Can the market alone fix the economy?

[jal]

The title
Re: How to fix the economy

Answer:
1. When 60% of the homeowners can afford to get a mortgage that is not over 3X their gross income for the area that they live.
2. When 60% of wage earners can save 10% of their gross income.
jal

 

[OmCheeto]

Hopefully the Obama administration will fix the SEC.

The Inside Story on the Breakdown at the SEC
http://www.time.com/time/magazine/article/0,9171,1881989,00.html

Holy poop. I'm only on page 2 and I've already said WTF six times.

Cox took charge in August 2005 after 17 years of representing Orange County, California. A Harvard-trained lawyer, he was a key leader of Newt Gingrich's Republican revolution, helping enact a provision of the GOP's Contract with America that restricted investor lawsuits against companies accused of securities fraud.

Just the kind of guy you want watching over wall street. I'm at a loss for expletives.

 

[Astronuc]

Perspectives on the economy -

I Bought an Expensive House. My Bad, Not Yours or
http://www.time.com/time/nation/article/0,8599,1881581,00.html

Why It's Taking So Long To Fix the Economy
http://www.usnews.com/blogs/flowchart/2009/2/27/why-its-taking-so-long-to-fix-the-economy.html

 

[mheslep]

...Note that Obama's plan takes rates back to what they were under Clinton,

That is true only for the income tax rate on the top brackets. The amount of overall taxes paid will go up beyond Clinton in many other ways: decreased deductions, increased capital gains, carbon taxes, additional business taxes.

when we had a budget surplus and a robust economy.

and a dot com bubble.

 

[DrClapeyron]

The title
Re: How to fix the economy

Answer:
1. When 60% of the homeowners can afford to get a mortgage that is not over 3X their gross income for the area that they live.
2. When 60% of wage earners can save 10% of their gross income.
jal

The people who have lost out are not only those buying houses 3X the size of their gross annual income. It is those people who have purchased houses soley as an investment to make money who lose the most, and they may be the same people. Houses are meant for dwelling purposes to provide a place to eat, sleep and raise a family.

Banks love rising home prices to collect higher fees on mortgages. The mortgages themselves are purchased on behalf of the bank and soon-to-be homeowner by the Federal Home Loans Bank, packaged into a tranche by the bank and sold to mutual funds. The only thing keeping high arbitrary prices high is the banks greed and their ability to be bailed out by purchasing US Treasuries with interest and selling them to the Federal Reserve.

How to fix the economy has passed. US Treasuries secondary rate on s 3-month note is less than half a percent. If you haven't been bailed out yet it's too late.

 

[OmCheeto]

Perspectives on the economy -

I Bought an Expensive House. My Bad, Not Yours or
http://www.time.com/time/nation/article/0,8599,1881581,00.html

That guy is hilarious. And I believe he is correct.

By Joel Stein Wednesday, Feb. 25, 2009

I don't like populists. First of all, they seem a lot more popular than I am. Second, they derive their popularity from exploiting our base fears — Joe McCarthy's fear of communist takeover, George Wallace's fear of black people, Lou Dobbs' fear of other cultures, Joe the Plumber's fear of working. Whereas I derive my popularity from ending paragraphs with middling jokes.
...

Much as it pains me, housing prices need to come down a lot more for the sake of the country. It's not that the housing market has suddenly gotten sick and needs medicine. It was sick, and it's getting better. Just like $4 gas, Pets.com and Jim Carrey's career, we are undergoing a needed correction.

The following guy I didn't find so amusing.

Why It's Taking So Long To Fix the Economy
http://www.usnews.com/blogs/flowchart/2009/2/27/why-its-taking-so-long-to-fix-the-economy.html

I suppose the title is a somewhat amusing parroting of a valley girl type question: Why is it taking so long?

I liked the second readers commentary the best:

There was no timetable to create the problems and there is no instant fix.

 

[BoomBoom]

During his speech before the Congress, Obama said he was increasing taxes to the top 2% of earners...the next day his spokesperson said the top 5%...families earning over $250,000.

This whole idea of "taxing the rich" makes me crazy.

You make it sound like he pulled a fast one or something. Obama clearly stated throughout his campaign that he would raise taxes on those making over $250k.

We are in a crisis and we need to do what is necessary to get out of it. I am by no means rich, but I would happily pay higher taxes if it could help get us out of this mess. Why all the whining for the rich? It's not like they are going to struggle in the slightest. It's just all about greed I guess.

 

[turbo]

We are in a crisis and we need to do what is necessary to get out of it. I am by no means rich, but I would happily pay higher taxes if it could help get us out of this mess. Why all the whining for the rich? It's not like they are going to struggle in the slightest. It's just all about greed I guess.

Really! "Geeze, honey, we are going to have to cut back and only get antique Persian carpets for the first floor of the main house. The other floors and the guest house will have to wait a few months." What a travesty!

The wealth never trickled down during the Reagan years and it is not going to do so today. The people making the most money from our financial systems should pay the most in taxes to support that system, and not put it on the backs of the workers who make it viable. Warren Buffett has said this on many occasions, and he is not a complete dummy.

 

[BoomBoom]

The wealth never trickled down during the Reagan years and it is not going to do so today.

Yeah, I wonder how many years this philosophy needs to prove itself as flawed before people start realizing it.

I hear all the time that "tax cuts to business create jobs". Really? Do they? Where is the evidence for this? That is somewhat counter-intuitive to how business operates. Business is in the business of maximizing profit, so why in the world would a business hire people it doesn't need just because it's taxes were lowered? That's ridiculous...they will simply make more profit and not hire anyone. The only reason a business will hire people is when they are needed, and this only happens when they have more demand for their product.

I can see it now, a company gets a tax break:
CEO: "Hey we just got a tax break, so let's hire some people."
Manager: "ummm, but sir, we don't have anything for new hires to do."
CEO: "So what, we have extra money now...give them a cubicle!"

 

[mheslep]

...That is somewhat counter-intuitive to how business operates. Business is in the business of maximizing profit, so why in the world would a business hire people it doesn't need just because it's taxes were lowered? That's ridiculous...they will simply make more profit and not hire anyone. The only reason a business will hire people is when they are needed, and this only happens when they have more demand for their product.

I can see it now, a company gets a tax break:
CEO: "Hey we just got a tax break, so let's hire some people."
Manager: "ummm, but sir, we don't have anything for new hires to do."
CEO: "So what, we have extra money now...give them a cubicle!"

How would you possibly have any idea about the actions of a CEO, or anybody building any kind of business at all?

 

[BoomBoom]

How would you possibly have any idea about the actions of a CEO, or anybody building any kind of business at all?

Are you traying to make some sort of point here, or just trying to make a snide remark instead of responding to the substance of the point?

Please explain why a company would hire employees it doesn't need just because it's tax was reduced?

 

[OmCheeto]

Are you traying to make some sort of point here, or just trying to make a snide remark instead of responding to the substance of the point?

Please explain why a company would hire employees it doesn't need just because it's tax was reduced?

Neopotism?

Don't laugh. I've seen it.

Thank god my company instituted a rule against it in the past decade.

Though I find that it has been replaced by what I would call "pseudo-nepotism".

Where friends hire friends and then the friends become a sort of corporate clique, excluding anyone who is not in the clique. Kind of like what they used to call the "Good ol' Boys" club.

http://en.wikipedia.org/wiki/Good_ol%27_boy_network"

Good ol' boy describes a system of social networking and perceptions alleged to exist prevalently among certain communities and social strata in the United States. Although the term originated in the South, these networks can be found throughout the U.S. and the rest of the Western world. It is typically taken to refer to informal legal, judicial, social, religious, business, and political associations among white males ("good ol' boys"); however, in modern times can be composed of either or both sexes. In some areas, the good ol' boy network is said to still exert considerable influence over many aspects of local government, business, and law enforcement. Usage of the term can often imply a wrongful exclusion of others from the network; however, often the emphasis is on inclusion of a member, as in, "doing a good ol' boy a favor".

Some negative effects of the good ol' boy network are its exclusion of others, leading to leaders of a community possibly limiting business transactions to other elites, or to friends or acquaintances from within the network, to give friends better deals, and generally to reinforce traditional power structures over any other elements in the society.

I would imagine this takes place mostly in large corporations where the executive board loses touch with what is going on downstairs. My experience with actual nepotism happened about 15 years ago. The matriarch of the empire was at the bottom of the management chain. She had hired, over time, the following: her aunt, her sister in law, her son, her son's girlfriend, her daughters boyfriend, her adopted daughter, etc.

I would imagine either type of system eventually pervades every large company and creates a somewhat bloated staff. Only in times of economic turmoil, ie now, does the executive board actually have to get off their butts and figure out where all of the money is really going. Because when times are good, there's usually plenty to go around. So why bother. That would be vacation time in the Bahama's that actual work would be cutting into.

Ooops. You can blame the following on Astro. He pointed out the article:

http://www.time.com/time/magazine/article/0,9171,1881989-1,00.html"

And it was not the only time the nation's chief securities regulator was absent during that critical weekend. On Saturday, as bailout talks continued, Cox dropped out to give a speech at the birthday party of a securities-industry overseer. On Sunday, Cox was a no-show once again, this time for a key conference call dealing with the multibillion-dollar sale of Bear Stearns' remaining assets to JPMorgan Chase. Less than a week later, the SEC chairman slipped away for a long-planned Caribbean holiday.

I guess looking for where the money went after the fact would be a bit pointless.
I hope he enjoyed his vacation.

 

[mheslep]

... The only reason a business will hire people is when they are needed, and this only happens when they have more demand for their product.

The absolutism (only) is incorrect. Businesses don't 'only' sit around and wait for more orders to pour in before hiring. They invest in the future, they create new products assuming that the demand will be there. And even if an increase in demand were the only reason, that is a Begging the Question fallacy to assume that proves your point. How is demand created?

Regards the evidence, some googling, or any basic macro text would have answered your evidence question on tax cuts.
Paper that became the CEA statement/basis for the recovery bill
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf
Table 2: 0.97m jobs predicted from the recovery bill tax cuts just past.

Romer paper that of recent work seems to be the most cited.
http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf

VI. CONCLUSIONS
This paper investigates the causes and consequences of changes in the level of taxation in the postwar United States. ...
In terms of consequences, there are six main findings. First, tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent. Second, these estimated effects are substantially larger than those obtained using broader measures of tax changes, such as the change in cyclically adjusted revenues or all legislated tax changes. This suggests that failing to account for the reasons for tax changes can lead to substantially biased estimates of the macroeconomic effects of fiscal actions. Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent. The behavior of inflation and unemployment suggests that this persistence reflects long-lasting departures of output from its flexible-price level, not large effects of tax changes on the flexible-price level of output.

 

[jal]

A “sucker rally” depends on the “gurus” advising those with money on the “side line” that it is time to get back into buying common shares. Since there are a lot of people already in the market waiting for the market to rally, (so that then can cash out), then there must be more people going into the market than people leaving the market for any rally to occur.

Market conditions are different than in the past. The banking system has never failed in past recessions.

Most people with savings are accessing information from the web and coming to conclusions without necessarily following the advice from their financial advisors.

The “herd behavior” may not evolve as expected or in the projected time frames of the financial advisors.
People are questioning their financial advisors and are losing confidence in their abilities to manage their investments.

Future dividends are getting questionable.
Shares are being diluted at an alarming rate.
Preferred shares and bonds are being issued by more and more companies.
This leaves the common shares at the end of the line for getting any share of future profits.

Governments have reduced interest on savings to record lows and the savers are STILL refusing to put their savings at risk in ponzi schemes for higher returns.

The fall of housing prices are permanent and will not reach their previous highs. Housing prices can only stabilize at 3X gross earning of 60% of the wage earners.
For example, the housing prices in Vancouver are out of reach of 60% of the working middle class and will needs to correct itself to 3X.

Canada did not/does not have a housing crisis.
Canada’s banks have not failed and are still reporting profits.

A recovery can only occur if 60% of the wage earners are saving 10% of their earnings.

NOTE: The above are my opinions and are as valid as anybody else’s opinions.

jal

 

[Astronuc]

Prosperity must extend to all, particularly the majority who have been left behind.

Forced From Executive Pay to Hourly Wage
http://www.nytimes.com/2009/03/01/us/01survival.html

 

[Oscar Wilde]

Yeah, I wonder how many years this philosophy needs to prove itself as flawed before people start realizing it.

I hear all the time that "tax cuts to business create jobs". Really? Do they? Where is the evidence for this? That is somewhat counter-intuitive to how business operates. Business is in the business of maximizing profit, so why in the world would a business hire people it doesn't need just because it's taxes were lowered? That's ridiculous...they will simply make more profit and not hire anyone. The only reason a business will hire people is when they are needed, and this only happens when they have more demand for their product.

I can see it now, a company gets a tax break:
CEO: "Hey we just got a tax break, so let's hire some people."
Manager: "ummm, but sir, we don't have anything for new hires to do."
CEO: "So what, we have extra money now...give them a cubicle!"

It is not at all counter-intuitive to how an enterprise operates, especially a self-maximizing one at that. After a tax cut, a business does not make more profit by not hiring anyone. I suppose it could make more profit by not hiring anyone, but you're missing the entire point. A business hires more people to increase its output so that at the end of the day it gains revenue. The revenue generated is larger than the money that would have been saved by not hiring workers. One of your premises, that a business maximizes profit, plays right into this philosophy. Also, try not to villify all chief executive officers and corporations just because of the mistakes of a few, no matter how trendy it may seem.

 

[Al68]

Are you traying to make some sort of point here, or just trying to make a snide remark instead of responding to the substance of the point?

Please explain why a company would hire employees it doesn't need just because it's tax was reduced?

Why would anyone need to explain such a thing, when no-one is claiming such a thing?

 

[Al68]

Yeah, I wonder how many years this philosophy needs to prove itself as flawed before people start realizing it.

I hear all the time that "tax cuts to business create jobs". Really? Do they? Where is the evidence for this? That is somewhat counter-intuitive to how business operates. Business is in the business of maximizing profit, so why in the world would a business hire people it doesn't need just because it's taxes were lowered?

What do you think people do with their profits from business?
Thinking that rich people won't use their profits to re-invest in the economy to make even more profit greatly underestimates their greed.

Maximizing profits is the goal, and it's achieved by re-investing profits to make even more. You seem to believe they are just not greedy enough to re-invest those profits.

And the phrase "trickle down economics" is just a fabrication of Democrats made up in order to mislead people.

Confiscating money from Bill Gates doesn't change his personal finances. It removes money from the economy that is otherwise invested in it.

 

[BoomBoom]

A business hires more people to increase its output so that at the end of the day it gains revenue. The revenue generated is larger than the money that would have been saved by not hiring workers.

Increasing output is a complete waste of resources if the demand for the product is not there...this is a money losing venture.

This can also be said of expansion as well. For one, Starbucks is a good example of this. They expanded beyond the demand for their product until there was practically a Starbucks on every corner...and now they are forced to close down all these excess stores.

I do understand the research and development argument as well (brought up by others), but this likely only applies to a small fraction of companies. Most companies provide a service or sell products and aren't involved in research and development. But a large portion of the higher taxes you are all complaining about will be used for research and development which is a win/win, because it will result in new types of companies and spin-offs from the new technology that is developed. Not to mention all of the jobs it will create...which will result in more people employed that have more money to spend and increase demand for products and services which will result in companies growing and hiring more people.

 

[misgfool]

What do you think people do with their profits from business?
Thinking that rich people won't use their profits to re-invest in the economy to make even more profit greatly underestimates their greed.

Maximizing profits is the goal, and it's achieved by re-investing profits to make even more. You seem to believe they are just not greedy enough to re-invest those profits.

And the phrase "trickle down economics" is just a fabrication of Democrats made up in order to mislead people.

Confiscating money from Bill Gates doesn't change his personal finances. It removes money from the economy that is otherwise invested in it.

Problem with rich people is that they save substantial portion of the money they get. That's why they are rich. They do not consume everything and by saving take money away from the economy. That's why they are a problem.

 

[Al68]

Increasing output is a complete waste of resources if the demand for the product is not there...this is a money losing venture.

Obviously a company will try to produce what there is demand for. And if there is not enough demand for any product the company produces, the profits are paid as dividends so that stockholders may invest the proceeds in a different company. They're greedy like that.

Profit motive will cause people with money to invest it in something they believe will be profitable. And their choice will be better for the economy on average than any thing gov't would do with the money if they confiscate it. Even if we agree that investors make mistakes, it costs them and they learn from them. The same cannot be said of gov't. Gov't gets its money for free, spends it based on politics, wasting most of it, because they can always get more.

And Democrats consider the private property of Americans to be at their disposal, to confiscate as they see fit, so they will not learn from any mistakes. They will just blame the people they took the money from, as silly as that sounds.

I know this is a rant, but Democrats have rationalized their theft so much that they now have a moral code that actually glorifies their thievery. Their moral code glorifies the act of taking from those "that can afford it" then blaming them for having money left over. Then having the nerve to claim that anyone who opposes their thievery is just taking the side of the rich against the majority. Disgusting and despicable to anyone without that corrupt moral code, but most Americans fall for the hateful propaganda they have been spewing for decades.

 

[Al68]

Problem with rich people is that they save substantial portion of the money they get. That's why they are rich. They do not consume everything and by saving take money away from the economy. That's why they are a problem.

So the problem is that rich people are just not greedy enough to invest their savings in the economy to make even more money?

Oh, wait...

 

[misgfool]

So the problem is that rich people are just not greedy enough to invest their savings in the economy to make even more money?

Oh, wait...

So how is it that there are so few rich, since making money is so easy?

Ps. And an answer to your question is: Yes

 

[misgfool]

I know this is a rant, but Democrats have rationalized their theft so much that they now have a moral code that actually glorifies their thievery. Their moral code glorifies the act of taking from those "that can afford it" then blaming them for having money left over. Then having the nerve to claim that anyone who opposes their thievery is just taking the side of the rich against the majority. Disgusting and despicable to anyone without that corrupt moral code, but most Americans fall for the hateful propaganda they have been spewing for decades.

We all have to make sacrifices to live in a organized human society. If it helps, I will light a candle for all the dollars the wealthy have lost. But if there isn't food for everyone, then there will be anarchy.

 

[Al68]

So how is it that there are so few rich, since making money is so easy?

Who said it was so easy?

I don't think anyone disputes that most of the money that rich people have is invested in the economy instead of being stored as cash or spent on goods and services.

And that's a good thing, since if the money were spent (by them or gov't) it would devalue the dollar for everyone else, in addition to the fact that it would be taken out of the investment side of the economy.

 

[misgfool]

I don't think anyone disputes that most of the money that rich people have is invested in the economy instead of being stored as cash or spent on goods and services.

True, but their cash reserves are still too big. The economy needs their dollars, the US needs their dollars. Surely all patriots help their country when it desperately needs help?

And that's a good thing, since if the money were spent (by them or gov't) it would devalue the dollar for everyone else, in addition to the fact that it would be taken out of the investment side of the economy.

You can say that for every dollar spent by poor or rich. But if nobody consumes, there are no companies, no jobs and no economy.

 

[Al68]

We all have to make sacrifices to live in a organized human society. If it helps, I will light a candle for all the dollars the wealthy have lost. But if there isn't food for everyone, then there will be anarchy.

Well, for one thing, we can feed the poor without resorting to thievery. Even so, that accounts for a tiny fraction of one percent of federal spending.

Would you teach your kid that it's wrong to steal, unless it's from someone who can easily afford it and you use it for a good purpose?

No need to light those candles, the rich will be fine regardless.

Despite the claims of Democrats, opposition to them isn't based on people losing sleep worrying about the financial well-being of rich people. That's obviously just hatespeech.

 

[Al68]

True, but their cash reserves are still too big. The economy needs their dollars, the US needs their dollars.

Wrong. "Dollars" are not material wealth. They are not edible. They have no inherent value. Their only value is due to their scarcity. Turning investment dollars into consumption dollars will just devalue the dollar.

Surely all patriots help their country when it desperately needs help?

Yes. Taking money out of the economy hurts the country.

It's ridiculous to think that raising taxes and increasing gov't spending could actually improve the economy.

 

[Al68]

I don't think anyone disputes that most of the money that rich people have is invested in the economy instead of being stored as cash or spent on goods and services.

True, but their cash reserves are still too big.

It's not their cash reserves that end up being lost to government by taxation. Or their spending money. It's the money invested in the economy.

 

[misgfool]

Would you teach your kid that it's wrong to steal, unless it's from someone who can easily afford it and you use it for a good purpose?

In capitalism money is a poor master, but an adequate slave. It is a tool, nothing more, nothing less. I would teach my kid, that don't let money become the master and do everything what it takes to prevent that.

 

[misgfool]

Wrong. "Dollars" are not material wealth. They are not edible. They have no inherent value. Their only value is due to their scarcity. Turning investment dollars into consumption dollars will just devalue the dollar.

Our economic system does not work without inflation. If dollars increase demand, they also increase salaries.

It's ridiculous to think that raising taxes and increasing gov't spending could actually improve the economy.

Actually theory and practice has proven the contrary.

 

[Al68]

Actually theory and practice has proven the contrary.

I think not. Propaganda has claimed the contrary despite actual facts.

People will believe lies when they're repeated often enough, and build on each other enough.

 

[Al68]

In capitalism money is a poor master, but an adequate slave. It is a tool, nothing more, nothing less. I would teach my kid, that don't let money become the master and do everything what it takes to prevent that.

Should I assume then that you would teach them NOT to covet the material wealth of others, contrary to the message of Democrats?

 

[misgfool]

It's not their cash reserves that end up being lost to government by taxation. Or their spending money. It's the money invested in the economy.

The fact is that the money is not in the economy. You can see that by looking at Dow Jones or Nasdaq and they are not falling because of US taxation policy. They are falling because (rich) people are so afraid for their precious dollars. But they don't seem to understand, that their fear is having massively destructive global consequences. Wasting time amplifies the effects.

There is no escape, the money has to return to the economy. Now the government can get and spend money by printing it or taxing it. Exploiting both options is a way to make sure that it does a rapid return and as a positive side-effect it forces the loose cash out.

 

[misgfool]

I think not. Propaganda has claimed the contrary despite actual facts.

People will believe lies when they're repeated often enough, and build on each other enough.

It's really very simple math. When the government pays $100 for a brick, then the economy has directly grown with $100 and indirectly more (as the brickmaker has to spend to make the brick etc).