Saturday, February 20, 2010
By Dean Baker, PoliPoint Press
Posted on February 9, 2010
The following is an excerpt from Dean Baker's new book: False Profits: Recovering from the Bubble Economy (PoliPointPress, 2010).
As the nation struggles to recover from the worst economic downturn since the Great Depression, the people who got us here are desperately working to rewrite history. The basic story of this economic collapse is very simple. The Federal Reserve Board, guided by its revered chairman, Alan Green span, allowed an $8 trillion housing bubble to grow unchecked.
Arguably, the Fed even fostered the bubble's growth, seeing it as the only source of dynamism in an economy that was suffering from the aftershocks of the collapse of a $10 trillion stock bubble. Greenspan repeatedly insisted that the housing market was just fine, even as a small group of economists and analysts raised concerns about the unprecedented run-up in house prices. He also dismissed concerns about the questionable mortgages the banks were issuing on a massive scale during the bubble years. In fact, he even encouraged people to take out adjustable-rate mortgages (ARMs) at a time when fixed-rate mortgages were near a 50-year low.
...[T]he devastating consequences for the economy of the collapse of the housing bubble were inevitable. Housing wealth, unlike stock wealth, is relatively evenly distributed among the population. For the vast majority of middle-class families, home equity is their financial asset. When the collapse of the bubble resulted in the disappearance of $8 trillion of housing bubble wealth ($110,000 per homeowner on average), tens of millions of homeowners had no choice but to sharply curtail their consumption.
The wealth that homeowners had taken for granted during the bubble years was gone. This meant that these homeowners could no longer borrow against home equity to support their level of consumption and that they would need to hugely increase their savings to rebuild the wealth they had lost. The rapid falloff in consumption, coupled with the collapse of housing construction, guaranteed the onset of a severe recession. There is no simple way to offset the loss of more than $1 trillion in annual demand in the economy -- $450 billion in lost housing construction and between $600 billion and $800 billion in lost consumption.
A massive wave of foreclosures and mortgage-loan defaults are also an inevitable parts of this story. Millions of people would have lost their homes even without the tsunami of junk loans the banks issued during the bubble years. When house prices plunge below the value of the mortgage, homeowners have less means and incentive to struggle to meet their payments. The huge job loss from the recession also propelled the massive wave of foreclosures.
None of this is complicated or mysterious. Anticipating this disaster didn't require brilliant insights or complex models. In fact, a good student in an introductory economics course would have possessed all the knowledge needed to see this train wreck coming.
However, the political elites do not want the official story to be that simple. They don't want the public to know that the people holding the top economic policy positions are incompetent, corrupt, or both. By burying the story in complexity, these elites are trying to confuse the American public. The confusion begins when the media and the politicians routinely refer to the recession as a "financial crisis."
The implication is that the financial system is at the root of the problem and that fixing the financial system is the way to restore the economy to its normal growth path. Although the failings of financial regulation certainly allowed the bubble to grow much larger than otherwise would have been possible, and the troubles in the financial system have aggravated the downturn, the current economic situation would be little changed if the financial system were instantly restored to perfect health.
The core problem is that the economy developed serious imbalances as a result of the growth of the housing bubble. In the short term, the only way to offset the loss of demand caused by the collapse of the housing bubble is through massive deficit spending. In the longer term, a reduction in the value of the dollar will be necessary to restore more balance to our U.S. trade. However, the political elites, led by the managers of the financial industry, do not want to allow for a discussion that results in a policy prescription of large deficits and a lower valued dollar. Such policies would go directly against their financial interests and directly indict the policy agenda they have promoted for more than a decade.
Rather than let people see the simple story, the political elites are anxiously touting the complexity of the situation. They want to focus the debate on complex derivative instruments like "credit default swaps" (CDSs) or "collaterized debt obligations" (CDOs). In this way they hope to quickly confuse, and lose, the public. They can then assert that the problems were so complicated no one could be blamed for not having foreseen them. After all, we're only human, and no one can predict the future. [...] The elites should not be allowed to perpetuate the falsehood that it was not their fault. Their failure to recognize the housing bubble or to have taken the steps necessary to rein it in before it grew to such dangerous levels brooks no excuse. Tens of millions of people have lost jobs, life savings, or homes because of this incredible failure on the part of the country's top economic policymakers. The people who are responsible for this disaster should be held accountable for the damage they have wreaked on the nation and the world.
In fact, the best way to prevent another bubble would be to fire the people responsible, but such a measure is highly unlikely. The list is long of people who should have known better and could have taken steps to counter the bubble before it grew to such dangerous proportions. Ben Bernanke, the chairman of the Federal Reserve Board during the last phase of the bubble, would top that list.
Bernanke was one of the seven members of the Fed's Board of Governors from 2002 until June 2005. In this capacity, he could have challenged Alan Greenspan's decision to allow the bubble to grow unchecked. Bernanke subsequently became head of President Bush's Council of Economic Advisors, where he served for seven months before returning to the Fed as chairman in January of 2006. The entire time from 2002 he sat back and allowed the bubble to grow. He never took any steps to rein it in, nor did he issue any warnings to the public about the potential consequences of its collapse. It would be difficult to imagine someone with a comparable record of disastrous failures being allowed to remain in most jobs. Would a nurse who routinely administers the wrong medicine and causes his patients to die be allowed to keep his job? Would a bank teller who leaves the cash drawer open remain in her position? How about the school bus driver who comes to work drunk?
In most lines of work, a certain level of competence is expected. Unfortunately, this is not the case for those who set U.S. economic policy. In political circles, the idea that Ben Bernanke should lose his job because he didn't take action to counter the bubble is considered absurd.
Bernanke was not, by any means, the only one who should have been trying to counter the bubble. Considering the dire consequences of the bubble's collapse, this was the most important thing anyone in a policy position should have been doing. Washington is chock full of people working on economic policy in positions at the Treasury, the Fed, the various regulatory agencies, and elsewhere who earn six-figure salaries. They all failed to see or issue warnings about the housing bubble. Not one of these people has gotten fired. In fact, not a single person involved in economic policy has probably even missed a promotion because of this gross failing.
This view -- that the collapse of the housing bubble caused the economic collapse and subsequent recession -- is completely different from the commonly discussed view that the abundance of bad mortgages was the main problem. Bad mortgages fed the bubble and allowed it to reach much more dangerous proportions. The core problem, however, was the bubble itself, not the mortgages. If all the mortgages had met normal prudential standards, but we had a bubble of the same proportions, the economy would still be in pretty much the same situation as it is today.
Conversely, if we had the same flood of bad mortgages and no bubble, the consequences would have been more limited, even for the homeowners who took out these mortgages. In many cases, they would have been able to refinance into standard fixed-rate mortgages. Even if refinancing had been impossible because of a bad credit or employment situation, homeowners might have been able to sell their homes and pocket some equity, rather than being forced into foreclosure.
In order to assign correct blame and to design proper reforms, it is essential to distinguish between the bubble as the primary cause of the crisis and the bad mortgages themselves. Although the flood of bad mortgages was evident to those who cared to look, an $8 trillion housing bubble should have been impossible to miss for any serious economic analyst. The point is that we do not need supersleuth regulators and analysts to uncover similar problems before those problems crash the economy, but we do need policymakers who are smart enough to walk and chew gum at the same time.
Creating new agencies is not the answer; forcing the agencies that are responsible for maintaining economic and financial stability (first and foremost the Federal Reserve Board) to do their job properly is. The Fed could have and should have stopped the growth of the housing bubble long before it reached such enormous proportions. Its failure to do so was perhaps the single most consequential error in economic policy in the history of the world.
Going forward, the Federal Reserve Board must clearly be responsible for preventing asset bubbles -- such as the stockmarket bubble and the housing bubble -- from posing a threat to the economy. Contrary to assertions from former Federal Reserve Board Chairman Alan Greenspan, recognizing such bubbles is not only possible but it is precisely what the Fed is supposed to do. And, once it recognizes a bubble, the Fed has all the power it needs to deflate it.
Many other changes should result from this experience. Most importantly, the country needs to rein in a financial sector that has grown out of control, nearly quadrupling its share of the economy over the last three decades. This sector accounted for almost 30 percent of all corporate profits at the peak of the housing bubble.
Ideally, the financial sector funnels money from people who want to save it to those who want to borrow it to start or expand a business or to pay for a home or a college education. Thirty years ago, this country's financial sector accomplished this mission very well, and the economy had a much more rapid pace of productivity growth than in the last three decades.
A financial sector brought back down to size will carry out its economic function much more efficiently. The United States doesn't need a financial sector that prospers through the creation and trading of complex financial instruments of little economic value. A reduction in the size of this sector would also make it less powerful and prevent it from exerting political control over those who are supposed to regulate it.
Part of the problem is that the sector's control over regulators is actually built into the system. The Fed is structured so that the private-sector banks dominate the boards that control the 12 Fed district banks that comprise the Federal Reserve System, along with the Board of Governors located in Washington DC. These boards then select the Fed district bank presidents. These 12 bank presidents sit on the Fed's Open Market Committee, which determines interest-rate policy outnumbering the 7 Fed governors who are appointed by the President and approved by Congress. (Only 5 of the 12 bank presidents vote at any one time.) This arrangement is akin to the pharmaceutical industry picking members of the Food and Drug Administration (FDA). Congress must democratize the Fed by rewriting its charter.
As we push for reform, it is important to avoid framing the debate -- as conservatives routinely do and progressives foolishly accept -- as a conflict between those who want more government control versus those who want market control.
Despite what they say to sell their policies to the public, conservatives have never been interested in reducing the role of government and "leaving things to the market." In reality, they want the government to structure the market to facilitate the redistribution of income upward.
Progressives do the conservatives' bidding when we denounce them as "market fundamentalists." We should, instead, be exposing their use of government to set up structures that ensure the market works to benefit the wealthy. We could then bring our policies into focus as those designed to ensure that market outcomes will benefit the bulk of the population.
The market is just a tool, like a wheel or a hammer. It would be bad politics and bad policy for progressives to make a big scene attacking the wheel. It is similarly bad politics and bad policy to put these attacks on the market at the center of a political agenda.
Break Up With Your Abusive Big Bank -- Move Your Money
That's right: A Colorado "Move Your Money" campaign is urging Coloradans to move their money out of Wall Street banks and into community banks and credit unions, which are typically more conservative about how they manage their money, more closely connected to the people and businesses who live near them, and more inclined to make loans they know will get paid back.
For too long the big banks and financial institutions have been the ones largely writing their own rules. They have been indiscriminately increasing credit card fees, offering mortgages that continually reset and creating new financial products like derivatives and credit swaps that allowed them to gamble with our hard-earned money.
Despite receiving trillions of dollars in U.S. taxpayer bailouts, the six largest banks - Goldman Sachs, Citigroup, JP Morgan, Bank of America, Wells Fargo and Morgan Stanley - have planned to pay out between $140 and $150 billion in compensation, even though their greed and recklessness did so much to cause our current financial crisis. All of these banks have numerous offices across Colorado.
JP Morgan, for example, announced on January 15th that it is setting aside $26.9 billion in compensation this year. On a per employee basis that is a 38 percent increase from 2008 and a 20 percent increase from the 2007 pre-crisis numbers. Citigroup will pay $24.9 billion.
It's as if the whole economic meltdown never even happened. These executives are back to many of their old tricks, including charging big overdraft loan fees for small debits, implementing unfair credit card practices, dealing in opaque, high-risk derivatives and filling their consumer contracts with confusing fine print. Not to mention they have employed an army of high-priced lobbyists to derail common sense reform, spending $344 million on them in the first three quarters of 2009 alone.
But now Main Street is fighting back against Wall Street. Coloradans like Linda Mulligan are marching into banks like Wells Fargo and Chase to shut down their accounts and transfer them to local banks and credit unions that share their community values of fairness and consumer protection.
If you bank with one of the biggies, you know you're through with their reckless behavior and abusive practices. It's time to break up with your bank! You can start again, not with match.com, but with moveyourmoney.info/find-a-bank, where you can find a bank or credit union that is far more personally compatible.
Once free and empowered, you can start an abusive bank survivor network by convincing your friends and organizations in person and via online social networks to do the same. Then you all can contact U.S. Senator Bennet and tell him you expect him to stand with everyday Coloradans in favor of financial reform and a new Consumer Financial Protection Agency to ensure the safety of basic financial consumer products.
It's time to choose Main Street over Wall Street. Join us and Move Your Money today.
By Mike Di Paola
Bart Centre, 61, a retired retail executive in New Hampshire, says many people are troubled by this question, and he wants to help. He started a service called Eternal Earth-Bound Pets that promises to rescue and care for animals left behind by the saved.Many people in the U.S.—perhaps 20 million to 40 million—believe there will be a Second Coming in their lifetimes, followed by the Rapture . In this event, they say, the righteous will be spirited away to a better place while the godless remain on Earth. But what will become of all the pets?
Promoted on the Web as "the next best thing to pet salvation in a Post Rapture World," the service has attracted more than 100 clients, who pay $110 for a 10-year contract ($15 for each additional pet.) If the Rapture happens in that time, the pets left behind will have homes—with atheists. Centre has set up a national network of godless humans to carry out the mission. "If you love your pets, I can't understand how you could not consider this," he says.
Centre came up with the idea while working on his book, The Atheist Camel Chronicles, written under the pseudonym Dromedary Hump. In it, he says many unkind things about the devout and confesses that "I'm trying to figure out how to cash in on this hysteria to supplement my income."
Whatever motivates Centre, he has tapped into a source of genuine unease. Todd Strandberg, who founded a biblical prophecy Web site called raptureready.com that draws 250,000 unique visitors a month, agrees that Fido and Mittens are doomed. "Pets don't have souls, so they'll remain on Earth. I don't see how they can be taken with you," he says. "A lot of persons are concerned about their pets, but I don't know if they should necessarily trust atheists to take care of them."
This paradox poses a challenge for Centre. He must reassure the Rapture crowd that his pet rescuers are wicked enough to be left behind but good enough to take proper care of the abandoned pets. Rescuers must sign an affidavit to affirm their disbelief in God—and they must also clear a criminal background check. "We want people who have pets and are animal lovers," Centre says. They also must have the means to rescue and transport the animals in their charge. His network consists of 26 rescuers covering 22 states. "They take this very seriously," Centre says.
One of Centre's atheist recruits is Laura, a woman in her 30s who lives near the buckle of the Bible Belt in Oklahoma, and who prefers not to give her last name. She has two dogs of her own and has made a commitment to rescue four dogs and two cats when—if—the time comes. "If it happens, my first thought will be, 'I've got work to do,'" Laura says. "The first thing I'll do is find out where I need to go exactly."
The rescuers won't know the precise location of the animals until the Rapture arrives, at which time they will contact Centre for instructions. "I've got to get to [the pets] within a maximum of 18 to 24 hours. We really don't want them to wait more than a day." A day she believes will never come.
Onion sez: U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion
U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion
"Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all."What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy.
"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."
According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!"
Screams then filled the Senate Chamber as lawmakers and members of the press ran for the exits, leaving in their wake aisles littered with the remains of torn currency.
At the New York Stock Exchange, Wednesday morning's opening bell echoed across a silent floor as the few traders who arrived for work out of habit looked up blankly at the meaningless scrolling numbers on the flashing screens above.As news of the nation's collectively held delusion spread, the economy ground to a halt, with dumbfounded citizens everywhere walking out on their jobs as they contemplated the little green drawings of buildings and dead white men they once used to measure their adequacy and importance as human beings.
"I've spent 25 years in this room yelling 'Buy, buy! Sell, sell!' and for what?" longtime trader Michael Palermo said. "All I've done is move arbitrary designations of wealth from one column to another, wasting my life chasing this unattainable hallucination of wealth."
"What a cruel cosmic joke," he added. "I'm going home to hug my daughter."
Sources at the White House said President Obama was "still trying to get his head around all this" and was in seclusion with his coin collection, muttering "it's just metal, it's just metal" over and over again.
"The president will be making a statement very soon," press secretary Robert Gibbs told reporters. "At the moment, though, his mind is just too blown to comment."
A few U.S. banks have remained open, though most teller windows are unmanned due to a lack of interest in transactions involving mere scraps of paper or, worse, decimal points and computer data signifying mere scraps of paper. At a Bank of America branch in Spokane, WA, curious former customers wandered aimlessly through a large empty vault, while several would-be robbers of a Chase bank in Columbus, OH reportedly put their guns down and exited the building hand in hand with security guards, laughing over the inherent absurdity of the idea of $100 bills.
Likewise, the real estate industry has all but vanished, with mortgage lenders seeing no reason to stop people from reclaiming their foreclosed-upon homes.
"I don't even know what we were thinking in the first place," said former banker Nathan Collins of Brandon, MS, as he jimmyed open a door to allow a single mother and her five children to move back into their house. "A bunch of people sign a bunch of papers, and now this family has no place to live? That's just plain ludicrous."
The realization that money is nothing more than an elaborate head game seems to have penetrated the entire country: In Wilmington, DE, for instance, a collection agent reportedly broke down in joyful sobs when he informed a woman on the other end of the phone that he had absolutely no reason to harass her anymore, as her Discover Card debt was no longer comprehensible.
For some Americans, the fog of disbelief surrounding the nation's epiphany has begun to lift, with many building new lives free from the illusion of money.
"It's back to basics for me," Bernard Polk of Waverly, OH said. "I'm going to till the soil for my own sustenance and get anything else I need by bartering. If I want milk, I'll pay for it in tomatoes. If need a new hoe, I'll pay for it in lettuce."
When asked, hypothetically, how he would pay for complicated life-saving surgery for a loved one, Polk seemed uncertain.
"That's a lot of vegetables, isn't it?" he said.
By Stephen C. Webster
Thursday, February 18th, 2010 -- 11:10 pm
"As a result of the vision and foresight of the California State Legislature Medical Marijuana Research Act
(SB847), the CMCR has successfully conducted the first clinical trials of smoked cannabis in the United
States in more than 20 years," the group said in the study's conclusion summary. "As a result of this program of systematic research, we now have reasonable evidence that cannabis is a promising treatment in selected pain syndromes caused by injury or diseases of the nervous system, and possibly for painful muscle spasticity due to multiple sclerosis."
"Obviously more research will be necessary to elucidate the mechanisms of action and the full therapeutic potential of cannabinoid compounds. Meanwhile, the knowledge and new findings from the CMCR provide a strong science-based context in which policy makers and the public can discuss the place of these compounds in medical care."
"'There is good evidence now that cannabinoids (the active compounds in the marijuana plant) may be either an adjunct or a first-line treatment for … neuropathy,' said Dr. Igor Grant, Director of the CMCR, at a news conference at the state Capitol,'" according to Salem-News. "He added that the efficacy of smoked marijuana was 'very consistent,' and that its pain-relieving effects were 'comparable to the better existing treatments' presently available by prescription."
While the dangers of smoking remain, a study published by the Journal of Pharmeseutical Sciencesin 2006 showed that inhaling vapors from the cannabis plant, created by flushing heated air through a small chamber, is a "safe and effective" mode of transmission for the drug.
The study found that cannabis can help ease the pain of neuropathy, migraine headaches and facial pain, AP noted. In tests on rats, a "cannabis-like drug" reportedly reduced nerve cells' pain signals.
READ THE CMCR'S FULL REPORT (pdf link).
By ROBIN SIDELA new federal credit-card law that takes effect Monday could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers are already deploying new tactics that could prove costly for even the most cautious cardholder.
The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.
Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.
"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.
Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.
The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.
The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent.
All this represents a huge change from three years ago when banks were tripping over themselves to issue credit cards to just about anybody, and consumers were on a spending spree. Banks have pruned many of their more profligate cardholders, and are using higher transaction fees to raise more money from cardholders who pay their bills each month rather than run up huge balances.
The biggest new tactic may be one of the oldest: raising rates. As long as credit-card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge whatever they want. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.
U.S. banks on average increased the interest rate on their credit cards by about two percentage points between December 2008 and July 2009, according to Pew Charitable Trusts, a nonprofit group. Some consumers say that their accounts have been hit with sudden interest-rate increases even if they haven't been late on a payment.
Bank of America says it hasn't raised interest on credit-card accounts since the law was passed last spring, except in the case where a cardholder has repeatedly paid late.
In a statement, Citigroup said: "We understand that customers don't like price increases, especially in difficult economic times. However, these actions are necessary given the doubling of credit card losses across the industry from customers not paying back their loans and regulatory changes that eliminate re-pricing for that risk."
Card companies also plan to collect more interest by switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now. But they give the companies more flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.
Cardholders should expect to see more fees for extra services, such as requesting a year-end itemization of all your purchases, paper statements or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.
Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees—the cost customers pay for purchases made in foreign currencies—but they are expanding the definition of what qualifies as a foreign transaction.
In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.
American Express Co., which is known for its lucrative rewards programs, recently added new fees to its co-branded Hilton Hotels, Starwood Hotels and Delta Air Lines cards. Cardholders who pay late will lose their rewards points. They can reinstate them to their accounts if they pay a $29 fee. An American Express spokeswoman said the fees are consistent with policies on its other cards and is aimed at encouraging cardholders to pay their bills on time.
For new customers, the days of 0% teaser rates and no-annual-fee boasts are dwindling. After cutting back substantially on mail offers, card companies are once again trying to woo new cardholders. But this time around, the avalanche of pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.
Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have an annual fee, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs—but also fees. Plain-vanilla cards that don't have any annual fees (or rewards programs) represented just 11% of mail offers in the fourth quarter, according to Mintel Comperemedia, which tracks credit-card mail offers. J.P. Morgan's Chase card unit and American Express are among those that have recently introduced new cards with annual fees.
Consumers can fight back against some of the industry's tactics. You only need one or two credit cards that are widely accepted. So it can make sense consolidating debt on the card that has the lowest interest rate, assuming it makes sense after taking into account the balance-transfer fee.
True, shedding cards can hurt your credit score. But John Ulzheimer of Credit.com has a rule of thumb to preserve it while closing accounts: If you are able to keep your overall "credit utilization" on your cards—the amount of credit used as a percentage of your overall available credit—below 10% then closing accounts to avoid paying extra fees could make sense, he said.
So use the card or lose it because there may be a price to pay for inactivity. Fifth Third Bancorp is charging customers $19 if they don't use their credit card in a year.
And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.
Bob Depweg, who owns a security-consulting firm in the Los Angeles area, intends to keep playing hardball in order to what he wants out of his credit-card companies. Since the law was passed by Congress, he says he has successfully convinced American Express to drop its annual fee on his card by threatening to take his business elsewhere. And when Citi raised the interest rate on his wife's credit card to 29.9% from 14%, he closed the account.
Regulations going into effect later this year will place even more constraints on credit-card companies. Starting Aug. 20, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to tell a credit-card company that they don't accept a change of terms in their card agreement. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.
Consumers who carry a balance may want to steer clear of retail cards, which woo customers with discounts. The money you save in the beginning could be eclipsed by the higher rates these cards typically charge as you pay off the balance.
Credit unions often offer lower rates than large banks, although some of their rewards programs are less generous than those of big banks. There are more than 8,000 credit unions in the U.S., and they tend to have pretty expansive definitions of who can join. The criterion for joining some credit unions is as simple as your Zip Code. Navy Federal, the nation's largest retail credit union, offers rates as low as 7.9% on a basic platinum Visa card for three million members of the Army, Navy, Air Force, and Marine Corps and their families.
That compares with an interest rate as low as 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by Lowcards.com, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.
Besides rates, reward programs are one of the other big considerations in choosing the right card. Cash-back cards are likely to offer the best deals in the new regulatory environment since banks have been making their own reward programs less rewarding. They are shortening the expiration periods, raising redemption fees or implementing earnings caps on rewards.
Although issuers have also been trimming cash-back rates in general—the standard rate today is 1% compared with 3% to 5% a few years ago—consumers can still earn higher rates by shopping in certain categories, such as gas or groceries.
"For the average person, if you're going to do a loyalty rewards program, simple is best," said Mr. Manning of the Responsible Debt Relief Institute. "Take the cash back."
Seven dirty words?
by Valerie Jamieson, Washington DC
Update: An earlier version of this story referred to the Borg using cloaking technology, which several readers pointed out is not supported by televisual evidence. Of course, we were speculating on the technology existing in the alternate universe created by J. J. Abrams. However, to avoid confusion we have amended the decloaking reference to cite the Romulans.
Star Trek fans, prepare to be disappointed. Kirk, Spock and the rest of the crew would die within a second of the USS Enterprise approaching the speed of light.
The problem lies with Einstein's special theory of relativity. It transforms the thin wisp of hydrogen gas that permeates interstellar space into an intense radiation beam that would kill humans within seconds and destroy the spacecraft's electronic instruments.
Interstellar space is an empty place. For every cubic centimetre, there are fewer than two hydrogen atoms, on average, compared with 30 billion billion atoms of air here on Earth. But according to William Edelstein of the Johns Hopkins University School of Medicine in Baltimore, Maryland, that sparse interstellar gas should worry the crew of a spaceship travelling close to the speed of light even more than Romulans decloaking off the starboard bow.
Special relativity describes how space and time are distorted for observers travelling at different speeds. For the crew of a spacecraft ramping up to light speed, interstellar space would appear highly compressed, thereby increasing the number of hydrogen atoms hitting the craft.
Worse is that the atoms' kinetic energy also increases. For a crew to make the 50,000-light-year journey to the centre of the Milky Way within 10 years, they would have to travel at 99.999998 per cent the speed of light. At these speeds, hydrogen atoms would seem to reach a staggering 7 teraelectron volts – the same energy that protons will eventually reach in the Large Hadron Collider when it runs at full throttle. "For the crew, it would be like standing in front of the LHC beam," says Edelstein.
The spacecraft's hull would provide little protection. Edelstein calculates that a 10-centimetre-thick layer of aluminium would absorb less than 1 per cent of the energy. Because hydrogen atoms have a proton for a nucleus, this leaves the crew exposed to dangerous ionising radiation that breaks chemical bonds and damages DNA. "Hydrogen atoms are unavoidable space mines," says Edelstein.
The fatal dose of radiation for a human is 6 sieverts. Edelstein's calculations show that the crew would receive a radiation dose of more than 10,000 sieverts within a second. Intense radiation would also weaken the structure of the spacecraft and damage its electronic instruments.
Edelstein speculates this might be one reason why extraterrestrial civilisations haven't paid us a visit. Even if ET has mastered building a rocket that can travel at the speed of light, he may be lying dead inside a weakened craft whose navigation systems have short-circuited.
Edelstein presented his results on Saturday at the American Physical Society meeting in Washington DC.
Virtual Guitar Chord site (in Flash--really cool)
Guitar Rig setups of some of your favorite guitarists
Services you can disable to make your PC run faster
Microsoft Silverlight (MS's content management & flash software)
Dress Up with Jesus
Really trippy videos
Aviary Open Source Creative Software
The Dark Lens of STAR WAR
Turn your long URL into a "Shady" URL.
The hunt for the worst movie of all time.
Friday, February 19, 2010
Poll: Large Number Of Texans Doubt The Theory Of Evolution, Believe In Human-Dinosaur Coexistence
A new University of Texas/Texas Tribune survey shows just how destructive a politicized right-wing curriculum can be. A large number of Texans polled said they still don’t believe in evolution and are convinced that humans and dinosaurs co-existed:
- 51 percent disagree with the statement, “Human beings, as we know them today, developed from earlier species of animals.”
- 38 percent agree with the statement, “God created human beings pretty much in their present form about 10,000 years ago.”
- 30 percent agree with the statement, “Humans and dinosaurs lived at the same time.” Another 30 percent said they “don’t know” whether the statement is true.
Refusing to believe in evolution is a point of pride for many conservatives, who are also trying to indoctrinate young people with their same misguided views. The right-wing Texas State Board of Education has been reviewing the direction of the state’s social studies curriculum and textbook standards. Some of their changes include adding “causes and key organizations and individuals of the conservative resurgence of the 1980s and 1990s,” “documents that supported Cold War-era Sen. Joseph McCarthy,” and how to “differentiate between legal and illegal immigration.”
In terms of textbook standards, as Texas goes, so goes the nation. The state “is one of the nation’s biggest buyers of textbooks.” Publishers are often “reluctant to produce different versions of the same material,” and therefore create books in line with Texas’ standards. (HT: Daily Kos)
Recent research suggests there are more tigers left in the wild than there are great white sharks
Ian Sample, San Diego
guardian.co.uk, Friday 19 February 2010 17.09 GMT
Great white sharks may be more endangered than tigers, with only a few thousand left in the world's oceans, according to a leading marine biologist.
The grim assessment suggests that fishing and collisions with shipping vessels have taken a devastating toll on the ancient predators.
The World Conservation Union, which operates the red list of endangered species, lists great white sharks as vulnerable but has no official estimate of their global population. But a recent survey suggests that great whites have fallen below 3,500 individuals, the number of tigers conservationists believe are left in the wild.
A team led by Barbara Block, a marine biologist at Stanford University, used radio transmitters to track more than 150 great white sharks off the coast of southern California.
"The estimated total population of great white sharks in the world's oceans is actually less than the number of tigers," said Ronald O'Dor, a senior scientist at the Census of Marine Life, an international collaboration that is cataloguing marine life.
"We hear an awful lot about how endangered tigers are, but apparently great white sharks are pretty close to the same level. Some people say 'I don't care, they eat people,' but I think we have to give them a little space to live in," O'Dor told the American Association for the Advancement of Science meeting in San Diego yesterday.
"The Australians have now got a system where they put tags on great white sharks and they have receivers on the beaches so when a great white comes into the bay the receiver automatically makes a cell phone call and tells the guy in charge to close the beach. So we can co-exist with marine life," he added.
In 2007, marine biologists at Dalhousie University in Canada analysed records from fisheries and research vessels dating from the 1970s to 2005 and found evidence for a dramatic fall in shark populations. Tiger sharks and scalloped hammerheads had declined more than 97% since the mid-1980s, while numbers of smooth hammerheads and bull sharks fell 99% off the east coast of the US.
What Ever Happened to Candidate Obama?
by KATHA POLLITT
February 18, 2010
This article appeared in the March 8, 2010 edition of The Nation.
February 18, 2010
Unemployment in the United States stands officially at 9.7 percent. This represents 14.8 million people out of work. By a broader official measure that includes people employed fewer hours than they would like and those discouraged from looking for work, the unemployment rate is 16.5 percent, or about 25 million people in a total labor force of about 153 million. We have not seen comparable unemployment rates since 1983, twenty-seven years ago, and before that, not since the 1930s Depression.
The job-creation proposals coming from the Obama administration, in the president's January 27 State of the Union address and elsewhere, generally point in the right direction, with more spending for clean energy, infrastructure and support for small businesses. These proposals follow from Obama's February 2009 economic recovery program, which injected $787 billion in new spending or tax relief into the economy over two years. However, just as last February's stimulus program was too small to counteract the evaporation of $16 trillion in household wealth resulting from the financial collapse, the scope of Obama's current proposals is nowhere near large enough for the situation today.
For example, Obama has proposed $33 billion in new tax credits for small businesses. By contrast, private borrowing by businesses over the previous six months was down by $1.5 trillion relative to 2007, with the largest proportional cutbacks coming from small businesses. What's more, Obama's call to freeze discretionary federal spending in nonmilitary areas is dangerously misguided. The fiscal deficits of 2009 and 2010--at between $1.4 trillion and $1.6 trillion, or around 10 percent of GDP--are indeed very large. But the freeze obscures what Obama and his advisers clearly know--that deficit spending is part of the solution to our economic predicament and will remain so until we see millions of people getting hired into decent jobs.
Here is what we need: a commitment from the Obama administration to create 18 million new jobs over the remaining three years of the presidential term. That would mean an average increase of about 500,000 jobs per month, or a bit more than 4 percent growth in job creation over the next three years. This can be done by combining two broad types of initiatives: measures to buttress the economy's floor and thereby prevent another 2008-type collapse, and measures to inject job-generating investments into the economy. If such initiatives are successful, the official unemployment rate will stand at around 4 percent when Obama runs for re-election in November 2012.
Is This Realistic?
The central features of this plan can remain within the framework of proposals already established by the administration. The key is getting the scale large enough. The only way this can happen is by combining the positive energies of the public and private sectors. This public-private approach is not only practically necessary; it will also counteract right-wing claims that the government is seizing control of the economy in the name of job creation. Most of the financial heft will have to come from banks and other private financial institutions. The banks alone are hoarding cash reserves totaling about $850 billion in their accounts at the Federal Reserve. Most of that money needs to be channeled into job-generating investments. For this to happen, interest rates and the risks for lending to small businesses need to fall substantially.
But it will be necessary for the government to keep injecting spending into the economy, which will add to the deficit. Scare stories aside, the fiscal deficit is not dangerously large. The interest rates the government is paying on its borrowing--as opposed to the rates that businesses have to pay on much riskier loans--remain historically low, in the range of 2 to 3 percent. This is because the world's financial magicians of just a few years ago have chosen to protect their remaining wealth by buying up the safest possible assets they can find, which are US Treasury bonds. When Ronald Reagan was running up record-breaking deficits in the early 1980s, the interest rates on the bonds were around 13 percent.
This huge gap in interest rates between now and the Reagan era will save the Treasury about $175 billion per year going forward. Also remember that falling unemployment rates reduce the deficit on their own, with each 1 percent drop generating about $90 billion in government revenues or reduced spending obligations. This is because when people are newly employed, they can support themselves and pay more taxes. We also need workers earning decent wages. Even if we didn't care about the ever-widening inequalities of wages, incomes and wealth, we would still need working people to have enough money in their pockets to boost sagging consumer markets. Conversely, when unemployment rises, the government is faced with huge extra spending burdens through unemployment insurance, food stamps, Medicaid and related social safety net commitments. The fiscal deficit could probably be eliminated altogether if unemployment could be driven down to around 4 percent, even without spending cuts or increases in tax rates. Finally, we can extract about $300 billion in savings and new revenues by ending the wars in Iraq and Afghanistan and by establishing a modest tax on speculative Wall Street trading.
One argument against taking bold measures now is that, mass unemployment aside, the official indicators tell us that the recession is over. The economy did grow at a robust 5.7 percent over the past quarter, though that may be only a short-term blip, driven by businesses restocking their depleted inventories. But let's assume that a recovery is indeed under way at more or less the normal rate of progress relative to recent recessions. In fact, under such a "normal" scenario, unemployment would not likely fall to around 5 percent until early 2017. We would not likely hit 4 percent unemployment until mid- 2018, assuming the recovery could be kept going for another eight years.
Even with a successful coordination of large-scale expansions of private and public spending, is it realistic to expect that the economy, which has been so trampled down for the past three years, could possibly create 18 million jobs over the next three years? It is an ambitious but realistic goal. This is basically the rate at which employment grew under Gerald Ford and Jimmy Carter coming out of the 1974-75 recession. The Carter years are widely derided through the lens of his 1979 "malaise" speech. Yet the first three years under Carter generated the fastest expansion of job opportunities of any comparable period since, including any three-year stretch under Reagan or Clinton.
The Carter presidency, of course, ended disastrously with the severe 1980 recession. But this was because OPEC and the oil companies doubled oil prices between 1979 and 1980. Even more important, Wall Street insisted at the time that Carter appoint Paul Volcker as chair of the Federal Reserve to stop the inflation that resulted from the oil price shock. Volcker immediately raised short-term interest rates, pushing them as high as 17 percent by April 1980. This brought unemployment up to 7.5 percent in time for Reagan's landslide victory over Carter in November 1980. (It is ironic that among Obama's top tier of economic advisers, the same Paul Volcker is taking the hardest line against Wall Street excesses.)
Of course, we need to control inflation, especially when it results from oil price jumps. But we can do this by getting serious about energy conservation and new renewable energy sources, as well as being prepared to release our strategic oil reserves as needed, to force oil prices back down amid a crisis. Pushing unemployment down to around 4 percent will also provoke inflation fears because it is likely to bring wage increases, as workers' bargaining power improves. But rising wages do not cause inflation on their own, as long as wage increases are in line with how much workers produce on the job. Also recall that the average wage today is about 10 percent below its peak level of 1972, even though average worker productivity has risen by about 90 percent since the early 1970s. In short, now is the time to focus on creating 18 million decent jobs and not to remain fixated--as we were from Volcker's 1979 appointment until the 2008 financial collapse--on fears of moderately rising inflation.
Reducing the Pain
Mass unemployment creates widespread human suffering. Minimizing this suffering has to be the first priority in fighting the recession. Helping people in need also contributes to countering a downward recessionary spiral and thus helps prevent another collapse. In general, the Obama administration has done reasonably well on this front, but the demands are great. More than 3 million homeowners have lost their homes through foreclosures or related bank actions since the crisis began, and the foreclosure rate is running at 170,000 per month, near the peak for the crisis. The African-American community, targeted as a large potential market for subprime mortgages during the bubble years, is suffering disproportionately from foreclosures. Clearly, in this case, the administration's efforts have accomplished next to nothing. Economist Dean Baker has proposed the most effective plan to keep people in their homes, which is to allow them to stay in their homes as renters, paying market rental rates. The government also needs to continue extending unemployment benefits and increase support for food stamps to compensate unemployed workers and the poor for their income losses.
In the same vein are work-sharing programs that extend unemployment compensation to workers who accept reduced hours that then enable their companies to avoid outright layoffs. Indeed, work-sharing can be even more effective and fairer than traditional unemployment insurance, since it spreads the reductions in work hours across a wide group of workers rather than concentrating the effects of the recession on the minority of workers who become completely jobless. Work-sharing programs have long been a major part of the social safety net in Western Europe. Over this recession, Germany has been especially aggressive in extending these benefits to prevent rising unemployment.
Such programs already exist on a modest scale in seventeen states. Senator Jack Reed of Rhode Island has introduced a bill that would extend these programs and provide start-up funds to create measures in the remaining states. While this would be a very favorable development, we also need to recognize that work-sharing programs, similar to anti-foreclosure measures, unemployment insurance and food stamps, do not inject any new major source of spending into the economy. They will help firm up the economy's floor. But even here they will need additional support, especially given the budgetary crisis faced by state and local governments around the country.
Bringing State and Local Governments Back to Health
California's budget is in a deep ditch, with an eye-popping 56 percent gap between expected revenues and spending commitments. Most other states are also staring at huge revenue shortfalls. The jobs recovery will not succeed until this situation is stabilized. How could it be otherwise? State and local governments account for about $2 trillion in annual spending, or 14 percent of GDP. Either directly or indirectly through their supply purchases, they generate 30 million jobs, 20 percent of the entire American workforce.
They are also the institutions most responsible for delivering basic needs to people--education, healthcare, support for the needy, public safety and infrastructure.
Unlike the federal government, nearly all state and local governments are required to balance their operating budgets every year. In a recession, tax revenues decline in step with the decline in people's incomes, spending levels and property values. This means that state and local governments almost inevitably fall into crisis in a recession. There are only two ways to avoid this within our current fiscal arrangements. The first is to build up a major surplus of "rainy-day funds." But keeping large amounts of cash on reserve is very difficult to do even during healthy economic times, given that the demands for health, education and public safety programs are persistent. The other way for states to avoid cutbacks during a recession is to receive financial injections from the federal government.
The February 2009 recovery program provided $144 billion in support to offset that year's state budget shortfalls. This money was well spent. I know this firsthand through my own employer, the University of Massachusetts. We received around $50 million last year, which enabled us to prevent hundreds of layoffs. The layoffs would have sent shock waves throughout the region, since UMass is the largest employer in western Massachusetts. One can tell comparable stories in scores of communities around the country. Another roughly $200 billion is needed now. The Obama administration is supporting measures that would amount to perhaps $30-$50 billion.
Increasing support for state and local government activities should not be seen as merely a short-term stopgap but also as a major element of a longer-term job-creation agenda. The main activities supported by state and local governments are all effective sources of job creation, in comparison for example with military spending. Thus, infrastructure projects create 40 percent more jobs per dollar than spending on the military, healthcare creates 70 percent more jobs and education creates 240 percent more jobs. So if the government just moved its 2008 budget of $188 billion for Afghanistan and Iraq into support for education and infrastructure programs at the state and local levels, this alone would produce a net increase of about 2.3 million jobs per year.
Scaling Up the Green Recovery
One of the Obama administration's main jobs initiatives is retrofitting buildings, especially private homes, to make them more energy efficient. The president has described home retrofitting projects as a "sexy" way to save money. In fact, even relatively small investments in home retrofits, in the range of $2,500, can pay for themselves in three to four years, since they can lead to monthly energy bills falling by between 25 and 30 percent. These measures also produce rapid environmental benefits, since raising energy efficiency is the easiest way to cut greenhouse gas emissions.
Despite these attractions, private investments in retrofits have not expanded quickly enough to serve as a major jobs engine. The private market for retrofits remains underdeveloped. This is because homeowners are understandably wary about making investments when they are cash-strapped and their home values have collapsed. They are also not eager to face the hassles of dealing with banks, utility companies and work crews. This could all change rapidly if banks, utilities and community organizations could, in various combinations, figure out how to make retrofits easy and widely accessible for homeowners.
In the meantime, the government needs to take the lead by immediately advancing a major nationwide retrofitting initiative. The opportunity is enormous. There are roughly 24 billion square feet of building stock in hospitals and healthcare, education and government buildings. This is about 20 percent of all US building stock. Retrofitting these buildings would cost about $150 billion. If we assume this program is implemented over three years, at $50 billion per year, this would generate about 800,000 jobs per year over those three years. Retrofits are a highly efficient source of job creation, since all the work must be done within local communities, and a large proportion of the budgets go to hiring workers, as opposed to buying equipment, land and energy.
This government-led project could be the launching point for a larger effort to build the institutional and market support for retrofitting remaining private-sector structures on an economy-wide scale. In addition to private hospitals and schools, the potential market for private retrofits for commercial and residential buildings is in the range of $650 billion. If even 20 percent of these buildings were retrofitted by the end of 2012, it would create another 800,000 jobs per year. Retrofitting alone could thus generate about 1.5 million of the 18 million jobs we need to create by the end of 2012. About 600,000 of them would be in construction, making up for one-quarter of the 2.6 million construction jobs lost since mid-2007.
Of course, the broader green investment project will need to expand well beyond retrofits to encompass public transportation, electrical grid upgrades and the creation of a competitive renewable-energy manufacturing sector. These will all be major sources of job creation over time. The same is true for investments in rebuilding our traditional infrastructure of bridges, roads and water management systems. But if we are serious about creating 18 million jobs within three years, retrofitting is the place to begin.
Making the Banks Respectable
The most powerful factor for creating 18 million jobs in three years will be the country's private financial institutions. Yes, I am referring to the same institutions--the banks, savings and loans, brokerage houses, insurance companies and hedge funds--whose reckless practices created the economic crisis in the first place.
That is the point. Financial institutions are a formidable force for both good and bad. They were effectively regulated for roughly thirty years after World War II, in the shadow of the 1930s financial collapse and Depression. This played a major role in generating the "Golden Age" of American capitalism through the mid-1970s, with rapid growth, low unemployment rates, diminishing inequality and historically unprecedented levels of financial stability. Without delving here into the details of today's debate on how to re-regulate finance--a debate, incredibly, still dominated by Wall Street--let's be clear on first principles. This is simple: we need regulations that will help channel credit toward productive, job-generating activities and away from hyper-speculation. For starters, that means pushing the lion's share of the banks' $850 billion in cash reserves into productive investments.
Of course, the banks need to maintain a reasonable supply of cash reserves as a cushion against future economic downturns. One of the main causes of the 2008-09 crisis and other recent financial crises was precisely that the banks' cash reserves were far too low.
In 2007 banks were holding only $21 billion in cash reserves. But increasing reserves from $21 billion to $850 billion in little more than a year is a new form of Wall Street excess. Let's say that banks should keep $200 billion in reserves as a cushion, a level roughly in line with the amounts they held during the era of regulation. The banks could still lend $650 billion to businesses just from the funds they are sitting on. At the very least, we could assume that overall new lending for productive, job-creating activities could be in the range of $700 billion or above, once we allow for funds coming from savings and loans, insurance companies and other financial institutions in addition to the commercial banks. We would then anticipate that the financial institutions would increase business lending by comparable amounts in 2011 and 2012. Doing so would help set a level of overall lending at roughly its average level during previous economic recoveries. At the same time, expanding credit and productive business investments by around $700 billion per year could by itself deliver nearly 18 million new jobs by the end of 2012.
A big problem is not only that banks are reluctant to lend but also that businesses are unwilling to borrow. Businesses have been heavily scarred by the recession and are not eager to take on new risks. Financial market policies therefore need to focus on helping to boost business confidence and reduce the risks of job-creating investments. The first step here would be for the Federal Reserve to substantially lower the interest rates at which private businesses may borrow. The Fed has been maintaining the interest rate at which private banks borrow among themselves--the "federal funds rate"--at little more than zero for more than a year. But the rates at which nonfinancial businesses may borrow are at historic highs relative to the nearly zero federal funds rate.
An average solid business now has to pay about 6.5 percent interest for a long-term loan, roughly 6 percent more than the rate at which banks may borrow. The Fed needs to push the business borrowing rates down to 3 to 4 percent. The Fed has the power to make such a move, though to do so would certainly deviate from standard practice. But let's recall that nothing the Fed did during the 2008-09 crisis to bail out the banks followed the rule book. It is time for the Fed to pursue innovative policies that will directly benefit ordinary businesses and working people.
The government also needs to intervene to lower the risks facing banks making loans for productive investments and the businesses doing the investing. The policy tool to ramp up here is the government's loan guarantee programs, which support small businesses, green investments, students, rural development and affordable housing. In 2007, the last year before the recession, the government guaranteed about $250 billion in private-sector loans.
The government should roughly double the level of support--i.e., guaranteeing another $250 billion in loans per year--to dramatically expand low-risk opportunities for a wide range of job-generating investments. The proposals being advanced to create a specialized Green Bank as well as an Infrastructure Bank fit comfortably within this broader agenda of channeling the country's financial resources to high-priority projects. At the same time, if banks decide they still can't resist pouring huge sums into the Wall Street casino, they will have to forfeit their eligibility for loan guarantees. The banks should also be required to continue holding high levels of cash reserves as a cushion against their high-stakes gambling. Keep in mind that the government holds controlling stakes in AIG--what had been the world's largest and most sophisticated financial insurance company--as well as Fannie Mae and Freddie Mac, still the most influential mortgage-lending institutions. AIG, Fannie and Freddie could easily convert part of their operations previously devoted to hyper-speculation to supporting guaranteed loans focused on job creation.
What happens when businesses default on these guaranteed loans? Won't this blow a hole in the government's fiscal deficit? Here is what recent experience tells us. In 2007 about 4 percent of the government's guaranteed loans went into default. If we assume that the default rate remained at roughly the 2007 level for this expanded program, that would add about $9 billion, or 0.3 percent, to the federal budget. Even if, implausibly, the default rate on the new loans doubled relative to the 2007 level, that would still increase the federal budget by only 0.6 percent. In short, roughly doubling the government's traditional loan-guarantee programs is eminently affordable as well as an effective means of reducing risks for private businesses, which in turn would encourage them to make the $700 billion in new job-creating investments we need.
How does the set of proposals outlined here realistically get us to 18 million new jobs by the end of 2012? Starting with the $850 billion cash hoard that commercial banks are holding in their Federal Reserve accounts, we move about $700 billion in new credit into domestic employment-focused investments. Assuming we have established a firm floor for the economy through the measures discussed above, injecting $700 billion in new spending into the economy will generate about 5.5 million jobs in 2010. That's because this $700 billion will generate a 5 percent rate of GDP growth, which in turn translates into about 4 percent employment growth. My calculation here assumes that the mix of total employment will shift toward green activities and education, where the jobs per dollar of spending are significantly higher than alternatives such as fossil fuel energy and military spending. We then build from the momentum of a strong 2010 recovery to maintain the roughly 4 percent rate of employment growth in 2011 and 2012, which will create about 6 million jobs in 2011 and 6.5 million in 2012. By the end of 2012, about 156 million people would be employed, 18 million more than the 138 million working today (see www.peri.umass.edu for details on these and related calculations).
The necessity of advancing a jobs program on this scale follows from the fact that the crisis before us is not just 9.7 percent unemployment, narrowly defined, or 16.5 percent unemployment, more reasonably defined, though these figures obviously speak volumes about the interlocking failures of our political and economic systems. Even under a fairly favorable economic scenario, we will be saddled with deep unemployment problems well beyond the 2012 presidential election and perhaps up to the 2016 election, unless we take dramatic action now.