Stop the Presses!!

As the bailouts continue, my "odometer" simply can't keep up with all the billions and trillions of dollars that the Federal Reserve and the Treasury are creating out of thin air. Some experts estimate that $5-8 trillion has been pumped into the economy, nearly half of the country's annual $14 trillion GDP--half of everything produced in the country in an entire year. To put this another way, let's say that the national debt (not including liabilities for Social Security, Medicare/Medicaid, etc.) stood at nearly $10 trillion at the start of 2008. This is the entire national debt stretching back to the birth of the country. In less than a year, we've added half as much debt to that total!!! What has all this money bought for us?

The Federal Reserve was created in 1913 with the idea that a central bank could provide more stability and stop the boom and bust of the business cycle. Is this the kind of "stability" they were talking about? Executives from the Big 3 automakers came to Washington aboard separate private jets (they couldn't even "jetpool") with a tin cup in their hand. They were sent packing, told to come back with a plan for what they would do with the money. Does Congress have a plan for the bailout package they passed? Where were the debates, the committee hearings, testimony from the leading economic experts in the country, before handing $700 billion to one man? Why the rush? The bailout package was predicated on the government buying up worthless "toxic" assets held by financial companies, but the Treasury Secretary seems to have a new plan every day. Now they're going to buy preferred stock in worthless financial companies. All this money was supposed to free up capital for people and businesses to borrow, but the banks are still sitting on it. So now we need to pump even more money into the system. Where does it end?

Before we come up with a solution to the mess we're in, we should at least figure out what caused it in the first place. If the collapse of the sub-prime mortgage market caused it, we could have spent a fraction of the money floating around so far, and paid for all of these foreclosures and defaults, for around $200 billion. I've even seen figures that show if the $700 billion bailout package was used strictly to pay off mortgages, everyone in America with a mortgage of <$75,000 could have it paid off. If the cause of all this was too much cheap, easy credit, how can more cheap, easy credit solve the problem?

Many people want to blame this financial crisis on the failure of the free market system. This couldn't be further from the truth. It's become evident to me how our educational system is failing us. No one understands capitalism anymore. The key to understanding "capitalism" is the word "capital".

In an article written by Jeffrey Tucker of the Ludwig von Mises Institute (The Rich He Hath Sent Away) , he explains how “true prosperity is based on wealth and accumulated capital; it is rooted in the savings that come from deferred consumption.” This is not the system we have, as our system is based on debt. The bailout packages, the money being lent by the Federal Reserve, it doesn't exist. It's not money that was sitting in an account ready to be used in an emergency or for a rainy day. It's all money that was created out of nothing and "loaned" to the government by the Federal Reserve, which then earns interest on that "debt". Again, the Federal Reserve didn't have this money either, it simply cranked up the printing press and created some. How nice would it be if every time you needed to pay the bills you could just print the money? This is the kind of power held by the Federal Reserve, which isn't "federal" at all. It's actually a collection of private banks, more like a cartel. Jeffrey Tucker also points out the effect of printing all this money. "Every dollar that the Federal Reserve prints waters down the value of the existing dollar, which means one thing: inflation." So here's something else to think about: the more money we print, the more inflation we have, which means the more it will cost to bail everyone out due to rising costs, meaning more money that has to be created to "solve" that. It's a cycle doomed to failure.

Inflation is a hidden tax on the people. If the government had to raise taxes on the people every time they wanted to go to war or pay for a new program, there would be far too much resistance. It's a whole lot easier to simply print more money to pay for everything, passing the costs on to consumers who face higher costs as their money is devalued, their purchasing power diminished, and their savings wiped out.

Also important to note is a simple fact: government doesn't produce anything. In order for the government to give something to you, they have to take something away from someone else. This puts a rather frightening aspect on the current crisis. Congressman Ron Paul explains it best. "In bailing out failing companies, they [the government] are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones." This doesn't sound much like capitalism to me, more like communism ("...from each according to his ability, to each according to his need." --Karl Marx). Personally, I like to subscribe to the idea that one man's bust is another man's boom. Buy low, sell high--that's the rule of the market, but the market isn't being allowed to function properly. Congressman Paul further explains in his book "The Revolution: A Manifesto" that "by preventing the liquidation of bad debt and the elimination of malinvestment and overcapacity, the Federal Reserve's actions help keep financial bubbles inflated and make the eventual collapse all the more severe." We simply can't print our way out of this mess.

A government big enough to give you everything you want, is strong enough to take everything you have.
-Thomas Jefferson