The Government: And An End To The Great Recession?

Most financial pundits seem to think that the Great Recession is over with and the government—through fiscal and monetary policies—diverted an almost certain depression. On the other hand, there are a growing number of market economists that tend to disagree based on the fact that this economic ‘low point,’ though devastating, hasn’t truly lived up to its potential of being “Great.” If you buy into the whole idea of this recession being “Great,” then you really undermined the true essence of the economic dilemma at hand: the government thinks that by putting a plug over the hole that it can temporary bring the flooding under control—but they could be wrong.

Capitalism's Animal Kingdom: Only The Strong Survive!

How do you put an end to a “Great” recession? Biological human logic says you don’t! You allow the natural forces of the market system to weed out the weak. Just like in the animal kingdom, if a baby gazelle is injured and weak, the herd has no other choice but to leave it behind: it will then be eaten up by the stronger lions. “Big gov.” pretending to be both Mother Nature and Father Time—stepping in to bail out the weak--is a crime against the capitalistic laws of nature. In all honesty, the government only has two goals in a recession of this magnitude: 1) price stabilization; and 2) financial hardship mitigation. It’s goal number 2 that gets the government into trouble. The Obama administration has initiated TARP, the stimulus, and many other government initiatives to alleviate the damages of this “Great Recession.” Whether or not you buy into the logic that they were effective is pure speculation, but the proof in this case still seems to be in the pudding. In the governments efforts to put a bandage over a wide open womb they may have sliced open an even bigger one. Both the Obama administration and The Federal Reserve may have overreached its objective by combining misguided fiscal policies with misallocated monetary policies.

"^*O(KJ)(^&$....What The Hell Is This?"

In its efforts to stem the decline in house prices, the government used methods most free market economists would deem inappropriate. What about the automobile industry bailout? Will these measures really allow Detroit to return to its prominence? The Obama administration strived to jump-start the recovery by passing a series of fiscal stimulus measures: tax rebate checks were sent to lower- and middle-income households in the spring of 2008, the American Restoration and Recovery Act (ARRA) was passed in early 2009 and several smaller stimulus measures became law in late 2009 and early 2010. In all, close to $1 trillion, roughly 7 percent of GDP, was spent on fiscal stimulus. With all this stimulus money going around, it’s no wonder many are now thinking that the Great Recession was put to an end. But the truth is, it was bad money thrown after bad money. And the moral issue that many forget to mention is the financial burden that our next generation will have as it strives hard to pay back all these borrowed monies.

It's A Tarp Alien Boy!!

The temporary economic jolt that “borrowed monies” created won’t ameliorate the main problem of long term recessionary growth. The real task, at hand, when tackling a recession of this magnitude is, indeed, long term growth: doing anything in the short term in the macro economy will only create major drawbacks. One of these drawbacks came in the form the TARP program (Troubled Asset Relief Program). From its genesis, TARP was cause for some concern: the program’s aim was to bail out financial institutions but the $700 billions price tag was like stabbing a dagger into the heart of an already ailing economic chest. This was the same federal government that shocked us into this crisis in the first place. Now the government wants to put a TARP over the one thing that it needs to just let burn free. Although good intentioned, the TARP will end up being a complete failure at the hands of the individual taxpayer who will be paying for this for many years. The cost of program will supersede its benefit: fact is, it was just too costly of a program to warrant its use. In fact, if TARP’s goal was to restore price stability and revive the moribund housing situation, then it failed substantially on both fronts—not to mention the ultimate cost to taxpayers and an almost certain lost of currency purchasing power.


(ARRA)--aka, Time To Get Some Shut-Eye

Also, what about the American Restoration and Recovery Act? The (ARRA) was passed in early 2009 and when first announced, this act of congress caught major flack from most market and academic economists. Many economic forecasters vociferously argued against its existence: the price tag again was way too high, the delivery way too slow and you can’t over look the fact that unemployment rate rose much higher in conjunction with its creation.

Obama's Stimulus--aka, Making It Rain...

Last but not least was the stimulus itself. Why did the government feel it had to stimulate an economy that was overtly stimulated just a couple a years back? We had just come off two of the biggest booms in our post WWII economics engine’s history. If you know anything about the general principles of the business cycle—as so eloquently detailed in two prior hubs—a bust is a time of non-stimulation and an economic engines cooling off period. “But what about deflation, all those poor people won’t be happy spending money anymore?” Complete pipedream to believe that deflation is bad thing! The free market enterprise system is geared towards self recovery, almost like a dog’s womb, just let the dog lick it, it’ll heal by itself, you don’t need to put hydrogen peroxide on it.

Because interest rates were near zero, the government couldn’t use its weapon of choice—which was monetary policy. Nevertheless, it decided to go for a lesser evil in passing this unusually large fiscal stimulus which amounted to about 7% of GDP. The economic engine breakdown of 2008 and our current recessionary low point has been a one-two punch to the face of an already badly beaten-up U.S. economy: the 9% unemployment rate is understated and realistically should be closer to 15%; both fiscal years of 2009 and 2010 have seen budget deficits close to $1.4 trillion.

This being said, the blow to the nation’s fiscal health has been equally devastating. All these printed monies represent a long-term economic parasite to a sick economy trying to get better. In the government’s wasted attempted at fixing the economic crisis (TARP, fiscal stimulus, etc), in essence, it may have wasted a total of $2 trillion of the taxpayer’s money. Scary when you think about it—our economic engine wasn’t designed to sustain these types of figures. By historical comparison, the savings and loan crisis of the early 1980s cost close to $350 billion in today’s dollars. The magnitude of this current economic engine breakdown has the makings for an even bigger transformation if we keep allowing a slow degradation of our economy at the hands of the government.

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