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How to make US Pres. Barak Obama’s plan succeed in getting out of the Recession

September 10th, 2010 Posted in global financial meltdown

How to make US Pres. Barak Obama’s plan succeed in getting out of the Recession

A clear analysis of the root cause of the US recession that led to a global financial meltdown will help US Pres. Barak Obam in formulating an integrated plan that will bring back US consumer confidence leading to long-term rise in sustainable consumer spending and economic growth in the US economy and the rest of the world.

The US must use its stimulus funding wisely to create a new sustainable economic model based on activities that are energy efficient, renewable-energy based, low carbon foot-print, technology-based and climate change-sensitive that its impact on US consumers will be long-term confidence in the future in terms of flexible job security thru a good balance between domestic savings and consumer spending.

Oil Crisis, US Recession and Global Financial Meltdown

As early as 2007, signs of economic recession have been observed throughout the world.  By end December 2007, the international price of crude oil went past $100 per barrel.  Continued speculation in the world markets as well as increased demand pushed the price to its maximum of $147 per barrel by July 2008.

From then on, it was a roller coaster ride and the price of crude oil dropped to $40-50 per barrel as off April 2009. US Banks and financial institutions began to request for US government bailout, some were allowed to fail, and the big US insurers and banks that were considered too big to fail were recipients of bailout funds from the outgoing Bush administration.

With the onset of the new Obama administration, the US legislature together with the US executive passed fiscal stimulus package to address and hopefully arrest the continued global economic meltdown that also ravaged Europe and major industrial economies in Asia.

Some Countries Were Spared.  Why?

But to its credit and lack of sophistication, the Philippine and Indonesian economies, remained somewhat unaffected. Financial, monetary and fiscal reforms put in place during the 1996 Asian Financial Crisis appears to have prevented bank failures, except for some rural banks which were affected by investment scams.  In the Philippines, home owners have to put up 30% equity and the balance of 70% provided by mortgage banks as part of the banking reforms after the Asian Financial Crisis.  It has also a National Home Mortgage Financing Corporation that could buy out bank mortgages so that home owners could save on interest costs and enjoy longer repayment period.

Furthermore, Asian nations such as Philippines and Indonesia have tremendous foreign exchange inflows from services provided by its overseas contract workers (OCWs) ranging from nanies, care-givers, cleaners, carpenters, drivers, computer technicians, musicians, teachers, accountants, economists, engineers, nurses and doctors. Since they remit roughly 70% of their incomes (30% is retained at their place of deployement),  an OCW supports his extended family to provide adequate food, decent housing, livelihood, education and health care. The OCW family saves and invests a portion of their income to buy their own homes in the urban and rural areas that spur construction related activities, put up sari-sari stores, buy motorcycles and jeeps for public transport, and buy private cars and vans for their personal and livelihood activities.

Impact of Recession on Comparative Economies (developing vs highly developed)

Compared to the Philippines, the US recession has a very profound effect on American households:

1) US employers have too much flexibility in reducing workforce to cut down on manpower costs, hence, a nationwide recession results in drastic reduction in national purchasing power, with its undesirable effect of reducing national consumption of goods and services.  Giant malls and retailers suffer and declare bankruptcies.  Private employers are quick to pass the problem of unemployment to the federal and state governments via unemployment benefits.

2) Once unemployed, they enjoy unemployment benefits, without corresponding productive output done in return by the recipients.  Money is spent without corresponding benefit to the society at large.  Without a job and being idle, jobless persons begin to loose hope, self esteem and dignity.  Social unrest follows resulting in crimes to society and family.

3) These unemployment benefits contribute to the US deficit, which is financed by borrowings from the outside world, from countries with significant trade surplus like China, Korea, Japan, etc.

4) Since the average American did not invest in fuel-efficient vehicles, their super-sized SUVs courtesy of the American Big 3 car manufacturers would naturally consume a significant portion of the family budget, which has been reduced to unemployment benefits.  Most end up having their vehicles repossessed, or for lack of money to buy expensive gasoline, don’t use their vehicle.  The sales of the American Big 3 plummet, and are on the verge of bankruptcy, only to be sustained by government stimulus funds.

5) In the meantime, the wealthy American family invested their pension funds in doubtful investment schemes that provided higher than normal interest rates, only to see their investment vanish.  They cut back on personal consumption, further reducing overall national consumption.

6) Lack of medical/dental health care insurance and benefits further aggravate the socio-economic condition of the American family, leading to lack of confidence in the future, resulting in households cutting on consumption and expenditure in more energy-efficient vehicles and durable goods.  American manufacturing and services begin to fall at an accelerated phase.

7) While the Asian and European countries invest heavily in advanced technologies (telephony, broadband, computers, vehicles, mass transport systems), science and engineering to improve their business infrastructure and educational systems and enhance global competitiveness, the American educational system stagnated over the past 3 decades.  It produced more non-technical graduates (e.g. Lawyers) and less of the desirable stuff of scientists and engineers.

8) In the name of globalization, labor intensive industries and business processing services began to be outsourced from cheap labor economies such as India, Philippines and other Asian countries.  Middle manufacturing, toy manufacturing, computer manufacturing and other heavy industries were transferred to other countries, leaving the US with nothing but expensive American lawyers, financial geniuses and fast food servers.  The health care systems from hospitals to dental care and care-giving became the territory of Asians and other nationalities willing to work for the Almighty Dollar.  The American youth became enamored with the TGIF (Thank God It’s Friday) mentality that no one minded the store anymore, and no one wanted to do the hard work that the American forefathers were known of.  American youth became soft, unwilling to do call center jobs, consumer care, health care, care-giving, garbage collection, etc.

9) World markets were opened to American agricultural products (a low technology endeavor) while the American mainland markets were flooded with cheap mass-produced high technology items (computers, TVs, iPods, cellfones, Blackberries).  American foreign policy advocated advancement of globalization to promote the welfare of a few Amerian farmers over the majority (low technology, large track of lands with few farmer beneficiaries unlike industrial land estates that provide thousands of jobs if a factory is located instead on that valuable piece of land).

10) With the global economic meltdown, jobs in the insurance, banking and finance vanished overnight, contributing further to massive unemployment and reduced consumer spending.  The fall of the American market resulted in global exports to America to decline, further reducing potential American exports to the world as the US recession evolved into a global economic meltdown.

11) The American auto industry failed to invest in the production of energy-efficient vehicles, and with the downturn of the economy, could not sell enough cars to sustain its high overhead and labor costs.  Very generous retirement benefits extracted from labor strikes further contribute to excessive production costs and labor union bosses don’t care a damn even if such benefits would drive their company to bankruptcy, since they believe, that the US federal government will rescue them anyway as it would be an American disgrace if it is allowed by US politicians.  The only hope at this point is for the US auto industry to downsize, reduce labor and retirement cost benefits, and produce fuel-efficient vehicles that the belt-tightening American would be willing to buy now which is being met by the Japanese, Korean and European car manufacturers.

Suggested Solutions

Following are suggestions that I have summarized based on discussions culled from experts and media:

1) Attack the root cause – help households payoff their mortgages so they won’t be foreclosed and rendered homeless. For households already receiving unemployment benefit and are unable to pay their mortgages, a supplemental mortgage benefit shall be provided, provided however, that the said supplemental benefit will go directly to the federal mortgage bank that bought the mortgage from the orginal bank.  In this manner, non-payment or non-remittance of benefit is avoided by making it an automatic transfer.

2) American businesses should endeavor not to layoff workers at the drop of the hat.  Rather, they retrain or assign them to do other jobs, request for federal and state subsidies to keep them in their payroll at a rate slightly higher than unemployment benefits since they are still doing some sort of productive jobs.

3) Households and families who could not afford the high interest and principal payments should have their mortgages transferred to a federal mortgage bank with low interest and longer repayment period.

4) Should the head of family become unemployed, or if even employed, and still they could not afford the monthly amortization, their expensive home mortgage is transferred to the federal mortgage bank and credited so that he could move to a cheaper or smaller home where the resulting mortgage would become affordable.  The excess credit could come in the form of direct cash transfer to pump prime the economy or as income tax credit to lower future tax liabilities.

5) Once the bad mortgages are removed from the original bank that provided the housing loan, this bank must immediately reorganize, revise compensation and bonuses and cut costs in order that its current level of operation and loan portfolio would allow interest income to cover operating expenses.  After the bad mortgage has been transferred to the federal mortgage bank, the corresponding credit default insurance that has been paid to the bank by the insurer should then be returned or reversed.

This approach is preferred than a direct bailout of the bank since it will require smaller stimulus fund (thus lower budget deficit) to support banks by way of removing its toxic mortgage assets.  Any losses that will be incurred in settling their credit default swaps and investment derivatives should be to the account of the bank management and shareholders as a form of atonement for going into highly risky endeavors, which taxpayers should not provide money for.  Let the banks that went into such risky ventures settle their own losses together without taxpayer support.

6) The US should begin to invest more into education to produce more scientists, engineers and technicians that will produce durable goods that the world would love to buy from America because of its quality. America should likewise reform its health care system and provide incentives for the American youth to enroll in medical, dental and health care degrees.

7) The new breed of Americans should begin to love hard work, avoid the TGIF mentality and rollup their sleeves and work with such focus and tenacity as their Asian counterparts.  This applies also to Britain and Europe as they may have already imbibed the American mentality.  They should be willing to work as call center agents, customer care, sales representatives, care-givers, teachers, doctors, nurses, accountants, scientists, engineers and other productive professionals, rather than just sitting idly awaiting non-productive unemployment welfare benefits.

8) The Americans should begin to behave, not imposing, polite but firm, and respectful of other countries politics and cultures.  Once Americans begin to be appreciated and loved, people will turn consuming hatred into cooperation and free trade, with American goods being patronized worldwide.

9) With Americans leading the way in energy conservation via investment in fuel-efficient vehicles, renewable energy, durable goods and manufacturing facilities, the demand for expensive fossil fuels like oil, natural gas, LNG, coal will be reduced resulting in lower fuel prices, cleaner environment, and global warming would be mitigated with America taking the lead.  I believe that when America takes responsible leadership, the world will follow because that is precisely human nature — you follow good examples.

10) With America leading the change in energy behavior and cultural attitude, the world would be a better place to live, and we could smile away this recession and global financial meltdown.

I know you have some ideas, so kindly post your suggestions and comments.

Please leave your inquiries, comments and suggestions.


3 Responses to “How to make US Pres. Barak Obama’s plan succeed in getting out of the Recession”

  1. Bryan Grygiel Says:

    Nice, I am happy to find this well Post

  2. admin Says:

    Hi Bryan. If indeed you are happy to find this post on what US Pres. Obama should do together with the US Congress and all Americans, perhaps you should invite or disseminate this blog article to the US Pres. and Members of the US Congress, as well as state leaders so that this will be discussed in detail. America needs to produce the goods and services that Americans themselves could afford and willing to buy, which is currently being provided by imports from responsive outside producers. Instead of giving free welfare to Americans, why don’t they work and learn new technologies and produce goods at competitive wages and production methods. This is the permanent and lasting solution to job unemployment in the US. Americans just have to work and educate themselves to advanced technologies to be competitive with Asians and Filipinos. Hope you don’t take it personal. Marcial

  3. Portland personal injury attorney Says:

    I can’t still agree. I always desired to write in my site similar to that but I suppose you’r faster.

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