The (New) Great Depression (Part II).

The media’s popular narrative about the causes and cure for the Great Depression invariably start with the storyline that the stock market crash caused the Great Depression.

Herbert Hoover purportedly refused to spend government money in an effort to reinvigorate the economy. Franklin Delano Roosevelt’s New Deal government spending programs allegedly saved America.

This is a big lie.

The 1920s marked the beginning of mass production and the emergence of consumerism in America, with automobiles a prominent symbol of the latter. In 1919, there were just 6.7 million cars on American roads. By 1929, the number had grown to more than 27 million cars, or nearly one car for every household. During this period, banks offered the country’s first home mortgages and manufacturers of everything – from cars to irons – allowed consumers to pay “on time.” Installment credit soared during the 1920s. About 60% of all furniture and 75% of all radios were purchased on installment plans. Thrift and saving were replaced in the new consumer society by spending and borrowing. Notice any parallels? 

Encouraging the spending, the three Republican administrations of the 1920s practiced laissez-faire economics, starting by cutting top tax rates from 77% to 25% by 1925. Non-intervention into business and banking became government policy. These policies led to over-confidence on the part of investors and to a classic credit-induced speculative boom. Gambling in the markets by the wealthy increased. While the rich got richer, millions of Americans lived below the household poverty line of $2,000 per year. The days of wine and roses came to an abrupt end in October 1929, with the Great Stock Market Crash.

The Great Depression was caused by the Federal Reserve’s expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. Just like the early 2000s. When the Federal Reserve belatedly tightened in 1928, it was too late to avoid financial collapse. According to Murray Rothbard, in his book America’s Great Depression, the artificial interference in the economy was a disaster prior to the depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. Government intervention delayed the market’s adjustment and made the road to complete recovery more difficult.

And, this is exactly what the IMF and the Central Bank are doing in Europe today. Pouring more capital into a failed banking system to avoid a runaway withdrawal panic is crazy. Where will bonds be when it is over? Every country in the Eurozone, save for Germany and the United Kingdom, are broke and their banks are failing. More of the same lunatic monetary policy will bring Europe to its own Great Depression, and it will happen next year.

The parallels between the 1930s and today are uncanny. Alan Greenspan expanded the money supply after the dot-com bust, dropped interest rates to 1%, encouraged a credit-driven boom, and created a gigantic housing bubble. By the time the Fed realized they had created a bubble, it was too late. The government response to the 2008 financial collapse has been to expand the money supply, reduce interest rates to 0%, borrow and spend $850 billion on useless make-work pork projects, encourage spending by consumers on cars and appliances, and artificially prop up housing through tax credits and anti-foreclosure programs. The National Debt has been driven higher by $2.7 trillion in the last 18 months.

The government has sustained insolvent Wall Street banks with $700 billion of taxpayer funds and continues to waste taxpayer money on dreadfully run companies like Fannie Mae and Freddie Mac. The government is prolonging the agony by not allowing the real economy to bottom and begin a sound recovery based on savings, investment, and sustainable fiscal policies. President Obama continues to exacerbate the problem by creating more burdensome healthcare, financial, and energy regulations. And, regulations are not the same as a single payer health care program, so please understand; these policies are hurting businesses and failing to help anyone.

Today’s politicians and monetary authorities have learned the wrong lessons from the Great Depression. The result will be a second, Greater Depression and more pain for the middle class. The investment implications of government stimulus programs are further debasement of the currency and ultimately inflation and surging interest rates.

And, at the end of the day, we will be forced to allow capital markets to sort it out without any additional government intervention after all, and, as they say in golf, take our medicine and play the next hole. But, we’re really bad at that, aren’t we?

How to End the Great Recession.

And, dramatically reduce unemployment, create 4 million high paying jobs, eliminate the retirement savings crisis, solve the student loan bubble, create unprecedented innovation, stoke social security and Medicare, and do actual real good in the world. Sound incredible? It isn’t. Follow along.

I want you to think about 10 people you know who are under or un-employed and write down their names, and under each write down the first three skills that come to your mind, even if they don’t seem like skills (e.g. she’s patient, a nice person, and she treats people with respect). Then, think of the one thing that you have always wanted to do (could be anything, including hiking across the country, baking the best chocolate chip cookies, driving an 18 wheeler across Alaska, inventing 5 new cocktails, writing that book, opening that restaurant with your grandmother’s recipes, anything.).

Now, create 10 jobs for those people whose names you wrote down, and write down what each person’s role would be. Then, figure out how to monetize your dream. Write down the amount of money you think you can make each year starting with year one, and then do the same for year two and year three. Next, figure out how much money you will have to spend to get that done. If your spending rate is higher than the money you will make, cut the spending until you show a profit. There. Now, you have a business plan.

What? You can’t figure out how to make money hiking across the country? How about a theme? How about interesting cities? How about a camera? How about a diary? Do you think Ken Kesey had a plan? You don’t know who Ken Kesey is? That’s OK. I KNOW you can come up with a way to make money at whatever your dream might be. 

Maybe you think you are not worthy. We all have self-esteem issues. Especially people like Paul Allen, Bill Gates and Larry Ellison. As you probably know unless you are living under a rock somewhere, all three men dropped out of college. None of the three of them invented anything.

 

All three of them used someone else’s invention to start them on their path. All three of them became dirty, filthy, and ridiculously rich. Doing what? Doing what they loved. Gates played with very rudimentary computers. Computers that would make the Apple I look like a Fujitsu K by today’s standards. Allen loved writing software in BASIC, a language that is dumber than the firmware that connects your keyboard to your PC. Then, after hooking up with Gates and finding IBM in a stupid marketing pinch for its entry into the PC market without an Operating System, bought a product called Quick and Dirty Operating System (QDOS) from a random programmer in Seattle named Tim Paterson, for $50,000, sold licenses to IBM, and the rest is Microsoft. While working as a grunt at Ampex, Ellison ripped off a relational database scheme described in a paper written by Edgar Codd, and used it on a project for a database system for the CIA. That became Oracle. How’s your self-esteem doing now?

So, you have your business plan, and you have your future employees identified, and your self-esteem is a little jacked up. What do you do now?

Before I lay out my plan to End the Great Recession, I should mention that a similar (though tongue-in-cheek) plan was proposed in an article by Sheila Bair, the former head of the FDIC, which she called the “Get Rid of Employment and Education Directive.”  But, not to be confused with hers, my plan is anything BUT tongue-in-cheek and here’s how it goes:

1) The Fed agrees to loan $400 Billion to the “American Future Entrepreneur Growth Fund” (it has no corny acronym, so it might have trouble passing Congress), at an interest rate of .5%, the exact same rate it charged the 6 big banks it lent $9 Trillion to back in December of 2010. This amount by the way, is half of the TARP bailout that saved the biggest investment banks in the world with your tax dollars, back in 2008. Half.

2) The AFEGF is organized like a Venture incubator, and the first thing it does is hire 100,000 really good recruiters who are then tasked with finding the most promising 400,000 entrepreneurs in the US, with fungible business plans. This will take 6 months. The criteria are a track record of entrepreneurship in one form or another, successful or otherwise, a business plan that passes a few tests, and the passion to do something big.

3) Those entrepreneurs are each loaned $1,000,000 and are given a goal of 3 years to turn that loan into positive cash flow. They must immediately hire 10 people from their list and assign them roles. They are each assigned a mentor from the VC community who VOLUNTEER their services to guide these start-ups to success. VCs like Joe Rizzi, Val Vaden, Don Dixon and Vinod Khosla who are all about making really smart investments and guiding them to ridiculous profitability, while looking for ways to make a positive difference in the world.

They will also be assigned community mentors. People like Joy Amulya from Global Family Village, Shawn Ahmed of the Uncultured Project, Beth Kanter and Allison Fine of The Networked Nonprofit, and  Craig Kielburger of Free the Children, to help entrepreneurs focus on global community projects where their energy, capital and spirit can turn their entrepreneurship into real and lasting good.

The entrepreneurs are each assigned a regional incubation lab where they will work out and implement their plan. The incubation lab will be staffed by accountants, sales and marketing leaders, PR, Advertising and communication consultants, lawyers, human resource professionals, and prototype design and manufacturing engineers who will provide the back-office infrastructure for 100 separate entities. The entrepreneurs agree to quarterly board meetings where their mentors review progress and manage their growth track. At anytime along the way, the entrepreneurs can use Crowdfunding to raise additional capital, allowing a whole lot of ordinary people to get a piece of this amazing action, and to potentially create even greater wealth.

4) There will be NO RULES (operationally).

5) At the end of this 3 year period, the Fed will either be re-paid the loans with interest or optionally be able to take an equity stake in the most promising enterprises, equivalent to their loan amount, and over a 10 year period, will recoup all of the money lent to these enterprises as the result of a 1 in 20 success rate (for every 20 start-up who fail, there is one who becomes the next Google, Facebook, Adobe, Apple, Microsoft, etc. These are the odds that the VC have been gambling other people’s money with since the late 1960’s and history says it always works).

That’s it.

If these 400,000 start-ups fail and succeed at the historic rate of Silicon Valley start-ups, they will create over 5 million jobs. They will re-pay all of the debt several-fold to the Fed and they will have solved at least 5 significant world problems. Along the way, their employees will have fully funded Social Security and Medicare for the next hundred years and created more wealth and innovation than the world has ever seen. Including a sustainable, endless and ultra-cheap alternate energy source. Trust me. I’ve done the math.

After Gates sold QDOS to IBM, Big-blue hired Microsoft (13 random guys and girls) to build their next release operating system, OS/2 for their cool new PC. Gates, by this time, was smart enough not to transfer the copyrights for QDOS or the new OS/2 to IBM, believing that there would be other hardware manufacturers of the new PC in the immediate future. Then, due to design differences, the IBM/Microsoft partnership broke down allowing Microsoft to go off and become, well … Microsoft.

You can argue with and debate my plan, and I agree it has holes, and there are always tons of devils lurking in the details, but there are always holes and devils in every plan, and there is also the undisputed history of the Silicon Valley and Microsoft and Apple and Google, and the unfettered tenacity and passion of the American people. And, you can’t argue with that.

Working Poor: Almost Half Of U.S. Households Live One Crisis From The Bread Line.

What does it mean to be poor? Existing poverty formula, dating from the 1960s, doesn’t capture modern expenses such as child care and healthcare. That may be part of why you feel so weird earning $50,000 yet can’t afford gas.

If it means living at or below the poverty line, then 15 percent of Americans — some 46 million people — qualify. But if it means living with a decent income and hardly any savings — so that one piece of bad luck, one major financial blow, could land you in serious, lasting trouble — then it’s a much larger number. In fact, it’s almost half the country.

“The resources that people have — they are using up those resources,” said Jennifer Brooks, director of state and local policy at the Corporation for Enterprise Development, a Washington, D.C., advocacy group. “They’re living off their savings. They’re at the end of their rope.”

The group issued a report today examining so-called liquid asset poverty households — the people who aren’t living below the poverty line, but don’t have enough money saved to weather a significant emergency.

According to the report, 43 percent of households in America — some 127.5 million people — are liquid-asset poor. If one of these households experiences a sudden loss of income, caused, for example, by a layoff or a medical emergency, it will fall below the poverty line within three months. People in these households simply don’t have enough cash to make it for very long in a crisis.

The findings underscore the struggles of many Americans during what has often seemed like an economic recovery in name only. While the Great Recession officially ended more than two years ago, unemployment remains high and wages have barely budged for most workers. For more people, whether they draw a paycheck or not, a life free of deprivation and financial anxiety seems perpetually out of reach.

That’s not to say that everyone who is liquid-asset poor spends all their time fretting. On the contrary, because many have regular paychecks coming in, they may not grasp the precariousness of their situation.

“They don’t necessarily realize how close people can be to one interruption to income or one interruption to health benefits,” said David Rothstein, the project director for asset building at the non-profit Policy Matters Ohio. “They’re one paycheck away from being in debt.”

Rothstein, who also serves on a steering committee at the Corporation for Enterprise Development, said that payday lenders — who loan money to desperate borrowers at high interest rates, drawing people into hard-to-escape cycles of debt — are “a huge problem” in Ohio, as in many other states. People often turn to payday lenders to cover one-time, unexpected expenses, but can end up in a long and costly relationship. Wait until they find out about ZestCash – how about paying $291. in interest and fees for a $500. loan?

“People say things like, it’s just one mechanical problem with their car,” said Rothstein. Before they know it, he said, “every other week, they’re back at the payday lending shop.” Those are called rollovers and they add interest to the already huge nut, sort of like the vig the gangsters and  loan sharks charged in the 1920’s and 30’s.

The Corporation for Enterprise Development findings echo other recent studies showing that many Americans are ill-prepared for financial emergencies. Analysts said the reasons include flat wages, the high cost of medical treatment and the nationwide drop in housing values leaving homeowners with less wealth than they believed they had.

Andrea Levere, the president of Corporation for Enterprise Development, says that greater financial literacy might have helped prevent the current situation.

People can “graduate high school and not know how to write a check,” Levere said, adding that an increased emphasis on personal responsibility for budgeting and spending should be an important part of any step forward. Yeah, I am sure the public schools having eliminated art, music and PE from their curriculum would just love to add personal finance. Come-on, Man.

At the same time, Corporation for Enterprise Development officials were quick to argue that public policy needs to address the scope of the problem. Levere cited the example of asset limits in public benefit programs, which restrict services like food assistance and public health insurance to households with few or no assets — a policy that critics say denies help to many people in need (how cold can you get?).

“In some cases,” said Levere, “it means they can’t even own a car that is in good enough shape to get them to work.”

Brooks agreed. “A family that loses its job, that was maybe solidly middle class, in a state where they have restrictive asset tests, is going to have to liquidate all their assets, all their savings for the future” in order to qualify for benefits.

The report maintains that there are a number of measures that could alleviate liquid asset poverty, from strengthening consumer protections against payday lenders to making greater assistance available to first-time homebuyers. Levere said even minor policy adjustments could have “revolutionary implications.”

“There’s a lot of ways forward. It doesn’t mean it’s not tough,” Levere said. “I’m a great believer in one step at a time.” Tell that to the guy who just got laid off due to productivity increases or overseas sourcing or medical emergencies or reductions in force because no one is buying his former employer’s products. This is just wrong on so many levels. Is this really America?