Assume No Stimulus. What would have happend? Where would we be?

Economics Economics Questions
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1

A friend of mine curious about the financial crisis seeks to hear the other side of the stimulus story:

"I think it’s very easy to say, “let the banks fail”, but my question is what does that really mean? Does that mean the individuals and businesses invested with them would lose it all as well? Would it really be the end of our semi-prosperous society as we know it? Is it an eventual slide to selling apples on the street?

I would love for someone to really lay out (A) what the alternate approach to the stimulus could have been or still could be and more importantly, (B) what are the consequences for that plan. I want to see someone give me both A and B, without all the crap rhetoric around A about how it’s patriotic, fiscally sound, saves the American Constitution, etc. If someone could point me in that direction…

Trust me though, I still have great unease with the current situation as well, and don’t feel that the stimulus is going to amount to the boost this country really needs. So, what’s the alternative, what does it mean, how do we get there and what does it look like for the American individual and business when it’s implemented?"

While I can give the one line answer, “we would be out of the recession,” I am not to sure of the logical consequences of not providing any stimulus. Thoughts?

2

You brought up letting the banks fail. I don’t know if you wanted to talk about the bailout too. Without the bailout, the banks/etc. would have failed. And the employees, businesses, and individuals invested with the companies would lose everything. That’s tough, but oh well. You don’t invest in a company unless you realize that you could lose everything. That’s the point of investing. As for the employees, take the automobile industry for example. If GM failed and went out of business, well - people still need cars. Another more responsible business would be created, or another mid-level automobile business would take GM’s place at the top. Still, more employees would still be needed. The only thing that would change would be the company name on each paycheck.

The better way to stimulate the economy would be to cut taxes and spending clearly. If they deleted the payroll tax, companies could hire more people, but the government would have to get rid of Social Security, Medicaid, and Medicare (I’m pretty sure payroll tax pays for these). It’s doubtful that would happen, though. All I can say is what I said at first. Cut taxes. Cut spending. Let people keep their own money and do with it as they want. I’m hoping that our extreme debt will help reel in our military from all of the overseas bases, but who knows.

3

Vienna,

A) The Alternate Approach: Restore / create unhampered markets. Abolish the income tax, abolish the central bank, abolish 90% of government activities (I am not defending the remaining 10%, whatever that may be. The 90% figure is simply a good start). These three things must be done first.

B) The Consequences: A true recovery would begin. Charitable organizations would arise to address the millions of displaced workers in the mean time. The time structure of production would collapse toward subsistence, and things would appear, and be, very ugly at first. But with unhampered markets restored, capital formation would occur. And this would occur quickly, no reason to believe it wouldn’t under unhampered conditions. Entrepreneurs and capitalists would organize capital in such a way as to meet the needs of the consumers. Fantastic opportunities would arise, things we can’t even think of under hampered conditions.

Since “A” will never happen, I can’t think of any other alternate approaches.

So, instead we got money printing and deficit spending. Money printing malforms the capital structure even more, and deficit spending, like all government spending, merely squanders scarce resources.

We will now face the consequences of continued intervention in the economy; continued pain, suffering, depression, with no end.

4

People act like the stimulus saved a bunch of costs. It didn’t. It just spread the costs around.

5

Well, come on now. If McDonald’s goes out of business, what happens? Are there no more cheezburgers for us to haz (sorry, couldn’t resist)? Of course not. What happens is other producers take their chance. Smaller producers might now have an opportunity, in different areas, to succeed whereas in the past they could not have. The cheezburger market will looks differents and stuffs (sorry again) but it is not gone. Flippers laid off from McDonald’s can go work for one of the booming new businesses (or newly booming businesses) which now need their services. Now, this is terrifying to the elites - things will be different! We might not succeed anymore! But it’s right for the rest of us. More to the point, if they failed, it’s because they were not doing well with the resources. Now the resources are allocated in a way that is more productive.

6

Thanks for making the distinction. There is a huge difference between a bailout and a stimulus. I accidentally used them as synonymous to each other.

7

Chloe,

However, let us assume that all we can get is no bank bailout and no stimulus, would we still be in square one? Or at least a little better than where we were? Granted the root cause is the central bank and frac banking.

8

Interesting question.

With no bank bailouts or “stimulus”, but with continued central bank and government intervention, we would have had the worst of all worlds. Economic collapse without the means for the economy to restore itself (unhampered markets). This is the problem with intervention, it must continually increase because of the damage it causes to the economy.

9

Well luckily for us there was an historic episode of ‘‘economic armeggedon’’ in which the alternative proposed by austrian economist was applied. Statistically, it was an economic period that was worse than the Great Depression of 1929. See for yourself…

Why You Never Heard of The Great Depression of 1920 by Tom Woods.

http://mises.org/media/3108

10

Good post! I completely forgot about the 1920-1922 depression. I first heard about it on Glenn Beck. The guy’s cheesy, but he does inform me of a lot when I watch him so that I can do my own research.

Here’s another link to text if you guys don’t have time to watch the video: http://mises.org/daily/3788.

11

Stimulus plans serve only two purposes:

1)Increase price inflation in a period when, naturally, prices tend to hit the downward slope.

2)Help out lobbies. Did I hear “cash for clunkers?”

Next!

12

Thanks for the feedback everyone. Quite helpful.

13

If I may add a final thought. Why should we entrust those that caused the crisis to amend it using the very same fallacious methodologies. We should be more inclined to reject their absurdities considering that this isn’t their first attempt to right THEIR wrongs. The following are facts that we should consider…

-On September 30, 1999, the New York Times ran a story on Fannie Mae and Freddie Mac. The Times reported that Fannie Mae was beingincreasingly pressured by ‘’the Clinton Administration to expand mortgage loans among low and moderate income people.’’

-Alan Greenspan, the Chairman of the Federal Reserve, boasted that the Federal Reserve’s monetary policies made it possible for many more people to buy homes (Ron Paul, The Revolution page 153)

''governments and banks (do not) have thepower to make the nation or individual citizens richer, out of nothing (printing fiatmoney) and without making anybody poorer. The short-sighted observer sees only thethings the government has accomplished by spending the newly-created money. He doesnot see the things the non-performance of which provided the means for the government’ssuccess. He fails to realize that inflation does not create additional goods but merely shiftswealth and income from some groups of people to others. He neglects moreover to takenotice of the secondary effects of inflation: malinvestment and decumulation of capital.’’He added: ‘’ If one wants to avoid the recurrence of economic crises, one must avoid theexpansion of credit that creates the boom and inevitably leads into a slump.’’ (Ludwig Von Mises, The Theory of Money and Credit, page 439).

This is why Austrians long before the inevitable would happen were warning…

Ron Paul predicted- as early as 2003- the coming crisis, stating: ‘’…capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans. Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss.’’ (Thomas E. Woods, Meltdown , page 16).

His prediction wasn’t just a lucky guess. It came from a sound and basic understanding of economics and common sense, by that I mean ABCT, as outlined by Mises. Using sound judgement once again…

During a debate- on the gold standard- in 1983 with Charles Partee, one of the then members of the Board of Governors, Dr. Paul stated: ‘’ I happen to believe and accept the ideas of the Austrian school of economics…the business cycle is precisely caused by central planning of money and that the booms and bust are inevitable. That, as we drive the economy this year and for next years election, you will see conditions improve; but sure enough you will see the consequence of the inflation that we have today and in a couple of years you will see the recession, if not depression, of 86 or 87.’’ The economy and stock market spiraled into a recession in 1987. http://www.youtube.com/watch?v=kcm8VvBcUdE

Alan Greenspan states- on the Great Depression- in his paper *Gold and Economic Freedom: ‘’*The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom….by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.’’

During a conference to honor Milton Friedman in 2002, the current Chairman of the Federal Reserve Ben Bernanke ended his speech by painfully admitting: ‘’Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.’’

The bastards did do it again and they’re just getting started. Fool me once shame on you… How many times will you allow them to make a fool out of you?

President James Garfield stated in a speech (lansing ,MI): ‘’ when you can have more cloth by shortening your yard-stick; when you can have more wheat by reducing the size of your bushel; when you can have more land by changing the figures of your deed; and havings: it read ‘‘200’’ where it read ‘‘100’’ ; when your dairyman can make more butter and cheese by watering his milk –then, and not till then, can you make wealth in this country by printing pieces of paper and calling them dollars…It is the wildest hallucination that ever struck upon a people. It is wholly wild, and wholly without foundation.’’