PrintMarch 1, 2009
Government to the Rescue?
What is the cause for the current recession? That is the question that has become worth 6.2% of America's GDP.
The answer to that question has proven elusive even to great financial minds such as Secretary of the Treasury Timothy Geithner, who has complained that TurboTax is too difficult for him to use. I place blame for the current recession on both Democrats and Republicans.
Democrats are responsible for causing this crisis:
Former President Bill Clinton placed significant pressure on Fannie Mae to increase lending to "low and moderate income people," as a September 30, 1999 New York Times article reported. Those who bash George W. Bush as having deregulated the financial sector should realize that Clinton repealed part of the Glass-Staegall Act, which had been in place since 1933. Former President Jimmy Carter, who presided over the highest interest and unemployment rates since the Great Depression, signed the Community Reinvestment Act in 1977. The Act encouraged subprime lending, especially lending into what many proponents of the Act called "communities of color" with less regard for the potential loan recipients' financial standing.
Both Democrats and Republicans are responsible for exacerbating and prolonging the crisis:
Former President George W. Bush took anything but a "ready, aim, fire" approach; he favored a "ready, fire, aim" approach without the "aim" or "ready" parts. Very soon after the severity of the problems became apparent, Bush endorsed the TARP program. Strongly backed by then-Secretary of the Treasury Henry Paulson, the TARP program has been anything but clear and effective. Originally, the program was to buy banks' toxic assets, which the Secretary said were not valueless. My question to him was, if they were not valueless then why was no one except the government willing to buy most of them? Paulson later admitted that, even while he was informing Congress that the program was for the purchasing of toxic assets, he had decided that the idea was not viable. Instead, the government decided to implement textbook socialism by buying into private firms. Bush exclaimed that he abandoned his principles to save the economy. In my opinion, one who is led by his or her principles only in times of gain is not principled at all. Assessing the success of this program has also proved controversial and difficult as its stated goals have changed. Before the goal was simply to avoid bank failures it was to cause banks to begin lending money again.
On the Democratic front, things have been at least as detrimental. President Obama has continued the TARP program while announcing bailout plans of his own. He has spent more money in his first month in office than any President in American history. He has now done the unthinkable: announce significant tax increases during a recession. The tax increases will not be sufficient to meet Obama's "halving the budget" goal, so how long will it be until lower income levels see their own tax rates increased? Because no country can loan the amount of money needed to cover Obama's new spending, the Fed is simply issuing IOU's to the Treasury while the Treasury prints trillions of dollars to keep the government afloat. While certainly not a problem at the moment -- outside of that caused by energy prices -- inflation is a near certainty in the not-so-distant future.
Obama has proposed spending breathtaking amounts of money, including a $643,000,000,000 down payment on America's universal healthcare system, which does not even exist as a plan. By some estimates, the debt Obama could ring up in eight years could be three times what Bush is responsible for, and Bush was certainly not a conservative spender. Obama attempts to pass these types of spending bills off by saying that they are necessary to "arrest the downward spiral" of the economy. He says that he does not want a "lost decade" like that experienced in Japan, but Japan increased its government spending by 400%, yet it remained in a recession for an entire decade. Certainly this lends no credence to the idea of a government's ability to spend a nation out of recession. Even FDR's Treasury Secretary said that they spent a lot of money, and it didn't work! Government debt of the size America has accrued is extremely dangerous. For those who do not believe me, you could ask the Soviet Union or Rome, but neither of them exists anymore.
Both sides of the aisle have fingered falling housing prices and non-existent lending as the causes of this recession. My response? Both are wrong; politicians in both Parties are at fault.
It is true that housing prices have fallen from their 2006 records. How low they have not fallen is shocking. Adjusted for inflation, housing prices are only at 2000 levels (still extremely high, historically). Nominally, housing prices are only down to 2002 levels.
According to an October 1, 2008 Forbes article, lending continued to trend upward even deep into the economic crisis. August 2008 lending levels were 9.5% higher, year-to-date. Recent data have shown that lending levels are still robust. When government says that lending is "non-existent," it is talking about the largest banks. However, smaller banks have gladly taken up the lending slack.
Negative rhetoric from Republicans, and now Democrats, is responsible for this crisis. Defaulting on loans certainly was taking place at fairly high levels, but defaulting on subprime loans is nothing new. Even now, only 8% of Americans have defaulted. Banks failed, but again, that's nothing new. Larger-than-normal numbers of people defaulting on their loans did indeed cause some banks to fail. Admittedly, combining this with falling housing prices created a very uneasy situation economically. It did not have to be this bad, however.
As some banks failed, news leaked about the government's list of hundreds of other "at-risk" financial institutions. This news -- combined with apocalyptic talk from vote-mongering politicians -- caused mad rushes on many other banks by people who, out of fear, wanted to retrieve their money. Bush and Paulson heralded the TARP program as completely necessary to avoid total economic disaster. When it initially failed to pass, investors became so afraid that they sent the Dow plunging 700 points in a single day. Now Obama says things such as, "...failure to act on an economic recovery package could plunge the nation into a long-lasting recession that might prove to be irreversible..." The Congress did, in fact, act on Obama's economic stimulus package, yet Obama's rhetoric has only gotten gloomier. This is the politics of fear, and investors and consumers alike are certainly fearful. Obama should take Clinton's advice and be a little more optimistic.
All of this talk from politicians has cratered investor and consumer confidence causing both to significantly cut back on spending due to misconceptions. Lending remains robust, and housing prices are anything but historically low; yet most people do not know this. They live in fear due to government-caused ignorance, and so they cut back significantly on their spending. This directly leads to massive lay-offs, more defaulting due to the lay-offs, and further economic decline. Anytime small snippets of positive news are released, politicians' doomsday rhetoric quickly drowns it out.
People are fearful because of the talk from the government, but is the talk from the government well-founded? No. By engaging in this negativity, government officials are preventing from happening the thing that can most quickly lift us from recession: increased consumer spending.
There is a very easy solution to this problem. Government: stop the apocalyptic rhetoric and immediately cut taxes.
