Understanding The Economic Crisis

Recently I made a post showing two people who predicted the financial crisis. What the videos and I emphasized is that the free market didn’t cause this and that government and the Federal Reserve did. One very important thing to understand about the current financial crisis is that the recession isn’t the problem, it’s the cure. The problem isn’t that home prices are falling and that companies are failing, the problem is that they got over-inflated in the first place. What’s happening now is that people are starting to act logically and financially responsible which is the correction that has to occur. The home prices and the companies that got blown up to unsustainable levels are coming back down to reasonable levels. I earlier posted a letter that I had written to my congressmen about the stimulus where I compared the stimulus plan to giving a drug addict more drugs. What essentially has happened in our economy is that we were all given drugs by the Federal Reserve in conjuction with the government, which allowed us to spend more money than we all actually had.

What was the drug they gave us? Easy credit. The Fed lowered interest rates artificially low and pumped massive amounts of money into the economy by printing it out of thin air. Then the government pressured banks to give loans to people that wouldn’t normally qualify for them (with things like The Community Reinvestment Act). And finally, the government-created entities, Fannie Mae and Freddie Mac, promised to buy the risky loans that banks were forced to give to people who probably wouldn’t be able to repay. If you were a bank being pressured and even threatened to be fined if you didn’t make loans to those with not-so-great credit, and were also told that you could sell those risky loans to Fannie Mae or Freddie Mac, why wouldn’t you give the risky loans? You would supposedly get your money no matter what. Why get fined or audited by the government for not doing what they said? So, the banks then had to loosen lending standards and get creative with ARM loans and no-money-down loans so that almost anyone could qualify for a loan. The rush that resulted in the real estate market sent home prices sky rocketing. People that already owned homes saw the value of those homes shooting up and began to think that they were becoming rich, and started to borrow against that supposed value to buy cars and big screen TVs and everyone became high off the easy credit drug.

So now we are all coming back down to reality. All that wealth we thought we had has turned out to be an illusion. Again, the problem is NOT that we are coming down, it is that we all got high in the first place. Now all we are left with is all the debt that we have accumulated while we thought we were rich. Giving us more drugs through stimulus programs and encouraging banks to lend and consumers to buy is adding to the problem. It only provides a short-term boost but a bigger long-term problem. What the free market is doing now is correcting itself from the artificial and unsustainable stimulus is was already given. As we come off the credit drug, the withdrawals are painful, but necessary. More drugs sounds ever so tempting to relieve the pain, but the more drugs we are given, the more painful the ultimate and inevitable withdrawals will be. The withdrawals (the recession) should be embraced and gotten over with as quickly as possible so that we can get back to health and move on.

Here’s a clip of Peter Schiff again, about a month ago, on CNN explaining some of these things. Notice how the other financial “expert” is still arguing that the free market caused this and that we need the government to fix it:

http://www.youtube.com/watch?v=8ilCF0ATdps

If you can get a decent understanding of why the problem was actually during the boom, and why the bust we are dealing with now is the solution, you will understand more about basic macroeconomics than 80% of the financial “experts” you hear about on TV. Unfortunately, you’ll know more than those who are the President’s economic advisers as well.

Also, an update on the Audit The Fed post I put up a few months back. The bill now has 179 cosponsors and is close to coming to the House floor for debate and a vote. Please sign this petition to put pressure on Nancy Pelosi to bring the bill to debate and vote.

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