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How will Geithner reconcile Wall Street bashing with strong dollar
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A society too emersed in a consumer mindset will extend that mindset to its "investment" decisions. Unfortunately leading the way on this mindset is the federal government. After witnessing corporate bailouts, the meltdown of Lehman Brothers, and hearing then-Senator Barack Obama bash Wall Street during the 2008 campaign, its any wonder that firms can still raise capital via a stock issue. Instead, the Obama administration and the Congress have chosen to support a continuing policy that encourages investment into the financial black hole of housing.
This is unfortunate given the economy's need for inexpensive capital and Treasury Secretary Timothy F. Geithner's statement today that the United States favors a strong dollar. If you want to boost the dollar's value, however, you need to create increased demand for American goods and services. Subsequently, we would then use up our existing slack in physical and human capital and as we reach capacity, increase the wages paid to workers.
We could have had the cheap financing necessary for business growth had we not incentivized it away in our efforts to boost up the housing market. America is about production, or, according to economist Edmund Phelps, it used to be. Instead, today we have decided to send capital and more of our means of production outside of the United States while maintaining our insatiable appetite for end-user consumption. One only need look at our negative export income of $387 billion in the third quarter 2009 for a reminder.
How has intervening in and boosting of the housing markets helped to reduce business investment and production here in the United States? It goes back to the adage of opportunity costs. Tax credits for home purchases and mortgage interest rate deductions persuade home buyers to put cash into an "asset" (and I use that word very loosely) with historically low returns versus into equities, which over the long term may average between ten and twelve percent in annual returns.
Imagine the type of buffer against foreclosures and unemployment most of us would be enjoying had the federal government not encouraged our misallocation of capital. Also imagine the access to inexpensive capital corporations would have had while the economy maintained full employment, higher rates, and a stronger dollar.
Now that Congress and the Administration have turned Wall Street into something to loathe and fear, it may be increasingly difficult to sell consumers on the benefits of moving toward a true ownership and investment society.
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