Shouldn’t lend money just to make money…

(Copyright 2008)

The WALTHER REPORT

By Tony Walther

So I suppose it’s all but a done deal with only some haggling to be done on the details. The federal government will assume a trillion dollars or more worth of bad debt and it will be unfair in that the big shots will be bailed out and the individual will be left to slog it out on his own or actually will do his part to finance the whole thing via taxes and an economy drug down by government debt.

Somehow as unfair and bad as it is, I think the country will get along and it may actually be an opportunity to reassess and get it right.

I know so little about economics it’s not worth me wasting words on this screen, but that won’t stop me.

Just saw former president Bill Clinton on Dave Letterman, and while I will always resent what Mr. Clinton did to bring shame to the cause of good government by his own personal actions, I have to admit he is a highly intelligent and perceptive and articulate person and we would have been no doubt better off if he could have served past a second term.

He said a lot about the economy and gave I think a reasonable explanation of what has gone wrong, and believe it or not he did not do a lot of finger pointing. He did say that the government has to step in but he also called for a program to help stem the tide of foreclosures. He said if that doesn’t happen the problem that caused the collapse of lending markets will persist – people reneging on their mortgages which in turn makes the mortgage-based securities used in the financial trade worthless (now I just kind of paraphrased there and added some elements of what I got in an earlier conversation from someone who understands this all better than I, plus what I have read over the past week).

Clinton, as is his wont, said a lot, but one thing I took away loud and clear, something that has occurred to me before all of this: “we have to quit loaning money just to make more money.”

Clinton said that there was an over investment in real estate. He suggested that government incentives could make other investments, such as so-called “green energy”, attractive and would create jobs that would in turn, among other things, help people buy homes and make good on their mortgages.

And my position is that while the money traders on Wall Street no doubt provide a necessary element in the economy – they help in the free flow of capital – at some point we have to be producing things and employing people in the effort to produce things. We can’t sustain a high standard of living for the broader public on an economy based solely on importing products made elsewhere and low level service jobs to provide comfort for just part of society.

On principle, I am against the bailouts that have taken place. But I am not the one that makes the decisions. I would rather see the nation move forward than come to a standstill and point the fingers of blame. Let’s learn from the mistakes and move on.

There needs to be more regulation on lending and borrowing and financing with complex instruments that may represent no or little real equity.

Above all, there needs to be more savings, and it seems such cannot come about until there is more incentive to save. Lower interest rates may be good for borrowing and business investments, but they don’t provide the motivation to save. On the other hand, if interests rates are too high that stifles business, but the more money folks make on savings the more they are liable to save and the more capital that will be available to borrow, and that in itself brings down interest rates somewhat, almost a vicious cycle to be sure. And that may be why there needs to be sound government involvement to keep things on an as even a keel as possible without upsetting the whole system.

It seems strange that after the tragedy of 9/11 the nation was urged to go out and spend money. Most of that money, due to our import-driven economy, goes overseas. We’d have been better off to put more of that money in savings and investments in our own country. We are now fighting wars in the Middle East and having to buy a huge amount of oil from the Mid East to do that. A lot of that oil money no doubt inadvertently goes to fund the very forces we are fighting. A lot of our money also goes to China, from which we borrow, and to which we pay so much for imports. While we try to maintain good relations with China, it is our main rival in the world today.

In my last blog, I wrote that I was beginning to like Ron Paul’s Libertarian ideas. I do. But I know he is not going to be elected. He’s not even on the ballot. Besides, he’s too old. So is John McCain. In addition, McCain has admitted economics is not his strong point. I fear that anyone he would have advise him would be like the advisers Bush has had, ones who have an agenda, an agenda that is aimed more at their own ability to make money than the overall economic health of the nation.

Barack Obama puts off the aura that says he is intelligent, wants to listen to others, and can reason things out.

I want to think that McCain means well, but he does not inspire the feeling in me that he has the patience or even the ability to weigh the complex issues that the next president faces.

There is a chance that the government will in the end come out ahead in this debt assumption because it would eventually be able to sell off assets after things stabilize. That is hard to get one’s arms around – how you make good on worthless paper.

I’ve always read about how cheap things were in the Great Depression, because since few had money to buy things, demand was low, prices were low.

But I recall the 1970s. Wages for many were stagnant, the whole economy was stagnant. And yet, prices went up and up. It was called “stagflation.” I hope we are not headed for that again, but with the current mess, it seems ever more possible. If markets remain in turmoil the flow of capital will be shut off and without that there will be little business activity and high unemployment. But the cost of things like food and oil, according to current conditions, will continue to rise. Yup, stagflation.

I suppose the cost of doing nothing could be long years of suffering, maybe even a depression bigger than the Great Depression.

Let’s hope the cost of doing something does not cause similar pain.

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