Monday, December 22, 2008

Money Monday - WHAT Economic Crisis??

Last week a friend of mine emailed me this article. Since it's rather long, I will just post bits and pieces of it for you to read. There is sadly a very large amount of truth to this article.

For the past couple of months the United States was been experiencing what we are told is an economic crisis. Indeed, stock markets are down considerably and the jobless rate is rising. Financial institutions are closing and the overall economy is slowing.

The mantra of the media and many politicians pins the Wall Street meltdown on "corporate greed." We hear this mess was spawned by de-regulation of the banking industry. And there is a cry for the federal government to step in to make everything better, from fixing failing banks to bailing ailing auto manufacturers to propping up debt-ridden cities and consumers.

While the blame game is in full gear, the average citizen is left in a fog to sort through the rhetoric. What to make of it all? What is the cause of our financial woes? And what is government's role in fixing it? A little worldview analysis helps clear away the fog to reveal the underlying problem and, therefore, the proper solution.

First of all, the underlying problem is not primarily with the "greedy" capitalists. Banking executives and Wall Street speculators do what they always have done; seek to make a profit. Making a profit is the purpose for any company to be in business and there is nothing wrong with that, per se, as long as there is no fraud, theft, or coercion in their operations or transactions.

...there is a lot of confusion over how the economy works. According to a recent study of Americans' knowledge of economic principles, only 54% can correctly identify a basic description of the free enterprise system. Therefore, if our nation is going to take the right course in these uncertain economic times, we need to refocus on the fundamentals of what makes the economy work. As my basketball coach used to say, the secret to success is perfect execution of the fundamentals. Let's be reminded of what the fundamentals are of economics before offering a solution.

Econ 101

How does the economy work? A simple example might help. Go back to when you were growing up and let's say you decide to set up a lemonade stand in front of your house. You did this, of course, to make money so you could buy something else you wanted, like a new toy! Were you being a greedy capitalist? Well, in one sense, yes, you were. You desired something you did not have. But in order to fulfill that desire, you set up a monetary exchange that benefited both you and your neighbor who bought your lemonade.

Your thirsty neighbor decided that, instead of spending his time going to the store, buying his own lemons, and squeezing them himself, he would prefer to quench his thirst by exchanging some of his money for your labor. In this exchange we have a win-win situation. Your neighbor quenches his thirst and you have a few extra coins in your pocket. No one was coerced to make the transaction and no one was defrauded by the exchange.

...a free market economy encompasses the golden rule: "Do unto others as you would have them do unto you." This is the biblical foundation for economics, along with the idea of private ownership of property.

Government's Role in the Economy

What is the government's role in a free market economy? Not much, except to ensure that business transactions are conducted peacefully, freely, and without fraud or deceit. A biblical worldview acknowledges that man is basically sinful and so there is the potential to defraud, lie, or cheat to gain an advantage when exchanging with your neighbor. The legitimate role of government is to bring to justice those who break these moral laws. Beyond that, the government has no role in the economy as it relates to setting prices or determining what is made and how much of each item.

The job of politicians is narrowly defined in the United States Constitution and that definition does not include managing someone else's business or "spreading the wealth around" by taking from the productive workers and giving it to others (see the October 2008 Truth and Consequences for more on the role of government).

To illustrate the problem of government intervention, let's say your competitor on the next block is a friend of the mayor and offers to give the mayor a campaign contribution if he passes a zoning ordinance barring lemonade stands on your block. That knocks you out of business! So now you have to hire a lobbyist to persuade the mayor to change the ordinance. This sets in motion an escalating battle for gaining benefits for certain businesses at the expense of others. And in every case, it raises the cost of goods and services for the consumer.

Intervention by the government into a free exchange of goods and services only penalizes those who are most successful and weakens the primary incentives that contribute to the free market's success. Under a government interventionist system, instead of "spreading the wealth around" the actual result ensures that everyone is equally poor. The only beneficiaries of such a ploy are the politicians who hold the reigns of power.

The Makings of a Financial Meltdown: Historical Perspective

With this background, let's reassess the current financial situation here in the U.S. How did this nice mess get started? I suggest there is no financial crisis, only a political crisis. While there are a number of factors that lead us down this road, let me sketch out one avenue that set the path in this direction.

The political crisis began in 1938 with the creation of Fannie Mae as a government agency to facilitate banks' ability to make mortgages. In 1968, the government converted Fannie Mae into a private shareholder-owned corporation, yet it still had strong ties with congress. In the 1970's Congress passed a law requiring banks to make loans to people who traditionally would not qualify, i.e., the poor and lower middle class. This legislation was beefed up and pushed further during the 1990's. All of these actions by congress are classic examples of interventionist policy aimed at restructuring society in some way, in this instance, to expand "affordable" housing to the "underserved."

But the manipulation didn't stop there. According to a New York Times article dated September, 1999, the Clinton administration pressured Fannie Mae to increase the percentage of mortgage loans made to low and moderate income people. The reporter insightfully commented, "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk. . . . But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's." The ominous phrase here is "significantly more risk." And of course, "may run into trouble" was prophetic. Based on all sound economic principles, the current economic meltdown was predictable.

By 2002 it became evident that trouble indeed was brewing and by 2004 federal regulators detailed to a congressional oversight committee the many irregularities they discovered with Fannie Mae and Freddie Mac. Many of our leaders in Washington refused to acknowledge any problem and instead attacked the messenger! Others called for more regulations.

But the point is there was already an incestuous relationship between these quasi-government companies and politicians. Fannie Mae and it's sister organization, Freddie Mac, were giving hundreds of millions of dollars in contributions to a number of politicians. This situation does not warrant more "regulation" or "oversight," it demands severing the unhealthy connection.

Hence, political meddling has caused "another nice mess" which is costing "we the people" over $850 billion. It will actually be much more, considering the government will probably have to print more dollars to finance this project which devalues the dollar. This means that every American will have less buying power for every dollar spent—another "tax" on the average citizen. By the way, this hits even the poorest of the poor who pay no taxes directly, but will have to bear the burden of inflation for every welfare dollar they spend, too. So much for helping the poor!

Meanwhile, politicians on both sides of the aisle congratulate themselves for "saving the economy" by passing another bailout bill and at the same time lining their campaign pockets with pork-induced payouts and favors to the tune of over $1.5 billion.

A Free Market Solution

In the current situation, our representatives should be doing what they were hired to do; run the country, not run the country's businesses. This means keeping their hands off the banking business, the automobile business, the farming business, and every other business. All businesses are none of their business.

We hear that these financial institutions are "too big" to fail and therefore must be bailed out. However, a free market solution means letting companies that are not able to offer goods and services at competitive prices go out of business, be bought by another company, or go through bankruptcy court for the purpose of reorganizing into a viable business. The free market determines winners and losers. That is just the hard reality of life.

To put this into perspective, in the early 1900's should the government have bailed out companies making buggy whips because of the advent of the automobile? How about the millions of people employed by wooden wheel manufacturers; should they have been guaranteed work because their companies were too big to fail? Or, why do we no longer drive Rambler automobiles? What did all the workers at Rambler do after the American company went defunct in 1969? (Hint: they found other jobs!)

What we are witnessing today is exactly the kind of abuse of power and mismanagement of the economy that our founders warned against. That is why they intentionally limited the scope of the federal government with a written Constitution. They envisioned the national government as the least intrusive component of our federal system, with the states and localities having the greater range of authority (the Tenth Amendment of the U.S. Constitution makes this clear).

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