What Would Obama Do? (To get us out of this recession.)

For all you out there wondering what tools Obama and his administration are going to use to get the U.S out of this recession here is a quick synopsis:

1) Government expenditures.  Increase government spending through infrastructure development and investing in new technologies like green energy.  This will create new jobs, new money, and lead to more spending which will hopefully stimulate the economy.

The downside to this method is that it causes private investment and consumption to be “crowded out.”  Crowding out happens because government spending causes the demand for money to increase due to people with new jobs (created by the government spending) who now want to hold money.  This increases the interest rate as the supply of money remains fixed.  Thus, making it more expensive to invest and therefore reducing private investment.

Also, high interest rates caused by government spending could reduce consumption as people will be more inclined to save and utilize the high rates to earn future money.  Right now we need to increase consumption and private investment to stimulate the economy.  It is possible that increasing government expenditures could decrease consumption and private investment.  There are many theories though that also say government spending is an effective way to stimulate an economy.

2)  The Treasury Plan.  This is the idea to buy up all the banks’ toxic assets (bundled mortgages, etc.) and pay the banks about 85% of the toxic assets’ value.  This will clean up the banks’ balance sheets and give them much needed liquidity and therefore funds to lend.  This will make them more solvent and in a better position to start lending funds out to businesses and consumers who will then spend this money, which will hopefully cause a multiplier effect through more and more spending.  This will create jobs and cause unused resources (unemployed workers, companies who have either severly reduced operations or completely stoped) to become utilized and help raise the U.S out of recession.  The only question is can the Treasury resell all these toxic assets in the future for more than they bought them for (85% of their current value)? Or are these toxic assets a write off?  This is a complex issue.

This is the plan.  Now lets see if it works.