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September 24, 2017

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U.S. needs a sovereign wealth fund

It is difficult to avoid contemplating the United States economy as the biggest Humpty Dumpty in a very long time. For years, Americans sat, like Humpty, on a wall built of the easiest consumer credit the world has known, of "no documentation" home mortgages for people who had no ability to pay, and of exotic collateralized debt and insurance obligations that few bankers or buyers really understood.

The fall has been greater than U.S. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke contemplated, and far greater than the US$700 billion bailout and the additional US$800 billion program to buy up debt that the Federal Reserve announced just before Thanksgiving. The total government commitment to guarantee deposits, inter-bank loans, and to ease credit is about US$8.5 trillion, according to Bloomberg news. A bad day in the U.S. stock market can suck nearly a trillion dollars of wealth out of the U.S. economy, and bad days have been frequent. Approximately one and a half million jobs have been lost since January. Contrast that to normal years, when the U.S. creates at least that many new jobs. Unemployment in the U.S. could exceed 10% next year. This week American automakers are asking for a US$34 billion bailout instead of the US$25 billion request that they couldn't justify last month, and public opinion polls show strong opposition to it.

Traditional American optimism makes us hope that President-elect Obama and all his men and women can put this humpty dumpty economy together again. It will be a daunting task, and former President Clinton's prediction of recovery in fifteen months to two years is overly optimistic. An economy in which consumer spending rose to more than seventy percent of the gross domestic product before the fall cannot recover that fast when consumers have no more money to spend, unemployment is at 10%, and 15% of American households owe more money than their homes are worth.

Treasury Secretary Paulson and Federal Reserve Chairman Bernanke have responded to the crisis in fits and starts. They saved Bear Stearns and CitiBank, and helped other banks, but let Lehman Brothers fail. That set off the near meltdown of the worldwide financial system. Although Paulson has thrown money at banks ever since, he stood by passively as the beneficiaries stated they would use the funds to buy other banks, rather than make more credit available as the bailout was intended to do. To complicate matters further, Paulson has been ideologically allergic to measures that would help distressed homeowners stay in their homes, in effect running away from the ground zero of the mortgage and housing crises.

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