Bank Bailouts: Should Banks be Forced to Pay Early?

Banks aren’t necessarily the most responsible institutions. After all, they had to get rescued by the government for failing to behave the way banks should and making risky decisions. Now that they are showing profits, many argue that they should be responsible for once and pay back the bailout money sooner than their original deadline and raise private capital as usual.

When the government sees this money back, it can help fund stimulus programs and control the national debt. However, given the central role of bank failure in creating the current crisis, pulling this funding back before there is a definite and consistent improvement could prompt a horrible economic reaction.

Banks are doing better than they were. There’s no doubt about it. In fact, according to the New York Times, JP Morgan Chase earned $3.6 billion in the last quarter, and ten big financial institutions paid back nearly $70 billion this year. It’s easy to understand why many are upset. With worries about the national debt and concerns about how Obama’s stimulus package is going to affect the future of our economy, it’s not unfair to wonder why the banks are taking so long.

To some extent, this is an important concern. However, these banks just got back on their feet. You’d think most Americans just weren’t around a year ago when some wondered whether or not this was the end of our economy. Banks were a major driving factor behind the financial crisis. When they don’t operate properly, when they fail, we can be pushed into a recession as we were before. Regulators have warned that “huge losses tied to commercial real estate, home mortgages and defaults on credit cards” are still present, and that banks are just not ready. Those Treasury officers who disagree have a right to their opinion, but it’s shocking how easily they would accept that risk.

Months of profit don’t prove that our banks are permanently moving in the right direction. Before we risk putting the U.S. economy back in turmoil by placing unnecessary stress on the banks (the money isn’t due back yet, after all), I would like to see consistent, high profits, and positive signals from the economy as a whole. Those who are in favor of forcing banks to pay back that money early should be fully ready and willing to accept the risk that comes with it. It’s more than possible that it would extend or deepen the recession we’re already in, and that’s certainly not worth it for a little extra funding. 

Party Divisions and Health Care

There’s new news for health care that, according to Senator Tom Harkin, “ought to give Democrats a shot in the arm to get this job done.”

            Though many Americans are still worried that the cost of their health care will increase or that they will see no direct benefit from Obama’s health care plan, a recent poll shows that they still trust Democrats more than Republicans on the issue of health care. This may help to reduce divisions between Democrats and create a more pleasant solution.

            Honestly, I have no problem with the bill taking forever to get passed. To me, it could take years, but that’s fine as long as it’s done right. My only problem is that it seems nobody can agree (as I said in my last post).  How can there be a correct solution when nobody can agree on anything?

Most people agree that something needs to be done, which is probably why they trust the Democrats more than Republicans to handle it. We may consider ourselves the best country in the world, but our health care system definitely doesn’t reflect it. Something does need to be done.

However, Democrats really need to think about how this is going to work. If a bill is going to get passed, it needs to have steady support. Hopefully, Democrats will take this poll to heart and understand that they need to be united (at least somewhat).

A Possible Solution to Divisions on Health Care?

             I had never heard of Senator Thomas R. Carper until I read this article in the New York Times.

            He posed something related to health care that I had never even thought of: allowing the states to accept or reject certain aspects of the new health care plan. Honestly, that’s the smartest thing I’ve heard lately.

            I know, I know, bills are supposed to take a long time to go through. The jump into government health care is a big one, and the plan must be as thought-out as possible. It needs to not only be feasible, but representative of what Americans want, and a legitimate solution to the severe problems with our health care system.

It seems as though nobody can agree. And honestly, I doubt they will change their minds anytime soon. Party members can’t agree with fellow party members, and there are so many different ways to go with the plan. It’s such a divided issue that there won’t be anything like a consensus anytime soon. Given this, it seems as though the best solution is to split it up and allow those who want it to accept it.

Even if it’s not the health care plan Obama wanted, or the plan the country needs, it could lead to a huge increase in citizen welfare. And who knows, if it works well in the states that adopt it, it could spread throughout the country gradually, getting passed in states that were previously hesitant. Obama did make a campaign promise, but it seems as though a large portion of the country isn’t ready for his health care plan. And if a solution makes everyone happy, why not use it?

New Keynesian Theory and the Stimulus Package

Economic problems are one of the most pressing issues in America today. Part of the reason for this is the fact that usually accepted economic theories are being tested, and some are failing. What used to be considered fact, such as the Neoclassical theory of economics, is now being thrown away for more accurate and usable theories. New Keynesian theory, or the belief in moderate government intervention when necessary, is becoming increasingly popular because of its ability to accurately predict and solve economic issues. Obama’s stimulus plan, an application of this theory, is the best answer to the United States’ current economic difficulties because it is the solution most capable of shortening and tempering the financial crisis, making it bearable for the American people.

Until this major financial crisis, Neoclassical theory was the most widely accepted economic theory, almost to the point of being considered fact.  Neoclassical theory is the belief that allowing the market to operate on its own is the best option. Neoclassical economists believe that government intervention causes more harm than good, and that in free market economics, everything will right itself in the long run. The chief economist of the International Monetary Fund (IMF) declared in 2008 that there had been a "'broad convergence of vision’” (Krugman 1). It was believed that Neoclassical economics was an exact enough science that it could prevent major economic problems, and that though there would be booms and recessions, these recessions would be minimal and best responded to by governmental inactivity. However, this assumption proved incorrect. Alan Greenspan, a proponent of Neoclassical economics, “was in a state of ‘shocked disbelief,’ because ‘the whole intellectual edifice’ had ‘collapsed’” (Krugman 3). The recent economic crisis is too intense, and on too large of a scale, to be predicted or prevented by the previously accepted principles of economics. As outrageous as it seems today, it was believed that there would never be another depression after the Great Depression, which now seems entirely possible. Even in the long run, market forces are not necessarily strong enough to bring the U.S. economy out of its major recession, especially given the fact that the world economy is suffering as well. The long term could extend so far into the future that, without a strong governmental solution, the economy may continue to spiral downward. This leaves most economists who were confident in Neoclassical economics searching for a new way of thinking.

One possible alternative is Keynesian theory. This is the belief that the government should regularly intervene in the economy to guard against mistakes made by the private sector and prevent and solve major crises. This involves strong, consistent fiscal and monetary policy meant to keep wages and prices steady and consistent with changing variables. Keynesian theory is also used to predict major crises, ignoring the classical assumption that only small-scale recessions are possible. Although applications of Keynesian theory could prove useful in the current economic crisis, strong Keynesian policies fail to fully consider how they will affect the economy in the long run. According to Keynesian theory, government intervention should be persistent and applied often. In this case, however, if Keynesian expansionary policies were applied until the economy righted itself, the United States budget deficit would increase severely. Our economy needs a push in the right direction, not a full-scale attack on the current problems until they are solved. Otherwise, there could be extreme long-term consequences.

The answer is New Keynesian theory. This theory assumes that in the long run, changes in the money supply are neutral. However, prices are sticky. This means that prices and wages don’t automatically respond to market forces, and it can cause hardships within the population in the short run. Though the market will right itself in the long run, the long run can be extraordinarily long, which makes these hardships unbearable. In the case of the current crisis, it could take up to a decade for the world economy to right itself and for unemployment to return to the natural rate, as “economic contractions associated with financial crises tend to be deeper and last longer than recessions not associated with a financial shock” (Brown 44).  In addition, since many members of the private sector have lost confidence in the market, investment levels could stay low despite the extremely low interest rates, which will slow the return to economic prosperity. The International Monetary Fund and World Bank have done little to improve the situation, in contrast to previous global recessions. “In previous international financial crises…these international financial institutions, especially the IMF, played a prominent and active role to resolve the crises” (Park 126). This puts a higher burden on the United States government to solve the problem. And as economic difficulties continue across the globe, countries such as the United States and China have established protectionist policies that could further inhibit economic growth. For all these reasons, government intervention is necessary, and it is clear that a mix of President Obama’s stimulus package and strong monetary policy is an excellent solution.

The first tool of New Keynesians is monetary policy. This involves the Federal Reserve Bank, and includes changing the amount of money available, as well as interest rates. Though our Federal Reserve Bank has been working endlessly to try to fix the current crisis, it is simply not enough. The current interest rate is almost 0%, and cannot be lowered to further spur investment. The truth of the matter is that the private sector does not want to invest. Until recently, it was thought that investments were smart and risk-free. Though they are usually a wise decision, they are definitely not risk-free. Now that these risks have been outlined, it is difficult for people to see the benefit in investing. They would rather save their money than risk losing it again, as many did in even the “safest” markets, such as the housing and bond markets. Though the Federal Reserve Bank should continue its strict monetary policy, it should be in coordination with fiscal policy, as that is the last possible option to boost our economy.

Fiscal policy includes taxation and government spending. Because consumers are saving rather than consuming or investing, the economy has no way of recovering. The government is the only one with the means to borrow a substantial amount of money and inject it into the economy. Though New Keynesians usually rely on monetary policy to correct the economy, they have accepted that this is the best available alternative. Currently, “U.S. unemployment is already at a 25-year high, and may exceed and remain above 10% for some time” (Brown 44). To save our economy from a major depression and long term suffering, heavy government spending must occur.

An argument, however, is where the $787 billion dollars of the federal stimulus package should have been allocated. Though the tax breaks do lessen the burden on the American people, they are likely to have a marginal effect on the economy, as people are more likely to save the extra money rather than spending it. Many also argue that not enough is being spent on restructuring our economy so that it can provide long-term growth. Another issue with the stimulus package is how long it is taking the money to actually enter the economy, and how slow new jobs are being created. In fact, “Critics maintained that its job-creating efforts would not largely be in place until 2010” (Burke 598). This is hardly a relief for the American people, as unemployment is causing hardships today.

Although there are arguments about how the money should be spent, that is an issue not everyone can politically agree on, and the main point is that the money is being pumped into the economy in a productive way. There are both benefits and drawbacks to the non-immediate release of the money. Though the economy needs fixing now to prevent the United States from entering a full-scale depression, we are not quite ready to fully receive the stimulus package and utilize it in the best possible way. This is because “unemployment will be structurally higher in the near term and only decline slowly over many years as adjustments are made in the skills of the labor force. This prediction stems from the inherent mismatch between skills available in the labor force currently…and the skills necessary to drive sustainable growth over the next five to 10 years” (Brown 44). The United States has a lot of long-term organizing to do, or structural unemployment will persist. Education must be altered, as citizens must be trained in the skills that are useful to America today. If we do not reorganize our workers and our economy, the stimulus package will be nothing but a weak, short-term fix. That is helpful to reduce suffering, but given the high contribution to the deficit, it should be able to provide some long-term benefits.

In response to the concern about raising the deficit or creating hyperinflation, those are both moderate concerns rather than pressing issues. The common concern is that we can “continue to spend beyond our means for a bit longer, but this will not persist indefinitely…The legacy of past policies already posts a significant roadblock for economic growth going forward” (Brown 49). Carrying a major deficit inhibits economic growth, which is important in the long run. Though the deficit is something that needs to be watched closely and, eventually, decreased, the time to do so is not during the largest recession since the Great Depression. Given that the deficit is increasing drastically, there should be attempts to correct it after the global economy rights itself. Taxes do need to be raised in the future, and while this may have a negative effect on future generations, it is not something that can be solved during an economic crisis of this scale. In addition, it must be noted that this is the only stimulus package that will be used to combat this recession. It is a one-time increase in the size of the deficit. Without the constant government intervention dictated by Keynesian theory, the budget deficit will not increase dramatically. Hyperinflation is also far from a pressing concern. Deflation has become a bigger issue than inflation as of late, making moderate inflation beneficial, and there is little to no empirical evidence that government spending causes hyperinflation. Overall, these concerns are relatively insignificant when compared to the suffering that could occur during a depression.

President Obama’s stimulus package will not provide perfect results. The sudden downfall of many accepted economic principles makes it difficult to determine the best possible solution, as many economists are still contemplating the answer. In addition, there are many policies the government needs to make to supplement this plan, such as restructuring, improving bank regulations, and continuing to place importance on technological advances. However, to prevent the current recession from spiraling into depression, the government must intervene in the market. It is difficult to say where the economy is headed, but given the New Keynesian policies being implemented, it may become the next widely accepted economic theory. And, hopefully, it can right our economy effectively.

Brown, G., and C. Lundblad. "The U.S. Economic Crisis: Root Causes and the Road to Recovery. " Journal of Accountancy  208.4 (2009): 42-48. ABI/INFORM Global, ProQuest. Web.  8 Oct. 2009.

Burke, J.. "The Obama Presidential Transition: An Early Assessment. " Presidential Studies Quarterly  39.3 (2009): 574-604.  Research Library Core, ProQuest. Web.  8 Oct. 2009.

Krugman, Paul. "How Did Economists Get It So Wrong?." New York Times (2009): 1-8. Web. 9 Oct 2009.< http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=1&_r=2  >.

Park, Y.. (2009). The Role of Financial Innovations in the Current Global Financial Crisis. Seoul Journal of Economics, 22(2), 123-144.  Retrieved October 9, 2009, from ABI/INFORM Global. (Document ID: 1826025051).