Wednesday, July 15, 2009

All that glitters is not Goldman

Goldman Sachs maintains its King o' the Hill status with its $3.4 B quarterly earnings report today. Hip hip hooray and good for them. (Note to self: be grateful that you are not VP, Corporate Communications, at Goldman.) Maybe the rest of the financial pack follows soon enough, and our banking system gets back on its feet and we focus our policy prescriptions on where we should have been focused all along: consumer spending.

From where I sit, the Obama recovery plan gets a C-, and risks being asked back to repeat freshman year if these leaders don't get their act together---fast. Remember the C+I+G=GDP formula from college Econ 101? What we've been missing all along is the "C" factor---consumer spending--by far the overwhelming component of gross domestic product and essential to recovery. It's not happening folks, which is why advertisers cut spending, the media biz is in the doldrums, and unemployment stats make all of us feel less and less likely to open our wallets again anytime soon.

What to do about this?

Well, for one thing, we don't need more highway projects, construction projects, and more spending on government programs that may or may not lead to new job creation or stem the loss of existing jobs. And we don't need to send bigger checks to the seniors (my dad reported on receiving an unexpected and unannounced supplemental SS deposit in his account recently).

The BobOnARoll plan: put money in people's pockets right now, conditioned on their spending it. Let's make a list: automobiles, dishwashers, fuel efficient furnaces, solar panels, home insulation; create your own list of durable goods. $10K credit per household, we'll send you a check. Let's get it on......


  1. Interesting remedy. What I have a hard time grasping is how to administer such a program. I can imagine the bureaucracy of qualifying:

    - What purchases qualify? For example, spend on only domestically made goods?
    - How do you distribute the money? Equally to all citizens?

    From a satisfaction perspective, it doesn't seem right to get money that wasn't earned through a wage (such as $ from a created job).

  2. Dear Bobconomist,
    please tell me how is it possible that the banks are still making billions of profits when 1) they are not giving out loans, 2) their share prices are at a all-time low and 3) the toxic assets are still around......
    Where is this money coming from? (well other than printing, but i cannot imagine the US treasury printing out billions of dollars already?)
    Perhaps i need to go back and study my econs again?

  3. Good thoughts, Kevin. Yes there are practical issues to confront--mu thought is that we work it as a direct income or social security tax rebate, a negative income tax for those households paying less than 10K in taxes. Everyone qualifies regardless of income.

    Moh, some of the bank profit we see comes from trading profit, not consumer loans, and in some cases we are seeing one time gains from investments that banks need to 'cash in' now in order to increase their capital reserves, per order of the Fed.

  4. Bob,
    my point exactly. Only Citi & BOA had their profits from sale of their assets. The other two media-proclaimed "big winners" have generated substantial trading/operating profits. Consumer loans non-withstanding, where are the other forms of biz coming from? Trading profits by definiton refers to returns after operating costs is subtracted. With a substantiaL reduced work force and the govt package (US tax payers' no less), surely there will be some returns.... The question is whether there's any real new money being generated or is it just a redefinition of loan ratios by the Feds hence the window dressing and good results. Perhaps Im overly sceptical, but as long as businesses are not picking up, corporate loans/credits are not being dished out and output continues to dwindle, with consumers holding back purchases, it's going to be a short-lived feel-good euphoria.... Okies back to my real day job for now....thankful to still have that, I digress.

  5. MOH, too bad you can't run for office over to be the BobOnARoll economics columnist?? :)