Tuesday, June 22, 2010

How Can We Pull Out of the Recession?

Q. What is a recession?

A. It is a period in which the middle and working class have less money to spend, and as a result, those who earn money when consumers buy things also earn less. As car dealers sell fewer and fewer cars, they have to let go of sales associates, and the sales associates in turn can't afford to buy furniture, and the furniture stores close causing more layoffs etc. etc.

Q. It sounds like the general public is running out of money. If almost nobody has any money, how can the economy keep going?

A. Well, it can't. People draw on their reserves, and once these are gone more and more activity comes to a halt.

Q. What about the government? Can't the government create jobs?

A. Yes, it can. It can create public works projects.

Q. So why can't the government start more and more projects and get people get back to work so that the recession ends?

A. As long as government infuses more and more money into society, there will be more and more activity. And more activity does mean more jobs. More jobs gives people more money to spend. As more is spent more taxes are collected, and with more tax revenue coming in the government can start even more projects with the result that more people get back on their feet.

Q. But there are those who say it's time to pull back on spending to make the economy healthy. What's wrong with that?

A. A society with a bad economy is like a person who is sick. If someone is sick because he or she is starving or dehydrated, it makes no sense to save on food and water just so his personal budget is balanced. If you need to make debts to keep someone alive, you don't ask whether or not money spent on recovery increases size of the person's debt.

Q. Are you trying to suggest the government should simply print more money and hand it out to the public without any limitations?

A. That is not the way to go. The government has incredible investigative and research capacities. A major part of the money lost in the last two to three years was lost through high risk speculation. Speculation is a form of gambling, and gambling there is always a winner and a loser. Government investigators and researchers need to find out who the winners in the financial contest are, and where they are hiding their money.

Q. This just does not make sense. Can you give me one example of who might be a winner in the market collapse we have just seen?

A. Examples of winners are those who made bets that the housing market would fall. Betting in the financial market place is done through derivatives. A speculator buys bonds or funds that pay off in case of a market fall. Once the market has actually fallen, he quietly picks up his cash. Most people don't know such speculators exist, let alone how they operate. The source of the money lost through gambling is to a great extent money gotten from people who listened to deceptive investment advice. Deception is a first cousin to fraud. Money fraudulently acquired is stolen money, and once stolen goods end up with an even unknowing buyer the goods once found are to be returned to the person they were stolen from.

Q. Are you saying that those who gambled against people's investments are in actuality beneficiaries of stolen goods?

A. Maybe not directly within legal terms. But they are benefiting from the hardships that were bestowed on innocent people. Without fraud and deception, the gamblers betting on a market downturn would have had nothing to gamble with. So the government needs to find creative means to get back that which was stolen.


Harmon said...

Howard, thank you for this plain- spoken and very informative blog. My usual question, my interest is about principle or basic structures of behavior,e.g.,the addictive component of gambling and speculative risk. What if the speculators had been less greedy and not allowed the derivatives to become such a potentially impotent mountain of paper that was so susceptible to the failing of the housing market: What then if they only reaped moderately? Is it not the case that they would be called Lions of Wall Street? Also clever products of ivy league education?
What is the underlying logic that seemed to universally support their scheming, i.e, until economies began to fail and they got caught and majorly blamed for the failure? Is there not some hypocricsy here? They were models to be emulated, were they not? Nearly blameless in my opionion. Every ambitious schoolboy's and scrapper's paradigm. This is what interests me: The state of mind and stage of human progress towards truly sustainable standards of living ethically and well across the board . The outside world creates impressions that I need to understand and come to terms with and still gain and maintain serenity. Everything is mind, which is fine if it's perfectly reflective (I hear). In your estimation, where are we on the whole at present? Have we learned anything about our current dialectical take on reality? Love this piece!

Howard said...

Thank you, Harmon, for your thoughtful comments. Yes, people consumed by greed are lost souls, who, like other strongly addicted personalities are oblivious of any effects their behavior might have on others. As to hypocrisy, those who bought into the deceptions of the financial world are for the most part naive admirers of those who pull strings in the markets . Unlike the true hypocrites who are aware of the game being played and who take conscious advantage of it, the main fault of the naively deceived is a lack of education that provides for healthy, live-saving skepticism.

Using Madoff as an example, the vast majority of his victims were simply members of a herd that followed its leaders.