Considering the Future, Because Somebody Should

February 20, 2008

Economic actions are moving fast and furiously in Washington.  President Obama railroaded his so called $787 billion “stimulus and “recovery” plan through Congress.  Now, the President is moving quickly to address other issues negatively affecting our economy.  On Wednesday the President announced a new bailout plan for distressed homeowners and began considering further loans to the bankrupt American auto industry.

Of course all of these actions are knee-jerk reactions to a situation that continues to spiral out of control.  Based on politics and not sound economic considerations, the President and Congress continue to spend us into oblivion in an effort to heal our economic ills.  The $12 trillion Uncle Sam has committed or already spent has done nothing to save our sinking ship.  If the consequences of this federal largess were just temporary and carried no future repercussions then we could all sleep more soundly at night.  However, what Washington has already done and is about to do will have enormous negative consequences for many years to come.

By following their political instincts, policymakers in DC aren’t considering the future consequences of their current economic policy actions.  Take their position on the auto industry for instance.  On Tuesday night, GM and Chrysler got back to Washington with a restructuring plan and their hands out looking for $14 billion more.  Of course, the billions already loaned to them by the taxpayer was simply a stop gap measure to prevent them from going belly up on the watch of President Bush.  Now, President Obama faces the same political consideration.  So, forget about whether giving Detroit more money makes any economic sense, they will get it because politicians don’t like to look uncompassionate.

The problem is that whatever amount the President gives them will not be the end of it.  GM and Chrysler’s woes have been building for decades and now they are trying to restructure during the biggest economic downturn since the Great Depression.  If the market doesn’t think the two carmakers are a good investment, then why should the government?  By continuing to finance these failures someday we will face the choice of either losing all of our money or continuing to throw money at them for the sake of the money we already spent.  What a great choice that will be.

Then there is the increased support that Fannie Mae and Freddie Mac will be receiving with the President’s plan to “help” homeowners.  Already slated to receive $66 billion in taxpayer support for projected losses, the two mortgage giants would receive up to an additional $400 billion under Obama’s plan.  Treasury Secretary Geithner was quoted as saying that the support “will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners.” 

Weren’t Fannie and Freddie big culprits in causing this current mess?  Since nothing has changed including the provisions of the Community Reinvestment Act why should we retool the mortgage giants with hundreds of billions of taxpayer dollars?  What does “ambitious efforts” mean?  Is this another recipe for disaster?

More automaker bailouts and strengthening Fannie and Freddie are troubling propositions to say the least.  But, an even bigger concern is the Federal Reserve’s monetary policies combined with Obama’s plans to stem the tide of foreclosures.  As mentioned earlier, the Fed along with the Congress has pumped in almost one hundred percent of GDP in dollars into our economy in the last year.  The federal funds rate still stands at an artificially low 0 percent.  Of course, the Fed has lowered the rate to this ridiculous percent not because that is what the market called for, but to stimulate the housing market.  However, last week, refinancings made up 74.2 percent of all mortgage applications.  So, instead of stimulating new buying, the policy is encouraging refinancing.  That’s fine, but then President Obama comes along and proposes helping distressed homeowners refinance their homes with hundreds of billions of dollars in subsidies. 

This combination of Fed monetary policies and Obama’s homeowner bailout will lay the foundation for another banking crisis.  As millions of homeowners lock into artificially low rate, long term mortgages this will set the stage for future bank failures.  When consumer prices begin to rise significantly because of Fed monetary policies and Congressional spending, the Fed will have no choice but to raise interest rates to quell inflation.  Banks will experience difficulties because on the one hand they will be taking in much less money through their loans than they have to pay the Fed for new money and they will lose deposits on savings accounts as customers move money to higher yielding money market accounts.  This is what caused the savings and loan crisis of the late seventies and it will cause another banking crisis in the future if Washington continues with these reckless economic policies. 

At the end of the day, the Fed’s monetary policies and the government’s fiscal program to end this economic crisis are all about politics over sound economic policy.  They represent nothing more than a massive expansion of the socialist welfare state, which has been discredited time and time again.  Our policymakers’ lack of creativity in dealing with this crisis is appalling.  Their neglect in considering the future consequences of their actions is criminal.  

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