Sunday, February 22, 2009

What Barack needs to do to prevent the collapse of the United States

First, the President needs to put the three or four weakest of the largest banks in the country into receivership, guaranteeing all deposits, firing the existing managements, and selling all toxic assets into a market on an as-is no-recourse basis.  The business assets of the banks will also be sold or reconstituted as new banks under new management.  If necessary, the Fed will write a check to capitalize the new banks, taking preferred.  No taxpayer money will be used (explicitly) to capitalize the new banks.  Toxic credit cultures produce toxic assets.  We need to write off vast amounts of toxic private debt that are weighing down our system—not have the taxpayers bail out the investors.

Second, the stimulus bill will be amended as follows:  all tax cuts will be repealed, as employed folks will benefit from a deflationary tax cut in the coming years and are doing well anyway; taxes on incomes over $200,000 will be increased to a marginal rate of 50%-67% in recognition that these folks have gotten a very good deal out of one of the richest countries in the world that is now in need of their help; taxes on business should be lowered as they are higher than other nations’ and make us an unattractive place to set up shop to some extent; a poverty-level income support or dole will be enacted as a negative income tax for the working poor and unemployed, without a time limit, to inspire confidence in the system and to allow for self-organized reallocation of labor resources during the massive structural adjustment the economy is going through; access to national health care shall be established for all those not covered by an employer plan through Medicaid, to prevent the rapid depreciation of human capital that can occur during a national melt-down.  Finally, the federal government should assist state governments about to be bankrupt with federal deficit dollars over a temporary interval of several years as necessary for the states to find a new budgetary equilibrium, with special attention to improving education at all levels.  And given the gyrations of the federal budget and monetary policy recently, the President will have to use his influence to ensure that monetary policy does not permit a hyperinflation or deflation to occur. 

Third, the President needs to quash plans to initiate martial law in the United States of America.  The people are a lot smarter than Homeland Security gives them credit for being.  The psychological impact of such an action would be devastating and would do more to destroy any remaining shred of a viable social contract than any locally-handled chaos might do.  Efforts to take guns away from Americans will fail and will only further decrease faith in the government.  The founders knew what they were talking about here.

Fourth, the United State and China—“Chimerica”—need to agree to a long-term plan to achieve more balanced trade, which will benefit Chinese consumers as they will be monetized to consume their own production, and American producers, as their products are demanded more.  The Japanese need to be included in such an agreement as well in similar terms.  As part of this agreement among the major economies of the world, it must be agreed that the dollar will undertake an orderly decline relative to the renminbi.  As such, given the chaos in Europe and the seemingly imminent collapse of the Euro, the dollar may continue to enjoy viability as a reserve currency in oil transactions.  Part of this agreement may be to require the parties to continue to transact their oil purchases in dollars.  The U.S. has extracted enormous rents from the rest of world while the dollar has been the reserve currency; we must convince the world we will not hyper-inflate.

Fifth, the United States should withdraw from foreign military adventures that it has not a chance of “winning” in any meaningful sense, such as Afghanistan.  The U.S. spends as much on its military, roughly, as the rest of the world’s spending altogether.

Sixth, assistance to those with underwater mortgages should be limited to a 15% cram-down of principal, possibly with an interest rate subsidy, and these deals should be made available only to homeowners who can’t afford their current payments on standard debt-to-income ratios.  Just because the mortgage is underwater doesn’t mean assistance is warranted.  Rich people pay rent too.  Otherwise, the house should be foreclosed and resold.  The vast majority of Americans handle this major investment well and will resent others being subsidized.  The market has a long way down yet reach sustainable price levels. 

Seventh, given the incapacity of Congress to act in a responsible manner, many of these actions may need to be taken as Executive orders.  A majority of American voters elected Barack Obama because he appeared to be straight, not a captive to special interests.  Financially, his campaign was not.  In office, however, as a young and relatively inexperienced leader, he is doing what leaders do well, adjusting to prevailing norms, trying to find a parade and get in front of it.  But the prevailing norms are corrupt; his primary financial advisors are a disaster.  Barack Obama is going to have to trust his acute historical sense, of his likeness to Lincoln, and of the ideals expressed in the Constitution that America has tried to live up to through its tribulations.  He will need to look far beyond the limited viewpoints of his current advisors, keeping the Constitution open before him as a vision of a republic of semi-autonomous states.  Modern network theory tells us sparsely connected networks are more stable than highly connected ones.  He needs to remember that the Constitution is the best the world has yet to implement.  He needs to bring the nation to a realization that we have indeed been living beyond our means and that while the adjustment is painful, we can live together sharing the new burdens fairly.

America is a rich country.  There is enough here for everyone to have a good life.  Our poor live better than most of the rest of the world.  But the great long-wave final act villains of credit over-extension and rampant income and wealth inequality have caught up with America.  The house of cards is collapsing and the wealth is all held by a few.  This is called a collapse of effective demand.

The only thing preventing President Obama from taking the necessary steps outlined here to get demand flowing at a lower, more appropriate level is the entire entrenched class system that controls Congress and the biggest corporations in the land.  But presidents before him have taken on the special interests, and he can too, if he chooses to fulfill his historical destiny.

I pray he succeeds.

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