Tuesday, January 27, 2009

Column 137 – Economy

Something went unnoticed this week as Congress wrangled over what was ineptly termed the "bailout." That is that on the last day of September, the national debt hit $10 trillion plus. President Bush signed legislation in July that raised the debt ceiling to $10.615 trillion. Meanwhile, the financial bailout legislation passed by the Senate last night would raise the debt ceiling further to $11.315 trillion. The gross national debt as a percentage of the gross domestic product has, under the Bush Administration, hit a 50-year high.

There has been an enormous amount of [barnyard epithet] circulated to push this bailout. Yes, banks have tightened credit. Yes, we are in a recession. But the problem is not that the banking system has frozen up. The problem is the collapse of the $8 trillion "housing bubble" (really a "dubious credit bubble"), about which many so-called experts continue to be in denial. The decline in housing prices to date has already cost the economy $4 trillion to $5 trillion in housing equity. Homeowners have been consuming based on their home equity, much of which has now disappeared. Given that, we would expect that consumption would fall and that banks would be reluctant to lend to people who no longer have as much collateral. It has been estimated that we will see a decline in annual consumption on the order of $160 billion to $300 billion.

That is the long and short of the downturn, and the bailout does almost nothing to counter this drop in demand. At best, it will make capital available to some marginal borrowers who would not otherwise receive loans. We should demand more for $700 billion.

The last downturn of these proportions was, of course, the Great Depression. Franklin Roosevelt was president – the scion of a wealthy family, he was considered a traitor to his class by the big money (read Republican) interests of his time, but he stood up to the opposition of big business and, in the New Deal, created a remarkable and rapid turnaround of the economy. Central to the recovery was the Reconstruction Finance Administration (RFA). FDR took this failing Hoover-era agency and increased its funding, streamlined the bureaucracy, and used it to help restore business prosperity, especially in banking and railroads, and provided for work relief, which Roosevelt used to pump money into the states by extending loans to businesses and local government projects.

An RFA-type solution including the government refinancing mortgages directly would do more to turn the economy around than the $700 billion band-aid the Congress applied last week. I can hear my conservative Republican friends (and foes) crying "socialism" at this idea. Well, how is the government taking over banks, bailing out insurance companies with loans, and generally intervening in the economy any less "socialistic?"

I think it's time we put the "socialism" bogeyman to rest once and for all. I would propose that the current economic crash is the other shoe dropping for extreme economic theories – in 1991 the collapse of the Soviet Union was gleefully celebrated by the advocates of Free Market Capitalism – hurray! Communism doesn't work! And they were right – as an extreme system that distorted socialism into an oppressive political system it fell under the weight of its unworkability. It took another seventeen years for Free Market Capitalism, which distorted capitalism into an dictatorship of the wealthy to fall, but fall it has. We now know that, in economics as in so many other areas of life extremes fail, and Free Market Capitalism is an extreme.

Communism is based on myths, chiefly that the "proletariat" will rule wisely and fairly; Free Market Capitalism is based on myths of its own, chiefly that the market will cause wealth to "trickle down" from those at the top to those at the bottom. Try watering your lawn by applying water only to the blades of grass and see how well this works. Just as grass takes in water by its roots and the water "trickles up" to feed the blades, an economy must take care of those who are producing its wealth and the wealth will then trickle up. Neither Socialism nor Capitalism, which were products of the Industrial Age, will do this –in today's world we need an economic system that combines the best of both, with a government that regulates the economy so that wealth is created and basic human needs are guaranteed to all. This bailout is more of the same and will not work.

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