Why the Patient Is Not Getting Better: Government is Strengthening the Parasite and Poisoning the Real Economy

George Washington Blog
Friday, March 13, 2009

Why isn't the economy getting better, even though the government is pumping trillions of dollars into bailouts and stimulus packages and intervening in markets left and right?

Because the government is treating the wrong patient.

Let's say you travel to the tropics and pick up a parasite. You go to your doctor who gives you very powerful drugs that make you sick. You go back to the doctor, he looks you over, and then adds more potent drugs to your prescription.

You go back a third time and say "Doctor, I'm getting sicker and sicker, why isn't it working?"

He responds "Oh, I thought the parasite was the patient. The drugs are making it healthier".

The Government is Strengthening the Parasite

The real economy is:

(1) People making things or providing real, useful services

(2) People saving money

and

(3) People investing the money they saved into productive businesses which will make more things or provide needed services.

According to top federal reserve officials and economists, the government's actions will encourage big financial players to make even riskier gambles in the future.

Indeed, the government is in the process of giving hundreds of billions - if not trillions - of dollars and guarantees to hedge funds (hedge funds are some of the biggest speculators of all). Indeed, the various bailout programs are giving huge sums to companies that make money by pushing paper around without actually producing any useful goods or services.

The heads of the big banks and financial companies are also getting huge bonuses even though they have driven their companies so far into the ditch that they need government bailouts. Even Paul Volcker says the incentive system is broken. Indeed, the government is making the CEOs richer by giving them billions of dollars of bailout money with which to feather their own nests.

And credit derivatives act as a parasite on the real economy: credit default swap buyers bet that the referenced company will go down the tubes (see this and this). And yet the government is allowing the credit default swap trades to increase, driving CDS spreads against many companies and governments to reach all-time highs.

The Government is Poisoning the Real Economy

Not only is the parasite being boosted by government actions, but the patient - the real economy - is being poisoned.

Manufacturing has been shipped out of America for decades, and the government is still actively encouraging companies to move manufacturing abroad.

Taxpayers will be on the hook for trillions of dollars of obligations through taxes/or inflation (even Bernanke has admitted that inflation is a tax, because people have less money in their pockets after buying necessities). So Americans will be able to save less.

And government has not only failed to require that companies accurately report their finances - so that investors can know which companies are stable and productive - but it has actually thwarted such accuracy. For example:

• A government agency prevented the SEC from investigating multi-billion dollar Ponzi-schemer Stanford

• As of 2006:
  

  "President George W. Bush has bestowed on his intelligence czar ... broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations."

• One or more treasury department officials actively allowed banks to "cook their books"

The government has been strengthening the parasite and poisoning the real economy. No wonder the patient is getting worse.