Given the current state of economy and the fact that every day or so more disturbing economic news are announced, the need and urgency for a comprehensive economic bailout or rehabilitation has become more apparent.
There have been much talked about the economic bailout announced by president elect Barack Obama who plans to spend up to $850 billion to boost the economy. Is it really enough? US economy is a $13 trillion economy which is sinking fast, the amount planned for is less than one percent of the total US economy and as such it may not properly and effectively address the economic issues.
To really help the economy and direct it on the path of growth and prosperity much more needs to be done. Incidentally spending money does not necessarily improve the economy unless clear plan and directions are set forth.
Currently there are three major economic issues; unemployment, credit crunch, housing market, that need to be studied and appropriate plans to be designed and implemented.
Unemployment; the rate of unemployment has been the highest in the last 3 decades or so and there is no indication that it is going to slow down anytime soon. In fact almost every week a company is announcing to plan to lay off a portion of their labor force. To improve the economy we must first put people back to work. Unemployed person brings much harm to the economy.
- He/she is not earning salary so he/she is not pay any income tax. Both federal and state treasuries will lose revenue and have to cut down on spending on projects.
- The unemployed person is collecting unemployment benefit which means the government is now paying him/her. That can be a major withdraw from the federal budget.
- The unemployed person cannot spend money because he/she is not earning any, so the businesses lose sales and as the result they start layoff more people which only worsens this vicious cycle.
What needs to be done is a three approach plan, first, give tax incentive to any businesses regardless of their size if they start hiring people which did not plan to hire before. Just to make sure that the new hires are beneficial to the company, the federal government in cooperation with the state government should also provide free job training or offer tuition reimbursement to re-train the unemployed people for the new line of work that they are being hired for.
The second approach is massive government spending on variety of projects which could increase employment. Repairing the roads, bridges and public buildings is the fastest way to hire people to do the jobs. Of course the repairs will be done by private construction companies which would have to hire more people to do the job. This will not only will reduce the unemployment rate, but it would also allow the corporations to increase their revenue and expand their operations which could increase employment.
The third approach is to give variety of incentives to the companies to start producing domestically and halt or reduce their foreign operations. In the last few years many companies either closed down or reduced their operation domestically and moved their operation to other countries where labor cost is less than in the US. It may sound protectionism, but that needs to be done to improve the economy.
Credit market, the financial market’s problem and recent fiasco has immensely hurt the US economy. Despite the recent financial assistance from the federal government, the financial market has not changed much and continue to act very conservatively by not granting credit to businesses or households. The lack of credit has caused variety of industries to suffer as the result. The most obvious one is the auto industry which has not been able to sell many cars due to lack of credit availability. The situation is so bad, that the three US auto companies are on the verge of bankruptcy, if they do not receive government bail out.
Financial institutions provide credit/loans which enable the companies as well as households to borrow money and expand business operation or buy goods and services respectively.
The government needs to provide large cash bail out for the financial market on the condition that they loosen up their requirements and start issuing loans to more businesses and individuals. Availability of credit will allow consumers to start purchasing more which in turn will help the companies to sell more and hire more people.
Some may argue that the financial market did not deserve the previous bailout and should have gone broke. Furthermore anymore assistance is waste of tax payers’ money which could be used up for more important purposes.
In a capitalist economic system, financial/credit market play a very important role. Financial institutions provide credit/loans which enable the companies as well as households to borrow money and expand business operation or buy goods and services respectively. One of the reason for the US economy being so dynamic and large is the ease of getting credit and enabling the population to borrow and purchase goods and services which in turn increase the economy. Absence of availability of credit would dramatically contract the economy and create recession or even worse, the depression.
As it is witnessed presently lack of ability to borrow is hurting every aspect of the economy and no industry is immune from its impact. Federal Government took the appropriate steps in helping the financial market, but the problem is that the Fed failed to ensure the bailout is used up properly and banks would pass it on to the public through loans. This time around a much closer control should be implemented to achieve the targeted effect.
Due to this fact hundreds of thousands of homeowners have decided to walk off their home and let the house be foreclosed.
Housing industry; undoubtedly the most expensive investment that any household makes is purchasing a home. Consumers buy homes for many reasons and the most important reason is to create wealth as the value of the real estate increase through years and by the time the consumer is ready to retire, the home worth substantial amount and can use its equity (increased valued) during retirement period. Of course buying home has tax advantages and also offer some independence. not to be bound by Landlords’ rules and regulations.
Recent drop in the housing prices and consequently causing millions of Americans loosing their wealth has caused a monumental economic problem. Many people have lost all their equities in their homes and the value of the homes are far less than the amount of loans they have and as the result homeowners do not have any incentives to make monthly mortgage payment, as if throwing good money after bad one. Due to this fact hundreds of thousands of homeowners have decided to walk off their home and let the house be foreclosed.
Of course, loss of jobs, and sudden increase in those teaser adjustable interest loans have made it impossible for millions more to make timely mortgage payment and are subject to foreclosure and loss of their homes. When suddenly so many homes become available in the market for sale, it depresses the home prices and creates a ripple effect.
Today’s market is an excellent opportunity for those who desire to invest in real estate, as the housing prices are far less than what they used to be in 2006. Great deals could be found at the expense of those homeowners who bought their homes just three or so years ago when the prices were unreasonably high.
Potential home buyers who are putting 30 to 50% down with good credit are not able to get loans to buy homes. This level of caution only hasten the problems.
Since millions of Americans have invested so much on their homes, loss of their equities prevented them from either selling or borrowing against the home to buy or invest. As such the economic activities are dampened. Many homeowners have been using their homes as their ATM machine and every time they needed money they either refinanced their homes or took second and even third mortgage on the home. Fortunately or unfortunately, those days are gone for some foreseeable future.
There is another twist to slow down in the housing industries, which is far less new homes are being built as so many homes are in the market for sale. This causes the construction industries and all other companies that manufacture and sell construction materials, appliances, furniture, etc. lose sales and have to layoff employees. Many real estate agents, brokers, and loan processors are all unemployed.
Homeowners need to have assurances that their hard worked and earned asset is not going to waste. This could only happen when the housing prices are stabilized and gradually going up so to build back the wealth that millions of homeowners have lost. By stabilizing the home prices, the homeowners could take the risk and borrow against their home to open up a new business, expand their existing business operation, or simply buy durable goods such as cars, furniture, appliances, etc. which all will help to improve the economy.
Home price stabilization could take place through loan modifications so to prevent foreclosures and keeping homeowners in their homes. Also extending credit to those who are willing and able to buy the already foreclosed homes could dramatically help to stabilize the home prices. The banks are refusing to even lend money to those who are truly qualified to buy homes. Potential home buyers who are putting 30 to 50% down with good credit are not able to get loans to buy homes. This level of caution only hasten the problems.
Federal government should take a much more active role in managing the economy and bringing it out of recession. Handing out money is not enough, leadership, innovative qualities are also much required. The White House seems to have lost all these qualities, assuming they had it before.