The Following opinion piece was submitted to the NYU Local Submitted Opinion section. Anyone with an NYU email address and a full name can post to this section.

This is the second part of my opinion piece on the current economic crisis. If you haven’t already read the first introductory piece, you can find it here.

The lending practices of Wall Street have clearly been detrimental to our economy but in relation to those of our own government, some would argue that Wall Street was but a pin prick that popped the bubble; the U.S. Government was the one blowing hot air into the system. The same type of lending practices that led to the sub-prime mortgage meltdown are also typical of our government’s relationship with lenders around the world.

This is not to say that borrowing money from other nations, or from a bank, is a bad thing. In fact, the United States has a long history of borrowing money. From before we declared independence from Britain, to the middle of the 19th century, our country had been running on a trade deficit. That is to say, we were importing more than we were exporting. But those who were borrowing were using that extra wealth to create factories, businesses, and more production. We were becoming industrialized, and the more we borrowed, the more we produced; the more money we had, the more wealth we created.

A pivotal point in American economic history came in 1913, with the founding of the Federal Reserve. It is important to understand that the Federal Reserve, contrary to its name, is not a direct part of our government. It is a private institution that was created through an act of Congress and given the power to, among other things, coin money and regulate the value of the U.S. dollar.

Jump to 1970 and the influence of the Fed’s decisions on the U.S. and world economy became much stronger. We were once again borrowing money to supply our budding consumerist society. The difference after 1970 was that our government was not borrowing money predominantly from U.S. citizens through the selling of government bonds domestically, but rather borrowing money from abroad. This practice soon began to pick up steam, especially when U.S. companies were moving overseas and China, Japan, India, and other nations were growing exponentially. Americans were buying goods from overseas and those American dollars were being sent to companies abroad. But those companies did not need to spend all that profit on growth, and they didn’t want to turn those strong American greenbacks into their local currency, so they turned around and bought U.S. Treasury bonds to keep their wealth, now in the form of credit, in American dollars. The U.S. Government would use that extra money to finance whatever it needed. From public work projects to new weaponry or even economic stimulus checks, our government was financing its consumerism off of the national debt.

But we needed even more money to finance the American Empire. Congress was acting like a child in a candy store. Whenever we passed a new law, Congressmen would attach amendments to fund some project in their home district and ensure they were on their constituents’ good side come election time. When we needed to fund humanitarian aid, a war, or reconstruction, Congress would turn to the Fed to print more money. You see, the government never actually had any of this money. We have been living beyond our means for decades now, but as long as foreign nations kept buying our bonds and the Fed kept printing money, we could at least make-believe we weren’t.

But instead of building production and creating wealth with the borrowed money like we did earlier in our history, Americans simply consumed products from overseas. We used our free money to buy plasma screen televisions, SUVs, and home improvements, but it was okay, because all the money we spent was sent right back to us! But through all our consumerism, and all our debt, we now stand here with nothing to show for the $10 trillion we borrowed. Nothing but stuff. Our response to all this is perhaps not all that surprising. We just created more money out of thin air to bail out the debt we already had. Not very logical, but no one even knows how much was printed because the Federal Reserve doesn’t have to report those figures.

For now, our creditors haven’t called in our debt, and as long as the Fed convinces them the U.S. government is good for it, we can continue pretending we have money to spend. But if the world were to lose faith in the value of the American dollar, and wanted to get their money back to exchange it for another currency, no amount of printing could save the Fed from our insurmountable debt. It is important to understand that while printing extra money is a great tool for the Federal Reserve to use, it is detrimental to everyone else.Every dollar they print devalues every other dollar in circulation. The only people who get to use the new dollars at full value are the government and Wall Street.

The Federal Reserve and the government have attempted to control the market through various tools, including the regulation of interest rates, import quotas, and subsidies for various industries (including the vast agricultural and transportation controls). Former Fed Chairman, Alan Greenspan “successfully” avoided a recession that should have occurred when the dot com bubble burst back in 2002 by controlling Federal interest rates to keep inflation in check. By setting interest rates artificially low, allowing corporations to borrow money from the government at very low rates, he created the housing bubble. Banks opted into this practice and borrowed money to finance mortgages for the American people. They assumed that taking on risky mortgages was relatively safe because the government was essentially providing large national banks with an unlimited money supply. Interference by the Federal Reserve can be traced back to almost any economic crisis in recent history from
the ’87 panic to even the ’29 crash.

Now the Federal Reserve is at it again, but this time the bubble is twice as large. The U.S. Government is effectively socializing the credit industry by taking control of Fannie Mae and Freddie Mac (FMFM), buying out AIG, and supplying relief to the biggest losers of any corporations. The government is now responsible for the $6 trillion in mortgages FMFM owned, of which potentially one trillion might default. But now that the companies did not collapse, even more mortgages will be made, even more will default, and the American taxpayer has become a co-signer for every single one of them. Every time someone defaults on their loan, the government will have to pay for it. But where will the money come from? Pundits keep talking about how the bill will land in the taxpayer’s lap, but no one is even talking about raising taxes. In fact, they are all still talking about lowering them! The only other way to pay for it all is to print more money and monetize our debt. Our national debt stands to be more than doubled by this financial crisis, and the people who are going to suffer will be anyone who holds their wealth in American dollars.

We didn’t have any money for the Iraq War, we didn’t have enough money for the “economic stimulus package,” and we don’t have any money for this. Our government is broke. and the only thing that holds it all together is the belief that the dollar is the world reserve currency. But the dollar itself has become a bubble. It isn’t worth as much as people think it is. It is arguably worthless, because there is absolutely no way our government could ever pay back this debt. Like the run on the banks in 1929, if there is ever a run on our government’s debt, we would have to default. And when that happens, the blind faith the world has in our system will disappear. One could argue that this may never happen, but you would have to subscribe to the belief that Ben Bernanke and the Federal Reserve could control the world economy with Monopoly money. And that is exactly how they operate. They believe they can control the world economy through the manipulation of the U.S. markets and currency. But in an ever expanding world, U.S. financial markets do not run the show anymore.

Without a doubt, whichever candidate wins in November is going to inherit a crippled economy, and will likely be blamed for any crash that occurs even a few weeks into his term. There is nothing to be done to avoid the crisis, although Bernanke is trying. If the market is stabilized, it will just augment the problem another two years down the road, just as the Fed did in 2002.

Both candidates have been flailing about, trying to convince people they could fix the problem if only they had the power, yet neither are saying anything significantly different. McCain blames the SEC chief for not challenging corrupt lending practices, while Obama just keeps talking about how the market needs to be more regulated and controlled. Neither understands “the fundamentals” of our economy. Obama criticized the “economic philosophy” to which McCain subscribes, describing a failure of the free market. It is an incorrect conclusion to reach from this crisis that the free market philosophy has failed. The institution of the Federal Reserve, and our politician’s interference in the economy, has stopped any such free market from establishing itself and testing its virtues. Regulation to stop corrupt economic practices will always be necessary, and the SEC needs to serve as a competent watch-dog, but increased or maintained governmental control over our economy can only lead to more disastrous effects.

Too many mistakes have been made for us not to suffer from a recession. Medicine sometimes tastes bad, but it is necessary to kill the disease. “Me-ism,” is the American attitude as my father would describe it. It has permeated our economic system from the average American who didn’t want to pay high interest rates on his mortgage, and the Wall Street executive who knew better but chose not to say anything, to the Congressmen and Presidents who wanted to buy lots of high tech toys and use them all around the world. We need to wake up and realize that we can’t have it all. The days of being “subsidized” by our parents are numbered. Beyond childhood, society expects you to be responsible professionally, socially and financially, and it is time to demand the same of our government.

I’m not talking about protesting or writing cute articles on government corruption; just don’t vote for them. Don’t vote for any of them. They have all been a part of the problem, whether actively or not, and none of them deserve any of the power nor do they appreciate the responsibility of public office. While Americans suffer from wars, hurricanes, and the financial crisis, Congress is going on vacation. The concept of living within our means seems distant and foreign, but if men like Peter Schiff and Ron Paul continue to be correct, the price for our ignorance will be a much lower standard of living than that to which we have grown accustomed.

Photo by Flickr user afagen used under a Creative Commons license.