Spring Break
Stimulus would only prolong problem
Ian Bezek
Issue date: 2/10/09 Section: Opinion
It appears likely that an economic stimulus package will soon be enacted. While its aim is good, the methods are flawed.
A stimulus can work if the economy is experiencing a temporary hiccup, but we face a severe problem that stimulus can't fix.
To understand the effects of a stimulus plan, we must first look at how we got into this mess. During the tech wreck of 2001, the government became worried as the economy headed into recession. The Bush administration overreacted, passing an expensive package of tax cuts, while Federal Reserve Chairman Alan Greenspan slashed interest rates.
The result of this was an all-out rush to buy houses. With interest rates near all-time lows, just about everyone with a pulse could get an affordable mortgage. The result? A gigantic unsustainable rise in home prices.
As common sense would predict, the housing bubble ended badly: Joe the plumber could never afford that half-a-million dollar mansion he bought with no down payment. Homeowners quit paying their loans, foreclosures began en masse and so began the economic downturn presently afflicting us.
The core problem of the economy is debt -- people have lots of debt, on credit cards, automobiles, houses, and so on -- and there isn't enough income to pay it all off. There is literally more debt in the economy than there is money (dollars) available to repay it.
This situation can't end well: When more debt exists in an economy than there are means of repayment, somebody is going to be left holding the bag.
This escalating debt mountain has been building for the past couple of decades as America has fallen into rampant consumerism.
Up until recently, people have been able to borrow more from corporations or the government to pay the interest on their debt. Now, corporations - as witnessed by the collapse of much of the banking sector - have been swallowed up by the debt too. If a bank lends to deadbeat Americans long enough, it drowns too.
A stimulus can work if the economy is experiencing a temporary hiccup, but we face a severe problem that stimulus can't fix.
To understand the effects of a stimulus plan, we must first look at how we got into this mess. During the tech wreck of 2001, the government became worried as the economy headed into recession. The Bush administration overreacted, passing an expensive package of tax cuts, while Federal Reserve Chairman Alan Greenspan slashed interest rates.
The result of this was an all-out rush to buy houses. With interest rates near all-time lows, just about everyone with a pulse could get an affordable mortgage. The result? A gigantic unsustainable rise in home prices.
As common sense would predict, the housing bubble ended badly: Joe the plumber could never afford that half-a-million dollar mansion he bought with no down payment. Homeowners quit paying their loans, foreclosures began en masse and so began the economic downturn presently afflicting us.
The core problem of the economy is debt -- people have lots of debt, on credit cards, automobiles, houses, and so on -- and there isn't enough income to pay it all off. There is literally more debt in the economy than there is money (dollars) available to repay it.
This situation can't end well: When more debt exists in an economy than there are means of repayment, somebody is going to be left holding the bag.
This escalating debt mountain has been building for the past couple of decades as America has fallen into rampant consumerism.
Up until recently, people have been able to borrow more from corporations or the government to pay the interest on their debt. Now, corporations - as witnessed by the collapse of much of the banking sector - have been swallowed up by the debt too. If a bank lends to deadbeat Americans long enough, it drowns too.
Viewing Comments 1 - 2 of 3
Arvensis
posted 2/10/09 @ 8:32 PM MST
I agree with the title, but once again a contributor to the Collegian has failed to recognize the root of the problem. Too many of these articles take machetes to the branches of the corruption tree - go for the roots!
I don't blame you for what you have learned in your "economics" classes; after all, we are not supposed to understand how things are truly run. (Continued…)
Arvensis
posted 2/13/09 @ 12:57 PM MST
I'm glad to hear that, Neil. What are your personal views on the system if you understand it? I am personally outraged that we have allowed a private, for-profit corporation run our financial system. (Continued…)
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