Between the Lines: So what’s the plan?
Last week, on what many investors worldwide have been referring to as “Black Monday,” the global economy took the biggest hit it has faced since Sept. 11, 2001. Markets in Europe and Asia dropped significantly and all but one major exchange in the world experienced an overall drop as investors’ confidence disappeared.
Economists were quick to attribute the falloff as being directly tied to the U.S. crisis involving subprime mortgage lending and its effects on the availability and strength of credit. Although U.S. markets were closed for Martin Luther King Day, Tuesday morning saw a storm of selloffs as trading opened and it seemed as if the United States would imitate the rest of the world in experiencing huge declines.
The Federal Reserve was not scheduled to meet just yet, but in light of the crisis, Chairman Ben Bernanke and other Federal Reserve leaders decided to immediately cut the federal interest rate by three-fourths of a point.
According to The Washington Post, this was the largest single- rate reduction in more than two decades. This should allow businesses and investors to more easily acquire credit, while allowing consumers to spend more using credit cards. The Federal Reserve has been consistently cutting rates over the past several meetings, but with fears circulating among global investors, the decision was made to drastically cut rates with all due speed.
Fortunately for the United States, we are able to make quick market decisions that can result in almost immediate effects. U.S. markets recovered significantly throughout the day after the cuts were announced, and European and Asian markets followed suit. Unfortunately, our legislative system does not allow for the sort of rapid response, which the Fed is capable of initiating.
Oddly enough, this financial crisis occurred as members of Congress were debating with the White House regarding an economic stimulus plan. The achingly slow-moving bureaucratic system means that even if a stimulus plan were passed tomorrow, it would be months before the capital it generated was injected into the economy.
The stimulus plan now being debated would provide tax rebates to single and married households at the lowest tax-paying level and would provide increases in unemployment benefits and food stamps for those below that level. The plan would also provide breaks for small businesses and investors so they would be free to invest more and free up credit.
In an act of rarely seen submission, President Bush took the reinstatement of his 2001 tax credits off the table. With the scattered remnants of his legacy left smoldering in the dying flames of a lame duck presidency, Bush moved toward securing shared blame with a democratically controlled Congress for the current economic crisis—and share the blame they shall.
With democratic presidential contenders having campaigned in South Carolina and lambasting their Congressional colleagues for being quick to agree with Bush’s plan, the realization that our system is anything but a pro-active one becomes more clear. The slow process of governing—which on any day can find a member of Congress voting against the best interests of the country based on his or her own re-election strategy—has reduced our government to a mere reactionary entity.
An effective economic stimulus plan would address the underlying problems of instability in mortgage securities and rampant predatory lending. Instead, our leaders will put cash in the hands of constituents and tell them to go spend it. In a nation with a notoriously disgusting national savings rate, is this not sheer misguidance? That money would be better spent paying off debt or saving for the next financial crisis—but “stimulus” and “tax rebate” are the words that rule the day.
I am beginning to believe sound fiscal policy is a thing of the past in our modern era. It is much easier to provide a short-term fix which may result in serious blowback than to pursue responsible economic policies that provide security for our economy well into the future.
With a major election around the corner, it is relatively simple to achieve “bipartisan” support—and all the lovely “work together for a common goal” rhetoric that goes along with it—for a bill that buys votes for incumbents and portrays a sense of “government to the rescue.”
Patrick Callahan is a senior political science major.
