OMB: Owner-Managed Business

And that, my fine readers, is the problem. When 70% of the GDP consists of consumer spending and consumers aren't spending because of job losses, it takes more than a decline in the numbers lost each month to bring about a recovery. Until people start getting new jobs or at least feeling stable in the new world of work, they are not going to spend more money.

The Federal Reserve's regional bank presidents all know this. It is a fundamental requirement--below entry-level--for their jobs. The purpose of their speeches, then, must not be to inform, but to persuade. The Fed, like the government that created it, is approaching the recession from entirely the wrong angle. Their emphasis on "saving the banking system" means that those whose reckless pursuit of profit threw the whole nation's economy out of balance are also the very ones who receive taxpayer-backed bailouts. The financial industries, those who caused the crisis, would have been better served if a few hundred managers and deeply-involved employees were marched before the cameras in orange jumpsuits and leg irons. The remaining people whose actions caused the crisis would have mostly sought plea deals.

Would this have made credit more available? Probably not, but whether you are an individual or a business, you are probably overusing credit anyway. And your overuse of credit threatens your personal (and business) financial stability. The concept of "financial leverage" is probably foreign to you, but it refers to the way that adding debt to a firm's capital structure can make good times much better at the expense of making bad times worse. The debt makes profits more responsive to changes in revenue. Sales go up 3%? Profits might rise 5% or more. Why? Because once the debt and operating costs are paid off, the rest (however large or small that is) goes into profit. On the other hand, when sales drop, the fact that debt payments are relatively fixed means that it is easy to be thrown into a loss situation.

As I mentioned above, people were using loans too readily. A person or organization receiving a loan is trading future income for present spending. This is why California is in such deep trouble. In addition to the state's never-ending appetite for spending, the state is faced with coming up with the dough to make payments on money borrowed for *past* spending. And this is also what is happening with many of us: as incomes diminish, payment on debt is more or less fixed, taking an ever-larger proportion of one's income. It means that many more people will have to go through the bankruptcy process (and Congress is going to have to revisit the anti-consumer provisions they added to the Bankruptcy Code in 2005 or face an incumbent-free House of Representatives).

It seems to me that asset prices are still far in excess of sensible values, while we continue to ship our productive capacity overseas to low-wage countries. The result of this is likely to be a severe asset price deflationary spiral that stops consumers from buying non-essential items (they won't have the funds to do so anyway) and knocks us on our collective economic rump. As the "circular flow of income" stops flowing, holders of debts (that is, financial institutions like banks) and owners of taxable properties (that is homeowners and car-owners) alike will be squeezed to the breaking point by the lack of payments flowing in and the fixed or growing payments they are required to outflow. Yes, that sounds a lot like today, but this is just a practice run.

We see that the Federal Reserve, for instance, found that its monetary tools grew less effective as interest rates approached zero. Now imagine what happens when consumers won't spend or borrow, but won't put any money into banks, either. Banks will find that people will likely become less enamoured with electronic payments--because banks will crank up the fees, since they won't be able to generate any interest income--and unwilling to leave funds in their bank or other financial institution accounts.

I want to interject something here: When I took "Financial Institutions and Capital Formation" at California State University's San Bernardino campus, the instructor (who advised some of the newly-independent Baltic nations on forming financial markets and institutions) said that bank safety funds like the ones administered by the FDIC had a 100% record of failure, given a sufficiently strong financial crisis. It won't take a 25% failure rate to collapse the FDIC's funds. Remember that our banks use fractional reserves. When they accept a deposit, the reserve a portion of it and then lend a portion out, which becomes a new deposit in that bank or another one. And the process repeats. So an original deposit of $100 can end up as several times as much in the banks' ledgers. The reserved value, on the other hand, can never exceed 100% of the original value. Be aware also that this added value on the banks' ledgers is equal to the principal value of the loans they make that are derived from that original deposit. It all works, as long as consumer and investor confidence allows banks to avoid paying back all deposits at once.

If ever there was a 100% run on all the banks, most of us would not receive our full deposits back, nor would borrowers be able to repay the full value they owed. This is not an excuse to pull your funds out of the banking system. Remember that our money only has value because the banking system and the government says it does. Fortunately, that megasize bank run isn't likely to happen, but if it ever did, everyone would suffer, with nothing that we could do to ameliorate the pain. If someone tells you to buy gold as preparation, ask yourself how buying gold is going to help you if the banking system collapses. (Answer: it probably isn't going to help.) Now, let's get back to our topic.

The regional presidents of the Federal Reserve went out of their way to say that the recovery could take years before it starts replacing jobs, even though they know (and we do, too) that there won't be a recovery until the job losses stop. Why do you think they are saying this, then? Could it be that they are hoping to persuade you and I to once again borrow money we don't have any realistic expectation of repaying, perhaps using our now-depressed-value homes as collateral? After all, a return to the heyday of borrowing and payments would be a quick way to restore our financial sector to profitability, even if it comes at the expense of those individuals and families that do business with them. Could it be politically profitable to be able to announce the end of the recession, even as a tenth or more of the people who formerly had jobs remain jobless? This would be a major feather in the new administration's cap. So I ask you, does it seem strange to you that these political, financial, and regulatory leaders, people who should know better, are throwing their hopes for a recovery on a return to the very things that caused the problems? Wouldn't they be remembered in a better light if they supervised a true restructuring, such that the asset price bubble could never recur, and neither could the abuses that the financial sector perpetrated, nor the lapses in oversight that the regulators allowed?

With a limited time in office (eight years maximum, assuming he wins re-election after the first four years), a wise executive would seek to make the longer-term changes that enhance his legacy, rather than concentrating on re-election. That is, the President should be pushing the Fed, the Treasury, various federal agencies, and Congress, toward the singular goal of getting rid of the things that caused our present crisis and preventing a recurrence. Mollycoddling too-big banks is not going to accomplish this. Nor will pulling all the little regulators (SEC, CFTC, NCUA, FDIC, etc) into one big agency, remembering how the federal agencies prevented state agencies from tackling the burgeoning crisis earlier in the decade, before the wave crested and broke on the shores of overleveraging.

On the one hand, goverment bailout may well have prevented global economic diaster; lessons learned from the Great Depression were appropriately applied. On the other hand:





1. The government remains the driving force of recovery.


2. The fundamental economic problems facing most Americans remain.


3. There is no substance behind the Dow?s rise, which is fueled by false hopes.


4. Old business practices are back; one new fad is to bundle together insurance polcies as investments.


5. Economic recovery is still kilometers out of reach and will remain so as long as consumer debt chokes spending.





The true beneficiaries of government stimulus spending are many of the institutions responsible for the econolypse. Where is the moral hazard?

Joe Wilcox writes the above. It is a worthwhile article to read. Follow his links. See the full story. In it, he shows that even a former government official admits that the fundamental conditions in society and the economy still point to quite a far run of "recession" before a true recovery begins. Following the links, you'll find "There is no recovery now, and there isn?t going to be one in the foreseeable future." He's right. Don't let those who pronounce untruths for selfish reasons deceive you into piling on the debt again. This is not the time for it.

NOTE: I am not a fan of any politician (other than Ronald Reagan) or party. Do not mistake this for some kind of anti-Obama screed. The situation started before I ever heard of Barack Obama, and its roots date back before his involvement in politics. His only connection is that he continues to follow the road blazed by his predecessors.