How To Restart The US Economy: A Massive Debt Relief

How To Restart The US Economy: A Massive Debt Relief
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Investing in education and high tech are critical and necessary actions. Nevertheless, they are part of a long term strategy to restart the economy.

Lowering taxes for small businesses who hire, increasing taxes for high revenues and launching large reconstruction programs are tactical actions unfortunately undermined by a political grid lock in Washington and a total loss of confidence in the prospects of the economy.

If there’s no hiring and no credit ease, consumption will slow further and production will remain sluggish. Catch 22 is currently in action and without an electric shock, the US economy electrocardiogram will remain flat.

As a reminder, the 2008 financial crisis was triggered by financial institutions which actions were blessed by the 1999, Gramm-Leach-Bililey act and the 2000, Commodity Future Act  both under the Clinton era. The first one allowed investment banks, insurance companies and commercial banks to merge. The second, exempted the entire derivatives market from federal regulation. As well said by Matt Taibbi, “These two laws transformed Wall Street into a giant casino, allowing commercial banks to act like high-risk hedge funds with a whole new galaxy of derivative bets to lay action on”. Former senator’s Byron Leslie Dorgan speech at the Senate in 1999, seems today prophetic even if the outcomes of this deregulation seemed predictable. More than ever, markets regulation seems to be the only way to avoid other financial disasters.

Needless to say that despite all the measures that were taken, the world economy is stalled and even on the brink of collapsing. As stated by an article of The Economist, and Prof Roubini’s gloomy forecasts, we are slowly going back to a deep recession: “A slew of recent indicators suggests the euro area is slipping into recession, as Germany’s exports slow, the fiscal screws tighten, confidence slumps and the banks’ travails imply tighter credit. Even if the euro-zone crisis were to be solved tomorrow, the region’s GDP would probably shrink over the coming months. America’s economy is still limping along, though the summer slump in share prices and consumer confidence suggest future spending will weaken further.”

Credit BallThere is something irrational about financial markets and the paralysis that rating agencies have triggered around the world. The depth of the crisis seems that have reached levels that are now totally disconnected from the economic reality and the western production capabilities. Indeed, European governments and the US government need to cut unnecessary spending and adopt rational deficit plans.  Nevertheless, the consumption machine is stalled because of investments scarcity. In 2008, the government bailed out the financial system with our taxes but the financial system didn’t return the favor, and instead used it as a collateral to save itself. Despite the good financial results of many financial institutions, loans for small and medium business are still extremely difficult to get, not to mention consumer loans. The situation is so obvious; if loans terms are not eased, consumption won’t restart, business won’t hire and the economy will continue to sink. Don’t expect this time a new magic measure by the Fed or the government; the solution to this infernal cycle are the financial institutions themselves. In this context, one of the most interesting proposal currently getting speed is a massive debt relief for the consumers. The equation is simple; if the financial system continues to ignore the signals of a falling economy and an angry society, it will end up dragged into the same black whole of destruction. Current Wall Street protests are the tangible sign that a massive debt relief is necessary to avoid greater troubles.

Reuters: “More than three years after the financial crisis struck, the economy remains stuck in a consumer debt trap. It’s a situation that could take years to correct itself. That’s why some economists are calling for a radical step: massive debt relief.  Federal policy makers, they suggest, should broker what amounts to an out-of-court settlement between institutional bond investors, banks and consumer advocates – essentially, a “great haircut” to jumpstart the economy.  What some are envisioning is a negotiated process in which cash-strapped homeowners get real mortgage relief, even if it means forcing banks to incur severe write-downs and bond investors to absorb haircuts, or losses, in some of the securities sold by those institutions.  “We’ve put this off for too long,” said L. Randall Wray, a professor of economics at the University of Missouri-Kansas City. “We need debt relief and jobs and until we get these two things, I think recovery is impossible.”  The bailout of the nation’s banks, a nearly trillion dollar stimulus package and an array of programs by the Federal Reserve to keep interest rates near zero may have stopped the economy from falling into the abyss. But none of those measures have fixed the underlying problem of too much consumer debt.”

Photos Credit: Blue Card By MyTudut / FlickR – Bank Debt Word Cloud By Vectorportal / FlickR

Video: CBS News –  Wall Street protests spreading beyond N.Y.C.
A group called “Occupy Wall Street” has been attempting to capture the discontent of America by camping out in N.Y.C.’s financial district. Michelle Miller reports that the campaign may be spreading beyond the city.