Economic Crisis Discussion Group

To see other readers’ comments, click on the questions below.

Discussion Questions:

1. Do you agree with the analysis by the authors of “The U.S. Economic Crisis: Root Causes and the Road to Recovery”? Explain why or why not.

 

2. Are there alternative causes of the economic crisis that have been overlooked?

 

3. What additional steps are needed by policymakers or others to facilitate recovery?

 

1. Do you agree with the analysis by the authors of “The U.S. Economic Crisis: Root Causes and the Road to Recovery”? Explain why or why not.

Although the authors of “The U.S. Economic Crisis: Root Causes and the Road to Recovery” paint a rather bleak picture of a long, slow emergence from the current economic conditions, I think they have laid out a compelling case.  I think in particular that our elected leaders must begin to focus on the need to manage and reduce future deficits rather than what appears to be the current focus of spending our way back to recovery.

William F. Ezzell

National Managing Partner—Legislative & Regulatory Relations

Deloitte LLP

The article is generally excellent and contains mostly logical discourse comparatively unfettered by political niceties, e.g. plainly stating that “The current fiscal stimulus package, despite some important components, may not be the best approach.”

Further, the authors “connect the dots” regarding economic drivers and their short- and long-term implications for our economy.

Curiously, though an unsupported “conclusion” to the article is that “Greater rates of taxation and lower spending… at the end of all this will be required once the economy has stabilized.”  The authors’ claim contradicts their earlier comment, “To rebuild the economic foundation for sustainable long-term growth, the U.S. economy needs higher levels of financial and real investment.” which comprises the private sector.  Also, greater taxation prevents the “…basic R&D, as well as high-margin service and manufacturing sectors because these will meet the needs of the global (and U.S.) economy.” identified by the authors.

Finally, the authors fail to explain how “Greater rates of taxation…” contribute to long-term economic viability.

Darrell D. Dorrell, CPA/ABV, MBA
Principal, FinancialForensics

I agree with several points in the article, but I do not think employment numbers will ever recover.  So many workers had unnecessary and non-productive jobs.  Employers are realizing they don’t need these people.  Computerization and other technology advances will allow companies to eliminate many positions forever.

Doug Stives, CPA

Professor of Accounting, Monmouth University

West Long Branch, NJ

The authors have used what seems to be the standard analysis as to the causes of the economic crises. But think more attention should have been focused on the politics of government spending that has greatly increased in the last eight years. Also an era of greed with many people believing that spending will not hurt them, although the writers do discuss the lack of savings by many people, rather than making investments should be factored. I realize this is an article written by economists, not political observers.

The comments about real investments sort of mirror what Tom Friedman has written in Hot, Flat, and Crowded.

Joe Marchbein, CPA

Jack P. Fitter, CPA APC

 

 

Good article. Says it well. The only thing I might suggest is that it did not cover the rating agencies conflict of interest in rating the banks and also selling the consulting services.

 

Bill Sipes, CPA/ABV/PFS/CFF

In general the article “The U.S. Economic Crisis: Root Causes and the Road to Recovery” is on track.The consumption of Americans has been excessive and the level of debt, both private and public is excessive.We are a nation of debtors instead of being a nation of creditors.While the author provides valid explanations regarding how America got to this point, I would like to add one more for readers to ponder.Returns on investments are too small.

Huge amounts of money have been invested in 401ks, and other retirement money.However, monetary policy is reduced the interest rate paid on these monies to almost nothing.Low interest rates and strong lobbying have created a situation where employees have almost no option but to invest in the money market accounts and the stock market.Companies and other debtors are able to borrow that money at rates close to 0%.Management doesn’t value the dollars borrowed because owners are almost giving it away.If interest rates were higher, management would have to be more diligent in their return on investment analysis.

If interest rates were higher, banks and other lending institutions could make a profit on their core business rather than becoming money brokers.The low interest rates contributed to the housing bubble because borrowers calculated their opportunity based upon their ability to make payments, not the value of the property.

 

George Tayar, CPA   

 

I am in agreement that the lack of responsibility of the American public and certain politicians has led to the current economic crisis.  Spend, spend, spend and pay later never works.

 Jason S. Inman, CPA, CIPM

I feel the author’s assessment of the situation is correct. Early in the article, they point to a consumption boom over the past two decades. This boom has been financed with credit card debt and the easy access to financing on home equity lines. This easy access to credit has fueled the unsustainable housing boom and resulted in the subsequent bust. They also touched to try by the government to grow home ownership with low financing rate.

William H. Luthy , CPA
Controller/CFO 
Las Vegas, NV

 

 

If it is thought that the increase in the ratio of consumption to income is the cause of economic downturn, the ratio should be improved not by decreasing consumption, but rather by increasing income.

The Consumer Price Index, U.S. City Average, all urban consumers, all items, was 215.834 for August, 2009.  This was an increase of 2.7% over the figure for December, 2008. Why is this called deflation?

There must be progress in alleviating the imbalance expressed by the often quoted statistic that the wealth of the bottom 95% does not exceed the wealth of the top 1% in the U.S. economy.  Handing more money over to the top 1% to “invest” only exasperates the situation.  Education is of key importance.

Finally, it would be very difficult to overestimate the detrimental effect to the United States economy from the costs of the invasion and occupation of Iraq.

Jim Unruh, CPA

Plantation, Fla.

 

I agree with your premises. Credit was made too easy and savings rates have decreased. Structured financial derivatives should not be allowed. Banks should encourage savings by raising interest savings rates. The government had a surplus during the Clinton Administration.

 

Alfred W. Sweenie, CPA

 

I do agree with the authors’ conclusions. I think it is important that we factor in a slower road to recovery than recent recessions. Americans have a short memory, so we need the media to help be a neutral voice in this process, rather than a cheerleader for the “highs and lows” that grab people’s short-term attention and reactions. I also believe that our road to recovery should not be on the backs of consumer spending. The largest segment of our population—baby boomers—are just now ending their accumulation phase and entering their “de-cluttering” stage, maybe this will be a natural method to reducing consumer spending. American ingenuity must now create a new market segment to replace consumer industry lost jobs. How many versions of shampoo do we really need?

 

Barbara Ray, CPA

CEO, Managing Member

Vantage Point Advisors, LLC

Salt Lake City, Utah

 

Gregory Brown and Christian Lundblad are correct in their assessment of the causes of the current economic crisis.  As they note, the problem is deeper than generally realized and relates to macroeconomic imbalances.  Increasing consumption fueled by cheap credit and decreasing savings have left households unable to react to job losses and lower income levels. 

The causes of the crisis often cited in the press tie in to the cheap credit and growing consumption.  Banks were willing to fund more mortgages when securitization allowed them to avoid interest rate risk associated with traditional long-term, fixed-rate mortgages.  Low interest rates provided by the Fed and the buying of U.S. government securities by foreign central banks meant it was difficult for investors to find high returns.  Many investors turned to increased leverage in order to find higher returns.  The government at all levels promoted increased rates of home ownership, and lending standards were lowered, at first gradually and then more rapidly as housing prices kept rising.  Both financial innovations and changes in regulation generated a larger role in mortgage markets for non-bank financial markets. 

Addressing moral hazard and the “too big to fail” policy are necessary to reestablish a healthy financial system.  This may include policies that stabilize financial markets, such as raising reserve requirements as a boom progresses.  A difficult policy area involves international markets. With the U.S. dollar acting as the reserve currency in the world, the U.S. will run trade deficits.  If exchange rates were free to fluctuate, the deficits would probably be relatively small.  But China, as well as Japan to a lesser extent, intervene in exchange markets and there is little the U.S. can do about it unilaterally.  The G-20 announced a plan that would include China and other countries promoting domestic consumption more, but there is not an enforcement mechanism in the plan.

A new book about financial crises [Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009)] states that the common theme in the large number of crises examined in the study, “…is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systematic risks than it seems during a boom.” This conclusion fits the recent boom, crisis and recession.  Long-term thinking on the part of government, business, and households is vital to economic health.  Sustainable growth cannot come from increased consumption and debt levels.   

John Lunn
Robert W. Haack Professor of Economics
Martha LaBarge
Assistant Professor of Accountancy
Hope College
Holland, MI

I believe the authors are correct in their conclusions, but that they do not go far enough.  The authors point out that consumption and spending levels were unsustainable thus leading to a crash.  This is correct.  However, they do not address the cause of the consumption and spending level increases. 

The increase in consumer debt and consumption was facilitated by an overabundant money supply.  For approximately two decades the interest rates in the United States were kept at a very low rate.  The Federal Reserve was focused inflation and stimulating growth.  The Fed succeeded in both areas.  The unintended consequence of the low cost money was too much growth.  It appears that the Fed believed that as long as inflation was kept in check, any growth rate was acceptable, even an unsustainable growth rate. 

I am not saying that the US Fed was solely to blame.  There was also a large carry trade between the United States and Japan.  The Japanese money rates were lower than in the United States.  Money was being borrowed in Japan and transferred to the United States for investment. 

The problem also goes beyond consumer behavior.  Firms that should have gone bankrupt were able to find financing to stay afloat.  Companies were also making unsustainable bets.  The use of short term borrowing to finance long term investments was, and still is, ill advised at best.  Interest rates change over time.  The idea of borrowing three or six month loans to finance a 20 year investment only works for three to six months.  If borrowing long term would have made the investment unprofitable, then the investment should not have been made.  Interest rates will increase and then the investment will turn unprofitable.  The myopic nature of United States business cannot continue. 

Robert Russ, CPA, PhD
Assistant Professor of Accountancy
Northern Kentucky University

 

It was somewhat refreshing to see this article place the blame on the appropriate institution responsible for this crisis, the government. It was also somewhat saddening to read its recommendations. This financial crisis would not be possible without artificial hampering with interest rates by the Federal Reserve. Many have blamed this crisis on the unregulated market, but a truly free-enterprise market would not have a few mathematical geniuses planning interest rates. As if the personnel at Bank A do not have the intellectual prowess to decide what interest they should charge when lending money to Bank B, or anyone else for that matter.

Due to the Fed’s low interest rates credit was flowing freely, and there was little incentive to save. If we had faith in the free market, we would give freedom to individuals and entities to decide what the monetary exchange rate should be—same as setting up a price for any commodity—without Greenspan, Bernanke looking over their shoulders deciding if they supply or demand an interest rate that is too high or too low. This, in return, would solve the issue of trivial saving and excessive overspending, because interest rates would adjust to their appropriate demand across different sectors. Higher interest rates would create incentives to save and spend less, and limit borrowing for capital based on artificial demand. Think of the housing market. Low interest rates caused the building industry to populate areas with many buildings due to artificial demand. Centrally-planned policy will always create artificial apparitions because no matter how intelligent these people are they can’t predict demands of millions of people, not mention that these people change their every so often.

The article states that, “We can perhaps continue to spend beyond our means a bit longer,” to solve the current problem. This is just a reiteration of the same policies that the government—specifically the Treasury and the Fed—is proposing. First they told us that overspending got us into this mess, and now they tell us that overspending will get us out of this mess. This is like killing a person by running him over with a car, and then trying to bring him back to life by reversing. We need to stop accepting these foolish policies and have more faith in a free market, unhampered by politicians. 

Mykola Kozak

Bayonne, N.J.

No, I don’t on many fronts.  The last thing we need is a tax increase.

The government should cut taxes at all levels.  If you look at the top corporate tax rate it is 35% in the U.S. and only 10% in Ireland.  We need to have a massive cut in taxes to stimulate economic growth.  We need to have massive cuts in government spending and pass the balanced budget amendment and a trailer bill requiring the national debt be paid off in 10-25 years.  Have a flexible paying off of the national debt depending on economic growth above 3%. Government should adopt a pay as you go system.  I agree that individually Americans need to save more, but we shouldn’t rely on the government to make individual Americans responsible.  The national debt is over 12 trillion dollars.

Richard Forscutt

The article was excellent and soundly addressed the issues, but I don’t believe it gave adequate attention to the diminished level of production in the U.S. as a cause of the crisis or to impacts of the trade imbalance on both creating and moderating the crisis.  The forecast for low inflation seems somewhat debatable.

“U.S. aggregate household consumption grew to represent more than 70% of gross domestic product (GDP), a historically and unsustainably high level ….”   “Excessive consumption was fueled by a loosening of lending standards …accompanied by record low savings rates.  Cheap credit from both home and abroad … also contributed.  In line with the private sector, the U.S. government also ran sizable budget deficits and a huge current account deficit.”  “Simply put, the U.S. economy, financed by excess credit, spent more than it earned.”

These quotes make excellent and accurate points, but note that the converse of the 70% consumption is that only 30% of the GDP represents production.  If production represents the value created by the U.S. economy, then proportionally little value is being added that can be traded with other countries.  This fits well with other observations, principally that for decades jobs and production have moved from the U.S. to other countries resulting in a large imbalance of trade.  In 2008 the U.S. trade deficit (goods) was $675.6 billion.  Total imports (goods) in 2008 were $2,100.4 billion.  Interestingly this is only 14.8% of the nominal U.S. GDP in 2008 of $14,2 trillon.  However, the movement of productive capacity off-shore over decades has undoubtedly been a significant driver of the current crisis.  As the article indicated, if viewed like a household, “the U.S economy … spent more than it earned”  in part because the earnings were also diminished, if earnings are considered in terms of the jobs and value-added functions moved off-shore.

What the economy ‘earned’ is being measured in terms of GDP, driven principally by consumption, whereas earnings for a country might be better measured in terms of value-added or production.  This might better measure output from the third party perspective of another country.  Said differently, while another country will consume U.S. valued-added products and services, other countries will not pay for U.S. domestic consumption.

In 2008, of the $675.6 billion trade deficit, $268 billion, 40%, was with China.  Much less significantly, but still of note, the trade deficit with Saudi Arabia in 2008 was $42.2 billion, or 6% of the total trade deficit.  These are of note as they help explain several things about the crisis.  First, supply-side economics is successive for suppliers to the U.S. as less-expensive goods sustain the U.S. standard of living and “over”-consumption.  Second, China and Saudi Arabia trade in U.S. dollars and so long as they do this, one of their few economically viable uses of the dollars received for their goods is to buy U.S. assets, e.g. government bonds, stocks, real estate, businesses, etc.  At the end of 2008, China was the largest holder of U.S. public debt at $727.4 billion, followed by Japan at $626.0 billion, and the Oil Exporters were listed as fourth by the U.S. Treasury at $187.2 billion.  ‘Reinvesting’ in the U.S. stabilizes the currency exchange between the respective countries, avoiding or deferring an exchange loss for the trading partners and avoiding or deferring inflation in the form of a further devaluation of the U.S. dollar.  Of course by selling its productive and other resources, the U.S. is sacrificing its long term economic viability, but the U.S. is obviously receiving the short term benefits of a sustained standard of living through excess-consumption, low interest rates to finance its government and consumer debt, mitigation of the crisis by sustaining demand for stocks and other assets, and mitigation of inflation via use of the U.S. dollars held by trading partners to buy assets and debt instead of chasing consumer goods.

“To rebuild…, the U.S. economy needs higher levels of financial and real investment.”  This is on point, but wouldn’t the investment only have a return if it leads to value creation?  Increased savings to fund retirement and other legacy costs, suggested by the article, would deal with the retirement and social security issue, but it also only addresses consumption during retirement years and will not put the economy back on a sound footing of value creation.  Consider whether the suggested investments would         not be better focused on increasing productive capacity in competitive fields.

“…The economy is likely to remain below potential output levels for some time.  Accordingly, we should expect inflation to remain low ….”  Monetarists define inflation as too many dollars chasing too few goods.  Through credit expansion and other means the U.S. government is increasing the money supply while not increasing already depressed domestic production, so will not more dollars be chasing fewer domestic goods?  The dollars may go overseas to chase foreign goods.  Normally if foreign suppliers received more dollars and they traded-in those dollars for their own currency, the U.S. dollar would devalue.  However, as noted above, since so many of the dollars are going to China, Japan and Saudi Arabia who are putting the dollars back into U.S. debt and U.S. assets, it seems the inflation that might otherwise be reflected by a devaluation of the U.S. dollar is being avoided or deferred.

The article suggested that to jump-start growth, “… a reduction in U.S. consumer demand … (and) foster(ing) export growth as opposed to relying on declines in import …” is necessary.  If foreign trade is having the impacts indicated above, then the article’s suggestion is again right on point, but perhaps the suggestion should be taken a bit further and should note that the suggested export growth probably can only be achieved through an investment in U.S. productive resources and a devaluation of the U.S. dollar. 

“The CBO forecasts that government debt held by the public will exceed 200% of GDP in several decades.”  “…it would be a shame to have much of the increase in government spending wasted as part of a turnaround effort that just leaves U.S. households in an even more precarious position. “  “Policies designed to avoid the pain of this transition will only exacerbate the eventual costs for future generations”, and I would add as well, for current generations as the current generations are suffering through this crisis and others likely to come given that the causes of this crisis are not remedied by the stimulus package.

The diminished productive capacity of the U.S. economy that resulted from the movement of jobs and facilities off-shore, under competitive pressures, is manifesting itself in this economic crisis and is a key driver in the U.S. consuming more than it earns.  While reinvestment of the dollars earned by trading partners into the U.S. economy is mitigating the current crisis and inflation, like the other factors noted in the article, in the longer term, is will cost the U.S.  Only by pursuing competitive advantages and reinvesting in productive capacity instead of stimuli of consumption will the U.S. economy have a hope of returning to long term prosperity.

Rod Gloss

Aurora, Colo.

 

The root cause was not consumption; that was a byproduct of an exuberant over confidence and positive long term view that the economy would continue to grow at a pace which was not sustainable.

Our economy is based on expectations financial well being: growth in assets, savings, security in jobs and retirement. We felt these expectations could be managed and for a while, the government maintained policies which enabled us to have an overly optimistic view. In pure valuation terms, the continued sustainable growth in our financial capacity blinded us to the systemic risks normally associated with an exuberant economy. All the signs were there:

• Run away home prices
• Exorbitant CEO salaries outrageous profitability in financial services
• A market gambling philosophy
• Financial planners and historical market growth assumptions
• Not understanding long term consequences of sending jobs abroad
• Out of control health care costs
• Collapse of immigration policies
• Indiscriminate and ineffective homeland security costs
• Rampant increase in all kinds of occupational, internet and identity fraud
• Auction rate securities market collapse

Dennis B. Kremer, CPA/ABV/CFF, CVA, CFE, FCPA

Katonah, New York

 

2. Are there alternative causes of the economic crisis that have been overlooked?

 

One great cause of the crisis was waste in companies and households, but primarily in government.  A majority of government employees enjoy high compensation with huge benefits and job security for doing very little to generate any economic benefit.  Many companies, mainly in the financial markets, still pay huge salaries and benefits to paper shufflers and non-productive employees.  This causes a false sense of security and drains profits and productivity across our economy.  While the securities markets and easy credit were rising non-stop, very few people cared that government was using tax revenues to pay for overpriced and useless projects.

Doug Stives, CPA

Professor of Accounting, Monmouth University

West Long Branch, NJ

First of all I must commend the writers of Oct/09 article to even tackle such a difficult subject. Their work is quite good. After reading the information in the article however I do not agree entirely with their analysis.

For one thing the time period of their causes seems to be skewed between 1982 and 2007. The root causes of this problem occurred I believe after the Second World War with the US providing full financial recourses to that conflict (Europe and Japan) as well as Korea and Vietnam. The US deficit build up from 1942 to 1982 has been a constant debt pain for the US to handle with available funding at the time. Also the article demonstrates no spending information as a result of the Iraq and Afghanistan Wars. The costs here are ongoing and a source of constant financial pain for the US taxpayer and current administration under President Obama.

In other words other causes and events certainly did contribute greatly to the economic crisis at hand in 2009. Never mind the” me” generation period in our history.

Sizable macroeconomic imbalances and foreign borrowing did contribute to consumer excesses in various markets so to correct it and return to long term growth is the million dollar question?

R. James Fisher, CA, ACIS, CPA

 

 

I feel we have had shift in values over the past two decades that stimulated the acquisition of personal property (ie: vehicles, electronics item and other luxury items) at the expense of saving. We have one of the lowest savings rates in the world! The constant demand for these products also created an unsustainable market environment, making a bust inevitable.

William H. Luthy , CPA
Controller/CFO 
Las Vegas, NV

 

 

Other causes of the crisis stem largely from the moving of away of the moral foundation that helped make the United States a great country.  It is hard to tell people to be responsible when they are taught that there are no absolute rights and wrongs.

Jason S. Inman, CPA, CIPM

 

 

Just read “The U.S. Economic Crisis:  Root Causes and the Road to Recovery” in the October JofA. And while I agree with the authors’ analysis, there is one important factor they left out. And that is, in order for many sectors of American business to regain health and rebound – especially the automotive and other troubled industries – they must restructure their employees’ pay and benefits scale. 

Due to the influence of unions over the past 100 years or so, the salaries and benefits of a large part of the American workforce have become unreasonable and unsustainable. For example, several months ago during the midst of GM’s financial crisis, I heard a radio interview of a carpenter who worked on the assembly line. This man had no education beyond a high school diploma, yet was making $100,000 a year plus benefits. Another example are grocery store clerks, who typically make $30+ an hour for standing in one spot all day and dragging items over a scanner, or perhaps stocking shelves. 

It is not my intention to demean these jobs or the people who perform them; all I am saying is that there are numerous jobs in the American economy whose pay, in relation to the education and skills necessary to perform the job (and in relation to the value of the job to society as a whole), is completely out of whack. Can anyone argue that it makes sense for an assembly line carpenter (who is a salaried wage earner and not a self-employed businessman) with a high school diploma to make as much as a doctor or an EMT, for example?

I realize I will probably be skewered for this opinion, but I think it is an ugly truth that no one wants to talk about. And we are going to have to face it sooner or later if we want to remain competitive globally. I also realize that to fix this will be long, arduous and painful. Generations have become accustomed to this kind of pay structure. And while we got by with it for many decades, it is coming back to bite us in a big way now that we are a global economy and find ourselves increasingly competing for products and services with China, India and others with much less inflated salary structures.

Michele De Good, CPA
Blair, Church & Flynn Consulting Engineers
Clovis, Calif.

 

Healthcare is a hot topic with very little popular understanding that the largest portion of our healthcare costs is directly related to our personal health habits, including obesity, smoking and drinking. So, while Americans go on a spending diet, they should also go on eating and exercise regimes that help us lower our overall health care costs. 

Barbara Ray, CPA

CEO, Managing Member

Vantage Point Advisors, LLC

Salt Lake City, Utah

 

Brown and Lundblad also note that a source of the cheap credit came from abroad.  This deserves a little more elaboration.  While the U.S. has run a balance of trade deficit for many years, the size of the deficit increased sharply beginning in the late 1990s.  As Exhibit 1 shows, net exports as a percent of GDP fluctuated between 0 and -2 percent for a number of years, but then approached -6 percent in early 2005.  The recession lowered the deficit as Americans cut back on consumption.

China and Japan hold extremely large quantities of American securities, particularly government bonds.  China in particular is pursuing an export-oriented growth policy, and maintains control of its exchange rate with the U.S. dollar to promote exports.  In order to maintain the exchange rate, China has to buy U.S. securities.  The increased demand for government bonds are part of the explanation for the low interest rates that prevailed in the last decade. 

John Lunn
Robert W. Haack Professor of Economics
Martha LaBarge
Assistant Professor of Accountancy
Hope College
Holland, MI

 

Causes: primary cause is greed! Caring nothing about what is right or wrong.

One of the most evident areas of that is the stock market. No longer value based—totally speculative.  Controls need to be put in place to curb uncovered options & derivatives-such as margin accounts must cover full value of stock, bond, etc.—so if you do not own the asset you can only gamble on the ups & downs if you lay out the full value. Until market goes back to value based what is the incentive to save—putting money there is the same as gambling!  Until you fix the stock market why would common people save, just to lose it there?

Depending on the government spending is very short term, since the government only gets its money from taxes. Letting companies fail that are not running profitably is the only effective way to move forward.  The good pieces of the failed businesses will be salvaged or purchased by businesses which use good business practices. There will be pain and job losses in the interim, but in the long run we will be better off!

Bruce Russell

Obermueller-Russell, Inc.

 

 

The current recession (great recession) was precipitated by the real estate bubble(or collapse).  A lot of people purchased homes that could not afford them. We have had heavily leveraged real estate and ultimately, the credit market has collapsed.  The huge national debt with many foreigners owning our debt (t-bills, e.g.) have made our national policy makers dependent on what foreigners want (e.g. the Chinese).  If the Chinese stop buying our debt, we are screwed. They have already said that they want a new national currency to replace the U.S. dollar. This is going to lead to a collapse of the dollar in the long run.  If the fed decides to print more dollars to pay back the Chinese and other foreigners in cheaper dollars, then inflation will sky-rocket. If the Fed decides to please the Chinese and other foreign investors by dramatically increasing interest rates, then unemployment will skyrocket and the recession will worsen.

Richard Forscutt

 

I agree with the points made by the article’s writers, but feel that the economic problem is larger and will be more difficult to solve.

Government’s bad tax policies and operation

• Reliance upon complex tax laws to raise revenue
  • Skillful citizens can evade taxes with little chance of being caught
  • Tax laws and related regulations are frequently changed
  • Citizens loss of confidence in the fairness of taxes
• Tax rates to high for economy
  • Numerous advertisements reporting substantial reduction of taxes owed
• Substantial unfunded government liabilities and inability to correctcorruption of public officials
  • Chairman of house and ways committee tax problems
  • Treasury secretary not paying self employment tax until asked to be treasury secretary
  • Inability of government to timely resolve problems such as Social Security disability applications.

 

Attractive foreign economic locations

• American citizens benefitting from attractive product import pricing
  • Chinese fixed currency in relation to dollar
  • Foreign labor costs low in comparison to American labor
  • Movement of American manufacturers and related knowledge to foreign locations

 

Transition of American economy producing tangible products to intangible products

• Numerous employees make transfer at lower wage
• Complex product and services require trained employees, which are difficult to create

 

Disintegration of family units

• Increased number of children born out of wedlock
• Numerous changes of household arrangements for children
• Single parents raising children and working
• Children leaving school before education completed and with no economic skills

 

Ineffectiveness of education

• Parents viewed as not being supportive of teachers
• Teachers required to teach and be police the classroom
• Teachers required to devote time to social issues at the cost of teaching knowledge

 

Increase in criminal sentences resulting in increased prison populations and increased resources to support the prison population

Resources used to support soft services and not beneficial products and services

• Compliance with increasingly complex laws
• Resolution of disputes between various parties

 

Nicholas S. Porter

 

 

I believe we all knew the current economic “crisis” was coming; it was just a question as to when. Greed, without a proper regulatory structure, will always go further than it should.

The markets responded by correcting itself, which was expected. Perhaps that correction was delayed and indeed amplified by the derivative markets, but still the correction occurred.

The markets were over valued in terms of housing and corporate stock prices. This was due to the fact that individuals and institutions had “an irrational over exuberance” in the markets. They thought the prices would continue to rise.

The corporations had over capacity in many cases, and downsizing, mergers, and bankruptcies were bound to follow, with the resulting effect of give backs, layoffs and high unemployment. After this however, the corporations should become more efficient and return to profitability, given adequate demand.

When the masses lose faith in a system, it is replaced by market uncertainty and its resulting effect. This is true whether it’s a socio, politico, or economic system.Fortunately, the governments recognized, (when the banks wouldn’t lend to themselves), the severity of the situation and infused massive amounts of capital and guarantees into the system to keep capitalism afloat. It is also a good example as to the value of faith or lack of, with at least a few trillion dollars lost in market revaluations.

The REALITY was that people were enjoying their new homes and cars and vacations and dinners out, for these things were “priceless”. And the REALITY was that our economy was able to provide those goods and services, on demand.

With the new global economy, and counties like India and China with a pent up demand for products (hopefully for electric cars), I am rather optimistic about the future. People want to work, companies want to build and serve, and consumption is a part of our human nature. We need a system which will accommodate that global production, distribution and consumption process.

The world’s nations have various economic systems in place, from free market to totally planned economies. The trick of course, is that you want a system that will facilitate and not retard the global economic flow. The world is evolving into one general economic system, which brings on a new interdependence and hopefully cooperation from all nations for mankind’s mutual benefit.

We have the Earth, which is a renewable resource. We of course have to REPLENISH it. There is enough work to go around for anybody who would like to get involved, from building to repairing and maintaining infrastructures, replenishing our good Earth, shifting people and resources to the “graying” of our society situation, exploring and applying our new scientific breakthroughs, to whatever the reader can imagine.

So what do we need? We have People (labor), we have Earth (land), and I believe we share a universal dream of creating a peaceful paradise here on Earth for us and our generations to enjoy.

If the accountants can maintain the high professional standards demanded of them, then I think the accounting information system, given its limitations, can handle our new global society’s informational needs.

The question is can a world wide economic structure, given that information, be able to manage the land and labor, which is required to produce and distribute, the goods and services, needed by the Earth and its People?

I believe it can if we’re able adopt a cooperative community concept, similar to when mankind formed tribes for the mutual benefit of its members, and took a giant step towards humanity and civilization in so doing.

Patrick Wirtz, CPA
Associate Professor, University of Detroit Mercy

 

3. What additional steps are needed by policymakers or others to facilitate recovery?

 

The critical question is whether Congress is willing to put the long-term health of our economy ahead of short-term political expediency.  The existing problems can be solved, but it will require a focus on what’s best for the nation as a whole, not on which special interest group has the most effective PR campaign.   

Ron Heller
Honolulu, Hawaii

Cut spending.  Although it will be difficult and unpopular, the truth is that programs like social security need total revamping. For example, workers can start social security at age 66 regardless of how much they earn. This age needs to be pushed above age 70.  Another step, which may sound irrelevant, is to impose term limits in Congress. This would slow down the huge amount of waste and fraud that career politicians have created.

  

Doug Stives, CPA

Professor of Accounting, Monmouth University

West Long Branch, NJ

Bailouts of businesses were not a necessity, and I believe that the bailouts damaged the recovery by wasting money.  Example is GM money dumped in and then filed bankruptcy.  Let them fail and the bailout money would not have been lost.  Even though they own some of the new company, it will be a long, long time before any money is realized if ever.

Inflation will likely be driven by the supply of money being printed and it is more likely that we will have very high inflation occurring within the next 6-20 months.

The federal government has spent or committed way too much money for bad stimulants and will not have money to try other alternatives.  The budget deficit will curtail any recovery for years to come.

Government consumption does not drive an economic recovery, it is private business spending that will drive economic recovery.  This is not aided by increased taxes but curtails business spending in anticipation of loss of cash flow, moving operations to overseas locations, not hiring people but working staff harder and longer, and creating and atmosphere of government distrust with leads to holding back expansion plans. 

Increasing tax rates has lead to less money collected by the government.  Tax cuts spur spending and expansion. 

Eulan Tucker

We could argue all day as to whether higher taxes are the answer to curbing the deficit. This point of view depends if one is a liberal or a conservative. Also will the public and politicians truly go for reduced  government spending when we look back and see what has happened when we look at the 1981- 2009 period. Is the past  prologue to the future?

We need leaders who are plain talking and not overly concerned with getting reelected.

Finally, we need leaders who quit shouting at each other and listen and work together. We do not need the Rush Limbaughs of America shouting and pushing one agenda and deriding those who disagree with them. Sorry if the latter seems to be a political remark.

Joe Marchbein, CPA

Jack P. Fitter, CPA APC

 

I believe that policy makers must look at the past to gain a perspective on what is needed in the future. For instance from 1929 to 1945, the U.S. accepted a lower standard of living in order to sacrifice and recover from the Depression of 1929 and the war effort.

The word sacrifice is the key. Who is willing to work for less, take less out of the economy and save (give more) for the future of the younger generation and the one that is not born yet?

Looking at the financial events of 2008/09, all one sees is high wages, corporate fraud and government overspending. What may be needed are stricter corporate laws to reign in financial acts that harm the financial market systems. The best policing of the U.S. economy must come from within the present structure. Thinking of only oneself and ignoring the rest of the world will not solve the crisis. The U.S. is dealing with a world economy and not just a domestic one. The rules and procedures are different and dangerous.

For instance, providing government assistance to bail out the auto industry may be a good thing domestically, but if the auto industries are using U.S. taxpayer funds to assist foreign markets/operations, this has to be balanced with a return to the U.S. taxpayer. The control over this is difficult, if not mind boggling. There are many other instances as well.

I truly believe that the concept of the “balanced budget” for everyone cannot be ignored any longer. Running up personal, corporate and government debts can only be solved with a return to the balanced budget method. It’s an old concept that has been ignored and or misused. Various U.S. state governments have tried and failed. It is not easy to achieve but it may prove to be the one sacrifice that pays off.

If the U.S. can reign in the horns of excesses and stop the debt bleeding (bankruptcies and foreclosures) with sound financial methods and systems the results for all of us in the future will be amazing. It really is just hard work and paying attention to financial and economic disciplines that are currently available. It appears to be time to take control of all of the economy and not let it control us.

         

My two cents!

R. James Fisher, CA, ACIS, CPA

 

I think the stimulus packages have had some short term benefit but will not help in the long haul. We need to have meaningful public projects that help the country’s intra-structure (transportation improvements and modernizations) with a limited life span so the costs are fixed and determinable. We will still have homeless people and people who live in homes they don’t own. Not everyone is geared to home ownership.

William H. Luthy , CPA
Controller/CFO 
Las Vegas, NV

Policymakers and others need to start by having a better educated public.  The AICPA course on financial literacy should be MANDATORY high school curriculum.  Next allowing our Judeo-Christian heritage back in the classroom will set a moral ground in which we can work from to establish justice and eliminate the need for excessive and costly regulation which never seems to work.

Jason S. Inman, CPA, CIPM

 

Most if not all of the current stimulus plans punish everyone, even those who have avoided the overindulgences that precipitated the crisis. Behavioral psychologists determined long ago that rewarding good behavior is a much stronger incentive than punishing bad. Yet we don’t tend to reward people for saving for retirement, pursuing a healthy lifestyle, paying their debts and adopting similar positive habits. Instead, we punish them by burdening them with higher taxes to pay for bank bailouts, Medicare, etc.

Barbara Ray, CPA

CEO, Managing Member

Vantage Point Advisors, LLC

Salt Lake City, Utah

 

The causes of the crisis often cited in the press tie in to the cheap credit and growing consumption.  Banks were willing to fund more mortgages when securitization allowed them to avoid interest rate risk associated with traditional long-term, fixed-rate mortgages.  Low interest rates provided by the Fed and the buying of U.S. government securities by foreign central banks meant it was difficult for investors to find high returns.  Many investors turned to increased leverage in order to find higher returns.  The government at all levels promoted increased rates of home ownership, and lending standards were lowered, at first gradually and then more rapidly as housing prices kept rising.  Both financial innovations and changes in regulation generated a larger role in mortgage markets for non-bank financial markets. 

Addressing moral hazard and the “too big to fail” policy are necessary to reestablish a healthy financial system.  This may include policies that stabilize financial markets, such as raising reserve requirements as a boom progresses.  A difficult policy area involves international markets. With the U.S. dollar acting as the reserve currency in the world, the U.S. will run trade deficits.  If exchange rates were free to fluctuate, the deficits would probably be relatively small.  But China, as well as Japan to a lesser extent, intervene in exchange markets and there is little the U.S. can do about it unilaterally.  The G-20 announced a plan that would include China and other countries promoting domestic consumption more, but there is not an enforcement mechanism in the plan.

A new book about financial crises [Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009)] states that the common theme in the large number of crises examined in the study, “…is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systematic risks than it seems during a boom.” This conclusion fits the recent boom, crisis and recession.  Long-term thinking on the part of government, business, and households is vital to economic health.  Sustainable growth cannot come from increased consumption and debt levels.   

John Lunn
Robert W. Haack Professor of Economics
Martha LaBarge
Assistant Professor of Accountancy
Hope College
Holland, MI

 

The government needs to cut taxes, cut spending, balance the budget, and pay off the national debt.  Americans need to save more, spend less, and rely less on the government in the future.

Richard Forscutt

 

 

Recessions are “bad”. They are the “hangovers” after the excesses of too much growth at too fast a pace.  But aren’t recessions really just corrections before the next surge? Currently, human nature is such that we naturally vacillate between fear and greed. Until we can control ourselves, there is no hope of controlling others and thus controlling the economy. Policymakers should abandon trying to “facilitate a recovery.” Regarding this current recession, the only ones to blame are those who tried to tamper with the system to serve their own agendas. I believe the blame lies in the greed of several groups:

1. The politicians, starting with the Clinton administration in the 1990’s and then the Bush administration thereafter, urged banks to ease their lending requirements (no more 20-25% down payments and adjustable rate mortgages were popularized) so that many more people could “afford” to buy homes.
2. Bankers and mortgage brokers who got paid commissions for originating loans and then selling them as investments to people all over the world.
3. People who could not afford to buy homes getting mortgages or refinancing for close to 100% of the value of their homes under the theory that home prices ALWAYS go up.

Theoretically, the government, elected to represent the interests of its constituents, should have known that free meals are not really free.  However, when you have a democratic system where politicians get elected by a majority, who pay no income taxes but want to be taken care of, why not give them what they ask for—affordable health care, energy, and unions that guarantee job security. There will always be rich people to soak.

But who created the wealth that made America the economic envy of the world?  Entrepreneurs that came up with ideas that made life better for others—Bill Gates, Sam Walton, Sergei Brin and Larry Page (the Google guys) profited tremendously.  Nobody coerced IBM to purchase DOS, consumers to buy more cheaply at Walmart or Web surfers to use Google to search the internet.  That’s the moral basis of capitalism—in the process of providing for themselves, people generate the capital and innovations that yield economic growth, improving living standards and enabling society to advance.

The Government’s job should be to act as referee—make sure thieves (Enron, Bernie Madoff) are prosecuted, ensure respect for property rights, keep a stable currency and do it all for a cheap price (i.e. low taxes). Unfortunately, politicians, not content to play referee, want to be part of the game because they see all the money and power being amassed in the private sector and succumb to their greed.

A free market works.  When any large player (corporation, government) tries to “steer” the market, then by definition, it is no longer free. When we humans evolve to the point where we no longer “need more,” then we can hope to control our economy.  In the meantime, capitalism is the most moral system and we should accept the bad weather as well as the good.

In the article, the charts are instructive and may support the real root causes but they could be more meaningful.  Exhibit 2, Household Debt, should be measured as a percent of total household equity (the traditional debt to equity ratio used for businesses). However, I suspect that the conclusion would be the same—too much debt.

 

Glen Malings

Syosset, NY

 

What needs to be considered in the economic discussions going on is the impact of what Paul Samuelson called the “foreign trade multiplier.” The implications of stimulus will be minimal if all we are doing is stimulating the purchase of goods made overseas without a corresponding increase of sales of products made at home.

Similarly there is a price to be paid for stifling regulations such as fuel efficiency, “open space” and the like.

It is appropriate for all countries including our own to pursue moderate economic nationalism.Each country after all is seeking to employ all of its people with the least amount of inflation.

What are the solutions? I would propose these:

1. Government should by antitrust measures prevent waste of financial resources on mergers and acquisitions.
2. Tax profits made from purely speculative enterprises those in which no real wealth is created.
3. Since the article proposes a tax on consumption why not consider a protective tariff against countries that import only foodstuffs and raw materials from us?
4. Eliminate anti-growth regulations growing out of “global warming,” “climate change” or the like.
5. Return as soon as possible the auto industry to private hands—preferably to U.S. ownership.

Obviously what I have offered here is an oversimplification. But what is important is that we correctly identify the problem and move in the right direction. Incidentally I believe that the best form of distribution of wealth is to increase the rate of productive participation. The answer is not increasing government spending, government taxation but rather real growth and full diversified employment.

Frank P. Bannon, CPA