So it is that the housing bubble had to burst. And now….? Well, how did the stock market react today?
Stocks plunged Monday, with the Dow down as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors.
But the Dow Jones industrial average (INDU) and other major indexes cut losses in the final hour. The Dow ended down just short of 370 points.
The index fell to 9,525.32, the index hit its lowest level during a session since Oct. 24, 2003, when it touched 9,497.72. (from here)
With the passage of the Wall Street Bailout Bill, is our economic crisis over? It would seem that it is not. I suspect there are several reasons for that.
- From the perspective of most people, this economic crisis came out of nowhere. There were experts who spoke up, but almost no one paid any attention. Although the news media constantly plagued us with nonsense about the state of the economy, the press almost never mentioned the full implications of an exploding sub prime lending market. The deficit was an issue, but the implications of so many potentially bad house loans never seemed to register. Did we refuse to listen, or did our media “experts” just turn out to be puffed up talking heads?
- Our government has responded to the crisis by assuming even more power over and responsibility for the economy. In the process, our politicians have ignored the Constitution. When men govern according to the Law, a society can be relatively stable and prosperous. When men govern according to their whims, a society is inherently unstable. Only the elite prosper.
- We have a consumer driven economy. With each generation since the Great Depression, we have become more impatient and spoiled. Instead of saving and investing for the future, we insist upon instant gratification. This impatience to consume in fact constitutes the basic reason for our economic crisis. Instead of waiting until we could put down a reasonable deposit, we consumers insisted upon easy loan conditions. To pacify our impatience, our politicians pretended to give us what we wanted. In reality, housing developers made a killing selling increasingly expensive homes.
So investors are queasy and wondering what’s next. To assure profits, businessmen want a stable business environment, but where is this stability businessmen crave? When government assumes a large role in the conduct of business, the business environment inevitably becomes unstable. Government must regulate business. When it becomes a player, government has a conflict of interest. So it fails in its primary task. Instead of providing a level playing field, government protects it own interests.
Worse, as government becomes an increasingly major player in business and the economy, politicians become more susceptible to bribes and playing favorites. When they are not inhibited by the restraint of Constitutional limits, the decisions of politicians can become almost whimsical. So it is that we have seen several decades of increasing government tinkering with the economy. So it is we have seen decision after decision driven by politics instead of economic needs. So it is that our government has “given” us freeways, low interest loans, free or inexpensive schools, subsidized mass transit, food stamps, housing vouchers, expanded Social Security and Medicare, drug benefits… So it is that we have steadily socialized a greater proportion of our economy. And we have done this without serious debate or the required amendments to the basic Law of our land.
This behavior is nothing new. Consider the factors that conspired to create the conditions that allowed the Great Depression to make a mess of America’s economy .
- During the 1920s, corporate, bank, and individual participation and speculation in the stock markets was very high. Investors, including banks, could buy stocks on margin, paying only a small percentage (for example, 10%) of the stock’s street value. This allowed for a tremendous amount of leveraging and exposure in equity assets with only a moderate cash outlay. In addition, banks could use customer deposits to buy stocks, further driving up share prices and increasing the potential fall in prices. And prices did fall. From October 1929 to the early 1930s, many stock prices lost over 90% of their value. For many Americans, their savings and wealth evaporated almost overnight.
- As a result of the business downturn, demand for goods and services plummeted, U.S. corporations responded by lobbying Congress for increased protection from the import of foreign-made goods. Congress complied. Led by Congressmen Smoot and Hawley, tariffs averaging 60% were placed on imported goods. Since a tariff acts as a tax, this led to a corresponding increase in the price of these goods to the American consumer. Foreign countries immediately reciprocated, shutting off markets for U.S. exports. Global trade contracted, leading to a further deterioration of the economy.
- With the economic downturn, incomes and tax payments declined. Believing a balanced budget was of primary importance, President Hoover raised income and corporate taxes, further decreasing disposable incomes and jobs.
We essentially have already met the first condition. Lenders extended too much credit. If we elect Democrats in the coming election, we cannot count on getting lenders under control. Democrats encouraged the easy lending that created the problem in the first place. Because Democrats want to protect domestic labor unions, we will also most likely meet the second condition. However, Democrats will probably not create the third condition. Instead of trying to balance the budget, the Democrats are more likely to continue their spendthrift ways. In that case, we will not see a decrease in disposable income. What we might see is the economic chaos Germany once saw, runaway inflation (see here).
Base upon historical precedent, the only practical solutions to our economic woes is to put lending back in private hands, promote free trade, and to cut government spending. These are policies that John McCain, Jim Gilmore, and Keith Fimian are more likely to support. We most certainly cannot count on their opponents to do the right thing. So please vote wisely.
When we shirk our responsibilities, there is no escape. Sooner or latter, there is always a price to be paid. We can only pray that God will grant our people the wisdom to see our dereliction of duty sooner rather than latter. We must start voting for leaders who refuse to “give” us things. We must vote for leaders who expect us to participate and share the burden. We must each help in the conduct of our society and accept responsibility for running our own lives. If we want politicians we can trust — who cannot be bought — we each must stop selling our vote to the highest bidder.