Those of us here in California have seen this movie, and it doesn't have a happy ending. When Governor Schwarzenegger came into office, the state government was 30 or so billion in the hole. Instead of cutting spending, we were told by the folks under the dome we would make a "one time fix." The state would borrow this huge sum of money by selling California bonds, and they promised to reign in the spending. Yea, right.
The Legislature didn't slow the growth of government spending, in fact, they actually increased spending every year since. The foundation was laid; spend more than you have, borrow from tomorrow what you can't pay for today, and congratulate yourself on your sound financial judgment.
This "one time" fix resembles the checks you receive in the mail from your credit card company. If you are behind on your bills and can't pay your credit card balances, all you do is sign this check and presto, you can pay off the credit cards. After all, the initial interest rate is 0% for the first 3 months.
This brings us to the first rule about holes. When you are in one, stop digging.
Instead of reviewing your spending, finding ways to spend smarter and better, you find a way to keep doing what you are doing, and then spend a little more. As we are learning this year, we can't keep borrowing indefinitely. California's bond rating has plummeted. Even if we can find people willing to buy our bonds, the state's credit rating is so poor, we will have to pay out much higher rates to sell these bonds. Like the example above, state government borrowed money to pay off the credit card bills, and then ran the credit card balances back up to the limit.
If California were a family, we would be getting that knock on the door from the sheriff being served with eviction papers.
On the national scene, we are seeing these same "fixes" by President Obama and the democratically controlled Congress, only on a much, much larger scale. The difference is, Washington owns a printing press.
Nations like China, who own around 25% of our nation's debt, are getting nervous. The safe bet American bonds once were, are becoming less appealing to foreign investors. The sheer amount of money being borrowed and printed right now, has given rise to the threat of rapid inflation in the near future. That may be part of the administration's plan, if money is worth less, the old debt can be paid back sooner. The only problem with that strategy is it puts the screws to people on a fixed income.
The huge number of baby boomers retiring, and those already counting on Social Security checks to pay the bills, will be hit hard. The price for everything they buy, from food to electricity, will sharply increase while their income will stay the flat.
So, what is the answer? I wish I knew for a certainty. However, spending trillions of dollars, and then coming back to ask for a trillion more, is not the answer.
In the next few weeks, we will see Congress ask for another staggering sum of money to buy up toxic assets from the mortgage-backed securities mess that started this financial meltdown. I am not a fan of government intervention in the free market, but this is one I actually agree with. The sub-prime mortgage mess is the chief culprit in our current economic woes. To start the credit markets lending money again, and for private capitol to flood back into the market, these toxic assets must be taken off the books. My concern is the same politicians who created the crisis, Barney Frank, Chris Dodd and others, will be heading the effort to fix it.
The banking bill will not be the last of it, get ready for "Son of Stimulus 2." Nancy Pelosi and Harry Reid are writing up another stimulus bill before the panic fades. If a trillion dollars in pork barrel spending and earmarks is good for the economy, another trillion must be better, right? These spending sprees in the name of stimulus could actually slow and even stop, our economic recovery. I suggest doing a little reading on FDR's new deal. Read about how government intervention into the economy stretched the depression out for years longer than it should have. You probably didn't learn this in school, but the facts are indisputable.
This economy will turn around. Americans didn't forget how to work, we didn't forget how to innovate, build, and chase after our dreams. We have just forgotten that we can't spend our way to prosperity. Hard work, building up your savings, delaying gratification, the things that built this country, still work.
The only thing that can stand in the way of American people is the American government.
We must learn our lessons from this crisis and start demanding our government live within its means, while we lead by example.