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Mortgage Meltdown: Economics 101

Theoretically economics should be a separate discipline from politics. It is referred in textbooks as the study of scarcity and allocation of resources. It ought to be an “assist” in developing national, regional and local policies that lead to better lives of citizens. In fact, however, it is merely an arm of political partisanship and ideology. It has become the effluent (sewage) of econometrics (measurement of economic data) because the measurements are selected for the purpose of furthering political ambition, power, and ideological agendas. The resulting economic policies are not surprisingly ineffective, unrealistic, and often lead to disastrous consequences.

The latest blast from the past is the talk of “economic stimulus.” In other words, more of the same, deferring the inevitable crash until somebody else gets into public office and we can blame them for not controlling an economy that has been scrambled with political agendas for 50 years or more. 

We don’t need and should not want “stimulus.” What we need is to correct our perspective, change our behavior, and pursue a zero tolerance on economic policies that are not designed to add value to our society, our competitiveness in a world economy, and encourage the one thing that has distinguished the American experiment from all other societies and systems of government and rules of the marketplace — INNOVATION. Capitalism and a republic operating under democratic principles are good things in theory. But if not practiced in reality they become mere buzz words behind which ambitious people hide their personal goals.

Economists are right when they constantly remind us that we are in a constant process of trade-offs. We take more from there and gain a little somewhere else. We spend a little here and take a little from there. This is true. Yet the same economists come up with exotic theories supporting unscrupulous politicians of all political persuasions. We are told that spending is not real spending because the multiplier effect will produce more in taxes than it costs the government. Ornate “theories” predict the recovery of the economy, and the necessity of periodic recessions, boom and bust cycles, etc.

For example, if the multiplier is 5, then one dollar spent by the government produces $5 “stimulus” to the economy. If the average tax is 20%, the government spends a dollar and gets it back. And five people get the benefit of extra revenue. But it doesn’t work that way. The multiplier is rarely 5 even if it averages five for the entire economy. The revenue is subject to costs that are not taxed. And the tax code which consists of thousands of pages of conflicting policies, procedures and favors to large political contributors, hardly provides 20% tax revenue. it is more like less than 1%, which is why the deficit continues to rise an alarming rate.

Add to that the intense pressure from government, business and banks for consumers to spend every penny they get and the pressure to improve one’s credit score at all costs so that more debt can be acquired and spent, and we are left with a nation whose citizens are completely enslaved in debt, a government that is hopelessly in debt and locked in policies that can only make the matter worse, and a currency whose value is correctly perceived by the rest of the world as resting on an economy based on the BIG LIE: Using whatever means are at the disposal of decision makers, they coerce, trick and otherwise convince consumers to buy items they don’t need or even want. Now that consumers are basically out of money and have no more credit available, the government wants to get more credit into their hands and give them just enough money to make a down payment on acquiring more goods than they need or want. 

This is not “stimulus”. It is pushing us over a cliff. If we want to give citizens some extra money, then let us couple it with reality — education on saving the money, retraining their spending and building wealth. 

A basic working assumption of economists is that individuals are rational maximizers most of the time. In other words they are successful, most of the time, about making decisions that are in their best interests. It is a nice assumption but isn’t true. Perhaps it could be closer to true if (1) everyone received adequate education and (2) government, industry and finance gave up the desperate goal of spending more regardless of the costs. 

As it stands, we are a generation developing a legacy that is the opposite of our parents — the inheritance will be trillions — tens of trillions — in debt and a currency that is nearly worthless. We will be a society of uneducated, unsophisticated citizens who cannot spell “innovation”, much less come up with it. 

And the top 1/2% of the country unaffected by the desperate poverty, hunger and housing situation of their fellow citizens, will debate “stimulus” packages that are geared to channelling even more money to themselves while giving the appearance of helping the nation. The upper class will socialize police services to make sure they don’t get hurt by people who are hungry and disaffected. Fore services will be socialized so that the homes of the wealthy are saved, the lives of the wealthy are saved and the property of the wealthy is preserved. The rest can go the way of Katrina. Healthcare will be socialized but the money will fist go to insurance companies and then to medical providers thus guaranteeing higher medical costs, and the brokering of life and death for profit. 

The solution for the current crisis that threatens us with the worst economic conditions we may have ever experienced, is to stop it. The Fed and finance sector cannot spend our way out of it without creating worse conditions. Punishing the rascals who came up with this scheme of moving risk around under sea shells so fast that nobody knows where it lands is not the answer either. Maybe they deserve jail. But more importantly, we deserve a viable society and viable economy. 

The rascals have the channels already established through which solutions can be passed. Getting rid of them would be like disbanding the one force that could have kept order in Iraq after the invasion — the Iraqi army and police. We need the power of government and the finance sector. It was the the investment banking firms that created the funny money and not the Federal reserve. That is why the Fed’s lowering of interest rates and “increasing liquidity” will have minimal results. 

The brakes have already been outlined in this blog. To summarize, stop the foreclosures (and don’t distinguish between those who “deserve” to be foreclosed), stop the write-offs for lenders, halt the criminal investigations, modify the mortgages down to any level that will keep the houses occupied, provide the owners of CDOs with a return as soon as possible as much as possible, and THEN find ways to crank up the economy without excess consumer spending and debt.

Filed under: ATM, bubble, Bush, CDO, community banks, CORRUPTION, credit unions, currency, education | Tagged: crash, economics. econometrics, education, rational maximizers, stimulus |