I watched a portion of the presidential debates the other day. Both candidates said that we needed to look at the root causes of the current financial crisis, and both demonstrated very clearly that they had no clue what the root causes were.
by Nick Coons
In March 1999, the dot-com bubble burst as it was realized that many investors put their money into companies that did nothing. The Federal Reserve expanded credit and lowered interest rates by increasing the money supply in an attempt to save investors from their bad decisions. An increase in the money supply causes inflation, and we saw housing prices soar. Artificially low interest rates cause malinvestment as people make purchases on credit that they otherwise couldn't afford, like expensive houses. But like all bubbles created by the Federal Reserve's expansionist policies, the bubble has to burst, and we're seeing that now in the form of declining home prices, increased foreclosures, and failing banks.
The question ahead of us now is; what do we do about it? The proposal put forth by Treasury Secretary Paulson is to increase the money supply even further. But anyone that even glosses over the issue should be able to realize that we can't solve our problems by implementing the same techniques that caused them. And further investigation into history will back this theory up.
Everyone is aware of the stock market crash of 1929 that led to the Great Depression, but few know about the crash of 1921 which was nearly as bad. In August of 1921 the stock market ended down 46.6% after a major decline (in 1929 it bottomed out at a 47.9% loss), and the federal government did very little to "assist" the economy on its way to recovery. The market acted as it should, uninterfered, as bankrupt businesses were self-terminated and their assets were sold to pay off their debt. The economy recovered quickly.
Contrast this to 1929, when President Hoover encouraged governments at all levels to increase their spending. Roosevelt aggressively expanded those policies by implementing tremendous spending increases. All of this spending was done by money from the Federal Reserve. That is, it was created out of thin air as it is done today. An economic downturn that could have recovered on its own in 12 short months was extended for nearly 12 years as the stock market went through several more devastating crashes.
When someone makes a savvy investment, they should gain the full rewards of that investment. Likewise, when someone makes a poor investment, they should accept the losses. The government bailout of large organizations shifts the risk from the investor to the taxpayer, and the currently proposed bailout will cost every man, woman, and child in this country over $2,000. I urge everyone to contact their representatives in Congress to oppose any government bailout. Let the market decline on its own without government getting in the way, so that in a short 6-12 months we can enjoy the fruits of a recovering economy.
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