The country is currently facing an economic collapse and a new President, Barack Obama, has just taken office. There is some question as to whether he would have been elected without this crisis. His opponent, John McCain, was leading the race prior to the overt expression of economic problems last September. The cause of the collapse was assigned to the Republican administration headed by George Bush. A huge 750 billion dollar "bailout" bill was passed by Congress in October giving the Treasury Secretary power to disperse money to ailing financial institutions.
Those policies that may have caused the collapse has been of only secondary importance. In fact, those that were instrumental in producing the collapse have been selected to provide the solution. The following comments are an attempt to reduce the situation to a set of time-tested principles that should be considered top priority.
We have become a highly leveraged society with credit providing the fuel for economic expansion. On the macro scale, we have depended more and more on foreign imports to fullfill our daily needs. This, in turn, places U.S. dollars in the hands of foreign countries. The U.S. dollars these countries receive eventually have to return to the U.S. This can take the form of purchase of U.S. goods, real estate, and investments in manufacturing facilities. Once these opportunities have been exhausted, the excess U.S. dollars owned by foreigners is often used to buy U.S. bonds and other financial instruments. These purchases of U.S. bonds help finance our credit economy - which in turn allows us to buy more foreign goods and incur more debt.
At the family level, the U.S. has been drifting towards more and more credit spending. This is coupled with the use of credit to finance short lived perishable commodities. This type of credit is not sustainable. Credit is best used to support business investment which produces a future profit thereby creating real wealth expansion.
Lately, the "experts" have been complaining that "in spite of the financial bailout" the banks are not making loans to the degree that was intended. As a result, the lack of recovery is being blamed on those institutions receiving the bailout money. If you look at any other segment of our economy such as retail sales, travel, insurance, new car sales, and even church contributions, you will find that they have all been adversly affected. Why shouldn't lenders be similarly affected?
In truth, much of the recent fall in spending is due to mass psychology:
If your neighbor buys a new car, you buy a new car.
If your neighbor buys a BBQ grill, you buy a BBQ grill.
If your neighbor buys a hot stock, you will buy that stock.
If your neighbor sells his stocks and puts his money under the pillow, you will do the same.
There is a strong tendency for people to copy what others are doing. They also tend to think what others are thinking. This often has no relationship to the real world. What happened to the Y2K panic? What basis is there for the global warming scare? A lack of knowledge and education leads to the lowest common denominator - group think.
CAUSE AND EFFECT
The dramatic relaxing of credit requirements over the last decade or so has led to a backlog of unsustainable debt. Very little attention has been given to how the debt is to be repaid. As a result, the risk of economic collapse has been steadily rising. The driver for this phenomenon is the short term group euphoria created by unrestricted spending and sales.
The crumbling of nirvana occurred when the inevitable defaults began to appear with respect to the existing debt. Bad loans led to foreclosures on over-leveraged homes. If the homes had held their value, the banks would have not been in trouble but there were now more homes on the market than there were buyers. Depreciating home values turned group euphoria into group panic. This further accelerated the decline of the housing market and spilled over into every facet of our economy.
The proposed additional "stimulus" package that Congress has proposed is nothing more than an extension of the welfare state. Welfare does not create prosperity. It indicates that the Democrat's hype about the crisis is only an excuse to further expand goverment and socialism.
It appears that our government dropped the ball on regulating credit requirements in the past. Rational rules which consider risk and avoid frivolous non-wealth-producing loans are necessary for long term recovery. In the short term, consumers must begin to spend money (not credit) to support our manufacturing and service industries. This will put a stop to the layoffs which are feeding the panic.
But just giving consumers money, tax breaks, and jobs is not the whole story. The mass psychology of the people must be turned towards confidence in the future of our economy. The exaggerated statements of the depth of the "crisis" by our politicians reminds us of the Y2K and global warming scenarios. These statements have contributed to a group mindset that we should hoard our money and pull in our horns. Over and over we have seen politicians proclaim a crisis which demands immediate action. It seems that immediate action is required to crowd out rational thought. It also ratchets up the power of the government which favors the politicians.
Each of us has an obligation to study, understand, and react to those major issues that affect ourselves and future generations. That is true morality.