If you want to know someone’s political ideology, just ask him or her why we are in this economic mess. A conservative will be happy to complain about President Obama and his liberal, Democratic buddies. Because of these liberals, the economy is being held back by excessive taxes, regulations, and public debt. People are spooked both by the situation at the moment and by the future impact of health care reform, financial regulation, and a potential “cap and trade” energy policy. Consumers are afraid to spend, and private industry is nervous about investing in an unpredictable environment with a likely future of complicated, burdensome, government rules.
Those liberal Democrats, of course, tell a different story. They emphasize that President Obama inherited a mess left over by the previous administration that has no simple, quick fix. Years of lax regulation and shortsighted tax policies that favored the rich led to a financial implosion, massive public debt, and an average American consumer with limited purchasing power. Immediately upon entering office, the President was compelled to propose, create or inherit bank bailouts, a stimulus package, new financial regulations, and long overdue reforms of health care and energy policy. These drastic, necessary responses to a crisis have made it easy for Republicans to attack him as a promoter of big government. So for primarily political reasons, they say no to everything that he proposes. Clearly, it is unfair to blame a guy for not fixing an inherited problem when the opposition has done everything it can to block his proposed solutions.
There is something to be said for both of these perspectives. Personally, I am not very impressed by either party. Our nation clearly faces systemic political problems that cannot be blamed on any one party. Still, I also believe that we give either too much credit or blame to politicians for the economic health of the nation. To a large degree, the economy has a life of its own. Policies can matter, but political success is often a question of luck. You just hope that your political party is in charge when the economy is in an upswing and out of power during the bad times.
I am not an economist, but I am forced to discuss economic issues frequently during the course of my history classes. This has been particularly true during these last few, extraordinary years. I have tried as best I can to make sense out of this current situation, and from what I can gather, the recent financial crisis and lingering economic troubles are largely the result of the decisions of both private industry and of individual Americans. Banks and other financial institutions made a lot of bad loans, and many Americans were more than willing to take those loans to get into homes that they could in no way afford. Neither political party denies this obvious truth. Republicans, however, tend to blame the borrowers for being foolish enough to take on risky loans and the government for aggressively promoting home ownership. Democrats, on the other hand, blame financial institutions for “predatory lending” and the government for its poor regulation of banks and the real estate industry. Whatever the case, the behavior of the years preceding the crisis demonstrate a problem that runs deeper than some bad home loans.
For many years, some of the greatest minds – and many lesser ones - in America have been drawn to the financial sector. They have gone there to apply their considerable intelligence and technical expertise to two activities: speculation and financial engineering. Some have studied the stock market using complex mathematical and statistical models in an attempt to “buy low and sell high.” Others created complex financial products that they claimed could eliminate the risks from lending and investing. Pools of thousands of mortgages or other types of debt were compiled, and investors would theoretically get a consistent return from these “Mortgage Backed Securities” when borrowers made their payments. Since so many mortgages were lumped together, you could theoretically predict with some certainty how many borrowers were likely to default and therefore eliminate the risk. The problem was that the people originating the loans often did not care if the borrowers had any hope of paying. These brokers, after all, planned to quickly sell the loans to the institutions creating the pools. Home prices became inflated by all of the easy credit, housing speculation became increasingly common, the real estate industry became overgrown, and a false illusion of prosperity resulted from the “bubble,” leading people to spend beyond their actual means.
When many of these loans inevitably began to go bad, all sorts of banks and financial institutions were stuck with these financial instruments, and no one knew what they were worth because few understood them. This ultimately led to mass panic, the financial bailouts, a decline in home prices, and lingering economic hardship. Now I don’t know enough about trading in complex derivatives to give advice on what should be done in this area. My gut tells me that it should either be outlawed or heavily regulated, but what the hell do I know. I can say with some confidence, however, that there are probably more productive things that great minds can be doing than inventing complicated instruments or models for turning money into more money.
What if more money was invested into the creation of actual goods and services instead of pure speculation? What if great minds were focused on innovative products rather than revolutionary investment strategies? To my simplistic economic mind, it seems that our nation would be better off. We live in an increasingly competitive world, and the winning nations will not be the ones that have the best financial engineers who create short-term profits for their investors and themselves. Bankers play a vital role in our economy, but in the end, great innovators and entrepreneurs have played the most significant role in our nation’s prosperity. Americans either invented or played the dominant role in the development of the telephone, electric light, television, personal computer, internet, and countless other life-changing technologies that have produced massive wealth and job opportunities. So where will the next great innovations come from?
Right now, banks and many private companies are sitting on an enormous amount of money. Some of this is the result of improvements in efficiency, productivity, and efforts to scale back the quantity of goods and risky behavior from the inflated, “bubble” years. Consumers are also keeping their wallets shut somewhat due to fears about the uncertain future. In the end, productive investment from the private sector is the key to getting us out of the hole. The government is strapped, and it has historically shown little capacity to efficiently produce innovative goods and services that the public demands. If anything, politicians should be thinking of creative ideas for encouraging investment into the development of innovative products and ideas. When jobs in industries with long-term viability are created, then consumers will once again have money to spend. The trick is convincing banks and companies that it is time to start lending, investing, and expanding once again.
