Maine Writer

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Saturday, January 31, 2009

Marc Pembroke of Jackman Maine speaks eloquence about our economic "recesspression"

Greetings to friends of MaineWriter about our nation's new economic climate and thoughts on the words "correction" or recession/depression:

Marc Pembroke says he follows discussions with interest, "...even though I do not often have time to intervene, but I would like to share a few thoughts...".

First, on the best new term for our new economic climate - let's call it a "recess-pression".

About a year ago, a few clear-thinking economists were still using the term "correction." I am old enough to remember when a "correction" was a good thing. It meant identifying an error and making it right, or changing direction so that travel was toward the intended destination. At the beginning of this crisis, we had far too much public and private debt. The average American spent more than his or her salary in 2007. We doubled our national debt from $5 trillion in 2001 o $10 trillion in 2008. Our banks were keeping less than 1% of capital reserves. When I took introduction to economics ages ago, every textbook on the market used to say that 10% was normal. Meanwhile, our housing stock was overbuilt and in many markets, overpriced. In other words, we created an irresponsible situation on many different levels. The situation was untenable, so we needed a major "correction." How about this for a solution? Maybe if we stop spending so much on imported geegaws and gadgets we don't need, eliminate government waste, and save a bit more of our salaries, we might be able to pay down some debt. That would mean shutting down businesses that don't deliver useful and necessary products at affordable prices.

Almost every pundit and elected official who chooses to comment on the issue says that doing nothing is "out of the question." Even so, I would ask, "Why?" I figure if the managers of a bank don't know how to run a bank, the bank ought to close so folks can go to a bank with competent officers. If we leant too much money to people who can't afford to pay it back, the solution is not to lend them more money. If the government would let the chips fall where they may, and raise interest rates to discourage lending, the market would quickly find the price for the unsold homes: that of the highest reasonable bidder. The prices would correct almost immediately. I have a son in California who recently bought a cottage with 1100sq ft of living space for the bargain-basement price of $360,000, down 40% from a year ago. I still find it high, but they can handle it. Suppose banks or Fannie Mae, Freddie Mac, etc. didn't lend so much? The house would go for what the buyers had on hand. What's wrong with that, other than the fact that too many lenders were over-invested in housing at unreasonable prices. Whose fault is that, after all?

As to newspapers, the industry has always been "subsidized" by advertising dollars. In other words, businesses making a profit in other sectors use a portion of their revenues to place ads in newspapers circulating in their markets. If they could not make a profit advertising in print media, the journalists would have to find some other way to get paid plying their trade. We need not speculate on whether the print media is truly "independent" or "objective." I have my doubts, but that's a topic for another day.

The solution is to look at where high-quality reporting and writing functions in other sectors. Almost every skilled profession, interest group, and religious community produces its own journals, literature, or white papers for its leaders. My guess is that talented writers will find a home somewhere amongst them.

One more thought on the economy. Recently, we seem to be hearing more advisors telling us that inflation is really not such a bad thing, and we should have more of it. The Treasury department is apparently going to print up the $800 billion for the stimulus package, a guaranteed way to lower the value of the dollar. The thought seems to be that by jacking up inflation, wages will go up and the actual value of the current debt will become affordable. I suggest that we look at how well it works in Zimbabwe. If you owed $100,000 in the local currency last year, by now it would be cab fare for a week, or maybe the price of a can of beans (assuming there are any cans of beans on the store shelves). So, if you would like to save, I suggest that your local jeweler might be a better place to invest than your stockbroker or bank. Gold will hold its value even if the Fed and Treasury succeed in destroying the dollar and bankrupting the nation. I don't mean to sound partisan. The republicans guided us to the brink of collapse, but the democrats might just finish the job!


From MaineWriter: Are there any thoughts about how to get us out of this horrible recessionpression? Putting Wall Street Executive Bankers in jail for taking bonus money that belongs to tax payers, unfortunately, won't help. Nevertheless, after working within Medicare and Medicaid services for about 20 years, I was subject to a jail sentence in Federal prison if there were even a hint of fraud in my organizations - this is no joke. It didn't take much proof to put the likes of me in jail. Wall Street Executives should be treated with equal justice to Medicare and Medicaid administrators. But, even if justice prevails, I cannot see where this will help our economy.

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