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The Student News Site of Stony Brook University

The Statesman

The Student News Site of Stony Brook University

The Statesman


    Memo to Politicians: It’s the Economy, Stupid!

    By now, everybody knows about the financial crises caused by the housing bubble and in last week’s issue of the Statesman. I discussed what caused the crises and how neither Barack Obama nor John McCain have a real handle on how to deal with it. Well, neither does our current president, who is proposing a brand new $700 billion dollar bailout of our financial institutions, in addition to what has already been spent.

    Am I the only one who misses the days when Bush was preaching small government politics? Somehow the Republicans have lost their way as the party of lassez-faire economics.

    Not only are the new propositions border-line unconstitutional, they also completely miss the point of the problem they’re trying to solve. McCain, earlier in the election, claimed to be a man that favored the deregulation of markets of any kind. However, in McCain’s hastiness to appease Wall Street and the supposedly economic-right wing of the Republican party, he missed what the point of government deregulation actually is. Having a market with minimum regulation promotes investors to supply capital and entrepreneurs to innovate. However, the Bush policy of deregulation of oversight for its own sake, in addition to bad legislation from congress, created an environment where it was appropriate to issue bad credit and bad mortgages.

    The other issue was that the Federal Reserve, without government oversight, kept interest rates low and increased available credit. The Federal funds interest rates determines the interest that banks have to pay to borrow money from the Fed. It increases the credit in circulation by printing more dollars or by buying US Treasury Bonds from banks. By keeping interest low and making credit widely available, it encourages investors to take out loans. This is supposed to help to stimulate the economy, but when credit is too widely available it creates inflation and devalues the dollar. When there is too much easy credit, investors get greedy and pump money into areas that can’t sustain it. The housing bubble was created because there was a lot of credit available for builders to finance new projects and home buyers to take out mortgages. However, the bubble burst because there wasn’t enough demand for those houses and people couldn’t pay off their mortgages. As a result, the issued loans couldn’t be paid off.

    Right now the popular message from the politicians, the presidential candidates in particular, is to blame those “evil, greedy corporations” and how they take advantage of poor, unsuspecting people. This is an easy accusation for the politician to make, but in actuality it should be themselves, and past government policy that is ultimately to blame.

    It is hypocritical for a politician to actively pursue policies, or to simply leave them in place, that make it easy for corporations to profit and then to blame those corporations when that plan backfires. When corporations make money and Wall Street benefits from a skyrocketing housing market, most politicians just don’t understand that this was an unsustainable bubble. They didn’t even consider overturning the so-called “Community Reinvestment Act of 1977” which was passed by the legislature to ensure that every American has the opportunity to take out a mortgage and buy a house.

    With plenty of housing available and a legal avenue available to issue loans to people with bad credit, why would investment corporations not take advantage of that? After all, its just a matter of letting the tax payers take care of the stockholders in the end. No problem.

    Its of no consequence to the CEOs that the tax payers are now saddled with trillions of dollars worth of bad investment. No stock broker in his right mind would advise an investor to put your retirement funds money into Fannie Mae or Freddie Mac right now (both of which are trading at year mega-lows of just under $2 per share). However, the government thinks that it’s a great idea that these firms should be nationalized, allowing the public to become 80 percent shareholders in a nearly worthless company.

    You can’t blame a corporation of taking advantage of corporate welfare when its available. The press doesn’t go after a guy picking up an unemployment check, but it is the same principle. Somehow, in the frenzy of doomsday headlines and the media storm, people forgot that the government isn’t supposed to be in the business of giving free rides to bankrupted corporations.

    It is indeed important to consider the alternatives of not nationalizing or bailing out these behemoth companies. These multinational investment banks and insurance groups have branches all over the world. Allowing them all to fail would certainly rock the economy in ways we would rather avoid.

    However, there is never such thing as a free lunch. The federal government, by leaning on the Federal Reserve and congressional legislation, is assuming that the public will benefit from buying these stocks at low value, in hopes that they will rise again. However, in doing so they’re taking a much riskier gamble; the value of the dollar.

    The Fed needs to print money or sell treasury bonds to pay for these bailouts. Printing money causes monetary inflation, which will devalue the dollar and hurt our purchasing power, especially against rising oil prices. For the most part, our treasury bonds are bought by China, which is probably starting to reconsider its massive investments in our country. Therefore, we can only pay for this by ruining our dollar more or increasing to our already massive national debt. Clearly, we cannot afford these bailouts in the long term, not with the trillions of dollars we already spend on defense and entitlement programs, especially since there’s no guarantee that these corporations will survive a public takeover.

    Unless the federal government is willing to grossly overhaul its monetary policy, which means recognizing that a fiat currency system contributes to the creation of the boom-bust business cycle we have been seeing over the last couple of decades, any bailout from the federal government is just prolonging bust period. To reset the cycle, our money has to be strengthened in value, not inflated, and we have to decrease the available credit to stop malinvestment. In the long term, the interest rates need to be determined by the market, and not kept artificially low by a central bank. This is the only policy that I know of that makes any long term sense.

    Of course, you’re not going to hear many politicians talking about that — with the exception of my hero Ron Paul (R-Texas), of course. The problem is that they can’t think past the next election, let alone the future. Any policy that the voters won’t emotionally respond to immediately, on a superficial level won’t be talked about. After all, there are plenty of corporations to be blamed now. There’s no need to think critically about these problems.

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