Friday, November 21, 2008

Is Spending Our Way Out of Recession Right?

I saw this article written by jeflin and have been wondering if spending our way out of recession is the right thing to do.

Taking on more debts to put money into the hands of consumers and businesses, in the hope of reviving the economy may be hard to comprehend for some, isn't America in a glory shit hole because of all the debts amassed. What if it cannot service its interest obligations or other countries like China and Japan have had enough and start dumping their Treasury notes?

Granted, debts is what got us into the current mess. Everybody has huge debts from nations, corporations down to the individuals. It is scary that US debts was less than 50 trillion dollars in 2005 and today has ballooned to twice the amount because of all the bailout.

Consumers are also burdened with huge debts in the form of credit cards, auto loans and the ultimate killer, mortgage loans. Coupled with unscrupulous mortgage brokers and investment banks, all these debts are packaged into CDOs and sold to unsuspecting investors.

The housing crisis has caused a lot of houses to be underwater (ie. valuation worth less than the mortgages) and could bring about a wave of foreclosures as owners walk away with little more than a bankruptcy name but leaving banks to abosrb the losses.

But sadly, almost all weapons in the Federal Reserve have been exhausted. It is a path not without danger, to raise more debts in a stimulus package, but the cost of inaction by doing nothing could be far worse. We are a few whiskers away from the Great Depression 2.

The way things have panned out in the stock markets and global economy, the recession is likely to get worse if left unchecked. Already, there are heavy retrenchments going on, Citigroup announced 52000 layoffs, a record number of job loss in recent times. This will shrink Citigroup's work force by 15 percent, and are in addition to 23,000 jobs eliminated between January and September.

I can't blame Citigroup. They hope to slash expenses by as much as 20 percent and having lost $20.3 billion in the past year, it is not expected to return to profitability until 2010. In fact, with Citigroup's stock value plunging, there is a strong possibility of a sale of all or parts of the company.

The situation is likely to get worse before it gets better. I am in support of the stimulus package and spending our way out of recession. Too bad, that we did not accumulate reserves during the fat years and now when we really open up our wallets and spend, we should not shy away and start to hoard money.

Get our finances in order and cut down debts when times are good, not in times of recession.