Published: October 10, 2008 07:03 pm            

Tar Heel Dispatch – $700 billion cure?

It’s time for a little straight talk. In the midst of the worst economic crisis in 80 years, people are afraid of certain doom, and we run the risk of making things worse by a foolish knee-jerk reaction, looking to the government for salvation.

Congressional leaders met through the weekend to hammer out a $700 billion bailout of the financial sector. Whatever final form the legislation takes, it will most likely buy up almost worthless assets, loans and mortgages that may never be paid back, taking them off the hands of the banking industry and placing that bad debt on the U.S. taxpayers.

Both McCain and Obama view the problem in much the same light. In fact you couldn’t tell the difference between them in last week’s debate vis-à-vis the bailout. Wall Street got greedy. Bush didn’t regulate. No one was minding the store. Now if we don’t act, they say we’ll lose millions of jobs.

If they are right, then the $700 billion bailout, increased regulations, government control of CEO pay, government entering the real estate business, or possibly allowing judges to rewrite loans may be the answer. Things are so bad, people are looking for an answer, some kind of plan to fix the economy, even if it amounts socialism by another name.

First, our savings accounts are secure, insured up to $100,000 per account. This is a government bail out of the fat cat bankers on Wall Street who, combined with the aid and direction of government, took risks and came up short.

Now they want us to reward their behavior, to the tune of $5,100 per taxpayer, for their mistakes, and they’ll accept a government takeover to get their money back.

But just maybe McCain and Obama have the story all wrong. Could it be that the real problem was government meddling in the economy and collusion between the government and industry that caused this problem in the first place? Could it be that the real answer to the problem is less government, not more? Would it be better if the government didn’t bail out the banks and let the market correct itself, painful as it may be? Have we not seen this before?

In 1929 the stock market crashed, ushering in the worst depression in world history. Milton Friedman, noble prize winning economist, blames the Great Depression on the Fed’s irresponsible monetary policy.

Over the 16 years between the creation of the Fed in 1913 and the crash of 1929, the Fed reduced the actual amount of dollars in circulation by about a third. For every $100 in circulation in 1913, by 1929 there was only about $65.

It is no wonder banks failed and people went broke with the government literally removing money from the economy.

President Roosevelt receives a lot of credit for saving the nation’s economy with his New Deal. But recent scholarship, including work done by the Cato Institute, suggests that the New Deal policies ironically prolonged the misery of the Great Depression, and only the economic boost from World War II saved the nation.

Indeed, the New Deal required tripling federal taxes which removed even more money from the taxpayers’ pockets, increasing unemployment, and stunting economic growth.

The current economic crisis can be attributed to a number of factors, all directly or indirectly the result of government meddling in the free market. Fed interest rate policy, federal ban on oil drilling, government agriculture subsidies, and an oppressive national debt have all combined to put us in a fix.

In January 2001 the Fed began reducing interest rates. These are the rates at which the Fed lends money to the biggest banks, who lend to big banks, who lend to small banks, who lend to businesses and individuals. These rate cuts were supposed to stimulate economic growth by increasing credit supply. After 9/11 these rate cuts became more and more precipitous as worries of a recession loomed.

In short, artificially low interest rates created an artificial boom, especially in housing. But when inflation began to creep higher due to the flood of dollars and credit, the Fed began to raise interest rates starting in June 2004.

Then the whole house of cards began to tumble down. Payments were missed, homes went into foreclosure, banks were unable to recoup losses by selling foreclosed homes, banks went into foreclosure, and today we see the $700 billion mess of bad credit we’re in.

A 25-year federal ban on American oil drilling, coupled with the devaluation of the dollar (a result of inflation and a $10 trillion national debt – $29,000 per person – owned by China), has sent energy prices through the roof.

Higher fuel prices have had a ripple effect throughout the entire economy. Government subsidies of corn ethanol for fuel has hiked the price of corn based foods (that’s just about every processed food) and dairy products, making it harder to put food on our tables.

So, when President Bush told the nation last week that “democratic capitalism” has made the nation great, one has to laugh. Capitalist capitalism made us great. Democratic governmental meddling in the free market is the problem, not the solution.

Historically, government attempts to “fix” the market are futile and have caused further problems. The real solution is to get the government out of the business of trying to run the economy, which can’t be “run” anymore than the weather can be run. We need to allow the natural course correction to take place, painful as may be. The alternative, government medicine, is always worse than the disease.



Tar Heel Dispatch is written by Tyler Younts, a first-year law student at Campbell University. Younts, who grew up in Farmer, has a passion for writing and for politics and for writing about politics. E-mail comments to news@randolphguide.com or directly to Younts at younts@email.unc.edu

        

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