I continue to be surprised at the nature of the discussions and debate about "the stimulus package." Many of these discussions very simplistically focus upon the total dollar amount of the stimulus package, as if that is the only true measure of merit, the sine non qua, of the package.
And we are invited (no thank you gentlemen) by so called distinguished economists (who have been wrong SO many times before because, remember folks, economics is an inexact science) to believe things like: $1 trillion will work, but $500 billion will not work. Oh brother.
And so many of these tidbits of advice from economists are so transparently colored by, and imbued with, CYA fears, a sense that a year from now, the economist might be called upon to explain how a swami who was reading tea leaves on some obscure astrology web site, did a better job of predicting how this stimulus wouldn't work, than he did. The result? Economists writing stuff like this: I recommend we spend another $1 trillion dollars, but I must make clear, it may take $3 trillion. Cover your a...
Look...take a deep breath...remember what happened in 1991-1992?
The economy seized up as the country prepared to go to war, people stopped buying things, and we entered into a recession. Bill Clinton got elected promising America economic recovery. Once in office, he immediately proposed and passed his recovery plan.
It was modest...repeat after me...modest. The fact of the matter is that it was essentially nothing (did I mention nothing?) but a tiny pebble thrown in the ocean that is our economy. Yet, it worked. In fact, it worked magnificently. Why? How? For god's sake, it was just a pebble!
It worked because it was focussed on the psychological element, THE DOMINANT ELEMENT of any and all federal recovery plans. Clinton ran promising to do it,"the electorate believed he would do it, he sold his plan when he passed it in Congress, and he did it.
This historical lesson must be applied with respect to Obama's stimulus package. As a general matter...scandalous I know...the total dollar amount is NOT GOING TO BE THE MOST DECISIVE FACTOR in determining whether this will be successful. Instead, the psychological dimensions surrounding its passage will be MUCH more decisive. Yes, it is true, the sum of consumer behavior (and buying mood generally) is the principal driving force in our economy, NOT government spending.
So...bottom line....Obama must affirmatively sell his plan to the American people. To do so, as with any advocacy challenge, he has many choices. He could do a Clinton...and really say nothing about the details...but just insist that...it will work!
Alternatively, he could do a modified Clinton, which I think is the more likely, and get a little bit down into the weeds by explaining how each major component of his package will work to help the economy. I think he is going to do this, and as such, he better be able to explain, against Republican complaints, how each component truly is what the American people SHOULD want in a stimulus package.
But, as Robert Reich recently pointed out, one thing that could sink America's efforts here is a concerted effort on the part of Republicans to vocally (IF they get media attention) undermine Obama's recovery effort. If Republicans attempt this, AND they get media traction, that could be fatal to the recovery occurring, and that should be avoided with some tact and diplomacy on Obama's part, and hopefully, some good will on the part of Republican leaders. By the way, big business wants Obama to succeed in resurrecting the economy, so Republicans can be brought into line using this fact. For Republicans, big business wants this is the ultimate cudgel.
Now, I know what you are saying: this recession is different from previous ones like the 1991-1992 recession. Unlike previous recessions, this one has a massive fraud/derivatives/slumping real estate prices hole that must be filled, hence, that is why we have to spend $1 trillion filling THAT hole. According to this argumuent, this recession is grounded in massive amounts of fraud, illiquid derivatives and nationally and internationally collapsing real estate values. To which I say: yes, this argument is correct, and as such, the dimension of this fact, obviously, must be confronted seriously and squarely with anything you do.
So...it is time to cut to the chase here on this.
First, yes, massive fraud has occurred, and somebody is going to have to lose money, take a haircut, as a result. To which I say: those who committed the fraud should lose all, go bankrupt, suffer the losses, etc.. They should NOT be bailed out by the US taxpayers.
Second, hundreds of millions of dollars worth of derivative instruments were created in the froth of the Bush years by irresponsible banks, irresponsible investment houses, and then, snapped up by irresponsible over-excited investors. Those who were responsible for all of this chicanery should suffer maximal losses, go bankrupt, etc. and not be simply bailed out by the US taxpayers.
To the extent that some of the "good investors" like pension funds and the like can be cushioned from these losses, bridge loans should be made to them to tide them over. But one thing should be clear, all the bad players must pay maximally; in particular, all those individuals who profited from this irresponsible behavior should disgorge their profits. I am speaking of the top 1% of income earners...ahem...likely in certain zip codes in the New York City area.
Third, certain big banks in the United States are going to suffer mightily as a result of sagging real estate values in the United States. Take a deep breath and acknowledge this fact. Certain bank losses are going to approach about 30% as a result of these sagging prices. Somebody is going to have to take a haircut as a result of these sagging prices. Who should take the haircut? The American taxpayers? No.
Look, some of the big banks were smart enough to plan for this possibilility. They did not gamble with their money like drunken sailors. Others banks were reckless. As a result, some of the reckless banks will have to be taken over by the federal government, and maybe even sold off. Yes, the shareholders will lose everything.
Other banks, only the healthy ones, should be spurred (yes, with federal loans on very favorable terms) to begin to make new loans.
With respect to the banks, a very simple rule: the federal government should minimize its haircut and maximize the haircut given to the shareholders of the banks. The American people should settle for nothing less.
Simultaneously, the federal government must take all possible actions to stabilize the national real estate market, including foreclosure avoidance legislation that refinances the mortgages for all those at risk of losing their homes.
Bottom line: I know it feels better to focus on the shiny objects like "$800 billion-Yes!", "$600 billion-No!". But, for the sake of the country, future generations, reason, and truth, let's clean up the discussion over this. Force the trad med to focus on reality, not shiny objects.