financial/economic people, please talk about what middle class needs to do

[seabeyond]

with the economics that are going to be hitting us with what the republicans have done to our economy the last 15 yrs.

those of us that have some money, that are trying to keep that money. what are opinions of what needs to be done. all kinds of opinion. the most pessimistic and the most optimistic.

thanks

[thunder rising]

1. You cannot be that clueless. If there was a simple answer mentioning it would nullify it.

[seabeyond]

3. who said anything about simple. i am looking for the complicated answers and thoughts

and listening to people that have knowledge in there. i am sorry that you feel a little sound bite is what i am looking for., it is not

[HamdenRice]

2. Politically, press for the unthinkable: cut military spending by 80%

That's basically what the world forced on the Soviet Union through financial pressure, and it's what we have to force on our government before our foreign treasury bill holders force it on us.

On a personal level, it's time to live like the average Chinese, Japanese or German family. Assuming we get over this crisis, save as much as possible from every pay check. Don't buy most of the stupid chochkes that the media thinks we need to buy. I know it's trite and cliche to say invest wisely, but I think a better way of putting it is to say invest creatively.

Basically we are in for some belt tightening, but America has a staggering amount of fat to trim.

[seabeyond]

4. it took years coming to where we are now. and we are doing something

totally new bailing all these institutions out. i am looking for how people with knowledge see this playing out. i have large chunks of cash sittin in cds.

some 401k now coming out of checks

i have been hording, not spending a year into bush election waiting for calamity. just took longer than i thought.

[GoesTo11]

5. A mix of things.

If you're worried about the US declining, invest your 401k in a mix of international stocks and TIPS. Try to keep your job or to remain employable - and plan to stay healthy long enough to work a little longer. Watch your spending - when you replace your car, get a fairly cheap and fuel efficient car; if you travel, keep flying to a minimum. Survey your life for easy savings - insulating your home, paying off high-interest debt first, etc.

I think if you just take the attitude you have - that our future cash flows might be quite limited and our assets are somewhat at risk, you adopt an approach where you can appreciate what you have and live on a lot less while still being content.

That's if you're middle class. If you're lower middle class, it's going to hurt. I recommend the classic book "Your Money or Your Life" by Joe Dominguez and Vicki Robin.

[seabeyond]

8. ok.... so what i am seeing

is even though people are bringing this back to worse than depression, just hang on, be fiscal and wait it out.

i got to the point of not having to live from paycheck to paycheck. i am very conservative on spending. but i dont want to be sittin then boom, ... it can be lost.

i do so empathize with those doing paycheck to paycheck. i was there for so many years and was hard. with today price and stagnant wage, i cannot imagine.

thanks.

[ProfessorGAC]

6. We're In Trouble, Sea

Like Hamden Rice says, we need to cut military spending, however, what he suggests is too drastic, as almost 70% of that money goes to ordinary working class folks in DOD, contractors, and ancillary functions working with the military. Drastic cuts would only worsen the economic condition.

One thing i'd like to see, but again, won't be done because it would be political suicide, is a comlpete value review of the financial system. Like any individual firm, they should be looking to cut out all activities that add no value to the end product. For instance, speculation adds no value. It creates a layer of profit taking that provides nothing to either the producer or the consumer yet impacts so many critical goods and services that it has a net negative effect on the overall economy.

In addition, not tying this capital up in a "gambling" scheme would encourage more real investment which generally promotes innovation. These innovations often help propel economic growth. Money just sitting around waiting to see what happens on a commodity that would be available anyway is wasted money and lowers the overall velocity of money. This last point is, in and of itself, and economic drag effect.

I think the markets and banking industry need HEAVY re-regulation to assure they stick to their knitting and quit getting outside their expertise. And, it would help assure streamlined operations if we reenacted usury laws, which would eliminate the predators from that market. Then, the cleaner and more efficiently you run a financial institution, the more business you get.

Lastly, i think we need to push hard to eliminate corporate "personhood". This has created a double-dip effect in which people with large capital get to play two hands at the table, while everyone else only gets one. It's inherently unjust and needs to be eliminated.
The Professor

[seabeyond]

7. excellent info. thanks. n/t

[thunder rising]

9. 30% of how many billions/year for DoD industry is a BIG chunk of money going to amoral people

[ProfessorGAC]

10. I'm Not Disputing That

I was referring to Hamden Rice's proposal that it be cut by 80%.

And don't forget that part of the 30% remaining is actually the hard assets (aka raw material). The aluminum for the airplanes. The steel for a ship. The hydrazine for a rocket.

So, the 30% doesn't all go the slimeballs. Whatever the percentage actually is, it's too high, but if we cut it by 80% then 56% of all workers in those industries would be jobless. That would do way more damage than good, no matter how you or i think the DoD is run. The engineer at Boeing losing his job is not the one to be punished and held accountable. But, punished and held accountable is what they'll be when they lose their job.
The Professor

[HamdenRice]

11. This isn't a Rosy the Riveter defense industry we're talking about

I realize that a good chunk of defense spending goes to "regular folks" but perhaps I should have said combined defense/intelligence spending, which includes spy satellites, a lot of NSA sigint and other high tech spending. The estimated combined defense-intelligence annual budget is around $1 trillion, and much of it is on high tech equipment that does not generate much mass employment.

Obviously, I did not intend to propose cutting off veterans benefits or any other promises of benefits that go to regular folks.

On the other hand, I do believe that to get our defense spending at an appropriate level means drastically downsizing the overall size of the armed forces, which means letting lots of soldiers demobilize. This may be an economic burden on small towns and rural areas where the military is a way out and way up, but we also have to always remember the guns/butter choice: every dollar spent on a soldier sitting in his baracks (hopefully that rather than killing Iraqis) is a dollar not spent on some similar person being educated at the local community college or teaching at the local middle school.

Even apart from the issue of the allocation of direct public sector expenditure on employment, every person employed as a soldier is a person not employed in the private sector where he or she actually would be generating income and wealth. This is the same mistake that many make about immigration: employment is not a zero sum game in a society with global capital mobility. More laborers (whether demobilized soldiers or immigrants) generally has meant more demand and more employment. Putting demobilized soldiers to work in the private sector doesn't mean more people looking for fewer scarce jobs; it means a bigger economy and more jobs.

Every dollar spent on a soldier is a wasted dollar, and downsizing the military -- even if it affects many regular folks -- is overall good for the economy.

Even if contracting employment is an issue, that can be solved almost instantly by issuing requests for bids to those same contractors on durable public projects -- green energy, mass transit and the like -- that actually generate infrastructure rather than build things like high tech missiles that are intended to be destroyed.

We don't have a "Rosy the riveter" defense economy; our defense economy is highly concentrated, inefficient, corrupt and ultimately bad at generating employment. Military spending, in other words, is no longer a Keynesian generator of growth.

[ProfessorGAC]

12. Wasn't Calling You Out Hamden

Sorry for name dropping like that. I agree there is room to cut, but we can't cut as deep as you'd like.

My only objection to your proposal in this more recent reply, is that the cuts wouldn't be as two dimensional as you suggest. The short and mid-term efects would be so disruptive as to prevent any long term benefit, since the early pain would be so economically intense.

I understand your point about the "Rosy" defense industry. But, boy i think you're way underestimating the number of ordinary folks who work for Boeing, Grumann, ADI, and these others companies.

And, i can't blindly accept that any reduction in defense spending is inherently good for the economy. It might be inherently good to have fewer war options, but that doesn't make it economically better in the near term. To make huge cuts, i think you'd have to have a VERY long term plan over decades, not years.

Understand that i'm no fan of how much we spend on DoD. You and i are on the same page here. But from a pure "fix the economy" perspective, one needs to be careful not to apply an iatotropic cure. Fixing what these tools have broken requires patience and systemic change over a long time.

It took them nearly 30 years to break it. I don't think it's reasonable or responsible to expect to change it back in much less time than that.

By the way: You didn't comment on my other ideas on how to systemically reverse the pendulum. Just wondering what you thought about those.
GAC

[HamdenRice]

13. I didn't take this as a call out at all -- but a discussion that really has to take place

I consider you to be very reasonable and very well informed, and I think you represent majority opinion. But I find that distressing, because many arguments in favor of a slow transition from defense spending I think are not well founded.

First of all, we need to think about (1) what is the proper amount of defense spending for the US, considering the potential threats. Only then, should we ask the questions you're asking which, if I understand them, are twofold: (2) is some higher level needed to prop up demand in either the labor, commodity, manufacturing, high tech, or any other markets? and (3) what are the costs of rapid transition and if they are high, how much should we pay for a slower transition.

I think when you disaggregate these questions, the idea that we need to keep defense spending higher than say $200 billion (20% of $1 trillion -- and I would go even further down) simply doesn't have much logical support in macro economic theory.

So as to the first question, here is one typical estimate of global defense spending, mostly taken from around 2004:

World Wide Military Expenditures
Country Military expenditures - dollar figure

World $1100 billion

Rest-of-World $500 billion

United States $623 billion
China $65.0 billion
Russia $50.0 billion
France $45.0 billion
United Kingdom $42.8 billion
Japan $41.75 billion
Germany $35.1 billion
Italy $28.2 billion
South Korea $21.1 billion
India $19.0 billion
Saudi Arabia $18.0 billion
Australia $16.9 billion
Turkey $12.2 billion
Brazil $9.9 billion
Spain $9.9 billion
Canada $9.8 billion
Israel $9.4 billion
Netherlands $9.4 billion
Taiwan $7.9 billion
Mexico $6.1 billion
Greece $5.9 billion
Singapore $5.6 billion
Sweden $5.5 billion
North Korea $5.0 billion
Iran $4.3 billion
Pakistan $4.3 billion
Belgium $4.0 billion
Norway $4.0 billion

deleted the remainder

The only countries that could conceivably be deemed short or medium term threats are China, Russia, North Korea and Iran. On the other hand, almost all the other expenditures, by the UK, France, Germany, Japan, etc., can for all intents and purposes be aggregated with ours as NATO and allied defense in case of a real threat to peace or stability.

Even the so-called threats of China and Russia have virtually no regional ambitions outside of a few renegade "provinces" that have little strategic value to the rest of the world. Diplomacy and nice words (which are cheap) could easily ensure that neither is a threat of any kind.

The only definition of "defense" that would justify anything close to our current budget would include our need to seize and control other countries' resources -- such as we are doing in Iraq. This is ironic considering the greatest accomplishment of international political culture of the last few decades was pursuading countries like China to compete over resources using markets; they are the ones signing up long term oil contracts all over the world while we fruitlessly try to seize them by force.

I find it hard to justify a defense budget over $200 billion, but frankly, with alliances it could easily be less than $100 billion.

If you agree with that premise, then the only questions are the second ones: is there some reason to use defense spending to generate demand; and is there some reason that rapid demobilization and transition to civilian economy are too expensive or unachievable in the short term?

As for the latter, before World War II, the answer had always been in this country that near instant demobilization was possible. Why this is suddenly not possible needs an explanation. (My father was in WWII, and the attitude among draftees as soon as Germany and Japan were defeated was, "we ain't stayin in Europe, and we ain't liftin' a rifle no more" and there were demobilization riots in Paris, which speeded up the process.) Near instant demobilization is possible given political will and the willingness to spend the kinds of resources we currently spend on the military. For example, rather than worrying about what jobs soldiers will have, we could just give them vouchers to go to college (like the GI Bill). For those depressed towns and rural areas that depended on military employment, we can create make work programs -- after all, that's pretty much what the military is anyway. It is only an irrational militarized political culture that makes us think it's OK to pay someone to sit in a barracks, but not OK to have them repair roads until the employment market adjusts.

As for industry, it took little time for industry to adjust to civilian purposes in the past. We have the capacity to create a targetted transition of contractors to civilian ends; it's militaristic political culture that makes us think you can't take a contractor making jet fighter "skins" and have them make bullet train "skins" within a few months. We have that capacity.

As for the demand question, there simply is no justification in economic theory that demand has to be maintained through military spending. You mention aluminum. If the military instantly ended its demand for aluminum, then the price for aluminum would fall and other industries would increase their use of it. If not, more aluminum would stay in the ground for future consumption. Either way, there is no reasoned explanation for why it has to be used on military aircraft as opposed to some other use.

With all these questions we always have to remember the guns/butter question: yes these things are expensive, but it's always even more expensive not to do them.

As for the other things you proposed, some I agree with and some not. I agree that speculation is rampant and generally not productive, but it is very difficult to separate good speculation from bad speculation. On Wall Street, speculation is often a means or modality of generating or spreading information, which makes the markets more efficient. Commodity speculation is sometimes, bad, but sometimes it's just a way of putting the cost of holding inventories onto speculators.

I'm often appalled at the degree of blind condemnation of derivates here on DU, but their use is quite opaque to most people. One of the first derivates I came across in my career was a company in the U.S. that needed to buy some mineral (I think it was titanium) from South Africa under a long term supply contract. It could have put money in the bank for a contract purchase price needed two years away -- but even then, it wouldn't know what the market price would be, or the Rand/dollar exchange rate -- so it made more sense to purchase both a Rand purchse option and a titanium put hedge. People don't seem to realize there are really useful and necessary business reasons for what looks like gambling -- options and derivatives. On the other hand, I don't see why the people buying and selling things like Rand options and titanium puts should not be required to be operating companies that need Rands and titanium. So to that extent I agree.

I certainly agree with the need to regulate, although I'm scared of the Bush administration's desire to fold the SEC into some super agency. Shades of Homeland Security! It seems that folding these agencies together magnifies their incompetence rather than generating synergy. I dealt with the SEC for several years under the Clinton administration, and they were highly specialized, highly competent at what they do, and with a very strong sense of professional espirit de corps (again what they actually do is something most "civilians" have no idea of). Folding them into anything else would be a disaster. I am planning to write something about this because in my opinion, it was the Bush era SEC that is more responsible for the current crisis than any other agency. The current crisis is caused by investors not knowing what is in the mortgage backed securities. But that's the SEC's job -- to make sure that the issuer clearly discloses what is in the security in clear language, and if you didn't do so in the past, you couldn't "go effective" with your SEC registration statement, which meant that your prospectus was invalid for use in selling, which meant you absolutely could not sell the security. Working with the Clinton era SEC was like working with a particularly harsh and demanding expository writing professor, who was constantly nitpicking about whether we had disclosed and explained things. If no one knows what's in these securities, it's mostly the SEC's fault.

Another form of re-regulation I would suggest (and this would be extremely unpopular with free market types) is a return to a division between commercial banks and thrifts (including savings and loans). There's a lot of finger pointing about various kinds of deregulation, including misguided finger pointing at the repeal of Glass-Steagal, but you have to go pretty far back for the deregulation that created the mortgage mess.

The real damage was done when Congress eliminated the thrift industry -- local, small scale banks, limited to operating in defined banking districts, that dealt almost exclusively in mortgages and consumer deposits, knew the neighborhoods, and could work out delinquencies with individual homeowner/borrower. Immediately after the repeal of the wall between the thrifts and the commercial banks we had Reagan's and Bush the First's savings and loan crisis, and the destruction of that industry is the underlying cause of the crisis today.

[redqueen]

15. Could you please be more specific about what specific deregulation took place

before the Gramm-Leach-Billey Act... the deregulation which was more responsible for this mess?

Thanks in advance.

[HamdenRice]

16. Hi Redqueen

The law that destroyed the thrift sector was called the Depository Institutions Deregulation and Monetary Control Act (also called Garn-St Germain Act). It was passed at the very end of the Carter administration during a something of a liquidity crisis for local thrift institutions.

I suspect you are much younger than me, but if you were around in the late 70s, there was this weird phenomenon of thrifts offering toasters for new deposits. It was a big running joke -- open an account and get a toaster. The reason was that there was a credit crunch, but the thrifts were forbidden from offering high interest rates on savings accounts, so they offered toasters and other home gadgets instead.

The underlying problem was that their sector was highly regulated in terms of what interest they could offer. As the country was suffering severe disruptions in interest rates, they could not increase interest rates so they offered "gifts."

This law basically began the end of the special set aside nature of thrifts.

[redqueen]

17. I was around,

but only a baby. Thanks for fleshing that out for me.

One of the founding fathers was especially distrustful of / opposed to the idea of large banks. It seems that's all we'll have left anymore.

[HamdenRice]

18. I was a teenager when savings banks were offering toasters

if you opened an account. It was very strange. It was a way of getting around restrictions on interest, when money was flooding out of them and into new fangle money market accounts. Billy Crystal (?) had a very funny routine about his elderly uncle or father or grandfather yelling in a thick New York accent about "a toastah? from a bank?"

[Bozita]

14. Dr. Ravi Batra, economist, visits Thom Hartmann's 2nd hour today

http://www.thomhartmann.com /

On the Program - Sep 19th 2008
"ANYTHING GOES FRIDAY"

Hour One "Brunch With Bernie" www.sanders.senate.gov

Hour Two - Dr. Ravi Batra www.ravibatra.com Topic: Is there a silver lining in this week's bad economic news?



http://www.amazon.com/New-Golden-Age-Revolution-Corrupt...

[KayLaw]

19. Mike Morgan says money markets.

http://realestateandhousing2.blogspot.com/

You may want to take a peek at his blog. I've noticed that he was quoted in the Stock Market thread last week. He's usually right on the mark and very honest.

[NNN0LHI]

20. kick