Because people are scared. As the British guy in "Sicko" said: people are in debt and afraid. Better to just keep your head down, do what you're told and hope for the best.

Politically it is difficult to deal with this problem today. It is not yet clear that the economic problems are going to get much worse. Today's 210 point jump in the Dow surely points to some optimists out there. I happen to think things are going to get much worse. However, I do not believe we should do anything to try to stop it. What if there is nothing that we can do today to stop the wreck from happening. And we go ahead and succeed in passing radical legislation that attempts to head off the wreck. Guess what, we are now the ones that would be blamed when the inevitable wreck occurs. And to be sure, any time government pushes new regulations on the markets the markets can easily panic and precipitate the very crisis we were trying to avoid. It may seem heartless but the only thing we can do today is sit back and watch the unraveling. There will come a point when the people themselves will demand that something be done to fix the problem. That will be the time for big ideas for reforming capitalist institutions.

. . . why are we thinking small? Elizabeth Warren

As Tonto said, "Whatchu mean 'we,' white man?"

1. Politicians don't get credit for solving a problem which may occur. Post-1932 politicians didn't have that concern. The Great Depression had arrived.

2. There's little evidence that their "big thinking" regulatory programs got the country out of the Great Depression -- or indeed, had much demonstrable effect on the economy, at all.

Folks are a bit more sophisticated, today. They sense that the real beneficiaries of "big thinking" will be the rent-seeking financiers and their lobbyists who have "access" to Congress and the federal regulatory agencies.

At the end of September, Countrywide had borrowed $51.1 billion from the Federal Home Loan Bank system -- a government-sponsored program.

"Countrywide is treating the Federal Home Loan Bank system like its personal ATM," Schumer, a New York Democrat who heads the housing panel of the Senate Banking Committee, said in the letter. Reuters 11/26/2007

The collateral for these loans are the toxic, sub-prime mortgages which, because they're unsalable, got Countrywide in trouble in the first place. If Countrywide goes belly-up and if these mortgages don't pay off, it'll be the taxpayers on the hook.

See! We are starting to "think big" -- at least to the tune of $51.1 billion.

Whaddaya think, Perfessur? Should we give the FHLB (estab. 1932) even more power to make stealth loans with our money?

We've been bullied into our small thinking by those who have spent the last 20 years pushing the message that there's something weenie about using government to do anything. The fact that this is a transparent lie, and that the message pushers themselves are using every available lever of government like slot machine handles, doesn't seem to have an effect on their efficiency in pushing the message.

****

When it comes to resolving the mortgage crisis, thinking big can also mean thinking small, at the level of individual homeowners and investors who are stuck with bad mortgages.

I'd like to see the banks, feds and cities get together on the mortgage issue and come up with refinances for mortgageholders that would include

low interest rates,

an escrow fund for fixup and maintenance (instead of home equity lines of credit),

and bonuses for living/participating in troubled neighborhoods.

Needless to say, having a plan and a willingness to stick it out should count more than credit score when it comes to these refinances. In fact, perhaps the refis should be done with homeowners' "pre-subprime mortgage" credit score, not the "post-subprime mortgage" credit score which is likely to be lower.

I'd also like to see entities that do foreclose on properties required to pay for extra security on boarded-up properties. (And not allowed to just add it to the foreclosee's bill.) I suspect that companies would be less willing to foreclose if they knew they'd have to put up security cameras, install alarms, pay a security guard, etc. Cities shouldn't get stuck with the cost of patrolling streets full of boarded up houses.

great post, my opinion-- I wish that the MIT professor who created the post had your courage but, as I've written in the past, she benefits from MIT's endownment and has reason to want taxpayers to bail it out and/or keep it chugging along.

The carrots that were laid, to encourage "moral hazzard," were sweet indeed and even our "greatest institutions" are now munching on those sweet carrots from Alice's Wonderland.

History is repeating itself: our education system is aligning itself with the moral values that the corrup corporations need to survive.

To boldly go...

Thinking ‘small’ is a culmination of the factors Elizabeth mentions along with the economic division that has taken place in income distribution over the past twenty years. This division has divided America further by creating a greater separation between the wealthy and middle class. As a result of the Great Depression many people were struck by tragic economic events, however folks also had more of an interest in helping each other out. Thus came about the programs Robert Schiller mentions and the changes with the New Deal from FDR. Today, much of our society has shifted to an every person for themselves mentality.

The media helps foster this mentality through positioning such as those stupid people that overspent foolishly (the overconsumption story), and have brainwashed the masses to accept this thinking that nothing is wrong (i.e., it is those people who are irresponsible and foolish with spending that are facing foreclosure, excessive amounts of credit card debt, etc.) The folks who support this thinking don’t want to consider that it could have been an unfortunate circumstance such as an illness, job loss, caring for a family member - that pushed them to financial misfortune.

We need to stop and ask ourselves how much we’ve gained when folks are losing homes in record numbers, have reduced or no health insurance and record levels of debt – just how much progress moving forward the middle class has truly made. Seems instead of moving forward, we have fallen more than two steps backward. If we do not make changes to support the middle class they will just become part of an underclass.

Now is the time for changes to reform our economic systems and help put in place a safety net for more middle class families. Government agencies and businesses that were responsible for supporting and issuing these mortgages need to shoulder responsibility with consumers. This needs to include creating workable solutions to reform these mortgages and other harmful financial products with more transparent terms and reasonable interest rates.

Since banks and other investors holding downgraded securities tied to risky mortgages are able to write down their values billions of dollars at a time, reforms should be made to help consumers out in a meaningful way. To help people facing foreclosure, the inflated mortgage value could be reduced down to the current market value of the home and shared responsibility given to the lender and borrower. This would still give lenders the ability to recoup more profits than they would in foreclosure and help more consumers stay in their homes. We all have a vested interest in seeking economic solutions that work for the sustainability and growth of our society.

The American public has lost faith in the government because of decades of increasingly rapid loss of purchasing power due to understated government inflation reporting.

Below are some concepts I have developed to more fully understand why inflation is understated and the resulting short and long term effects.

First, to verify that I was on the right track, I determined the number of months of work it took in 1970 vs. 2007 to buy elements of the American dream. In the case of home purchase, for example, I used median compensation and median new home prices for the respective years.

Months of Work to Purchase (male worker over 15, before taxes)

Chevrolet Impala 1970 -- 6 months
Chevrolet Impala 2007 -- 9 months

New home 1970 --- 48 months
New home 2007 -- 100 months

One yr family healthcare 1970 -- 1 month
One yr family healthcare 2007 -- 5 months

One yr in-state college tuition 1970--- 0.4 months
One yr in-state college tuition 2007 -- 3 months

In 1970 a typical family of four had one worker and reasonable hope of owning their own home, paying for proper healthcare, sending their children to in-state college and enjoying a respectable retirement – the tenets of the American dream. Since 1970 there has been an ongoing erosion of that purchasing power. Families have compensated for this by adding another worker, then by dipping into savings, increasing credit card debt and, most recently, by tapping home equity.

During this period of declining purchasing power, financial services happily took advantage of desperate consumers by jacking up credit card interest and fees -- then encouraging liar financing of tickler rate mortgages. Now, with the inevitable resulting mortgage crisis upon us, the Middle Class is no longer able to sustain their purchases of goods and services and more and more workers are losing hope of ever living the American dream.

How did the middle class lose so much ground? It wasn’t a conspiracy, but rather a nasty side effect from attempts by recent Presidents to ensure reelection by manipulating economic indicators. In particular they understated inflation. This subterfuge allowed the economy to appear stronger for the next election, but unfortunately it was implemented upon the backs of the Middle Class. Historically wage increases have been keyed off of inflation so understating it results in a loss of purchasing power.

Just to give you a feeling of the size of these effects, economist John Williams (see www.shadowstats.com)estimate for Sep 2007 is that, using pre-Reagan basket-of-goods measures we are now at 10.4% inflation; using pre-Clinton post-Reagan methodology we are at 6.1% and using the current post-Clinton methodology we are at 2.7%. Despite all of these machinations, the fixed basket of goods purchased by a family is still inflating at a 10.4% clip while median net compensation has increased by only 2.7% a year over the past five years. Consumers can only make ends meet by continuing to cut back, i.e. no discretionary purchases, shop Wal-Mart, foreign pharmaceuticals etc. The middle class can no longer sustain their purchases of goods and services, a sure sign of a coming recession. The current Bush Administration will, of course, attempt to delay the appearance of the resulting recession by increased massaging of the reported numbers until after the 2008 election.

By reporting lower-than-reality CPI growth, the government accomplishes the following in the short term, thereby ensuring that it stays in power.

1. Reduces the expectation for future inflation which would become self-fulfilling. This type of inflationary spiral is how we got to 18% inflation in the ‘70s. Nipping this in the bud would involve temporarily higher interest rates such as we saw under Volcker, but would likely cause the current administration to lose the White House as happened under Carter.

2. The growth rate of the CPI is a fundamental input to determine interest rates. Lower interest rates result in a smaller burden to service the national debt (now over $9 trillion dollars) and provide artificial stimulation (i.e. cheap money) for industry and home building in particular. Creates an apparently strong economy and helps to balance the budget without increasing taxes.

3. CPI growth rate is a deflator on the GDP, so under-reported CPI growth causes the inflation adjusted GDP gains to appear stronger than they really are. In fact over the past several years such under reporting has served to mask a recession which is traditionally indicated by two or more quarters in a row of falling GDP. Again a means to stay in power.

4. Under reporting CPI growth means that the government is imposing a hidden tax increase because the tax brackets are not indexed upwards sufficiently. This means that for some workers, their tax percentage goes up even though their before-tax income is not keeping up with inflation. This occurs in spades for the AMT which is not indexed at all. Helps to balance the budget with hidden tax increases.

5. Social security and other government pension benefits do not keep up with the cost of living. Helps to balance the budget without increasing taxes.

The long term toxic problems created by underreporting inflation are as follows:

1. Workers and retirees experience dramatically eroded purchasing power and can no longer sustain their purchases of goods and services.

2. Sub par businesses, which should have been pruned out of the economic system to keep it healthy, take one-time charges and refinance their debt for peanuts. This just delays the day of reckoning when much more economic harm will be done. When the roof finally does cave in, those businesses which are healthy and deserving of cash for growth won’t be able to get it.

3. As international governments and banks realize the weaknesses this under-reporting has seeded into our financial system, they lose faith in the dollar and its value falls. Of course, they will now demand much higher interest rates to carry our external debt. Higher rates than if we had reported correctly in the first place. If you are a European banker, how do you feel about holding 5% Treasury notes while the US dollar fell 10% in the last year and 5% in the last month? Treasury interest rates in the 10-15% range are coming in the near future and there is no way we can avoid it unless we want to oversee the complete collapse of the dollar.

Climbing the Down Escalator – an Analog for the Plight of the Middle Class

(i.e. the Ladder of Success is really a Down Escalator)

Consider an escalator moving downward with workers attempting to climb up it. Their height on the escalator is indicative of their purchasing power. Every time they get a pay raise, they take a step up. But inflation is indicated by the continuous movement of the escalator downward. All of the people on the escalator represent the Middle Class participating in the American dream. Those that are fortunate enough to step off the top have become independently wealthy and need not work another day of their life. Those that are off the bottom cannot support themselves independently and are in need of low income housing, food stamps and/or Medicaid to survive.

The government tells us that the escalator is moving downward at 3% a year and therefore workers are receiving pay raises of 3% a year. Unfortunately, the real downward speed of the escalator is 10% a year and practically everyone is moving toward the bottom. Workers are falling off the bottom and losing financial control of their lives.

The current government gains and retains power by telling those that have stepped off the top that, in return for contributions, they will lower their taxes so they will never again have to go on the escalator. The government then uses this money to capture the votes of the workers close to and off the bottom by telling them their real dangers are gays, abortions, Mexicans, terrorists and that they will protect them. The more people that fall off, the stronger the government gets.

Since tax brackets are indexed upward using the government’s inflation numbers, higher tax brackets are traveling down the escalator towards the climbing workers at 7% a year. The AMT has now also appeared near the top and, since it isn’t indexed at all, it is traveling down towards the workers at 10% a year.

Today the Census Bureau tells us that income dispersion (the Gini index), the measure of how much income is made by those off the escalator compared to those on it, is the highest on record. The last time it even approached current levels was in 1929 before the Great Depression. The purchase of goods and services is mostly made by those on the escalator. Those off the bottom are only buying subsistence items. Those off the top do not purchase goods commensurate with their income (e.g. they don’t buy ten cars, twenty TV’s and eight houses.) Since there are fewer and fewer people on the escalator and they are losing real wages, their purchases of goods and services must ultimately fall and with it our GDP – i.e. a classic depression where many more workers will lose their jobs and be knocked off the escalator.

How do we fix this? Fess up to the real inflation rate and encourage businesses to give pay raises commensurate with that rate. Raise the basic interest rate to at least equal inflation (The Volcker Cure). Create new good jobs in the US by promoting those industries needed to address the most pressing global issues. I realize this will temporarily cause major financial grief but, if we don’t, we are just kidding ourselves and will see the value of the dollar deteriate futher while we dig ourselves into a deeper and deeper economic hole.

Re: 2. There's little evidence that their "big thinking" regulatory programs got the country out of the Great Depression -- or indeed, had much demonstrable effect on the economy, at all.

Maybe not, but it kept from the economy from getting much worse and moe importantly it offered hope. And that in turn kept people from turning to the much more radical solutions that were on the table back in the 30s. You FDR nitpickers seem to forget what the other viable alternatives were back then despite the fact that our nation spent the next fifty years fighting them in wars hot and cold. And for those who like to claim that it was WWII that ended the Depression, well, sure-- and how did that happen? Might it have had something to do with the government spending boatloads of money, putting millions of men to work in uniform and imposing regulations that made the New Deal look like laissez faire?

This is typical "professional manager" bull. A 2007 Impala may be "better" than a 1970, but a 2007 worker is also more productive than a 1970 worker, so we can call it a wash. Would you be happier is we used Bentleys instead of Impalas? I really wonder what "improvements" you will find that makes a 2007 Bentley better than a 1970 Bentley. And this poster has done much more useful work in addressing the underlying economic problem -- the decline of working class wages and the stagnation of middle class income -- that I doubt you have the mental acuity to even conceive of. I.e., if you don't think there's a problem, you ain't gonna solve it. Which is why Republicans and conservatives are doomed. They believe the economy is doing great, but the "story" has not been properly "marketed" to the masses. I hope they continue in la-la land, right up to the day their house gets foreclosed.

I'm going to give jpf311 the benefit of the doubt and assume that the post was intended to provide a little additional information about microsrfr's incredibly helpful post and not refute it. It is certainly true that a "basket of goods" today is different than a basket of goods from years ago, and jpf admits that "quality upgrades" can be used to hide inflation.

But the middle class is trying to climb a down escalator, which is dropping even faster when we factor in the effect of developing nations coming online and grabbing part of production.

The big-thinking challenge we need to face is that of coming up with solutions for individuals which can be scaled up to be good for everyone. Or to look at it another way, to make the world a better place without killing large parts of it first.

When it comes to the mortgage question, I'm just not satisfied with the idea that we should let market forces restore balance by dropping most of the people who got these bad mortgages out of the financial system. It's a waste of their productivity for one thing.

There are encouraging signs that mortgage companies are starting to get the clue that they need to begin writing down these mortgages to the point where people can dig their way out--it's too bad it has taken this long. (I'm basing this on a conversation yesterday with a bank exec., by the way, so it's not an unassailable source but sometimes a "sense of the industry" is helpful. He felt it was obvious that this is what companies need to do if they are to survive.)

One company that is thinking big is Google. They are working to find renewable energy sources to run their data centers--and a recent article in the NYT wondered if this would be bad for their bottom line, a distraction from their core business of selling ads....there's your thinking big/small dichotomy right there.