Something I’ve learned from my time as a father and a teacher is that children learn by example. We model the behaviors we desire to see in our kids, whether that is honesty, hard-work, courage, or caring, but the pendulum swings both ways, we also will see bad behavior when our children pick up on our bad examples, whatever they may be. So what have we learned from our government’s bad example? Is it really so hard to believe why Americans don’t mind borrowing more than they can afford?

The newest lesson our government is teaching Americans; borrow more to save yourself from financial disaster. That is the example Obama’s stimulus plan is making for us and most especially our children, who will learn about it in U.S. history class someday. Now, I’m not saying that all borrowing is bad, sometimes a calculated investment can provide high returns, but it sounds to me like our government is trying to pay off their school loans with a credit card. This is a big “no-no” when it comes to debt because school loans usually have a lower fixed interest rate, while credit cards tend to have extremely high and unpredictable rates. This is a situation no caring parent would ever want their child to be in, but we see these bad money management decisions growing in popularity and why not? The U.S. government is doing it. If something as big and powerful as the United States government can do it and be “ok”, then why can’t I?

The solution requires our government to be a positive financial role model. As Obama has said and not yet done, we need to balance our budget and only pay for things we can afford. How he can say that with a straight face while promoting an over indulging stimulus bill is beyond me, but at least he recognizes the problem, it’s more than can be said for other presidents. My prediction: when our top governments officials can work together to facilitate a sound money system we will then see a generation where proper money management is the norm.

Photo: President Obama signs the American Recovery and Reinvenstment Act of 2009.

I have recently had several opportunities on various news programs to discuss the economy and what is wrong with the so-called economic stimulus package. I have said over and over what we shouldn’t be doing, and now I’d like to explain what we should be doing.

But to improve the situation, you must first have a solid grasp of how we got here. Government policies and central planning created the housing bubble, now going bust. About a decade ago the government made expanded homeownership and affordable housing a public goal. Through Fannie Mae, Freddie Mac and the secondary mortgage market the government incentivized creative, low down-payment, more widely available mortgage products, and discouraged the market-proven lending standards of the past. The Federal Reserve kept interest rates artificially low, which added more fuel to this fire. Many related sectors temporarily flourished because of this, and many people got into homes they otherwise could not have afforded. The increased demand for housing sent prices soaring until in many markets housing became even more unaffordable, necessitating even more creative mortgages, and impossibly leveraging homeowners. Many risky investment vehicles such as mortgage-backed securities, derivatives, credit default swaps grew out of this unsustainable situation. As the foreclosures began, the house of cards started to tumble. Too many people have confused the symptoms and the pain of the bust with the problematic policies that caused the bubble, which is really what needs to be treated.

First of all, just as the best cure for a hangover is not to drink so much, the best cure for a recession is a recession. It is time to sober up and return to free market sanity, risk and reward, supply and demand, without political intervention. Politicians are good at catering to the needs of special interests, but very bad at determining what needs to take place in the market. Government should stick to punishing fraud and enforcing contracts. When they use the tax code, bureaucratic departments and their manipulative rules and regulations to dictate social and economic behavior, we end up with distortions and malinvestments. Bailing out banks, continuing failed Fed policies and strapping the taxpayer with toxic debt will worsen the pain, and punish the innocent.

If Congress really wanted to do something helpful, it would cut taxes. Ideally, we would repeal the income tax altogether and get the IRS off the economy’s back, which would be a huge boon. We should also cut spending. Cut every unconstitutional department and program, every wasteful governmental encroachment on the people’s liberty and money, starting with our massive overseas empire. The cost of our empire is bringing us to our knees, just as the Soviets’ empire did to them. Congress should also abolish the Federal Reserve and take back its responsibilities to ensure sound money, safe from the manipulations of powerful banking interests.

These things would constitute real change, real economic stimulus. The plans being bandied about Washington are just more of the same. As long as no one seriously considers the cure, we are unfortunately destined to prolong the disease.

]]> http://independentadvocate.com/2009/02/02/cures-for-our-economic-disease/feed/ 0 http://independentadvocate.com/2009/01/30/if-china-pulls-out-the-dollar-crashes/ http://independentadvocate.com/2009/01/30/if-china-pulls-out-the-dollar-crashes/#comments Fri, 30 Jan 2009 14:44:50 +0000 IA http://independentadvocate.com/?p=534 WSJ

Team Obama has entered White House and brought with them a massive economic stimulus plan (some estimate a plan including up to $800 billion). As young voters who will eventually be handed the bills for what politicians do today, instead of robotically jumping head over heels for a stimulus plan, asking the same question we are hearing today, “how much money should the stimulus package include?”, they should backup and discuss whether or not stimulus package is the right action to take in the first place.

Much of the media, and many politicians and Americans seem to be in complete agreement with Team Obama’s stimulus plan ideas. They argue we need a stimulus plan that will pump a large amount of dollars in the economy so that spending will increase; more jobs will become available and therefore will enable the economy to get out of the rut it is in and back on track to economic prosperity. But not everyone agrees.

They are not well known amidst all the ‘stimulus salvation’ hype, but a growing number of economists and financial experts believe that any economic stimulus package will only worsen our economic situation. These select few stand squarely against the group-think mentality of the media, and jaded Obama supporters. Some students are taking notice.

Richard W. Rahn from the Cato Institute is one of those leaders who firsts looks at the necessary question, “‘where would the government get the stimulus money from?”

“It must either tax someone else now or borrow more money, which diverts productive saving to current consumption,” Rhan says. “Either way, it is less than a zero-sum game.”

Rhan looks to history as evidence to why direct government payments (i.e. a stimulus package) will face.

“During the Great Depression, government spending soared as a percentage of gross domestic products, but full employment did not return until World War II. During the last eight years, U.S. government spending has greatly increased in both absolute terms and as a percentage of GDP, yet the economy now performs worse than it did a decade ago.”

And he’s right. The productive American tax-payer (a future student in the work force) is the one who will pay for any sort of government stimulus package. Similar to the infrastructure overhaul that came with the New Deal by FDR during the Great Depression, every dollar spent by the federal government (such as Obama’s huge infrastructure project) is a dollar taken away from the tax-payer.

The infrastructure project President-elect Obama is proposing will only take jobs away from the productive private sector and give it to a usually unproductive public-sector job (recent data by the Bureau of Economic Analysis shows the average federal public-sector employee gets nearly paid double what a productive private employee earns).

This could potentially be good for small amount of students planning to work for the federal government, but not for the majority of us.

While an obvious way for the government to get stimulus money is by increasing taxes, that isn’t easy during hard economic times (even for a liberal Democrat like Obama). However, this will hardly prevent the government from spending lavishly. Thanks to our Fiat money supply, the government can use another trick called money creation to receive more spending money. By printing new money it can spend more.

But even the most unschooled economic student knows that printing excessive money, which the stimulus would require, creates massive inflation. This again punishes the tax-payer when he comes to find out the dollars he has earned and saved is worth a lot less now than before. The U.S is currently $10.7 trillion in debt and plans on printing more money and creating more inflation to combat a recession? Too bad dollars are not as soft as toilet paper.

Peter Schiff, President of the Euro Pacific Capital (which many students may remember as Ron Paul’s economic adviser), predicted the housing bubble back in 2006-2007 and is another minority financial expert who says a stimulus package will be bad news for the U.S economy.

In a recent editorial in the Wall Street Journal, Schiff argued a recession is actually the cure to the current economic crisis and isn’t supposed to be pain-free times. The transition from borrowing and spending to saving and producing cannot be accomplished without a severe recession, given the current imbalances of the US economy, he argued. Biting the bullet and dealing with these issues should be a priority.

Schiff must have students in mind. Introducing a stimulus package instead of allowing for a natural recession to occur would be equivalent to attempting to heal a broken leg by taking massive amounts of painkillers and continuing to walk on the broken leg. Just because we can’t feel the pain doesn’t mean it’s fixed. Instead, we should allow the painful recession to occur by staying off the broken leg until it heals properly. If not students will be in hot water by graduation time.

It is understandable that young voters feel a great urgency for the government to take some action in hopes of repairing the economy before we enter in the job market. But this urgency is no doubt a reason we are forgetting to discuss vital issues such as if a stimulus plan is the right thing to do in the first place for our future.

In the end, any stimulus plan will negatively affect young Americans and ultimately the future tax-payers—the very entity we are trying to help. The best plan of action is this: Obama should take a step back. He should allow a healthy, yet painful recession to occur that will eventually heal the market from the economic crisis in time for graduation job hunting season. Otherwise we as students will be left paying the bill and likely without employment.

At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.

“Make more loans?” Mr. Hope said. “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”

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