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the current economic crisis part 2

February 3, 2009

While reading a recent discussion regarding the new $800 billion stimulus package that is currently being debated by Congress, I saw a couple of comments suggesting that this plan will not only fail to inspire confidence and compound the real problems due its insincerity, but that it is a “Frankenstein” bill cobbled together from a variety of different ideas and ideologies that should be broken down and presented individually. And, in my opinion, I think that there is at least some truth to both of these statements.

To take the more obvious observation first, the bill is a monstrosity of allocations and I think that the bill should be streamlined, or at the very least, broken up into separate bills. In the present bill, for example, there is an allocation of $25 million for ATV trails. There is also $650 million set aside to continue the coupon program for the transition to digital television. Now, compared to the $800 billion total, $675 million does not seem all that much, but honestly, how will this stimulate the economy in any meaningful way? There are things in this bill that I think are helpful, such as money meant to be spent on ready-to-go infrastructure projects and unemployment benefits, but I think this $675 million is a waste of money and I am sure that there are more allocations such as these hidden throughout the bill.

As for the idea that this plan is not entirely sincere in its aim to stimulate the economy, I partially agree. I think that the people writing this bill hope it will, but I do not think that they are all that confident about what they are doing. As with the last bill, there is no guarantee that the money will be spent the way they want it to be unless there is more government interference. Look at what happened with the last $700 billion bailout.

The government funnelled massive amounts of tax-payer money to the major banks while slashing interest rates in the hope that this would stimulate more lending. But what really happened? The banks (e.g., Bank of America, Citigroup, etc.), full of bad assets and basically insolvent, hoarded the money instead. My guess is that the same will happen with any new influx of capital unless the government takes a more hands on approach by either temporarily nationalizing the banks, finding out how bad their bad assets really are and begin lending again, or by including specific guidelines on how the money should be spent by banks who solicit government help and assigning government accountants to these institutions to make sure that the money is used accordingly.

One of the main problems with this situation, however, is that the government is loathe to do anything that looks “socialist” because this is still a bad word in America. I find it funny, though, that the free marketeers of the the previous administration who advocated a market with little regulation or oversight were happy with the status quo when the market was strong and the economy stable, but as soon as the massive amount of corruption and mismanagement eroded the free market into a cesspit of credit-based consumerism that no longer had the ability to live beyond its means, those same free marketeers demanded swift and decisive action from the government in the form of using tax-payer money to shore up the weakened economy by buying bad assets from failing companies, guarantying bad debts acquired by failing companies, helping failing companies merge, etc. etc. The problem is that they simply gave the money to these companies with little to no strings attached.

The previous bailout plan, as well as the unprecedented authority given to the Treasury and the Federal Reserve, was one step closer to nationalizing certain sectors without actually nationalizing them. In my opinion, this was a slight of hand that simply added an extra layer of bureaucracy to the process of stabilizing the economy, which ultimately left the tax-payer even more unprotected. The reason is that without directly nationalizing these industries or at least including specific guidelines on how the money should be spent, and leaving them in the hands of the very same corrupt, greedy or just incompetent CEOs that have time and again proven to be unreliable, much of our money has be squandered (e.g., After Bailout, AIG Execs Head to California Resort) or simply hoarded (Some Banks Hoarding Bailout Money). I am not a big fan of nationalizing certain sectors and leaving the rest to sink or swim in the shark infested ocean that is the free market, but if that is the direction we are heading in, why not do it right? Why just give these companies another huge infusion of cash when we have no control over how they spend it, no means of tracking how they spend it, etc.?

I am somewhat hopeful in that I have heard Congressman Barney Frank say that the money will be tracked this time around, but I have not heard anything about how they plan to make sure that all of this money will be used appropriately, whether by the states, or the private financial institutions, etc. As for the entire financial sector, well, it is an absolute mess that needs to be cleaned up. For starters, I think that the Glass-Steagall Act should be reinstated. It was a good idea then, and it is an even better idea now. I also think that this supposed “shadow economy” created by hedge funds and investment banks needs to be investigated by federal regulators (that is, of course, assuming that there are any true regulators left seeing as how all of this managed to slip past most of them over the past decade).

And this is only one part of the problem! I wish I had the time to get into the credit card industry and the high rates of interest they charge (I think we should consider new usury laws targeting credit card companies, “national” banks, etc.), not to mention our manufacturing and trade difficulties. But the main point is that if nothing is done to fix the present system and provide protections from further abuse and mismanagement, we are definitely going to compound the real problems for a much, much worse future. I just hope Congress gets their collective heads out of their asses long enough to figure this out.

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