cypherboy's Blog

I am generally appalled at the plan to rescue U.S. financial institutions by having the federal government buy their bad debts.  It takes the risk out of business and tells everyone, "don't worry, uncle sam will save you if you really screw up"  It removes all reason for banks to behave differently. 

The worst part is that the people who got us into this mess, the banks, get about a trillion dollars of our money.  Supposedly we'll get that paid back if this resolution trust corporation entity does what it's supposed to do.  I'm not holding my breath.

The treasury secretary says he had no choice but to do something like this.  Indeed there's a story out today that details the kind of calamity we could have faced had they not stepped in.  You can read it here.  What really bothers me about this is the idea that we couldn't have handled a 22% drop in the Dow Jones Industrial average.  We've done it before.  1987 we saw exactly that kind of thing happen when the Dow was in the 2-3,000 point range.   The Dow is now in the 10-12,000 point range.  A drop to 8,300 would be bad, not not catastrophic. 

It's certainly true that a bunch of businesses would have closed and a bunch of banks would have failed.  That's what happens in an economic downturn.   We've had them before and survived.  My concern is that we now have a government that seems panicked by the notion of a recession and actively fights to keep us out of one with reckless spending. 

In 2001, the economy was sluggish and indeed contracted for one quarter.  It was not technically a recession.  Bush got his tax cuts passed, but only with some conditions.  One condition was that the government would send out rebate checks to give an immediate boost to the economy.  It worked.  The tax cuts themselves spurred the economy further in the years to come, leading to strong economic growth and record tax revenue for the government. 

This year we had the same kind of concern crop up about the economy and the solution was much the same: government money in the hands of the people to give the economy a boost.  It worked.  The last quarter's GDP was up 3.3%.  Again, we have probably avoided a recession.  

Now we're taking a trillion dollars of our money and putting it into a banking industry that has been behaving recklessly for more than a decade.  Money has been cheap and they've loaned it to people who can't afford to pay it back.  Rather than have the banks that were the worst offenders at this go out of business we have propped them up so they can continue their foolish ways. 

Here's where I see a real mess on the horizon.  The national debt essentially just jumped by a trillion dollars in one day.   It wasn't due to social security or other entitlement programs going out of control, it was the treasury and the fed deciding to spend that much money to avoid an economic downturn.  Entitlement spending is still a problem and now we're that much closer to the day when the U.S. government has borrowed so much money that they can't raise taxes high enough to pay to service the debt.  Put another way, at some point down the road (could be 20 years, could be 10.. who knows when)  the bank that will be insolvent will be the U.S. Treasury and we won't have anyone there to bail us out. 

So I have a solution.  There is a way to pay for this bailout without putting the burden on the U.S. taxpayers: get rid of about 500 billion dollars in U.S. federal spending each year.   Can that be done?   To borrow a phrase we've heard so often this year: yes we can!

A simple bill could be passed by congress and signed by the president that would do the following:  close the department of education, the EPA, the interior department, the commerce department, the homeland security department, the veterans affairs department, the health and human service department. (and maybe some others)  Some of their functions would be moved to other departments, but their big buildings with high paid cabinet secretaries and thousands of staff people to back them up would be let go.   Their assets would be sold off.  Much of what those agencies do are duplicated at the state level anyway and are simply not needed.   

Furhermore, we'd close our military bases in Japan, Germany, the Phillipines, Iceland.. and a whole host of other peaceful areas.   It seems foolish to have troops in peaceful parts of the world while we need them in other non-peaceful parts of the world.

I'd also cut the pay of all members of congress (both house and senate) in half.  Cut the pay of the President and Vice President in half.  Cut their staff budgets in half. 

More importantly, social security, medicare and medicaid need to be scrapped and reconstituted in such a way that entitlement spending no longer exists.  We've set up these programs that say if you meet x criteria you get y amount of money.  The problem is that we can never budget for this.  We just borrow money and pay for it.  In the case of medicare and medicaid, they've interfered with the normal supply and demand functions of the healthcare market and are causing costs to skyrocket.  (private insurance is doing the same thing)  These program need to be reworked or scrapped.  I'm not trying to throw grandma out on the street or create a society where we let people die because they can't afford healthcare.  I'm just saying we have to find a different way to deal with this that gets the government out of it.  Maybe private charity is the answer.  I don't know.  But I do know that what we're doing now is crippling our country. 

Social security should be removed from the federal budget.  The problem has been that it runs a surplus some years and the politicians love to use that to show our budget deficit isn't as bad as it really is.  Social security will go out of business down the road if we don't do something to fix it.  I have a solution for that too, but it's a little too involved to go into here.  Essentially I'd privatize half of it, change the way it's paid out and make sure that we have enough money to pay for it. 

The fact is that the federal government needs to cut spending enough so that we can run a 500 billion dollar budget surplus every year for at least ten years.  It's the only way to pay down our debt enough to avoid a real economic calamity.