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Jitters Merely Contribute To Problem

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By Lowell L. Kalapa
(Released on 11/30/08)

It seems that the economy is on everyone’s mind with the erratic swings in the stock market making everyone a bit nervous. How we got into this mess and when can we expect things to turn around are perhaps the most often asked questions.

As we have learned in the past few weeks, much of this dilemma stems from subprime lending for mortgages for which there was absolutely no prospect of being repaid, as lenders were encouraged to make these loans so that low-income families could realize the American dream of owning their own home. However, that alone is not the reason for the current tailspin.

To a large degree, it has been the consumption habits of Americans that have developed over the past three decades. It is the habit of wanting to have what we want now, otherwise known as instant gratification. In order to make that possible, Americans have come to rely on credit cards to help them make those purchases. Of course, for many Americans, it is without a thought that eventually those credit card bills will have to be repaid.

At the other end, manufacturers and producers of those goods and services churned out more and more to meet consumer demand, expanding their businesses far faster than they should have and used credit to make that rapid expansion happen. What domestic manufacturers could not produce at an attractive price was produced by foreign manufacturers. As a result, America built up huge trade deficits with countries like China, Japan and India. As the value of the dollar fell, more foreign capital flowed into the United States buying up government debt to the point that Japan and China each now own over a half trillion in U.S. debt followed by Great Britain which holds just over $300 billion of America’s outstanding debt.

Realizing consumer demand for goods and services will drop off dramatically, companies both at home and abroad are beginning to lay off workers and close down factories, putting hundreds of thousands out of work and creating fears among those still employed that they will be next. This fear and panic will worsen the problem as consumers retreat from the markets.

Speaking of fear and panic, it certainly didn’t help when Congress initially rejected the $700 billion rescue plan proposed by the administration. Regardless of the amount of money and who was going to get what, when Congress rejected the proposal it sent fear and panic throughout the markets and around the world. It seemed the great government of the United States was unwilling to step up to the plate and deal with the credit crisis. Even though it may not have been the perfect response or the right amount, it nevertheless was symbolic that America was willing, or in the initial vote “unwilling,” to deal with this problem.

What now do we do to get out of this mess? While the “solution” will be complex because it is a global challenge, the first step begins with the American consumer. Government needs to restore the faith and trust that were so damaged by the initial vote on the rescue proposal. Not only will consumers have to get their financial houses in order, but the federal government will, likewise, have to put its financial house in order by reducing its debt, reigning in its unbridled spending spree, and being more realistic about its deliverable services. Taxpayers cannot expect the federal (or state and local) government to be all things to all people.

This also means that the federal government cannot be expected to bail out every floundering business especially when the business model being used can never be successful or is so outdated that it is irrelevant in today’s market. And as we learned this past spring, just handing out checks to consumers will not in and of itself stimulate the economy. Instead, the path to economic revival will require government at all levels to invest in activities that will create jobs, put people back to work and money back in their pockets.

For those who are invested in the market, now may not be the time to shed equities but to buy them at bargain prices. Selling now only insures that investors will lock in losses. Investors should consider that, on the whole, most companies have substantial amounts of capital, but because of the uncertainty in the economic environment they are probably unwilling to invest it in new activities because the outlook for generating income is poor. However, given the right opportunity, that cash could be put to work. This is where a public-private partnership that would minimize risk could prove to be the wedge that begins to thaw out the markets.

The solution won’t be easy, and perhaps that is good, because any and every effort will recapture what we have lost, discipline.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com

 

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