In Obama’s Opening Salvo, Peter Schiff ofÂ Euro Pacific CapitalÂ discusses the misperceptions of President Obama and Treasury Secretary Tim Geitner in regards to the handling of the current economic crisis.
In the worldview of Geithner and like-minded economists, credit, rather than savings, is the central figure in the economic equation. Therefore, he sees anything that eases the process of lending to be an effective economic policy. With such a view in mind, the centerpiece of Geithner’s plan is the commitment of up to $1 trillion to revive the collapsed market for securitized debt. In the lead up to the Crash of 2008 securitization, more than anything else, permitted Americans to borrow more than they had ever borrowed before.
Prematurely unfreezing the credit markets through forced lending with newly printed dollars will only act as a temporary band-aid. Our outlandish spending got us into this mess and spending even more to fix it just doesn’t seem like a feasible long-term solution. Perhaps we will see a bounce in consumer spending if credit is released into the free market, but how long will this last? If we are not producing anything, only consuming, the manufactured credit will simply run out and we will find ourselves back in the same situation in a few months, perhaps years.
Credit, whether securitized or not, cannot be created out of thin air. It only comes into existence though savings, which must be preceded by under-consumption. Since savings are scarce, any government guarantees toward consumer credit merely crowd out credit that might otherwise have been available to business. During the previous decade too much credit was extended to consumers and not enough to producers (securitization focused almost exclusively on consumer debt). The market is trying to correct this misallocation, but government policy is standing in the way. When consumers borrow and spend, society gains nothing. When producers borrow and invest, our capital stock is improved, and we all benefit from the increased productivity.
The free market is trying to correct these problems naturally, but continued intervention is keeping the bust cycle from playing out. We need a painful market correction, but those in Congress and the Executive branch seem to think that they can fix this through more of the same monetary and fiscal policies that got us into this mess.
To restore prosperity, credit (derived from savings rather than a printing press) must flow to producers. Greater liquidity for business will lead to legitimate job creation, increased production, and rising living standards. By further encumbering the economy with burdensome regulation, and by transferring business decisions to vote-seeking politicians who will bail out the irresponsible, reward failure and punish success, the government will create a society destined for misery.
It’s time America started producing something again. Even before the great depression, we actually produced and exported goods. Now, we produce almost nothing. Our entire economy is a service economy, exporting nothing of value to the rest of the world. We need more production right here at home. When we become the exporters, we become the savers. the rest of the world become debtors and we can turn the tables on this crisis.