I would like you to think about the past. Think back in time to the Election of Barack Obama. What was the largest problem facing him at the time? I think most people would say the economy. James Carvells "its the economy stupid" were surely words to live by this election cycle. We have experienced such a large decrease in wealth and increase in unemployment that its amazing we have not done more by using the tools in the fiscal tool belt to fix the problem. So why haven't we done anything? And this is when you say, Hey Stephen, they have done a lot. The Dems led by Barack Obama passed the American Recovery and Reinvestment Act. A huge 787 Billion dollar stimulus which has meant the difference between potential growth in the third quarter and a loss. So Problem solved right. Ummmmm, No. While I understand that as the economy contracts and more people loose work, people pull back on their spending thereby decreasing corporate profits which further decreases employment. While avoiding the beginning of the economic black hole was certaily a good move, it wasn't actually the problem. The stimulus was a band aide that some would argue should have been a full body cast. So what was the actual problem. It was regulation. Bad Regulation.
There are currently problems with under regulation and over regulation. As you can guess, most democrats think that the economy and more specifically the financial sector needs MORE regulation and they are right to a certain degree. In 2004, Bush and the republicans changed a very important part of the securities exchange act of 1940 that established a maximum leverage ratio for all financial institutions. The congress and Bush changed the leverage ratio on the five largest broker dealers from a maximum of 15 times their assets to an infinite leverage ration. Can you guess the five institutions that qualified for the exemption? Bear Sterns, Merryl Lynch, J P Morgan, Goldman Sachs and Lehman Brothers, All of which ceased to function as broker dealers less then five years later. Guess what Bear Sterns leverage ration was, 40:1 and Lehman? 33:1. That's why the economy got so bad. These companies could make money no matter how bad the risks they were taking were. All this extra "money" flowed into assets " ie pieces of paper which have value." So although people felt richer there was just a lot more paper. The republicans on the other hand argue that over regulation is the problem. Get the government out of the way and people will be better off. Over regulation will hurt America if we continue to bail out companies and promote the idea of too big to fail and tell people what they should be paid. The government should not own businesses. The government just doesn't do a good enough job running them and even if they did a good job in one case its because it has the full faith and credit of us, the American tax payer, backing them up. We take the risk and they get the reward. That doesnt seem fair. There are so many bad regulations and we got rid of some good ones. Cant we just agree to put regulations in place that help America as a whole. Milton Friedman argues that the government should act as a umpire for the private sector and let them compete. In this case I think we have a blind, def, bo legged one armed ump that doesn't even like baseball. Making the calls that really matter.
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2 comments:
I really like this post; it hits the nail right on the head as far as the causes of our current economic problems. As our economic situation has gotten progressively worse I have heard both sides arguing that the other side caused the economic melt down, and I have also seen that as they argue nothing really gets done. The stimulus bills passed are an acceptable temporary fix, but they are far from a permanent solution. What we face now is essentially the same as what we faced in the 1920's, a lack of production in America leading to unemployment, and a collapsed economy. It has been argued back and forth whether FDR's policies helped us to get back on our feet, WWII, but what most people miss is that while they were both somewhat responsible for our economic, the bigger picture was the return of production to America. We had just lost our major production of crops, our most major export at the time. The start of the war and the public works both brought on new industrial jobs for the working class. Today's problems stem from our current continuing loss of jobs in industry. America no longer produces anything, our only remaining major export is our industry. This problem came from over regulation, encouraging jobs to be shipped over seas. At this point, I feel that we have only two options left open to us: Option one involves a complete overhaul of our economic regulation policies, in an attempt to draw industry back to us, or, option number 2, we attempt to fill in a new industry to regain some of the jobs we have lost elsewhere. If we fail to do either of these, we face an economic collapse far then anything we have ever seen before.
Hey Noah, I agree with a lot of what you say. I personally hope that we use your option number 2. The government does a great job fostering basic research. So many of the most important inventions have come through government or government sanctioned monopolies like the phone company. The phone companies research facility "Bell Labs" holds like 13 nobel prizes including the laser, the big bang theory, the transistor, basic computer programing theorey and more. Where is the money for research in the past 20 years. Thats why we are falling behind. Take money out of social programs and divert them into basic research. Campanies cant think 50-100 years out but Governments can.
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