Going to California

Yesterday, US congress committed its most irresponsible act to date. They voted down a $700 billion bailout package which was to be used to stabilize the floundering economy. To those who thought Iraq was a travesty of US government, this one is far worse since it directly effects you. One cannot study politics without some overlap with the field of economics. Politics is a form of economics in a way, even though it doesn't deal with hard numbers. The one who controls the purse is the one that holds all the power in any given organization from the great nation states to the small town social clubs. Right now, those who have been given that task in the United States are doing a pretty poor job of it. However, it seems like many Americans are actually siding with those members of congress who voted down the bailout. Why is this?

I think the first part of the answer is simple enough. People dislike the idea of spending $700 billion of tax payer dollars on anything. Arguably, the US has probably spent that much fighting in Iraq, though people tend to notice the price tag more if they're spending it all at once. That segues into the second part of the problem. People see the bailout as simply a handout to the rich bankers who have supported the Bush administration and they see it as an attack on the poor. In other words, stealing from the poor to give to the rich. It is obvious that banks have played a major role in the sub-prime credit crisis, but to blame them alone is a mistake. Everyone in the US, from consumers, the government, and banks shares the blame for this problem. According to reports, it dates back to as far as the Clinton administration. Back then, plans were set into place that would make it easier for America's lower class renting poor to own their own homes. A particular focus was given on minority groups. In 2002, Bush announced he was proud of the success of such programs under his administration since a record number of American minorities, notably African-Americans and Hispanics, now owned their own homes. The government was likely twisting the arms of banks to get them to give out these home loans. The problem is these new sub-prime mortgages were not going to minorities that could afford them, but to people of all stripes who had bad credit. The banks saw this as a possible money making opportunity, as banks are inclined to do, and started trading these mortgages like stocks. The problem here was that there were no liquid assets and not enough collateral to back up the value of these traded loans. Suddenly, the value of property dropped and people who had no business getting a mortgage started missing their payments. The next thing you know, the bank has foreclosed on the property, taken the house, and now these traded loans were now worthless. The economy did start to slow but the markets managed to stay aloft for the time being, boosted by high oil and energy prices. However, the slowing economy reduced demand for oil, and the price of that dropped. When that happened, the markets crashed. With so much bad debt, some of America's biggest banks; Freddie Mac, Fannie Mae, AIG, Washington Mutual, they all began to entre receivership. This caused a panic in the market and stocks began to tank. Lastly, we as consumers are not completely out of the blame circle on this since so many of us have tried to live beyond out means. Many of us have racked up thousands in credit card debt and own homes with 40 year mortgages we can barely afford. Some have said that if you dangled the incentive of owning a home in front of the renting poor, of course they're going to take it, even if they can't afford it. In my opinion, they're foolish if they do and that's the result of our failed education system, but that's a debate for another time.

Economists have been saying that they've seen this coming for a while now. First of all, the markets aren't experiencing record drops since the amount of points lost as a percentage isn't even in the top ten compared to other crises of the past. Still, without some sort of bailout plan to stabilize the economy, the values will continue to slide. First to be affected will be those who hold the bad debts and those retirees or people near to retirement who have their retirement funds heavily invested in the stock market. Next will be the housing market, as banks will begin making it extremely difficult to obtain a mortgage. This signals the end of the sub-prime, 40 year mortgage that has become quite common in recent years. You'll see a move back to the 20 year mortgage at the highest interest rates banks can charge. Businesses will suffer next. Publically traded corporations will be unable to raise capital as people pull out of the stock market. Private companies will find it difficult to obtain business loans as banks tighten the purse strings. If the banks are allowed to go under, they will take most of the money they store with them. The deposit insurance plans only cover up to $100,000 I believe. Most private citizens don't need to be worried about loosing their savings since most people don't have that much money tied up in their bank account. Businesses on the other hand regularly keep much more than that in the bank. If the bank goes, that money is suddenly gone through no fault of the business that owns the money. With no money, businesses go under. When businesses go under, people get laid off. When people get laid off, unemployment skyrockets since there are no other jobs available. When that happens, we get another depression.

Now, I'm not saying it's going to go as far as the Great Depression of the 1930s, but it is indeed possible. Bailout plans were a staple part of the era's economic plans to recover when it was realized that at minimum, some government intervention is needed should there be serious economic threat. John Maynard Keynes said that governments should increase their spending to stabilize the economy during economic recession in order to prevent it from slipping into depression. Crowing examples of this in action stand before us today. Hoover Dam and the Golden Gate Bridge were depression era projects used to create jobs. Of course, we have a chance of preventing that from happening before things get too far out of control. This is how the bailout would work. It would inject just enough cash into banks to allow them to get their house back in order. Keynes said that governments must act quickly in the short term to ensure economic stability, then work on the root causes after that has been achieved. This has worked well for the last 60 years. Of course bailouts must come with some strings attached to make sure the money goes where it needs to go. These bailouts aren't about rewarding bad behaviour. Think of it this way, you could spend $700 billion now to stabilize the economy, or you could spend the next five years waiting in the bread line (or perhaps while you push your 1990 Ford Windstar to California) thinking it over. Neither solution is really desirable from a taxpayer perspective but you have to take the option that's going to do the least amount of damage. It is also worth noting that Bush is correct when he said it's unlikely the entire $700 billion would be spent. During the savings and loan crisis of the 1980s, a similar though smaller bailout plan was passed. Only half of the roughly $300 billion was spent and the government did end up getting most of it back. Those who are concerned about the bailout raising taxes or taking from the poor to give to the rich are making mountains out of mole hills. The $700 billion does create a buffer zone should more problems crop up. Spending maybe $400 billion tops now is not as bad as the trillions it would cost the government to jump start a depression economy. It took a world war to get America fully back on track the first time. Since the US is a major trading nation in a globalized world, inaction threatens to bring the economies of other nations into recession as well, including and especially Canada and the European Union. European banks are already in panic mode. They've frozen all loans until a bailout plan is reached. Canada has a strong economy now but who knows how long we can keep it that way, regardless of what party gets in come October 14th.

For Americans, it's fortunate that there is an election in November as there is no better time for a leadership change after the failing of the incompetent Bush administration. This should have been stopped years ago. Of course, we can address that when congress gets their act together and passes the bailout. Greed and fear rule the market and there is a lot of the latter right now. If you can't keep both in check, America will truly be screwed.