Economic News

Here is some news for you on the economy front.

Over the past few days, the market has experienced a lot of bouncing.  Earlier this week, several of the big financial institutions on Wall Street had better-than-expected showings, proving that people were already getting back into the market.  This prompted speculation that the worst of the financial 'crisis' is over, which in turn sent the Dow Jones up several hundred points.  Then comes Fed chairman Ben Bernanke.  First, he said he didn't anticipate another failure like Bear Sterns.  Then he turned around and warned that a recession is possible.  What??  Which is it?  Something funny is going on there, but I don't have enough knowledge of the industry to know what.  If any of you do, please drop a comment to enlighten us.  At least Bernanke followed that up with an expectation that the second half of 2008 should be much better than the first half.

Regardless, the Financial Times had a recent article about how to safeguard the economy: it's all about the capital.  The thrust of the article is that the government should do whatever it can to encourage the creation and generation of capital, because that is ultimately what prompts economic growth and stability.

Capital could be considered the opposite of taxation in some ways.  Here's what I mean by that.  Let's say a business owner gets taxed 35% on his profits of $500,000 for the year.  That amount ($165,000 - ouch!) is no longer available to be used for the expansion of or investment in the business.  This limits the productivity and growth of the business, which in turn limits profits, employment, and so on.  On the other hand, what if the tax brackets were adjusted so the same business owner only had to pay 28%?  That would mean that only $140,000 would be paid in taxes (still an ouch!), leaving the owner with an extra $25,000 for expansion, new product development, investment, and so on.  This, in turn, increases the productivity and growth of the business, increases profits, allowing the hiring of more jobs, and so on.  See how it works?  Capital is the money that starts that whole process of growth, so that's the key thing to consider in talking about the economy: how can we inject more capital into the economy?  Or, perhaps more correctly: how can government create incentives for (or just get out of the way to allow) the injection of more capital into the economy?

The St. Louis Examiner sums it up: regulation is the problem, not the answer.  It talks about how Bush is accused of being anti-regulation, even though the reverse is true.  But I don't want to get stuck on that particular example, so read the article for the details.  The main point is what is most appropriate: more government intervention is the cause of the problem, not the solution.

This mortgage 'crisis' is the perfect example.  The government encouraged risky loans so that more people could 'experience the American dream' of homeownership.  People got mortgages they had no business getting because of the interest-only ARM mortgages being handed out like candy (for some great examples of problems that have contributed to the financial crisis, check out Right Truth's collection of stories and links).  If you looked at this last link, one example is a working class illegal immigrant (which is another story all by itself) who got a mortgage for a $400,000+ house!  Now, how do you suppose an illegal immigrant gets a mortgage like that?  There is a serious relaxation of standards in fact-checking and other areas of the mortgage industry which could/should have prevented that loan.  Guess what?  This relaxation was prompted and encouraged by the government.  And now look at the mess we're in!  Naturally, the government wants to step in to 'fix' things now.

But how can they possibly 'fix' things if they're the ones who created the problem in the first place?

This is the point.  Government should get its collective nose out of the market as much as possible.  Of course, there has to be some minimal regulation and oversight to prevent fraud, crime, and all that.  But, there is no reason for the federal government to get involved in minutiae like fact-checking mortgage applications.  Less government intervention is almost always better for the citizens, especially when it comes to the free market.

There's my two cents.