We all know what's been going on with our economy. Simply put the housing bubble finally burst. That combined with other factors -- mainly the passing of free-wheeling deregulation legislation over the last three decades by the Reaganites which encouraged poor risk-management decisions by our financial institutions -- precipitated an increase in interest rates. This understandably drove up to massive figures the amounts of monthly payments on the plethora of adjustable rate mortgage (ARM) loans granted during the "anything-goes" Bush years. Of course this was predictably followed by a dramatic increase in the number of foreclosures. The masses of borrowers defaulting on loans and the subsequent onslaught of properties falling to the banks coupled with the devaluation of derivatives contracts (unregulated insurances policies) that secured those loans and that the issuing banks listed on their books as assets caused lending institutions to no longer have the capital to extend loans which locked up the credit markets. And voila, here we are.
One market nosedive and numerous bailout bills later and new President Barack Obama is now trying to hold off a complete economic collapse with the passage of his $878 billion stimulus package while at the same time fervently insisting that he does not advocate Socialism and supports American style free-market Capitalism. For the sake of the country, my future, and that of my children, I truly hope his plan works. That said, pumping money into a dying system is lunacy. It's like bailing out a sinking ship with a Dixie cup, no matter how hard you try it's just not going to work. A better path to a real and lasting solution would be to take a critical look at our economy as a whole and ask the difficult but necessary question: is our current financial/economic system--the one that has made a very small minority of people ridiculously wealthy while hastening the demise of the middle-class and driving the poor further done the poverty hole--a system worth salvaging?
This is certainly a big question, the answer to which has monumental and long ranging implications. But in the shorter term consider this: as a result of this unprecedented financial crisis the Bush and Obama administrations have both pushed for and passed huge bail-out/stimulus bills, bills that do not have any tax revenue to support them and subsequently must be paid for with more dollar-devaluing deficit spending. And a further devalued dollar--which will not seriously hurt the financial institutions that got us into this mess as they can easily convert their cash assets into other currencies to ride out the crisis--will devastate the working classes. Populations, who due to deregulation, encouraged flat real wages over the last three decades today live closer to the poverty line then at any other time in the last hundred years.
Don't get me wrong, I'm fine with spending future tax revenue now to stimulate and thereby salvage the economy but to do this correctly we need to put that money into the hands of the people who are going to spend it today and not into the hands of those who will use it to cover bad investment losses or to make even more risky speculations. That said, I fully understand the value of using the banks to distribute stimulus funds as through their fractional-reserve model any sum distributed by them could potentially be expanded throughout the economy by as much as ten times it's original amount. But to make that happen, there needs to be conditions placed on these funds to force the recipient banks to do just that.
Unfortunately, to date none of the recipient banks have significantly increased their lending. Quite to the contrary, all of the recipients of Troubled Asset Relief Program (TARP) funds have one thing in common; they are using their TARP allotments as life preservers and not as economic stimulants. The rescue of our economy envisioned by the starry-eyed congressmen when they passed TARP has morphed into a public rescue--meaning a payoff of bad debts to bolster balance sheets--of the same private institutions that through poor risk management and shady investments drove our economy into the ground and are now themselves on the verge of collapse.
As good as a public financed makeover may be for the banks, it does virtually nothing to stimulate our economy. And even worse it effectively is a reinforcement of the very behavior that caused the whole mess. As far as these banks are concerned their poor decisions, which made senior management and the heavy-hitter investors fabulously wealthy but threw many smaller stakeholders to the wolves and caused massive unemployment throughout the country, has paid off. Hell, these "stimulus" bills which are basically massive transfers of public wealth to the private sector, don't even require these fiscally insolvent and failed institutions to replace their senior management. From an investor standpoint these guys may actually come out looking like heroes as it could be argued that through their leadership, if you can even call it that, these companies were able to take huge speculative risks without actually taking any risk. And in the end profit will have been made by all, except of course the vast majority in the lower echelons--you know, the peons, and who cares about what happens to them anyway.