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Sunday, November 16, 2008

Our Economic Future is Gloomier than our Present

Economic downturns, more often than not, are not only difficult to avoid but frankly in many ways a natural part of the economic cycles. Despite what some politicians claim, our economy can't actually hum along in prosperity forever without ever slowing down. That said, while most downturns are unavoidable, the length and ferocity is entirely due to the response, or lack thereof, by the government. For instance, the recession of the early 1930's turned into the Great Depression by the combination of of protectionist trade policies and tax increases. The economic malaise of the mid 1970's was perpetuated by the combination of price controls and tax increase and it turned into a period of stagflation. Reagan turned this into an economic boom by the combination of interest rate increases by the Fed, to tackle inflation, followed by tax cuts which spurred the economy. Given that the length and ferocity of an economic downturn is directly related to the government's response to an economic downturn, we should all be much more worried about our economic future than our economic present.


1) The bailout is a total and complete debacle.


Despite the impression that some politicians may give, wastefully spending billions of borrowed Dollars by the Federal government is not actually a productive use of resources. It is now clear to me that the bailout will wind up being the biggest boondoggle in the history of our government. The Feds are no longer buying up toxic assets. Instead, they are simply giving financial services companies money. Furthermore, the definition of what company qualifies continues to expand. On top of this, companies that aren't struggling at all like the Hartford are applying for some of this money. Worst of all, so far the money that's been received isn't being used to lend. Rather these companies are using this money to merge. While this may all be great for the individual companies involved, it will do absolutely nothing to help the economy at large. Furthermore, running up a massive new government tab only adds inflationary pressure to an economy already facing a recession. That is the nightmare scenario


2) The auto bailout is the financial bailout lite.


If the financial bailout isn't enough, now the automakers are asking for their own piece. Of course, this bailout will do nothing to rectify their many fundamental problems. As such, their bailout is another colossal waste of money. It would be a massive scandal on its own if not for the massive bailout I already mentioned.


3) The government wants to waste more money with a stimulus package, unemployment extensions, and foreclosure moratoriums.


We already had a stimulus package in the summer and that was a colossal failure. Yet, no later than the next administration, the government will send about $600 to each individual again. Barack Obama is also talking about extending unemployment benefits and foreclosure moratoriums. These are great policies for those that benefit from them, but they do absolutely nothing to help the economy.


4) The government is focusing on the wrong groups in the mortgage crisis.


The government is determined to save borrowers from themselves. Their main priority is to stop a run on foreclosures. As such, they are doing everything in their powers to stop it. The FDIC recently announced that they would insure the losses of banks that give troubled borrowers loan modifications. (which would give more affordable terms to those that have terms they can't afford now) The government is talking about underwriting new loans for troubled borrowers. All this does is keep folks in homes they should never have gotten into in the first place. What the government needs to do is do everything it can to help these borrowers remove themselves from their homes as quickly and painlessly as possible. Instead, they are doing everything possible to keep these borrowers in their homes. That only perpetuates the mortgage crisis, not resolve it.


5) The whole government is entirely clueless


This isn't about Barack Obama, the Democrats, the Republicans. It's about all of them. There is no one in the government that has a handle on what government policies will help. Does anyone really believe that focusing only on the middle class will help the economy out of this mess? If you don't like that policy there isn't much alternative. That's because the Republicans are fresh out of ideas altogether. As such, we will get a middle class tax cut, massive new wasted spending, and potential tax increases for the wealthy and corporations. That certainly doesn't give me confidence. The future of our economy is what we really need to worry about.

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