In the beginning of the first George W. Bush administration the U.S. was experiencing the aftershocks of what is referred to as the “the bursting of the dot com bubble,” the collapse of tech stocks. Wanting to avoid beginning an administration with a serious economic downturn, the President, in concert with his financial advisers, decided to cut taxes and pump money into the economy as a means of avoiding recession.
Their strategy seemed to work. As the country drifted into an eight month recession—near the end of which September 11th occurred--Fed Chairman, Alan Greenspan, lowered interest rates and the economy, after struggling to find its footing, began a long upward climb. The administration had postponed the recession by inflating the next bubble.
The first Bush tax cut provided a significant stimulus, and easy money was the rule. Investors—and many pseudo-investors—jumped on the bandwagon, driving stock prices upwards. Many chose to put their money into real estate, for how could you lose? There were occasional warnings during this time, but no one took them seriously. Few imagined that the bubble could burst, for we’d all been taught to buy real estate, it can only go up. More than a hundred years ago, Will Rogers had reminded us, “They’re not making it anymore.”
The real estate bubble began to inflate. No doc, adjustable rate, interest only, and no down payment loans became the norm, and billions of dollars flowed into the housing market causing home prices to skyrocket. The ever-increasing prices brought in wave after wave of new investors, many from foreign countries. Homeowners, flush with a new source of capital, their homes ever-growing equity, saw it as a source of additional income. Banks encouraged such borrowing, filling the airwaves with offers to loan up to 125 percent of a home’s value. The “Home ATM” was created.
By 2006, however, danger signs had emerged, but most chose to ignore them. Even if the economy were to experience a correction, how bad could it be? Newly appointed Fed Chairman, Bernanke offered his “expert” opinion that housing would enter a moderate slowdown but would avoid a crash.
As we rolled into 2007, some economists expressed concern that the growing housing crisis would spread into the broader economy with dire consequences; however, Bernanke continued his optimism, stating, “Even as the housing industry stumbles through its correction, major financial institutions should be spared . . . we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market.”
So the question for us now is: Have we begun inflating the next bubble? With the government borrowing and spending as in past recessions—on a much grander scale, of course—are we setting ourselves up for a great reckoning? Are the artificial highs on Wall Street only a response to the government’s tacit support of the markets?
The Fed has pumped trillions of dollars into our economy, bailing out banks, insurance companies, investment firms, taken over auto manufacturers—companies “too big to fail.” But will their approach restore us to sound financial footing, or could it be that we are inflating the next bubble, one which might one day cause a bursting of Titanic proportions? While I try to see a solution, to avoid a defeatist attitude, I am skeptical of the current strategy. Borrowing our way to prosperity, a policy that defies common sense and logic, is one which experience has shown to only postpone the inevitable pain.
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