Sorry that I’ve been away for a while. I’ve had my own challenges at work which have occupied most of my time recently.
I felt that I needed to take some time today to comment on the Wall Street Bailout bill. My view is that the bailout will only make things worse. Quite frankly, it could be a potential disaster that could push us into another depression.
The main thing to remember is that the government created the mess that we’re in today. Here's how they did it:
First, the government passed legislation to pressure Fannie Mae and Freddie Mac to provide home loans to people who couldn’t afford them. Remember, Fannie Mae and Freddie Mac are quasi public companies that were created by the government. Most of the debt problems in housing market can be traced to government interference in the mortgage market.
Second, the government has greatly inflated the money supply over the past decade to artificially lower interest rates. The artificially low interest rates have caused an unprecedented amount of reckless borrowing and spending.
Third, the government itself has gone on a drunken orgy of spending over the last 8 years. In the process, they've turned a $155 billion annual surplus into a $500 billion annual debt. The national debt has doubled over the last 8 years to a whopping $10 trillion. That $10 trillion does not include the unfunded liabilities in the Social Security and Medicare systems that are ready to hit us in a big way as the baby boomers start to retire.
So, the financial crisis is all about bad debt caused by the government promoting excessive borrowing. The $700 billion bailout will only make matters worse because the government doesn’t have $700 billion to spend. The government is already running a $500 billion a year deficit. The government will have to borrow more money and incur more debt to fund this program. This time, the Chinese and Japanese aren’t going to fund the borrowing by buying T-bills. The money is going to come right from the Federal Reserve further inflating the money supply, which will very likely lead to Jimmy Carter style inflation and interest rates. The wholesale price index has already increased by over 9% in the last year, which is the worse inflation in 27 years. It's only going to get worse.
The end result could be another Great Depression along with hyperinflation. Remember, that’s precisely the scenario that led to Hitler’s rise to power in Germany. In my view, the government has already put many of the mechanisms in place to support a dictatorship in the name of fighting terrorism.
So, what should the government really do??? Here is my four point plan for getting us out of this mess:
First, immediately cut government spending and balance the budget. If the government gets out of the credit markets there will be plenty of credit left for the private sector. Remember, we had a balanced budget in 2000. It’s not that hard to get there again. It only takes some political will to do so.
Second, reign in the Federal Reserve. The Federal Reserve helped cause the Great Depression. They’re doing it again. There are a lot of approaches that can be taken to do this. Regardless of which approach is taken, one thing is certain -- we can no longer allow faceless, unelected bureaucrats to have absolute and largely secretive decision making power over our money supply.
Third, we have to make America the best place to invest and innovate once again. The first thing that we need to do is streamline our Byzantine tax and regulatory systems. A much harder task is fixing our abysmal government monopoly school system, which is protected by cowardly politicians who’d rather destroy our kid’s future than stand up to the teachers’ unions.
Fourth, don't try to block the recession. What is a recession? It’s a corrective period where bad investments and debt are discounted or liquidated. Doing this frees up resources for other, more productive economic activities. Attempts by the government to prolong the inevitable will only make things worse. Much worse. So let it happen. It will be quick. Let’s come out of it with a more rational fiscal and monetary environment to get the country back on track.
Anyway, politicians of both parties have created this mess. Anyone who thinks that these same people will fix it is not living in the real world.