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National Politics Fri Jan 30 2009

The Best Recession Money Can Buy

Congressman Don Manzullo (Republican, Illinois 16th) appeared on The Rachel Maddow Show on Wednesday to discuss his (and every other House Repulican's) 'no' vote on the economic stimulus bill. While Rep. Manzullo should be given credit for wading into enemy territory, particularly when it is occupied by the smart, incisive Maddow, his arguments demonstrated a core misunderstanding Republicans have about economic matters. Maddow repeatedly asked the congressman to explain how $200 million to renovate the National Mall is not stimulus. Ever the seasoned politician, Manzullo, rather than attempting to argue a point he was certain to lose, instead explained some GOP ideas for stimulus. The Illinois 16th is home to a Chrysler manufacturing facility, so fittingly enough, the congressman pitched his idea for a $5,000 voucher to purchase automobiles. (Manzullo specifically mentioned the Jeep Patriot, a car that receives a mediocre 28 mpg.)

Herein lies his fundamental misunderstanding: this recession was not caused by a lack of consumption -- it was caused by over-consumption. Americans purchased too many homes of too little value with too little equity. Put quite simply, we bought ourselves into the recession. When the GDP begins to fall, as it did dramatically today, it is because there is a lack of wealth being generated. If every American were to buy a car tomorrow, surly the economy would see a slight uptick. Car manufacturers would have some cash on hand but, and this is the rub, they would not use this money to build new cars, at least, not if they were smart. Once a person buys a new automobile, they do not plan on purchasing one for several years. As a result, the car industry would be hit even harder once they realize that the market, in unison, over-consumed due to a false propping up of demand. More likely than not, they would hang on to the cash and trench themselves for an even more difficult future. This is true with every industry, if you lower the price for the sake of liquidity, you are doing it to erase excess supply because there is little demand. It is a financial formula to tinker with demand and create fast cash. It does not create wealth or prosperity.

The recession happened because our rate of consumption grew too quickly for our ability to create items of wealth. Due to the low interest rates and "creative" loans we bought houses with little regard to their actual value. Arguing that we can consume our way out of the recession is like arguing you can drink yourself to sobriety. Our economy needs food stamps, unemployment benefits, and smart investments until we can sleep off our hangover and get back to innovating, the only real economic stimulus. Comically, then Pres. Bush, acting as a pushy bartender, rather than suggesting educating or saving, advised Americans to "...go shopping." after 9-11. (Check out Moody's research on the topic, here.)

People in the real estate profession understand downturns in the market are coupled with a "flight to quality". That is, people return to the fundamentals of what drives the economy, creation of items of value. It is for this reason that spending $200 million is a good idea, a National Mall in a good state of repair possess real value to this nation. Spending billions of dollars on permanent infrastructure creates real value and also has the added benefit of raising property values, whose plummeting is the real cause for this recession. Tax cuts which, at their best, prompt a quick shot in the arm. At their worst, tax cuts only encourage short-term, over-consuming that will need to be reckoned with as soon as their temporary effects subside.

It is understandable that Rep. Manzullo was playing to his district but, most Republicans (to be fair, many Democrats) continue to tote the party line that more consumption is the solution. We don't need more consumption of widgets we need more creation of wealth.

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Drew / January 31, 2009 6:57 PM

The National Mall is a lousy stimulus budget item. Why don't we spend an extra 200 million re-decorating Congress... or on a innovative landscaping project to help beautify the capital.

Good Luck / February 1, 2009 9:45 AM

Your economic analysis is chock full of buzz words and it is clear that you are in the 101 class.

That you are using MSNBC as your main source of information should let you know that you are being mislead. Newsreaders and pundits are not really intelligent.

Government cannot create wealth and the republicans are right to oppose this spending bill. A small percentage of the bill would actually go towards proven job growth measures and the bulk of it is meant for democratic party empire building.

It is sad to see that so many americans are being duped into thinking that this spending bill will help our country.

Carl GiomettiAuthor Profile Page / February 1, 2009 10:33 AM

I am not aware that Moody's aligns themselves to a political party. This is my principal source for arguing that smart government spending, not tax cuts, have a larger economic impact.

Investing in the National Mall or building new transit (regardless of who is funding them) are capital investments and is a textbook definition of creating wealth. That I did learn in my 101 class.

I'm glad to see you discounting arguments because it came from a television news source. Nothing wins a debate like ad hominem attacks.

Good Luck / February 1, 2009 10:16 PM

Ad Hominem attack? Grow a pair, son. There is nothing ad hominem about my critique of your understanding. I'd recommend grabbing hold of another warn out buzz word.

If you knew a little more about finance, you'd understand that Moodys is responsible for issuing ratings on mortgage backed securities, CDOs, and CDSs.

Their inability to assign a correct risk rating on those instruments led institutional investors to believe they were investing in secure investments instead of highly risky assets.

If you are looking for cover, you always look to the democratic party.

Your idea that re-landscaping the mall or building new transit creates wealth shows what an idiot you are. If those activities create wealth, then whose wealth is it? What is the multiplying effect of that transaction?

Carl / February 1, 2009 11:00 PM

My criticism of your ad hominem attack was in response to your statement regarding news organizations, hence the preceding sentence.

I understand what Moody's principal business is. However, their mistakes rating investments does not discount the research that they conducted regarding government stimulus spending. If you would like to refute their research directly, please feel free.

If you don't believe that renovating public spaces or building transit creates wealth and positive economic effects, then I suggest you talk to the nearest urban planner about the effect streetscape improvement projects have on local economic activity.

I welcome civil debate on anything I or someone else writes, however, I don't believe it is appropriate to resort to calling someone an idiot when you don't even have the courage to sign your own name. Any other comments you have that are not directed towards the subject of the post will be deleted. Or perhaps I should just "grow a pair."

Good Luck / February 2, 2009 8:46 AM

Typical liberal mind. Welcome free speach until it disagrees, then stifle it.

See, I believe that you are just another person peddling intellectual dishonesty as original thought. I would say that the fact that Moody's core business rating business was so off the mark and disastrous in consequence for the investment industry and the American public in turn that it calls the firm's methodolgy into question and therefore any of their research into, should we say, junk status.

It is hillarious that you consider MSNBC a news organization. Propaganda, sure. News, not so much.

What did Matthews say? A tingle down his leg when Obama speaks? His job now is to make sure Obama succeeds? Real news?

Good Luck / February 2, 2009 8:52 AM

Here is a snippet from your New York Times (hardly an un-biased source like MSNBC), but even they connect the dots.

To Christopher Cox, the chairman of the Securities and Exchange Commission, the need for action was obvious in the spring of 2006.

His agency, which would later be criticized for a 2004 ruling that let banks pile up debt, had grown deeply concerned about lack of oversight of the nation's largest credit-rating agencies, like Standard & Poor's and Moody's Investors Service. Linchpins of the financial system, their ratings are vital to safeguarding investors by evaluating the risks of bonds and other debt. After the collapse of Enron and WorldCom, which had repeatedly been awarded favorable ratings, the agencies had agreed to meet voluntary standards.

But the S.E.C. concluded that those agreements were inadequate, so Mr. Cox urged Congress to give his agency oversight powers. ''Without additional legislative authority, the S.E.C. will not be able to regulate in a thoroughgoing way,'' he told the Senate banking committee at an April 2006 hearing.

The plan drew broad, bipartisan support on Capitol Hill. But executives at the credit-rating agencies soon began pressing Mr. Schumer and other allies in Congress to block the proposal or at least limit its reach, according to current and former employees.

''They knew Schumer would support them,'' said one former Moody's executive, who asked not to be named because he still works in the industry. ''He was their go-to guy,'' the executive said.

While the Manhattan-based agencies were not significant campaign donors to Mr. Schumer or the Senate campaign committee, their lobbyists and many of their clients were.

At that time, revenues for the agencies were skyrocketing. The housing market was robust, and Wall Street investment firms were paying the agencies to rate various mortgage-backed securities after first advising the firms -- and also collecting fees -- on how to package them to get high credit ratings.

It was an obvious conflict of interest, financial experts now say. Despite their high ratings, many of those securities, based on risky loans, would prove worthless, roiling markets and threatening financial institutions worldwide.

Good Luck / February 2, 2009 9:11 AM

You are reaching when you think that re-landscaping the national mall is going to contribute one iota to the local economic activity of Washington DC. Maybe a temporary spike for the contractor (politically connected, of course), but no real wealth building there.

It is even more rediculous that you are going to cite urban planners and the effect of a nice street scape to raising local economic activity.

How do consumers buy? Do they walk down the street and say to themselves "Oh my, what a nice sidewalk, I think I'll buy something in this store. Oh heavens, the tax rate is 11%! I think I'll save my money or go somewhere where I can get the same product cheaper"

You'll find a better way to generate wealth is to let people and companies keep more of the money they generate because the natural progression is to reinvest that money in something that will improve their utility.

It is that investment that creates an efficient multiplier effect, where government spending is inefficient and does not have the same multiplying effect because it takes funds from revenue generating entities in the form of taxes, which ultimately decreases the economic output of those entities.

Good Luck / February 5, 2009 10:08 AM

Nice lack of counterpoint. Its probably a good idea to stop passing yourself as a credible voice on this issue.

Oh wait, you could go work at MSNBC!

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