By Michelle Seitz

I’m sure I’m not the only taxpayer frustrated by Washington’s generosity to irresponsible, politically connected corporations. We hear that the credit markets are frozen. Without federal dollars, America would see a domino effect of banks failing one after the other. If you believe this, I have some land I’d like to sell you. Look through your “junk mail,” both snail and online, and see how many invites you receive for credit. Take a stroll to your local car dealership this weekend and see how quickly they’ll get you financed. While it may be true that people who have less than appealing credit or are overextended may not be getting offers, but is that a bad thing? Aren’t reckless loans what got us here in the first place? Isn’t it natural for banks to hold back on lending in harsh economic times? What is the demand for borrowing when people are afraid of losing their jobs?

President Bush’s $168 billion economic stimulus plan in February of this year was supposed to give the economy the boost it needed. Then, along came Bear Stearns. The federal government extended a discounted loan to JP Morgan Chase to entice them to buy Bear’s troubled liabilities. Case closed – economy saved…hardly. In October, the market began to hemorrhage. State governments are now asking for federal dollars along with the troubled auto industry. President Bush addressed the nation assuring us that the federal government would rescue the falling economy. The government being the rescuer is the equivalent of a small raft being thrown to someone drowning in the ocean in the middle of a hurricane, when the one throwing the raft was the cause of the storm!

The federal government now has plans to take stakes in nine of America’s top financial institutions and equity investments in potentially thousands of other banks. One month later, the DOW continues to plunge, consumer confidence is in the tank and the threat of more foreclosures still exists. The threat of a global recession is eminent. What does our President-elect say? More economic stimulus is needed! Why not, as it has worked so well thus far. Don’t forget; he was hired to fix the economy!

One only needs to take a look at history to see how well government intervention works. Did President Hoover’s Reconstruction Finance Corporation of 1931 and 1932 end the Great Depression? Hoover gave federal loans to politically connected companies much like the Paulson/Bush plan. When President Roosevelt took over, he invested heavily in the country’s infrastructure and took the Keynesian approach. Both of these approaches turned a bad recession into the Great Depression and further prolonged misery.

Critics of capitalism and a laissez-faire approach fail to realize that economic downturns are part of the overall economic cycle. Recessions do not mean that capitalism has failed. That also doesn't mean that government oversight is not needed; but there is a difference between proper oversight and intervention. The problem with government intervention is that it prolongs the downturn and creates new problems in the future. Fannie Mae and Freddie Mac were the outgrowth of “The New Deal” along with the waves of entitlement programs that the government is currently having a difficult time funding.

The Bush administration wasn’t interested in bailing out the “dot com” companies at the beginning of this decade. Is the tech sector dead as a result? America had an 8-month recession with a decent recovery. While the credit crisis is far more severe, over-reaction can make a bad situation worse. The federal government has already spent over $1 trillion to try and stop the bleeding. The new administration plans on spending more and possibly a move to bail out the ailing auto industry. As it stands, the federal deficit will exceed $1 trillion next year. The potential effects these actions will have on the value of our dollar and impending inflation, one has to ask if we are pouring water into a leaky bucket and what the opportunity cost will be from allocating an incredible amount of resources to banks, individual states and companies that are poorly run.

By Michelle Seitz

One of the most difficult things to hear during the Presidential campaigns was the continued bashing of oil speculation. We elect officials to represent us in Washington and carry out the people’s business, yet most do not have even a beginner’s grasp of how our markets work. I don’t know which was worse during the campaign: Obama’s instance that high oil prices were due to the war in Iraq coupled with investor greed, or McCain’s populist pandering that illustrated his ignorance on the topic as well.

In order to understand the truth behind oil speculation, we must first understand a very simple concept of economics: supply and demand’s effect on prices. Speculation does not just begin on a whim. In other words, investors don’t dump investments in other sectors to flock to the commodity market as Paul Krugman would like you to believe. Increased demand is what drives oil speculation. Globalization has caused global poverty to decline rapidly this decade. In fact, since 2002, the world economy has grown 4.6% which happens to be the highest sustained rate since the 1960’s according to Michael Mussa of the Peterson Institute.(1) When economies prosper, an increased demand for oil is the result.

Now that we have established the motive for speculation, the process must be explained. Speculation is not greed driven. It’s a HEDGE against future price increases. If an investor buys oil futures, that person is betting on the fact that oil prices are going to continue to rise. The contract locks them into today’s prices. However, if one person buys a futures contract that means someone else is selling it. The seller has different expectations than the buyer. The seller believes that prices will DECLINE in the future. In addition, the person bidding up and buying oil futures must then turn around and sell the oil later. This means that the more people’s bidding drives up the prices, the greater prices will FALL in the future. The economic growth the world has enjoyed since 2002 has now come to a halt with the global credit crisis. This means that demand for oil is no longer as strong as it was before. As a result, crude oil is currently trading in the low $60 range as opposed to the $140 range this past summer.

Critics of speculation argue that speculation restricts supply. This statement is false. If a person buys an oil contract now to lock in today’s prices, they cannot sit and hold the oil off the market. They have two options: 1) take delivery of the oil or 2) sell the contract to another investor. In any event, when the contract expires, there is no net effect on oil supply.

Think of speculation as an insurance policy. If you own a company whose profitability is severely hurt by high oil prices, it’s in your best interest to lock in today’s price. If you are correct and the price of oil continues to rise, your business can survive and your employees whose livelihood depends on the success of your business will thank you. If you are wrong and prices drop, you will lose money; however you are still in business and can recover as opposed to shutting your doors had the opposite happened.

Should they not be allowed to do this? Are critics saying that business can’t hedge to survive? What’s the alternative? Should companies close their doors, lay off workers and be deprived of capital to grow? Who does that hurt?

The bottom line is this. If speculation was driven out of pure greed, then we would have seen what we saw in early 2008 years ago. After all, if it’s solely greed driven, then these greedy speculators can drive up the price any time they wish. Remember that there are two sides to these contracts. The global credit crisis blindsided the market, and now people are seeing instant relief at the pump thanks to those greedy speculators who are now recovering from losses.

(1) Samuelson, Robert J. “Let’s Shoot the Speculators!” Newsweek (July 2008) Online.

Change we can believe in? For those who believed that “change” was coming to Washington, the details of Obama’s economic stimulus plan will be very disappointing. It turns out that “Obamanomics” is nothing more than a continuance of the failed economic policies of the past. What a surprise! Does the President-elect know that the change from “tax and spend” to “tax cut and spend” has been the type of “change” that the Bush Administration enacted? All throughout the campaign, Obama pledged not to continue the “failed policies of George W. Bush.” Now, he’s stealing a page right out of Bush’s fiscal policy. Let’s go through the details…

We’ll begin with the tax proposals. Obama’s plan includes the following: On the individual side, he proposes a $500 individual tax credit ($1,000 for couples). On the business side, the proposal consists of an extension of the Net Operating Loss (NOL) carryback feature to 5 years (currently 2 years), tax credits to businesses that create jobs or avoid layoffs, increasing the amount that allows small businesses to write off a wide range of expenditures up to $250,000 (currently $175,000) and doubling the renewable energy tax credit.

Fiscal conservatives understand that tax cuts only work when they are coupled with spending restraints – not when they are used as an inducement to win bipartisan support. Speaking of inducement; when the tax code is used to encourage behavior, the result is never what was intended.

The problem with Obama’s individual tax credits is 1) checks of this nature were part of the Bush plan in early 2008, which failed to “stimulate” the economy; and 2) if this credit is made a permanent part of the tax code, many of the recipients are people who already have no federal income tax liability which basically makes it a form of welfare.

On the business side, there is a catch to the NOL carryback feature. Write-offs are retroactive to expenditures made as of January 1, 2009. In other words, businesses have to invest the money in order to receive the credit. The problem with giving tax credits to businesses that hire or avoid layoffs is that businesses who were already planning on hiring will be the only ones to benefit from the credit. Troubled businesses that are forced to let workers go will not be saved by a small tax credit. Chalk this up to Obama’s lack of private sector experience. Apparently, he hasn’t looked into the costs of TOTAL compensation for a worker.

Many of these tax credits are nothing more than extensions of the credits already enacted by the Bush Administration, yet we were led to believe that John McCain was Bush’s third term! In all seriousness, it is most unfortunate that the Obama Administration will not play the card that the Bush Administration missed – addressing the fact that the United States has the SECOND HIGHEST corporate income tax rate in the world. Instead of playing games with tax credits that have ridiculous stipulations, reducing the corporate income tax rate would bring relief to ALL sectors of business while simultaneously encouraging business to come back to the United States. More businesses in the United States leads to job opportunities and will curtail jobs being lost to tax-friendly overseas environments. In addition, businesses would have fresh capital to grow and expand.

Moving on to the spending side of this turkey….

Most of the spending in Obama’s plan is nothing more than welfare to individual states. Up to $200 billion is being proposed to expand the federal share of Medicaid which makes one wonder exactly how that will stimulate the economy. A majority of the remainder will be used to spur the growth of federal infrastructure spending. When was the last time infrastructure spending has pulled the economy out of recession? Another problem with infrastructure spending is that the money is rarely spent on what it was intended. When money of this nature is allocated to states, it’s time for politicians to become famous. It’s time for a new community center or a face lift for a school. There is no political publicity in road and bridge repair. Besides, if they actually were fixed, then it removes politicians’ ability to complain that there is a lack of funding! Lastly, infrastructure spending does not happen immediately as there are numerous federal mandates (government red tape) that require strict compliance. It is very likely that the economy could be in an inflationary expansion period by the time the spending proposals take effect.

In short, the Obama plan grossly misses the mark. In addition, the $800 billion price tag is abhorrently understated. Obama’s plan will end up well over the $1 trillion mark if Congress approves. Reckless government spending at time where our national debt is creeping up to 70 percent of our gross domestic product can make the last bout of inflation look mild. Let's not forget that "crisis" is a friend of the state. The scare tactics being used as a means to inject billions of dollars of "artificial" money into the economy will only pave the road for bigger problems in the future.

By MIKE PORTER

We hear over and over again how today's economy is the next "Great Depression.” Nancy Pelosi and President elect Barack Obama continue to call for an economic stimulus package to save America from an economic collapse. President elect Obama addressed the nation on January 8th claiming this crisis could "linger for years," and only the government can solve an economic crisis of this magnitude. Today's economic woes are a far cry from the 1930's Great Depression. However, the solution by our government remains the same. Can the federal government stimulate and save our economy? If it worked for The Great Depression, shouldn't it work for today's lagging economy? The truth is it did not work in the 1930's; and our government not only prolonged the Depression, but actually made the economy worse.

One great myth is that Herbert Hoover tried the classical approach by staying out, and the economy only became worse as a result. Nothing could be further from the truth. Herbert Hoover raised taxes on the top marginal rate as well as tariffs. The top marginal rate was raised from 24 to 63 percent. The tariff hike became known as the "Smoot Hawley Tariff" and was the largest tariff hike in U.S. history. Excessive tariffs severely impacted imports and exports. This robbed the American consumer of low cost imports. Consumers were forced to pay higher prices as a result of fewer products on the market to satisfy demand as well as higher labor costs of American made goods. Declining exports resulted in fewer overseas consumers purchasing their products which hurt businesses. It was Hoover who started the Reconstruction Finance Corporation (RFC). These actions prove that Hoover's approach was in no way indicative of laissez-faire economics. Hoover's policies failed and paved the way for Franklin Roosevelt's big government expansion called "The New Deal".

Franklin Roosevelt's (FDR) New Deal contained an expansion of existing Hoover policies. Three years after Hoover raised the top marginal rate, FDR raised the top marginal rate from 63 to 79 percent. Entrepreneurs were not going to make many investments in a lagging economy to give ¾ back to the government in the slight chance they would make a profit. FDR enacted Hoover's idea of the RFC which was supposed to give low rate loans to struggling companies. Our government decided which troubled companies would get the loans and which ones would not. What ended up happening in many cases was government bureaucrats gave low rate loans to their friends and supporters regardless of whether they were in need.

In addition to raising the top marginal rate, FDR also enacted tax increases on inheritance, corporate income, and excess profit taxes. Social Security excise taxes on payroll also affected business expansion and hiring. Excise taxes were levied on all kinds of different products. Alcohol, cigarettes, matches, candy, gum, margarine, fruit juice, soft drinks, cars, tires (including wheelchair tires), telephone calls, movie tickets, playing cards, electricity, and radios are examples of the products that had excise taxes put on them. These excise taxes were often paid by middle and lower income people - the very people The New Deal was supposed to help.

Perhaps the worst program was the "National Industrial Recovery Act" (NIRA). This program forced manufacturing companies to pay wages that were above market levels. This put an additional load on already struggling companies which made it more expensive to hire and keep employees. This also affected the consumer who was forced to pay higher prices for goods and services. The "Agricultural Adjustment Act" paid subsidies to farmers to produce fewer crops, which was supposed to raise the value of crops and save the farming industry. This resulted in fewer crops produced so less crop workers were hired. As a result, the struggling American had to pay higher prices for food. The "National Labor Relations Act" gave unions more power in workplaces. This led to countless strikes, less production, and fewer jobs. It has been estimated there were as many as 14 million strike days in 1936 and 28 million strike days in 1937.

A study was conducted by UCLA economists Harold Cole and Lee Ohanian in 2004 based on 1929 data provided by the Conference Board and the Bureau of Labor Statistics. The study concluded that the New Deal prolonged The Great Depression by about seven years. Prices across 19 industries averaged 23 percent higher while gross domestic product (GDP) was 27 percent below where it would have been without the New Deal. Cole and Ohanian estimate the NIRA account for 60 percent of the weak recovery. They claim without the NIRA the Depression would have ended in 1936 instead of 1943, only to be saved by World War II. After two years the US Supreme Court repealed the NIRA because it was considered unconstitutional. That did not stop the FDR administration from ignoring certain industries once protected by NIRA who continued to collude and price fix for another four years. Cole concluded the study by saying "…recovery would have been very rapid had the government not intervened."

The average unemployment rate in the 1930s was over 17 percent. It reached it's height in 1933 with a peak of almost 25 percent. One may ask how FDR was able to serve four terms if these policies were so bad. One theory, according to Jim Powell, author of the book "How Roosevelt and His New Deal Prolonged the Great Depression," could be due to the fact that most of the New Deal programs were spent in political swing states in the West and the East where incomes were 60 percent higher than in the South. The Southern states were among the poorest states in the union at the time and received the least amount of money for New Deal programs. One can conclude that it appeared though FDR may have bought his four terms in office by distributing more Federal dollars where it would most benefit his political career.

FDR is continuously touted as the model for liberal fiscal policy, and we can clearly see the New Deal was an expensive and miserable failure. With the Democrats in full control today, we will certainly hear more about how the government has to get involved to deal with this economic crisis. This economy, while in a recession, does not come close to the problems we were facing in the 1930s. However, our government has only scratched the surface on how they can save us from ourselves and further deepen the current crisis. If our government does enough, it very well could create an economy that would be worse than anything we have ever seen before.

Sources:

http://www.businessandmedia.org/articles/2008/20081027150030.aspx

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx

http://www.cato.org/pub_display.php?pub_id=3357

http://www.ashbrook.org/publicat/guest/08/folsom/crisis.html

In September our great nation was faced with a financial crisis not seen since the 1930’s. In response to this financial crisis, President George W. Bush called for a bill to save our financial markets. On September 28, 2008 America passed the “Emergency Economic Stabilization Act of 2008”. This bill provides over 750 billion dollars of tax payer dollars to attempt to restore credit and regain confidence in a downward economy that has grown to epic and global proportions. In essence the bill will allow the federal government to buy into the financial system through the ownership of preferred stock. I firmly stand against this action and have concerns about the federal government buying ownership into the financial district.

First lets go over how all this happened. In a nutshell this all leads back to the "Community Reinvestment Act" which forced banks to comply with Fannie Mae and Freddie Mac by giving out loans to people regardless of whether or not they could pay for them. Fannie and Freddie, partly owned by the federal government, offered to back these bad loans if any of them were to foreclose. With the government backing these loans, banks felt they had nothing to lose since they had to comply with the federal mandates or face costly lawsuits. So banks got creative with how they issued loans (Arm, interest only, no money down, etc.). Fannie and Freddie continued to make money as long as home values increased and as long as more loans were issued. The more loans the more money Fannie and Freddie made. Fannie and Freddie then bundled these mortgage loans into "mortgage backed securities" and sold them as investments to other banks who bought them. Next came high oil prices and inflation started to rise. Interest rates went up and more people started to foreclose. With too many foreclosures at one time, Fannie and Freddie couldn't back these loans and the downward spiral continues to this day.

What happened was not the result of the free market or deregulation, as the left would have you believe. What happened had everything to do with the fact that a bad government policy failed. Fannie and Freddie removed an important element of capitalism…..the element of risk. When risk is removed there is no fear and therefore there can be no failure. Risk is an essential part of capitalism. The old saying “the higher the risk, the higher potential for return” still holds true today as it did hundreds of years ago. In this case there was no danger in giving out risky loans because banks were assured they would be backed by the government. For example, let’s say you and I go to a casino, and I force you to play the slot machines. Then I tell you not to worry because if you lose any money I will cover your losses. Are you going to behave differently in that casino if I tell you I am going to back your gambling that day? Of course you will, and our financial markets are no exception.

So what does our government do? They buyout Fannie and Freddie so they are completely owned by the federal government, and bailout our banks by buying shares of preferred stock as collateral. Our federal government failed us by trying to make everything fair instead of letting the market determine who can pay back a loan. In a normal market banks all take a reasonable amount of risky loans, but too many can jeopardize their business. The federal government failed to regulate Fannie and Freddie and failed to enforce the existing laws we already have in place. As a result the federal government now has complete ownership of Fannie and Freddie, as well as a substantial stake in our largest banks.

So what should our government have done? For starters our government had no business mandating companies to take bad loans in the first place. I would love to see everyone own a home, but as we have seen too many people owning houses they cannot afford can lead to a disaster. I would like to see the government dramatically change the “Community Reinvestment Act” and reduce the power Fannie and Freddie have in the marketplace. Next, I would like to see the government stay out and not offer any tax payer money to financial institutions. However, as I stated above our government broke capitalism so now our government believes they have to come in and fix it. I am against the government owning any shares in our financial sector. If it is decided that federal help is mandatory then I would rather they issued bonds or loans coupled with legislature that completely changed the way Fannie and Freddie operate.

As a free market capitalist I am weary whenever the government buys into the private sector to “help out”. Usually when the government gets involved with anything they cause more problems than they solve. When this is all over is our government going to sell those shares back and get out of the private sector? That remains to be seen, but I have my doubts. What voice is our government going to have now that the government has a direct steak in the financial world? What kind of new regulations are going to be put in place while they are partial owners? Is the government going to mandate how these companies invest their money? I don’t recall hearing GW Bush say a bad government policy had a hand in causing the financial crisis. As other industries fall on hard times as a result, is the government going to bail them all out? The fact is we do not have the money to subsidize the private sector, and our federal government shouldn’t be in the business of running it in the first place.

Sources:
http://online.wsj.com/article/SB122398468353632299.html
http://money.cnn.com/2008/09/28/news/economy/Sunday_talks_bailout/index.htm?cnn=yes
http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/09/28/franks_fingerprints_are_all_over_the_financial_fiasco/

Here are some quotes that may sound familiar to you:

"Unless we tax the oil companies, they will reap huge and undeserved windfall profits."

"When I proposed this tax I indicated that the revenues should be used for three basic purposes: one, to assist low-income households in bearing the burden of rapidly increasing energy costs; secondly, to improve the transit systems of our country, including not only rail but also buses and subways, and even the sharing of rides in other rubber-tired vehicles; and third, the development of alternative supplies of energy."

Do you recognize any of these quotes? Did you hear something similar during the 2008 campaign? In all actuality, these are quotes from former president Jimmy Carter around the time he enacted "The Crude Oil Windfall Profit Tax of 1980". That is correct; we have tried this before. A windfall profits tax on oil companies is not change; rather it represents a government policy that has already failed us.

For starters, "The Crude Oil Windfall Profit Tax" wasn’t exactly a windfall profits tax. It was an excise tax on domestic oil production based on the amount of oil a company produced. The more barrels of domestic oil they produced, the more they would pay in taxes. The average citizen was struggling with high energy prices at the same time oil companies were reaping huge profits. This was seen as unfair by Congress, President Carter, as well as the average citizen. Once the tax was enacted, the federal government would then reinvest this money in alternative energy supplies and inject the money back to other areas of the economy to help low income citizens deal with rising energy costs. After all why should these greedy oil companies keep this money when this money can be moved around to other people who need it more than they do? It only makes sense, right? This was a socialist concept supported by Jimmy Carter and the overwhelmingly Democratic controlled Congress.

It was estimated that the tax revenue from a windfall profits tax would exceed $320 billion during the years of 1980 and 1989. In reality, this tax brought closer to $80 billion in gross tax revenue. The net amount was actually much lower than this because the tax was deductible against corporate income. The final net amount was around $40 billion by the time this deduction was figured.

The graph below illustrates the projected tax revenue versus the actual tax revenue:




As the graph indicates, the realized tax revenue from a windfall profits tax never came close to the projected expectations. So what exactly were the results of "The Crude Oil Windfall Profits Tax;" and why were the results so disappointing? How could something that seemed so good turn out so bad?

According to the "Congressional Research Service,” the tax had actually decreased domestic production by 3 to 6 percent. Domestic production dropped by the oil companies to avoid having to pay extra money in taxes. As a result of drops in domestic production, America increased their dependence on foreign oil by 8 to 16 percent. The windfall profits tax actually lead to more oil imports instead of producing the oil domestically. In addition, like most government mandates, this tax was very difficult for the oil companies to comply with. At the same time, this was equally as burdensome for the IRS to collect. It’s no wonder why this tax didn't meet the target revenue. In today's world, the last thing we need is to increase our dependence on foreign oil.

According to the Tax Foundation, US Oil companies as of 2005 spent nearly $150 billion just to comply with existing federal income tax alone. The Tax Foundation also states that between the years of 1980 and 2005 oil companies paid nearly $2.2 trillion (adjusted for inflation) in taxes at both state and federal level. In addition, the price of gasoline has both state and federal taxes figured into the price at the pump, which you pay when you fill your gas tank. The Democrats back in 1977 as well as today do not understand that corporations cover their costs in the price of the product they sell. In this case the product is gasoline. Increasing taxes on any company is going to be passed off onto you, the consumer. In the end, it will mean higher gas prices at the pump. So why are we crossing this bridge again when we see the data clearly shows it has not worked before? Is this the change America is looking for?

The average profit from a gallon of gasoline is about 8 percent, which is way less than most other industries. When a corporation makes a profit, the company will keep a portion of this profit as "Retained Earnings”, which is money for the business to operate. This money will then be used to find more oil, find more alternative fuels, expand and hire more employees as well as improve the way they produce gasoline. In essence, oil companies showing a profit can actually lead to lower gas prices due to better equipment, production efficiencies, and oil exploration. Probably the most overlooked aspect of this is the fact that oil companies have provided millions of jobs and increases in wages during these prosperous times. Increasing their costs to do business will only force them to cut back on these expansions or even worse, leave the United States for a more favorable business environment. Today the global market is more competitive than ever, and America should be looking for ways to attract companies to stay in the United States.

Finally, the profits that are not kept in retained earnings are distributed to the shareholders. Who are these shareholders? Well if you own a 401k or a pension plan, the chances are you own shares of stock in an oil company. About 40 percent of all oil stock is owned by mutual and hedge funds. Does our government have the right to tell you that you do not have the right to a prosperous and happy retirement? Who is our government actually hurting if a windfall profits tax is enacted the way Nancy Pelosi, Harry Reid, and Barack Obama would like? The truth is they will be hurting everyone including the low income and middle class families they claim they to be assisting. In 1988, "The Crude Oil Windfall Profit Tax" was repealed by Ronald Reagan because it was actually harmful to our economy. Why would anyone consider revisiting this terrible mistake 20 years after it was repealed? This does not represent change, but a failure in history our government is about to repeat.

Sources:
http://www.taxfoundation.org/publications/show/1168.html

http://www.presidency.ucsb.edu/ws/index.php?pid=33214

http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/edf8de04e58e4b14852570ba0048848b?OpenDocument

http://money.cnn.com/2008/04/29/markets/thebuzz/index.htm

The government has been non-stop in rewarding irresponsibility. A recession is the perfect excuse for the government to spend trillions of dollars propping up politically connected institutions. Capitalism goes further and further down the drain as the government continues to buy ownership in failed financial institutions. There is no end in sight to reckless government spending as more and more “needy” institutions line up for some cash. Currently, the government has not drawn the line on bailouts. In fact, there are plans for another $500 billion in spending. With China (one of our biggest buyers of Treasury bonds) enacting an enormous stimulus package of its own to the tune of $586 billion, one has to wonder if they will sell their Treasury bonds to finance their own government spending. Investors have turned to the U.S. dollar during these turbulent times, which can induce China to sell. However, upon sale of said securities coupled with insane amounts of government spending, it is very likely that the U.S. dollar will suffer a worse fate than it did in 2007. Don’t get used to those low gas prices just yet…..

The government refuses to learn from history. Government-injected spending has always prolonged the agony and has paved the way for bigger and more costly problems in the future. Over the years, “funny money” has severely weakened consumer purchasing power. What ever happened to the days of buying cars for cash, and a $20,000 mortgage? Answer: the Fed, World Bank and the International Monetary Fund (IMF) bailouts. In addition, these institutions were only interested in protecting large commercial banks. After decades of protection, now they are too big to fail! There’s a reason why small banks are virtually non-existent in your local neighborhood.

The IMF has been bailing out entire countries since the 1940’s. From Mexico to Hungary, Iceland, Pakistan, Tanzania, South Korea, Ukraine … the list goes on. As a result, the world has all of this “funny money” floating around. Currencies are devalued, global inflation sets in; and nations are riddled with debt. With each “crisis,” the price tag for bailouts grows. The Fed dealt with million-dollar crises in the early part of the 20th century. Today, the Fed is dealing with trillion-dollar crises, and the more artificial money the Fed injects into the economy, the more costly bailouts will be in the future.

Some economists are predicting a global financial apocalypse. I don’t believe the future is that dismal, but something does need to change because there will be a point in time where the Fed, IMF and World Bank will no longer be able to supply money to crashing economic sectors and nations. That time is coming soon – possibly in the next 20 to 30 years.

What is the solution? It’s certainly not the government. Rather than treat the disease, the government treats the symptoms. The remedy starts with the consumer. In the coming months, our new President and government officials are going to tell you, the consumer, to SPEND SPEND SPEND! Help is on the way. People in lower-income brackets may even get another $600 check from the government to spend away in order to “boost” the economy. It worked wonders last time, didn’t it? My condolences to all who thought Obama wouldn’t continue Bush’s economic policies.

There IS a solution. Consumers must go on a credit diet. People must learn to exercise some fiscal discipline. The government won’t do it, but consumers can lead the way. People have always been the solution to our nation’s problems, and that will not change. Consumer contractions in spending will force the market to react. Short-term deflation will pale in comparison to the long-term problems that lie ahead if consumers do not force the government to change its economic policy.

For those who have read my columns for some time, there is one message that is constant: BAD ECONOMIC POLICY. You, the consumer, can reverse course by changing your household economic policy:

1) Minimize credit card debt with an ultimate goal of paying off everything that is charged on a monthly basis. All credit cards charge a higher rate of interest depending on the type of card and individual risk. It is impossible to forge ahead when minimum payments comprise a portion of your monthly expenses.

2) Don’t buy too much house! The mentality that a big house = wealthy cannot continue. A home is NOT an investment when you will repay 3 to 4 times what it is worth in mortgage interest alone. In addition, state governments have raised property taxes to the point where one is basically “renting” their house from the government. Owning a home is still the best option. After all, why pay the landlord’s taxes through rent and forego a tax deduction? However, the key is to own a smaller home and avoid a huge tax burden and mortgage.

3) Take advantage of easy-to-use software programs that help with budgeting. Do not live beyond your means. If you are borrowing money for the family vacation, something is severely wrong.

In summary, the consumer needs to kick their addiction to credit. The government will continue to feed into the problem by propping up failed institutions for appeasing the hunger for credit. The only way to reverse course is for the consumer to overcome their addiction. It is a fallacy to believe that the supply of “funny money” is endless. What’s next? Quadrillion dollar bailouts? The government may have killed capitalism, but it cannot destroy the will of the consumer to prosper by making smart credit decisions. Opportunity will always be out there even in the most precarious situations.