Do We Need Another Stimulus Package?

Robert Shiller says the stimulus checks don't provide enough insurance against the possibility of a recession, and much more is needed:

One Rebate Isn’t Enough, by Robert Shiller, Economic View, NY Times: Tax rebates ... will eventually put more than $100 billion into the hands of consumers. The hope is that by spending the money, they will lessen the risk of economic disaster from the subprime crisis.

Have the rebates, now mostly distributed, achieved their objective?

It’s not very likely. The rebates may be helping..., but the stimulus they are providing is certainly too small to make a real difference. More will be needed, perhaps much more, before the economy is truly on safe ground.

From the outset, government officials considered the tax rebates as a kind of insurance for the overall economy. ... Has the tax rebate substantially reduced the probability of a downward spiral?

It is too soon to tell, because the Treasury only started to send out rebate checks in late April. Retail sales did rise in May. But the dreaded serious recession still seems very much a possibility. The unemployment rate shot up to 5.5 percent in May, from 5 percent. The Reuters/University of Michigan consumer sentiment index has fallen below the lowest levels of the last two recessions.

The theory supporting tax rebates was originally devised by John Maynard Keynes... But people who have studied [Keynesian] models find that these repercussions aren’t powerful enough unless the initial stimulus is really large. ... Why aren’t they more powerful?

Part of the answer is in the slowness of people to spend extra money. Another is that some of the rebates will be spent on imports. That money will flow abroad..., with little of their rounds of expenditures finding their way back home. Third, the domestic expenditures will tend to result in higher interest rates,... which should reduce investment and lower asset prices. When asset values decline, people tend to cut spending through a negative “wealth effect.”

It is also possible that ...[h]eightened anxiety about the economy might spur people to ... pay off debts and to save, rather than spend. ...

Fuzzy as this picture may seem, there is unfortunately even more uncertainty about the rebates’ effects. ... [from] the peculiar lending dynamics in the subprime mortgage market,... the state of financial institutions’ balance sheets and the confidence that the public has in these institutions..., the vagaries of speculative asset markets, mistakes by securities rating agencies and the problems of bond insurers.

The economy is too complex to capture all these things in any single model. In trying to steer the economy, we are necessarily trying to steer something we don’t properly understand.

We simply do not have the means to quantify all the issues related to the rebates. But the models we do have suggest that the overall effects of the rebates are modest at best.

The reality of the subprime situation, augmented by the energy crisis, at least suggests that we’d better get ready for another round of rebates. There is little talk of it now, but we should be putting in place another stimulus package..., and stand ready for another after that, and another.

To me, the economy feels like a tug-of-war with good news on some fronts pulling one way, bad news on other fronts pulling in the other direction, and it's not yet clear which side will win the battle. If we can get more help on the good side of the rope, wouldn't that be best?

I'm sort of indifferent on a big push for a stimulus package right now, mostly because it seems like a non-starter on the political front - even if congress went along Bush would likely veto it - but it might also reflect a different probabilistic outlook for the economy. If we had included, say, infrastructure spending as part of the initial stimulus package, then the effects would kick in on a sustained basis over time rather than as a one-time hit as with the tax cuts. Thus, this type of spending could have provided the continuous stimulus Shiller is calling for. And if we are wrong and there is no recession, how big a problem is that? Well, what's so bad about building new infrastructure repairing what we already have, don't we need to do that anyway? With a stronger economy, wouldn't it be easier to pay for it? Insurance that also has investment value seems like a good bet to me. But we didn't include infrastructure spending, or any other type of sustained stimulus in the initial package, and while I'd like to see more infrastructure investment in any case, short of an obvious and sharp downturn in the outlook, there doesn't appear to be much chance of any new tax rebates, or spending on infrastructure or anything else anytime soon.

Update: Robert Reich says Unleash Fiscal Policy Now, or More Severe Recession Ahead.

Comments

[Dr. Steven J. Balassi]

These one-time stimulus packages will not keep working. The government needs to permanently reduce the tax rate for low and middle-class workers. These groups tend to spend the money they receive (this will increase consumption, 70% of GDP). It will also bring some additional stability to the demand side of the market.

[Ryan]

Assuming that consumer spending is what we want, these stimulus checks are sort of a roundabout way of getting it. Tax cuts would be far easier to implement (harder to get passed in Congress of course) and would have a lasting effect.

I personally want the market to correct, so maybe I can afford a house, refinance student loans, but cheap stocks, etc.

[roger]

I think that is truly a waste of tax money. Rather, the government should reject the libertarian framework that suggests the state should always and only minimize interference in the economy, and then only by finetuning taxes, and straightforwardly put stimulus money - 200 billion dollars, say - into direct research and development of alternative energy technologies and industries. You could have given tax credits to physicists in 1944 if they would devote their attention to nuclear physics, but you wouldn't have gotten an atom bomb in that way. Nothing has been more pernicious over the last thirty years than the idea that it is 'unholy' for the government to engage in positive economic activities. It isn't. Nor is it a bad idea for government to generate new industries - like the Chinese, South Korean and Japanese governments do.

[Jim Harrison]

As essential inputs to the production of goods and services get scarcer, our aggregate wealth will decline, although misleading statistical measures like GNP may continue to indicate growth. The problem we face is how to share the inevitable burdens of a shrinking economy without consigning any group to misery. A return to the palmy days of the 90s, let alone the 50s, is the sheerest fantasy. One might hope there will be an Indian Summer before the rigors of the Fall set in, but I'm afraid that was what the Clinton years were. Under the circumstances, whether we fire another Keynesian shell at the approaching recession is not very important because what's approaching is not a recession at all any more than global warming is just a phase in a natural cycle.

[Lafayette]

Options

Article: From the outset, government officials considered the tax rebates as a kind of insurance for the overall economy

Tax rebates automatically provoke a reduction in net revenues to the Treasury. (Which the Treasury tries to cover by issuing T-notes.) So, there is an intrinsic "cost" in that the Treasury forgoes net tax revenue and increases debt maintenance.

Is there an optional method to provoke economic activity? Let's play "What if ...": What if the rebates were not allowed and an option sought. What could be that option?

That option could be Government Expenditure, say, on Infrastructure or Social Investments. Those types of expenditures would certainly stimulate jobs, if applied properly.

The tax rebates offer the individual receiving them a choice. Do I spend it? Or not? Given the American propensity to spend and not save, it will likely be spent -- but certainly not all of it. Most will go to consumption, some into savings and some to money-markets waiting for a better day. The effect is nonetheless dispersed.

Government expenditures on Infrastructure Projects, otoh, offer no choice. They provide a double effect -- provoking immediate employment AND redirecting national priorities towards specific needs. Are we not at an economic conjuncture that is "special"?

The Dems should think along these lines. The Repubs will go likely with "business as usual", i.e., lower further income taxes on the rich. (When, in fact, we should be increasing them.)

But, of course, McCain will have his political chits to repay .... to the plutocrats-in-waiting.

Thoughts-Whilst-Meandering: Bush is going to leave this country broke, in order to hobble a Dem-PotUS that he knows is going to win the next election.

[save_the_rustbelt]

Yesterday was the first time in a while I have had time to watch much tv news. Let's see how we are doing.

1. the airlines are cutting services at a frantic pace, now eliminating smaller cities, possibly from all service
2. the housing market is in the tank, and we are likely to lose entire inner ring suburbs
3. the auto industry is collapsing

I don't see another stimulus package doing much good, although an infrastructure package might have multiple benefits (only a limited number of workers can work on infrastructure, but the blue collar class will spend the money and create some amount of ripple effect).

Expand unemployment, food stamps and Medicaid, might do a little bit of good in the short run.

So, in the short run, we are probably toast.

[bakho]

Governors are calling for a Federal capital projects fund of $1.6 Trillion to repair infrastructure and build mass transit. "New York Mayor Michael Bloomberg, California Gov. Arnold Schwarzenegger and Pennsylvania Gov. Edward Rendell have created a coalition to encourage and direct federal funding for infrastructure investment. The coalition, Building America’s Future, will make its first task educating presidential candidates on the importance of infrastructure renovation."

http://americancityandcounty.com/news/bloomberg-schwarzenegger-rendell/

This is the kind of long term stimulus that is needed.

[Lafayette]

s-t-r: 1. the airlines are cutting services at a frantic pace, now eliminating smaller cities, possibly from all service 2. the housing market is in the tank, and we are likely to lose entire inner ring suburbs 3. the auto industry is collapsing

The longer one puts off the remedy, the more difficult the problem is to cure. The US waited two administrations too long. Now it's gotta do it the hard-way.

Next time Americans think they want to vote Repub, let's hope this pain reminds them of why they should have second thoughts about doing so. Though I have no real reason to believe they will. It's a country with a nanosecond memory, so it keeps repeating its errors.

In politics ya pays for what ya gets. We wanted stupidity, we got it ... in spades.

[a]

"The theory supporting tax rebates was originally devised by John Maynard Keynes."

Yes, and ever since there has been rising per capita debt in America, giving the illusion of prosperity (and economists taking this as vindication of Keynes).

Spending doesn't produce prosperity. Spending comes from prosperity. Trying to reverse the natural order can last a while - as history has shown, one can keep on piling up debt and spending for quite some time - but when it ends, prosperity will just disappear.

"Federal capital projects fund of $1.6 Trillion to repair infrastructure and build mass transit." Oh, and the Federal government just has that kind of money in its back pocket. Or the Chinese will only be too willing to lend it. This is the problem when one's idea of economics is to keep the consumer spending; when one actually needs the money, one doesn't have it. Old Sam bought a plasma screen and now doesn't have any money to fix the roof. Sure, that roof has to get fixed or the house will get wrecked the next time it rains. Alas, that's Old Sam's problem, and no one is going to feel sorry for him.

[GoatGuy]

No time to wax eloquent ... (not that I ever have!)

I very much agree with 'Roger' above - a hundred billion dollars spread out evenly over the economy simply adds about $2,500 per household (after The Multiplier), which in turn will a) pay for a fluff or b) pay down a long overdue credit or c) buy a few groceries or d) offset a bit of the extraordinarily fuel-bill crisis.

Manhattan project kickstart, zero.
Disposable income radical change, zero.
Filip, one.

Go about this the other way around: it is NOT a question of 'either/or'. Spend HALF the money on extending federally underwritten unemployment retraining benefits. The other HALF on serious infrastructure advancement research and engineering. Bridges need to be retrofitted apparently. Nuclear power plants need to be commissioned. North slope oil needs exploitation (though frankly I think this is a net INCOME line item, not expense... sign a bill, and off the Oil companies shall go.) Solar (I don't care what tech, but ultimately the top resource to learn how to efficiently tap - and PATENT) needs a big 'build a dozen megaprojects' kickstart.

Likewise, deconstruct the buildup of the Military-Industrial complex (that will add monies to the infrastructure bottom line). No matter what I think of "being there" (i'm for it), truth is that we're mostly wasting more money than getting a return on it in good-will, collateral, cooperative joint ventures, or anything else. Nuf'is'a'nuf. The MIC itself doesn't generate a bunch of jobs, more personal wealth, lower unemployment, a self-supporting Energy Manhattan Project, or anything else. It keeps a rather small number of young lads in the falaffel, and keeps an incredibly voracious weapons-industry afloat. What could be better? $25,000 bombs that BLOW UP, and need replacement. Its a waste.

Finally ... the government needs to come to grips with the hard economic reality of the End of the ReFi Piggy Bank. Our 'contagion' or 'malaise' or 'stagflation' is directly the result of the nation's newest fiat money-supply running dry. It should be no surprise to anyone that all those home-improvement projects, community-improvement projects, regional civic bond issues and remarkably upgraded 'lifestyles' were being paid for by the ReFi Piggy Bank, and it is gone bust.

So, acknowleging that THAT $500/billion-a-year (after multiplier) source of NON-inflationary money is gone ought to pave a path for economic reform that engages and allows for a similarly increased money supply. The problem (again, per Roger's argument) is that adding 'money every month' to individual's and family income is simply either inflationary or decrediting - without opening the paid-down credit funds to any kind of higher economic mandate. Paid out in larger chunks, it then powers segments of the economy that otherwise would wither from lack of monetary injection.

Maybe the argument is simplistic compared to the Great Thinkers of this site (and let me just say: I really, really, really appreciate the level of cognition shown by all authors and most posters), but I also think that elliptic spirals of economic theory are only part of the solution. The other, major part is winning the hearts and minds of the people whom ultimately have to PAY for (or INVEST in) it. Political capital.

GoatGuy

[save_the_rustbelt]

Just made a grocery store run - good grief!

While I agree with Laf, keep in mind much of the Clinton prosperity was built on a fraud-induced stock market boom.

Neither party has much street cred on the economy.

[Bob]

>> To me, the economy feels like a tug-of-war with good news on some fronts pulling one way, bad news on other fronts pulling in the other direction, and it's not yet clear which side will win the battle.

Well i suggest you get out a little more than. Actually make that a lot more.

If you can fool yourself into believing that this economy has much in the way of good news your uninformed or in the Bush admin.

[Ken]

I'm going to agree with Lafayette. There are no good answers! Fiscal policy faces the same bad decisions the Federal reserve does. Cut or hold rates and allow the double digit inflation on the supply-side to crush profits or cut rates and kill whats left of housing. not to mention the damage it has done to the dollar. With only 50 billion in Treasurys hands to bail out the buck they arent going to be able to do it.

On the fiscal side you might buy a little pricing power with the tax rebates but thats about it. Its like peeing on a forest fire. I admire the effort but what good in the long run will it do.

We have a structual problem in the US economy and its time to face the facts. The lack of wealth of the many has begun to erode the wealth and investor confidence of the few!

The next president, whoever that may be, will have to do a little better than tax cuts and rebates to restructure the economy or we'll be right back here in a year in worse shape than we are now. and wouldnt it be nice to have a savings rate as opposed to making excuses as to why we dont have one?

[peder hollinghurst]

we will see how well the economic stimulus package helps us later in the year. while we are getting a boost in spending confidence now, what will happen later in the year when the stimulus money is all gone.

i have been blogging about this for the past month and i will continue my year long mission to blog about the economic stimulus package. 600 dollars divided by 365 days is a buck64aday.

i am the help the goverment never though they would get. I am spendning my stimulus a buck64aday.

read my story

www.buck64aday.blogspot.com

[Lafayette]

a: This is the problem when one's idea of economics is to keep the consumer spending; when one actually needs the money, one doesn't have it.

The economy is a mechanism that creates both prosperity and well-being only by consuming. Consumers have enough money to spend, only when they consume.

Consumption provokes demand; demand provokes the supply of goods and services; which are supplied by labor; which earns wages; with which consumers may continue to consume. There is a symbiotic relationship amongst all these factors.

Consumers must consume in order to live. They have no alternative. So, there is always a base level of consumption that the economy depends upon.

In Economics 101, one learns that the three components of National Product are Consumption, Government Spending and Investment (modulated by the net amount we export/import).

However, the Government spending and Investment (as well as export/imports) both depend upon consumption. Without consumption there are no wages, without wages there is no Tax Revenues, so government cannot spend. Without consumption there is no reason for companies to Invest.

So, to think that the sky is falling on our heads is just too dramatic a notion to allow. It cannot happen. It can diminish significantly, but apart from war, an economy cannot cease to exist.

What happens, in the pattern of consumption, is that it becomes a cyclical phenomenon. Which is the reason why insufficient consumption stimulates recessions, even depressions. But the cycle never ceases to exist.

What Keynes added to our understanding of the cyclical phenomenon is that Government policy can actually provoke Consumption. Which is why Governments either use tax rebates or outright spending to stimulate the economy. Government policy, at the right moment, can even provoke Investment -- if Demand for goods and services is sufficient.

What has happened of late, almost uniquely in America, is a period during which interest-rates where very low. People thus assumed that because they were low that credit could be used to leverage their spending beyond that normally allowed by Disposable Income. In the US, particularly, the lowering of interest rates also unlocked residual value in their residential holding. This unlocked value was also used for consumption.

So, what has happened? Both credit resources and unlocked residual realty value have now come up against natural limits. The cycle that they prompted is unwinding, which results in lower consumption -- and therefore lower supplies of goods and services, meaning increased unemployment. No much (maybe two points above the norm), but enough to modulate substantially consumer sentiment and dampen the propensity to consume.

Because all these factors are symbiotic, they influence one another. When consumers sense that a downward trend in the cycle is occurring, they reduce expenditure in order to save. This mindset, or mentality, can only change when the propensity to consume reinstates itself amongst consumers.

We are not quite there yet. But, there is no reason to believe that consumers will not resume consuming. Can we predict when it will happen? Not really, we can only observe it in the quarterly aggregate economic statistics. Despite all the economic modelling to date, we have never been able to forecast when a cycle changes from downward trend, enters the cusp, and resumes its upward trend. Or the reverse.

But, it will happen. The right stimulus, in terms of government expenditure, will provoke it. And, yes, even the Chinese will assist by assuming new debt to help Americans to consume again -- because it is in their best interests to do so.

All that will come to pass. But, the past will not be the same as the future. And, America has to think about how it will be forced to change. It is an appropriate time for us to wrap our minds around that question.

Because change requires competent leadership to be undertaken successfully. Or the status quo simply reinstates itself. In a global economy as dynamic as it has become, the status quo is just not good enough to guaranty our continued prosperity.

If it does not change, America will maintain its economic cycle but at some lower level. This will likely engender, due to the nature of the American economy, increased Income Inequality -- which will foment internal strife. The sort of internal conflict and contention that makes life more difficult, if not unbearable.

[Lafayette]

Disregard previous comment -- too many typos

The economy is a mechanism that creates both prosperity and well-being only by means of consumption. Consumers have enough money to spend, only when they consume -- and vice-versa.

Consumption provokes demand; demand provokes the supply of goods and services; which are supplied by labor; which earns wages; with which consumers may continue to consume. There is a strong Symbiotic Relationship amongst all these factors that move an economy.

Consumers must consume in order to live. They have no alternative. So, there is always a base level of consumption that the economy depends upon.

In Economics 101, one learns that the three components of National Product are Consumption, Government Spending and Investment (modulated by the net amount we export/import). What Econ 101 did not teach us, however, is that labor can be supplied just about anywhere on this planet -- to supplant local labor when its costs become to onerous to be competitive. This is a key part of the paradigm change that all nations must accept, regardless of certain rules that we try to implement that assure that competition is fair and equitable.

Government spending and Investment (as well as export/imports) both relate to Consumption. Without consumption there are no wages, without wages there are no Tax Revenues, so governments cannot spend. Without Consumption there is no reason for companies to invest to meet Demand.

So, to think that the sky is falling on our heads is just too dramatic a notion to allow. It is not going to happen.

The pattern of consumption has been demonstrated to be a cyclical phenomenon. Those cycles are long or short, deep or not. Insufficient consumption by households stimulates recessions, even depressions. But it never ceases to exist.

What Keynes added to our understanding of the cyclical phenomenon is that Government Spending can actually provoke Consumption. Which is why Governments either use tax rebates or outright spending to stimulate the economy. They do not, however, always get Spending right, either in its amount or purpose. Spending can be wasted and our experience in Western economies is that it has been dissipated. Nonetheless, at moments of economic decline, it is the policy most often employed to buoy Consumption.

What has happened of late, and almost uniquely in America, is a period during which interest-rates were very low. People thus assumed that because i-rates were low, consumers assumed credit could be used to leverage their spending beyond that normally allowed by Disposable Income. In the US, particularly, the lowering of interest rates also unlocked residual value in the value of their residential holding. This unlocked value was also used for consumption. Both worked marvellously well to fuel the domestic economy. For a while.

So, what has happened? Both credit resources and unlocked residual realty value have now come up against natural limits. The economic cycle they prompted is unwinding, which results in lower consumption -- and therefore lower supplies of goods and services, meaning diminished employment, either in terms of hours worked or outright lay-offs.

Because all these factors are symbiotic, they influence one another. That consumers sense that a downward trend in the cycle is occurring induces a desire to protect their standard of living by saving or reducing consumption. This mindset, or protective mentality, can only change when the propensity to consume reinstates itself amongst consumers.

We are not quite there yet. But, there is no reason to believe that consumers will not resume consuming. Can we predict when it will happen? Not really, we can only observe it in the quarterly aggregate economic statistics. Despite all the economic modelling to date, we have never been able to forecast well enough when a cycle changes from downward trend, enters the cusp, and resumes its upward trend. (Or the reverse, when an upward cycle enters its cusp at the apex.)

But, it will happen. And the right stimulus, in terms of government expenditure, will provoke it. And, yes, even the Chinese will assist by assuming new debt to help Americans to consume again -- because it is in their interests to do so.

All that will come to pass. But, the past will not be the same as the future. And, America has to think about how it will be forced to change. It is an appropriate time for us to wrap our minds around that question. Why?

Because change requires competent leadership to be undertaken successfully. Or the economy reverts to “status quo”. In a global economy as dynamic as it has become, the status quo is just not good enough to guaranty our continued prosperity.

If it does not change fundamentally, America will maintain its economic cycle but at some lower level. This will likely engender, due to the nature of the American economy, increased Income Inequality -- which will foment internal strife. The sort of internal conflict and contention (delinquency, crime, broken homes) that makes life more difficult, if not unbearable.

[Ken]

"So, to think that the sky is falling on our heads is just too dramatic a notion to allow. It is not going to happen."

Lafayette,

while i agree with your view of the cycle Id like to point out a few things that have happened since the end of the 80's. In the 91 downturn/Credit Crunch we saw a milder but similar crisis than what we see today. The government's, Clinton and Rubin's, approach was fiscal discipline. Reduce deficits, remove the floor from the credit market and all rates, govt and commercial would fall. That did have an effect but at the same time Greenspan made govt paper risk free releasing reserves from an inflation hedge. This allowed for the expansion of MS and eased the liquidity crisis. But I would like to point out that this too was a bandaid approach. a hangover from the S and L and LTCM crisis. Every downturn since the late 80's has involved some type of liquidity problem and each time the answer to the problem was to find new liquidity sources within the Banking system. Sweeps, Then the inflation hedge Treasuries and this last crisis, caused by Banks expanding into a customer base they wouldnt normally have loaned to and with questionable collateral.

My concern is that we have run the gamut on these tricks to unearth new liquidity without addressing the real systemic problems in the US Economy. Lack of Income growth! Consolidation of Wealth and Commerce into fewer and fewer hands. lack of savings to support reserve requirements!

How many times are we going to run to consumption to bail us out? Do we need a savings rate?

The Credit Crisis is far..far..far from over. Its time to address those fundamental inefficiencies in the economy so that a stimulus package will work because this package will not work nor will a second.

[Robert Bell]

Greg Mankiw weighed in:

http://gregmankiw.blogspot.com/2008/06/shiller-on-fiscal-stimulus.html

I get his point about "permanent tax cuts" but I don't actually think anyone sees stimulus payments as being anything the first installment of a perpetuity. If they did, they would be presumably be more likely to spend them, and hence the stimulus more effective.

[Lafayette]

Patience

Ken: My concern is that we have run the gamut on these tricks to unearth new liquidity without addressing the real systemic problems in the US Economy. Lack of Income growth!

Lack of income growth is typical of this cycle, but not all cycles. Don't forget that the sub-prime mess followed quickly on from the dot.com mess, almost without a breathing space.

Not only, but there are a few "externalities" (how I hate that word, as if some other planet was involved). The most important is the massive shift of income to both China and Russia and the Middle East. This happened in the face of low interest rates, meaning these countries preferred, for a long time, to keep dollars.

Cashing them in would have had the Treasury defending a run on the dollar even worse than it has been. Somehow we are fretting about a problem that does not exist -- that is there is not enough income/liquidity in the system to pull it out of the doldrums.

I venture that though this may be observable, it is not a constraint to growth. The constraint to growth is the lack of consumer propensity to spend because of an unclear future. When the economic clouds start separating, when consumer confidence returns, the economy will grow slowly out of the hole it is in.

Consumer confidence always returns. Perhaps it has to be provoked a wee-bit. But it returns nonetheless, regardless of the circumstances. And, unlike the 1930s, we wont need a war to do it.

If economic cycles stop, life on earth stops. That jess ain't gonna happin.

Patience.

[Ken]

sustainable economic expansions are based on savings and production. not consumption through debt. what we are doing now is creating inflation and bubble hopping our way to banking crisis after banking crisis.

we need savings.

[Lafayette]

Perspective

Ken: sustainable economic expansions are based on savings and production. not consumption through debt

I read it differently.

Sustained economic expansion comes from aggregate consumer spending that is sustained by employment. When unemployment jumps, two things happen. The unemployed stop spending to preserve what they have and the employed gradually spend significantly less because of the signaled menace of unemployment.

And the opposite happens when employment jumps. Aggregate demand is enhanced and job creation ensues, which further amplifies aggregate demand. (aka the Virtuous Cycle)

Credit debt (installment and mortgage debt) was 2.46 trillion in 2007 versus a GDP of 13.84 trillion or 17.8%. Were it much higher, there might be justification for concern as a principal element of GDP formation.

But it isn't.

[Ken]

Banks are seeing loan values (allowance for doubtful accounts rise) deteriorate faster than required reserves rise. Thats is the essence of a credit crisis. stimulating consumption with more borrowing will only serve to exacerbate this.

Right now the only reason we dont have core cpi inflation is the lack of pricing power outside of food and fuel. Inflation is backbuilding on the supply-side of the economy. Demand pull inflation should be a real concern.

[Lafayette]

Entire paradigms are changing, Mr. Obama

Ken: Demand pull inflation should be a real concern.

Yes, of course. So, expect tax rebates to prompt consumer propensity to spend. But, will it be enough? It hasn't in the past. Entire paradigms are changing, which means entire ways of doing things, including running an economy. Old solutions may still be necessary ... but not sufficient.

The moment may be historically appropriate for a large and ambitious program to for American renewal. (Aka the "New*2 Deal".) Not just by tweaking Health Care. Not just by building new highways. And certainly not by developing new toys for "our boys". Not by continued dependence upon the carbon molecule as an energy resource, whether found at home or bought abroad.

But by making investments not simply to enhance industry or commerce, but to better our life-styles and incorporate more of our population in doing so.

Infrastructure renewal is about finding and adopting renewable energy resources, about catching up with the rest of the world in atomic energy generation on a wide scale - both of which reduce our energy bill. It pertains to enhancing Collective Transportation by investing in rail systems. By installing renewable energy sources into and onto residential housing. By accelerating the technology that replaces the internal combustion engine.

Let's not just finagle Health Care to provide more patients for high-cost Remedial Care medicine. Let's shift our attention (and social Investments) to lower-cost Preventive Care -- particularly as regards the ominous pandemic of obesity that plagues the nation.

Moreover, it pertains to reforming the education system to graduate competent high schoolers. To move the largest number possible of them onto tertiary level university or professional skills training. Children have to be inculcated with a sense of duty, not only to the community but to themselves and employable careers.

[It would be nice to instate a new moral/ethical system of values, but that may well be beyond the purview of any government. Except for one notion: If we implement zero-tolerance for the young poor adult delinquents/criminals, then we should do so also for white-collar adult delinquents/criminals.]

The world is no longer OUR oyster. It belongs to a larger community and we must learn to take our place in it.

We are coming from a Go-go Growth Fixation that has got us where? An S&L meltdown, a dot.com boom 'n bust (that enriched a comparative few and impoverished many), and a hedge-fund failure (LTCM) that shocked the world. Not to mention as well a Sub-prime mess and Credit Seizure that is wreaking havoc in the heartland of America and has been unfortunately exported globally.

It's time to change mindsets, especially as regards growth-at-any-cost. The US, as a center of financial probity, with its shocking array of repetitive dysfunction, is no longer credible. Credibility is essential in the management of the Global Financial System. Uncle Sam must institute a more probing supervisory overview of its financial system's practices as a whole.

Now, THERE'S a Change Vision for you, Mr. Obama. Feel free to plagiarize.

[yamada]

So, why not central bank bankrupt, for providing original fund to the banks for write-offs, to save financial systems? We must remember the way how bubble was made, and build up the system to cope with the bubble, accordingly.

Bubble is caused by peoples’ expectation that the price of asset(real estate) will soar in future, with pouring high-powered money to the asset side of economic units’ balance-sheet. So, to solve this problem, such asset bubble on economic units’ balance-sheet must get ridden of in order, by the new system as below. Though it may be seen contradictory, high-powered money enables to work this new system. Please remember, no one has ever invented the solution in history, which fact that entraps economic dispute into confusion nowadays.

1. Every economic unit’s(including banks) assets that caused the bubble(real estate or CDO et al) on balance sheet should be evaluated on mark to market basis by the authorization of a third party(maybe auditor), which brings about some insolvent(i.e. debt section surpasses asset section on balance sheet) economic units.
2. FRB decide to write off a certain amount of the loans to the banks, which amount distributed to each bank according to the amount of each banks’ insolvency, calculated on 1.
3. Every bank that gets profit from written off should next enforced to, by using the profit from written off as original fund, write off its loans to its each debtor, according to the amount of insolvency of each debtor. If the bank is unable to use all the written off profit it earned, the remainder is taxed all.
4. Other economic unit that gets profit from the written off by the bank should next enforced to, by using the profit from the written off as original fund, write off it’s loan(or trade claim) to its each debtor, according to the amount of insolvency of each debtor. If the economic unit is unable to use all profit it earned, the remainder is taxed all. These processes are to be repeated operationally.
5. In consequence, the bubble portion of the targeted asset is extracted from the economy, and is transformed to tax.
6. It’s up to the Government how they dispose of their above tax claims, considering the situation of economy, of each bank and of each economic unit. Talking about the latter two, as a option the Government should examine the possibility of the bank’s and economic units’ turnaround, together with the other creditors, remaining desirable debt to the bank’s and economic unit(empirically it's ten to fifteen times annual earnings before interest, taxes, depreciation and amortization, known as EBITDA, of the economic unit), writing off the rest debt, with taking into account the value of disposable collateral(that do not accrue earnings), of guarantor and of consolidated basis.
7. Every write off must be supervised and tracable by centralized function of the system. So every write off must be executed through this function. Every write off may be done through this function, which exist on internet for access.
8. For cross-border. For each non-residential economic unit, the amount of write off should also be calculated in the same way as 4. , on the only cause from specific asset depreciation in the resident country. Economic unit that will be written off should next write off in the same booked currency. In case profit of the written off exists on the non-residential economic units, it's taxed and absorbed by the foreign(=non-residential) government and handed over to the sovereign(=residential) government of the currency, based on treaty.
9. In case inflation expectation exists, the system enables FRB to on one hand raise benchmark rate to cope with inflation expectation, on the other hand restructuring the balance sheets of economic units.
10. FRB should carefully watch the rate of the number of insolvent economic units to the number of all economic units in the US, when deciding the amount of the loans(trade claim) written off on 2.
11. As a result, FRB may bankrupt because FRB paid for asset depreciation to save financial system, the new second FRB shall be established which take over the first FRB.

For further details, please see the blog as below:

http://reversewealtheffect.blogspot.com/