Economic Status (opinion)

There are many questions surrounding the recent $700 billion bailout plan, and more importantly, where our economy is heading. I will try to explain as correctly as possible, but my response involves my own forecasting. The main catalyst to our current economic condition is the housing bubble bursting, which some have contributed vaguely to the .com bubble remnants and rapid increases in the cost of energy.

The value of homes, in certain high growth areas, increased too rapidly; this did not happen in Pittsburgh, which is why we are considered to be isolated from the financial problems occurring in Phoenix, for example. To fund the purchase of homes, mortgage backed securities were offered at value X. With the value of homes growing, X kept growing in value to Y. For example, we could say home prices usually increase in value at 3% yearly rates, but over the years, this rate has been much higher, say 20%. Soon enough, our hopes were introduced to reality, and the market began to adjust according to the law of supply and demand. Hence, the value of these securities dropped to Z, and the debt that now exists can be identified by Y-Z. The government proposed the $700 billion bailout to help cover the Y-Z debt which now exists in the marketplace. Regardless of how we look at it, government is looking to save financial companies from further destruction. The goal is to hold on to this Y-Z debt long enough for it to appreciate at the HEALTHY 3% until the value Y is reached again, or until a higher value, say Y+A is reached (this would be best case scenario).

The immediate impact to such a bailout would be the decrease in the value of the dollar, but continued economic trouble will continue for another year, or longer. We have to look at the longer term solutions and effects as well. We were over confident on our economic future since the 1990’s when the tax increase which cost President Bush his 1992 re-election began to balance out government spending. Now, the American citizenry has low confidence in our future; any solutions must address continued government deficits and any other factors which influence consumer confidence. Therefore, our steps have to be as follows: 1) lower taxes; 2) cut spending; 3) obtain significant progress in energy independence; and the least attractive but necessary 4) approve a (not ‘the’) bailout plan for the people. While not a quick fix, an increase in our population over the next 10 years would help (this is a story for another day).

The bailout plan, similar to FDR’s increased government spending on infrastructure, is something which can get the economy started, but passing it too quick can spell disaster and emotional reaction, rather than success and a proactive prevention for possible future occurrences.