I have chosen a couple of articles pertaining to the bailout plan that is being implemented by Congress and the Federal Reserve in conjunction with the Treasury. The first article is “Dissecting the Bailout Plan” and the second one is “The US Economy’s Bottomless Pit”. Both these articles criticize some aspects of the bailout plan while lauding the other points. Overall, the tone and content of the articles are towards presenting a meaningful analysis of the current scenario.
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To begin with, a summary of the article about the bottomless pit is in order. The article lays out the premise that the bailouts being talked about include just about every segment of the economy and range from Wall Street Majors to Automotive giants as well. There is a wry irony that states that nowadays the numbers being talked about are in the range of trillions and a trillion is the new billion.
Thus, there is severe criticism of the way in which “printing presses” are being turned on and this may not prove to be good for the economy in the long run as indebtedness to foreign creditors would grow to such heights that the US economy may not be able to sustain itself. As the article states, if only the US was not able to print money, the country would have been bankrupt many times over.
The economic principle that the article is trying to address is that the US government should encourage the growth of savings and stimulate investment as a long term solution instead of blindly increasing the Federal Deficit in a desperate move to contain the crisis. Though painful in the short term, “A short-run reduction in GDP is a sacrifice the US must be willing to accept. If it swallows this medicine now, in the long run, it will have a sustainable rise in GDP as higher savings leads to increased capital investment, greater productivity, and eventually a lasting increase in consumption” (Schiff, 2008).
The root cause of the current crisis is indiscriminate lending practices and the profligate nature of the US consumer is running up huge debts, be it in the form of credit cards or mortgages. Thus, unless the “shopped-out, saving-less” consumer is forced to change his or her ways the longer-term outlook for the US economy remains grim.
I would like to apply the principles to the current issue by relying on the textbook concepts of savings and investment as a preclude to GDP growth rather than indulging in financial speculation and esoteric banking practices that trade in “virtual numbers” rather than a reliance on the manufacturing and other sectors that stimulate demand and contribute to sustainable GDP growth.
In my view, overproduction and lack of aggregate demand lead to surpluses that can only be redeemed through an ever-increasing complexity of financial instruments that have to succumb to the decline in “underlying value” sooner or later. And this is what happened with the sub-prime meltdown and the resultant risk of systemic collapse.
In conclusion, as I have stated throughout the paper, both the articles talk about how the people who caused the mess are being rewarded and there is no talk of bailing out the consumers in the process. However, it is my contention that along with the lenders, the borrowers also need to understand the dynamics of indiscriminate consumption and avoid the pitfalls of lower household savings.
- Schiff, Peter. “The US Economy’s Bottomless Pit”. Asia Sentinel. Web.
- Reynolds, Alan. “Dissecting the Bailout Plan”. CATO Institute.