Sumerth's ultra-liberal version of reality

It seems like only yesterday that the United States was once the world's greatest economy. A nation of growth and progress, the U.S. continued to dominate the world economy, producing advancing technology and helping other nations who strove to follow its path. Yet, currently the United States is in a serious recession. The economy continues to falter as GDP declines, and unemployment sky rockets. Currently the GDP of the United States according to the last BEA release shows real GDP at -6.3%. This is expected to continue to fall for the next year or so. Unemployment, another indicator which shows us that our nation is in a recession, has gone up to 8.5%. Roughly double of what it was during the economic boom of the 1990s. Inflation has also increased; according to the BLS release in February the CPI rose 0.5%, showing that price levels continue to rise. There were many players who played a key role in the responsibility economic mess our of our once great nation.

Let's start early, all the way to 1982 when Ronald Reagan was president. Reagan an economic genius, helped spur the economy into a long twenty-nine year period of economic growth. He did this by implanting his idea of supply side economics where instead of trying to increase the demand or the consumption of products (who's effects are good yet not perfect: increase in GDP but higher levels of inflation) he tried to increase supply (whose effects are almost perfect: increase in GDP along with a slow decrease in price levels). Reagan's economic plan coined famously as Reaganomics helped the supply side of the economy or the entrepreneurship of the economy in two major ways. One, Reagan lowered the costs of business by reducing the power of labor unions in companies. Reagan’s war on Unions started in 1981 when he fired 13,000 air traffic control workers and destroyed their union, this was the start of the demise of the labor union movement. All though I usually drift to the extreme left of the political spectrum I must admit that this plan worked. Soon wages became flat and production went up due to the lowered cost of dealing with Unions.

The second step in Reagan's plan of shifting supply was to deregulate various public industries, most notably telecommunications, transportation and financial services. The deregulation of these industries boosted competiveness, investment, as well as opening new industries thus increasing overall production of the economy. Thirdly, Reagan helped simplify our tax system into 5 simple progressive tax brackets. This along with tax cuts targeted for the wealthy led to increased investment and more production. These economic principles were followed by the next two presidents, Bush Senior and Clinton. Clinton especially was lucky enough to have the explosion of the internet to encompass his similar Reaganomics policies. If you disagree with me just take look at the numbers, a net increase in employment of 16 million, and an average increase in GDP of 3.4% a year. Yet what does this have to do with economic recession today? Let's take a look at the housing crisis and we'll see an amazing connection.

During the economic that twenty nine year economic boom, a series of government placed economic policies led to the demise of the housing market. One of the many was the extremely low interest rates which allowed more people to take out loans for homes. Here the Federal Reserve tried to artificially move demand thus creating a fake boom to match the increase in supply and causing the prices for all goods and services, mainly houses, to go up. So if anybody wanted to buy a home they would have to pay more for it. Thus with housing prices going up, sub-prime lenders made loans to people who could not afford them allowing for these lenders to make a short term profit in this artificial boom. Soon the value of these loans went down due to increased interest rates (causing housing prices to decrease) as well as banks not covering the difference when people could not meet their loans due to decreasing housing prices. Yet why was this shift artificial? Since the Federal Reserve kept the rate at which they lend money so low the supply of funds (money they lend) kept shifting right. This put downward pressure on the price to borrow money leading to all capital resources to flow into the housing market.

Along with this government backed companies such as Fannie Mae and Freddy Mac bought up these loans or mortgages and combined them to sell to investors as mortgage backed securities further complicating the process. Finally in 2007 when this housing bubble exploded, the entire economy felt it’s after shock.

Now how did this affect the banking industry? Remember as the value of homes went up (due to low interest rates), sub-prime lenders made loans to earn short term profits. Soon Wall Street heard of this and banks began to invest heavily into the mortgage backed securities that Fannie Mae and Freddy Mac were selling. When the housing bubble burst, banks such as Citigroup, Bank of America, and Bear Stearns collapsed as well due to the heavy losses in their investment of mortgage backed securities. Hedge Funds especially took a hard hit to the housing market since they invested a minimum of 7 billion dollars in mortgage backed securities. Also insurance companies such as AIG, began selling credit default swaps (paying banks when mortgages defaulted) to various investment banks. This soon put these companies in quite a mess. To go along with this banks needed to stop lending in order to stay in business. This credit crunch soon affected many other industries who had nothing to do with the housing market. Since many industries were not receiving any form of investment, companies began to cut cost. Soon prices for many goods and services shot up leading to various people reducing in expenditures. With this decrease in expenditures companies were losing profit and began to lay off jobs. With unemployment peaking at 9% and rising along with declining GDP due to decreased investment as well as consumption the United States was about to enter a long recession.

In a nutshell there were many key factors which led to the demise of the economy, the 29 year inflationary boom, irresponsible actions by the Federal Reserve, and greedy lenders and investors. And no, it was not all George Bush’s fault, take it from a true liberal. I’m not trying to lay the blame on any of these factors but instead pointing out how we should try to fix the problem. You cannot make good decisions without understanding your mistakes.