Further stimulus of the economy is required. The 9.2% national unemployment rate, leaving 14 million able workers at home, demands it.
But there is no appetite to revive the Obama administration’s fiscal stimulus, which apparently intended to give states block grants to keep doing what they were doing, or to provide nimble political ear-markers with the big cardboard checks suitable for press-release photos.
I take no pride in saying this. There is (or at least, was) an argument to be made for government spending in the time of a debt-fired liquidity trap (which is when people and companies are paying down debt and not using cash to be someone else’s customer).
Here is the argument: the economy is made up of consumption, investment, (usually small) net exports, and government.
When there is a terrible decline in consumption and investment, government can step in.
That is what President Franklin Roosevelt did in the mid-1930s: created visible and meaningful work for millions, all on the public dime.
But the country won’t stand for it in 2011.
Another government stimulus came in the past year by way of the Federal Reserve, which instituted two rounds of so-called quantitative easing, designed to add money to the economy. The theory here is that since banks are taking money out of the economy, the Fed’s purchasing of government securities would put real cash back in, through bond dealer desks and the banks’ own checking accounts.
This appears to have worked, in its limited way, as the investors put the cash into the stock market, propping up asset prices. People tend to spend a portion of their newfound wealth, as we discovered when both stocks and house prices were going up at the same time.
But it is debatable as to how much actual spending has trickled over to Main Street as a result of QE and the desire for wealth effects. I think we all still feel pretty poor.
So I suggest we do a Main Street-only stimulus plan. I call it “Buy loan maturities.”
Okay, gotta work on the program name. But it will more directly affect the fortunes of small businesses than either the fiscal or monetary stimulus plans have done.
Here is the proposal: the Federal Reserve will pay out a portion of any loan maturing in 2011 and 2012 that was made to a U.S. employer of five to 1,000 full-time people. The bank being bought out will administer a 48-month extension of those maturities on behalf of the Federal Reserve.
Why these dates, amounts, and timetables? To change the economic psychology and get the Main Street juices flowing.
Because most companies have been feeling that they must reduce the risks inherent in owing bank debt. And the banks have been feeling that they must either reduce the number of loans outstanding – especially to the problem, slow-paying borrowers – or to raise more capital. So they have chosen to reduce the loans.
So everyone is in debt-paydown quicksand, and they are not hiring.
But if the competitive landscape is changed by companies being free to invest in expansion, they might do so. The reasoning is that, if they do not, their competitors, buoyed by the same program, and understanding the opportunities during this period, might.
So the reinvestment of nearly two years of bank principal could result in new capital spending, new retail expansions, and new hiring.
By definition, the program would reach out-of-the-way communities as quickly and as effectively as the former program enriched the bond dealers. A little bit of movement on the local front could mean new people moving in, old people selling or renting their houses, a new spring in the step of the community.
The practical side can be worked out – and I am not concerned that this should be an issue. My only concern is that the program be big enough to make a change to the liquidity, stability, and propensity to invest in our middle-market companies.
Because they represent 80% of the hiring in the country, and only changing their fortunes will mark a change to the unemployment rate.
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