They would say that the government needs to get more involved to control these things and stop them from continuing. They would say oil companies are earning too much profit, while housing prices need to stop dropping and higher education needs to be supported by more government loans so that everyone that wants to go to collage can.
These ideas sound good on the surface, but their implications create several moral hazards and government dependencies that result in worse conditions. These are the things that led misguided socialistic nations to their own demise and we they are now leading America. These ideas are also at the heart on the Presidential debate.
America is a democratic and capitalistic society. Collective socialism is not the change that we should put are hope in. Capitalism didn’t fail, the government did, and the government is unlikely to get us out of the mess they got us into. The most reliable and historically proven strategy to restore an economic downturn is to let Capitalism do what it does best – stabilize the markets.
Capitalism is the only system that can take the very things that are perceived as the biggest problems and use them to rebuild the economy and restore the hope in America.
If the economy is going to slow down for the next several years, when we need to be very careful what we put our faith in to rebuild the economy.
Let’s look at some of the perceived problems with the economy;
1. Higher Prices
2. Falling Housing Market
3. Decreasing Consumer Confidence
4. Failure of Government
Higher prices leads to high profits, like the oil companies that have seen record profits the last few years. In a free and capitalistic society, high profits are targeted by new investment dollars that flow into new businesses that try to create cheaper solutions with the intention of generating their own profits. It is these investment dollars that chase high profit industries and are the leaders in creating new jobs. New jobs reduce unemployment and results in lower prices as the alternative solutions they produce are sold under the prices of the existing solution.
This is how capitalism works and the fewer government involved the lower the prices become. Government intervention to reduce high prices only increases the risk of new businesses to target profitable industries, which in turn reduces the investment dollars flowing into these industries, resulting in fewer jobs and fewer new solutions to stabilize prices.
Therefore higher prices are a sign of hope for capitalism. The last few years of high oil prices have already caused millions of dollars to pour into new businesses with new solutions for alternative energy sources.
Failing Housing Market
The purpose of the government sponsored mortgage giants Freddie and Fannie was to increase home ownership by reducing the barriers of getting a home loan. Now that they have collapsed with unintended consequences resulting in the largest mortgage bubble in history, it’s easy to see the folly of their ways. The government support given to Freddie and Fannie, was well protected by many politicians while their function in the mortgage industry enabling investment banks to overestimate the value of their real-estate assets, drastically increased the risk of their entire financial stability. Of which, many of them will not survive.
As the house bubble burst, prices have been falling around the nation. Many of the government supporters of Freddie and Fannie are now supporting a complete bailout. But what the market really needs is to get back to ‘real’ home prices and that means home prices should continue to come down – and investment banks that over leveraged their mortgage assets should be allowed to fail.
Home prices would fall much faster, but that would be the fastest way to clean the system of bad loans and let the market reduce the cost of home ownership – with lower prices. If the goal of Freddie and Fannie was to increase home ownership, then what better way to make housing affordable then to let prices drop? Yet, the government refusses allow that to happen because it would also reduce the money supply in the entire economy, leading to the very recession that we need to face.
Decreasing Consumer Confidence
A decrease in consumer confidence will help our economy rebalance from a consumer driven economy to a producer driven economy. A long time ago, we used to produce most of the consumer good in the world. Today, we are the largest consumer nation in the world – with a $700 brillion dollar annual trade deficit.
The manufacturing sector of our economy has been decimated by lower wages in emerging nations that have been able to produce products at lower costs. But, instead of consuming less, we have been consuming more for decades. A decrease in consumer confidence will be good for the economy because it will lead to an increase in savings and an increase in long term financial planning by every household.
Failure of Government
The entire financial meltdown and ensuing recession that we are headed into is a grand failure of the government’s efforts to plan the economy, rather than allowing market forces of capitalism to run the economy.
The primary reason the government didn’t allow capitalism to run the economy was because the expansion of the global economy over the past decade has created global competition, forcing every nation to live within their ability to produce products for the rest of the world. That meant reducing the standard of living for America.
That truth was too hard to face, so government intervention was starting with the creation of the Federal Reserve which led to artificially low interest rates that helped keep the easy money coming. Government intervention seemed like the only reasonable way to compensate for the jobs being lost to globalization.
But, the strategy only worked because the dollar is used as the Reserve Currency of the world. Therefore, the Fed could continue to hand American’s money and the world was forced to honor their value. At least until the entire system melted down when the housing market started to collapse last year.
One of the side effects of government intervention was that it caused a real-estate bubble, which was perpetuated by the government sponsored entities of Freddie Mac and Fannie Mae and the banking industry to sell mortgage backed securities to banks around the world.
At this point, if should be clear that government intervention in the economy was a bad idea and further intervention (like bailout plans) will likely cause further damage to the economy. The worse direction is to further expand the government role in planning the economy, yet that is the direction we are headed. Capitalism didn’t fail, government intervention did.
The truth that the government has been avoiding for decades is that America cannot continue living a high standard of living while borrowing and spending from the rest of the world.
Despite the Presidents, Federal Reserve , Secretary of Treasure and Congress’s ideas to bailout the entire nation, the best thing for the economy is to turn into the storm and face the recession head on. Facing the recession with smaller government, less regulations, less central power and lower taxes is the best solution to flush the economy of its bad investments and bubble housing market prices.
Nobody in government wants to face the music because the damage to the economy would be too severe and they would all be fired and blamed for the disaster. Yet, that would be the best decision to make and the sooner we face the music the sooner we can rebuild the economy.
If Capitalism was allows to run its course and the government reduces its role in planning the economy, we would see several additional benefits, including;
1. Lower Prices
2. Education Reform
3. Affordable Housing
4. Affordable Higher Education
5. Reduction in Government Spending
6. Increase in Personal Savings
The failure of the government’s oversight of the mortgage industry should provide a clear and present example of how government economic planning does not work, as argued by many great economy scholars throughout history and in recent times by Sen. Ron Paul.
A much better plan then a national bailout is to abolish the Federal Reserve as suggested in this article, Populists Back Ron Paul’s Plan To Kill the Fed.
Perhaps one of the best explanations of how to save America can be found is Thomas J. Dilorenzo book, "How Capitalism Saved America".
How Capitalism Saved America: The untold history of our country
"How Capitalism Saved America"