Economic Collapse 2008

In the month of September, the federal government passed a bill that called for spending over $700 billion of public money in order to take over failed assets from Wall Street firms. This plan was supposed stop the bleeding and enable the financial markets to start their path to recovery. It is important to note that even before this general bailout plan was enacted, numerous firms such as Bear Sterns, Merrill Lynch, Citigroup, and others had already received individual public loans. It has become quite apparent since the approval of these measures that none of these classic Keynesian approaches to stabilizing the economy have even slowed down the bleeding, let alone solved any major problems.

This first attempt at resuscitating the economy occurred under the Bush administration’s watch. Now America has entered a new era with a new president. Obama is a man who has claimed to be about good ideas, not politics. He has quite often stated the he wants to take measures that will work. Surely, then, he has noted the utter failure of the bailout as an economic tool. Right?

Unfortunately, this has not been the case. Despite the mile-high pile of evidence, from nearly every economic metric, clearly indicating that government spending in response to market failure does not work, this is precisely the solution our new president successfully pursued. Obama was been one of the strongest advocates of the second major bailout plan urging Congress to hastily come to agreement on a bill in order to start America on the road to recovery. He has received his wish as the second bailout plan was officially signed into law on February 17th. This time the price tag was a whopping $787 billion.

In a prior article that I wrote about the first bailout plan, great detail was given to explaining both the theoretical economic problems and America’s history with bailouts. Rather than regurgitate that information again (all of which applies to this plan as well), this article will take a more contemporary angle, explaining how this plan severely hurts American national interests, and how it is simply a case of “kicking the can down the road.”

In order to truly make it out of this severe recession (depression if you prefer), it is absolutely necessary that firms change their business models, as current circumstances have proven the modus operandi to be untenable in the long term. However, to a certain extent businesses are resistant to change. If they can continue to operate as they have in the past and to remain liquid, change will not occur. The government has been allowing many of the firms responsible for much of the damage to continue operating under the status quo. Obama has spoken at great length about how this new plan will ensure a new way of doing business that protects against the type of greed and corruption which led us to this disaster.

However, there are two gigantic problems with this claim. First of all, where will all of these regulators come from to ensure businesses are acting ethically? Furthermore, who will train them? And most importantly, who will determine what is ethical or not for businesses to do? It is unlikely that this regulatory force will have any other effect besides making it more difficult to do business.

The second problem is related to a great quote by Milton Friedman: “the greatest advances of civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government.” New, more efficient business practices will not be developed by a regulatory board, but by entrepreneurs who have seen and learned from the disaster of this time and taken those lessons into account when establishing their own firms. A bailout simply disables the creation of new business innovations by maintaining the existence of firms that have proven their ineptitude and inefficiency in the marketplace. By allowing them to retain their market power, new businessmen with new ideas are hindered from developing their own companies, and must wait to rise through the corporate ranks in order to express their innovations. The bailout is directly delaying progress.

Another severe problem with firms not changing their basic business models is that all of this money, like all of the public money that has already been spent, will essentially go down the drain (or, rather, into the pockets of CEOs). The models that these companies are functioning under are ones that have proven to lose money for all except the top officers. The American people are thus only ensuring that major executives throughout the country continue to get their high bonuses, in spite of the fact that the companies in question have not achieved anything.

Changing gears slightly, towards a standpoint of pure national interest, this is a terrible idea for America. America’s national debt currently stands at roughly $10.7 trillion, while the amount of tax receipts taken in for 2008 was about $2.98 trillion. The amount of receipts is likely to fall in 2009. These simple facts spell major trouble for America. While America’s geopolitical position and military might in the world allows it a certain level of leniency when it comes to loans, the reality is that, at some point, they must be paid off. It is not advisable to continue to borrow when the amount of collateral that America has seems to be decreasing every day with the rise of China, India, and the European Union.

Furthermore, it is important to note who holds most of this debt: China. While at the current moment there is a tenuous friendship between the two nations, it is quite clear that the two are headed for a collision. How intense or heated this will become is unknown. However, allowing a nation who could become a potential enemy at any moment to hold the majority of a mountainous debt does not seem to be in line with our national interest.

Albert Einstein once noted, “Insanity is doing the same thing over and over again and expecting different results.” Never has there been a better time to heed these words than now.