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Let the World Burn
Hindsight is 20/20, so when it comes to the recession that started in 12/2007, and all of those $700 billion plans to throw money at it, maybe we should consider a "do over." We should not do the government bailouts of financial institutions, which blew us all head over heels into this crisis. We shouldn't do the economic stimulus. We should have simply let them fail, and let the chips fall where they may. After all, you don't see these financial institutions rushing to help out everyone that they hurt - no, aren't they still all about the business of making money and overpaying executives.
So where would we be today if the $700 billion financial bailout, and the $787 billion in the Recovery and Reinvestment Act, were still in government coffers? I value not being an alarmist, and it's difficult to know what would happen for sure, but following is what is within the realm of substantial probability given the wild reactions to financial variations (and the Great Depression example).
The housing bubble collapse put millions and millions of mortgages that weren't worth the paper they were written on in jeopardy. These bad mortgages were "bet" on by the investors by buying insurance on them from such institutions as AIG, and this insurance was not backed up by actual funds. The demand on these funds as the mortgage market collapsed, which it did, would have disintegrated AIG, which would have dealt a severe blow to the entire world-wide financial system. But the government stepped in and saved AIG since it was "too big to fail." This we already know.
Another 4 million mortgages are expected to receive foreclose notices in 2010, with 2.4 million actually losing their homes, up from 2.1 million in 2009. Unbelievable! The banking system bears the brunt of this collapse. Would the banking system have actually failed in the face of an even worse disaster? Eventually all of our financial institutions around the world would have crumbled one by one as their capital entirely disappeared and stripped them naked revealing their insolvency and untenable condition. The financial institutions were over-leveraged to around 30 times the amount that they had on deposit, so they were financially untenable if they were asked to come up with the money. Bottom line: They would have been asked. Instead of Al Qaida bringing down the financial system with an attack, we actually would have done it to ourselves.
The financial security of every person depends on our financial system. To name one already painfully infamous part: Our retirement (401Ks) are in the stock market. When the value of stock fails, it wipes out the 401Ks. When stocks reached minimal values, weaker companies would close. Without the ability to raise capital to run on, or expand, many other companies would go out of business or reduce employment.
Unemployment in the US during the Great Depression was 25%, and in some countries was over 30%. With the tragedy of a total financial collapse, it could go much higher. With job loss and unemployment at over 30% unemployment, could any of us split our food by a third to support others? (It would help or waistlines) Could we take in the homeless? Could the government suddenly take on the support of 30% of us? I'm sure we would all try our best, as the government and people did during the Great Depression, but even right now families with small children live in the street because of the recession and home loss. It's very hard to stop. With revenue drops of 30% or more, many companies would simply go out of business, causing even higher unemployment.
This recession has financially affected every one of us. At a recent interview of 12 people from all walks of life, who were selected for non-financial reasons, each one reported they had been substantially affected by the recession. Some had less business, could not get loans to help their business, had to lay off people, had been laid off, had their pay reduced, had credit cards cancelled or reduced, had lost money in 401Ks - not a single person was unaffected. Virtually everyone was affected. How much worse could it become if left unchecked?
With no realistic resources for helping others (witness the New Orleans flood response unpreparedness), most likely mass starvation would happen at 30% unemployment, crime would increase as people tried to feed their families, needs would far outstrip the ability of religious groups and charities to feed and clothe families, many more millions of families would lose their homes and end up in the street without shelter, food, or clothing.
The streets would no longer be safe anywhere as people did whatever they were driven to, to survive. Martial law would be declared, and the National Guard would have to be deployed in every city in every state, pulling them out of military service, and stretching them beyond any realistic capabilities.
The murder rate would skyrocket. Farms and small communities would be the least safe of all. Having no resources or know-how to make their own food, people would flock to where food is being raised and steal the crops, while hiding in the countryside. They would likely take over small towns and farms and organize into paramilitary support units to defend and support themselves. They would soon reach such proportions that the National Guard and the military combined could not handle. We would have war within our own country. We would be like Iraq was for this decade, or like lawless Somalia.
The war against Al Qaida in Afghanistan and Pakistan, which isn't popular anyway, would come to a swift end because there would not be enough military personnel available to support it and no financial capacity to support it. Left unchecked, Al Qaida would thrive in the resulting anarchy in Afghanistan, Pakistan, Iraq, Iran (where they would make alliances with Hezbollah), Somalia, and a multitude of Arab, African, and Indonesian countries. They would gain nuclear weapons that are available in those countries. They would likely over-run the governments in these weaker countries and put religious fanatics like the Taliban in charge. At that point, they would have the power and resources to strike Europe and the US and inflict major damage. Like the Nazis during WWII, they would be very difficult to stop in their march toward world domination.
At this point we could have another world war and send a billion sons, daughters, husbands, and wives off to be killed.
Maybe $1500 billion wasn't such a bad investment in our future. After all, we're getting almost all of the $700 billion bank bailout back, usually with interest. It is about the same amount as the Recovery and Reinvestment Act ($787 billion), and according to a Washington Post article, "According to an estimate by a colleague of mine at the Economic Policy Institute, Josh Bivens, the Recovery Act is probably responsible for no more than 1 to 2 percent of this country's long-run fiscal gap."*1
1. Five myths about unemployment By Heidi Shierholz; Sunday, July 25, 2010.
Supply Side economics generally works better than Keynes economics. Both economic theories have worked major revolutions in the economy in the past. Supply Side puts more money in the hands of business, and then business creates jobs. This worked in the 1980s and 1990s. Keynes economics puts more money in the hands of people, so they buy products, which creates jobs. Keynes is what moved the entire world from an economy grubbing for food and shelter, with 30% unemployment, to healthy economies that provided for all. But both theories can create problems. We happened on a problem in 2000 with Supply Side economics. Business ceased creating jobs at the rate required to match population growth from 2000 to 2009. There was zero net job creation, and from 2007 to 2010 there has been negative job growth, giving us 10% unemployment, and despite healthy profits business is still not creating jobs.
Supply Side economics (aka "trickle-down economics" and "Reagonomics") ceased to function as well as predicted. The culprit likely was the fact that both individuals and the economy had so much debt that people simply couldn't buy as much, and with housing prices rising at such ridiculous rates, too much of everyone's money was going into housing. People continued their downward trend in savings, so only the wealthy had money for investing, and most money that goes into the stock market tends to recirculate within the market as re-investment and inflated stock prices, not as a spark for employment that circulates through the overall economy. While there was little overall inflation, there was inflation in housing prices, and inflation arrests growth and destroys the spending power of money.
Debt removes around 20% or more of every dollar that people have free to spend on what they want - to buy products that keep us employed. It can do the same to other bills such as auto loans, appliance purchases, and can even do it to your electric bill if you put it on your credit card. Government debt was improving substantially until 2001. We actually had government surplus from taxes. Since 2001 government debt has skyrocketed. That debt also substantially erodes our government's ability to pay its bills - which provides services for us. The economy is badly out of balance.
So what does this mean to us? We need to get off the personal debt bandwagon. We need to encourage our politicians to find the best systemic balances that work in the long term.
We love to complain and blame politicians who have the very difficult job of finding the appropriate keys to these situations, and throw them out of office when the system isn't working. The main thing we don't want to do is study economic theory. We prefer the shortcuts: Reagonomics (friend), Welfare (foe), free trade (friend), Keynes economics (foe), Capitalism (friend), Socialism (foe), taxes (enemy), big government (enemy).... Mantras such as these are our security blanket - we're OK as long as we can mindlessly chant these slogans.
We need effective government that can deal responsibly and effectively with this financial crisis. Not the underfunded government that can't regulate because it can't put people in the field. Not bloated government that wastes taxpayer money in inefficiency and simply lives to propagate itself. But effective government. The steep recessions from 2001 to 2010+ are our wakeup call. We have to get beyond mindless sound bites, talking points, and easy fixes and understand how our economic system works, how it goes wrong, and how it must be maintained to provide opportunity for all of us. Polarization doesn't let this happen.
A major part of what we are experiencing, I believe, is an adjustment because of "false," valuations in our economy, and we will continue experiencing these until we intervene with a systemic control. This is not what we want to hear. Everyone wants to "get theirs" in our economy. We want unrestricted opportunity. And that is exactly what got us into this mess: unrestrained grabs for money, most recently in the housing market. If we want a system that brings individual reward for individual initiative, then we have to develop the economic system so that it isn't poised to self-destruct and bring us down as a reward for our hard work.
Ask your political representative to work on developing a fair and balanced system, not on using more idiotic mantras to polarize us.
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