Sunday, March 15, 2009

Econom-nom-nomics Part I: Bubbles, Past and Present

Dear Frank H. Fleer,

You invented bubble-gum, so I'm assuming you're an expert on bubbles. Perhaps you can shed some light on our current situation. See, our economic bubble just popped, and I don't get the rationale behind our government's actions in reinflating it.

Perhaps some background is in order. Let me explain:

So that's how we got here. The government lowered interest rates back in the early 2000s to avoid the painful process that naturally happens when a bubble bursts. The bubble reinflated (more so, really) and then popped again in 2008. And again, the government is throwing everything at the problem to try to avoid the pain: Bank Bailouts, Auto Bailouts, Mortgage Bailouts, Stimulus Plans, and Spending Plans. All of these things are designed to keep the bubble growing bigger.

But Frank, all these programs, initiatives, and efforts cost a LOT of money. And President Obama doesn't seem to mind. Here's what he's decided to spend in 2009:

Thanks Economist!Now, if that goes through, here's what our national deficit will look like, compared to the past few years:

Eek! That's a LOT of money we're spending as a nation, and all with no guarantee that any of it will work.

Indeed, I worry whether our government's reaction will lead the country to become something akin to a socialized, command economy, where the government controls all the functions of production (a la China). This, in my mind, would be a bad thing, as it reduces the incentive for innovation and achievement, and treats people and their work as cogs in the government's machine.

It puts a tough question to our country's leaders right now: Is the bottom line growth of the economy the only thing that matters, or should we be concerned about the direction our country is taking on a deeper level?

Frankly, Frank, it seems that our country right now is so wrapped up in 'fixing' this problem that it is failing to consider the consequences--short- or long-term--of the policies it is establishing. And who knows how that bubble will end up popping?




brd said...

Wow! Great information! I know that Cadh8 will like this too! And I love the scroll-pix.

I don't agree with your conclusions exactly, so I will have to think more and then write a good answer about how it was George Bush who committed the first bunch of money to the big boys of Wall Street. (Without strings.) However, I agree that the solutions being developed so far seem to have "bubbles" in them. These "air inclusions" as they may be referred to in industry, can generally create weakness in the product. How to avoid this? Perhaps Frank can give us some advice.

TheUkieVillain said...

I'm not trying to bash Obama on this--it WAS under Bush that the first stimulus payouts happened and the first bail out monies were given to AIG, et al.

But the more that the Government is a major shareholder (ie. OWNER) of various companies--currently AIG, CitiGroup--the more those companies can be called 'state controlled.'

When that happens, you end up with either (1) Nearly unlimited free money to those companies with no oversight, since the government won't let them fail (since it would lose its previously-invested money) OR (2) Significant oversight over the operations of the enterprise; in effect, the government running the company. Neither of these is good IMO, but those are the outcomes of what the government is doing, unless they set specific and time-sensitive methods for extracting their capital, which they have not yet done.

cadh 8 said...

OK, Can I just say that I love the graphic for the "irresponsible family". :)
That being said, this is a great explanation of what has been happening in this country for the past 9 years.
But I agree with Ukie that instead of trying to correct, it seems that the goverment is trying to keep the bubble growing. This did start with George Bush, hand in hand with Congress all pressing the panic button together. But lets also back up to the practices of Congress over the past 9 years as well. They supported the cycle so clearly laid out in the graphic. The mantra that everyone deserves a peice of the American dream (read this home ownership) no matter how unprepared, ineligible, or irresponsible. And that is where personal responsibility comes in. People could have made better choices for themselves. But they didn't.
And guess what, Obama is keeping promises now, not breaking them. I have to saying he is doing about 90% of what he said he was going to do. I respect him for that, because I thought the slow and resistant nature of our government would prevent him from doing this. Unfortunately for me, his promises were why I voted against him. But we should not be shocked at the spending. We should be ashamed as a country though, because we as a hard working capitalistic and flourishing economy should not be in this position. And people should be fighting it with their hearts...fighting welfare, fighting bailout, fighting debt...fighting to make THEMSELVES better. Not hoping Washington makes them better.
Anyway, I am going far afield here, but I fear that this country will never be the same again. Change has truly come. I am still trying to have hope, but it gets harder by the day in regards to the handling of the economy.

brd said...

Today's breaking news: AIG Execs get more bonuses. Want to sign a petition to Congress expressing the opinion that bailout money should not be used for this? Click here.

cadh 8 said...

This is exactly why the government should have stayed out of it in the first place. Of course no one wanted the money to go to these execs, but if there are contracts in place I can see how AIG would be legally bound to honor them (or get sued), but on the flip side it is pretty scary for the government to start telling companies what they can and cannot do. That is why they should have been allowed to go bankrupt in the first place then no one would be getting a bonus and people would have learned their lesson.
But really, this is rediculous.
I don't think I spelled that right...
Why won't they go with the BRD plan and get it over with?

cadh 8 said...

Did I make comments at least partially defending AIG bonuses? Did I for a moment think that maybe people who had truly done good work were being rewarded with this money? I AM SO SORRY!! Because, no, these bonuses were really loathsome wastes of money and were put in place AFTER AIG knew it was going down but before the whistles had blown. They were retention bonuses, because goodness knows they would not want to lose the kind of sharp minds that were sinking, I mean driving, that ship. After hearing the details I am utterly sickened.

But I am frightened to hear Barney Frank state that the government "owns" AIG. This gets at the fundemental question. Was the bailout a way for the governement to save the economy or to buy it. People talk about the separation of church and state, but to me it is more important to have the separation of buisness and state. With both cases, it is not that the two should never interact, it is that the one (government) should never control the other.

Oh, and will I ever stop being so naive?

brd said...

I think we are all naive to the depth of greed that exists in the world. Thank God that such naivete exists. It is a sign that good people still live and breathe who are not energized by greed but by the angels of our better selves.