The Economic Outlook

Another possible world is that the US slashes the corporate tax rate to out-compete other countries. And cranks up the H1B and green card numbers by a significant factor for "educated" foreigners.

Result: Lots of companies move back to the US and lots of new companies started in the US.

Call it a post-modern equivalent of trade wars. :)

#5 - "I still cannot picture unemployed investment bankers joining road-repair crews."

Perhaps a visual aid? Bad bankers, dodgy mortgage brokers, securities ratings "experts", credit default swappers, mortgage securitizers... Imagine them as characters in the following scene: http://www.youtube.com/watch?v=3Euekn_ksIc

The New York situation is such a non sequitur, who cares what happens to such a spoiled bunch of dimwits? You've noted that the financial sector needs to shrink, I'd similarly add that giant cities like NY and LA need to shrink.

What is missing from your economic outlook is a time span. I am old enough to remember the Great Inflation and the short lived recessions since the 60's. I expect downturns to happen, when will it end? My parents remember the Great depression. Is your outlook, a sharp two year recession like the early 80's, a decade of stagflation like the seventies, or a decade of depression?

Our economic outlook is poor.

1) Our financial industry is being allowed to get away with the largest fraud ever perpetrated. Banks should have been allowed to fail. AIG should have been allowed to fail.

2) The automotive industry saw that the gettin' was good and made a garish attempt to get in on the action. This is exactly what happens when you buy off a criminal: you enter a cycle of victimization.

3) Others will follow and soon everything will be "too big to fail".

4) Our politicians are demonstrating they are too weak to stand up to these pressures.

We have a bankruptcy system that is generally free of corruption. It's run by our court system which has due process, legal authority, case law and experience judges and staffs that know how to deal with these things.

We have unemployment insurance, pension insurance, worker retraining programs, deposit insurance and other such things to help protect the average citizen from the failings of our bigger, longer-living virtual citizens: corporate entities. Those are the tools that should have been used to address the possible failings of these institutions.

A car czar? Why not a bankruptcy judge? A car czar would be an appointed politician answering to pretty much nobody. What happened to our right to due process and fair legal proceedings? Creditors, employees and others should get their day in court.

Management at AIG, Citi and the big three automakers is either criminal, negligent, incompetent but most likely a healthy dose of all three. Let's be frank: these bailouts were all about preserving management and shareholders and not about workers and creditors. They are the exactly people who created these problems and they are the exact people who should be paying for the damage done.

Any bailout of the big three that kept people like Rick Wagoner employed should be viewed as an affront to decency. Why should this man be allowed to keep his job when thousands who did theirs will lose theirs? The union bosses are no better. They helped create this situation as much as anyone did. They'll keep their jobs, too, even though thousands of their members will lose their jobs and be forced to make major concessions (granted, they should have too--but having a job with less pay and fewer benefits is better than no job and no pay and no benefits).

Bankruptcy would most likely result in a change in management, and a major restructuring of this industry. The breakup of the big three would create opportunities for new investors to step in and purchase pieces of the business and put them back together in new and creative ways that would result in a growth industry rather than a stagnant one.

Everything said about the auto industry equally applies to the financial industry. AIG should have been allowed to fail. Keeping AIG alive merely preserves the Ponzy scheme they created. Where is the effort to unwind AIG? Why are they being allowed to continue selling insurance? They are effectively insolvent. The problem is that if AIG goes under their insurance is void and everyone has to put the risk they sold to AIG back on their books which means many banks will have to fess up to the fact that they are effectively insolvent as well.

As long as this goes on our economy will go down.

Welcome to 1990's Japan.

"The best of all possible worlds would be a huge shift in capital flows, with the U.S. doing more of the world's saving and other countries becoming more reliable places to invest. We would earn high returns building up capital in India, China, and the developing countries. They would increase their demand for our goods and services."

Wasn't that what was happening back when the global economy was on more solid ground? I feel like this contributed to the lowering of the risk premium that you had spoke about and lured capital away from the US, which drove the dollar up and drove interest rates down worldwide. I also feel like the expectations of future global oil demand rested on the growth of China and India and is what drove many speculators to drive up the cost of gas. Of course all of this is easier to speculate on than to actually prove.

There are a lot of mid-level and boiler room mortgage banking jobs out there that got filled by people who knew as much about banking as they do about civil engineering.

If the roadbuilding business gets to be a good enough racket, eventually the sub-prime mortgage salesmen will start showing up, just as they did in the IT industry in the late 90s. However, I will eat my bowler hat if this contributes to more than nominal job creation before 2010 if not 2012.

As for the higher-skill, higher-paid positions on the street and in hedge funds and whatnot, I don't begrudge them their fat years, but you're not getting any sympathy out of me now. They won the employment lottery. If they spent it like rock stars then they have earned a similar end. Those with useful skills will no doubt find their way back to the top shortly. Those without should go buy a pair of workboots and a shovel.

I don't think the education sector is safe at all. I'd go so far as to say it qualifies as having serious bubble potential. Higher Ed is seriously overpriced and is being hit by a sudden drop in demand, and local Ed will be slammed by state and municipal financial woes.

Pick up a newspaper ... Other countries already are working to protect their preacarous auto companies.

I can picture laid off autoworkers doing infrastructure work.

I will add my own observation based on the constant predictions of doom from everyone in the government and news media. Supposedly, if the government were not already bailing out the financial system, things would be far worse than they are. Well, today we did not bail out the auto industry and, even though we were promised that the world as we know it would come to an end, the stock market is actually up! This is in spite of the ponzi scheme news that also broke this morning. I am all for liquidity in times like these, but suspect that bailouts and low interest rates are not all they are promised to be.

"We would earn high returns building up capital in India, China, and the developing countries. They would increase their demand for our goods and services."

Why do economists continue to believe that China, Japan, Korea, India, etc., will ever buy our goods and services? They have the reserves to do so now, but continue to keep their markets predominantly closed. Their interest is in employment and development, not trade.

This would be a good time for a G8-wide zero tariff agreement.

(I personally find tariff issues with foreign goods a real pain, because I am often having foreign technical devices shipped to me for evaluation, and I ship it back to them if I don't buy it, and the paperwork is immense.)

No, Eric. Their interest is trade--trade to us, not trade from us.

Be very cautious when you hear all these Govenors running to Washington with a handful of "shovel ready projects". If you have been around construction as I have, you will see it takes years to start repairing a bridge or aquiring a new right of way. With the EPA, DNRC, OSHA, and envioramental groups opposed to any project, it can be many years to stick that first shovel in the ground. It takes 10-12 years to even think about a nuclear plant. Yes we need our roads and bridges upgraded, and the electrical grid expanded and modernized but this will be no quick fix for this economy as we know it.
One soulution I would prppose to start us on the track to recovery is a whole new way of thinking that went by the wayside long ago. It starts with Honesty. We need to get integrity and honesty back in the boardrooms, Goverment, Schools and in our own homes. Yes we have problems, lets quite playing the blame game and think of home we can start over. We have inventors in the basement shops and garages building better mouse traps and software. These folks need to be encouraged and those items brought to the forefront in this country. We will find an oil replacement, this needs to be worked on by all countries for the betterment of mankind. Dont worry ther will be plenty of profit to go around. We need to work together as a nation once again with a can do outlook. Times will be painful for quite awhile but dont write off the American Dream.
Lastly, we need to walk that higher morale road starting at home. My genration has done enough harm with greed and lies, we can start over with our kids and grandkids.