Monday, March 30, 2009

Why Sarah Refused Stimulus Money

Why did Sarah Palin refuse potentially hundreds of millions of dollars from Obama's "Stimulus Bill?" She did so because she saw the money as designed to build the size of government and thus lead to tax increases for the people of Alaska -- and the United States.

Some of her critics have portrayed Palin as rejecting "free money" that would benefit the people of Alaska. Those critics are shortsighted. There is no such thing as "free money." Palin is rejecting money she believes will aggravate the financial crisis rather than ameliorate it.

On my other blog, I'm writing a related piece about "What Caused the Financial Crisis?" Gov. Palin knows what caused the crisis: over-borrowing, over-spending, and over-lending. Barack Obama probably knows -- even though economics is not his strong suit -- but has chosen to act like a politician rather than a President.

Companies, including banks and other financial institutions, borrowed too much (and had too little capital). Individuals, companies, and, especially, governments spent too much. Individuals, companies, and governments borrowed too much, more than they would able to repay in a time of economic downturn.

The aforementioned paragraphs outline what happened. They will tell you more than you'll hear in the millions of words emanating from the TV networks and the national publications. They rely too much on long-winded "experts" and impenetrable financial jargon (e.g., "credit default swaps," "derivatives," and "subprime mortgages").

I won't join the "Blame America First" crowd. However, in the 1990s and the new century, our country struck a "deal with the Devil," China, a subject I'll write more about this week. Essentially, we said to China, "Look, we'll buy all the good you can manufacture or assemble . . . as long as you buy our burgeoning debt at relatively low interest rates." Essentially, China lent us huge amounts of money that we used essentially to pay for the goods we bought from them.

Domestically, the government did everything it could to encourage the purchase of homes, including purchases by people who were poor credit risks. Meanwhile, equities, stocks bought and sold on Wall Street, kept surging upward.

What were the assumptions underlying all this? They were that home prices and stock prices would continue to go up . . . essentially forever. However, what if house prices started to go down sharply -- as they did? And what if stock prices went into a steep decline -- as they did?

The answer is that our whole financial house-of-cards -- for individuals, business, and government -- would collapse, as it has. Unfortunately, the Obama Administration is regathering the cards -- and rejiggering some of the players -- to rebuild the "House" all over again. We need a newer -- saner -- financial model, but we're getting the old, unworkable one.

What is Obama's "solution" to the financial crisis, one caused by over-spending, over-borrowing, and over-lending? Unfortunately, he proposes a "hair of the dog" answer -- to spend, borrow, and lend more. In short, he's proposing a solution of appearance rather than reality. He's trying to postpone the crisis rather than solve it.

(More tomorrow on the financial crisis -- and some contrasts between Sarah Palin and Barack Obama.)

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