February 2, 2013

simple math

I attended a presentation this week by Julie Stackhouse, senior vice president of the Federal Reserve Bank of St. Louis. Stackhouse presented to the Cornell School of Business on the 2008 financial crisis from the perspective of the Federal Reserve. Till now, the financial crisis has been some great monetary enigma, unknowable to the high school senior that I was when it began. Subprime mortgages aren't exactly interesting, but the complex interplay of citizens abusing rising housing prices, banks issuing loans to folks that could never pay them back, and mortgage brokers leading buyers to variable rate mortgages made for a really interesting presentation.

All of the jargon aside, Stackhouse was able to boil down the past half decade in to a solution; one quote from chairman of the Federal Reserve, Ben Bernanke, who said that to fix the debt crisis incurred, the federal government needs to either cut spending, or increase revenue. And until this country learns to spend within its means, our standing as the financial superpower of the world is unsound.

And I breathed a great sigh of relief to know that someone in this country understands how money works, even if it's not the folks that set our budgets and taxes. The national debt is the biggest offense to common sense in the modern era. You can try to chalk it up to financial crises and a need for government programs, what have you, but it can be simplified to an analogy.

Let's imagine a man named Sam, and Sam buys a used car using a high limit credit card for, say, $16,500 (that's taking nine zeroes off the actual debt). Now, Sam makes about $2,500 a month, so he figures he'll be able to pay off his credit card bill within the year. But Sam, not the sharpest spender, continues to spend $3,500 every month on music, booze, and Xbox Live arcade games. Or, y'know, fiscally responsible Sam-programs like food, clothing and gasoline. Either way, the Average Joe American can discern that Sam's irresponsible spending is going to cause his debt to increase. And let's not even think about interest.

This means trouble for Sam, and it means trouble for the United States. If our government continues to spend beyond its means, we'll cease to be trusted as a site for investment and safe capitalism. If you thought that our economy has been bad since 2008, try to imagine if the rest of the world were to cease economic activity with the US. The world economy would belong to the nations we borrow from now, namely the Chinese, and the US will be stuck as second fiddle (or worse).

The moral of the story is that it's time Congress began realizing the limitations of our economy. We have two options: decrease spending, or increase taxes. Neither option is apt to make many people happy, but it's a long-term game that needs to be played at this point. And if we don't trust the head of our national banking system, who will we trust?

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