I'm starting to develop a real fondness for the statesboroherald.com blogs.
Political philosophy, Sunday alcohol sales, various philanthropic causes — some contentious, some not, all fun to read (OK, most).
There was a blog a couple of weeks ago about a theoretical plan to lower interest rates, which called for local banks to lower their mortgage rates with the (again, theoretical) idea being that lending would be stimulated, which would stimulate the housing market, which would stimulate the local economy.
Having been to the Community Bank Symposium sponsored by GSU last week (see story this weekend), I can tell you that, even at current rates, local banks are struggling to maintain their profitability (aka spread). Recently reduced Federal rates have been a financial punch in the solar plexes for them.
But this is a typical Keynesian idea. Anytime a recession rolls around the Keynes faithful turn to two possible solutions: lowering interest rates or increasing government spending, primarily infrastructure.
Now, freezing/lowering interest rates is easy to debunk. Historically low interest rates, coupled with poor mortgage decisions by consumers, poor property value assessments and poor bundling of mortgages by investors, created the current real estate problem. By lowering interest rates, the Fed essentially encouraged more and more borrowing which in turn created an unnatural demand for housing and over-inflated prices — the bubble.
When HGTV has a show called "Flip That House," there are too many amateurs dabbling in real estate.
Try to pin the bubble on the mortgage lenders, but the fact remains they would not have sold those mortgages if rates hadn't been set artificially low by the Fed and if consumers weren't clamoring for the loans. The result: foreclosures, bad investments and upside-down mortgages.
Only a decline in real estate prices will right the ship.
Now, government spending on infrastructure. Fine idea, but how do you pay for it? Only two ways since government doesn’t produce anything: taxes and borrowing. It either takes money from the productive segment of society today or burdens the productive people of tomorrow.
Let me use this example. Say you’re in a wagon headed out west. As you reach your land, a terrible storm rises up and wipes out all your supplies. No tools, no money, no assets whatsoever. There's no government and no help. You're in a bad financial situation. After all, you’re broke.
All you have left is yourself, your land and your ability to work/produce.
In order to feed yourself, you go out and collect food from the land, build traps to catch small animals and make crude weapons to hunt larger ones. Might even fish a little.
Over time, you plant and grow enough food to begin trading with those around you for goods – a horse, perhaps, or a wagon.
Notice though, at no time did the government factor into this.
As you continue to prosper and trade for more long-term assets, you become more wealthy and more productive. The horse helps make plowing the field more efficient and the wagon carries more product to market.
Now, imagine if the government was demanding one-third of everything produced, no matter how small, because they will use the proceeds to pay for some “common good.” Doesn't that inhibit your growth and your ability to bring additional goods to market, which benefits all who come to buy?
"But we're going to build a road," say the Keynesians. "I live nowhere near that road," you respond.
So now your economic growth and the growth of other farmers is stifled, except maybe those who live on the road and happen to be friends with the very government officials who are working for the “common good.” A typical situation for government intervention — their actions benefit the few while costs are spread out across the many.
In order to spend money on infrastructure or create a government job, the government has to borrow the money, especially during a recession when tax revenues are down. Someone has to pay it back. Like I said, taxes today or taxes tomorrow. No other option.
But we currently have too much debt — $9 trillion or $30,000 for every American. That's why the dollar is falling against foreign currencies. They don't think we can pay off what we've already spent.
Imagine someone handed each member of your family had an additional $30,000 in debt. Would you take on even more debt in order to make yourself financially more stable? Even if interest rates were low? I don't think so.
Georgia AP and Georgia Press Award winning (well, third place) columnist Phil Boyum may be reached at (912) 489-9454.
Political philosophy, Sunday alcohol sales, various philanthropic causes — some contentious, some not, all fun to read (OK, most).
There was a blog a couple of weeks ago about a theoretical plan to lower interest rates, which called for local banks to lower their mortgage rates with the (again, theoretical) idea being that lending would be stimulated, which would stimulate the housing market, which would stimulate the local economy.
Having been to the Community Bank Symposium sponsored by GSU last week (see story this weekend), I can tell you that, even at current rates, local banks are struggling to maintain their profitability (aka spread). Recently reduced Federal rates have been a financial punch in the solar plexes for them.
But this is a typical Keynesian idea. Anytime a recession rolls around the Keynes faithful turn to two possible solutions: lowering interest rates or increasing government spending, primarily infrastructure.
Now, freezing/lowering interest rates is easy to debunk. Historically low interest rates, coupled with poor mortgage decisions by consumers, poor property value assessments and poor bundling of mortgages by investors, created the current real estate problem. By lowering interest rates, the Fed essentially encouraged more and more borrowing which in turn created an unnatural demand for housing and over-inflated prices — the bubble.
When HGTV has a show called "Flip That House," there are too many amateurs dabbling in real estate.
Try to pin the bubble on the mortgage lenders, but the fact remains they would not have sold those mortgages if rates hadn't been set artificially low by the Fed and if consumers weren't clamoring for the loans. The result: foreclosures, bad investments and upside-down mortgages.
Only a decline in real estate prices will right the ship.
Now, government spending on infrastructure. Fine idea, but how do you pay for it? Only two ways since government doesn’t produce anything: taxes and borrowing. It either takes money from the productive segment of society today or burdens the productive people of tomorrow.
Let me use this example. Say you’re in a wagon headed out west. As you reach your land, a terrible storm rises up and wipes out all your supplies. No tools, no money, no assets whatsoever. There's no government and no help. You're in a bad financial situation. After all, you’re broke.
All you have left is yourself, your land and your ability to work/produce.
In order to feed yourself, you go out and collect food from the land, build traps to catch small animals and make crude weapons to hunt larger ones. Might even fish a little.
Over time, you plant and grow enough food to begin trading with those around you for goods – a horse, perhaps, or a wagon.
Notice though, at no time did the government factor into this.
As you continue to prosper and trade for more long-term assets, you become more wealthy and more productive. The horse helps make plowing the field more efficient and the wagon carries more product to market.
Now, imagine if the government was demanding one-third of everything produced, no matter how small, because they will use the proceeds to pay for some “common good.” Doesn't that inhibit your growth and your ability to bring additional goods to market, which benefits all who come to buy?
"But we're going to build a road," say the Keynesians. "I live nowhere near that road," you respond.
So now your economic growth and the growth of other farmers is stifled, except maybe those who live on the road and happen to be friends with the very government officials who are working for the “common good.” A typical situation for government intervention — their actions benefit the few while costs are spread out across the many.
In order to spend money on infrastructure or create a government job, the government has to borrow the money, especially during a recession when tax revenues are down. Someone has to pay it back. Like I said, taxes today or taxes tomorrow. No other option.
But we currently have too much debt — $9 trillion or $30,000 for every American. That's why the dollar is falling against foreign currencies. They don't think we can pay off what we've already spent.
Imagine someone handed each member of your family had an additional $30,000 in debt. Would you take on even more debt in order to make yourself financially more stable? Even if interest rates were low? I don't think so.
Georgia AP and Georgia Press Award winning (well, third place) columnist Phil Boyum may be reached at (912) 489-9454.