We Can’t Go On Like This
In 2005 Americans, for the first time since the great depression, spent more money than they made. In the two-and-a-half years since then the negative net savings rate has only gotten worse. America, publicly and privately, is addicted to living on credit. The current crisis stems from a thorough corruption of the culture and an appalling lack of leadership on all levels. Like any dangerous addiction it threatens to destroy the addict, which is in this case the republic.
People have to stop thinking of the federal government as wealthy parents. The government is a financial entity with assets and liabilities like anyone else, with one exception; the government can print money. Increasing the money supply to pump up the economy artificially is a dangerous practice, but one the government has already employed to excess. In 2002 a dollar could buy 1.0 euros and gold cost $312/oz; by 2008 it could only buy 0.73 euros and gold cost $900/oz. The majority of the increase in the price of oil in 2008 was the decrease in the value of the dollar.
In order to retain some kind of integrity in the currency, the government issues bonds. The interest on those bonds becomes a government expense. The US government currently spends 9% of its budget on interest on their $10.4 trillion debt. Interest paid on the debt buys nothing but time. Interest on the debt buys not one gun for the army, not one shelter for a hurricane victim, not one textbook for a student. Interest on the debt only enriches those who buy the bonds, and typically those people are foreign governments, particularly China and Japan. They save; we spend and they make money. We transfer our wealth from taxpayers to the federal government to foreign countries. Our economy is slowly bleeding to death servicing the debt and every government bailout only makes the situation worse.
We’ve been here before. In 1994 the Democrats controlled both elected branches of government. The budget deficit stood at $270 billion (2.9 % GDP) and the Republicans offered a ‘contract with America’, the centerpiece of which was an end to deficit spending. The ‘peace dividend’ brought on by the collapse of the Soviet Union and a decrease in military spending helped. Between President Clinton and Speaker Gingrich, divided government worked. Clinton was reelected in 1996 (The first Democrat to be elected twice since FDR) and the Republicans retained both houses of congress. Although long term entitlement spending was still not resolved, by 1998 the federal budget was balanced. Bankruptcy was averted and the republic was saved temporarily from irresponsible spending and borrowing. George Bush’s son, George, was elected President and for a time peace and prosperity continued, until September 11, 2001.
On the personal level the culture shifted during the 1990’s. Those who could remember the great depression retired from the workforce and the generation that fought WWII began to die of old age. Their children, the baby boomers were not as thrifty or careful with credit as their parents; aside from the ‘stagflation’ of the 1970’s and the stock market crash of 1987, they had known only prosperity during their lives. They practically regarded it as a birthright. The expected to live as well as their parents but weren’t always aware of how long it took their parents to accumulate that wealth. As indulgent as baby boomers were, their children, ‘generation X’, were even more so.
Blame MTV, or rapidly evolving digital technology, or a lifetime of television commercials, but somewhere along the line attention spans seemed to get shorter. Young people had always been somewhat impatient and short-sighted, but by the 21st century the desire for instant gratification seemed to pervade the whole culture. Television came to mean more to political campaigns than ever before and the cost of television time caused the cost of running for office to explode. The 1996 presidential campaign (all candidates) cost $449 million; by 2004 the cost had risen to $1 billion.
When Newt Gingrich left congress in 1998, the Contract with America began to break down. The perquisites of political power began to corrupt the Republicans just as they had corrupted the Democrats. Republicans stayed largely in line until 2005, but when Majority Leader Tom Delay was indicted and left the House, party discipline crumbled. It was every congressman for himself. Between 2000 and 2008 the number of lobbyists doubled to 34,750. Many, perhaps most, politicians in Washington came to regard reelection as an end in its own right. There was no higher purpose to being in office than being in office. The nation desperately needed statesmen; instead they got self-serving megalomaniacal hacks. Statesmen make difficult decisions; hacks just sell themselves to lobbyists for money and overspend taxpayer’s money. For FY 2008 the annual deficit reached a staggering $438 billion (3.1% of GDP).
Unable to see beyond the next election, and with an election never more than two years away, the political leadership became terribly short-sighted. Capitalist economies are cyclic. Recessions are never fun but they are necessary. During recessions inefficient businesses go under, and capital and workers move to more profitable businesses and industries. However, during the transition, the unemployed become angry voters that can threaten incumbents. Unfortunately in the early 2000’s politicians learned to short circuit business cycles and mask recessions. By inflating the money supply and keeping interest rates artificially low, the economy was propped enough to avoid a spike in unemployment, but the dollar was devalued and inflation increased.
The last component of the debt crisis was the mortgage debacle. In a quest to make home ownership more affordable, the community investment act of 1977 encouraged banks and other lenders to lend money to homebuyers who might have difficulty paying it back. The act was strengthened in 1999 by President Clinton. By the early 2000’s it was taken to the point of intimidating lenders to make risky loans. Artificially low interest and relaxed lending standards led to a frenzy of risky subprime mortgage lending. Some loans went to poor people; some went to illegal aliens who didn’t have a SSN and couldn’t speak English. By no means, however, were all recipients of this creative financing disadvantaged. Many, perhaps most, were middle class, buying houses with low introductory rates. The fact that they couldn’t hope to afford the payments once the introductory rate ended didn’t seem to bother them. Since they assumed that they could always sell the house for more than they paid; they figured that the increase in equity would cover the realtors’ commission and, at worst they’d break even. What never seemed to occur to them was that millions of other people were thinking the same thing. When all of these houses went onto the market at once the housing bubble burst and prices plummeted.
By 2004 the housing market in large parts of the country had degenerated into a Ponzi scheme. People wanted to get into the market for no other reason than the market was going up as speculators help drive up prices. By the summer of 2004 it was obvious to anyone what was happening. The Bush administration begged congress to tighten the rules on home mortgages but Democrats successfully blocked any reform. Freddie Mac and Fannie Mae had made sure to buy off the right congressmen, particularly Barney Frank and Chris Dodd, both Democrats. Ironically the quest for affordable housing had resulted in higher home prices than ever. For those priced out of the market bankers offered the interest-only, no down payment mortgage. There’s a common sense word for an interest-only mortgage; it’s called ‘rent’. ‘Affordable’ housing was a fantasy but brokers were getting rich on commissions and too many powerful people wanted to keep the party going.
While the housing market spun out of control, the war in Iraq went badly. The younger Bush decided to finish his father’s war in Iraq but the assumptions that the campaign was based on turned out to be way off the mark, not the least of which was the monetary cost estimate. By 2006 the war was costing the US taxpayer $10 billion/month for a cumulative expense, by the end of FY 2008, of $648 billion. Of course Bush followed the guns & butter strategy well established by President Johnson forty years earlier.
The desperation of the government to pump up the economy reached an absurd extreme in the spring of 2008. Consumer spending accounts for 2/3 of the US economy but, by then, consumers were tapped out, deep in credit card debt. In an effort to spend us into prosperity, the government then simply sent checks to the public, urging them to spend the money, even though the government was running a huge annual deficit. Politicians were frustrated that some recipients behaved responsibly and used the money to pay down their credit cards, rather than spending it at Walmart. The political hacks actually borrowed money from China, for Americans to spend on Chinese-made goods. Whose economy was this designed to help, ours or the Chinese?
The incumbents would have probably been better off to let the economy slide into recession in 2007, but by then artificially inflating the economy was too much of a habit. Instead the sub-prime mortgage house-of-cards collapsed five weeks before the 2008 election. Desperate incumbents demanded an immediate $700 billion bailout to prop up the economy long enough to get through the election. The arrogance and the petulance of the politicians and the financiers demanding that taxpayers cover their own bad bets were truly sickening. Some members of congress had the courage to oppose the bill but in the end, after loading the bill up with bribes and payoffs, the travesty passed. The stock market felt good for a day or so and then resumed its downward slide and the taxpayers got stuck with the bill.
Sadly, public and personal prodigality has run the economy into the ground. The best we can probably hope for now is that the politicians stop interfering and that the economy slides into a period of deflation and recession. Only then can the economy be allowed to sort itself out. In order for this to happen the government would have to curtail spending and leave the economy alone; there are no signs that they would do either. The voters would also have to learn to reward candidates who save money rather than those who come up with creative new ways to spend it. Sadly, there is little indication that that would happen either.
The alternative to letting the market function is worse. As the government borrows money to buy up assets it sends more wealth overseas assumes more power over people’s lives. The 2008 MBS bailout effectively nationalized a large segment of the finance industry. What’s next? Taking over banks? the airlines? the auto industry? health care? Once a government gains power they rarely give it up. The question remains, when this all plays out what will we resemble more: Venezuela or Zimbabwe? The surest path to socialism lies with more government economic rescues. As Nathan Shrader of Political Grind said so well “The bailout plan is a recipe for tyranny.”
Americans needs to grow up and stop living beyond their means and expect the government always to cover their losses. Otherwise we could lose not only our money and our jobs but our liberty as well.
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