If Obama thinks that the tax-cut will spur euphoric spending this year, he better think again. Re-building their capital base and paying off debt will take years. Moreover, banks will not lend to consumers with high levels of debt and an unemployment rate that is growing -- no matter how much cash the banks have. So giving money to banks is not the answer. From Stock-Traders-Daily.... ------------------------------------
"Consumers are not investing money because they do [not] have money to invest. Consumers are [not] borrowing money because they have borrowed [enough already]. Prudently, consumers are now [re-building their capital base and paying off debt instead. Therefore, our government cannot expect consumers to come back into the market immediately. They will not come back until their capital base is restored. Coincidentally, this will make many of them credit worthy borrowers again as well, and satisfy the re-found policies of creditors too. Patience is required for the consumer to stabilize again. I have addressed this issue specifically in my return to parity analysis.
Constructively, with a little time, consumers will build capital, they will have paid existing debt, and they will be ready to borrow again. Our government cannot force the issue. However, offsetting recent layoffs could help influence this process to happen faster. On this topic, so long as our government approaches this issue with managed expectations, the consumer will start to participate in the economy again soon.
The second part of this two-part problem is the financial institutions themselves. Reasonably, the financial institutions caused the consumer problems of today as well. However, the financial institutions did not just lay a heavy burden on consumers, but they did it to themselves. Consumers will work their way out of this mess. Some of them will have to bite the bullet for a while, and others will need to declare bankruptcy in order to survive. Either way, the consumer will come back to the economy eventually.
Hey Prof! I'm actually quite saddened that you were not chosen to be part of Obama's cabinet - there is so much that you could fix.....singlehandedly! At the very least, I hope you get (or already have gotten) the invitation to sit on THOR's board. I'm appalled that they've waited this long to ask you. In any case, I hope you are still consulting to the other major VAD players and offering your engineering prowess and improving the field. By the way, how did your meeting at FDA go? Well, I hope. They sure could use some shaking up down there and you are just the man to do it! Got to run - hope everything goes well at Texas Heart - was it this week or next that you're assisting Dr. Frazier with that complex case? And don't forget - please bring back a momento for me from Israel - I know you'll be busy with the peace talks but my mom would just love something from the homeland. Thanks!
I'm saddened by the lack of an ability for solving truly simple problems by those who rule the country.
It's truly obvious (read: simple conclusion) that the banks would not utilize the dollars given them in the way the dumb congress thought they would.
1- The banks could no longer securitize mortgages (read: act as originators who earn fees for each mortgage) and therefore now had to keep them. This means that banks must take a risk. In a rising unemployment environment, they would demand much more as a down payment and a higher credit score from each applicant. That alone would sharply reduce the qualification subset and bank lending.
2- The exact same thing happened with credit cards. They are no longer mailing pre-approved cards. Moreover, credit scores fall for those with multiple cards.
3- Then you have the Leveraged Buyouts the banks financed. This is another Tsunami coming since those LBOs occurred mainly at the end of the cycle (read: at the top). The loans to those Private Equity companies will come due starting in 2012 and beyond. I have no idea how the banks will get that money back. We are taking more $Trillions.
4- So in conclusion we all can see how really stupid our congressional representatives are when they first appeared on TV in the waning days of BUSH and congratulated themselves for heading off a dire economic problem. The fact is they threw our money away with that solution.
5- The simple fact is that there will be no lending to people at high risk for honoring their obligations. Ditto for companies. Therefore the solution path is/was to allow the capitalistic solution for bankruptcy to work. If anyone has noticed, the shareholders and 401K holders took a beating anyway and the USA is in deep debt that will be felt for decades. Furthermore, the unemployment rate is soaring. The only ones who benefited were the billionaires who were able to extract the money they would have surely lost. You see...they were not covered by the FDIC beyond a small percent of their net worth. Furthermore, who do you think played the Credit Default Swap market. You guessed it, the very wealthy, not the average Joe and Jane. It was them that would have been destroyed if we had not given $150 BILLION to AIG.
6- I would have used the BILLIONS by starting a Manhattan type project for all forms of energy..including clean coal. I would pump more into infrastructure. I would accelerate energy efficient autos by outfitting 50% of the gas stations with hydrogen or other alternate fuel or charging capabilities so the auto companies could roll out those energy-saving cars within a few years and the customers could easily get the fuel. And that would be just the start to keep the USA at the leading edge.
7- With those dumb politicians, the USA is in a steep decline with nothing to show for those $Billions.