Credit Crisis Solution

The media is popularizing the “doom and gloom” perspective of the economic situation. Almost daily, new negative economic indicators are presented.

The government is enacting multiple initiatives to contain the damage and restore hope, as the crisis is primarily perceived as lack of confidence. The need to contain the damage is necessary; however, I have a lot of criticism about the programs in enacted, and the potential political, monetary, and social consequences:

Political

1) China has expressed worries about their treasury holdings and with good reason. The government issues the Federal Reserve (a private institution) bonds (with a defined life) in exchange for federal notes (cash). A large part of the stimulus package is simply creation of money to create growth, and when you create the supply of money you affect the demand and value. China recently overtook Japan as the largest holder of United States debt, and the largest holders of our debt are Asian countries and Oil exporters. This creates the threat of political instability especially, as this recent trend continues to persist, and particularly if these bonds begin to expire without buyers (see inflation below)

2) With the primary focus on the a few smaller issues there is an evident danger of abuse to the system. Among the primary causes of the system failure are fraud, greed, abuse of power, and lack of accountability/oversight. A lot of these institutions are being bailed out without recourse, AIG is receiving their bonuses, and speculators are receiving payment on all their bets at the tax payer expense. In Japan, shamed CEO’s are given the option of public apology or suicide, not rewarded.

3) Many countries are blaming the crisis on the United States, which has some validity. A lot of the policies which led to the systematic collapse originated in the United States and were adopted by other countries, much of the lost wealth was invested in American companies, and our credit tendencies caught up with us. A loss in confidence of the US leads to a loss of influence, and being a country that looks out for our own interest, that’s potentially costly, especially with the additional threat of terrorism.

4) Unfunded liabilities.

Monetary

1) As mentioned above, money is a text book example of supply and demand, and with the increase in money supply, there is also the increase in inflation as money looses value. The scary part of this is that even without the stimulus packages; inflation has outpaced wages, and thus spending power. Loss of spending power mixed with high amounts of debt, and increasingly unfavorable spending habits, creates a scary scenario. Think about the idea of hyperinflation if the fed continues to print (it would lead to reversion to the barter system as money would become useless).

2) Similar to the idea of inflation is the idea of interest rates. The credit crisis is lack of confidence of investors, leading to growth constraints. Interest rates are a direct reflection of risk, unsecured credit card debt carries high interest rates; conversely, benchmark government securities yield relatively low interest rates. If the confidence in these securities is jeopardized, then the interest rates will rise to attract investors, which will impact all other forms of debt. Inflation was out of control in the 1980’s arguably as a result of America dropping the gold standard, this led to runaway inflation, which was tamed by Paul Volker raising interest rates to unprecedented double figures, and contracting growth. Any increase in interest rates will surely further limit growth, but is inevitable.

3) The Federal Deposit Insurance Company (FDIC) was set up soon after the great depression to guarantee and encourage investments. Recently, the FDIC chair issued a warning of the funds dwindling. There’s no way the government would let this fail, but it illustrates the scope of the crisis.

4) Unfunded liabilities.

Social

1) All the potential disasters mentioned above leave the threat of social instability. As things are now, the homeless account for only a small portion of the population, if those numbers increase and basic needs are not met, catastrophe will ensue.

2) It’s happening around the world, the environment has taken a back seat to the economy, erasing progress, and creating a slippery slope.

3) The dispersion of wealth between the rich and poor is astounding, and those in power know each other in power and are able to sustain their thrown. The middle class is suffering as a result and even being lost. My brothers are facing steep increases in higher education costs exacerbated by interest rates double that of only a few years ago. This challenges the “American Dream,” as less people are able to afford higher education, and are never meet their potential, slowing the growth engine of the country.

4) Unfunded liabilities.

Unfunded liabilities- the world has faced an astounding loss of wealth in a short period, those most affected include the ready to retire. Social programs in the US include medicade/medicare and social security for which retirees are the recipients, the idea of these programs, and retirement is relatively new. The political, monetary, and social impacts are potentially unimaginable, especially with the loss of wealth and political consequences of initiatives to tame these beasts. The Concord Coalition , and government accountability office have produced facts about the looming crisis which I would encourage the reader to view.