Fun with Economics

In the past few months, there has been a lot of concern about the health of the economy, U.S. and world. And while it's not as bad as most news would make it seem (at least not right now), it's headed down for a really rough ride. Most people try to place the blame on obvious targets; GWB, his administration, Congress, oil speculators, oil execs, etc. The truth is, if one entity deserves the blame (as a note, there's always multiple causes), it's what I call the fourth and unregulated branch of government: the Federal Reserve. Before I get into detail about the problems of today, let's go back and analyze the causes of the Great Depression. There were several factors that led to the Depression; it was partly natural, as recession cycles are quite normal in correcting inequalities in supply and demand. The real issues are based in what exacerbated the problem. One of these issues is debt, due to cheap credit (sound familiar?). Another is great reduction in international trade due to the Smoot-Hawley Tariff Act, passed in 1930, which increased tariffs on over 20,000 imports. Even though this came after the initial crash, the unemployment rate of 7.8% in 1930 increased to 25.1% in 1933, and in retaliation to the act, countries around the world raised tariffs on goods, effectively crippling international trade (Yay for gov't regulation!). Even worse than the Tariff Act, though, was the policies of the Federal Reserve. After WWI, Great Britain attempted to briskly return to the gold standard. This lead to deflationary pressure, and the unemployment and price inflexibility lead to Britain asking the US to help. The Fed did so by allowing US currency to inflate. With US currency inflating, British currency could also inflate, as it could not do so on its own. And here we have the Great Depression. Yay gov't regulation. FDR then came along with the New Deal, which was extremely well intentioned, but in the end, not near as effective as hoped; the unemployment rate by 1938 was 19%, when in 1933 when the New Deal was started it was 25.1% (There was some good out of it, though. The FDIC, for example. Social security could be much more efficient if privatized, but that's a different blog post). What really got us out of the Depression was WWII. Now, my basic point behind the Great Depression flashback is that the Federal Reserve (and gov't regulation in general) really kinda sucks. Today, we're letting our economy go to waste because the Fed decided to have a short term fix by drastically cutting interest rates. That's not to say that gov't regulation isn't necessary in all situations (in a perfect world, it wouldn't; in a perfect world, I'd be anarcho-capitalist); it would currently be necessary to help regulate the really sucky mortgages and subrime loans, (though an educated public could take care of that problem). Anyway, back to my point, the Fed has mostly proven itself ineffective in fixing problems, though it seems to have a knack for exacerbating them. Now, don't put all blame on the Fed (though, again, they do deserve the most). The presidency has a played a part, also. Under Bush, we saw the largest expansion of the federal government since FDR (my sister calls Bush a totalitarian Democrat, his (and the neocons) policies and perversion of the Republican Party is why I no longer associate myself with that party). Also, his "stimulus package" was just a huge waste of taxpayer money (it only increased consumer spending for one month by one percent [it was only geared to people with income under $75k, truth is, the people most likely to spend it and therefore inject money back into the economy are those with higher incomes; not politically wise, but nonetheless truth]). Congress you can blame for supporting such legislation. You can also blame Congress for blocking drilling in ANWR and offshore. It doesn't matter that it'll take years to get the gas (we'll have alternatives by then), the impact on the psychology of the speculators is immediate. Today, when Bush lifted the ban on offshore drilling, oil closed down $6.45, the hugest drop in seventeen years, down to $138.74. Congress doesn't even have any legislation in the works to allow offshore drilling. For anyone who said that oil prices wouldn't drop immediately if we drilled elsewhere because it takes years to get it out of the ground, today officially destroyed their logic. So uh yeah, I feel like that hole thing was a huge digression. Summing up, the Fed is bad. If I remember anything else to post, I'll post it.