Sickness May Be the Cure for the U.S. Economy

Everyone has been guilty, at one time or another, of ignoring a cold. Though you knew you were sick, you may have kept working hard, playing hard, and staying out late. Not until you were bed-ridden did you start drinking orange juice and taking your health seriously. The U.S. economy appears to be following a similar trajectory. We have consistently ignored serious symptoms to the point where our economy is nearly a terminal case.

After ignoring and downplaying the inflating credit bubble for much of his first two years in office, this week Fed Chairman Ben Bernanke emphasized, in testimony before the Senate Banking Committee, that no economic recovery would occur unless the financial system was restored. He was quite correct in his belated diagnosis. His prescriptions, on the other hand, are much more dubious.

As the evidence gathers, it looks as if Bernanke and his new colleagues in the Obama Administration are becoming increasingly desperate. The current recession is deepening at an alarming rate. In fact, it now appears to be diving fast towards the depression that we have long forecast. To prevent necessary deleveraging, the policymakers are improvising on a grand scale.

But, just as happened in the Great Depression, the confusion and experimentation in Washington has sapped businesses of the confidence necessary for a sustainable recovery. Rhetorical posturing by Senators and Cabinet members has replaced earnings reports and economic indicators as market moving events. This is no way for a recovery to begin.

It is widely recognized that the basic cause of today's financial and economic crisis was pressure by politicians to 'encourage' banks to make oversized loans to under-qualified homebuyers. This policy was just one small part of a creeping socialist agenda over the last few decades. Now that the crisis is full-blown, the statist tendencies of the Federal government have come into full flower. As Mr. Obama's chief of staff has noted, the crisis will not go unexploited by those who wish to expand the role of government.

Although the initial reaction to the government bailouts was relief, the financial markets are beginning to question the wisdom of trying to cure a credit problem with the injection of yet more credit. Whether one believes that the 'stimulus' is too much or too little, no one can doubt that the result so far has been failure. And although the spending is small in relation to the problem, it is enormous relative to the national budget.

So, if it doesn't succeed, which I'm sure it won't, the Government will surely feel justified in upping the ante still further. In fact, left-wing think tanks and Nobel Prize-winning economists are currently laying the intellectual track work for such a move. In the end, the American people will be left with severe stagflation.

Though our future looks bleak, I do have reason to hope. Americans are industrious and able to learn from our mistakes. When the depression sets in, economic reality may then deliver the final verdict on socialism and lead to a long overdue restructuring of the American economy. A restored 'producer' economy would return America to the path of prosperity.

In short, after decades of creeping growth, Washington socialism is about to fall flat on its face. I say good riddance to the plague that progressively stifled American enterprise, and has now caused such acute pain to my countrymen.

As perverse as it might sound, this sickness may lead to the cure. Our economy must rid itself of parasitic ideology, broadcast from Washington for as long as anyone can remember. It may take a brush with our economic death-bed to show us the way to a healthier future.

Comments

[sinnfein:]

Recovery won't be allowed until the $3-4 trillion they have been preparing us for is spent. What do you suppose the kickbacks from the awarding of
$3 trillion worth of contracts totals?

Feb 26 06:26 AM

[kelm:]

The creeping socialism is not the cause, it is a symptom as well. It is America's willingness to tolerate massive incompetence on the part of our officials and hold none of them accountable for their actions combined with an incredible passivity that sees voters allowing more government as long as their personal finances are growing that is to blame. We have no intellectual center anymore and we hold no one accountable, not even ourselves.

Example:

Government encouraged lending to low income people as a social agenda to promote home ownership. This policy has failed and caused more damage to the very group of people it was designed to help yet Barney Frank sits on the banking committee still. Why?

It was Bernanke's job to see this crisis coming - he failed. Why is he still there? Ditto for the Fed governors.

The SEC completely failed to detect some massive ponzi schemes and the IRS just discovered Sanford owed over $100 million in taxes. Has anyone been fired?

What about Citi and BofA? When do we insist on cleaning out the executive house if we the taxpayer are holding 20 - 40% of the companies? We don't even insist on having a government rep (taxpayer rep) on their boards.

This nation has become unbelievably passive and if we don't change it will be the end of us.

Feb 26 09:09 AM

[Carlos Lam:]

More borrowing, printing, and spending by the federal government will certainly not help things. Propping up zombie banks and moribund automakers will only forestall recovery. What we need is a willingness to allow our economy's deadwood to wither and die, but politicians simply don't understand this. They'd rather spend your money and mine on pet projects or spread money around their districts. Unfortunately, this is nothing new. It will take either (a) a miracle or (b) a complete economic catastrophe for the political class to understand that we have to let failing businesses die before our economy can once again advance.

Feb 26 10:12 AM

[One Eyed Guide:]

Hmm, seems to me that a cold that has been ignored and turned into pneumonia should be treated with antibiotics, not allowed to run its course. People used to die regularly of "bad colds" before there were treatments just like recessions used to be 22 months long during the 1854 to 1919 period and only 10 months long from 1945 to 2001 when we followed the treatments that we learned were effective. (This is the official recession data from the National Bureau of Economic Research at www.nber.org/cycles.ht...)

What happened today is similar to the politicians in Africa who started rumors that polio vaccines were a Western plot to sterilize Muslims. The net result of this was enriched politicians and more polio among the ignorant.

Economic theories that restricted speculation were pooh-poohed and replaced with theories that did not use real world assumptions about markets. After all, how realistic is it to assume markets will be self-regulating and unaffected by cheating if it takes five people to referee 22 people in a game of football?

The lesson we get from earlier periods is that we need to apply our learning in effective programs to minimize the recession. If we continue act as if “the market will correct” we can be certain that we will have a financial disaster.

The current administration’s programs are not perfect but they are based on past learning and are far better than doing nothing.
Those who make criticisms need to state what the alternative action should be and make a projection for the outcome under the existing programs and their recommended program.
This article only predicts doom without pointing out a better path forward.

I’m not comfortable with what is being done but I certainly believe that it doesn’t indicate the failure of socialism. In fact, I see little socialism involved, just the (partial) application of proven economic models to replace self-serving political actions.

I hope I’m right because the alternative has led to revolution, war and destruction in the past.

Feb 26 10:14 AM

[boats.j:]

Creeping socialism from Washington? Are you serious?

Its the bloody Banksters and captains of industry that are socialists! Running to the taxpayer when they've stolen so much from their shareholders their companies have failed! Privatization of profits and socialization of losses! Go sell this crap to someone who'll believe it!

All you're doing here is looking to get the guys to buy you a round of drinks! Santelli you're not!

Feb 26 10:26 AM

[Bill Jencks:]

Leave socialism and politics out of this !! This is about bad economics - economics is regarded as a pure science, politics is not a pure science, very dirty at best, so dragging politics into economics doesn't help. In fact politicians usually have no real depth of understanding in economics at all. You could count the number of wise economists in Congress and in The Senate - on your thumbs(..and that's in a good year).

To blame 'creeping socialism' is no solution to an economic problem. And it doesn't really matter whether your a Democrat or a Rebuplican - if politicians do not understand how to pay back there own country's debt, if the President of the US and the Fed are happy to try and inflate away the US Debt as well as tend its own feckless dollar with continuing "benign neglect" - well, come on - that's not socialism.

That's just complete economic stupidity.

Feb 26 10:30 AM

[cash:]

No matter whose fault it is (and there will always be more of them at any time), it is the industrious and the prudent that pick up the tab. They are the ones pulling this wagon, and they get whipped harder if the wagon slows.

Feb 26 10:37 AM

[Midwest:]

Although this article makes a few good points, it has one very glaring error. Mortgage lenders were NOT pressured by the government to provide subprime loans to unqualified buyers.

President Bush's own President's Working Group on Financial Markets made it very clear that the position taken by this article is simply not true and has no basis in fact. The report was issued in last year and it debunks the oft repeated claim of pressure to supply loans to unqualified buyers is at the core of our problems. This stance is far more partisan than the author would be comfortable admitting to.

www.mcclatchydc.com/25...

"Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans."

The mortgage bubble is a large portion of our problem but it is not the only one. Bankers played fast and smooth with money that did not belong to them, made outrageous bets on the future that failed, homeowners saw their homes as ATMs, credit card companies provided billions in credit to people that could not afford it, the consumer continued to live far beyond their means and this contributed to a perfect storm of events that are currently unfolding before us.

There is plenty of blame to go around but this article relies on a premise that is not true and fails to examine the larger picture and to offer a realistic solution.

We are not headed toward socialism as this article asserts but rather taking uncertain steps toward an uncertain future. Do not forget that the current mess we are in was deeply worsened by a Republican controlled Congress and SEC. Their failures to assert control over the growing problems several years ago let a fire turn into a conflagration that is currently consuming us.

Nationalize the larger banks, mark-to-market their current assets and loans, take the enormous write downs NOW so we can move on. Once the new values of the assets are realized then the economy can begin to rebuild.

Feb 26 11:17 AM

[rber:]

Oh I think they understand quite well but telling the truth and guiding the economy through a "reset" will mean a quick trip out of the whitehouse and that is what drives all this short term thinking. "you can't have it both ways" but the politicians will keep trying until there it becomes clear there is no other way out or, that the truth is forced on them by external forces.

On Feb 26 10:12 AM clam75 wrote:

> More borrowing, printing, and spending by the federal government
> will certainly not help things. Propping up zombie banks and moribund
> automakers will only forestall recovery. What we need is a willingness
> to allow our economy's deadwood to wither and die, but politicians
> simply don't understand this. They'd rather spend your money and
> mine on pet projects or spread money around their districts. Unfortunately,
> this is nothing new. It will take either (a) a miracle or (b) a complete
> economic catastrophe for the political class to understand that we
> have to let failing businesses die before our economy can once again
> advance.

Feb 26 11:18 AM

[Alex Filonov:]

GImme stagflation! It's cured easily: just raise reserve requirements and interest rates. There is no easy cure for deflation. And remember: both are really in people's heads. If people think that prices are going to grow, they spend all money they have (hey, money's gonna be worth less a month later!). If they think that prices are falling, all purchases, with exception of necessities, are delayed.
You are right that only enterprising spirit will pull us out of current crisis. But we have a long road ahead. You can't just wait until patient recovers, sometimes you need to cure symptoms. If patient dies of symptoms, the idea that he'll become stronger after overcoming the sickness it kind of irrelevant.

Feb 26 11:20 AM

[carey_jim:]

Change your title to 'Admitting Sickness is the first Step towards a Cure for the U.S. Economy' and you will be closer to the truth.

Sickness, in itself, is not a cure, no matter how you parse it.

An alcoholic has to admit that he has a problem with alcohol before he can solve his problem but being an alcoholic is not the solution. (Maybe it is for some people ;)

We Americans will have to admit our economic problems and AGREE ON WHAT THEY ARE, before we can solve them.

Agreeing on what the problems are is going to be the real challenge. Finding solutions will be the easy part.

Feb 26 11:25 AM

[Socialism c...:]

Yep. We ARE industrious, and DO learn from our mistakes. Methinks many have learned quickly of a BIG MISTAKE made in November.

reteaparty.com

Feb 26 12:54 PM

[boats.j:]

Hey! Industrious guy! I'll have one All-Star Special Breakfast!


On Feb 26 12:54 PM Socialism cannot compete! wrote:

> Yep. We ARE industrious, and DO learn from our mistakes. Methinks
> many have learned quickly of a BIG MISTAKE made in November.
>
> reteaparty.com

Feb 26 01:13 PM

[kg:]

These articles drive me nuts...lets assume that it's a categorical fact there was government pressure to lend to those whom shouldn't have been lent to. Who decided to lever up their loans in personal real estate, credit cards, commercial real estate and other commercial loans to 20-40 percent? And who developed and believed in risk models that are defunct? And who provided fee for service credit ratings that were categorically bogus to make an extra buck?

Not the gubment boy

The author's argument is nothing but a lame deflection from folks who preach individual accountability but don't practice it. And frankly, if we are generous lets call them imprudent, less generously lets call them just plain morons.

My favorite personal anecdote...was there a government edict that told all these companies to suddenly stop sending me 5-6 credit card offers a week? Don't think so.

Feb 26 03:42 PM

[kg:]

Ref above, not 20-40 percent but 20-40 times

Feb 26 03:43 PM

[phaf:]

The "creeping socialist agenda" and "Washington socialism" to which you refer is really government response to populist outrage over the failure of free markets to function in an equitable and sustainable fashion. Behind every "business stifling" regulation we all have to slog through is a catastrophe of some over zealous, profit driven enterprise causing harm to their customers or third parties (i.e. unsafe products, pollution dumping, on and on and on). Short of government intervention and litigation to put the brakes on such excesses, there is no fix to these concerns; free markets make terrible cops. Until everyone in business behaves ethically, responsibly, and with sustainability in mind, it will always be this way; (of course this will never happen, it's human nature to get carried away when the dollar signs are in the eyes).

Case in point: healthcare. The hodgepodge patchwork inefficient bloated privatized bureaucratic pig of a system we have has been an abject failure. Don't like the proposals being cooked up in Washington? You better come up with something better soon, because the crisis is exploding and the voting public (including many small and large business owners and stakeholders) are clamoring for something to happen. That's how these unpalatable regimes are put into place- the free markets fail in some critical arena, the public demands change, and the elected representatives do the best they can (plus a little added bonus for those with the most money and clout). Ouila'! The next debacle is born!

Feb 27 11:10 AM

[scootie2008:]

"It is widely recognized that the basic cause of today's financial and economic crisis was pressure by politicians to 'encourage' banks to make oversized loans to under-qualified homebuyers."

bull$hit

Mar 05 08:43 AM