Posted by
DecoNservAtiVE on Thursday, October 23, 2008 1:59:57 PM
Barack Obama and John McCain with help from the media and "economists" have turned the subject of the economy into a concept that many Americans believe is "above their pay grade". This could not be further from the truth. While macroeconomics has become an increasingly distorted and unnecessarily difficult subject to learn and keep up with, the fundamentals of our economy have strong roots. The concepts that make the American economy work are rooted in logic as opposed to the shifting ideals of Socialist economic principles. The basics of "Econ 101" should be familiar to the majority of Americans who have atleast attended a semester of college. They start with the simple pattern of supply and demand. Supply of course refers to the amount of an item available for ditribution and demand refers to the public desire for that item. A larger supply of a product in relation to its demand drives down prices and a smaller supply of a product in relation to its demand drives up the price. As demand goes up, so in turn does the price. So if I have 500 widgets and I have a demand of 500 customers I know exactly what my product is worth based on my costs of production and desired profit levels. If I have 500 widgets and 1000 customers, I know that the widgets are worth more and therefore my price goes up. This is considered a fair increase in profit margin because the demand now outweighs the supply. If I have 500 widgets and only 250 customers, I know that demand for my product is low and therefore I must drop the price to compete. Competition does complicate the matter a bit adding in the variables of consumer choice, variations on original prducts, improvements and market share. Even that element doesn't put the subject of economics out of the reach of even the most numb high school freshman. Anyone who has ever bought anything can tell you the basic law of supply and demand and even work in competition. So why does it seem so complicated on a national economic level? Because macroeconomists make a living by overcomplicating things. I'm horrible at math, if I look at en equation that is move complicated than 5 + X = 10 my eyes start to shake and i get a headache but even I can understand the nations economy.
The U.S. economy is based on the capitalist system. Capitalism at its core is a market based approach. It allows the greatest freedom for consumers and businesses alike and in a true capitalist system does not require or allow government intervention. In a true capitalist system, the checks and balances on businesses to ensure that they do not abuse customers come from the consumers themselves. Capitalism breeds competition and competition necessarily provides choice to consumers which forces businesses to conduct themselves honorably or risk losing market share. This is called a market correction and it is an inherent balance within the capitalist market. By contrast, Socialist systems, such as the Communist systems prevalent in China and Russia allow the governments complete control over the markets. In this type of system, companies are either entirely owned by the government, partially owned or can be seized. This provides the ruling party with the power to influence the markets in any direction they feel benefits them, and does not provide comsumers with choices. The American Capitalist system has in place some checks and balances that go above and beyond consumers. In the American system, the government provides oversight to the system. This oversight has been perverted over the years by socialist/marxist policies intended to give the U.S. government more power over the market, but at its core it does have merit. In a pure Capitalist market, the one problem that can exist is collusion. When two or more competitors in a particular market come together and make a deal to share markets and work together to defraud the public by artificially driving up costs, you see collusion at its core. An example of collusion is OPEC. In the case of OPEC, you have socialist nations interacting with a capitalist world market. These nations joined together to form an alliance, share markets and pool resources as well as artificaially influence the price of oil. We've all seen how this type of collusion can be harmful without a powerful oversight and how this eliminates competition and defrauds the public. Early in the creation or our nations economy, the capitalist model was altered to allow government, on behalf of the people, the ability to prosecute businesses who engage in harmful acts or collude with others to defraud the people. This role of oversight was meant to be only that, oversight. What is oversight? The government should be keeping a sharp eye on the business practices of businesses, randomly inspecting records and listening to consumer concerns. They should be paying attention to the basics of economics and ensuring that no injustices are occuring that the market is not correcting itself. They should be watching for pockets of collusion and stepping in when companies take advantage of consumers. You may be asking, "Well isn't that what they are doing now with the bailouts?" The answer is NO! They're perverting these authorities and are actually injecting socialism into the system. The government is now purchasing stake in companies, completely taking over companies, and becoming an active invester in the markets. Remember the examples of Russia and China? In countries like those, the market is allowed to work only until the business proves profitable. At that point, the government steps in and takes over the company. Sometimes the process is gradual, with the government purchasing stake (stock) in the company and then eventually taking over a majority and finally the whole company. Other times it is done in one fel swoop with the government seizing the entire company in one shot. Sound familiar? That's what the government has done with with Fannie and Freddie. These entities actually go a step further, they were created by the government, they're called Government Sponsored Enterprises (GSE's), and the CEO's were all but appointed by the government. The government has also purchased stake in AIG and a number of other insurance and financial institutions under the guise of "bailing them out". They've also began purchasing in effect, the homes and deeds to businesses of Americans who were granted risky loans by the GSE's. This is part of the reason why the recent bailout packages were rejected by most Americans. With our economic system, the solution to such problems as we face today are much simpler. Instead of Socializing the financial institutions, the government should have done what it claimed to be doing and infused the market with capital and allow the market to correct itself. Yes, it's true that more than a few of these financial companies got themselves in hot water but they should have been allowed to fail. In the financial markets, the assets would have been sold off and any cash would have been insured by the government, another check that the American Capitalist system has added. Let's also not forget that the largest single cause of the current turmoil is risky home loans granted to people who did not have the ability to keep up with the payments, sponsored and MANDATED by the U.S. Goverment through Fannie Mae and Freddie Mac. How could they have infused the markets better? First, inject private capital into the market by eliminating the capital gains tax for a period of no less than 12 months and no more than 36 months. This would provide investors with more flexibility and more money to put into new and existing businesses and help to add liguidity tot he market. Second, reduce corporate and income taxes to a flat 15%-20% for the same period. This would allow consumers more cash on hand and allow businesses more profits to reinvest as capital. A move like this increases consumer confidence in the markets and helps businesses deal with tough economic times. The third step is to repeal the mark to market accounting rules which substantially diminished the real value of assets and also to repeal the Sarbannes-Oxley bill which has failed to live up to its intentions to provide oversight where it was necessary. In place of these procedures, the market must be allowed to determine the value of assets/securities on its own with no government intervention and also new government oversight regulations must be implemented to ensure that the proper oversight is provided where necessary. While corporations like Alcoa, the big three automakers, Reynolds Metals and Kraft Foods are subject to SOX testing, GSE's like Fannie and Freddie were able to slip under the radar as were many other financial institutions. Many of the SOX testing standards create unnecessary costs, and cause more problems than the solve but, there are some standards within the SOX testing standards which must be monitored to ensure stability. Finally, the government should not have purchased AIG, seized Fannie and Freddie or taken a stake in financial institution by purchasing troubled assets. Instead, the government should have dissolved their GSE's auctioned the assets they held and offered incentives to companies who purchased those risky loans. They should have allowed the AIG crisis to play out fully instead of attacking the problem with a buyout. The most likely scenario is that the company would have been absorbed into another insurance company (like Progressive) who does not engage in the excesses that AIG does. Another avenue of approach would have been for the government to insure AIG assets for the short term, allowing the company to fail without tanking the assets. The government would then have to have strict timelines to get rid of the insured assets and distribute them back into the market. Finally, on the subject of the "troubled assets", repeal of the mark to market accounting rules would drastically change the value of these currently "worthless" assets. It would also keep the assets in the market and what that does is keep what's called "real property" in the system that can be used as collateral. Before closing, we should also touch on something else that has been floated around to scare people away from investigating the economy. "Commercial paper" is nothing more than a trust relationship between businesses and the banks that lend to them. Chances are if you own a small to medium sized business and do business at a local bank who holds few if any of these "troubled assets", you've had little to no trouble borrowing against the value of your business to carry on as usual with payroll and normal business operations. In the case of large corporations dealing with larger banks, many on the international scene and holding large amounts of "troubled assets", more is being asked of businesses to convince the banks that they are credit worthy. If the steps above were taken instead of the Socialist panic that ensued in the recent weeks, we would be seeing much better circumstances than we see now. There would be much less instability and much more liquidity in the market.
In closing, we have allowed "intellectuals" to cloud our view of reality and cloak the simplicity of the economy in equations and extra syllabals. The fact is that the average American can understand the economy, Barack Obama, John McCain and Barney Frank aren't any smarter than us, in fact, they appear to be dumber than we are. They don't even understand that dealing with problems at a level as close to the core as possible will produce the best results. Instead they believe that reinventing the entire economy is the best path to follow in order to get out of this mess. I've got a solution, bring congress together, and let's have them all attend an "Econ 101" class, taxpayer funded of course. I'd rather put out the few hundred thousand dollars that would cost then another 700 billion dollars next time these clowns decide to "fix the economy".