Why didn’t the U.S. follow Iceland’s example and forgive all debt by its citizens to recover from the financial crisis?

Since the end of 2008, Iceland’s banks have forgiven loans equivalent to 13 percent of the gross domestic product, easing the debt burdens of more than a quarter of the population.  According to Laes Christensen, Chief emerging markets economics at Danske Bank A/S in Copenhagen “Iceland followed the textbook example of what is required in a crisis.  Any economist would agree with that.”

I will start off the paper discussing Iceland’s economy and what lead to their economic meltdown and how large a role forgiveness of debt played in helping them to recover.  The second part of the paper I will discuss what America did in order to recover from the financial crisis and what experts said about forgiveness of debt, both good and bad.  I will also add my own opinion and tell who I agree with and why.

I will conclude my paper with how President Franklin Delano Roosevelt forgave debt to help America recover from the depression in the 1920’s and what financial experts said about his decision to do so.

Paper Draft

Jacques Toussaint

Professor Mkang

Pol 3103

November 18, 2012

 

 

Swiss Government and Economic Recovery

The financial crisis experienced in 2008 was the single largest economic slow down globally. Five years later, many of its effects are still being felt and recovery only seems feasible when making projections over the next ten years.  Unemployment, through much of the western world, stagnates near 10%. Pre-crisis normalcy seems nowhere in sight in the United States or in much of Europe. However, Switzerland, one of the financial capitals of the world, seems to have recovered from all symptoms of the crisis. Unemployment is under 3% and the median income is over USD 107,000 a year. Why? Why has Switzerland managed to overcome the banking crisis when others are still suffering from its effects?

The answer is quite simple: strong government intervention. The extensive role of the state has created market-wide reforms for the Swiss banking system and the measures implemented have created a secure and trusted banking system. It has made the baking system both strong and capable of handling major crises, such as the one that occurred in 2008. Many credit the strength of the banking system to large influx of international capital when in fact it is the other way around; the strength of the system attracts capital. The strength of Swiss banks comes from the strong government regulations.

The first section of my paper will discuss the what is implied by “overcome” and the “banking crisis” when referring to the Swiss financial system. The second part of the paper will summarize the current views as to why Swiss banking is strong today while comparing it to current American banks. The third part will discuss my hypothesis as to why Switzerland has largely avoided and recuperated from the financial meltdown of 2008. Finally, I will discuss how the United States government could learn from some of the microeconomic policies implemented in Switzerland and how these policies could help the United States recover at a faster pace.

Wall Street Journal Opinion: Do you agree with this view?

The 10% President

A question raised by President Obama’s immortal line on CBS’s “60 Minutes” on Sunday—”I think that, you know, as President, I bear responsibility for everything, to some degree”—is what that degree really is. Maybe 70% or 80% of the buck stops with him? Or is it halfsies?

Nope. Now we know: It turns out the figure is 10%. The other 90% is somebody else’s fault.

This revelation came when Steve Kroft mentioned that the national debt has climbed 60% on the President’s watch. “Well, first of all, Steve, I think it’s important to understand the context here,” Mr. Obama replied. Fair enough, so here’s his context in full, with our own annotation and translation below:

“When I came into office, I inherited the biggest deficit in our history.1 And over the last four years, the deficit has gone up, but 90% of that is as a consequence of two wars that weren’t paid for,2 as a consequence of tax cuts that weren’t paid for,3 a prescription drug plan that was not paid for,4 and then the worst economic crisis since the Great Depression.5

“Now we took some emergency actions, but that accounts for about 10% of this increase in the deficit,6 and we have actually seen the federal government grow at a slower pace than at any time since Dwight Eisenhower, in fact, substantially lower than the federal government grew under either Ronald Reagan or George Bush.7

***

Footnote No. 1: Either Mr. Obama inherited the largest deficit in American history or he won the 1944 election, but both can’t be true. The biggest annual deficit the modern government has ever run was in 1943, equal to 30.3% of the economy, to mobilize for World War II. The next biggest years were the following two, at 22.7% and 21.5%, to win it.

The deficit in fiscal 2008 was a mere 3.2% of GDP. The deficit in fiscal 2009, which began on October 1, 2008 and ran through September 2009, soared to 10.1%, the highest since 1945.

Mr. Obama wants to blame all of that on his predecessor, and no doubt the recession that began in December 2007 reduced revenues and increased automatic spending “stabilizers” like jobless insurance. But Mr. Obama conveniently forgets a little event in February 2009 known as the “stimulus” that increased spending by a mere $830 billion above the normal baseline.

The recession ended in June 2009, but spending has still kept rising. The President has presided over four years in a row of deficits in excess of $1 trillion, and the spending baseline going forward into his second term is nearly $1.1 trillion more than in fiscal 2007.

Federal spending as a share of GDP will average 24.1% over his first term including 2013. Even if you throw out fiscal 2009 and blame that entirely on Mr. Bush, the Obama spending average will be 23.8% of GDP. That compares to a post-WWII average of a little under 20%. Spending under Mr. Bush averaged 20.1% including 2009, and 19.6% if that year is left out.

Footnotes No. 2 through 4: Liberals continue to claim that the main causes of the current fiscal mess are tax rates established in, er, 2001 and 2003 and the post-9/11 wars on terror. But by 2006 and 2007, those tax rates were producing revenue of 18.2% and 18.5% of GDP, near historic norms.

Another quandary for Mr. Obama’s apologists is that he has endorsed nearly all of these policies. The 2003 Medicare drug benefit wasn’t offset by tax hikes or spending cuts, but Democrats expanded the program as part of ObamaCare.

The President also extended all the Bush tax rates in 2010 for two more years in the name of helping the economy, and he now wants to continue them for people earning under $200,000, which is where 71% of their “cost” resides. The Iraq campaign was won and beginning to be wound down when he took office, and he himself surged more troops in Afghanistan.

Footnote No. 5: Mr. Obama keeps dining out on the excuse of the recession, but that ended halfway through his first year. The main deficit problems since 2009 are a permanently higher spending base (see Footnote No. 1) and the slowest economic recovery in modern history. Revenues have remained below 16% of the economy, compared to 18% to 19% in a normal expansion.

The 2008 crisis is long over. The crisis now is Mr. Obama’s non-recovery.

Footnote No. 6: Even at face value, Mr. Obama’s suggestion that he is “only” responsible for 10% of what the government does is ludicrous. Note that in addition to his stimulus, what he calls “emergency actions” include his new health-care entitlement that will cost taxpayers $200 billion per year when fully implemented and grow annually at 8%, even using low-ball assumptions.

But the larger point concerns executive leadership. Every President “inherits” a government that was built over generations, which he chooses to change, or not to change, to suit his priorities. Mr. Obama chose to see the government he inherited and grow it faster than any President since LBJ.

The pre-eminent political question now is whether to reform the government we have to make it affordable going forward, or to keep growing the government and raise taxes to finance it, if that is even possible.

Mr. Obama favors the second option, though he pretends he can merely tax the rich to do it. Nobody who has looked honestly at the numbers believes that—not his own Simpson-Bowles commission and not the Congressional “super committee” he sanctioned but then worked to undermine.

At every turn he has demagogued the Romney-Ryan proposals to modernize the entitlement state so it is affordable, and he personally blew up the “grand bargain” House Speaker John Boehner was willing to strike last summer.

Footnote No. 7: Mr. Obama’s posture as the tightest skinflint since Eisenhower is a tutorial in how to dissemble with statistics. The growth rate seems low because he’s measuring from the end of fiscal 2009, after a one-year spending increase of $535 billion. That is the year of his stimulus and thus spending is growing off amuch higher base. The real annual pace of government growth is closer to 5%, and that doesn’t count ObamaCare.

***

In another news-making bit with “60 Minutes,” which the program decided not to air, Mr. Obama conceded that “Do we see sometimes us going overboard in our campaign, mistakes that are made, areas where there’s no doubt that somebody could dispute how we are presenting things, that happens in politics.”

Note the passive voice, as if the President’s re-election campaign is disembodied from the President. If Mr. Obama’s campaign seems dishonest enough that even Mr. Obama is forced to admit it, this is because it’s coming from the top.

A version of this article appeared September 25, 2012, on page A18 in the U.S. edition of The Wall Street Journal, with the headline: The 10% President.

Monetary Policy: Quantitative Easing vs. Tightening Policy

Which policy do you support?  Why?

The Federal Researves have repeatedly announced that it would maintain a lower interest rate policy, while providing more liquidity (money) to the markets.  Of course, more supply of liquidity can cause inflation in the near future.  Which political groups support which policy?  What are their supporting logic (or rationality)?

Just feel free to link website or post your opinions on this issue.

Fiscal Policy: Expansion vs. Austerity

Which policy do you support for the U.S. government policy?  More importantly, Why?

Most governments in advanced economies have expanded government’s spending.  But in some cases, espeically in the Euro area, expansionary fiscal policy has been one of most controversial policy issues.  Of course, a similar debate has been going on here in the United States.  Can you identify key politics groups (proponents & antigonists) on the fiscal policy issue in the U.S.?  What are their distinctive logics to support their policy position?  Which one do you support?