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December 8, 2008
Exclusive: We Need a Recession
Everyone is panicking about the state of the current economy – and with good reason. This week, the Dow Jones Industrial Average dropped to nearly 8,000 before finishing the week at 8635.32. Unemployment rose to 6.7%, with the market shedding over 500,000 jobs; since the beginning of the year, the economy has shed 1.9 million jobs. Manufacturing has lost over 250,000 jobs; construction has lost over 200,000; retail has lost almost 230,000. Meanwhile, employers are cutting back work hours rather than cutting employees, which bodes ill for the future – the average workweek dropped to just 33.5 hours.
What’s the solution?
The solution is to do nothing.
The current economic crisis is due to a combination of three factors: heightened oil prices, constant inflation, and gambling in the real estate market. The problem began with low interest rates set by the Federal Reserve, which caused more money to flow into the economy. With money flowing freely, prices rose, as they always do during inflationary cycles.
This was particularly true in the real estate market, where home values escalated at an unsustainable rate. At the same time, more banks were willing to give loans to risky borrowers, knowing that even if the borrowers defaulted, they could sell their homes at a profit, pay the bank the loan, and walk away with cash in their pocket. Due to the constant inflation, savings rates dropped to virtually nil – a 2% return from putting money in the bank was nothing compared to the 10% return to be grabbed from buying a second house.
Then the oil prices spiked. While oil prices had been rising steadily over the last decade, they rocketed shockingly from $50 per barrel in 2006 to over $140 per barrel in 2008. That meant that the price at the pump went from $2.50 per gallon in 2006 to almost $4 per gallon in 2008. Americans could no longer afford to pay both their mortgages and their gas bills.
Simultaneously, builders had been taking advantage of the wide open real estate market. A surplus of housing suddenly became evident. That surplus was accentuated by the oil-driven foreclosures. Real estate values plummeted.
With dropping real estate values came more and more foreclosures – people couldn’t afford to sell their homes and pay off their loans, since their home value was now less than their loan value. So they simply took off and stuck the bank with a loss.
To sum up: the problem was government-created inflation, combined with foreign oil manipulation, and short-sighted gambling.
The solution the government proposes simply accentuates the problem. They think the answer is a large-scale program of bailouts, job creation programs, and low interest rates – in other words, more inflation, and less punishment for gambling. Meanwhile, the Democrats in Congress and President-elect Obama are talking about hampering American drilling efforts yet again. Even if the market temporarily stabilizes, then, we can expect another, harsher recession in the near future – this one with even more catastrophic consequences, since more big companies will be living off of the government dole.
The real solution is hard to accept but easy to administer: leave things alone. Bad companies must go under. Inflation cannot be pursued – prices must drop, enabling suffering Americans to buy products (including homes) at lower prices. Only when the market cleans itself out – only when Americans and American businesses stop living on credit – will we burst forth from recession.
FamilySecurityMatters.org Contributing Editor Ben Shapiro is a graduate of UCLA and Harvard Law School. He is also the author of the recently published Project President: Bad Hair and Botox on the Road to the White House, as well as national bestsellers Porn Generation: How Social Liberalism Is Corrupting Our Future and Brainwashed: How Universities Indoctrinate America’s Youth. Feedback: editorialdirector@familysecuritymatters.org.
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