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What Obama Left out of His Economic Recovery Plan: Higher Wages and Debt Relief

This is not a normal recession where the mismatch between supply and demand will work itself out over time.

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The Fed’s low interest rates and other credit-enhancing inducements have been unable to stimulate spending. According to the Wall Street Journal:

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century. (Kelly Evans, " Hard-Hit Families Finally Start Saving, Aggravating Nation’s Economic Woes")

Summers and Geithner should pay attention to what’s going on in the country and change their approach. The US consumer will not lead the way out of this economic downturn. It’s physically impossible. The country is undergoing a generational shift from profligate consumerism to thriftiness. Stimulus alone won’t get people spending. Salaries will have to go up to make up for losses in retirement funds and housing prices; and the face-value of mortgages and credit card debt will have to be written down. Otherwise, spending will continue to falter and the economy will tank. No economic recovery plan has a chance of succeeding if it doesn’t address these two key issues: higher wages and debt relief.

Naturally, the Federal Reserve does not want to deal with the underlying causes of the crisis. After all, they’re in the credit-peddling business. The Fed’s job is to generate business for the financial community, which means creating a favorable environment for credit expansion. In recent weeks, the Fed has provided billions of dollars to GMAC (General Motors finance arm) so that prospective buyers of GM vehicles can secure 0 percent financing even though they have bad credit scores. This is how the Fed stealthily perpetuates subprime lending even though it leads inevitably to disaster. The Fed is working a similar scam through the FHA where, according to Business Week:

The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more . . .

As if they haven’t done enough damage. Thousands of subprime mortgage lenders and brokers -- many of them the very sorts of firms that helped create the current financial crisis -- are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country’s swooning economy. (Chad Terhune and Robert Berner, " FHA-Backed Loans: The New Subprime")

Unbelievable! One Fed sting after another. And when they blow up -- as they often do -- the taxpayer foots the bill. This shows that the Fed has only one arrow in its quiver: easy money. Bernanke’s panacea for joblessness, falling demand, plummeting asset prices and deflation is credit expansion -- one size fits all.

 
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