The Economic Mess

There’s an economic bubble that could affect Virginia’s economy for a year and a half. There’s the mess the Federal Government will make that could last for years. Then, there’s the meltdown, the economic bust born of immorally wrong overspending that will come if the Federal Government continues its un-constitutional compromise of purpose. Virginia is the junior partner in this business. Yet, Virginia can make a difference in setting its house in order – and serve, once again, as the nation’s leader in good governance.
The economic mess started with a housing bubble which threatened the banks. It wasn’t the first bubble in our history and won’t be the last. Historian Niall Ferguson describes their cycles in his great book, “The Ascent of Money”. The pattern has these five stages:
1. “Displacement: Some change in economic circumstances creates new profitable opportunities for certain companies.” Like the Congress makes Freddie Mac and Sallie Mae the guarantors of bad housing loans with the full faith and credit of the United States government.
2. “Euphoria or overtrading: A feedback process sets in whereby rising expected profits lead to rapid growth in share prices.” As a realtor from the Middle Peninsula told me, “Bad mortgages were bundled with good as bonds and sold over 25 times – each time for a profit.”
3. “Mania or Bubble: The prospect of easy capital gains attracts first time investors and swindlers.” Lending institutions didn’t do due diligence in reviewing housing loans – despite the political heat to float bad loans. The Securities and Exchange Commission didn’t apply the regulations or seek updated authority to properly oversee the Ponzi scheme in housing bonds.
4. “Distress: The insiders discern that expected profits cannot possibly justify the now exorbitant price of shares and begin to take profits by selling.” Experts knew there was a housing bust coming by August 2007 – well before the September 2008 pop.
5. “Revulsion or discredit: As share prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether.” It happened in September 2008, much to the incumbent party candidate McCain’s distress. At the same time the stress of doubled gas prices and the financial fear from the housing bubble became the straw that broke the back of the big three U.S. automakers, but this is a different problem that government is going to make worse.
The right answer to the housing bubble was to let the market fix itself. I read one estimate that the bubble was $1.7 trillion. Let’s say it was no more than $2 trillion. Calling in those loans would collapse some major banks – but not all of them. The Executive Branch bailed out some banks and not others. Their vacillation only fueled the fear. The poorly crafted and unevenly executed bailout added over $1 trillion to the U.S. debt and didn’t really fix the problem. The Federal Reserve could have floated the credit for the banks to get through a couple of years of adjustment. The Housing Bubble was a giant bubble, but just another bubble.
Enter the Big Three. General Motors and Chrysler were heading towards bankruptcy clearly, Ford less so. If they can’t make a profit on their sales of millions of vehicles worldwide, then they should go bankrupt. The hit on the national economy would be hard – and very tough in local economies like Michigan, but survivable. Someone has the money to take over the bankrupt car companies and make them profitable. Consumers have enough money to buy the cars. The U.S. economy won’t collapse like a house of cards if Detroit’s auto companies go through bankruptcy. The industry will come out stronger like the re-ordered U.S. steel industry is today after the devastation of the 1980s – even though they worry about getting enough orders from car companies – and like some airlines are.
Enter Congressional and Presidential politics. The Republican leadership and too many members voted for the first big Treasury bailout before the November election. Then the Republicans killed the auto bailouts for 2008. Next year the Democrats will push for several trillions in new debt for more bailouts. Passage of any bailout is simply a transfer of wealth through special interest politics. Republicans would be wise to vote “no” at every opportunity.
Every bailout is another dollar that will come due for the next generation of Americans. It’s a dollar piled upon the impossible debt of the current ‘socialist’ Social Security, Medicare/Medicaid and drug benefits. It will lead to certain bankruptcy of the entire Nation. It is accelerated by irresponsible spending on programs that can’t be traced to a constitutionally-mandated federal government responsibility. The certainty of coming failure makes the spending and borrowing an immoral theft of wealth – and opportunity – from young and future Americans.
Virginia needs to elect representatives to Congress who won’t waste money in bailouts. Our elected officials need to cut spending, cut taxes and reform entitlements. Now.
The General Assembly must balance the books by law. Hallelujah. Virginia needs to lead by example with spending cuts, tax cuts and reform of entitlements and mandates. Now.

JAB studied economics at the United States Military Academy, Harvard University, Columbia University and the University of Hard Knocks (Real World Branch Campus).