I would spend every dime replacing the military equipment either damaged or destroyed in the past 6 years. That would be the biggest stimulus to the American economy.

Why? All of the money would be spent within the US, to US businesses, on goods manufactured in the US, all going to legal US workers, and thus the money would have the best chance of actually cycling within the US a few times.

People can complain about defense spending, but it always has been the best stimulus to local economies ever - and we get something for it. More taxes are generated through defense spendiing, so that other social programs can get funded without pain.

Sure, it sounds simple and many peacenik types will wring their hands and say making swords instead of plowshares is "not nice." However, we will need to replenish our defense systems, and it's a better deal than seeing all the money end up in China or elsewhere immediately on goods made elsewhere.

I like the defense spending idea. Even if the entire amout of the stimulus wasn't spent on military equipment, that tyoe of expenditure has exactly the effect that I think is needed to re-start the economy.

The only problem is one of scale. Last year the Defense Department spent only a little more than $100 billion buying military equipment. Even if that amount were doubled or tripled, it still amounts to only about 1/3 of the amount of the total stimulus that the economists think is needed. Beyond that is the probable inability of the defense industry to produce substantially more than it has in recent years. If defense spending were suddenly multiplied, it is doubtful that the industry would have the capacity to ramp up production to actually spend the money to create jobs. In fact it's doubtful that they would make the investment in additional productive capacity, knowing that the order thruput resulting from the new stimulus money is only temporary.

But I think that a slug of money for increased defense spending should definitely be a part of whatever package is finally approved.

"I've asked this a dozen times and no one can give me an answer. When in history has government ever spent an economy back into prosperity?" History has already proven it simply doesn't work. But I do agree on defense spending, that's one area where the government does belong and I happily pay my taxes for. I'm not picking on the Republications or Democrats. They are ALL at fault.

It's not about getting a check from the government it's about keeping more of what we earn. Most of us pay out close to 50% in total taxes to local, state and federal governments. How much more do they need to confiscate in the name of a bail out? How much more can we afford?

BTW, it's not our job or right to speculate on how people would or should spend their money. They earned it and they have a right to spend it any way they wish. More and more seem to believe that everything we earn belongs to the government and they let use keep a certain percentage of it and then spend the rest how they see fit.

Call me crazy but I don't believe the founding fathers had that in mind when they created the Constitution or the concept of limited government.

In my view we’ve for the most part turned away from the Constitution, limited government and most of the core values such as personal responsibly and work ethic that made our county great. Until we get back to the basics, the government can print money until there’s not enough trees left for paper and it’s not going to fix a thing. We are going the wrong way and another trillion in pork barrel spending isn’t going to fix it. The government doesn’t create prosperity, private citizens do.

Originally Posted by dklassen

"I've asked this a dozen times and no one can give me an answer. When in history has government ever spent an economy back into prosperity?" History has already proven it simply doesn't work. But I do agree on defense spending, that's one area where the government does belong and I happily pay my taxes for. I'm not picking on the Republications or Democrats. They are ALL at fault.

It's not about getting a check from the government it's about keeping more of what we earn. Most of us pay out close to 50% in total taxes to local, state and federal governments. How much more do they need to confiscate in the name of a bail out? How much more can we afford?

BTW, it's not our job or right to speculate on how people would or should spend their money. They earned it and they have a right to spend it any way they wish. More and more seem to believe that everything we earn belongs to the government and they let use keep a certain percentage of it and then spend the rest how they see fit.

Call me crazy but I don't believe the founding fathers had that in mind when they created the Constitution or the concept of limited government.

In my view we’ve for the most part turned away from the Constitution, limited government and most of the core values such as personal responsibly and work ethic that made our county great. Until we get back to the basics, the government can print money until there’s not enough trees left for paper and it’s not going to fix a thing. We are going the wrong way and another trillion in pork barrel spending isn’t going to fix it. The government doesn’t create prosperity, private citizens do.

Amen

Originally Posted by Villages Kahuna

Several politicians and others are currently being quoted that spending the better part of a trillion dollars in an attempt to stimulate a disastrously damaged economy is not the correct thing to do.

Unfortunately, the critics never seem to offer an alternative. Do they propose that the amount should be smaller? Larger? Should the government stay out of the business of trying to stimulate the economy and permit the free market to make the corrections? Usually after the criticism of the plans being put forth by the new administration, no other alternative plans are proposed. Criticisms are limited to a dislike for what's being proposed, but with no "better idea" offered.

So a question for this forum might be...

Should the huge economic stimulus package being designed by President-elect Obama and his financial advisors be enacted into law? Should the amount be increased? Decreased? Or should the government simply do nothing, let the free market make whatever corrections it can, and tend to other issues of national governance?

I would suggest that as participants respond to these questions that they incorporate some sort of economic argument on why the alternative ideas they suggest might work better. It would add to an interesting discussion of respondents opined on how their alternative suggestions would improve the economy, whether there's a chance their ideas might actually worsen the situation, and what effect alternative suggestions would have on the duration of the current economic cycle. If references to other alternatives or other expert opinion can be cited in replies, they might add to everyone's understanding of the economic theory underlying the alternatives being considered or suggested by both the new administration as well as their critics.

OK, Steve and DKL, am I interpreting your replies to mean that no action should be taken by the Congress or the administration to address the current financial crisis? While I would disagree with that recommendation, I would like to learn more about why you think a "limited government-free market" approach would reverse the current economic decline and begin to strengthen the U.S. economy in some reasonable time frame.

Remember, there's little more the Fed can do with monetary policy to help the situation. Interest rates are already close to zero and they're printing money as fast as they can without cratering the value of existing treasury bonds held by foreign investors. Whatever government response is chosen, it will certainly have to be in the area of fiscal policy rather than monetary policy.

I think I answered your question and did some basic history analysis to back it up. The housing crash was as easy to predict as the sun coming up in the morning. It just so happens that the rest all happened at once. The down turn in the economy was also easy to predict, it's been coming for a long time and it will stabilize just like all the other times. The difference is we have a new president that doesn't study economic history and thinks throwing trillions away will fix it when it never does. A government balanced budget and tax cuts especially for capitol will promptly turn it around. It always does.

Remember the big dotcom bust in the early nineties. I lost my job and it took almost 18 months for the technology sector to come back. IT folks were loosing their jobs left and right. You know what? The technology sector came back to life all by itself and unbelievably it did it with no government help.

The solution is for the government to get out of the way and let the folks who really make the economy go do their thing. Once this turns around we'll hum along for another 15 or 20 years and then it will happen again, just like clock work.

I would like to learn more about why you think a "limited government-free market" approach would reverse the current economic decline and begin to strengthen the U.S. economy in some reasonable time frame.

Because it works every time it's tried. That's how this county became the most powerful and prosperous in the world. Socialism didn't build this nation, free market, entrepreneurs, limited government did. That's just the plain truth.

Government is not the solution. More often than not they are the problem.

Ok, here's my prediction. Seven years ago I told everyone that would listen to me the housing market would crash within 10 years. I was off by three years. If the government does nothing we'll come out of this in about two years maybe a bit longer. If Obama gets his way it will take 7 - 10 years. If they get busy and cut spending, balance the budget and cut taxes especially cap gains we'll come out of this in a year and a half. If they would just do that, consumer confidence would zoom and business would start hiring again with more freed up capitol. Business are laying off more these days because they see the writing on the wall if Obama gets his way. They are preparing for a long haul.

Originally Posted by dklassen

The solution is for the government to get out of the way and let the folks who really make the economy go do their thing. Once this turns around we'll hum along for another 15 or 20 years and then it will happen again, just like clock work.

I certainly respect your opinion. I disagree that the government should stay completely out of it, but I really haven't concluded exactly what the Congress should do or how much they should spend to do it.

I would only point out that all economists that I've read recently--those of all flavors, most conservative to most liberal--have uniformly said that the economic crisis that we're facing is unprecedented in economic history and will take huge government intervention to correct. I may have missed some, but I'm not aware of any notable economist who purports that the free market can correct the current financial crisis.

One of the problems that absolutely needs some intervention to correct is the current "frozen" status of the credit markets. Even if the Congress were to pour money into the economy, it will do little good unless the banks begin to lend, providing the multiplying leverage to increase the impact of the government stimulus contributions. The initial $350 billion was not enough to increase the bank's capital ratios to levels sufficient to meet regulatory standards. And with the weak economy, the creditworthiness of almost all borrowers has been compromised to the point that the banks cannot safely lend to them and expect to be repaid in full. It doesn't take the 25 years of experience I have in banking for almost anyone to understand that banks cannot safely lend to auto companies, auto suppliers, most retailers, other banks or insurance companies, etc. All of those companies have been severely weakened by the financial crisis and would almost certainly not pass the credit screens that banks use to approve loans. Until companies such as those begin to increase production, buy supplies and materials and hire more people, the economy cannot begin to re-build itself. Without loans from the banks, they simply don't have the money to do those things. The frozen status of the banks is absolutely something that has to be corrected, regardless of what other actions--or no actions--that Congress comes up with to reverse the economy.

I added some comments to my last post.

The credit market will free up when people start going back to work and the housing market stabilizes which it will all on it's own. It always has. People will go back to work when business has more capitol and aren't running scared with the prospect of higher taxes which of course Obama promised them. Maybe they wouldn't need so many loans if the government wasn't taxing them and regulating them to death?

You keep going full circle that the government is the only solution to this.

Originally Posted by dklassen

I added some comments to my last post.
You keep going full circle that the government is the only solution to this.

You're right. In the last couple of years there ws no one more critical of the profligate spending by Congress, the increasing defits and the ballooning national debt than me. During the campaign, I criticized both candidates for their repeated claims that they would lower taxes. I couldn't see how that could happen while at the same time beginning to balance the budget and begin to whittle away at the national debt. The numbers had reached the point that the tried-and-true tax-cutting approach to stimulating the economy and "growing out of the problem" simply couldn't work any more (in my opinion).

The main difference between your beliefs and mine are of scale. The free-market-limited government approaches that worked in the past are simply not powerful enough to deal with a crisis of this magnitude. The financial crisis that occurred in the few weeks before the election and since, which seems to becoming more critical every day, has "flipped" me into the camp that if we are to avoid permanent damage to our economy and a change in our way of life, we will have to sacrifice whatever desires we might have for fiscal balance. To avoid a complete economic disaster, we'll need to sacrifice the financial future of several future generations of Americans. Our free-market capitalistic system will also likely change. It will almost have to become a "European-type" capitalism, with government heavily involved in the financial system and most of the national social programs. In time that must mean increased taxes and much slower economic growth than we've become accustomed to as Americans.

It's already happened with the government owning most of the large banks and financial companies as well as the three auto companies. The money already injected into those companies already exceeds their market capitalization. The free market has not been able to resolve the healthcare problems of the country, nor has any action been taken to adequately strengthen Social Security or Medicare. Once the government takes those actions, we're there--we will have become Europe. The government will control the banking system, healthcare and will support all those retired people. The rest of the economy can remain capitalistic, but taxes will have to increase to pay for the aforementioned functions that will have fallen under government control.

I really hate to say what I did above, but I believe that to be the facts. Free market capitalism worked extremely well for the U.S. for 50-75 years. But either it's failure or some other perfect storm of conditions has resulted in our economy becoming so weakened and further threatened that there is no alternative except substantial government intervention.

President Bush said it today during his press conference. He said that supporting the $700 billion bailout ran completely contrary to his personal economic beliefs. He said, "...what else could I do when my economic team came to me and told me that unless we injected that huge amount of money into the banks, we'd be facing a depression even worse than in 1929".

I too have finally concluded that substantial government intervention is the only answer. I haven't arrived at any total amount or combination of uses that I feel comfortable with. But huge intervention seems to be the only economic tool left that holds a chance of reversing the economic slide and beginning the re-build of our economy. The scary thing to me is that I'm not even certain of that.

The longer term risk that we face is that Americans forget how well free-market capitalism worked for so long and become accepting of some form of quasi capitalistic-socialistic economic model, similar to what exists in Europe. If they don't forget, we can get back to the system we all know worked in 10-15 years. But if Americans forget and become comfortable and reliant on government's involvement in their lives, we can look at Europe and see what type of economy we will be living with.

Originally Posted by Villages Kahuna

You're right. In the last couple of years there ws no one more critical of the profligate spending by Congress, the increasing defits and the ballooning national debt than me. During the campaign, I criticized both candidates for their repeated claims that they would lower taxes. I couldn't see how that could happen while at the same time beginning to balance the budget and begin to whittle away at the national debt. The numbers had reached the point that the tried-and-true tax-cutting approach to stimulating the economy and "growing out of the problem" simply couldn't work any more (in my opinion).

The main difference between your beliefs and mine are of scale. The free-market-limited government approaches that worked in the past are simply not powerful enough to deal with a crisis of this magnitude. The financial crisis that occurred in the few weeks before the election and since, which seems to becoming more critical every day, has "flipped" me into the camp that if we are to avoid permanent damage to our economy and a change in our way of life, we will have to sacrifice whatever desires we might have for fiscal balance. To avoid a complete economic disaster, we'll need to sacrifice the financial future of several future generations of Americans. Our free-market capitalistic system will also likely change. It will almost have to become a "European-type" capitalism, with government heavily involved in the financial system and most of the national social programs. In time that must mean increased taxes and much slower economic growth than we've become accustomed to as Americans.

It's already happened with the government owning most of the large banks and financial companies as well as the three auto companies. The money already injected into those companies already exceeds their market capitalization. The free market has not been able to resolve the healthcare problems of the country, nor has any action been taken to adequately strengthen Social Security or Medicare. Once the government takes those actions, we're there--we will have become Europe. The government will control the banking system, healthcare and will support all those retired people. The rest of the economy can remain capitalistic, but taxes will have to increase to pay for the aforementioned functions that will have fallen under government control.

I really hate to say what I did above, but I believe that to be the facts. Free market capitalism worked extremely well for the U.S. for 50-75 years. But either it's failure or some other perfect storm of conditions has resulted in our economy becoming so weakened and further threatened that there is no alternative except substantial government intervention.

President Bush said it today during his press conference. He said that supporting the $700 billion bailout ran completely contrary to his personal economic beliefs. He said, "...what else could I do when my economic team came to me and told me that unless we injected that huge amount of money into the banks, we'd be facing a depression even worse than in 1929".

I too have finally concluded that substantial government intervention is the only answer. I haven't arrived at any total amount or combination of uses that I feel comfortable with. But huge intervention seems to be the only economic tool left that holds a chance of reversing the economic slide and beginning the re-build of our economy. The scary thing to me is that I'm not even certain of that.

The longer term risk that we face is that Americans forget how well free-market capitalism worked for so long and become accepting of some form of quasi capitalistic-socialistic economic model, similar to what exists in Europe. If they don't forget, we can get back to the system we all know worked in 10-15 years. But if Americans forget and become comfortable and reliant on government's involvement in their lives, we can look at Europe and see what type of economy we will be living with.

Let us assume that you are correct in government spending (help us all if the govenment ever invades our life to the extent you have imagined in this post)...but for now please those of you who are knowledgeable about this, talk to the subject of accountability.

I simply see the government thus far spending money and throwing it into a deep pit. If the spending is correct, how do we INSURE we get what we pay for...recovery ?

They spent the first 350 billion and it did nothing. Now they want the second 350 billion and it will do nothing. Then they will grab the big enchilada to the tune of 1 trillion. When that does nothing what then? The treasury already said they have no idea where the first 350 billion went. Does that not disturb anyone here?

The economy is no worse now than it has been in the past and we always recovered rather quickly except when government got involved.

When you or I run into financial difficulties, we cut our budget, stop spending and try to earn more money. What does the congress do? They vote themselves a pay rise and start spending money like a drunken sailor on liberty. Does that sound like a good solution to you?

You all are treating this as though it’s never happened before. Go look our are history. This recession is NOTHING new. ALL economies go through recessions some worse than others and then recover. You are buying into their scare tactics lock stock and barrel.

I don’t have much more to say about this but mark my words. If congress gets their way, they will run our economy so far in the ditch it will be decades before we recover if ever and the blood will be on their hands and our grandchildren will pay the bill... trillions of it.

Here’s my message to congress. Balance your budget, stop spending money like crazed maniacs, cut a bit off income and cap gain taxes. You will see credit, consumer and business confidence and our economy come roaring back to life. Sure, it’s a conservative approach but it works every time.

I shared my thoughts with a couple of my old banking buddies. Here's the response I got from one of them. Actually, other than the timeline, it's pretty close to DK's response. To be honest, as scary as his scenario is, I find it hard to debate.

My short answer.

The core of your argument is...

"if we are to avoid permanent damage to our economy and a change in our way of life massive government intervention is needed."

I believe pretty much everyone now understands that "our way of life" over the past twenty years has been to maximize consumption through borrowing.

Everyone won under that scenario: lenders made fat profits; producers produced goods that consumers consumed; politicians collected taxes on the transactions, and consumers got a boost in their quality of life. But only for the short run.

Unfortunately, the underlying economic props of value creation did not exist. Eventually, the lenders balked and the bubble popped.

The carnage is visceral:

-Most lenders are bankrupt.
-Most borrowers have loans they cannot possibly repay.
-Producers of goods that consumers purchase are facing huge drops in their sales and have to lay off workers, making the problem even worse.
-Taxing entities are facing large declines in tax revenues and budget shortfalls and are forced to do the same things that businesses are doing--lay off workers and reduce services.

Overall, the consumer, who has been spending 105% of his income, has now throttled back to where it is estimated that he/she will be spending only 95% of his income and saving 5% or paying down debt. Their cutback in spending has resulted in a huge decline in GDP. But in time, maybe a long, long time, an economically healthy and ultimately desirable outcome might result. There will be huge amounts of pain in the interim. Our way of life will change. But hopefully only temporarily.

The Current Planned Response and The Expected Result

To have the government fill the gap with additional spending - trillions of $$.

In the short run, that's a practical solution. But it's nothing more than an extension of the circumstances that caused the problem in the first place.

The government is not spending the cash flow it is currently generating--it is borrowing it. That's been the case for almost a decade. Enough time to create a chokingly large national debt.

The trillions of dollars bailout would merely push the cycle out a couple of years "to preserve our way of life."

As the first borrowing balloon popped, so will the government borrowing bubble end. Lenders will balk. We'll be repeating all this again in a few years. Long before the economy has recovered and re-built itself. Americans do not have the self-discipline to change their way of life themselves. It will take the harsh discipline of economic forces to accomplish that.

At that point, with the economy, heavily dependent on government spending, the government will have three options, or a combination of the three:

-Let the value of the dollar sink to unprecedented levels and permit the resultant inflation to run its course.
-Default on it's debt.
-Cut spending in massive amounts.

So my feeling is--let's get on with it. We'll have a depression. Huge numbers of people will be out of work. Consumption will drop even further. Our way of life--the unsustainable way that we have become so accustomed to--will change decidedly. The economy will recover, but very, very slowly--taking a decade or more. But when we come out the other end, the country's "way of life" may be more sustainable. Our country's position in the world will change as the result. But that's simply the result of the mistakes we've made in the past. Sad, but unavoidable.

Some of us may see all this happen; others will be watching from another place. It'll take a long time, more than some of us have left.

I balk at any solution sponsored by Special Interest Groups (SIGs) when such solution seems to benefit only the SIG and not John Q. Public. The banking SIG has now run off with a large chunk of change. The Auto SIG is still circling around the money beast. Others are pummelling Congressfolk and their staffers - who are no smarter about what to do than anyone else - with: 1) we can make you look good to your constituents; and 2) don't forget who really butters your personal bread.

K, you made a highly astute comment with "Overall, the consumer, who has been spending 105% of his income, has now throttled back to where it is estimated that he/she will be spending only 95% of his income and saving 5% or paying down debt. Their cutback in spending has resulted in a huge decline in GDP. But in time, maybe a long, long time, an economically healthy and ultimately desirable outcome might result. There will be huge amounts of pain in the interim. Our way of life will change. But hopefully only temporarily."

Personal financial risk management has been sorely lacking, and that is one of many root causes to this economic dilemma. For some reason, people have lulled themselves into believing: 1) jobs last forever; 2) pay raises always occur; 3) there's always a new credit card which will let me flip the balance from my old card; 4) if I don't look, it will go away; 5) I am never responsible - it's always some other guy's fault; and 6) the government is mother, the government is father and these "parents" will always bail me out from my own stupidity, naievete and greed.

Government, through several decades of bowing to different SIGs at different times, has interfered with the economy so badly it's shameful. Government's manipulation of international trade policies (especially in giving most favored trade status to countries which routinely exploit labor) has ruined the domestic manufacturing base, especially at the small business level. Government's foreign aid policies, which in essence are government-to-government briberty to obtain allies, is appalling, especially when these foreign governments have SIGs of their own which lobby Congress. Again, more root causes which are not being corrected.

So, how will throwing another $350-900Billion on the short-term make anything better? The first $350Billion went away fast, and with almost no traceablilty.

We need to face the fact that stupid financial actions cause people to get hurt, that pain is part of the healing process (unfortunately), and that there will be more pain before we "get better." Government's sales pitch that it can just print and distribute more money to SIGs, and that will make the pain go away, is folly. It WILL make selected SIGs able to salvage some short-term protection, but that's all. You can't cure the illness by feeding the patient $1Trillion worth of placebos or economic morphine - the illness simply remains and will continue to consume the patient.

In spite of all of this, our Congress and the outgoing/incoming President is determined to "look powerful" to fearful voters despite itself. While I don't expect any guarantees, I do expects plans, accountability, public scrutiny via "Sunshine" and "Freedom of Information" laws, and protection from scurrilous folk. So far, we have had none, and none is in the pipeline. We have not gotten a "helping hand" from Government, but instead have only gotten "the finger!"

Where's our SIG?

Originally Posted by SteveZ

K, you made a highly astute comment...

First, the statement you credited me with really wasn't mine. It was in a reply that I received from an old banking buddy of mine with whom I shared the question from this thread.

I'm getting what I intended in starting this thread...some thoughtful viewpoints from a few people. I intended the thread to be a non-political examination of the situation, the causes and the possible solutions. For the most part, that's how people responded and that's the way the dialog progressed. I think that's great.

Without any attempt to introduce politics into this thread, I suppose it needs to be noted at least that whatever economic solution is enacted by Congress, there's no doubt that there will be a political component or motivations that will underly their decisions. Further, I suppose that the SIG's you refer to will have some influence. There are simply too many of them represented on K Street to expect that not to happen.

I only hope that whatever happens remains close to the economic theory that holds the greatest chance of success--even if that means doing nothing. But I'm not holding my breath.

So the news starting to trickle in today is the credit crises (so called) may not be quite as bad as the government has been telling us all along and I’m starting to believe that the economy is not as bad as the media and government is leading us to believe.

Sure we have problems… some of them are big. But we’ve been through recessions before an NEVER did we need trillions of dollars for bail outs.

Unemployment is at 7.2% at the moment. They say it could go as high as 10% later this year. It’s been at 10% twice in the last 60 years and has never been lower than 3% in the last 60 years.

The average over the last 60 years hovers around 5 to 6%. That means 98% of workers today are still employed. We also know there will always be a certain % that is unemployed. As I stated, it’s never been lower than 3%.

The artificial bubble has burst in more areas than one. Now the economy is vetting and it needs to stabilize on its own without Washington creating another artificial bubble and putting or kids in debt to the tune of multi-trillions of dollars.

Freddie and Fannie were the ones that started most of this housing mess (that would be the government) and now we’re being told by the government they are the only way we will get out of this mess. I smell a huge rat.

Are we in a recession? Sure we are. Have we been there before? Sure we have. Have we recovered every time? Yes indeed.

I say no to the second 350 billion and even a bigger no to the next 1 trillion.

Our biggest problem is that consumers and employers have completely lost confidence. They haven’t lost confidence in America or themselves; they’ve lost confidence in our government and are scared to death what they are going to do next. That translates into stagnation which translates into a deeper recession. Everyone is holding back and rightly so.

The government is failing us miserably and we should not trust them with another dollar until they put themselves in check.

My question is who in government is going to step up and stop this madness? Is there not one left in Washington that has the brass to speak out, get angry and tell us the truth?

Another interesting read is the Declaration of Independence.