Reagonomics Comes Home To Roost

 "The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you."

 

Gordon Gekko in "Wall Street" 1987

So much much for supply-side, trickle down, voodoo economics. Keynes, HELP!!!

What is Reagonomics?

"A popular term used to refer to the economic policies of Ronald Reagan, the 40th U.S. President (1981?1989), which called for widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets.

The term was used by supporters and detractors of Reagan's policies alike. Reaganomics was partially based on the principles of supply-side economics and the trickle-down theory. These theories hold the view that decreases in taxes, especially for corporations, is the best way to stimulate economic growth: the idea is that if the expenses of corporations are reduced, the savings will "trickle down" to the rest of the economy, spurring growth.

Prior to becoming Reagan's Vice President, George H. Bush coined the term "voodoo economics" as a proposed synonym for Reaganomics."

Demand-side economics was replaced by Reagan/Greenspan's suppply-side economics.

"Greed is good." Gordon Gekko in "Wall Street" 1987

Greenspan:

"(In) the 1970s he was advising presidents Richard Nixon and Gerald Ford, and in 1987 he was named Chairman of the Board of Governors for the Federal Reserve System. Greenspan held the post under presidents Ronald Reagan, George Bush the elder, Bill Clinton and George W. Bush. As chairman, Greenspan was largely responsible for directing U.S. national monetary policy; he is often credited with keeping inflation at historically low levels, and is sometimes criticized for the boom-and-bust nature of the economy in the so-called "dot-com" era of the 1990s. He stepped down from the post on 31 January 2006, and was succeeded by former Princeton econonomics department chair Ben Bernanke."

NOTE: Bill Clinton was no Keynesian...remember when he and Newt Gingrich put out their' Contract on America. They ended welfare to the poor (who spend their' money as soon as they get it out of necessity, thus creating money flow) and started welfare to the corporations (who spend their' money on cheap labor via outsourcing, thus, cutting off the money flow here at home).

Back to Alan...

 

...and the tumbling global markets:

The huge sell-off is a sign that global investors do not believe that the Fed's rate cuts or President Bush's $150 billion "stimulus package" can revive the flagging economy or breathe new life into the over-extended US consumer. After Monday's sharp downturn, the prospects for averting a deep and protracted recession are slim to none.

 

Now here's the gist of the matter:

"The present crisis is not the result of normal market forces, but price fixing at the Federal Reserve and the financial engineering of the main investment banks. If there had been sufficient regulation of the activities of the Central Bank, so that interest rates had not been kept below the rate of inflation for over 31 months straight (under Greenspan) than the trillions of dollars in low-interest credit would not have flooded the real estate market, igniting a frenzy of speculative home-buying and creating the biggest housing bubble in US history. Despite his feeble excuses, Greenspan's role in destroying the US economy is no longer in doubt. Even the far-right Op-ed page of the Wall Street Journal conceded Greenspan's culpability in Saturday's edition. Here's what they said:

"Amid the daily market turmoil, and to help prevent a crash, it helps to step back and remember how we got here. With the benefit of hindsight, everyone can see that the U.S. economy built up an enormous credit bubble that has now popped. Our own view -- which we warned about going back to 2003 -- is that this bubble was created principally by a Federal Reserve that kept real interest rates too low for too long. In doing so the Fed created a subsidy for debt and a commodity price spike."

  Greenspan's low interest rates stimulated risky speculation that resulted in humongous equity bubbles.  That much is certain. The Fed's "cheap money" policy generated artificial demand for housing which drove prices to unsustainable levels. Now we can expect to see a real estate crash unlike anything this country has experienced since the 1930s. That is the unavoidable outcome of Greenspan's "low interest" fake prosperity.

Greenspan is not the only one responsible for the present calamity. The financial markets have been reconfigured in a way that accommodates all manner of corruption. The new model, "structured finance", allows worthless assets to be disguised by fraudulent ratings and sold to unsuspecting investors. At one time, this assertion might have been dismissed as the ravings of a conspiracy nut. But now we can find the similar accusations in the Wall Street Journal and on CNBC."

The above quotes are from an article by Mike Whitney: http://www.informationclearinghouse.info/article19126.htm

Adding,

Economics Professor Nouriel Roubini summed it up like this  nearly a month ago:

 

"The United States has now effectively entered into a serious and painful recession. The debate is not anymore on whether the economy will experience a soft landing or a hard landing; it is rather on how hard the hard landing recession will be. The factors that make the recession inevitable include the nation's worst-ever housing recession, which is still getting worse; a severe liquidity and credit crunch in financial markets that is getting worse than when it started last summer; high oil and gasoline prices; falling capital spending by the corporate sector; a slackening labor market where few jobs are being created and the unemployment rate is sharply up; and shopped-out, savings-less and debt-burdened American consumers who ? thanks to falling home prices ? can no longer use their homes as ATM machines to allow them to spend more than their income. As private consumption in the US is over 70% of GDP the US consumer now retrenching and cutting spending ensures that a recession is now underway.

On top of this recession there are now serious risks of a systemic financial crisis in the US as the financial losses are spreading from subprime to near prime and prime mortgages, consumer debt (credit cards, auto loans, student loans), commercial real estate loans, leveraged loans and postponed/restructured/canceled LBO and, soon enough, sharply rising default rates on corporate bonds that will lead to a second round of large losses in credit default swaps. The total of all of these financial losses could be above $1 trillion thus triggering a massive credit crunch and a systemic financial sector crisis." ( Nouriel Roubini Global EconoMonitor)

Also, see in Report On Business: http://www.theglobeandmail.com/servlet/story/LAC.20080118.ECONOMY18/TPStory/Business/columnists

Jospeh Stiglitz reports over at Times Online: 

"Low interest rates fed the bubble, but that was not enough: the Chairman of the Fed actually encouraged people to take out variable rate mortgages (where payments would go up as interest rates increased), just when interest rates were at an all-time low. They had only one way to go, and that was up.

Then these "toxic mortgages" were sliced and diced, bundled and rebundled, in complex securities. The bankers seemed, for a moment at least, to believe in financial alchemy. Take a bad mortgage, blend it with an A-rated security and the mix got an A rating from the credit agency.

What, one has to ask, were they thinking? They were trying to defy the laws of economics: how could individuals pay more on their mortgages than their income? I, and others, repeatedly pointed out that this simply could not go on. A day of reckoning had to come; it has now arrived.

For the Fed and the Bush Administration, the answer to what they were thinking is easy: they needed the profligate borrowing to keep the economy going, even with Bush's huge deficit spending. The game was called "kick the ball down the road".

The hope was that, somehow, the real estate bubble would not blow up during their watch and that somehow the others could be postponed, too. The war had driven up the price of oil, so more of America's income was going to Saudi Arabia and other oil producers, and less on American goods. The war expenditures themselves stimulated the economy far less than money spent on, say, the infrastructure (such as New Orleans's levees).

The Bush tax cuts for the rich provided little stimulation. The toxic mortgages and the housing bubble allowed Americans to consume 100 per cent of their income and savings dropped to zero for the first time since the Great Depression.

The game is up."

more at: http://business.timesonline.co.uk/tol/business/economics/wef/article3220961.ece

"The Bush administration has been warned repeatedly about the disastrous effects of their supply side theories. Of course, they brushed off their critics and carried on with the plundering until they hit a roadblock. Now they're running around in circles trying to find some way to stop the bleeding. Good luck.

 Remember the $2 trillion wars (Iraq and Afghanistan) that could be paid for with "unfunded" tax cuts to the rich?

 Remember the cuts to capital gains and corporate taxes that were supposed to "trickle down" to working class Americans creating more jobs and making us all more prosperous?

  Remember the low interest rates that were supposed to create Bush's "ownership society" that, in fact, generated the greatest speculative frenzy in real estate in American history?

 Remember Dick Cheney's brusque assurance that, "deficits don't matter"?

  Remember the myriad corporate giveaways, the lavish "no bid" contracts, and deregulated subprime shenanigans that were supposed to "grow the economy" and strengthen our markets?

  The system is failing because it was designed to fail. The impending economic crisis is no accident,..."

http://www.informationclearinghouse.info/article19105.htm

Lastly, Paul Craig Roberts, Assistant Secretary of the US Treasury for Economic Policy in the Reagan administration.

The Keynesian policy of driving the economy through consumer demand was applied to a different economy than the one we have today.  In those days the goods Americans purchased, such as cars and appliances, were mainly made in America. Construction workers were not illegals sending their wages back to Mexico.  The US had a robust manufacturing workforce.  When consumer demand weakened, companies would reduce their output and lay off workers.  Government policymakers would respond to the decline in employment and output with monetary and fiscal policies that boosted consumer demand. As consumer spending picked up, companies would call back the laid off workers in order to increase output to meet the rising demand.  

Today Americans are losing jobs for reasons that have nothing to do with recession.  They are losing their jobs to offshoring and to foreigners brought in on work visas.  Today many American brands are produced offshore in whole or part with foreign labor and imported to the US for sale in the American market.  In 2007, prior to the onset of the 2008 recession, 217,000 manufacturing jobs were lost.  The US now has fewer manufacturing jobs than it had in 1950 when the population was half the current size. 

US job growth in the 21st century has been confined to low-pay domestic services.  During 2007, waitresses and bartenders, health care and social assistance, and wholesale and retail trade, transportation and utilities accounted for 91% of new private sector jobs.  

When a population drowning in debt is hit with unemployment from recession on top of unemployment from offshoring, will the people spend their rebates in eating places and bars, thus boosting employment among waitresses and bartenders?  Will they spend their rebates in shopping malls, thus boosting employment for retail clerks?  If they become ill, the lack of medical insurance will direct their rebates to doctors' bills. 

Economists and other shills for globalism told Americans not to worry about the loss of manufacturing jobs.  Good riddance, they said, to these "old economy" jobs.  The "new economy" would bring better and higher paying jobs in technical and professional services that would free Americans from the drudgery of factory work.  So far, these jobs haven't shown up, and if they do, most will be susceptible to offshoring, just like the manufacturing jobs.  

The Bush administration has in mind a total rebate of $150,000,000,000.  As the government's budget is already in deficit, the money will have to be borrowed.  As the US saving rate is about zero, the money will have to be borrowed abroad.

Foreigners are already concerned about the US government's indebtedness, and foreigners are bailing out some of our most important banks and Wall Street firms that foolishly invested in subprime derivatives.  

Under pressure from budget and trade deficits, the US dollar has been losing value against other traded currencies.  Having to borrow another $150 billion abroad will further erode the dollar's value.

Meanwhile, Congress passed a $700 billion "defense" bill so that the Bush administration can continue its wars in the Middle East.  

Our leaders in Washington are out to lunch.  They have no idea of the real challenges our country faces and America's dependence on foreign creditors."

more at: http://www.informationclearinghouse.info/article19125.htm

Other sources used:

http://www.answers.com/

http://www.imdb.com/title/tt0094291/quotes

"It's all about bucks, kid. The rest is conversation."

Gordon Gekko in "Wall Street" 1987