Obama's Economic Policy?

[chuck34]

OK, I know this is probably going to start some huge thing here. I don't really want a knock-down-drag-out fight. I would just like someone to explain to me Obama's economic policy, and why it will work. Please use specific examples of when, where, and how in history something simmilar has worked.

Just one rule, do not use the words Bush or Iraq in your explaination.

[Garry Walker]

How dare you question the wisdom of the Messiah?

[chuck34]

How dare you question the wisdom of the Messiah?

I'm not questioning him, I just need educating.

[Rollo]

Which aspects of it are you specifically questioning? Because in general terms, the idea of government spending to prop up the economy has been the policy of every administration since Eisenhower.

[Rudy Tamasz]

To me the biggest cause of the current crisis is insane spending when people, corporations and governments were buying what they couldn't afford. trying to fix it with more spending is like curing the hangover with a big glass of vodka. Go figure the effect.

[chuck34]

Which aspects of it are you specifically questioning? Because in general terms, the idea of government spending to prop up the economy has been the policy of every administration since Eisenhower.

See this is what I'm talking about. I do not want an expaination that says "They did it, so I will too." I want someone to explain why government spending to prop up the economy is a good idea on IT'S OWN merits.

So again why is it a good idea and when has it worked? You say every administration since Eisenhower has done this. So give an example of who raised taxes, by what percent, how much government spending went up, and how that worked out.

[chuck34]

To me the biggest cause of the current crisis is insane spending when people, corporations and governments were buying what they couldn't afford. trying to fix it with more spending is like curing the hangover with a big glass of vodka. Go figure the effect.

Ok so how is Obama spending more money going to fix the mess?





I get what you are saying, I'm just sort of playing devil's advocate.

[Lousada]

People are currently bombarded with doom messages, the economy is going down, massive job losses, banks refusing credit, stocks going down, etc. People react to this by holding back expenses and saving more. It might be yourself who loses his job! So saving rises and demand falls. Falling demand causes more companies in trouble so more job losses and so on. The idea is that the goverment bridges the fall in demand by increasing goverment spending (and reducing it back when consumer demand grows back again, but no goverment ever does). That way demand keeps up and the economy keeps going, gradually filtering out the bad.
Whether this will work this time is another question.

[chuck34]

People are currently bombarded with doom messages, the economy is going down, massive job losses, banks refusing credit, stocks going down, etc. People react to this by holding back expenses and saving more. It might be yourself who loses his job! So saving rises and demand falls. Falling demand causes more companies in trouble so more job losses and so on. The idea is that the goverment bridges the fall in demand by increasing goverment spending (and reducing it back when consumer demand grows back again, but no goverment ever does). That way demand keeps up and the economy keeps going, gradually filtering out the bad.
Whether this will work this time is another question.

That's a pretty good description of the theory (Keyensian I believe).

Now, has that ever worked? And how do tax increases fit into that?

[Sonic]

That's a pretty good description of the theory (Keyensian I believe).

Now, has that ever worked? And how do tax increases fit into that?

Now that is the question. President Roosevelt's initiatives were seen by many as the reason that the USA pulled out of the great depression. However just as many see them as the reason it lasted so long!

So it seems even history is unsure on the answer to your question. :confused:


http://en.wikipedia.org/wiki/Franklin_D._Roosevelt

[Breeze]

The simple answer is, IT WILL NOT WORK! Here is a lucid explanation of why it will not work from a man who may know a thing or two about Finanace and Economics.

http://www.aynrand.org/site/PageServer?pagename=reg_ls_financial_crisis

[Rollo]

So again why is it a good idea and when has it worked? You say every administration since Eisenhower has done this. So give an example of who raised taxes, by what percent, how much government spending went up, and how that worked out.

The general level of income in the economy is defined the following:
Income = Consumption + Investment + Govt Spending + Receipts for Exports - Savings - Taxation - Payments for Imports

simplified it is: I = C+I+G+X - S-T-M
In other words, the general level of income is defined by all injections minus all imports.

In a bearish economy, the level of savings tends to increase as consumer sentiment goes down and ironically the level of investment tends to fall based on that same sentiment. If I is smaller and S is bigger, the general level of income tends to fall. The only logical method of making up the short fall is to increase government spending.

After the Second World War and partly in response to the Great Depression, the idea of government spending through the military-industrial complex (otherwise known as the "Iron Triangle", was proposed by Ed Sard, then Charles E Wilson who was the Secretary of Defence.

http://upload.wikimedia.org/wikipedia/en/2/27/U.S._Defense_Spending_-_%25_to_Outlays.png
Admittedly the trend is downwards, but when you consider that the U.S. military budget is almost as much as the rest of the world's defense spending combined, that it must play a significant part in the economy. As far as the equation goes, if you increase G then the level of income should rise.

Government spending and taxation have slightly different effects in shifting the general level of income. Whilst taxation is in fact a leakage, the government by deciding who to place the burden on, can tweak the level of consumption.
If the burden of taxation is "lifted" from poorer people, they're more likely to spend their money than richer people, but it's fairly obvious that the revenue still has to be collected somewhere. So called "stimulus packages" are little more than Government Spending (G) disguised as tax breaks.

[Lousada]

That's a pretty good description of the theory (Keyensian I believe).

Now, has that ever worked? And how do tax increases fit into that?

In a normal situation it should work, if it is applied correctly.
The problem at this moment (and also in 1929) is not a recession in the classical sense. This economic crash we have now is because an artificial bubble has deflated. The past years stocks, houses, basicly everything, has been too high priced for what it was really worth. It has resulted in overcapacity in a lot of branches, best seen in building and cars. This has been corrected with one big shock.
No goverment spending in the world will bring the wealth back to levels it was in 2005-2007 unless they create another bubble. This is simply because that wealth was 'air'.
What this stimulus package could do however is soften the blow for the economy. Building is currently in a slum. The goverment needs buildings, roads, infrastructure and so on. So it could now get cheaper building projects and at the same time avoid massive job losses in the sector.
It should only build that which is needed (roads, bridges, schools) and not create supply for non-existant demand, like building houses or something. (That would be communism!) Bailing out car manufacturers smells a lot like that and it will never ever work. I must say I'm not that informed about the particular details of this stimulus package to judge it in that sense.

The stimulus package is short term and only addresses the symptoms, not the causes. One major cause of this crisis is out of control banking and lack of oversight. I have yet to see measures that will stop this from ever happening again. I have also yet to see bankers prosecuted for being completely irresponsible. Like that guy who bought a 30000 dollar bidet for his office! Even Bernie Maddof, who is a proven fraud, can sit in his penthouse trying to erase all evidence. A solution will never happen until the cause is eliminated.


Raising taxes is something you should warm to anyway in my opinion. Americans want a lot of things and at the same time do not want to pay for it. Bush solved it by deficit spending but that will not last. So taxes must go up or you have to accept that a lot of things won't be there anymore.
Your current tax code is inefficient and complicated. At the same time it promotes tax-competion within the borders. That is something that is ruining your country in my humble opinion.

[Lousada]

The general level of income in the economy is defined the following:
Income = Consumption + Investment + Govt Spending + Receipts for Exports - Savings - Taxation - Payments for Imports

simplified it is: Y = C+I+G+X - S-T-M
In other words, the general level of income is defined by all injections minus all imports.

In a bearish economy, the level of savings tends to increase as consumer sentiment goes down and ironically the level of investment tends to fall based on that same sentiment. If I is smaller and S is bigger, the general level of income tends to fall. The only logical method of making up the short fall is to increase government spending.


This was not one of my favourite subjects in school ;) I corrected a small error in your formula though ;)
I would like to add that the US has been operating on a trade deficit for years so M is a lot bigger than X. So G must rise a lot to keep Y positive.
The way it is understood is that higher goverment spending (G) reduces private investment (I). A lot of US goverment spending has been on stuff that generates only little income, like wars, but also ever rising interest payments. So a lot of the taxes do not generate in more income.

[Rollo]

The way it is understood is that higher goverment spending (G) reduces private investment (I).

Can't agree here. This would suggest that I is a dependent variable of G but it isn't. Investment is almost exclusively based on the likely rate of return that is to follow (allowing for opportunity costs and whatnot).

Plenty of investment occurs in areas where there is no government spending whatsoever, quite independent of any government sentiment at the time.

[Sonic]

My head hurts!!!

[chuck34]

In a normal situation it should work, if it is applied correctly.
The problem at this moment (and also in 1929) is not a recession in the classical sense. This economic crash we have now is because an artificial bubble has deflated. The past years stocks, houses, basicly everything, has been too high priced for what it was really worth. It has resulted in overcapacity in a lot of branches, best seen in building and cars. This has been corrected with one big shock.
No goverment spending in the world will bring the wealth back to levels it was in 2005-2007 unless they create another bubble. This is simply because that wealth was 'air'.
What this stimulus package could do however is soften the blow for the economy. Building is currently in a slum. The goverment needs buildings, roads, infrastructure and so on. So it could now get cheaper building projects and at the same time avoid massive job losses in the sector.
It should only build that which is needed (roads, bridges, schools) and not create supply for non-existant demand, like building houses or something. (That would be communism!) Bailing out car manufacturers smells a lot like that and it will never ever work. I must say I'm not that informed about the particular details of this stimulus package to judge it in that sense.

The stimulus package is short term and only addresses the symptoms, not the causes. One major cause of this crisis is out of control banking and lack of oversight. I have yet to see measures that will stop this from ever happening again. I have also yet to see bankers prosecuted for being completely irresponsible. Like that guy who bought a 30000 dollar bidet for his office! Even Bernie Maddof, who is a proven fraud, can sit in his penthouse trying to erase all evidence. A solution will never happen until the cause is eliminated.


Raising taxes is something you should warm to anyway in my opinion. Americans want a lot of things and at the same time do not want to pay for it. Bush solved it by deficit spending but that will not last. So taxes must go up or you have to accept that a lot of things won't be there anymore.
Your current tax code is inefficient and complicated. At the same time it promotes tax-competion within the borders. That is something that is ruining your country in my humble opinion.

I totally agree with your assessment that we should spend money on things like roads and bridges (schools are, or at least should be, a state not federal issue), and I would add electricity grid updating needs to be done. And if that is all that this stimulus is/was I would be fine with that. Your other point about this addressing the symtoms not the cause is dead on also. What will stop the next bubble?

Raising taxes in NOT something that I will ever warm to. Why the hell should I? Why is it not an option to cut government programs to cut the deficit? Why do the American people get all the things they want, especially if they don't want to pay for it? That is just plain dumb. I want a Ferrari, I don't want to pay for it, so shouldn't the government give it to me?

I agree 100% that our current tax code is inefficient and complicated. The IRS needs a major overhaul. Perhaps something like a "Fair Tax", but I do realize that will probably never happen.

I'm not sure what you mean about tax-competition witin our borders. Can you please explain that for me? Thanks.

[chuck34]

Here's another little tid-bit that I found about taxes. I always hear how the "Bush Tax Cuts" only helped the rich and hurt the poor. Somehow that just doesn't seem to correlate to the facts.

Percentage of Federal Personal Income Tax Paid for top 1%.
1999: 36.18%
2006: 39.89%

Percentage of Federal Personal Income Tax Paid for bottom 50%.
1999: 4.00%
2006: 2.99%

Yet I keep hearing about how the "rich" don't pay their fair share. Not that I am advocating that the bottom should pay more either. I'm just saying that it looks to me like the dreaded "Bush Tax Cuts" actually helped the lower income people and hurt the upper income people.

http://www.ntu.org/main/page.php?PageID=6

[Rollo]

Two issues here which I'll deal with separately:


Why is it not an option to cut government programs to cut the deficit?
Going right back to the equation for income:

Y = C+I+G+X - S-T-M

In a shrinking economy, it is quite natural and prudent that investors will also tend to pull back with new investment because it follows that they'll also gain a shrinking return.
There therefore needs to be an increase in government spending to stop the shrinkage. The main reason why it's advantageous to maintain government programs as opposed to cutting taxation, is that government spending (as an injection of funds) actually has different effects to a cut in taxation (a leakage).

Sensible management over the course of the economic cycle suggests that governments should be having surpluses during the peaks and deficits during the troughs, to "flatten out" the bumps.


I'm not sure what you mean about tax-competition witin our borders. Can you please explain that for me? Thanks.

For some utterly crazy reason, there are 50 sets of sales taxes and other state taxes. If I was a company like Westinghouse and I wanted to start a new fridge factory, I'd seriously consider which state would give me the best rate of return - because taxation is an expense, I'd find the cheapest.


I'm just saying that it looks to me like the dreaded "Bush Tax Cuts" actually helped the lower income people and hurt the upper income people.

Good.

Since the majority of actual "work" is produced by poorer people's labour (because they no other factor of production to offer) then they should be rewarded for it.
1% means a hell of a lot more to someone who is trying to find money to put food on the table, than someone in the top 10% income bracket.

Besides, Robin Hood only robbed from the rich... because the poor had no money.

[chuck34]

Two issues here which I'll deal with separately:


Going right back to the equation for income:

Y = C+I+G+X - S-T-M

In a shrinking economy, it is quite natural and prudent that investors will also tend to pull back with new investment because it follows that they'll also gain a shrinking return.
There therefore needs to be an increase in government spending to stop the shrinkage. The main reason why it's advantageous to maintain government programs as opposed to cutting taxation, is that government spending (as an injection of funds) actually has different effects to a cut in taxation (a leakage).

Sensible management over the course of the economic cycle suggests that governments should be having surpluses during the peaks and deficits during the troughs, to "flatten out" the bumps.



For some utterly crazy reason, there are 50 sets of sales taxes and other state taxes. If I was a company like Westinghouse and I wanted to start a new fridge factory, I'd seriously consider which state would give me the best rate of return - because taxation is an expense, I'd find the cheapest.



Good.

Since the majority of actual "work" is produced by poorer people's labour (because they no other factor of production to offer) then they should be rewarded for it.
1% means a hell of a lot more to someone who is trying to find money to put food on the table, than someone in the top 10% income bracket.

Besides, Robin Hood only robbed from the rich... because the poor had no money.

Your equation works fine and dandy, in theory. When has it worked in practice? The other factor is if the government invests in the wrong areas. One current example, Citi Group. The government bought up a bunch of prefered stocks. That means that they get payed before anyone else. Now if I had some money to invest in a company (one that may or may not make it, but I'm willing to take the risk) when I won't see a dime of profit until after the gov make their 8%? I have heard a few different economists talking about how there is a "capital strike" going on right now. There is actually quite a bit of capital just sitting around not really doing anything because the investors don't know if they should invest because the gov keeps changing rules everyday.

So there is something wrong with states competing amongst themselves for businesses? If that is wrong what about the different tax rates between nations? Shouldn't we all adopt the same tax rate? That's one of the reasons the US is hemoraging jobs, our corporate tax rate is high compared to most other nations.

"1% means a hell of a lot more to someone who is trying to find money to put food on the table, than someone in the top 10% income bracket." That seems like a resonable statement until you realize that a whole lot of the top 10% income bracket are actually S-Corps and farms. Basically that means that the owner's income IS the business income wether or not the individual actually "takes home" that money. So if you raise their taxes a lot of times that puts that small business out of business because they just can't afford the taxes. Couple that with the fact that about half of the private sector jobs are small businesses and you can see how that will quickly make things worse.

Robin Hood was a criminal. One with good intentions, but still a criminal.

[Rollo]

Your equation works fine and dandy, in theory. When has it worked in practice?

All the equation is, is merely a way of expressing:
Net change = All inputs - All outputs.

When has this worked in practice?
Pretty well much for every entity that exists, in every system that exists, and in every time period that exists, and as applied to econmics? From FOREVER PAST to FOREVER FUTURE. :D

[chuck34]

All the equation is, is merely a way of expressing:
Net change = All inputs - All outputs.

When has this worked in practice?
Pretty well much for every entity that exists, in every system that exists, and in every time period that exists, and as applied to econmics? From FOREVER PAST to FOREVER FUTURE. :D

Point taken.

But I was specifically asking how increasing the G factor specifically has raised the income (Y)? I guess the way I see it, if you raise G then another term is also effected, probably I. I just don't think that any of these terms are independent of one another. Change one and at least one other will change. Also the equation may be a bit simplistic as it does not deal with debt loads or inflation. Inflation is going to be a pretty big problem for us comming up soon IMHO.

[Mark in Oshawa]

Here is how I see it. Government spending on limited applications and to genuinely look after the disadvantaged in society ( the poor who have no hope of ever really going upwards, not those fit to work but unwilling to ) and to look after the defense and foreign policy goals of a nation is ok in my books ( again, in moderation ). I am yet to see however how Keynesian economic models have ever really worked.

The Depression dragged on in the US because Roosevelt's New Deal was full of public make work projects and the gov't was involved in all sorts of economic activity that was to put people back to work. Yet only WW2 really seemed to stop the slide. Yet in 1920 there was an fall off in economic activity that was as bad as the start of the "crash" of 29 and the government did NOTHING. Yet a year or so later the roaring 20's were on....

IN more modern times. The economy of North America was hiccuping along in the early 70's as the US was pulling out of Vietnam. Canada had a hip charismatic leader who was firm believer in Keynes. ( Obamamania was called Trudeaumania in 1968 ). The US elected Carter, another left wing Keynesian and the results? By the late 70's we had the "misery index", deficits on both sides of the 49th, and interest rates in double digits. The solution? Reagan coming in, chopping the highest tax rates and actually generating more revenue for the treasury. The fact his Democrat led congress found more ways to spend it and still end up putting the US in deficit territory ignores the fact that the tax cuts ended up putting more money in the governments hands despite taking less from individuals on a percentage basis. Canada on the other hand had a recessionary economy despite the good things happening in the south due to overactive government inititives and high taxes until Trudeau and his Libreals were kicked to the curb by the election of the Conservatives. That even though didn't really jump start the Canadian side of the economy until the after effects and adjustments to the US/Canada Free trade agreement and NAFTA were made and the Libreals in the 90's in Canada had a ROARING economy for close to a decade plus.

Government cannot mess with the economy. When it does, usually bad things happen. The mortgage crisis in the US is predicated on the fact that Clinton inititives to put more minorities in their own homes was NOT a sound financial policy ( putting people in mortgages they cannot afford is just not sustainable as we have found out) but the pressure for this to continue from people like Barney Frank and the like have created this crisis. Pouring money into the banks and telling banks how to do their business wont fix it either.

One doesn't have to be an economist to see that Keynesian economics doesn't work. It is proven in history. The 20's non intervention allowed the economy to fix itself. The New Deal had the best intentions but the unemployment rate was in double digits in the US for a DECADE. The 70's and the Carter/Trudeau nexis left North America in a lingering maliaise that had people out of work (including my father for a time) up to 10 % or better and record deficits. Cutting taxes and getting out of the way of the business world brought prosperity.

Government should set ground rules to protect us all in a very general fashion, prosecute when the line is crossed but let business go. It is more efficient and their profits become part of the tax flow that helps make life easier for the rest of the country. Don't choke the golden goose, let it work for you. Obama has the goose in prision, is force feeding it and it is telling it that life is miserable.

The rich employ people with jobs that help the economy. The only jobs Obama is creating is the bureaucrats to run his bloated government. When the government lays people off, then I will take it seriously.

[Mark in Oshawa]

Remember, 5% of the US population is said to be paying 60% of the income tax load or some such number. You try to take more, that 5% moves their money offshore followed by themselves and then you cant take it no more. The golden goose has the money to leave the country. Just as the rich in the UK left in the late 60's and 70's ( John Lennon the most notable ) to avoid being taxed to death by the Labour governments of the 70's. You want rich people IN your country paying reasonable amounts of taxes, not punishing them for their success.

[chuck34]

Remember, 5% of the US population is said to be paying 60% of the income tax load or some such number. You try to take more, that 5% moves their money offshore followed by themselves and then you cant take it no more. The golden goose has the money to leave the country. Just as the rich in the UK left in the late 60's and 70's ( John Lennon the most notable ) to avoid being taxed to death by the Labour governments of the 70's. You want rich people IN your country paying reasonable amounts of taxes, not punishing them for their success.

From the link I posted earlier, it says the top 5% payed 60.14% of the taxes in '06 (last data availible).

You don't have to go back to the 60's or 70's to see that people with means move away from high tax areas. Where do most English F1 drivers live right now?

[Mark in Oshawa]

Chuck, Hamilton still lives in the UK does he not? I know Eddie Irvine still was living in Ulster where he is from. You know your taxes were too high though when the Beatles, hardly right wing anti-tax reactionaries were protesting the tax burden in their song "taxman" and how Lennon, Harrison and Starr all left the country for periods of time.

I think a lot of people have an envy or hatred for the rich in this world and it is this class warfare nonsense that builds support for "taxing the rich". What is ignores as you have pointed out how much they pay already and how it is the rich that invest money in new ventures, new businesses and make economic growth. No government can do that. Even the Communist Chinese woke up to that reality in the 1980's.....

[Mark in Oshawa]

Chuck..another factoid I heard. IF you confiscated the wealth of the top 5% of Americans, it would be a drop in the bucket of debt the US is dealing with. Income tax is a pretty inefficient way of financing the treasury. What makes money for government is the growth or at least stimulus of all economic activity and that means they have to allow it to happen. All I have seen from Obama is impediments and disincentives to economic growth.

[chuck34]

Chuck, Hamilton still lives in the UK does he not? I know Eddie Irvine still was living in Ulster where he is from. You know your taxes were too high though when the Beatles, hardly right wing anti-tax reactionaries were protesting the tax burden in their song "taxman" and how Lennon, Harrison and Starr all left the country for periods of time.

I think a lot of people have an envy or hatred for the rich in this world and it is this class warfare nonsense that builds support for "taxing the rich". What is ignores as you have pointed out how much they pay already and how it is the rich that invest money in new ventures, new businesses and make economic growth. No government can do that. Even the Communist Chinese woke up to that reality in the 1980's.....

I thought I heard Hamilton moved to Switzerland, could be wrong though. Also, I'm pretty sure Button and Coultard live in Monaco. But I guess that may be wrong too. I guess bottom line is, perhaps I shouldn't have said that as I do not know for sure.

[chuck34]

Chuck..another factoid I heard. IF you confiscated the wealth of the top 5% of Americans, it would be a drop in the bucket of debt the US is dealing with. Income tax is a pretty inefficient way of financing the treasury. What makes money for government is the growth or at least stimulus of all economic activity and that means they have to allow it to happen. All I have seen from Obama is impediments and disincentives to economic growth.

I heard that as well. Something about taxing the top 5% at 100% and still not having enough to cover the new spending.

Another thing I find crazy is this cap and trade business. It is supposed to cut down on "green house gasses" by taxing them. So eventually the gasses go down, along with revinue. But Obama is relying on the revinue from this tax to boost his spending. Circular logic if I've ever heard it.

[Rollo]

Government cannot mess with the economy. When it does, usually bad things happen.

Governments have been progressively removing their responsibility from the affairs of nations for the past 20 years. The actual amount of government control has been dwindling.


The mortgage crisis in the US is predicated on the fact that Clinton inititives to put more minorities in their own homes was NOT a sound financial policy ( putting people in mortgages they cannot afford is just not sustainable as we have found out)

Financial Policy (and policy generally) is solidified by the passing of legislation. The main piece of legislation which caused the sub-prime housing bubble was the Gramm-Leach-Bliley
Act, 1999, and I quote from the preamble:
To enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers, and for other purposes.
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=106_cong_public_laws&docid=f :p ubl102.106
This isn't government "messing" with the economy but precisely the opposite, government moving away from it by letting the markets run themselves, according to laissez-faire principles.

Goverment doesn't "put people into mortgages", people put themselves into a mortgage. Isn't that why banks employ risk assessment officers?



but the pressure for this to continue from people like Barney Frank and the like have created this crisis. Pouring money into the banks and telling banks how to do their business wont fix it either.

Pouring money into the banks shouldn't have been necessary if the banks prudently managed themselves. What we've witnessed is gross greed or incompotence on the part of the banks. Where did their risk assessment go?

If anything, all this shows is that the banks need to be told how to run their businesses, because quite frankly they have shown that they simply are incapable of doing it themselves. They were left up to their own devices, and then cried when it all blew up in their faces. It wasn't the government lending money to bad risks, but the banks.

[Rollo]

Also the equation may be a bit simplistic as it does not deal with debt loads or inflation. Inflation is going to be a pretty big problem for us comming up soon IMHO.

Nor does it need to. Inflation is the rate of change of prices rather than the events themselves. Inflation of itself is actually not a bad thing because in essence all a price is, is a measure of value against some standard; that standard is course a fib.

Historically since the beginning of the Roman Empire inflation finds a safe level of about 3-4%, so a little isn't entirely damaging. Inflation will only be a problem if it isn't prudently managed. If the economy is over-inflated, then the government by buying back currencies or retiring debt will reduce the size of the money supply and inflation will fall.

[chuck34]

1) Governments have been progressively removing their responsibility from the affairs of nations for the past 20 years. The actual amount of government control has been dwindling.

2) Goverment doesn't "put people into mortgages", people put themselves into a mortgage. Isn't that why banks employ risk assessment officers?

3) Pouring money into the banks shouldn't have been necessary if the banks prudently managed themselves. What we've witnessed is gross greed or incompotence on the part of the banks. Where did their risk assessment go?

4) If anything, all this shows is that the banks need to be told how to run their businesses, because quite frankly they have shown that they simply are incapable of doing it themselves. They were left up to their own devices, and then cried when it all blew up in their faces. It wasn't the government lending money to bad risks, but the banks.

1) Perhaps other governments have allowed their control to dwindle, but not in the US. We have more and more government control (or at the very least meddling) every year.

2) The banks were told in the mid 90's (before the Gramm-Leach-Bliley Act) by Janet Reno, the A. G., that banks had to stop "red-lining" and lend to more "at-risk" and "minority" people. Or they would face civil rights charges. So yeah, banks employed risk assesment officers, but the Federal Government told them to stop doing their jobs.

3) The question is not why the banks were poorly managed or where their risk assesement went (see above answer). The question should be, Why do we need to bailout banks that are poorly run?

4) Again see #2 about government interference. Even after the G-L-B Act the banks were not "left up to their own devices". That being said, I do think some "smart" regulation is in order. But what we have had up to and including the present time is not "smart".

[chuck34]

Nor does it need to. Inflation is the rate of change of prices rather than the events themselves. Inflation of itself is actually not a bad thing because in essence all a price is, is a measure of value against some standard; that standard is course a fib.

Historically since the beginning of the Roman Empire inflation finds a safe level of about 3-4%, so a little isn't entirely damaging. Inflation will only be a problem if it isn't prudently managed. If the economy is over-inflated, then the government by buying back currencies or retiring debt will reduce the size of the money supply and inflation will fall.

You are correct, inflation in the 3-4% range is not bad. However, do you really think it will stay there once the US has to start printing money to pay for all this "stimulus"? What did inflation in the 10-12% range do for economies in the 70's?

[Mark in Oshawa]

Rollo, if you really think gov't had nothing to do with the bank crisis, then you are ignoring the reality. Chuck is right. The US gov't more or less told banks to look beyond whether the people could pay or not with ethnicity coming into the question. If that isn't meddling threatening the banks with civil rights charges, then nothing is.

I will say though that the people who bought the houses without enough capital are not innocents though. That said, nothing I saw in the last election leads me to believe those same people have learned anything. The gov't is expected to keep bailing out people. AT someone point, someone says "check please" and the bill has to be paid. Obama looks like he will be printing money to do it because I cant see the Chinese or any other investors from outside the US propping up the US treasury for some of the nonsense that is coming down the pike.

I am all for responsible banking regulation. We have it in Canada and the Canadian gov't doesn't own one percent of any of the major banks in this country. We are the only G8 nation that didn't suffer a bank failure of any note in the last year. I think there is a middle ground governments must balance the need to let banks be banks, vs the need to protect the public. What I am seeing in the US is the Congress and Obama wanting to take an activist role in the bailout.

You need not wonder how wise this is except to look at the Government wanting to run the auto companies planning and priorities. IF GM goes Chapter 11, the Government will be in there dictating what cars GM should make and how they will promote them ( bye bye NASCAR factory support ). Never mind that if it all fails, who really will lose? Not the government. GM's workers, and dealers. Whatever sins they may or may not have made, having the government of the US start dictating product planning and marketing to one of the big 3 scares the heck out of me.