I’ve written a lot about what a bad idea the so-called Stimulus Package and the trillions of dollars of spending which will follow it are. This has led some of those who are still lulled into complacency by the siren song of “hope and change” to complain that I’m offering complaints but no solutions. Some have even issued a childish “if you’re so smart come up with a better idea” kind of challenge.
There’s no question that it’s a lot easier to identify a problem than it is to come up with a solution, but I’m perfectly willing to do both. If I’ve focused more on the flaws of the current stimulus and recovery proposals, it’s because there’s no chance for a better solution if we implement policies which make the situation so dire that it will be too late to change course or introduce some common sense. When you cut your foot on a loose nail in your deck, your priority is on stopping the flow of blood first and you hammer the nail back in later.
To figure out solutions you need to first understand the causes of the current crisis. Right now we are largely reacting in blind panic. We need to stop and look back and react rationally based on the evidence of how we got here. In our current crisis there are basically three main causes.
First, there were natural cyclic forces in the economy which caused a slowing of the sustained and robust economic growth on which our business sector and government had come to rely. This slow-down started in 2002 and was superficially countered by Bush’s tax cuts and rebates, which actually had the long-term effect of prolonging or delaying the impact of the economic slowdown and preventing a natural recovery.
Second, there was over-extension of credit in the real estate market in the form of bad loans to unqualified borrowers which was then compounded by utterly irresponsible speculative repackaging and marketing of those debts as derivatives. When the robust economic growth which had allowed lenders to get away with these practices began to slow down causing a decline in real estate values, the speculative house of cards they had created came tumbling down. Blame for this problem is easy to assign, both to government policies which encouraged the bad loans and to the lack of government oversight in setting out rules for banking standards and practices which would limit risk and mandate some level of accountability. But the problem has been decades in the making and it’s hard to single anyone out as the real culprit because everyone was at fault.
Third was excessive government spending of deficit funds either drawn from the treasury in the form of debt issued beyond the level justified by a shrinking economy or as currency which just printed with no accountability whatsoever. Excessive generation of debt was necessitated by the huge cost of the War on Terror. The practice of printing too much currency was undertaken deliberately in an effort to push down the value of the dollar.
Initially this was a way of attracting foreign investment in the United States to stimulate the economy, but ultimately it was also used as a hidden form of taxation, putting money in the coffers of government by reducing the value of money held by everyone else from common citizens to foreign nations investing in dollars and dollar based securities.
To give credit where due it was a very clever policy. It had little direct negative impact on lower income consumers while effectively taxing foreign entities and multinationals who would normally be beyond the reach of the IRS. The problem is that these economic tricks produced short-term stimulative effects, but these were offset by the long term effect of deflating the real value of American assets. In short, pretty soon everything cost more but was worth less, creating an environment in which any general economic decline would be aggravated.
So when the natural economic contraction hit an inflated and volatile credit market based on assets which had a shrinking real value caused by manipulation of the money supply and deficit spending, you had what some have called an economic “perfect storm” and everything fell apart.
In retrospect the crisis would have been easy to avert. Government regulators should have stepped in and told mortgage investment companies and banks they had to limit the amount they could borrow against mortgages — maybe to a level of 3 to 1. If they had done just that, even the inevitable foreclosures on bad mortgages would have been survivable. If they’d gone farther and dealt with the bad mortgages and irresponsible lending practices with some sensible regulation, so much the better. In addition, the Bush administration could have made the decision early on in this process — possibly requiring some prescience — that it would be better to let the 2002 recession happen and bottom out so that they could have a nice recovery and a healthy economy by 2007.
The problem is that there were political arguments against behaving sensibly. Powerful Democrats in Congress controlled the mechanisms which could regulate lenders and mortgages and their long-standing relationships with real estate interests and community housing rights special interests guaranteed that they would take no action. Similarly, the Bush administration knew that it faced reelection in 2004, which would have been the natural bottoming out point of the recession. To go into an election with an unpopular war which was going badly and an economy in recession seemed like a really bad idea politically. As I said earlier, plenty of blame to go around.
That’s how we got to the weird place where we are now, where almost every economic indicator is down despite the fact that consumer disposable income is up (even if they are saving more than spending, gas prices are at record lows adjusted for inflation, prices of other goods remain inexplicably stable and our balance of trade is better than it has been in decades. Under normal circumstances our economy ought to be in the middle of a powerful recovery, not in the middle of a bizarre death march.
The truth is that spending huge amounts of money on poorly thought out attempts to stimulate recovery as has been done in the TARP bailout and in the current stimulus plan, does more harm than good. Whatever stimulus effect there is to these programs is offset by the negative impact of trillions of dollars of deficit spending, and neither of these programs actually addresses the root problems which created our current crisis in the first place. The problems are obvious and the solutions ought to be equally clear, but just like the Bush administration, the Obama administration seems to be in a panic and under pressure to show some sort of effort, yet still unwilling to put politics aside and do what really needs to be done.