Today I received a message via my personal email about fixing the economy. Recently I have heard many people complain about President Obama's "bailouts" and the way he is handling this situation. In fact I've done some complaining myself about his approach and his strategy in general. However, I don't speak up much because I think the solution is not obvious to anyone and it hasn't been long enough to judge him. Anyway, first the letter I received:
Dear Mr. President:
Please find below my suggestion for fixing America's economy.
Instead of giving billions of dollars to companies that will squander the money on lavish parties and unearned bonuses, use the following plan.
You can call it the Patriotic Retirement Plan:
There are about 40 million people over 50 in the work force. Pay them $1 million each as severance for early retirement with the
following stipulations:
1) They MUST retire. Forty million job openings
- Unemployment fixed.
2) They MUST buy a new American CAR. Forty million cars ordered
- Auto Industry fixed.
3) They MUST either buy a house or pay off their mortgage
- Housing Crisis fixed.
4) Tons more Money they would spend on Medical care and Drugs
- Health care and Medicare not fixed, but better off.
It can't get any easier than that!
Disclosure: I might be over 50.
I'm assuming this was sent in a bit of a tongue-in-cheek manner, but since it was written fairly seriously, I'll reply in the same manner. At first glance it is an interesting proposal. However, I have some concerns:
I doubt it is possible for the federal government to borrow, earn or otherwise obtain forty-trillion dollars (40,000,000 people * $1,000,000 = $40,000,000,000,000).
Paying off mortgages (debt) in HUGE numbers by shifting that burden to all taxpayers is not a solution. It is yet another crisis waiting to happen.
In my estimation the root of the so-called "housing crisis" was caused by overly optimistic valuations of homes based in part by giving too much money to too many people (via low mortgage rates and poor vetting of borrowers incited in large part by the government's involvement via Fannie and Freddie).
Many of the people over fifty probably already have homes and will not need two. A temporary huge influx of cash into the housing market is not likely to make the sector sustainable. Indeed it will drive up house prices and increase sales, but how long will they stay there?
Paying off their mortgage will remove reliable income stream from the financial system: Mortgages. Despite the talk of doom and gloom, careless valuations of mortgages and home prices in the past several years, overall I believe mortgages are a relatively safe investment.
I understand from several respectable advisers that it is often the case that when people suddenly become wealthy they squander the money on lavish parties and unearned payments to anyone for haphazard reasons. Apparently lottery winners offer a good statistical sample of this type of behavior. So this leads me to believe that giving $1,000,000 to a bunch of people will instigate more of this unhelpful behavior.
Now I have been told not to knock an idea unless you have an alternative. So in this area I have only a few: My ideas are to focus on education, small/innovative business and to remain calm in order to take time to make deliberate rational decisions.
Education
As for the auto industry, I don't have much sympathy for the companies. They have been poorly run companies for a long time and they just waited too long to do anything about it. The competition has beat them at their own game. A free market is often a zero-sum game. Unfortunately, that's the deal.
However, the dramatic consequences of those employers not being there should indeed be taken seriously. That doesn't mean the solution is to fund large poorly run companies and hope they will change. That is really not much change. Instead, I suggest we invest in educating and training those people who will essentially be unemployed due to the collapse of most of the American auto industry (keep trying Ford). I think we all want and need those people to have jobs, just not auto jobs. So educate or train them for other jobs that will be beneficial to our community as a whole (and to them personally).
Small Business
Furthermore, as an investor (and as a tax payer issuing a "bailout" to a company, we are just that) I would feel safer investing in other companies. If you think it's a good idea to bailout GM and Chrysler you should be buying their stock? So, do you? Are you?
I don't, I am not. In general I'd feel safer investing in MANY small companies of all kinds rather than a fewer large companies. Off the top of my head and with no research I'd rather see some investment in companies like Tesla Motors, and Zero Motorcycles. These companies are not revolutionary but what they're doing does take ingenuity and innovation that I personally only find in small companies (or small teams). I'm sure there are hundreds and probably thousands more out there that aren't as visible but are at last as innovative and worthy of investment.
Remain Calm
In general it is companies in the pursuit of money that caused the great wealth of this country that has recently been depressed in a relatively small way (I stress relatively). This country remains incredibly prosperous and wealthy compared to generations past and much of the rest of the world. Therefore, we should trust in the greedy capitalist system that brought us to this far, understanding that there will be ups and downs along the way, but we will continue to learn and gradually improving as we proceed. It is not a perfect system but it changes evolves and largely it works. I view our current system very similarly to Winston Churchill's famous statement on Democracy "It has been said that democracy is the worst form of government except all the others that have been tried." That all gives me enough confidence to say remain calm long enough to make careful decisions.
I'm not saying I'm thrilled with the president's moves, but I do think he is smart and that he has surrounded himself with smart people and he has ambitious and genuinely good intentions. We are not yet six months into it with this new guy. The last guy spent eight years digging the hole Obama is trying to climb out of. Lets give him his chance.
