Did the government purposely create our current economic crisis?
The financial meltdown of the previous several weeks and the a response of our Federal government has been well documented, as have the causes. It will not be my intention to recount them here except to point out that the federal government itself, by encouraging and at times actually requiring, banks to lend to people whose ability to repay was questionable at best, bears much of the blame for our current troubles. Why would they do something so irresponsible and compound the results of all their other foolish and irresponsible economic positions? We can come to three possible conclusions. First, our politicians are simply stupid. Now I must admit that few of us would describe our congressmen and women as the brightest bulbs and while they appear to lack even a basic understanding of economics, I don’t think this is the answer (in most cases).
The second possibility is that they don’t care. This is probably the best answer based on the history of our politicians over the last several decades, neither party excluded. Considering that Chris Dodd received major contributions from Fannie and Freddie (I’d call them kickbacks) and several others are feeding from this specific trough, the idea that politicians would desire to continue in power and receive the perks of position over taking a stand for responsible public policy is hardly beyond the realm of possibility. Since the time of FDR politicians have been in the habit of promising more money and benefits to more groups in a desire to remain in office to the point that our deficits are now closing in on a trillion dollars a year and the debt is growing exponentially. Such a trend continues only if a majority of politicians care more for their own power than the future of the country.
Such a trend can not last forever, however, an everyone knows it even if they choose not to do anything about it. Ours is a huge and wealthy country and has absorbed more debt and fiscal irresponsibility than many have imagined but we are not “too big to fail”. The fact is that the country is broke and like a homeowner who has run out of income before the end of the month, the government has been borrowing and borrowing and continues to do so. The only thing that keeps this going is the fact that interest rates have been very low for a long time and easy credit in the consumer markets has kept them there. Interest on the current debt already rivals defense and Social Security as a federal expenditure. But credit and interest rates are subject to market forces just like anything else. When credit is easy, lenders compete for borrowers and interest rates are low. Now credit is tight, unavailable according to some sources. That will make interest rates rise. If that happens, our ability to finance the debt will become much more difficult. Also, the higher the debt grows and the greater risk the US government becomes in the eyes of investors, the higher the interest rate they will demand. Finally, inflation has been low for along time but it’s creeping up, particularly due to higher energy costs (another fault of Washington) and the inflation of the money supply (Washington again) and inflation effects interest rates. Either way, if rate go up even marginally, our ability to pay our interest and finance more spending will become difficult, if not impossible. When that happens, programs, entitlements, defense spending, it will all have to be drastically cut and cut immediately. No one wants to see that, particularly those in power. No one wants to be saddled with that footnote in history.
Which brings us to possibility number three. There were those in government that orchestrated this to some degree to avoid this very possibility. If stocks are rising and things are good, people put their money there and not in bonds. If bonds are becoming less and less attractive due to greater returns in the stock market and questions about the US government’s ability to continue to pay its obligations and the need to raise interest on those treasuries to make them more attractive will make the debt unsustainable, something else must be done to make them more attractive. If raising rates is out of the question, the only other option (other than finding a degree of fiscal responsibility) is to make other options, like stocks and real estate, less attractive. In times of uncertainty or bear markets, people flee to the safety of bonds. And by engineering, or at least assisting, this crisis the federal government would have accomplished two things. First, people will buy bonds even at their current low interest rate (buying into te illusion of ‘safety’) and continue to finance all the government’s exorbitant spending and two, the government has gotten its fingers into one more industry and increased its power, always a benefit for those in charge during a crisis.
Now while I am not one for conspiracy theories, the fact is that our continued ability to finance our debt through low interest rate Treasuries is crucial to our financial stability. The debt and its consequences are something neither party wants to address which will only make the situation worse when this ponzi scheme collapses. But politicians just continue on their merry way, promising more handouts and wasting more money while more and more Americans readily vote with their hands out. Whether it’s stupidity, carelessness or conspiracy, the tragic results will be the same for us when it all comes crashing down. We may have bought a short breather but it took over two years for the crash of 1929 to become the Great Depression. There are laws of economics just as there are laws of physics. We can’t spend more than we make indefinitely, our chickens will come home to roost.
The second possibility is that they don’t care. This is probably the best answer based on the history of our politicians over the last several decades, neither party excluded. Considering that Chris Dodd received major contributions from Fannie and Freddie (I’d call them kickbacks) and several others are feeding from this specific trough, the idea that politicians would desire to continue in power and receive the perks of position over taking a stand for responsible public policy is hardly beyond the realm of possibility. Since the time of FDR politicians have been in the habit of promising more money and benefits to more groups in a desire to remain in office to the point that our deficits are now closing in on a trillion dollars a year and the debt is growing exponentially. Such a trend continues only if a majority of politicians care more for their own power than the future of the country.
Such a trend can not last forever, however, an everyone knows it even if they choose not to do anything about it. Ours is a huge and wealthy country and has absorbed more debt and fiscal irresponsibility than many have imagined but we are not “too big to fail”. The fact is that the country is broke and like a homeowner who has run out of income before the end of the month, the government has been borrowing and borrowing and continues to do so. The only thing that keeps this going is the fact that interest rates have been very low for a long time and easy credit in the consumer markets has kept them there. Interest on the current debt already rivals defense and Social Security as a federal expenditure. But credit and interest rates are subject to market forces just like anything else. When credit is easy, lenders compete for borrowers and interest rates are low. Now credit is tight, unavailable according to some sources. That will make interest rates rise. If that happens, our ability to finance the debt will become much more difficult. Also, the higher the debt grows and the greater risk the US government becomes in the eyes of investors, the higher the interest rate they will demand. Finally, inflation has been low for along time but it’s creeping up, particularly due to higher energy costs (another fault of Washington) and the inflation of the money supply (Washington again) and inflation effects interest rates. Either way, if rate go up even marginally, our ability to pay our interest and finance more spending will become difficult, if not impossible. When that happens, programs, entitlements, defense spending, it will all have to be drastically cut and cut immediately. No one wants to see that, particularly those in power. No one wants to be saddled with that footnote in history.
Which brings us to possibility number three. There were those in government that orchestrated this to some degree to avoid this very possibility. If stocks are rising and things are good, people put their money there and not in bonds. If bonds are becoming less and less attractive due to greater returns in the stock market and questions about the US government’s ability to continue to pay its obligations and the need to raise interest on those treasuries to make them more attractive will make the debt unsustainable, something else must be done to make them more attractive. If raising rates is out of the question, the only other option (other than finding a degree of fiscal responsibility) is to make other options, like stocks and real estate, less attractive. In times of uncertainty or bear markets, people flee to the safety of bonds. And by engineering, or at least assisting, this crisis the federal government would have accomplished two things. First, people will buy bonds even at their current low interest rate (buying into te illusion of ‘safety’) and continue to finance all the government’s exorbitant spending and two, the government has gotten its fingers into one more industry and increased its power, always a benefit for those in charge during a crisis.
Now while I am not one for conspiracy theories, the fact is that our continued ability to finance our debt through low interest rate Treasuries is crucial to our financial stability. The debt and its consequences are something neither party wants to address which will only make the situation worse when this ponzi scheme collapses. But politicians just continue on their merry way, promising more handouts and wasting more money while more and more Americans readily vote with their hands out. Whether it’s stupidity, carelessness or conspiracy, the tragic results will be the same for us when it all comes crashing down. We may have bought a short breather but it took over two years for the crash of 1929 to become the Great Depression. There are laws of economics just as there are laws of physics. We can’t spend more than we make indefinitely, our chickens will come home to roost.
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