We heard from a kind reader who takes the logical step and asks “What’s next?”:
As you point out, EVERY thoughtful observer agrees the Paulson plan is misguided. This, and McCain’s poll numbers, suggest the conversation should now shift to the following issues:
1) Will the Paulson plan buy enough market confidence to get us to January 20 without need for a new plan?
2) What should the Obama administration do about the Paulson plan on January 20? Can the plan be transformed into something useful?
3) What else should the Obama administration do on January 20?
Here are our answers:
- No, the Paulson plan won’t get us through January 20. Why not? Because we expect the economic news between now and then to be horrible, and we expect the stock market will follow it down. House price declines are still accelerating. Ford’s sales dropped 35% year over year. Consumer credit is tightening, and consumers are already strapped. Unemployment is growing. Corporate profit margins are shrinking. The rest of the world is spiraling downward. Stocks are still expensive. Throw all that together, and we doubt the Paulson plan is going to fix anything in short order. And, if, after a month or two of the government spending hundreds of billions of dollars, the economy and markets are still declining, we think the American public will be screaming for more action.
- President Obama should immediately convert the Pauson plan into a bank recapitalization plan, in which the government stops buying crap assets and starts buying bank equity. He should also instantly force the banks to write down the value of their toxic trash, so private investors and bank customers don’t have to worry about getting sandbagged. For an explanation why, please see this post (or the writings of any of the HUNDREDS of bewildered economists pleading with Paulson to change his mind).
- President Obama should also immediately launch a new New Deal in which the government spends hundreds of billions on the nation’s infrastructure: broadband, wireless, alternative energy, bridges, roads, etc. (along with a boatload of alt energy tax credits and investment incentives). This fiscal stimulus will create jobs, move the country in line with other first-world nations (in terms of broadband, etc), fix decaying infrastructure, and stimulate the private sector to help move us beyond the foreign oil addiction.
No, this won’t fix the economy, housing market, or stock market instantly. But it will help. And it will set the country up for another sustainable long boom once we finally do work through this mess.