PrintNovember 14, 2009
Not Too Big to Fail
Recently the government released figures for third-quarter economic growth, celebrating a whooping 3.5% GDP increase. The market rallied as the Dow climbed above 10,000. According to a Wall Street Journal report, the White House announced the creation of 640,000 new jobs thanks to the stimulus package. Is all the hoopla just an overly optimistic, time-calculated cheerleading exercise right before the elections, or is this "recovery" real?
Last fall, the mortgage meltdown and other factors caused the economy began to tank, and with it, many bank loans went from stale to toxic. TARP's injection of capital was designed to as a financial lifeline to help banks to stay afloat -- especially the larger banks, because their failure would be devastating to the national economy. So the concept of "Too Big To Fail" was born, and it was subsidized by the American taxpayer. From every quarter, concern and fear reverberated.
But along with the American obsession for instant gratification and instant fixes comes a lapse in national financial fortitude. The prevailing sense is that government must solve not just the big economic, political, and social problems, but personal ones, too: my health, my kids' education, my retirement. Government policy panders to the consumer (especially the poor) instead of championing the producer. Because the American taxpayer is ubiquitous and therefore invisible, someone else, distant and unknown, foots the bill. Ironically, this is literally true for the 50% of American income-earners that pay no income taxes at all.
So President Bush instituted the Mother of All Bailouts with TARP. Now President Obama has picked up the ball, and like Forrest Gump, he is out of the end zone and still running. He's not about to let a good crisis go to waste. What was to be a bank bailout (which we could halfway justify to keep our economy from cardiac arrest) became the economic equivalent of treating ingrown toenails and breast implants as the government bailed out car companies, struggling homeowners, and insurance companies, too. Or maybe the objective was to build political power. In any case, running up a $1.4 trillion U.S. budget deficit in one year should set off major alarms.
Don't forget: the Stimulus Package -- the Grandmother of All Bailouts -- was designed to stimulate the economy until the good times do roll again. But it's sobering to read up on U.S. prosperity in 1930s and what happened to Japan in the 1990s. Back then, governments tried to sustain their respective economies simply by spending money, but it had the reverse effect. Again, nobody consulted the history books when the Cash for Clunkers program was designed. When it ended, car sales flatlined again.
The same thing will happen when the First-Time Homebuyers program ends. It's like trying to fix a water leak with duct tape. With little consumer confidence and an annual revenue of $2.4 trillion, the government can't prop up a $14-trillion economy, especially when it is obligated and/or committed to defend our shores, deliver the mail, feed the poor, and provide health care for the elderly and poor (soon to be everyone).
Reviewing Economics 101, the value of any goods or services has to justify the cost. If the justifiable expense can't be paid for with cash, then it has to be paid for with debt. So today, when the government doesn't have enough cash to meet its budget, it must borrow the money for every additional expense over its revenue, thereby sinking deeper in debt.
As a part of the stimulus package, the folks in Wichita, Kansas recently received $55,000 to help the underprivileged spay or neuter their pets. That money must be borrowed, since it is literally not in the coffers. The cost is more than just the expense: it's a lasting liability that will have to be repaid with interest. Even though someone was paid to spay or neuter the pets, there is no long-term benefit to the whole. This kind of support is not worth the cost, nor the added interest, nor the crippling debt; it only hastens the day we'll meet the economic "grim reaper" with a near-worthless dollar and hyperinflation.
This abuse of the American taxpayer continues today, where only $194 billion (or 27%) of the $700-billion stimulus package has been spent, doing little if anything to stimulate consumer confidence. Meanwhile, Washington adds insult to injury by limiting management pay while proposing plenty of legislation to give more government entities the teeth -- no, the fangs -- to destroy capitalism. And capitalism is the bedrock of our strength and prosperity.
The net effect of our government's move to avert the economic crisis with TARP and the stimulus reminds me of the moment when President Obama told the world that America was arrogant. It's hard for me to believe the world would think of us as arrogant with the amount of blood America has shed in countries like France, Somalia, and Panama (to name a few) -- but I believe it is arrogant for us to believe we are Too Big to Fail.
