Economy worsening, Obama policies are detrimental

The Dow dropped another couple hundred points today. I'm not surprised. Judging the market's wellbeing by the Dow alone, however, is rather foolish. Aditionally, a record number of Americans are behind or in foreclosure on their mortgages (including 48% of subprime mortgages). January unemployment was at 7.6% from 7.2% previously (with February's stat coming soon, likely to be higher). Inflation rose 4 times as much as the Fed predicted it would (surprise, surprise) and the banks still won't bump up the loans.

On a side note, I think it's hilarious that the government criticized the banks for being too lenient in their lending policies, when the government used GSE's, the Community Reinvestment Act, lower interest rates, and etc. to encourage more lending. And now, after too much lending exploded in their faces, the government is now criticizing the banks for not lending enough. It makes sense to not lend when the prospects or quick recovery are increasingly bleak. The government is, again, trying to push banks into extending their lending practices to people that they wouldn't otherwise give loans to. This caused the problem. Doing it again will not fix the problem. Banks are naturally tight in their lending policies because they judge the economic landscape as being very troublesome. It isn't because they're run by horrible rich people who hate the economy... they just don't think that it's a good time to be lending. This is natural. This is what we want as an economy. Too much credit, encouraged by artificially low interest rates, leads to the boom and bust cycle (as argued by Hayek and the Austrian School).

But, back to the whole idea of government intervention. I direct your attention to the oft-forgotten recession of 1920-21.

This is a topic covered at length in Tom Woods' book Meltdown, about which I wrote a review for the YAR. I encourage you all to buy the book (it's fantastic) and check out the review in the next issue of YAR.

This recession is often overlooked by economists. Why? The answer is quite simple... it's because it undermines the policies they are employing.

In this recession, price levels fell far more sharply than in the Great Depression. Prices of retail goods declined by 36.8 percent for 1920-21, which was the the largest one-year decline on record. By many estimates, the economy suffered a decline significantly worse than it suffered at the start of the Great Depression. Why, might you ask, did the economy recover completely only 22 months after the recession's bottom?

In this recession, the government's response was extremely minimal. Unemployment rose from 2.3% in 1919 to 11.9% in 1921. However, government rescue procedures were not enacted, other than marginally increased support for the unemployed.

There are several reasons for this, as explained by Woods and the Austrian School. Firstly, when the government intervenes minimally in the economy, it allows the economy to follow its natural recovery mechanism. Wages are allowed to fall, bad assets are purged, and unproductive business ventures are slashed.

However, in the current crisis, the Obama Administration is doing all that it can to keep these bad assets on the books. This slows the recovery process down to a crawl. Instead of letting bad companies go bankrupt (e.g. Chrysler, GM, AIG, etc.) the government keeps these unprofitable companies afloat. What's wrong with that? Well, isn't it obvious? The government has paid out billions to all of these companies. Did that work???? Absolutely not. Within only a few months, each of them came back to the government to ask for even more money, on occasions even more than the initial recovery. Bad companies, bad assets, bad business procedures (i.e. loose lending, malinvestment) need to be purged. This can only happen if the government lets it happen.

Every single action that the government has enacted has failed. I have illustrated TARP's failures below. I illustrate the failure of the big three bailouts above in extremely small detail (though this failure was already evident). The jury is still out on the bailouts, the new $200 billion consumer credit plan (...yeah), and the continually changing effort to make the banks lend again (buying bad assets, making a government-run bad bank, etc.).

The government has already committed ~$2 TRILLION dollars of taxpayer money to combat these problems. People deserve to know that it's not just the strategies are failing, it's that these strategies are actually slowing down the recovery process.

NOTE: The 1920-1921 recession economy had much more wage flexibility than is present in our economy. This is one of the reasons for the quick recovery. However, we don't have this wage flexibility by government design.