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The Fed just doesn’t get it.. February 9, 2009

Posted by The Armchair Economist in Business, Commentary, Consumerism, Economics, Politics.

Late 2008, the the Fed gave out ~$350b, about half of the $700b ‘bailout’  Congressional hearings showed that  there was very poor accountability towards how banks spent that money.  Rather than  loan it out, banks just hoarded it.  When asked why they weren’t loaning the money, they said that they are increasing loan requirements due to the poor economic outlook.  In other words, the banks are doing what they should be doing… assessing the risk of nonpayment to potential borrowers.

Today, the Fed announced an overhaul in how the rest of the bailout money will be used: it will be used to buy back the ‘toxic assets’ that are supposedly weighing down the banks balance sheets.  How does this change the fundamental problem of banks not loaning the money out?  Banks (and most businesses) are very simplistic, they exist to make a profit.  If they find a borrower who has a good job and has good credit, they will be tripping over themselves to loan them money.

We are trapped in an environment where the government thinks they can solve this problem by buying our way out of it, at the expense of indebting our future generations in mountains of debt.  Although trained in economics, I have begun doubting the keynsian economic model that we have been operating under.  Briefly, keynsian economics states economic growth can be manipulated through adjusting interest rates, taxation and financing of public projects.  However, taking a step back, why are we operating a country under the assumption of continuous economic growth.  Isn’t economics a zero sum game? The only time it isnt is when something innovative comes along that improves efficiency or productivity.  (some examples: steam power, rail, computers and internet).

I would argue that one reason we are in our current situation is because the government (even though many recognized we were in a dangerous situation years ago) was too euphoric in spending the bottomless pit of new tax revenues from the expanding economy.  (someone smarter than me had to have realized the fundamental flaw with the whole housing bubble: increasing return without an increase in risk). The existing plans to salvage the economy, ranging from the $700b bailout plan to the $800b ‘economic stimulus’ plan, do nothing to address the fundamental flaw of our economic policy: dependance on economic growth to fund an ever larger government. (another paradox of this is that for economic growth, the government relies on people spending money things like large screen TVs and SUVs.. one reason our economy kept booming the last few years was because people essentially used their home equity as a credit card.. at the expense of the national savings rate… in other words: the government is relying on American’s being irresponsible with their spending today, in the name of economic growth, at the expense of securing their future.  There is no political incentive shore up what is going to happen when the house comes crumbling down: what happens when people retire and are loaded up with debt?  Do they expect the joke called Social Security to maintain their consumerist habits? Anyone notice how the two political black holes of social security and medicare haven’t been touched?)

Why don’t we take a step back, cut spending, and return the money back to their rightful owners (ie: tax payers) and let them decide how to spend that money?

To President Obama: If you really stood for change, you would be addressing our national dependence on cheap credit and reliance on economic growth rather than figuring out how we can set an artifiical floor on the economy at the expense of our grandchildren.


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