(This post is contributed by another guest strater who wrote to us on email@example.com . The author is an IIMC alumnus currently working in the US. The post is a strat.in SPECIAL about the measures taken by the US government to tackle the recession.)
While the USA has entered its 3 year of recession, Barack Obama still enjoys record approval ratings but the euphoria over a Washington outsider returning the country to its people is dying out fast. Obama has the right ideas but he does not know how to fullfil them..Here’s why..
Let us look at his stimulus package and his financial advisors viz. Tim Geithner and Larry Summers. Summers was one of the architects who repealed the Glass Steagall Act and allowed investment banks to take on unlimited amount of risk, while Geithner famously allowed Lehman to collapse. After Hank Paulson scared the US House about an economic collapse without the bailout, the number of begging bowls at White House have gone through the roof. The 700 billion tax payer dollars with a modest leverage ratio of 10:1 (Citigroup’s was 33:1 quite recently) would have created 7 trillion dollars of investable capital. This would easily be enough to make USA energy independent within 4 years and create jobs in the private sector. Obama feels that banks would start lending once the toxic assets are cleared off their balance sheets. He is completely wrong, in my view. Banks have learnt a lesson they can never forget. Banks make money by lending to people who can pay back the money with interest. Americans do not have jobs and there can be no savings or loan paybacks without jobs. The ills caused by consumer spending over the last 30 years cannot be cured in one year. If Obama wanted to get USA out of recession through creating demand then the size of the stimulus had to be far larger and invested in creation of cash producing assets instead of bailouts. But that would have resulted in an immediate run on the dollar and staggering inflation(though that is unavoidable now). Keeping the value of the dollar high would not have been a cornerstone of US policy had USA been a export oriented economy like China, Germany or Japan. But after losing its manufacturing prowess by 80s and relying on treasury sales after the IT boom and bust, USA has little that the world needs except fiat money. Strangely, a global recovery would mean a fall in value of the dollar as people begin to invest in more riskier assets.
Obama wants to make a downpayment of 600 billion dollars on healthcare today when he himself does not know how healthcare reform will pan out and what will be the eventual solution for this problem. GM and Chrysler are bankrupt. What was the point in giving billions more to burn earlier this year? That only prolonged their misery. Bankruptcy of GM and Chrysler will cost jobs but not all of them. They still have valuable assets. The airline industry in USA went bankrupt post 9/11. They never received a bailout. All airlines are operating today and the quality of service from Delta ,for example,is at par with the likes of Cathay Pacific. But it is a leaner airline today with far better management than in 2000. Same can be the case with the auto industry.
In my opinion, Geithner is an extremely indecisive man with deep connections to Wall St. Hence he is fine with pouring billions into Bank of America and Citigroup while all it will take to wipe out the cash injection is for the house prices to fall by 10%(which is bound to happen). An orderly bankruptcy (unlike the one for Lehman) for Citigroup,BankofAmerica was in the tax payers’ interest. These banks did not pay higher taxes when they made record profits and should take full responsibility for their mistakes. All banks did not have such massive losses. Many smaller banks in USA are in fact faring far better. Nationalising these banks for a period of 2-3 years like Sweden did in 90s is a far better solution than pouring billions into a hole hoping to hear the cash hit the bottom.The real reasons why Geithner does not want to nationalise banks is because his Wall St friends are still in charge. In addition to that, many investors and foreign countries including China and Singapore foolishly invested in American financial institutions. A bankruptcy would wipe out their holdings and prevent them from lending money to the USA in the future.USA needs these investors and countries to buy its debt today more than ever before.
Obama wants to invest 150 billion over 10 years to make USA energy independent while Steven Chu himself admitted that USA would not be able to meet its share of emission cuts due to pressure from the industry. He also said that biofuels and not hydrogen was the practical solution (he headed the biofuels department at Lawrence Livermore Labs) for USA to be energy self sufficient when the world still faces a food shortage and the time for biofuels is past. For a good example, we can look at Brazil. Brazil started the biofuels program in 1980 and it took almost 30 years for it to be a net energy exporter. US energy demand is many times that of Brazil & the world’s food requirements are twice those in 80s. Many experts agree that the US economy can be converted into a Hydrogen based economy within 10 years with less than 5 trillion dollars – at the expense of Exxon Mobil, Chevron, Conoco etc and a funding cut for Steven Chu’s former pet projects!! (Wonder what will it take to make influential americans to give up their
The Obama administration can only be characterised as one which is grossly misallocating resources which ultimately will lead to failure and hardship for future generations of Americans. This recession is an opportunity for a structural change in USA economy to consume less and produce and save more. It is also an opportunity to get rid of industries and businesses with outdated ideas and management but is not being used as such. The USA is still benefitting from the hangover of its superpower status. Many commodities are priced in dollars which keeps dollar demand high inspite of it being a fiat currency. Almost all developing countries back their currencies with the dollar while the dollar is not backed by anything !!
To conclude, in my opinion, even if the US economy improves, it still suffers from the fundamental problem of borrowing and consumption for growth.
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