No Easy Answers for an Economic Nightmare

Hardly a day goes by without a company or an entire sector coming to Washington, begging to be bailed out. We’ve had the predictable, with the car giants General Motors (NYSE: GM  ) and Chrysler -- Ford (NYSE: F  ) is thus far abstaining -- passing the begging bowl around. And we've had the unpredictable, with two porn owners recently saying Congress must "rejuvenate the sexual appetite of America."

I think I'll join the queue next. I’ve seen my net wealth fall by around 30% over the past 12 months, and I’ve had enough. I want to go back to the good old days, when I could walk into Home Depot (NYSE: HD  ) , grab a new washing machine, bath, shower, kitchen and patio furniture, with no upfront payment, and pay no interest for three years.

Oh, and the value of my house has gone down lots, too. I felt much wealthier when it was worth 25% more, and plus, I could always do a home equity withdrawal if I fancied jumping on a round-the-world cruise -- upper deck, of course.

Bail me out too, please
What do you think, President Obama? Do I qualify for a bailout? Things are really tough for me now. I have to work more hours so I can earn more money. I may lose my job. I have to cut back on my spending. I’ve even had to switch my grocery shopping from Whole Foods (NYSE: WFMI  ) to Wal-Mart (NYSE: WMT  ) . All in all, things are grim.

But as grim as things may sound for me, they are nothing compared to the millions of unemployed Americans, the millions of people who have already lost their houses, and the millions of people who are living on the absolute breadline. And it’s only going to get worse.

But how do we get financial help to them, to the people who most need it? How do we right this listing economy?

It’s those very questions that are confronting our brand-new president right now. He and his advisors are devising plans they think will solve our economic woes.

Free checks don’t work
There are no easy solutions. Ex-President George W. Bush tried posting checks to millions of people, urging them to spend the money, thinking it would help the economy. Not surprisingly, it gave the economy a one-off boost, but once the checks were spent, the economy snapped back to exactly where it was before. D'oh.

What about tax cuts? Sounds good. Cutting taxes for businesses might encourage them to sack fewer people because they don’t need to save as much money. Cutting taxes for individuals means we’ve all got a few more dollars in our pockets to spend.

On the flip side, tax cuts can be politically difficult to reverse. Often the rich benefit far more than the poor. If people save their tax cuts rather than spend the extra cash, that won’t really help the economy much at all. And then there’s that massive deficit we have to pay back at some stage, and guess who is on the hook for that? Yep, it’s you and me, via higher taxes sometime in the future.

Spend big
Spending. That’s the key. We’ll spend our way out of trouble. We’ll build roads, hospitals and public transport. Not only will we have some world-class infrastructure, but we’ll be creating a few million jobs.

It will be great for anyone who can pour concrete or safely wield a nail gun. For someone like me, whose attempts at home DIY usually start with a screwdriver, end with a sledge hammer and a much bigger problem than I began with, it may not help me too much. But hey, it’s not about me.

Those are some of the many challenges facing our president today, and that’s before we even touch on the thorny subject of Big Bad Bank -- that’s the debated government-created bank into which all the banks are supposed to dump their toxic "assets." We won’t go there today.

We can’t just do nothing
Unfortunately, doing nothing is not an option. The economic and social chaos is not worth thinking about. Obama has to do something, it’s just that every something has a catch.

I don’t envy the task at hand. Governments and central bankers across the globe are spending as fast as Michael Jackson, and cutting interest rates to zero. I also don’t have any "light-bulb" solutions, unlike the hoards of hindsight economists who are waiting to pounce when deflation turns into rapidly rising inflation in 12 to 18 months' time, despite that being precisely the goal.

In my mind, everything adds up to a long recession, with the economy not turning up again for at least another 12 to 18 months, possibly even longer. In the meantime, we should do as much as we can to hang onto our jobs, pay off any debts, and concentrate on rebuilding our wealth.

Investing opportunities in a flat market
It could mean the stock market remains relatively flat for an extended period of time. That doesn’t mean there are no opportunities, but it does mean you’ll need to be selective. My personal preference is for large, dividend-paying companies, companies like Procter & Gamble (NYSE: PG  ) and Johnson & Johnson (NYSE: JNJ  ) . They may not set the world on fire, but they'll let you sleep at night, pay you a decent dividend, and should allow you to avoid another permanent loss of capital.

The Motley Fool Income Investor newsletter is chock-full of large, steady, dividend-paying stocks. You can check out their very latest picks by signing up to a no-obligation free 30-day trial.

Fool contributor Bruce Jackson can remain flat for only so long. He is a beneficial owner of Procter & Gamble shares and options, and the Motley Fool also owns the stock. Johnson & Johnson is a Motley Fool Income Investor recommendation. Wal-Mart Stores and Home Depot are Motley Fool Inside Value picks. Whole Foods Market is a Motley Fool Stock Advisor recommendation. The Motley Fool's disclosure policy is not receding.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2009, at 2:32 PM, SteveTheInvestor wrote:

    I think the first move should be to determine exactly how many banks are even solvent. If enough of them are to allow for a reasonably competitive market, let the solvent banks take over and shut the others down. Don't buy their toxic assets, don't bail them out. Just move the accounts and turn out the lights. For once, those who hold the toxic assets need to take responsibility.

    As a taxpayer, it sickens me to bailout firms that were reckless (stupid).

  • Report this Comment On February 02, 2009, at 2:51 PM, jralso wrote:

    I agree with the first post, and contrary to the authors representation that no action is not an option...no action is always an option (some decided they did not like it, but it exists)

    "I’ve even had to switch my grocery shopping from Whole Foods (NYSE: WFMI) to Wal-Mart (NYSE: WMT)"....somehow I do not believe the author went from food shopping at wfmi to shopping at wal mart.

  • Report this Comment On February 02, 2009, at 2:54 PM, nerd1951 wrote:

    The misunderstanding about infrastructure spending is distorting the whole discussion of the economic stimulus. It's not just designed for those who drive bulldozers and pour concrete. Much of the "pork" that people are complaining about will also create jobs. $500 million to NASA to study climate change? Put scientists, engineers, technicians and their support staff to work. More Pell grants? Keep college and university instructors and staff employed. New computer systems for government agencies? Put IT workers, computer manufacturers and shippers working. I may be getting all Keynesian but one person's pork is another's job. And yes, lets put those construction workers to work fixing our crumbling roads while we're at it.

  • Report this Comment On February 02, 2009, at 4:08 PM, whereaminow wrote:

    Promoting evil simply because you see no viable alternative is still evil. The Motley Fool staff needs to do some soul searching. They need to take a principled stance against government handouts. They need to take a deep breath, exhale, and start diagnosing the cause and offering viable solutions.

    Here is my full rebuttal to Bruce Jackson's article:

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=139261&t=0...

    David in Qatar

  • Report this Comment On February 02, 2009, at 8:09 PM, AtlasAynRand wrote:

    Yes we CAN DO NOTHING. And we should do nothing.

    Doing nothing is called CAPITALISM.

    To think the likes of Government can identify every twist and turn to insure no unintended consequences, and spend our way out of this self-created mess, is just, well just plain stupid.

    After we print up all the money we can, who will be our masters? China? Japan?

    Are we to be the United States of (fill in name of Country)?

    Guess we won't have to worry about trade protectionism. Buy America will be just that...

    we will be bought.

    I keep waiting to hear the Government talk about a clawback from those high and mighty folks who hijacked our economy in the first place. Guess it could hurt re-election fund raising and those in Congress who joined in the ride up.

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