Ron Morley's Freedom Blog

This is the place where I do my little bit to explain the evils of the State.

Paulson Declares victory, sets stage for next economic crisis

 

The latest word from Treasury Secretary Henry Paulson is that he believes “we have stabilized the major financial firms” and that he does not anticipate any more failures of large companies. He has effectively declared victory in the so-called economic crisis that this nation is facing, a crisis largely the result of the overextension of credit. So what is his next goal? Why, to make sure that consumers begin borrowing again, because the economy needs to get moving again. So, he's decided that the $700 billion which were supposed to be used for the purchase of so-called “toxic mortgage-based assets” from troubled banks, will instead be used to encourage banks and other financial institutions to begin making more loans to consumers. In other words, he wants to start another round of loaning money to people who cannot afford to borrow it, simply to avoid something loosely defined as “turmoil in the markets”; which is evidently something to fear, at least for the entrenched political/economic power brokers in Washington, D.C. and on Wall Street.

We are being told that consumers must start spending in order to prevent the economy from falling into a depression. The truth of the matter is that the Federal government has made such a hash of the marketplace that it is impossible for anyone to be able to predict what is apt to happen next. And that is why banks are being so reluctant to resume their practice of lending to those on the fringe of economic viability as they don't want to pile up a bunch of potentially bad loans. Unlike the mortgage crisis, in which the banks are at least able to take possession of a physical asset, the house, of someone who defaults on their mortgage, they cannot do that with credit card-based debt. Those loans are what are known as unsecured loans, there are no assets at risk for the borrower should she default on her credit card payments. When a bank has to write off a credit card account as non-performing they have no way of recovering any of the money which they loaned the consumer. They cannot seize the flat screen TVs, the vacations, the PCs, etc.. that were purchased with the now worthless credit card.

Once again, the Federal government is acting in a way which will simply exacerbate the current economic difficulties that we find ourselves in. Rather than allow the market to take its natural course, go through a period of re-adjustment (known as a recession), and emerge with assets better distributed, to companies and individuals better able to use them than were the previous owners, the Feds insist that all troubles must be resolved in an extraordinarily short period of time. Thus, the State will put in place some sort of “program” to encourage the accumulation of yet more consumer debt, at a time when the economy cannot afford it. Rather than encourage savings, which will act in the long-term as an economic stimulus by providing a solid foundation for the economy to grow on, the State insists that “market turmoil” can only be avoided if consumers act now to continue to pile up their credit card debt. I would not be surprised to see Secretary Paulson propose that interest on credit card debt be made deductible from Federal income taxes, in the same way that mortgage interest payments are. After all, if such encouragement works for overly stimulating the housing market, there's no reason why it shouldn't work for credit cards. Remember, the goal of the State is to avoid “market turmoil” which could result in those currently feeding at the public trough being displaced. Thus, it is imperative, in the eyes of the State, that consumers continue to spend themselves into such debt that they will forever be in thrall to the banks, even if that enslavement results in yet another financial crisis in the near future.

Comments

Art said:

1. Where did the $7,000,000,000 come from?  What the hell is a general fund.  Is that the printing press at the Fed?

2. Why not help the homeowners directly with that money.  All these toxic debts were created by these greedy banks, so why should they get any help.  Let them go bankrupt and help the homeowners keep their homes.  

3. Let the markets correct themselves.

# November 13, 2008 10:15 PM

Ronald D. Morley said:

To take your comments one at a time, the $700 billion is being borrowed from overseas creditors, mainly the Chinese.  In the long run we are expected to pay that money back, but the reality of the situation is that the U.S. is now saddled with so much debt that it is unlikely that will ever be a realistic possibility.  Instead, our politicians will continue to roll-over the debt, paying only the interest on the loans.  Given the track record of our Congrescritters when it comes to making hard choices that may not be incredibly popular with their constituents it is most likely that the Federal government will continue to pile up deficits until the interest payments become so onerous as to strangle both the budget and the nation.

There are many reasons not to directly help individual homeowners.  First, it is unconstitutional.  Though few seem to pay any attention to it in this day when all eyes seemingly turn to Washington, D.C. for the "solution" to all of our problems, the U.S. Constitution does not allow the Federal government to take such action.  It is nowhere in the list of eighteen areas, in Article 1, Section 8 of the Constitution that are the allowable domain of the central government.  Secondly, there is the issue of fairness to those of us who did not sign up for mortgages that we could not afford, but instead have managed our affairs so that we can pa our bills and live up to our financial obligations.  Why should money be taken from our pockets to aid those who failed to exercise good judgment? It is simply wrong to use the coercive power of the State for such a purpose.

I must take issue with your statement, "All these toxic debts were created by these greedy banks..."  So far as I am aware there is not a single instance when a mortgage broker held a gun to the head of someone looking to buy a house they could not afford, in order to force them to sign the mortgage.  The fact of the matter is that there was greed on both sides of the table.  Home buyers are equally at fault for failing to exercise sound financial judgment and for failing to spend a few extra dollars, generally around $500, to have a real estate attorney look over the proposed contract and point out the potential problems with the adjustable rate mortgages that so many people signed up for.  There is no right to keep a home that one obtained by signing onto a mortgage that one cannot afford.  To allow people to keep property under those circumstances is merely to reward profligacy and to set a precedent that no sane society should contemplate.  After all, if people are allowed to keep their homes simply because they can no longer afford the payments, why should they not be allowed to keep automobiles that they default on the payments for, or simply spend their credit cards up to the limit, then say, "I can't afford the payments, but, instead of being forced to declare bankruptcy, I should simply be allowed to keep everything and go forward with a clean slate."  That way lies economic disaster and moral decay.  

On the other hand, I wholeheartedly agree with your statement that the markets should be allowed to correct themselves.  One of the major problems with this whole "financial crisis" that we find ourselves in is that the Federal government decided that certain companies "are too large to be allowed to fail", which has led to propping up organizations that should have been allowed to go bankrupt.  There is nothing wrong with bankruptcy as a process.  It is the way in which markets are allowed to dispose of inefficient companies which are not making the best use of their assets, and allowing other organizations to buy those assets and put them to more efficient use.  By arbitrarily interfering with that process, in the interest of "avoiding market turmoil" the State has done nothing except to insert a far larger measure of uncertainty into the marketplace than would have existed had normal bankruptcy procedures been allowed to go forward.  That is why the credit markets dried up: banks suddenly had no idea whom the State would support, there was no way of assessing the risk of any given loan.  Without being able to determine the risk involved in any given loan the banks, wisely, decided to sit on their capital and not loan it until the situation could be cleared up.  As the Federal government continues to change the rules, the goals, and the methods it is using to prop up unproductive sectors of the economy the uncertainty has only gotten worse, which is why the credit markets are still not as fluid as Treasury Secretary Paulson and Fed Chairman Bernanke would like.  

However, instead of admitting that it is the meddling by the State which is making the situation worse, the power-brokers in Washington continue their efforts to choose who will be the winners and losers in the marketplace.  Arbitrary actions by the State will never adequately take the place of the functioning of a free market, but our leaders cannot admit that for fear that such an admission would undermine their positions of power.  In the long run arbitrary action by the State in the marketplace will do nothing except distort the market, leading to the inefficient utilization of assets, slower economic growth, and an increase in rent-seeking by those who wish to profit from the use of the coercive power of the State to transfer wealth from one group to another.  The power of the State increases, while the ability of the economy to sustain the nation is lessened, as shown so dramatically by the old Soviet Union.  There is no difference between central planning of the economy by bureaucrats in Washington versus that of apparatchiks in Moscow; and no reason to expect, simply because the State based in Washington is supposedly "democratic", that it will be any more successful.

# November 14, 2008 8:37 AM

Nicolas Dong said:

I'm concerning about World War III  

^^

because of what's happening right now.

Perhaps, only after that war, can we learn what we really need.

# November 15, 2008 7:10 AM