It's time to address underlying economic problems

By DAVID MOON, Moon Capital Management, LLC
September 18, 2011

Bank of America announced that it will eliminate up to 30,000 positions in an effort to cut expenses from its consumer bank division. That’s a quarter of the company’s consumer bank positions, yet Bank of America plans to close fewer than ten percent of its branches.

If it can continue to operate its branch system with 25 percent fewer people, why hadn’t the company already eliminated those unneeded positions?

That sounds pretty harsh, especially with 25 million people under or unemployed.

Anyone who criticizes Bank of America for the move, however, doesn’t understand business. Companies will hire people when they need more people.

People won’t buy a new house simply because rates have dropped another half point. Many businesses are awash in cash.

A lack of cheap money is not our country’s problem.

Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Timothy Geithner are treating an economic addiction to debt by trying to force the patient to take on more debt.

Like treating diabetes with donuts, it only makes the problem worse.

A week ago, Geithner published an essay in the Financial Times (of London) offering a plan for regaining momentum in the world economy. His very premise is bothersome. The economies around the globe become a bit more interrelated each year, but I don’t want the US Treasury Secretary worrying about the “world economy.” I want him worried about the US.

His editorial recommended that Congress pass the President’s newest stimulus bill. He wrote that Europe should be more forceful in generating investor confidence. Finally, he chastised Asian countries for not “properly” managing their currencies.

Based on that plan, Geithner believes that the solutions to US economic woes lie outside of the manipulative influence of the Treasury, Federal Reserve and the entire executive branch. I agree.

There are things our government can and should do. First, quit making things worse. Second, to the extent possible, make the patient comfortable. Finally, treat the underlying problems.

The Fed should abandon quantitative easing. It solves nothing, yet sets the stage for inflation. It benefits investment banks at the expense of savers and those on fixed income. Although an announcement of this sort would initially drive down bond prices, it would provide a needed increase in interest rates and stave off a worsening of the coming inflation.

Maximum weekly unemployment benefits should be temporarily increased, but without an extension of the benefit period. The top benefit level is woefully inadequate to help many of the middle-aged unemployed.

To address long-term problems, every federal program and piece of legislation should expire after 12 years. This would force a debate on the effectiveness of any Congressional action, rather than automatically perpetuating anything that gets into the budget.

Congress should be both term limited and required to pass a rolling five-year-budget. This reduces political pressure to purchase votes for the next election. It also forces a fiscal discipline that Congress is clearly unable to adopt as a matter of principle or patriotism.

Finally, Secretary Geithner should spend more time writing op-ed pieces for foreign newspapers.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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