Sunday, March 15, 2009

Stimulus packages and what lies beneath...

The stimulus packages emanating from Washington as of late have triggered much debate between Keynesians who advocate government policy interventions and Friedmansians who espouse letting a free market be free. Free to rise unfettered, and free to crash without the government propping up any failing business entities. Stabilization policies however do require government intervention to stave off further potential damage. And so we have the tug of war going on in America right now between Obama's administration leaning towards Keynesianism while Republicans are howling for letting the AIGs of the world fall. (My take on it is frankly populist in nature: let them fall no matter the outcomes - sometimes it's better if the gangrene claims the leg)

In reality, the chance of such mishaps continuing to occur in bear markets are high if the fundamental financial architecture is not overhauled. International hot money flows, hedge fund oversight, and consumerism at its core need to be checked. While economists encourage consumerism as a key ingredient in economic growth and sustainability, this has led to "saving for a rainy day" being thrown to the wayside. Americans currently spend more money than they earn. How is that possible? By incurring debt. The money is not flowing from a vacuum. The country as a whole is saddled with debt, from the tiny consumer to the big Uncle Sam. This has serious repurcussions for future generations of Americans who will inherit massive levels of debt. China's treasury bill injections have been in excess of a trillion dollars and just recently the Chinese Premier (or another high level government official) did not mince words in warning the U.S. to not let the dollar devalue. China's increasing power in the world economy and its influence on America is unquestionable. How will you impose your will on a nation when that nation finances your lives?! Have you ever heard of a debtor swashbuckle his will with a creditor? Normally the debtor tries to avoid the creditor, if not take on a mentally subservient role.

My take on the stimulus package is that there's much showboating and a lot of pork barrel projects and very little focus on the fundamentals of 1) the financial system architecture 2) consumer behavior. And both are needed to stabilize the system in the long run and prevent future crises. Oh, and one more thing, cut out all dealings in 'interest' and the world will be much healthier economically....but that's for another blog.

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