Morgan Liddick: Putting out economic fires with gasoline

Time for a warning. Sometimes, you just have to go to the dentist, regardless of how much you think it’s going to hurt. Sometimes, you have to visit the woodshed.

Sometimes “it’s for your own good,” means it’s for your own good. In our national obsession with avoiding consequences, ducking responsibility and blaming our misfortunes on the other guy, we seem to have forgotten this lesson.

Our reaction to the sub-prime mortgage problem our economy faces is a good example of this amnesia. Although Treasury Secretary Paulson’s proposals for reform of the U.S. financial system represent a beneficial step toward healthier economics, the reaction of our political leadership to the sub-prime “crisis” is much less helpful.

Exhibit A: $16 billion, says the U.S. Senate, to save homeowners from the consequences of their own decisions. There must be no pain, even if one’s parlous situation is the result of greed, compounded by stupidity.

Exhibit B: Low-interest rates, says the Federal Reserve Board, so that our economy will continue its expansion. There must be no interruption of buying, regardless of the fact that Americans are burdened with more than a trillion dollars of consumer debt.

This is dangerous nonsense. Should people be encouraged to keep spending beyond their means; or to believe that the party will never end nor the bill come due?

The reality is that recessions are an inevitable part of the business cycle. Without occasional corrections to the economy, it would be difficult to determine what one should pay for anything as prices rise, fueled by speculation, fashion, fear and other factors that have nothing to do with underlying value.

Consider our current problem. After the dot-com crash and the flight of capital from technology stocks early in the decade, there was a question about where adequate return on investment could be found.

Real estate seemed to be the answer, so for years a Niagara of money in the form of investment trusts, sub-prime mortgages, zero-equity financing, leveraged purchases, no-money-down loans and every manner of easy money which the mind of man could invent inundated real estate markets. And since “everyone knew” that there was no possible way real estate could lose value, initial success only invited more capital flows toward this apparently inexhaustible form of wealth-creation.

Due to this inflow, real estate boomed. Builders went flat-out to produce more of it, which was snapped up immediately. Prices rose. Predictions of infinite growth seemed sensible. People used their homes as ATMs, taking out equity value and spending like there was no tomorrow. But there was.

Take a moment to recall your Economics 101. What is the term for too much money chasing too few goods? Yep, that’s right. Inflation. So, what do people think will happen when even more money — loan relief, IRS “stimulus” payments, and the inevitable Federal builder-rescue programs — hits the street? Equilibrium? Hardly.

Order? No. Calm? Guess again.

Taxes will be raised to cover this marker, of course. That is one of the realities behind proposals by Barack Obama and Hillary Clinton to raise taxes on households making more than $250,000 a year. But that is liable to be the least of it.

If you’re been paying attention, you might have noticed that the prices of many staple foods have been rising, not only here but around the world. According to the World Bank, the prices of many commodity foodstuffs have gone up 80 percent since 2005.

There have been food riots in Africa, Central Asia and Mexico. Not to mention what’s happened to petroleum, and to the dollar itself. I wouldn’t recommend a European vacation anytime soon. Now, Congress proposes to pour mega-bucks into this situation to save us from the terrors of a recession. Good thinking.

In trying to prevent an economic downturn now, what we are actually doing is storing up a tidal wave of trouble for the future. Remember “stagflation?” That’s what happens when insupportable debt combines with economic uncertainty and declining productivity. But even that won’t be the greatest of our worries.

For a preview of how bad it could get, look at Zimbabwe — unemployment at 80 percent, inflation of over a thousand percent a month, presided over by a leader who promised to alleviate the suffering of the common man. Of course.

So perhaps, instead of lauding the political pander bears who want to put this fire out with gasoline, we ought to reward those who tell us the hard things: that people who spend more than they can afford are irresponsible; that recessions are an unavoidable necessity; that those who promise a future of easy street, forever, are a particularly repulsive species of snake oil salesmen. Because that’s the truth.

Sometimes, it’s for your own good.

<i>Summit County resident Morgan Liddick pens a Tuesday column. E-mail him at mcliddick@hotmail.com. Also, comment on this column at www.summitdaily.com.<;/i>