Panic! at the Banks!

The world is so different now than it was when I last posted on this blog. Large firms, insurance companies and banks have folded or have been bailed out. A $700 billion bailout package was passed by Congress (won't be implemented for a while though) . Phrases like "bailout", "Wall Street to Main Street", "PANIC!"and "Depression" are seemingly interwoven into every newscast I watch. More recently Wall Street has spiraled out of control and pretty much brought the entire world with it. Unemployment's creeping up, energy prices are through the roof and - even though the government says it's not the case - inflation is going up (heck, I feel it in my wallet, how can they say it's not a problem!) These are definitely trying times. This scenario seems to be a Perfect Storm of sorts to bring down our country's economic and foreign relations power.

Coincidentally, all of this is going down as we get ready to select our next president. Politics and the economy are going to definitely go hand-in-hand in this election race but I find it disconcerting how each candidate promises to cut taxes and cut spending, because I personally think that's the wrong way to handle the economic crisis that we're in. Let me tell you something, the DEFICIT is killing us! It's devaluing our dollar, increasing our dependence on foreign countries and weakening our ability to conduct diplomacy. Most importantly, it's taking away real wealth from the average American household. In recent history, the government's been cutting taxes and banking on the hope that these cuts would spur enough growth to eventually cover the deficit caused by the cuts. Then they cut spending to make it look like they're doing all they can do to save us - the regular Joe Six-Packs of the country - money. But the government is the biggest spender in the country and I think it needs to spend money to spur growth in a New Deal-esque way. You need to spend money to make money right? Spend money on our infrastructure, on alternative energy sources for the short term and the long term, on services that improve the quality of life (health care) and build a stronger, more competitive workforce (education), etc. All of this has to be paid for in some way. Tax us fairly so the rich don't get richer through tax loops; widening the gap further between the middle and upper class. I personally do pay a lot in taxes but wouldn't mind the tax burden if it meant that I would be getting grade-A service in return.

So let's talk more on the topic of services provided by the government. In light of the current financial sector meltdown, I think that the government should provide oversight over and regulation of the various sectors of our economy. Many argue that it's sacrilegious to our capitalistic foundation to grant government so much power over firms and businesses. Hell they're using the bailout package to essentially buy a stake in these companies! A colleague of mine states that so much regulation would put a stranglehold on innovation and the creative means by which businesses generate money. He argues that no one had a problem with these companies when they were making money during a boom and tax revenue was coming in. This is true. It's easy to turn a blind eye to situations when the good times are rolling, but that doesn't necessarily mean that when everything heads south we shouldn't take a step back, evaluate where things went wrong and how to prevent them in the future.

Everyone is scared about where this economy is heading. Wall Street is scared about the future and the markets have really plummeted in the last week. When the Great Depression hit, it was the lack of movement of money which really made things worse and fed the panic. In order to prevent that scenario, our Congress passed a $700 billion bailout package to ensure liquidity. However, even after they passed the bailout package the markets continued to plunge. So why are investors still hesitant about the economy? Well, one of the reasons is that although the amount of money was agreed upon, the actual implementation will take a few weeks and possibly months to feel the impact. But I think that the traders on Wall Street need more assurance. What sort of regulations will be put in place to ensure that this doesn't happen again? Heck, what the hell are they even going to regulate? Derivatives? In speaking with my cousin, it doesn't seem like derivatives are all that bad if used properly. It seems like it was the underlying contracts that were risky. Regardless, it's Congress's and their subcommittees' jobs to figure this out. And I think that eventually a set of checks and balances will restore confidence back in the market.

Additionally, the government should set up a "bubble watch" committee which would keep an eye on bubbles in various sectors report them to Congress once a quarter. It's not hard to see that there's a bubble forming and once Congress is notified, steps can be taken to differentiate a speculative bubble from a genuine boom. This ability to nip a bubble in the bud may also restore confidence in the stability of our economy.

I recently came across transcripts of FDR's fireside chats online. He held these chats to reassure the United States' citizens during the Depression and explain to them in layman's terms what the government was doing to restore the economy and their reasons for taking those steps. I wish the next president holds the modern day equivalent of these fireside chats. .