Bad News On Our Economy, Who Is At Fault & What We Can Do

I attended the Policy Maker Breakfast sponsored by Trinity University of San Antonio today. Their guest speaker was Joseph Stiglitz who in 2001 was awarded the Nobel Prize in economics for his analyses of markets with asymmetric information. He is now a University Professor at Columbia University in New York and Chair of Columbia University's Committee on Global Thought. He is also the co-founder and Executive Director of the Initiative for Policy Dialogue at Columbia. His website is: http://www2.gsb.columbia.edu/faculty/jstiglitz/index.cfm.

With a balance of humility, humor and common sense he reviewed the mistakes of the past 10 years and the impacts they will have for the next 10.

My Summary: Greed is one of the 7-deadliest sins found in the Bible. In a large part, it can control our behavior. The only thing that can stop it is for us to look to Biblical principles that last for all eternity. As you read these notes, I encourage you to look at your own level of greed. I am afraid most of us will have some degree of it's influence in our lives until we leave this earth. Stick to Biblical principles and pray that the Holy Spirit helps you keep this sin under control!

Greed got us into this mess, Greed will not get us out! Speak out and speak loudly!

Here are my notes on Joseph Stiglitz's speech:
Three stories are being written within this 20-year span, the Economic Crisis, the Financial Crisis and the Inventory Crisis.

Economic Crisis
Consumption (people buying things) drives the economy. Consumption fueled by people working for their money is a good thing. Consumption fueled by excessive borrowing spells future disaster. We are in the middle of that disaster now. The excessive borrowing manifested itself in new homes, cars and other things people could not afford.
Our past savings rate was 0% for many years. We were spending our future.

People are saving now with rates topping 5% and growing. The paradox with this is that for the short term, it will hurt the economy even further. Remember people need to consume (buy things), to keep the economy going, not save.

The government says the recession is over. In technical terms they might be right. However, real people will not come to the same conclusion until they have a job. While our economy might grow by 1% during the next few years (ending negative growth or the recession), productivity (producing the same amount of product with less people) will continue to increase at a 2-3% rate producing 2-3% less jobs every year.

If our economy grows by 1% but productivity increases to 2-3%, simple math tells you that job demand will shrink by 1 – 2%. Again the people’s recession will not stop until the economy grows more than 3-4%.

The $800 billion stimulus package will be impacted by the estimated $400 billion drain of the state and city governments. They are losing that much in revenue (reduced consumption = reduced taxes). If they don’t have it they cannot spend it. The stimulus package impact will be short lived and stunted.

Financial Crisis
The financial crisis was created by 3 groups of people. Consumers, national banks and government regulators.
The last period of economic good time bubble was fueled by consumer spending. In a large part, this spending was financed and not earned. This became an emotional epidemic fueled by the expanding divergence in the economic classes of people. The poorer people wanted what they could not afford.

Banks motivated by greed (short term) were more than happy to spread this epidemic of greed to everyone they could find. Big screen TVs, new cars & homes and cell phones were all funded by big national banks that were motivated by short term incentives approved by their board of directors. In effect the board of directors said "Come get your bonuses now, let’s party and worry about it later".

These home loans were sold to buyers around the world by these large national banks and then later by Fannie Mae, Freddie Mac and other wholesale suppliers of debt. All with the false impression that they were backed by the United States government. From the banks point of view, they were receiving higher returns with no risk. No risk until the people realized they could not make payments on their new 5 bedroom $300,000 new home.

The government then backed these national banks and financial companies. They “were too big to fail”. The banks and the regulators used FEAR to scare the American people into bailing them out. The banks and the government wanted to cover their mistakes with our, the tax payers money.

There are 5 bank lobbyists for every congressman in Washington DC. In-short the government turned a blind eye to the underwriting practices of the large national banks. The government was paid to look the other way! They did, and everyone was happy until the people could no longer finance their greed and could no longer make payments on their debt.

The government made a BIG mistake in bailing out the national banks and financial companies. In-short, they privatized gains (bank executives got their bonuses), and socialized their losses (tax payers paid for it). They should have let them fail!

They continue to make mistakes by allowing these same banks to NOT fully recognize their losses. They should be realizing more losses because the value of the property they own (mortgages and commercial property) is no longer worth the amount of the loan. This policy is called “Close Your Eyes And Look The Other Way”. We are not out of this crisis! One day, they will have to recognize these losses.

Further complicating our financial future is the fact that for the first time in history, the United States (through the Federal Reserve) now owns 80% of all mortgages. They have been purchasing these to keep interest rates for homes low. Again trying to artificially stimulate demand and spending. The problem with this is that they cannot keep doing this and plan on unwinding this next year. As they do this, interest rates could increase. As rates increase, consumption will further decrease.

Further complicating the future will be inflation. If the Fed will not allow high inflation, what then? Higher interest rates, resulting in lower consumption which will add to a continued weak economy.

The Inventory Crisis
This is the good news! When the bubble burst hit in 2008, companies stopped ordering goods and shrank their inventories. They are now ordering again because they need something to sell. This could have a short time impact during the next 6 months. DO NOT BE FOOLED! The temporary increase in consumption (fuel for the economy) should not last more than 6 months.

David's Summary:
In summary, consumption (our economy) will continue to shrink due to the lack of jobs, increase in savings, muted stymulus package, trouble in the state and city budgets and higher interest rates... and what he forgot to mention, higher taxes. If you have not already, prepare for a long economic winter, one that will last more than a few years you might want to start saving for it.

So What Should We Do About It!
For me Joseph Stiglitz explained the economy’s past behavior and how the miss-guided steps of the federal government will prolong the real recession. The Big National Banks should have been punished for their short term behavior motivated by greed. They should have been allowed to fail. AIG who provided insurance for many of these oversold and overvalued mortgages (in the securities form) should have been allowed to fail.

Our government looked the other way when the National Banks took on too much risk out of short term greedy motives. Our government was then scared into bailing out these same banks. FEAR and GREED got us into this mess.
We need new government leaders from the top down to get us out. They need the courage NOT to be motivated by the financial lobbyists (5 for every congressman), either through greed or fear.

We need leaders with Biblical principles. Start working on that now! Write your congressman and vote new ones into office if they do not do what you ask them to do! Tell them to STOP SPENDING and run the country based on conservative values!

We also need to vote with our dollars, stop supporting the Big National Banks with your business. They not only got us into this mess, they also support immoral activities such as abortion and the homosexual and transgender agenda.
Use CFAA’s shopping guides to build Christian values in our country! Use smaller regional banks and credit unions. Go to www.christiansuniting.com