CONSIDERING PRESIDENT OBAMA’S BAILOUT PLANS, THE SIX

ASPECTS OF THE DEBATE IN WASHINGTON ARE:

January, 2009

by Max Berre

1: Funding for reconstruction of infrastructure.

2: Bailouts through equity purchases

3: Middle-class tax cuts

4: Green growth

5: Buyout of bad mortgages

6: Increasing the FDIC limit

1: There are two good elements here. First, it will create value; second, it will create jobs.

The cost is an increase to the debt.

One of the reasons that the debt got so big in the first place, is not just that the we spent

so much public money, (getting into debt to do so), we spent it on things that generate

neither value nor income, such as no-bid contracts for services to government, money

spent on consultants, and subcontractors, that ultimately only went through four layers of

subcontractors before anything got done, by which time, all of the money was siphoned

off.

Huge increases in military and security spending didn’t actually manage to BUILD

anything of value. As a basic rule.... every time you spend money, you should get

something valuable in return. Value for money has to be maximized. When we build

infrastructure, The money is spent on assets of tangible value that are capable of

producing income, such as roads, hospitals and schools.

Moreover, the idea of building infrastructure to create jobs is a really good idea. The

question of employment generation is an important one, which people tend to ignore.

While "trickle down" may not be valid because money sent to the top is mostly saved,

Keynesian theory backs the idea that money does TRICKLE UP, because the working

class can be defined in economic terms as: "people whose income is very close to the

basic cost of living" it means that when they have an extra dollar in their pocket they are

likely to spend it on something basic, e.g. food, clothing, transportation, education. The

wealthy meanwhile, are "those whose income is far above the cost of living" meaning

that it is doubtful how much of it they will spend. Basically, if you want to generate

further jobs, the money has to get spent.

The US unemployment rate is around 7.5% which is ominous. In the Netherlands, a

country that the US likes to call a "socialist welfare state with an unemployment

problem" the unemployment rate half that figure.

2: When you do a bail-out, it speaks to the "moral hazard" problem, because you just

leave the same idiots in charge of business that drove the firms into the ground in the first

place. However, if the state does an equity bailout, it doesn't just give free money to

firms, or buy bad bonds to uphold their value, instead, the state buys company stock, and

becomes a shareholder of the company. When you own shares....... you have some

control over a firm.

Today, many pension funds in the US and in Europe own enough company shares that

they are able to have a say in how the company is run, so many companies have inputs

from large pension funds, who tend to be long-term investors. That prevents waste. Since

the government always wants to be re-elected (1st lemma of public economics), its

representatives within the company will pursue strategies of preserving firm value, while

maximizing social value, (employment generation, environmental responsibility, limiting

executive payouts). That's how Obama managed to tell firms under bailout that the CEO

doesn't get to have more than $500,000 a year. "Moral hazard" solved. In Japan, this

problem is solved because the ministry of finance has a special relationship with key

banks. In Europe, it’s solved because the state and the state pension funds tend to be

active shareholders throughout the economy. Now the US needs a plan.

3: The middle class are the section of the population most likely to spend on value-added

goods and services. Funny thing... because that's mostly what the US produces: Value-

Adding Services.

Also... politically speaking, it would be a good idea if Obama managed to get at least

SOME Republican support for the bill. Tax cuts in general should help that effort. If

not.... it only means that there were lots of Republicans who voted no on tax cuts, which

is something most republicans don't want to do, ideologically speaking.

4: In a decade, green technology is likely to become one of the most profitable types of

investment around, for years to come. Potential demand is huge. That means that the US

should get into a position where it can develop its own green technology rather than

having to import it. It would be even better for the US if we manage to actually EXPORT

green technology. The race is on, and Europe, Japan, and the Gulf States are already

pouring vast amounts of money into green-related R&D. We already depend on the Gulf

States for oil. Should we come to depend on them for solar technology too?

5: Recessions destroy economic value by a process of chain reaction. Spending cuts and

job losses, leading to revenue, and income drops, which lead to further spending cuts and

job losses.

WE HAVE TO STOP THE BLEEDING IF WE WANT TO PATIENT TO LIVE.

If we put a stop to the foreclosures, we can limit the destruction of value created during

the boom. Bailing out homeowners is more fair than bailing out the mortgage providers

(the effect is similar). Also, there will be a lot fewer homeless people.

As a political point, its also important to consider that one reason that the democrats are

in power now is because many formerly rural areas are now filled with "new middle

class" homes. The people who live there are typically young, professional, ethnic

minorities of working-class origins who climbed their way into the middle-class through

hard work. They vote overwhelmingly democratic. This is why Virginia went to the

democrats. The old rural areas of VA are now filled with middle-class DC voters who

grew up poor, and still have loyalty to the democrats. It's in the interest of the Democratic

Party to make sure that these people don't lose their homes, especially if they live in

swing voting districts.

6: This has happened in Europe. This is a good idea because psychologically speaking.....

often all the state has to do is promise to act, rather than actually act. If the state sets a

high FDIC limit, acts once or twice to establish credibility, the mindset in the market will

adjust accordingly, and the cost to the state is small in the long-run.