The definition of insanity is doing the same thing over and over again and expecting different results. And by that definition, the entire Obama Administration and the Progressive movement have proven themselves quite insane. Keynesian Economics has a perfect track record: 100% failure. Worse, the Obama Administration has twisted and convoluted the Keynesian Economic model to fit their ideological social agenda which is far more radical than any previous attempt to make this failed theory work.
The recession has not ended. We are not in a recovery. What has happened is that the Obama Administration has dumped stimulus after stimulus into the economy using borrowed money and made claim that the temporary boost in the stimulated sectors of the economy was evidence of a recovery. The upticks have been nothing more than an artificially produced result of spending tax money borrowed from the future. And as soon as the stimulus spending ends, the uptick returns to negative growth. And worse, we have nothing to show but more debt.
Cash for Clunkers used borrowed money to stimulate the Auto Industry. As soon as the program ended, the sales fell below the level they were prior to the stimulus. And we have more debt.
First Time Home Buyers were rewarded for buying homes at higher than they should have been prices, and now many of those buyers are under water on their mortgages. Many have now gone into foreclosure and America is left with more debt.
Mortgage foreclosures were halted by the Obama Administration and the courts last October. Banks have been prevented from recovering losses, which further erodes the stability of banks. Now that foreclosures have resumed in a lot of cases, the temporary halt had a net effect simply delaying the inevitable and compressing the number of foreclosures into shorter time. The net result has flooded the housing market with a glut of inventory and forced falling housing prices to decline even more. And this has led to the current double dip recession in the housing market.
According to The Independent “The ailing US housing market passed a grim milestone in the first quarter of this year, posting a further deterioration that means the fall in house prices is now greater than that suffered during the Great Depression.”
What the Obama Administration has been trying (and failing) to do is akin to spinning multiple plates and trying to keep them all spinning to keep them from crashing down to the ground. But these plates, just like the economy, will not keep going without a tremendous and sustained effort. And the inevitable result will be the crash you are trying to avoid in the first place. With spinning plates, you just become tired after a while. But balancing an economy manually and artificially is expensive and makes the inevitable crash all the more violent.
The “bubble” in the housing market was created by extremely low interest rates making money readily available to buyers. While buying a home is the American Dream, too much of a good thing is never a good idea. And just for good measure, the Sub-Prime market exacerbated the problem by giving loans to people who really couldn’t reasonably be expected to pay the money back. With the help of Fannie Mae and Freddy Mac, these toxic loans were bundled together with more attractive investments into packages that could be easily traded. But as the loan defaults grew, banks were left holding a lot of really bad paper.
Enter the Federal Reserve! They bought up a lot of the toxic assets with borrowed or printed money. Some of the banks were bailed out by this, but the game had completely changed. Many of the “good” loans were on houses that had declined in value so much that people owed more than the house was worth.
The Federal Reserve and the Obama Administration noticed that banks were not lending, people were not really that interested in borrowing due to the uncertain economic conditions, and any hopes of a recovery were fading. Despite trillions of dollars pumped into the economy, in accordance with Keynesian Theory, the economy should be primed and growing. Yet it was not. One major flaw with the Keynesian Theory is that any spending stimulates the economy. But the truth is, when the government does the spending (stimulus) or provides the money for people to spend (“rebates”) it is simply taking money from other sources, or in the case of Obama, borrowing from the future. But his plan has failed and we are now in the future that Obama expected to be much better. He has moved money from one pocket to the other, and borrowed massive amounts of money. Yet the economy does not grow. This artificial stimulation creates an illusion of economic activity. But as soon as the injection of money stops, the activity subsides.
So, what is a good Keynesian to do? The stimulus only stimulated until the money ran out. It didn’t “prime” the economic pump. It did not become the perpetual motion machine they expected.
How can the Obama Administration get the economy going again? If we go into a double dip recession, or a Depression, the Democrats will defeated in the upcoming elections like never before. A bad economy in 2012 could see super majorities for Republicans at unstoppable levels, and a Republican in the White House. And nothing they are doing is working.
In a panic, The Fed decided to buy bank bonds by printing money, just to get the banks to start lending again. (Ok, they don’t really “print” the money. They just pretend it exists, which is probably worse.) They called it Quantitative Easing. It was nothing new. Japan had been using QE for years now, with absolutely no results except massive debts. But just because it has never worked, the Obama Administration expected different results this time. (Recall the definition of insanity.)
So, although it failed for Japan, The Federal Reserve dumped $1.7 Trillion into the desperate move. And did it work? Well, not exactly. Housing values continued to fall, foreclosures continued to rise and that stubborn unemployment number just refuses to budge. Worse, printing money, even virtual money, has a nasty side effect. Inflation. So, when QE1 was all done and there were no measurable effects, the only logical thing to do is try again and expect different results. At least that is the pattern for this administration. So, along comes QE2. Another $600 Billion and where did it put us? A second recession in the housing market and a sharp decline in the dollar, which is part of the reason oil is increasing in price.
QE2 will end on June 30, 2011 with the same result as QE1 and the Japanese attempt. Failure.
So what is next? At best, Quantitative Easing has had the same effect as a stimulus. As long as the money keeps flowing in, the economy bumps along, not really picking up, just limping down the shoulder. When QE2 ends, the economy will take a dip. Unemployment will start to go back up, as we are already seeing, and the economy will officially begin 2012 in a second recession, making a “Hope and Change” and “Yes we can” second term presidency for Obama a total impossibility.
There is no doubt in my mind that this president will order the Federal Reserve to do a third round of easing (read the insanity definition again). But this time, not expecting it will work, but hoping in desperation that the economy will just tread water and he can fool the people until November, 2012.
And then what?
More regulation, higher taxes on the rich, more social programs and exponentially growing debt?
We are in for a lot of economic pain. Obama’s policies have done nothing more than artificially keep the markets from bottoming out and self-correcting. The only way the economy recovers is to allow it to make the corrections Obama has prevented. Now, we must still take the fall and we come out with far more crushing debt than had we just allowed the markets to correct on their own.
Eventually, we have to let the plates stop spinning and then pick up the pieces and move on. It is proven beyond the shadow of doubt that Keynesian Economics will never work.