighted with tax cuts presumably in order to attract some Republican support. What he seems to have missed over the last twenty years is the Republicans couldn't give a damn about cooperation whatever may be at stake. They'd just as soon see the economy crash and burn and have Obama take the blame. That being the case, we shouldn't lose any sleep at all at not being able to attract Republican support. It isn't going to come and, if it did, it would come at much too high a price thereby eviscerating the needed stimulus from the package. He should simply go it alone with the substantial Democratic majorities while he still can. If he's successful, no amount of carping from the Republicans will save them in 2010.
If Obama allows the Reps to prevent the needed stimulus to get the economy moving again, we will lose in 2010 and he will lose in 2012 and go down in history as a failed President (if the country even survives for history to be written). If the Republicans insist upon obstructing needed legislation via filibuster or other means, Obama should aggressively take the fight to the Rebublicans and call their bluff. This is not the time to be faint-hearted.
On another related topic, a lot of red ink can be stopped by ending the horrible draw on our economy of funding two wars. Both should be ended as quickly as possible.
In additon, the horrendous increase in the fedral debt created by the Bush adminstration should simply bought in by fiat money created by the federal government. This would not be inflationary if accomplished gradually with high-interest debt instruments being the first to be selectively retired. The reason this would not be inflationary is that by retiring the debt instruments (which are simply another form of money already in the money supply), we would would simply swapping one form of money (non-interest bearing money at that)for another interest-bearing form of money in the form of govenment bonds. Under the circumstances, this would wind up being better than a wash in terms of the overall effect on the economy since we would be substuting a non-interest bearing medium of exchange of an interest-bearing medium of exchange by retiring debt and the interest payments that attend such debt.