You can't go anywhere these days without someone talking about how horrible the economy is. Today we are faced with soaring fuel prices, a housing market slump, and the job outsourcing. Is the situation really as wretched as popular thought carries on? It would seem so, if you observe how resolutely the Federal Reserve is continually interfering with our free market, in an effort to fix these "wrongs."
Let's throw personal responsibility out the window while we're at it. The Fed's monetary policy has now created the notion that whenever investors take on too big of a risk and tank, their pals at the Federal Reserve will bail them out. Many of the problems with the housing market slump came from defaulted mortgages: Defaulted mortgages are not an effect of a "bad" economy, but more specifically of its monetary policies.
The Federal Reserve decreased the interest rate two times this past summer to encourage banks and other federal institutions to borrow from the Federal Bank, in order that they could remain solvent. In recent years, these financial institutions invested in sub-prime mortgage loans to many unworthy candidates.
For example, two loans would be provided on individual properties. The first loan would be given at 80 percent of the property's value with the second at 20 percent of the property's value. This allowed homebuyers to purchase with zero down payments. When interest rates rose and home values fell, mortgagors could not afford to keep up with the payments, and also could not sell their property. Foreclosures rose drastically.
Risk is a part of business; but it is not the duty of taxpayers (while the Fed is using our tax dollars!) to help private investors. The financial institutions knew that they were engaging in risky business, which sometimes pays off with a high reward. In this case, with losses mounting, the Federal Reserve came to the rescue. But do taxpayers share in the profits of these institutions?
Why, then, does the taxpayer share in the losses?
This monetary approach has rightly been called a moral hazard by many. Monetary policy should not be conducted as insurance for ill-advised financial risks. I think we are all intelligent enough to refrain from loaning our buddy $1,000 of our tuition money to start a liquor store in his basement without knowing whether he has the resources to reimburse the loan if his entrepreneurial experiment should go awry.
That is, of course, unless we know mom and dad are good for another $1,000. The Federal Reserve has essentially reduced itself to acting like a parent who will bail their child out when he or she takes on extreme financial risks. Certainly, investors will take on more risky business without demanding higher returns if they know the Federal Reserve will be there to offset the risk.
The Federal Reserve is no longer part of the National Bank but is now Geico Car Insurance. The exuberant investors pay their deductible (the risky investment) but the premium (the loss) is mitigated. In this case it would be silly not to take the risk! Why not go play a hand of poker at Mystake Lake (a.k.a. Mystic Lake Casino) if you get $100 worth of chips for $10?
Let this be proof that we do not need government intervention: Let the markets rule. Certain aspects of our economy may be in downward cycle, but it is nothing to fret over.
Take the housing market for example. For over 10 years the housing market was rising at an unprecedented rate. At some point it had to turn.
But don't just take it from me-listen to what the experts have to say. TIME Magazine recently interviewed Sam Zell, Chicago investor and chairman of Equity Financial. Zell has a reputation for breathing life into mismanaged or distraught assets and a net worth of $6 billion.
When asked about the direction of the U.S. housing market, Zell responded: "The key to housing is the employment rate. As long as the employment stays basically full-say, under 5.5 percent-I see no major crisis in the housing market. Yes, we have a subprime issue. Yes, we have a lot of investors who got hung out, but I don't see the crisis the way the media portray it. And consequently, as long as employment stays strong, I don't see any issue as far as rental housing is concerned. ... But we're also building a lot less houses now. For many years, we averaged about 1.6 million houses a year. And then in the last four years, we went to 2.1 million. We're regressing to the mean. So there will be a period of indigestion but no crisis. No meltdown in the housing market. That's ridiculous."
Zell also had something to say about all of those investors who jumped in and bought huge inventories during the housing boom and are now faced with selling their homes in a down market. According to Zell, "All of those people were all about greed. And where is it written that thou art entitled to flip a profit? Not anywhere I know of. So I'm not very sympathetic. And the fact that all of these investors allowed their greed to overcome their fear-that's the way the world works."
What goes up must come down, but it does go back up. No matter what network news would like you to believe, America is the most productive and efficient country in the world.
Last year, alone, the U.S. accounted for more than 20 percent of the world's manufacturing value, while holding less than 5 percent of its population. China only holds 8 percent of the value with 22 percent of the population. Manufacturing companies have experienced layoffs; but could this, in fact, be due to increased methods of labor productivity? Factories indicated record output in 2006, while reporting landmark profits.
The problem is not how our economy functions or the people who allow our economy to function. It is meddling policy-makers who want to fix what isn't broken. In a free market society like ours, buyers and sellers will naturally correct the market in time.
Let those truly in charge (buyers and sellers) have time to make decisions. Our cumbersome, elitist government agencies should be eliminated. We are all capable of making our own decisions and ruling our own lives in spite of what Hillary, Reid and Pelosi want you to believe. This may mean taking a major loss in profits one year, but the next year, hopefully you'll be more cautious and recover.