What's Wrong With the Bail-Out Proposals?

This morning the American stock markets opened with a four hundred point plummet before recovering; as I type this, it's fluctuating wildly between fifty points down and one hundred fifty points down for the day. One of the reasons given for the recovery is the .75% rate cut announced by the Federal Reserve as an emergency measure.

My opinion: they should have let it crash.

Why? Why do I want people to lose their retirement investments, companies to lose their funding, investment banks to fold up, I hear you ask?

Because the past five years of what the Bush Administration called a healthy economy has been achieved almost entirely on borrowed money, that's why. Borrowing by federal and state governments; borrowing by corporations who saw no end in sight to expansion; borrowing by individuals who either couldn't resist impulse buys or, more often, had to borrow and keep borrowing just to maintain their existing standard of living.

The past month of fluctuating and downward-drifting stock returns, and the whispers of recession growing louder every day, was air hissing from a leak in a massive bubble economy- a bubble that surpasses the dot-com bubble, which happened during a period of balanced federal budgets. Dropping the key rate does nothing more than slap an adhesive patch on the leak and add fresh air to replace what's leaking out.

If you want to save the economy, there are several things which need to be done.

(1) Deflation. There's just too damn much real and virtual American money in circulation. This has driven down the value of the currency, driven up prices, and utterly failed to drive up the common man's wages. The result: transfer of more actual capital out of the hands of the poor and middle classes and into the hands of the wealthy... and also into the hands of foreign governments like China and Saudi Arabia, who already use this fact to exert influence on our foreign and economic policies. We need a period during which money goes out of circulation and stays out of circulation, so the value of each remaining dollar goes up.

(2) Wealth equalization. Simply put, the place to take money out of circulation from is at the very, very top of the wealth pyramid, where 1% of the nation's population owns fully half its capital. At least for a short time the federal income tax needs to be made steeply progressive- I propose taking all but the top income bracket off the rolls entirely and jacking up the top bracket's rates to make up for the lost income. I'd even go so far as to eliminate separate Social Security and Medicare taxes, lump funding for those programs into the general fund, and make the rich pay for that too- temporarily. This will encourage the wealthy to stop grabbing nine-figure annual salaries plus stock options and instead allow their employees to take home more pay.

(3) Balanced budgets aren't enough: we need surplus spending. Our governments need to bring in more than they are spending, using the surplus to pay off debts and bonds... and, once paid off, not run it up again. This will make the dollar more stable in the long term, as other nations gain faith in our government's ability to pay our debts. At the same time- and more important- it will allow taxes in the long term to be cut and STAY cut. The best way to achieve surplus spending, of course, is to cut government spending overall- and cut it radically.

So, what's in the wind for the federal economic recovery plan- points that both Republican and Democrats basically agree on?

Tax rebates/refunds to everyone... rebates and refunds not matched to cuts in spending or tax hikes at any point.

Emergency freezes on foreclosures to allow debtors and lenders to negotiate new loan agreements.

New spending programs to create government jobs and assistance programs, thus running up more debt.

In other words, the money supply is going to increase, the national debt is going to get bigger... and the wealthy are going to get wealthier. In exchange, the pain of the correction, when it comes, is put off a while.

I personally believe that the correction must come, sooner or later, on the grounds I mentioned. Yes, a deflationary period will be very painful, as will a smaller government that provides less for the citizens. Banks will fold, credit will shrivel up. It's a very unattractive prospect.

But it's going to happen anyway, eventually. As it is, we've put it off since at least 1992. The longer it takes to happen, the worse it's going to be when it does hit... and if not done in a controlled way, it could lead to a global depression the likes of which my generation not only hasn't seen but can't even imagine.