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Today's Economy - More Proof Socialism Doesn't Work

By Sammy of Stone Marmot

Oct. 13, 2008

Housing market collapsed. The stock market drops almost 40 % in one year. Major banks failing or about to fail. It seems like capitalism doesn't work.

WRONG!! Most all of this was caused by seemingly well intentioned government intervention into the market place eventually screwing it up. And recent government behavior in the past few months looks like they are only going to make it worse.

First, way back in the mid 1930's during the "Great Depression," some people felt that it was not right for someone to work their whole life only to find themselves destitute when they were no longer able to work because some disturbance in the economy destroyed their savings. So the US government created Social Security (Socialist Security?) to fix this problem.

The result of this is that eventually many people cut back or even stopped saving for retirement. After all, the government's Social Security program was going to cover all of their retirement needs, or at least that is what many thought.

Some time later someone felt that everyone should own their own home and the government should somehow encourage this. Thus an income tax deduction for interest on home mortgage payments was born. Soon this deduction included all interest payments.

This resulted in people cutting back on saving up for anything and just borrowing for anything they wanted. This, when combined with Social Security, caused saving rates to plummet.

People noticed this low saving rate and high consumer debt. So they tried to get rid of the income tax deduction for interest payments. But too many were now dependent upon these deductions, so getting rid of all of them was political suicide. So they got rid of most of them but kept the home mortgage interest deduction. Creative people found how to get most other debt covered by this deduction by bundling them into home equity loans. So consumer debt was able to continue growing.

People also noticed that the Social Security program wasn't bringing in enough money through payroll deductions to cover its future costs. Raising payroll deductions or cutting back on benefits is political suicide, so only a little bit of each of these things was done, just enough to push the problem out a few years for someone else to try to solve. Instead, the government created the IRA and 401(k) plans to encourage people to save for retirement to cover this eventual Social Security shortfall.

But now companies noticed that if they could get all their employees to participate in 401(k)s or IRAs, these companies could cut back or even eliminate their own employee pension plans, saving these companies lots of money. So now a lot less people are covered by pensions and are dependent upon these IRAs and 401(k)s.

Then in the 2001, people noticed the economy was headed for a recession. So rather than accept reality, the government decided to try to force interest rates to artificially low levels to try to avoid the recession. This plan did probably reduce the depth and impact of the economic downturn. But it also encouraged people to buy much bigger houses than they could ordinarily afford. It also encouraged people to simply buy multiple properties as investments. This superheated the housing and construction markets.

A few years later interest rates started to return to more historic levels. Suddenly all these people with variable rate mortgages were seeing their interest rates and, consequently, monthly payments skyrocket. These people could no longer afford their oversized homes and investment properties, and they couldn't sell them, either, since these properties were no longer such a good deal and few were buying. Both the housing markets and the construction markets collapsed. But this also took down the financial markets, who lent all this money for these mortgages which were now being defaulted. This made money tight for anyone who would ever need to borrow money. Now virtually every company was having money problems.

Consequently, almost all stocks dropped in value. This caused most all IRAs and 401(k)s to lose significant value. So the government tried to force interest rates to artificially low levels to try to repeat the supposed success from a couple years earlier. This caused the remaining IRAs and 401(k)s to lose value.

Now people are fearing that they have worked their whole lives only to find themselves destitute when they are no longer able to work because of some disturbance in the economy destroyed their savings and Social Security will be bankrupt when they need it. Huh? Doesn't this sound familiar? We have sure made a lot of progress these past 70-some years of government tinkering with the economy!?!

What is the government doing now? Making massive amounts of money available for bailing out these companies that are troubled. Where are they getting this money? They hope to borrow it. But what if there isn't enough money out there in the marketplace to borrow or those who have the money don't want to lend it due to lack of confidence in getting paid back, low interest rates, etc.? The government will have to try to jack up interest rates to try to attract lenders (Didn't they just drop interest rates?). If this doesn't work, they will have to print money, which would cause inflation to skyrocket (Ready to pay $1,000,000 for a loaf of bread? They are paying more than that in some countries, like Zimbabwe, that have tried this).

So what are we to do? I don't know. The government has so disrupted the economy and is so intertwined into it now that it can't simply pull completely out right now without total economic collapse. This shows the severe consequences of politicians "tweaking" the economy for short term political gain. We need to look for solutions that reduce, not increase, government involvement into the economy. The fact that some people will be hurt in the short term is virtually unavoidable any way we go. But I feel that increasing government involvement for a hoped for reduction in short term pain is probably only going to increase the pain for most of us down the road.

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