CONSIDERING PRESIDENT OBAMA’S BAILOUT PLANS , THE SIX ASPECTS OF THE DEBATE IN WASHINGTON ARE: January, 2009by Max Berre1: Funding for reconstruction of infrastructure.2: Bailouts through equity purchases3: Middle-class tax cuts4: Green growth5: Buyout of bad mortgages6: Increasing the FDIC limit1: There are two good elements here. First, it will create value; second, it will create jobs.The cost is an increase to the debt.One of the reasons that the debt got so big in the first place, is not just that the we spentso much public money, (getting into debt to do so), we spent it on things that generateneither value nor income, such as no-bid contracts for services to government, moneyspent on consultants, and subcontractors, that ultimately only went through four layers ofsubcontractors before anything got done, by which time, all of the money was siphonedoff.Huge increases in military and security spending didn’t actually manage to BUILDanything of value. As a basic rule.... every time you spend money, you should getsomething valuable in return. Value for money has to be maximized. When we buildinfrastructure, The money is spent on assets of tangible value that are capable ofproducing income, such as roads, hospitals and schools.Moreover, the idea of building infrastructure to create jobs is a really good idea. Thequestion of employment generation is an important one, which people tend to ignore.While "trickle down" may not be valid because money sent to the top is mostly saved,Keynesian theory backs the idea that money does TRICKLE UP, because the workingclass can be defined in economic terms as: "people whose income is very close to thebasic cost of living" it means that when they have an extra dollar in their pocket they arelikely to spend it on something basic, e.g. food, clothing, transportation, education. Thewealthy meanwhile, are "those whose income is far above the cost of living" meaningthat it is doubtful how much of it they will spend. Basically, if you want to generatefurther jobs, the money has to get spent.The US unemployment rate is around 7.5% which is ominous. In the Netherlands, acountry that the US likes to call a "socialist welfare state with an unemploymentproblem" the unemployment rate half that figure.
2: When you do a bail-out, it speaks to the "moral hazard" problem, because you justleave the same idiots in charge of business that drove the firms into the ground in the firstplace. However, if the state does an equity bailout, it doesnt just give free money tofirms, or buy bad bonds to uphold their value, instead, the state buys company stock, andbecomes a shareholder of the company. When you own shares....... you have somecontrol over a firm.Today, many pension funds in the US and in Europe own enough company shares thatthey are able to have a say in how the company is run, so many companies have inputsfrom large pension funds, who tend to be long-term investors. That prevents waste. Sincethe government always wants to be re-elected (1st lemma of public economics), itsrepresentatives within the company will pursue strategies of preserving firm value, whilemaximizing social value, (employment generation, environmental responsibility, limitingexecutive payouts). Thats how Obama managed to tell firms under bailout that the CEOdoesnt get to have more than $500,000 a year. "Moral hazard" solved. In Japan, thisproblem is solved because the ministry of finance has a special relationship with keybanks. In Europe, it’s solved because the state and the state pension funds tend to beactive shareholders throughout the economy. Now the US needs a plan.3: The middle class are the section of the population most likely to spend on value-addedgoods and services. Funny thing... because thats mostly what the US produces: Value-Adding Services.Also... politically speaking, it would be a good idea if Obama managed to get at leastSOME Republican support for the bill. Tax cuts in general should help that effort. Ifnot.... it only means that there were lots of Republicans who voted no on tax cuts, whichis something most republicans dont want to do, ideologically speaking.4: In a decade, green technology is likely to become one of the most profitable types ofinvestment around, for years to come. Potential demand is huge. That means that the USshould get into a position where it can develop its own green technology rather thanhaving to import it. It would be even better for the US if we manage to actually EXPORTgreen technology. The race is on, and Europe, Japan, and the Gulf States are alreadypouring vast amounts of money into green-related R&D. We already depend on the GulfStates for oil. Should we come to depend on them for solar technology too?5: Recessions destroy economic value by a process of chain reaction. Spending cuts andjob losses, leading to revenue, and income drops, which lead to further spending cuts andjob losses.WE HAVE TO STOP THE BLEEDING IF WE WANT TO PATIENT TO LIVE.If we put a stop to the foreclosures, we can limit the destruction of value created duringthe boom. Bailing out homeowners is more fair than bailing out the mortgage providers(the effect is similar). Also, there will be a lot fewer homeless people.
As a political point, its also important to consider that one reason that the democrats arein power now is because many formerly rural areas are now filled with "new middleclass" homes. The people who live there are typically young, professional, ethnicminorities of working-class origins who climbed their way into the middle-class throughhard work. They vote overwhelmingly democratic. This is why Virginia went to thedemocrats. The old rural areas of VA are now filled with middle-class DC voters whogrew up poor, and still have loyalty to the democrats. Its in the interest of the DemocraticParty to make sure that these people dont lose their homes, especially if they live inswing voting districts.6: This has happened in Europe. This is a good idea because psychologically speaking.....often all the state has to do is promise to act, rather than actually act. If the state sets ahigh FDIC limit, acts once or twice to establish credibility, the mindset in the market willadjust accordingly, and the cost to the state is small in the long-run.