During this week's class we began to explore financial institutions and markets. We learned about the US monetary system, the role of the Federal Reserve, and the dangers of inflation.
We began a healthy debate about the structure of the US currency and left room for debate about the notion of re-adopting the gold standard. I believe that we still have much to say on this topic. Feel free to explore it here.
On one thing we will agree, however. Our firms, households and governments are very leveraged. We see in the national debate that our country is at last owning up to the notion that spending, debt, and deficits have gotten out of control. But what is the answer? Some say we start with the idea of "austerity."
What do you think?
MSBA511 - Applied Financial Management, exploring our vocations in business with a vision of service to God and community.
I just spent an hour writing out a huge comment and rant and it said it was "unable to process my request". Here is all that is left of my rant:
ReplyDeleteLoans like these were bundled together and sold as investments to MANY large companies. So for a while, companies had the illusion that they were making money on their investments in the mortgage backed securities market and since loans were handed out like candy, it looked like everything was booming. So when finally most of these people defaulted on their loans, those mortgage backed securities weren't worth very much. So that is partially if not mostly why so many companies freaked out. They had invested largely into BAD LOANS and there was essentially just no money to back up anything...but there were houses. Houses that lost value. So essentially, if loans were not made so recklessly, a lot of these companies that needed bail-outs may not have been in much financial trouble.
So I would say that it is unfair to blame the wall-streeters for companies needing bail-outs. If certain programs realized and recognized the riskiness of loans, then perhaps everything would not have crashed down so devastatingly.
Again, this is not to say that risky loans shouldn't be made. BBB loans should not be made, bundled with other BB loans, then sold as an AAA bundle. So I know this is off topic and a bit of a rant, but austerity is a small part of what might help lower the national debt. However, we should approach it with knowledge rather than quickly slashing great programs.
I will have to continue this post when it is not 1 am.
I do not know if anyone else watched President Obama give the State of the Union but decreasing federal spending was a big part of his speech. I believe that this country in general, whether it be government, corporations or people on an individual level, have gotten used to spending more money than they have, many times because they can get away with it. The majority of society does not live within their means. This relates back to the concept of “keeping up with the Jones’” that was mentioned in one of the first articles we read for Spirit of Entreprise. People want what others have: the luxury car, the huge house, the dress their favorite artist wore, when they do not necessarily have the funds to do so. We live in a very materialistic society, and when I say this I am generalizing. Therefore, I believe part of the problem is society’s mindset regarding the matter. In other countries they are so hesitant to give loans and the people are hesitant to take them. This creates a society in which people only go to college if they have enough money in their savings to pay the tuition or they only buy a car if they can pay it in full. The major problem with this is that it creates, in my opinion, a bigger gap between the rich and the poor.
ReplyDeleteThis video reminded me of the Latin American Debt Crisis. So many Latin American countries were in debt, and had a horrible income distribution problem, so financial institutions gave them loans to help them get out of the debt. The government officials did not extend these loans to the people, but instead used them to make itself richer. This created even greater inequality and more debt. In order to fix the problem, the financial institutions gave the countries more loans, however, these new loans had provisions attached to them. The provisions mostly dealt with social matters. This helped solve the problem.
Now, although, austerity is very important, I agree with Amelia that it is not the only thing that needs to be done. As seen in the Latin American Debt crisis example, how many is spent can have a huge effect on the outcome. Therefore, the country needs to not only cut spending in certain areas but reallocate funds so that the money is used more efficiently and in a way that will hopefully be beneficial to the economy.
Here is the first part of my post that got deleted last night: Firstly, I have mixed feelings about austerity. I think there are plenty of gov’t programs being paid for by tax payers that are inefficient, ineffective, and not used to their potential. The gov’t should delve further into these programs and get rid of the ones that do not work and are sucking up tax payer’s money and put more money into the ones that are effective. Although it would be costly to find out which programs are not effective, it may be a worthy investment for the long-run to avoid paying certain taxes for ineffective and perhaps detrimental programs.
ReplyDeleteAlthough I do not think austerity is the sole answer, I do know that printing more money is not the answer (http://online.wsj.com/article/SB122973431525523215.html). Although we will probably not end up like Zimbabwe (http://news.bbc.co.uk/2/hi/business/4765187.stm), inflation is a dangerous illusion of wealth that will surely be caused if the Fed Res prints more money. However, our government spending IS out of control and we have an insane debt. Our current debt owed by citizens is ~14 trillion and our total national debt is about 55 trillion (http://www.usdebtclock.org/). 1 trillion dollars could buy one 3 dollar latte every day for 900 million years, it is Australia’s GDP, it could buy up all of the stocks traded in Toronto—that’s just ONE trillion. How does the gov’t expect to pay back that debt? Taxes, duh. I’m not against taxes, but I’m against paying for programs that are ineffective.
Second part: I think the video fails to point out that wealthy people pay A LOT of taxes for these programs. Example, my friend made 80K his first year at an I- banking job. He was taxed at 42%. This means he saw 46.4K of it. The median among medians of household incomes (by state) is ~51.7K (http://www.census.gov/hhes/www/income/data/statistics/index.html). It is also unfair to “blame the rich people” for big companies even needing bail-outs as the video suggests since that does not seem to be true.
ReplyDeletePrograms like Freddie Mac and Fannie Mae, whose mission is to provide affordable financing so that more people can own homes, started granting loans that could not be paid back. Example, my friend Steve Berherdt who has been in mortgage backed securities for 30+ years told me it got so bad that he has seen someone who works part-time at McDonalds get a loan for $100,000 with only $900 as a down payment. This means, the McD’s employee paid $900 up front to show that he could pay a 100K loan (+interest) when his income clearly cannot support this loan. This would be considered a risky loan labeled BB. When these types of loans were bundled and sold, they would be labeled as AAA to investors (many BB securities DO NOT equal 1 AAA securities)… [PLEASE REFER TO FIRST POST for continued rant]
The concept of austerity is something that hits home for me...quite literally. My home state of NJ has been struggling for the past few years with a ballooning debt. Governor Christie is appeasing the issue by cutting funding to valuable programs, such as schools. The school system should be the LAST arena for budget cuts. Schools have closed, class sizes have increased, enrichment programs have been cut and, oh yeah, teachers' salaries have remained stagnant despite the increase in workload. The future of NJ students is bleak. No wonder so many end up on reality shows...
ReplyDeleteAside from schools, other non-profits, such as hospitals, VAs and community organizations have suffered. I worked for a non-profit called NewBridge Services and personally felt the effects of austerity. NewBridge is able to function due to federal and state funding, grants and donations. State funding was severely cut which caused a decrease in programs, which are heavily relied upon by community members. Those people who could not get the treatment they needed to survive suffered.
Besides programs offered by NewBridge, salaries, which had not increased for two years, remained the same and people were laid off. Morale was low...Really low. Each day, employees feared that their job was the next to be terminated. That fear persists.
As the video suggests, austerity hurts the bottom 40% of the income scale the hardest--and it is those people who can least afford it. Why is the burden placed on the shoulders of people like teachers (my Dad), principals (my Mom) and employees who are providing services that others are not (me)? I didn't swipe the nation and state's credit card.
The answer could be increased taxes, which, generally unpopular, would help. I don't agree with President Obama's decision to extend the Bush-era tax cuts. That is just another way that people on the lower end get burned.
Is there an answer to how to reduce debt? I'm not sure there's one, but austerity on its own can have detrimental effects on society. Remember Spain and Greece? That could be us if things remain the same.
Austerity in the form of increased taxation is not an option. The tax situation in this country is like the frog boiling in water to death. The ancient Romans were preparing to revolt when their government reached the all time high tax rate of 10%!
ReplyDeleteI come from a family tradition and lifestyle that does not choose the programs and services provided by the government, because they are not the quality we need. To me, it is just as well that taxes be lowered and programs are slashed, because I do not use the programs anyway. While there is use for some of these programs for other people, many private companies show more efficient ways of addressing the same needs, and, with better results. I prefer a lifestyle where I am able to choose my own way of living such as with regards to choices of education, healthcare, etc., instead of the government choosing for me, because as an educated person, I believe I am able to make better decisions for my individual needs than the government is able to do for me. While I understand I have to help through taxes those who are not able to take care of themselves, the tax rate is still too high.
Since the government is in an unfathomable amount of debt, and given most people who pay taxes are hurting financially already, and since taxes are already too high, increasing taxes is not an option. The government’s record, the little that we are able to see and is even auditable that is, shows they are not able to stay within a budget by already having the ridiculously high tax-income that it receives now, so there is no reason to believe the government can significantly reduce the debt through an increase in taxes. Most people have greater liabilities than assets, and just because living with debt has become a norm, does not mean it should be a norm. So, most people are not in a financial situation to receive greater taxes. Therefore, the good that would come from raising taxes is far outweighed by the negative drawbacks, as the people will really feel it. The government has already abused its right to claim greater taxes.
To support why increasing taxes is not an option, and why, decreasing taxes is needed, I’ll let a founding father, Thomas Paine, and, a great president, Ronald Reagan, give their views on taxes: "What at first was plunder assumed the softer name of revenue." - Thomas Paine "If, from the more wretched parts of the old world, we look at those which are in an advanced stage of improvement, we still find the greedy hand of government thrusting itself into every corner and crevice of industry, and grasping the spoil of the multitude. Invention is continually exercised, to furnish new pretenses for revenues and taxation. It watches prosperity as its prey and permits none to escape without tribute. " - Thomas Paine "The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." - Ronald Reagan "Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other. " - Ronald Reagan "The taxpayer - that's someone who works for the federal government but doesn't have to take the civil service examination." - Ronald Reagan
When it comes to politics, especially my pocketbook, you could say I am more than conservative. Actually, I would more than likely disagree with any form of unnecessary funding for programs such as welfare (it’s not my responsibility to pay for you because you choose not to get a job) and/or high taxes. Yes… taxes allow our country to survive without taxes we would have no roads, no schools etc. Yet, as Amelia pointed out, taxes --at least substantial ones-- are ALWAYS paid by the rich. My mom told me once for every dollar she makes she has to pay the Federal Government two! Last time I checked, the feds weren’t at my mom’s office working 18 hours a day. Nonetheless, the financial crisis which not only currently impacts the U.S., but also the PIGS (Portugal, Ireland, Greece and Spain) countries, remain evident and… it is a problem we have to address.
ReplyDeleteI don’t think taxes need to be raised anymore
than they already are. Let me rephrase this. I would not like taxes to be raised again. Maybe a raise in taxes would actually help the U.S. economy, but I don’t want to pay them. Who does? Yeah yeah yeah… we know the benefits BUT it’s no fun seeing all that cash taken out of your paycheck. In response services, I don’t want to be paying for ineffective services either. Most of the services in the U.S. are ineffective (in my opinion). Look at welfare, food stamps, education, anyone remember No Child Left Behind?! I’m currently working with Microsoft for our Field Team Study class and Microsoft is attempting to form relations with the U.S. government that is both TRANSPARENT and ACCOUNTABLE. Perhaps, if I got a detailed report of where my money was going or what service my money is aiding, I would be less strict with my wallet.
Austerity programs historically, have been implemented by countries that were previously under dictatorial regimes. We can’t come up with a better government measure to reduce the federal deficit? Clearly not, we are just following suit. And look at Greece last year! Citizens faced cuts to pensions, public services and education spending because of government austerity measures.
ReplyDeleteI totally agree with Amelia’s comment that there are too many government programs being paid for by tax payers that are inefficient, ineffective, and not used to their potential. Everyone’s so worried these days about being politically correct, that they’re over-exerting efforts. But I don’t understand why there has to be an ultimatum… increase taxes or slash services… and that’s what austerity does.
I think welfare and public services are crucial to social progression, but they need to be rethought. My best friend from home, (RI) for example is a struggling college student, like me, who attends school full time, student teaches, and has two part time jobs. Her parents would never allow her to go hungry, and even though she may have to cut a few pedicures out of her monthly budget to buy her own food, she could! She qualifies for food stamps, and uses them! I see a problem with this. I know we can argue about this saying that she should choose not to use the food stamps… but that is for a different blog. Because the economy is so bad right now, too many people have the same mentality as my friend—the government says I qualify, so I can get a break here and save some money if I take them up on the offer. THE GOVERNMENT SHOULDN’T OFFER IT! Regulations need to be checked so that the programs, that we all pay for, are efficient and effective.
Side note… Meredith, I’m with you 100%... RI is a mess too! Jobs are being subcontracted out along with wage cuts and medical costs tripling. RI is leading the way in the “Race to the Bottom”.
I believe Sara makes a critical point with the reallocation of funds. I think we have all agreed that the solution shouldn't be found with raising taxes, but with deciding where these funds go. Education is all over our country and probably hard for the central government to keep track of. Yet, education is what is fueling our economy and should have the most attention. I was talking with Meredith earlier at how sad it was that the people who are affecting the future of our country get paid so much lesser than people who entertain us. What will help this economy is education and awareness and not being ignorant of past experiences. If more funds are spent towards educations, there might be less of a need for other government services. More people will gain more knowledge that will help them make better decisions when it comes to lifestyle and spending. Ignorance is wide-spread and causes a lot of problems in today's society. I feel that in order to gain the public's trust, government focuses on little problems without trying to see the problem in a big picture.
ReplyDeleteFirstly, kudos to the film. It was engaging, clear and concise. A major feat for any instructional piece or lecture. I find myself agreeing with Professor Blyth. I worry about this knee-jerk, excessive, pro- cut government spending sentiment. Now, I must admit, I've almost always looked at this issue through a political lens (not an economic one), so I often associate this topic with the left vs. right heated political debate. But as I delve deeper into the economic debate, I think Blyth makes a sound argument. He cites the fallacy of composition and I think this counters the whole "common sense" attitude toward cutting government spending; and quite well actually. This is not so say that we should keep spending - because obviously we have a huge deficit and we need lower it - but I think we need to cast a very wide net when looking towards solving this problem. I'm no economist, I don't know what is best.
ReplyDeleteWe can recall President Bill Clinton's administration, which was hailed for economic prowess, although there is debate about how much of the 1990s prosperity should be given to him and how much of it should be given to the Internet boon. President George W. Bush was supposedly supposed to be the conservative figure for the new millennium, and yet he is assailed for his out of control spending (although he is the namesake of the so-called "Bush tax cuts" which are popular among the conservatives). And now we have President Obama, who was handed a messy situation and was tested with a faltering auto industry and overall financial crises. His decision with the bailouts seemed to have signaled his willingness to spend, although nearly every economic expert agreed it was a necessary action.
It seems to me that people outside of power - people like you and me - can easily shout about and debate the issue to pieces, but it seems like when you control the reigns of the economy (country and in many ways the world) - the decision to "slash government spending" is a bit harder. Because yes, for every weird, obscure government program you may want to bring up, there are a dozen other really important ones, whether it be defense spending, education, or social security. Prioritizing is key here, and it must guide the decision-making.
I don't have the answer, and I'm no economic scholar. I'm glad I don't have to make these decisions.
The video presented solid information in an interesting and engaging way. I agree- debt isn't a good thing to incur or carry. In a perfect world we- individuals, companies and governments alike- would be able to save money well in advance of need and use that savings to pay for our needs. Unfortunately this world is far from perfect and debt is a reality. As in all times of economic crisis people have become very concerned about the national debt and rightly so. The issue with this concern is it is frequently not rooted in relative terms. Is the debt high? Yes. Is it the highest in absolute terms? Yes. It is instructive to remember that debt shouldn't be disconnected from income. If one owes 35k to finance an MSBA from Catholic University, we would all agree that that is a large debt. If that same person then got a job paying 100k we would the regard their school debt as a trifle. Similarly when compaired to the GDP (14 trillion and rising!) the national debt is about 66%. High but not close to the highest its ever been. Relative to other periods, like the late '40's when we were incurring massive debt fighting WW2 our debt/gdp ratio is low, and after incurring all that debt during the second great war what happened? Economic boom carrying us through the late 40's, through the 50's and into the 60's. In the 80's the debt tripled yet the country was able to have an economic boom in 80's and another period of strong growth in the 1990s. So is debt an issue? Yes. Is it the unmanagable beast portrayed by politicians angling for reelection or newspapers trying to sell papers? No. As a nation we have and will push through more difficult times than this without crippling business with extreme taxation or leaving many in need with out the tangible aid they need to make it through the day. As America digs out from this latest market down turn the economy will rise and with it the tax rolls will grow also. If we are able to put limit increases in national spending (and we will by having decreasing citizen dependence on the state by getting jobs) we will be able to use this increased revenue to pay down our debt and move forward.
ReplyDeleteOur nation’s debt is rapidly growing out of control. Action does need to be taken in order to get it under control. Austerity is a possible positive solution, if and only if, it is implemented in the appropriate manner. The idea of austerity is one where spending is lowered by decreasing public services and slashing government benefits. Cutting these programs altogether would be catastrophic to those who use them. Some people do abuse these systems; however, the majority of the people using them do not. Very rarely will you find an individual that wants to live as poor as you need to be in order to receive government money. We must remember that not everyone has the same opportunities in life, and these programs allow them to live. Having said that, there are ways in which these programs can cut back and continue to aid these families. For example, I know someone that was able to get free braces and whitening treatments because it was covered by the government. In my opinion, this is a cosmetic procedure that the government should not cover. But, I do believe that the government should cover a yearly dental visit for those who qualify. The line of austerity is a very fine one that can challenge ones morals and ethics.
ReplyDeleteIn theory, I believe the idea of austerity is a positive one that if implemented correctly, provides a logical solution when a government deficit occurs. If a government overspends, the most logical course of action would be to decrease the benefits and public services deemed unnecessary or a luxury. This would include free museum visits, certain welfare incentives, and unnecessary healthcare perks (I am pretty sure new wheelchairs are not necessary every 3-4 years on our dime). However, there are many other ways the government could currently save money but have instead used means of austerity in order to pursue certain political endeavors. Government grants and earmarks have become a large source of irresponsible spending by the government. Many bills passed have extra incentives and perks for specific regions that do not relate to the bill at hand. These add-ons are typically pushed through and paid for with our government money, no matter how irrelevant they are. In fact, the government spent over 2 million dollars on an earmark for children’s wooden arrows (http://www.time.com/time/specials/packages/article/0,28804,1855948_1863903,00.html).
ReplyDeleteIf the government were to monitor these bills they would be able to save more in unrelated studies and invest more in education and other public services. In conclusion, there are many other measures the government could take to cut the budget without sacrificing vital government programs such as education and Medicare. When the government begins to cut funding for books, yet still funds the entire Smithsonian Museum to allow for free entrance, it further proves that our current financial status is somewhat skewed.
Lewis said it beautifully; Debt is a necessary "evil". Most people like to think debt is evil and should be avoiding at all costs. Although, the deficit is extensive, should the government stop paving roads and subsidizing school? Let's think of entrepreneurs worldwide, would they be able to create new wealth without taking on debt?
ReplyDeleteSure it is important to set a credit limit on who borrows and when the capital is lent. Remember, self-control from Aquinas (in Spirit of Enterprise), one can only be responsible for his/her actions. Starting with individuals and households, spending should be responsible, the same with corporate and government agencies. As an entity, employees tend to think they are not spending “their” money. We all pay taxes, and we all utilized government services, such as public schools and transportation. Therefore, we should also be responsible in any available resources. Deficit or not, our communities still need to be cared for one way or another.
Austerity would be nice. But would it be realistic? The problem is much deeper than poor financial management.
ReplyDeleteIt stems form bad judgment and unwise decisions. This isn't just people being corrupt with funds. It's worse than that. It's from STUPID people. It's from poorly formed intellects. Our problem here is that people are not wise. Corruption is involved but there is also a large portion of really, really poor decisions. Yes, we need to balance budgets. Yes, we need to cut spending and dial back the deficit. But who are we going to leave it up to? People point fingers and claim one group is pitted against the other but, what happens when both groups are dishonest and intellectually handicapped?
I never voted for these yokels. Let's throw them out and elect me.