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The Student News Site of Stony Brook University

The Statesman

The Student News Site of Stony Brook University

The Statesman


    Hail to the Chief of the Economy

    An amusing part of the 2008 presidential election is the illusion of choice. We’re under the impression that we get to choose between two futures. One is the economy that Obama will create under his ‘progressive’ tax plan. The other is the pseudo-conservative McCain plan. However, what neither of them will say, is the president doesn’t actually have any power to levy taxes. So, whether you subscribe to the McCain plan or the Obama plan, it ultimately doesn’t matter because only Congress can pass these measures.

    By the same token, the President can’t fix the economic problems caused by the bursting housing bubble. The Federal Reserve was created in 1913 by a congressional act in response to financial panic and currency reform. The idea behind this monetary policy was to create liquidity and control over the money during banking panics. However, the Federal Reserve is an independent entity that can act without authority from the president or Congress. From this perspective, Obama or McCain will be, in reality, equally powerless when it comes to fixing the problems of our economy.

    Both candidates and many other politicians are quick to blame problems of the free market on the credit crises with the hope that voters will grant them, and the Fed, more power over our nation’s money system while bailing out failed credit institutions and lenders. However, it was government regulations that caused these problems in the first place, not some inherent flaw in the free market system. In combination, through congressional acts and the the Federal Reserve’s policy of keeping interest rates low we fostered an environment of easy credit at little cost, encouraging property and building over-investment and speculation. Thus the ‘housing bubble’ was born.

    And now that bubble is bursting. As of last week, there were five multinational investment banks. Today there are three and the number is threatening to shrink; when Bank of America bought Merrill Lynch, its credit rating sunk, indicating a less than healthy acquisition. American International Group (AIG), lost 70 percent of the value of their stock on Monday and managed to secure a $85 billion bailout from the Fed.

    Meanwhile, Obama and McCain are competing over which of them knows less about the economy and which will do a better job in ‘fixing in.’ According to Obama, ‘We know how we got into this mess. What we need now is leadership that gets us out. I’ll provide it. John McCain won’t.’ McCain, in response, blamed the economic crises on ‘reckless conduct, corruption and unbridled greed.’

    Neither candidate talked about monetary policy or how government legislation and poor Federal Reserve practices lent their hand to this ‘unbridled greed.’ For most politicians, its easier to blame a ‘big bad corporation’ than to take take responsibility. Few politicians are willing to create a more hands off policy, because they don’t realize that inaction is sometimes preferable to poor action.

    The nationalization of Fannie Mae and Freddie Mac is going to take trillions of dollars, while tiding over other banks is costing us billions more. This will obviously put us in a bind when it comes time to actually pay for these actions, regardless of whether or not it was the job of the Fed to do so in the first place.

    And how does the Fed pay for this anyway? The Fed can either print money or buy mortgaged-backed U.S. Treasury Securities from banks, both of which cause monetary inflation is the federal fund rate is kept low. However, it is only recent policy changes that give the Fed more power to lend money directly to banks. The inflation caused by these practices hurts lenders because the money they’re paid back with isn’t worth as much, people who save devaluing money in banks and businesses who may hold off on long term investments.

    In addition, it is suspected that keeping the interests rates too low for too long is responsible for bubble-burst business cycles that have been common over the last several decades, according to the Austrian school of economic theory. Low interest rates stimulate borrowing which causes an expansion of the money supply, which is possible in our current banking system. This causes wide scale investment, in housing in the latest bubble or in Internet companies during the ’90s dot com bubble. However, this type of investment is unhealthy because it fosters malinvestment into unsustainable areas. This ultimately causes a bust when the market corrects for the poor investment which causes a decrease in the money supply again.

    The Fed’s newly found role as savior of failed banks serves to sustain this cycle. In this bust stage of the business cycle, we should be clearing the bad credit out of these failing institutions and tighten up the money to improve investment policy. Instead the Fed is propping them up on an inflated monetary system so the cycle cannot restart.

    The Fed’s stated goal is to shore up the world’s economy, which will surely suffer if our nation’s largest banks fail. However, these problems being caused by this business cycle are inherent to a central bank system with a fiat money system in which funds can be created out of thin air.

    So, while Obama and McCain believe that they can be the strong leaders who can tackle our economic crises, in reality, neither of them even understand what the problems are being caused by, let alone have the authority of the ability to do anything about it. We need congressmen, like Rep. Ron Paul (R-Texas) who understand the business cycle and the inherent problems associated with a central bank. What we don’t need is a president with an over-inflated ego and empty campaign promises.

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