L'Économie
I have basically no qualifications to analyze the economy, but hey this is America, land of the arm-chair quarterbacks. Actually I did get an A (maybe an A-, but that's still an A of sorts) in the one class on economics that I took in college, so that's got to count for something right?
My understanding is that the basic cause of the recession was two-fold: risky lending practices (ie subprime mortgages) combined with the securitization of debt (which is how the mortgage collapse rippled through the entire financial system). How those conditions came about in not so clear-cut, and that's possibly a discussion for another day.
So now the question is how will Obama try to get us out of this mess? Where I differ from many of the voices I've been hearing lately is that the recession should signal the end of free-market policies. While capitalism likely got us into this mess, I also think that it's the vehicle that will get us out of it. Not to pigeon-hole President-elect Obama, but the democratic party has a tradition of greater taxing and spending (though Bush has joined them on the latter half of that equation). The raising of taxes during the Great Depression had catastrophic effects, and while Obama has said he would only tax the rich, the financial woes of Wallstreet sure appear to me to be "trickling down."
I honestly think that Obama will be reticent to make any tax hikes in the current situation, but things could get interesting when special interest groups that have been completely ignored for the last 8 years come knocking on the Whitehouse door. Is now the time to join Kyoto, increase subsidies to alternative energies, and socialize health care (I do agree with 1.5 of those initiatives by the way)?
While I'm not happy that more liberal ecomonic policies are on the horizon, the economy (or at least the stock market) does swing largely on emotion, and a lot of people feel that things will be looking up come January 20th. I was listening to NPR last week when a lady, who introduced herself as a real-a-tor (I'm guessing they do work similar to realtors), felt that houses would start selling again once the new administration was in office. Here's to the power of positive thinking!
Comments
-Mom
In response to your comment, I never asserted that increased government spending got us out of the depression. Arguably we weren't out of it until after WWII, which obviously changed public sentiment towards the nation, but possibly it was simply enough time for markets to correct themselves.
I agree that inaction only exacerbates the low consumer confidence, but it seems that the effects of the government injections are shorter and shorter lived. How many people do you think could name the first company that was bailed-out in 2008? Yet their long-term consequences remain. It could be argued that the bail-outs during the savings-and-loan crisis in the late 80's contributed to willingness of financial organizations to participate in risky mortgage practices.
I'm all for monkeying with the federal funds rate, but I think about how the government propped up Geneva Steel for so long and how much money went to keeping a few hundred jobs in an inefficient business. They eventually shut down anyway because there was no market for it.
I think that people are starting to see the current wave of bail-outs as looking out for Big-Business while ignoring the average Joe anyway (eg - Chicago window and door factory sit in). I don't know if more stimulus checks or lowering taxes might be a better use of the money. Or then again, maybe we should just ride it out.
I think we can look at the great depression as a point of reference.
For example, I agree with you that WWII got us out of the Great Depression, however I do not agree with your assumption that during this era free market principles were in effect. The economy that was set in place was more of a command economy than a free market (government decided what goods would be made for war, etc). Therefore, Barack Obama's policies might help the economy after all.
I do agree with your point that people are tired of government bail outs for the rich while the rest of us have to fend for ourselves. It's ironic to me that the republicans lecture the poor about welfare, but in the same breath vote for bail out policies.
Well that's my story and I'm sticking to it!
-Rhett
And that's just one explanation for why the government is to blame. Another compelling theory is that the fed left interest rates too low for too long, creating inflation and a housing bubble. The Fed's failures are government's failures, not capitalism's.
I have more thoughts, but blogging on a phone is hard, so they can wait.
Furthermore, there is also a good argument that the housing bubble was actually caused by inglatio
you write:
"Is your solution to just conduct business as usual and hold your breath and close your eyes and hope everything is better when you open them again?"
Is it, therefore safe to say that your opinion is that economy cannot correct itself? That only government wisdom can set the economy straight again?
you continue:
"I don't know why you are so anti-Keynesian, but as you mentioned, we have a fiduciary economy, so public opinion matters. More than anything else. This is why the government needs to give the impression that they are taking measures to improve the economy. It becomes a self-fulfilling prophecy, because if people think the economy is getting better (warranted or otherwise), then consumer confidence increases, and the economy actually does get better. Unfortunately and as we all have witnessed recently, the inverse is also true. Nothing is so uninspiring as inaction."
Public opinion really matters more than anything else when it comes to the economy? So, if there is one 3rd-world county out there, whose people hold its economy in higher esteem than Americans currently hold the U.S.'s economy, then that economy is, in your judgment, better than the U.S.'s?
Also, if perception is the key, why can't non-Keynesian economic policies, like lower taxes and lower interest rates, inspire faith in the economy just as well as Keynesian policies?
-rdh
I never said that the recession is the failure of capitalism. I would say that capitalism lends to speculation which will naturally have it's ups and downs. The freedoms of a capitalistic system make possible new conventions like securitization of debt, as well as a host of successful business structures over the years.
I agree completely that the government contributed to the problem by encouraging Fannie and Freddie (from whom we bought our home by the way, and they were a nightmare to work with) to help increase homeownership essentially by issuing subprime mortgages (funny how they weren't called that at the time). With Freddie alone having $800B in assets at the end of '07, their failure alone is a largely responsible for the recession, and by implication the government for setting up such an entity.
To what period are you referring regarding keeping the interest rate too low for too long? For much of '06 and most of '07 the rate was about 5%, not all that low.