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2008 Financial Crisis: The Government Response


What is the grade that you would give the
United States for responding to the boom and bust today? The answer is definitely a failing
grade. Have we fixed the problems that created this
boom and bust? Sadly, no we have not. We still have a central bank that controls interest
rates and which controls the monetary system. We still have a political class that is involved
in manipulating the systems through the central bank for its own end, such as gaining reelection
or making people feel good rather than angry with their rulers and governors. We also have a financial services sector,
which is connected to the political class and which is being bailed out by the political
class. This has created a serious problem of moral hazard. Imagine you are playing a
poker game and you confidently believe—and are right in believing—that if you lose
a whole lot of money on it, somebody is going to reimburse you. What are you going to do?
You’re going to behave recklessly. You will bet extravagantly and excessively on weak
hands. By analogy this is exactly what the banking system did, and we have not removed
the underlying institutions and practices that led them to do this. They are still like
that poker player who thinks that he can be bailed out if he makes rash or foolish decisions.
What this means is that another boom and bust of this kind is likely in the future, unless
we change the way the monetary system works. What is the grade that you would give the
United States for responding to the boom and bust today? The answer is definitely a failing
grade. If you look at the response of the United States to the financial crisis and
compare it to that of other countries, it doesn’t come out very well from the American
perspective. The United States has done one thing, which
almost everyone has done which is bad, and that is to bail out mistaken and insolvent
financial institutions. It’s not alone in that. So that’s a case where everyone, if
you like, gets a failing grade. However, at the same time, it has also failed to deal
with the increasingly acute problem of the state of the nation’s finances. The United States currently has a budget deficit
of over a trillion dollars. This is simply staggering in terms of the amounts and numbers
that are involved. A trillion dollars: one dollar bills, stacked side-by-side, would
stretch all the way from New York to San Francisco and back to Salt Lake City. That’s the kind
of numbers we’re talking about here. Every other country in the world, notably the European
Union countries, have been making major cutbacks and retrenchments in public spending. The
United States, by contrast, has been simply borrowing as though there’s no tomorrow
and is looking to boost public spending rather than reduce it. Why is that a bad move, and why does that
mean they get a failing grade? Because it means all this spending—this public spending—is
going to crowd out private spending. There isn’t a money tree somewhere in the gardens
of the U.S. Treasury Department where that money comes from. So to the extent that money
is being spent by the government, it has to be either raised through taxes or borrowed
from private people with wealth. And that means that it can’t be used for something
else. And in fact, just as in the 1930s, the most likely effect is to prolong economic
failing adjustment, rather than having it brought to a rapid close.

Stephen Childs

36 Comments

  1. @MartyrofCake It's all fine and dandy to have a "balanced" view, but in times like this we need a correct view. We can talk about trying to compromise on issues like this, but the fact is that we are so outrageously in debt, that a balance is out of the question. We need some hard measures to reduce this spending and return the economy to the private sector. Government spending =/= economic growth. Private sector growth = economic growth.

  2. One trillion dollars = spending one million dollars per day for 2700 YEARS – WITH MONEY LEFT OVER!!!

    The debt deal is a joke, the federal government is an out of control Leviathan and it's time to crash the system and start over.

    The new starting point? The Constitution. It's an incredible document that's been ignored for way too long.

  3. The Treasury does have a "Money Tree" it's called the FED, but he fed can't create more "wealth" which is the important distinction.

  4. @MartyrofCake go get yourself 100 dollars, or rubles or whatever you use.. Give it to the first guy you see on the street, and tell him to go spend it somewhere. If it makes you richer, his spending your hundred dollars.. then yeah, Keynes was correct. However if you're living in the real world, and all you've done is given away 100 bucks then fuck, I guess the guy was a moron huh?

  5. @daPlumber702 Ur right! I think the only time this works is exactly when that moron goes out and puts the money in an industry that has a high barrier to entry and it is a first mover. This is investment in innovation for key industries and it would create jobs for us. However, the reality is that money is put into things such as farming subsidies?! because that of course, makes everyone better off. not.

  6. @LORDNARCISSUS

    I'm not sure if I got your comment right nor not. (Sarcasm is a hell of a thing over the interwebs) but if you were sincere about the farming subsidies then you can apply that to just about anything. Keynes was just plain wrong. He failed to understand that no one will spend another person's money as carefully as they will spend their own. NO ONE.

  7. @daPlumber702 that was sarcasm about the farming subsidies. However, I think that spending such as what the US did for Boeing helped get their foot in the airline industry. I am cautious to say that ALL spending is ineffective. However, about 99% of it probably is.

  8. @rogerthetaxdodger if you increase government spending, you decrease consumption due to an increase in taxes. However, in reality government just borrows more and doesn't increase taxes… so, yes, in effect increasing G would increase GDP. It works because Government debt is like free money … They can borrow almost as much as they want and ignore the future time bomb when it would have to be paid back.

  9. @LORDNARCISSUS even in Boeing's case there are arguments to be made that they would have done what they did anyway without any subsidies/help from the government. And an even better argument to be made that if they didn't it would be because there would have been another better company to do it first and Boeing just wouldn't have been needed then. The same argument could be made for most things down to roads.. though I would give that smaller roads/upkeep might be needed. might.

  10. "We still have a political class that is involved in manipulating the system to its own ends." Wow, what a humorous inversion of reality. Rather, we have a system that manipulates our political infrastructure to its own ends. A government is at worst only a vehicle for the whims of private industry at the expense of all else. A government is at best our collective will against moneyed interests that wish to exploit us. But the way you present things, unregulated industry is our best friend. BS.

  11. I don't agree that the corruption of regulators is an example of why regulation doesn't work. The failure of regulation is what got us into this mess to begin with. Instead of doing away with regulation and allowing a private company to destroy our natural resources, why don't we the people have the power to disallow a revolving door between regulatory bodies and industry?
    What more power is there, you ask? For one, a huge amount of the damage to the environment was the usage of

  12. the dispersant Corexit, which is itself destructive but makes a death-sludge of sorts when mixed with oil, to hide the oil footprint to which they're accountable for damages. The FDA was never even required to see if this item's safe for humans because such an investigation would need to be requested by the entity that makes the chemical to begin with, as if that would ever happen. Now infant mortality and cancer rates are up all along the coastline, and hideous mutations

  13. are being observed in sealife. Why don't we default to looking into the toxicity of chemicals like corexit before we drop millions of gallons of them into the ocean?
    Regulation is needed because industry, as we have seen, will NOT act in the common good. If corporations like BP are people, they're psychopaths, and society needs to be protected from them.

  14. "the BP incident happened even though there were controls in place." This actually isn't true–devices such as the "dead man's switch" which are required in Brazil and across europe were made unnecessary in deregulatory efforts during the Bush administration. It should be noted how friendly BP's relationship is with this administration–the coast guard even enforced BP's rules to keep journalists away from affected areas by threat of several years' jailtime or $40,000+ penalties..

  15. How does anything you're saying contradict anything that I've been saying?" I guess I could pick out this part–"If you believe that even more power would have prevented that incident" The core of our discussion thus far is that little to no power has been exercised at all to resist or regulate these scoundrels. I expect regulators to regulate. The BP spill showcases not a failure of the concept of regulation, but rather, a testament to the current lack thereof. See blowout preventer example.

  16. Insufficient is your word, not mine, and not an apt descriptor for the LACK of regulation (dead man's switch) we saw with the BP spill. It seems you'd prefer there were no regulators–you don't trust the government, so you're vesting full trust in corporations to do the right thing when their actions are determined by shareholders rather than any of the people their policies affect. Is a collection of private tyrannies motivated by greed better than a regulatory agency representing the public?

  17. So your argument is that, due to FAILURE of regulation by corrupt government, we should avoid addressing issues of corruption and instead shun regulation: companies like BP should be able to dump millions of gallons of harmful dispersant into the water, should be able to drill anywhere they want regardless of risk, and should be able to evade any need for redress of public grievance. Don't try to claim the public should "just sue BP", you know it's not feasible in our so-called justice system.

  18. Jesus christ someone get Obama to watch at least ONE of these videos.

  19. "'just sue BP' is the closest thing there's ever been to a functioning mode of environmental protection."

    Sure, if you define "functioning protection" as a glacial legal system wherein the damage is long done before the court date is even reached, liability is estimated based on how much oil was spilled (encouraging wonton dumping of dispersants), and the recompense is piddly: the Exxon-Valdez damages were whittled down from 10 to 2-3 billion by the supreme court.

  20. Arctic marinelife populations and the everglades both are irreversibly damaged, all because we left environmental safety decisions to the so-called free market.

    You can't blame "every conceivable technical and human error problem" when what went wrong not only happened during the Ixtoc spill in '79, but all the failed follow-up techniques to address Deepwater Horizon were the EXACT same as those attempted in Ixtoc.So why should a corporation be allowed to drill in deepwater when

  21. when the risks are far greater, and there clearly has been no attempt to push the line in dealing with the concurrent disasters? Why not put an indefinite moratorium on deepwater drilling when a disaster clearly cannot be handled? What I don't understand is how content you are with the way things are currently, where everything is "resolved" in court and the shareholders have the ultimate say.

  22. "the individual actors and those funding them are personally responsible, and leave the companies, the shareholders and the insurers to figure out what constitutes reasonable precaution" The shareholders of course opt for minimal precaution because, aside from a tiny PR hiccup (that cleans up after a couple months and would never affect an oil giant in the long term), they don't have to pay a fucking dime when anything goes wrong! Same deal the world over, be it Nicaragua, Nigeria or the US.

  23. Our core disagreement here, I think, is that you want our courts and our shareholders to be the arbiters, whereas I think we need to address our lack of transparency (or a functioning democracy, really) so that our regulators are actually accountable. I expect some actual public input into the decisions of oil companies working in U.S. territory.

  24. Deepwater oil rigs are less than 1/100th of those currently stationed in the gulf, so why is the decision to drill between the state and the oil company, and not the population of the state who actually suffers when something goes wrong? Such resources should really be nationalized, but that's another story.

  25. At least in a Ponzi scheme, you could refuse to invest. Social Security just takes your money anyway.

  26. Greed made people spending money on Ponzi mortgage scheme and government helped to encourage them. Instead of letting the bubble spread and busts on those who made their choices including wealthy corporations and financial institutions government broke the balance by stepping in and saying their guarantee something… well u can see now they dont guarantee a damn nothing only that they will backup those who helped them to be elected – corporations!

  27. Except it has flaws which got us here in the first place. How about adding amendments to remedy the problem.
    Amendment 1. Ban government borrowing from foreign & central banks.
    Amendment 2. Mandate a cut & dry 100% reserve monetary system(equity based) so people are more n touch w/ finance.
    Amendment 3. Budget must be balanced in peacetime.
    Amendment 4. Each congressman can be recalled by his/her party voters mid term & replaced by another party member to enhance accountability.

  28. I've been wondering how the USA has been able to get away with its enormous debt problem for so long. Even Dick Cheney once said, "… Reagan proved that deficits don't matter." I believe what Reagan REALLY showed us is NOT that deficits don't matter, but that deficits don't matter as much, as long as there is spectacular growth of wealth, as there was during and after Reagan's era. Now that the Washington bureaucrats have strangled the economy's wealth growth to death, I believe we may finally have the chickens come home to roost, to use Obama's racist preacher's phrase. When the disaster comes, this will be great for power hungry politicians who will blame the markets in order to gain even more power. I fear for our future.

  29. Could you guys do a video explaining the 2008 recession, the causes and affects?

  30. Philippines has this protectionist economic policy where foreigners or foreign companies can own only up to 40% and Philippines sends 6k workers/day abroad;thus, the Philippines economic mystery. please make a case examples Philippines economic frauds.

  31. What would be some risks that banks are taking now that they wouldn't take if there was no bailout options?

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