Congress has just approved a stimulus plan that will add another $ 850 Billion or so on top of our oversized national debt. Rather than go into the details of the plan which is filled with "earmarks", "pork", and other questionable spending items, I would like to address the question as to whether we need this stimulus plan or not.
What went wrong in September, 2008? It appeared that the economy was on an even keel and was in a position to survive the meltdown of the housing industry and the collapse of the credit markets with respect to mortgage defaults. What happened was a total collapse of the credit markets! Fear and the demand to mark bank assets down to market value drove the banks to write down their overly leveraged assets to pennies on the dollar! This wiped out balance sheets of banks that provided the credit needed to grow our economy. Without credit, many companies that relied on commercial paper to fund their day to day operations were forced to cut back spending. Consumers faced with downgraded credit ratings curbed their spending which furthermore put the economy in a tailspin.
The government is the only institution that has the resources and the will to step in and try to right the ship. I believe that their initial response which was to take over the "toxic" assets at the banks was the right answer at the time. If done early enough, it would have put a floor on the valuation of the mortgage based assets and prevented the spread of fear that destroyed otherwise "good" assets. For whatever reason, Sec. of the Treasury Paulson dropped the ball and chose to pump money into these banks directly without any transparency or accountability.
Now we are faced with an even greater crisis that is costing more to finance and in doing so will only further increase our national debt. What are the possible consequences:
- Nationalization of our banking system.
- Government ownership of a large share of our automotive industry - not just the "Big 3" but their suppliers as well!
- Heightened inflation as we are forced to raise our interest rates to attract foreign capital to fund our deficits.
I say that it is time to cut government spending and put our focus back on the real problem that caused this mess. Fix the housing sector!!! Put together a bill that allows the GES entities to take over the mortgages from the banks at discounted prices. Let them restructure these loans so as to keep the owners from defaulting. Offer a tax credit for new home buyers. And then, offer to buy back some of the other bad debt from selected banks through a reverse auction process.
Spending on infrastructure is good but takes too long to create jobs. We need to restore confidence in our economy and we need to do it now! There is no alternative to government involvement at this time but let's not as taxpayers give them a blank check. Demand from your congressmen and women accountability. In future blogs, I'll give you some sample letters that you can send to Washington. Let's fix the economy now and do it right!
