Saturday, January 30, 2010

Recovery or Calm Before the Storm?

Some economists are now predicting a double dip recession. That means, a brief period of relief like we're starting to experience now, then a second, worse recession soon after. Why is this even happening in the first place? Well, like most things in macro economics, it's complicated.

Many blame Bush. And why not? The recession started around mid 2007. He was President at the time. Clearly, anything that goes wrong is the fault of who ever is president at the time. So what is it that Bush did that caused it? If you ask people, you'll either get a "i dunno" or people will tell you that Bush spent tons of money fighting two wars unpaid for and cut taxes across the board(that means for everyone poor to rich). So, he essentially hired tons more soldiers and pumped a lot of money into bomb, gun, and tank manufacturing companies increasing jobs then he cut taxes for all Americans so people had more money in their wallets. Well, I can certainly see how that results in deficit spending and increases the national debt(which is bad for the government). But that should actually HELP the economy, not hurt it. So how on Earth could that have possibly created the recession?

Ok, then how about the fact that the greedy wall street bankers... um... did something and got rich in some way I don't understand and Bush just let them do it? Huh? How about that?! See, what actually allowed banks to give so many loans to people that couldn't otherwise pay them bank was the lifting of restrictions that occurred during the Clinton administration. Of course, it's a stretch trying to blame Clinton for something that happened about a decade later. But that's the thing with macro economics, it's not just one thing that causes a problem. It's a chain of things.

I recently watched a couple of interviews from Ben Bernanke. In 2006, after recently replacing Alan Greenspan as Chairman of the Federal Reserve, he predicted that 2008 would see huge growth in the economy. Keep in mind, as Chairman of the Federal Reserve, this is the top and most respected economist in the world. Even if Bush was a rocket scientist, how could he possibly doubt what Bernanke was saying? Keep in mind also that the Democrats had taken over control of Congress by 2006 and everyone was predicting growth in the housing market.

Many Democrats, meaning well, wanted to see poor people that couldn't otherwise afford a house, be able to buy one now before homes increased in value. Banks were being subsidized(that means our government gives them tax payer dollars to do something) to give loans to people that couldn't otherwise pay. This was a crazy period of time. I knew a couple people that were buying multiple houses--people that wouldn't otherwise be able to buy one, now had several. Some banks made loans for no money down. That means literally homeless people could get loans they'd never be able to pay back. Banks didn't care. The government was giving out "free money" to make it happen. How can you argue with that?

Also remember, Congress does not need Presidential approval to sign off on the federal budget. In fact, if Bush wanted to stop the Democrats in Congress from doing whatever they wanted with the budget, he can't. Restrictions on banks had been lifted for a decade now under a Democrat president, and now Democrats in Congress were bankrolling loans to people that couldn't pay them back.

So what went wrong? The buying frenzy ended and houses plummeted in value. Instead of increasing, homes were now worth less than the money people paid for them. These same people that put no money down in the first place, had nothing to lose for walking away. That meant banks got stuck with the balance, owing a lot of money for homes that were no longer worth what they cost.

In short, banks lost their butts and went into survival mode. That means, they stopped loaning to anyone else, and just tried to hang on. When the banks stopped loaning, existing businesses could no longer expand and new businesses could no longer get the capital to start up. Meanwhile, the natural attrition of existing businesses collapsed meaning more lay offs with no new jobs for people to move to. This started driving up unemployment and thus, here we are now.

It's interesting how the recession has been blamed on Bush when, if you have even the slightest idea about what's going on, simply isn't entirely true. It's also interesting that Obama talks about how he didn't create this mess we're in. But he, and his Democrat colleagues controlled Congress at the time and they were the ones subsidizing banks to give out loans to people that couldn't afford them which created this mess. I can try and make the argument that Obama is actually more to blame for the recession than Bush was. Well, the Senate is half of Congress and Obama was just one of 100 senators, so that only made him 0.5% responsible for what Congress did. Heh, ok, so it's a really small percent, but still...

But who really knows? As I said, the truth is usually a lot more complicated. Not to mention, I'm obviously not able to go through all the bills and budget sheets that Congress votes on(some of which isn't always public), so I have to rely on what journalists say--and I've made a recent blog about how biased they are. I'm well aware that journalists push their agendas and cherry pick facts to make their stories more interesting even if it means object (boring) truth suffers. I highly doubt the issue is as simple as "The Democrats did it! Get 'em!" as I've made it sound. All I'm trying to say is that idiots who've barely done any research on anything need to stop going around like they have a clue. And all you damn Democrats in California, stop canceling out my votes! Heh.

Oh yeah, and Ben Bernanke, the top economist in the country that was so horribly wrong about predicting growth in 2008... Obama just appointed him for a second, four year term. It's very possible that Bernanke wasn't wrong. Rather all things considered, 2008 would have been prosperous only he didn't predict Congress(the Democrats) messing around with the banking system and causing the crash. I recently read that Obama's bail out of the banks, although eased the economic pain in the short run, might lead to the cycle to repeat itself in the near future. I mean, after all, the Democrats are still bailing out the banks and subsidizing them to make loans again. The banks know no matter how reckless they remain, Obama will still bail them out. This leads to another economic principle known as Tragedy of the Commons.

Normally ToC means a group of companies that share a common resource. Let's say timber logging companies that cut trees from the same forest. Take away all restrictions, and the faster a company cuts down the trees, the more trees they will get before their competitors get them. Now, if it was just one logging company, they'd be able to conserve the trees. But since it's many companies, going slow is economic suicide.

Now not all banks gave out loans recklessly. Many stayed responsible, but in this climate, being responsible is economic suicide. After all, if Bank A gives out loans to everyone with little restrictions, why would you go to responsible Bank B? Why would Bank A be responsible if they know Obama will just bail them out? Can responsible Bank B compete against banks like Bank A that can be as reckless as they want? Keep in mind, Obama isn't bailing out all the banks, just the big ones that gave loans recklessly are being "rewarded" with bail outs. Isn't that some messed up backwards crap?

It's like, we're never going to get out of this recession until the Democrats learn to leave Capitalism the hell alone and let it work on it's own, or we get Republicans in Congress again. I really don't care which party has the White House(that doesn't seem to matter that much), just get the damn Democrats out of Congress before we become a third world country.

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