Our Over-Regulated, Baseless Economy

There’s been a lot of talk, since this is election season, about which person or party can fix the economy. The question we should be asking shouldn’t be, “Who can fix the economy?” but, “Can the economy be fixed?” Before we ask whether or not the fundamentals of the economy are strong, we should be looking at if the economy even has fundamentals. Before we can judge what we should do with the economy, we need to look at a few things. The first is the housing market that recently cost taxpayers 700 billion dollars. After that, we need to take a look at our economic base. Finally, we must evaluate the government’s role in the economy.

 

Everyone knows about our pals Fannie Mae and Freddie Mac that we just had to bailout for 700 billion. Not that many people know why. A lot of people are blaming President Bush (R) and the Republicans for the current state of the economy. Well, the reason the economy is so bad is because of the housing market, which became unsustainable due to predatory and insecure loans made by mortgage companies such as Fannie and Freddie. To figure out why this happened, we need to look all the way back to 1977. It is 1977, President Carter (D) is in office and the Democrats control both the House and the Senate. A bill comes up, called the Community Reinvestment Act, which was created in response to a lack of credit options to low-income Americans. The Congress passed the bill, and Carter signed it into law. This law, abbreviated to CRA, forced banks to offer credit options to low-income areas, meaning a bank could not refuse a loan just because someone was probably too poor to pay it off. The banks came up with loans they could sell to the poor in order to meet the requirements of the CRA. The people these loans targeted would not qualify for loans under regular circumstances, allowing them to buy houses they could not normally afford. There’s a reason they wouldn’t qualify for the loans. It’s because they couldn’t pay for them. The mortgages are called subprime mortgages. Prime, of course, meaning good, and sub meaning below or less than, thus these are “less than good mortgages”. These people couldn’t pay for their loans, but some tricky maneuvering by legal departments allowed the subprime lending to continue on. In 1995, under President Clinton (D), the CRA is expanded to allow for even more subprime mortgages. This brings us back to our buddies Fannie and Freddie. Fannie Mae became officially backed by the government in 1968, under President Johnson (D). Freddie Mac was created in 1970 under Nixon (R). Both of these occurred under a Democrat controlled Congress. This isn’t to say the Democrats are entirely to blame, since Nixon was involved and there was a small Republican majority in Congress during 1995, but President Bush and the Republicans of today should by no means be blamed. Throughout this time period, Fannie and Freddie acquired secondary subprime mortgages until 2007 when they started showing signs of weakness. Because nobody could pay off their loans, the companies holding those loans were hemorrhaging money, and by 2007 it couldn’t be covered up by legal tricks anymore. By 2008, Fannie and Freddie owned 50% of all securities, including a substantial number of subprime mortgages. Since subprime mortgages are not profitable, this brought about the need for the 700 billion bailout to prevent Fannie and Freddie from collapsing, which would lead to massive loss of homes. This package was a necessary band aid, but by no means a fix, and it shouldn’t have been needed in the first place. In the hindsight offered by history, one must ask, “Why didn’t the government realize that there’s a reason the banks didn’t offer loans to those people?”

 

The next major problem with our economy is that it doesn’t exist. Every year, more and more manufacturing jobs are exported to other countries. We have a service economy, and it gets more and more intangible every year. This is shown by the housing market which was based on mortgages people couldn’t pay. If you have no money, and someone else with no money owes you five-hundred dollars, how much money do you have? The correct answer is none, since you have no money, the person that owes you has no means with which to pay you back, and no one in their right mind would by a debt that won’t be paid back. That’s actually where the government comes in. Through Fannie and Freddie, the government bought all of those loans that couldn’t be paid back, thus artificially stimulating our economy by encouraging people to go into debt they can’t pay, along with encouraging businesses to make the loans, knowing they can rely on the government to save them from bad business decisions. This sounds fine until you realize the government is paying money for those loans, and where does the government get money? Taxes. Every time the government buys faulty loans, that’s money in taxes that are taken from the people. Every dollar the government takes is one less dollar people have to fuel the economy by buying or to pay off the massive debt they incurred from the bad business decisions. Basically, the government is buying loans with money it got from the people who are in debt because of the loans. Do you see the problem here? This practice of government intervention and rescue of businesses that make mistakes accomplishes three things. One, it increases deficit spending, thus increasing the nation’s debt. Two, it ensures people will be forced to go into negatives themselves, since they are struggling to pay off the loans the government bought with their money. Three, it makes people more dependent on government handouts and rescues, reducing personal responsibility as well weakening the base of the economy as a whole by removing competition via an elimination of the risks associated with business decisions. Our economy is based on the principles of the free market. People own businesses and have to run them wisely to compete with other businesses that off the same services. If a person makes good decisions, they prosper, but if a person makes bad decisions they fail and are removed from the market. Each person is accountable for their own decisions, which ensures people, to maintain an acceptable standard of living, work hard and make wise economic choices, which provides us with a strong and vibrant economy. Whenever the government rescues people from their bad decisions, it undermines that personal accountability, and people no longer have the incentive to work hard or compete, since their standard of living is ensured by government hand-outs. In addition, every dollar the government spends trying to “save” an economic sector is one less dollar that could be used by consumers to support that sector. One option, the option of government intervention and rescue, provides a standard of living for the owners of that sector and higher taxes for everyone else. The second option is the government stays out of it and the consumers decide whether or not that sector is important enough to keep afloat. They do this by deciding whether or not to buy from that sector. If the sector is important, then people will support it through the act of paying for goods and services. If people don’t want to buy the service from that sector, then it obviously isn’t important enough to warrant government intervention. There are situations, however, when government intervention is necessary to prevent a tragedy, such as when a sector can’t be saved by people buying the service, and the loss of the sector will collapse the framework of the economy, such as the scenario represented by the housing market. However, as is also shown by the housing market, most, if not all, of these scenarios are caused by government intervention in the first place. Since our economy was based on the capital principles of competition, personal accountability, and the will of the people when it comes to the importance of different sectors of the economy, and the government has completely disposed of all of these in the past 30-40 years, it can be safely concluded that our economy is no longer based on those principles. One might ask how a Capitalist economy can be based on something other than Capitalist principles. For an answer, one just needs to look at the current state of the economy.

 

Now we must look at the role of government in the economy. From the 70’s on, with the exception of President Reagan (R), and one or two others, each administration has seen a rise in government intervention in the economy. Now, it is easy to argue that the high levels of government intervention during President Clinton’s administration led to the largest surplus in history, but it is also easy to argue that the high level of government intervention in the Soviet Economy led to it having the strongest economy in the history of Russia, until it collapsed from overspending and an exhausted and dilapidated economy. In addition, it must be pointed out that deficits don’t necessarily hurt the economy, depending on what the deficit is for. The greatest example of deficit spending improving the economy is World War II where massive deficit spending spurred industrial growth and led to the U.S. being the dominant economic power of the 21^st century. An example of deficit spending hurting the economy is the Welfare program, which leads to 80 cents less made in employment for every dollar spent on the program. In both cases, massive amounts of money are spent by the government, but to different results. The difference? In the example of World War II, the deficit spending was on tanks and planes made in the U.S. and paychecks for soldiers. Whichever factory made the best planes and tanks would get the most business, encouraging competition and personal responsibility, and whichever soldiers did the best were promoted and made more money, to the same result. In the case of Welfare, however, government money goes not to the one that outcompetes or makes the best decisions, but often to the opposite. It is very rare that a successful businessman is on Welfare. Welfare encourages people to not compete or make wise business decisions, since that would take them off Welfare, but in addition to this, and even more fundamental, it does not encourage production or work, both of which being vital to a Capitalist economy. According to an American Voice report, every dollar the government puts into Welfare leads to a drop of 80 cents earned from employment because people have no more incentive to work. Less work means less income tax money going into the government, which, when the nearly 1 trillion dollar a year price of various Welfare programs is taken into account, means more taxes on those who do have jobs. More taxes means less money for people to spend on the economy, and less money being spent on the economy means more unemployment and more need for government bailouts. Now that the two types of deficit spending have been established, ask yourself this, which type of deficit spending are the government bailouts?

 

 This is normally the part where you are told what we “must” do to “fix” the problem. Not here, not now. The economy is not broken, so it can’t be “fixed”. The economy, as a living entity that is fluid and flexible, has been killed by government intervention and loss of accountability. Throwing more money, and thus more unnecessary intervention, at the problem won’t make it go away. It will cover up the problem for now, but it won’t do anything permanently. Welfare, either corporate as in the bailout, or personal, as in the program, does not solve anything, since it provides no incentive to innovate, compete, or improve. As long as the government bails out corporations and people that make dumb choices, those people will keep making dumb choices. The only true “solution” to the economic problem is to let the current economy go and rebuild it as it was intended. People should be held accountable for their choices, but, unlike in the case of the CRA, they should also be able to make their own choices. You can not hold someone accountable for choices they had no say in, but neither can you bailout those people at the expense of hardworking taxpayers. The solution is to let the economy go where it goes and deregulate enough so that these banks can make economically sound choices and avoid subprime mortgages if they wish to. Then, if the bank fails, it is the fault of the bank and its competitors can take over, as is intended by the fundamentals of a Capitalist economy.

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Tags: 1977, Economy, Fannie Mae, Freddie Mac, Jeff Patterson, Jimmy Carter, RCA