Sedona Hotels Fight Economy: Is there Hope?
I am writing this blog post in response to many of my professional clients, who have recently asked for my opinion on our economy. I thought that I would break this blog post into two parts: part one would be a statement of facts, trying to leave out any personal views that I might have; and then the second blog post will interject my opinions. I look forward to publishing these blog posts and soliciting as many comments as I can, in hopes that maybe we can have an impact on our current state of affairs.
I believe it was Detective Joe Friday who made this quote famous, "Just the facts, Mam".
As I write this post, a recent poll indicated that 50% of those economists polled now believe that we are headed for a double dip recession. As a practicing Certified Public Accountant, with active clients in the Northwest, Southern California and the Southwest, I can state that most small business owners do not believe that the recession labeled as the 2nd Great Contraction by Kenneth Rogoff and Carmen Reinhart in their excellent text, "This Time is Different: Eight Centuries of Financial Folly", never ended. As we approach the 2011 Labor Day weekend, the number of unemployed individuals is still above 9%. Republicans blame the failed policies of the Obama Administration; Democrats blame the Republicans for creating grid-lock; and now, Vice President Biden has labeled the Tea Partier's as Terrorists. Critics of President Obama's decision to let congress take a vacation while the economy teeters on the brink were shocked by his statement that the last people he wanted back in Washington were the Congressman. Isn't that what President Reagan once told us, "that Washington is not the solution--it is the problem"? Many of my clients, and a few Sedona Arizona Hotels, including the Southwest Inn at Sedona have asked, "how did we get into this mess, and how are we going to get out"?
Looking back to 1990, we were going through a minor recession, because of a blowup in the Tech Boom. Our economy was flat and going nowhere. Washington came up with a clever plan to stimulate our economy and provide a social agenda to those who could not afford a home: Ease monetary credit and regulations. Massachusetts Representative Barney Frank in his role as Chairman of the House Banking and Finance Committee empowered Fannie May and Freddie Mack to begin aggressive lending to banks, which were encouraged to loan to individuals who would not have qualified for loans, without the easing of financial regulations. What followed was one of the greatest expansionary periods in our countries history. But after so many years of growth, stimulated by the real estate industry and the ever-increasing desire to put anyone and everyone into a home, the easy credit that created our "false" economy (sounds like an opinion, but it is a fact) overtook common sense, and our national debt to income ratios soared to above 125% by 2007. Charts in the "This Time will be Different" text clearly show that once you go above 90%, you are entering unsustainable territory.
Now, after years of economic stimulus, why are we now talking about a 2nd recession? Where did all of that money go?
The Fed embarked on an unprecedented program of buying up the "toxic assets" (the bad loans made to individuals who should not have been allowed to take them out), from the banks who had written the loans, which then swapped bad debt for cash on the balance sheets of the banks, but at the same time Washington under Barney Frank (yes, the same guy who created this mess) wrote over 500 banking regulations encapsulated into the Dodd-Frank Bill, which made lending these funds out to the public almost impossible. This government disconnect, which created an infusion of cash into our system, also froze the funds in the vaults of the banks with a burden of regulations. Bloomberg News reported on Friday, September 2, 2011 that the Federal Government has now filed law suits against 12 of the largest banks from whom the government bought the bad loans from, for selling them fraudulent loans, (again a fact, which makes it very hard not to interject an opinion). Didn't we use a bait and switch gimmick: unsustainable private-sector debt was transferred to public debt; and now those debts are unsustainable as public debt. The August 13th issue of The Economist stated it exactly, "the risk of America and other rich-world countries slipping into recession again is real. The root of the problem on both sides of the Atlantic is simple: too much debt, and too little political will to deal with its consequences".
So, why did Bernie Madoff go to jail and Barney Frank will receive a pension for life?
In August of 2011, the Standard and Poor's rating agency downgraded the United States debt to AA+ from AAA. The Charles Schwab Center for Financial Research stated that the S & P's rationale for the downgrade was its view that the recently negotiated budget agreement fell short of what's needed to stabilize rising US debt levels. They added that an additional factor was the contentious nature of the budget process itself, which reduced the S & P's confidence in the ability of policy makers to address rising US deficits. The August 15th issue of Time Magazine stated that the credit rating agencies were looking for a $4 trillion deficit cut, which would have dropped the percentage of US debt to GDP from 101% down into the low 90's, where according to the research of Rogoff and Reinhart, is barely over the threshold of unsustainable.
Democrats want to stimulate our economy by using Keynesianism policies of increasing government spending; even though The Office of Management and Budget reports that 35% of our current debt is directly attributable to "government programs" including the shortfall in tax revenues from the current recession. Republicans, led by Sara Palin rant and rave about lowering taxes, but as I pointed out to Judge Andrew Napolitano on a recent Fox News radio show, taxes are a simple algebraic equation, which multiplies "taxable income" times a tax rate: remember that a number times zero is still zero. Under our current economy, our government is collecting fewer taxes, because of the drop in taxable income of so many small businesses; so lowering taxes does not appear to be the problem. As a practicing Certified Public Accountant with a degree in Tax Law, I can tell you that the United States has the most complicated and inefficient tax system in the world, largely because each congressman has written in countless loopholes to satisfy their constituents.
Quite simply, our debt is a function of our government's choice to spend more than they take in. If we look at our debt acquisition back to President Nixon and the abolition of the Gold Standard, we can see that we were very close to being neutral. Under Presidents Ford and Carter, Congress adapted the Keynesianism model of stimulating the economy by spending more, which in turn ran up the deficit between income and spending. Ironically, Republicans point to President Reagan for stimulating the economy with tax cuts, but the fact is that under President Reagan, we ran up record deficits, primarily through a build up in military spending. By the time President Reagan handed the rains over to 1st President Bush, the deficit had been reduced, but it still was a deficit. President Bush ran up more spending by way of the first Gulf War. Finally, under President Clinton and the Newt Gingrich led congress, we eliminated the deficit, and actually produced a budget surplus. Under the 2nd President Bush, and a democratic led congress that went nuts spending the Clinton surplus, we quickly fell back into a deficit. President Obama says that he inherited this mess, but whom did he inherit it from: President Bush, or Nancy Peloci and an out of control Congress? Either way, Obama's government has now outspent all of his predecessors by record levels. Former Governor Mike Huckaby has stated that it is time to "throw the bums out"; is he right? A recent New York Times poll found that 82% of Americans disapprove of how Congress is doing their job.
Carmen Reinhart and Kenneth Rogoff, in a July 14, 2011 post to Bloomberg News stated that, "current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP".
Has the Obama Stimulus program worked? We currently have record deficits, plummeting consumer confidence, extraordinary cash holdings of US corporations, a sudden drop off in retail purchases, and a decline in the exchange rate of the US dollar. Anders Aslund, writing for the Petersen Institute for International Economics has stated that, "the United States needs a fundamental reform of both public expenditures and revenues to function normally". We have lost a generation of growth, and yet many of those who accumulated debt prior to 2008 are still saddled with untenable debt payments. We know what those who took out the real estate loans, which could not be afforded did: they walked. Ironically, most of the government's efforts have been aimed at these financial vagabonds, leaving the rest of functioning America to struggle beneath the weight of the debt burden. As long as this debt burden rides on our shoulders, consumers are not going to spend, thus business are not going to hire. What makes Congress believe that a cut in the payroll tax will encourage businesses to go out and hire new employees? Only a demand of goods and services will produce that affect; and only a reduction of debt to income will allow individuals to feel comfortable about spending again.
Congress bailed out Wall Street, why can't they bail out Main Street? Carmen Reinhart spoke to the 2010 Jackson Hole Economic Symposium, and advocated the need for "forbearance". If countries like Greece are allowed to receive debt restructuring, and if underwater homeowners can simply walk away from their financial troubles, then why can't Congress come up with a plan to help successful and struggling businesses restructure their debt, which in turn would increase their cash flow, which in turn increases spending, which in turn increases hiring of new employees.
Is all of the government's spending necessary? The World Economic Forum has downgraded America to 68th for government waste. You will recall that President Reagan created the Grace Commission to study government waste. That commission never died; it is now called Citizens Against Government Waste. They publish an annual summary of those most outrageous expenditures by congress. Why not start reducing our expenses by following a few of their recommendations? Remember then candidate Obama's example of government waste: there are two agencies overseeing Salmon-one for when they are in the water, and one for when they are out of the water. We now have more money and more people working for government agencies then we had 3 years ago, and with no apparent help to the economy. In fact hiring government workers adds to the already bloated reserve of federal entitlements and pensions required to take care of these workers.
Finally, should a fairly simple tax return for an average family, with wages, a little interest and dividend income, maybe a retirement account and a home mortgage and a few medical expenses really require most of a weekend to prepare for the average citizen? Should the Tax Code be written for self-serving interests via loopholes?
Those are the FACTS. I have tried to stay politically neutral without tipping my hat; however, in the follow up blog, I will go hell bent on expressing my opinions. For now, I have read the facts, and I believe that some combination of Forbearance, or debt restructuring to improve the debt to income ratio, along with Governmental expenditure and tax reform are the only answers to our economic problems.
The Southwest Inn at Sedona is making an ongoing effort to produce our own form of forbearance through price and value offerings. If you are interested, please read how the Southwest Inn is Helping the US Economy.