January 29, 2009
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An Independent Online Kurdish-English Newspaper

On the Economy: Consumption and Low Interest Factors Igniting Economic Growth - By Rauf Naqishbendi

Consumer spending to stimulate the economy has been the intended target of recent government programs to foster economic recovery. Twice since the economic stagnation began, taxpayers have been sent free money for the sole purpose of spending.  At the same time the Federal Reserve Bank kept on lowering interest rates to ease borrowing and entice consumer spending. Thus consumers kept spending beyond their means and people kept on borrowing money that they are now unable to repay. The combination of consumer spending and low interest rates which used to ignite economic growth in the short term worked in an opposite direction in the long run. The result is the economic turbulence we are now experiencing. Ironically the same ill-fated strategy that brought us economic decline is at work to cure our current ailing economy.

The Federal Reserve Bank continues to printing money to bailout institutions managed by incompetent and morally corrupted corporate officers. The monetary policy of supplying abundant paper money and lowering interest rates to stimulate both business and consumer spending is what got us where we are. During the 1990s, the Fed kept lowering interest rates to maximize homeownership. It’s a benevolent idea to make housing affordable to every family, but ownership should have been pegged, as it has been traditionally, to income and one’s credit worthiness.  The Fed kept pumping up the money supply to entice consumption and lending, while the banks abandoned discipline in borrowing, luring people to spend extravagantly.  As we witnessed, banks kept on producing credit cards, flooding peoples' mailboxes with pre-approved cards, and printing checks ready to spend. They stretched their lending criteria to the level of madness, ignoring every established traditional lending qualification.

History keeps replaying itself. Again, the Fed is lowering interest rates to encourage borrowing and easing lending qualification to rescue a deteriorating real estate market. Now banks are censured for holding tight on lending. There is no sound support for this blame. Banks are in business of lending money and safeguarding customer deposits. Sure, banks are not readily lending money as they did in the past, but that is due to an uncertain economic climate.

Why are banks so stiff about their lending practices?  Look at Northern California real estate where housing prices appreciated nearly ten to fifteen percent annually for years. Banks lent real estate loans to applicants with minimum or no down payment without any reservation. The reason for such an easy lending environment was the assumption that if the lender defaulted, banks could sell back the property and recover their investment as prices rose. But now, even with twenty percent down payment banks are hesitant to lend. Why? Because housing prices will continue to decline an additional 20-30% from current prices, according to many economists. In this case, if houses to go down and mortgage holders walk away from the property, banks will be at the short end of the deal. They will not be able to sell the property and recover their investment in this down turning housing market.

Another reason to be factored in is that banks require that the borrower has long term employment and can afford to make their mortgage payment. Again in this uncertain economic climate very few jobs are secure in the long term (30 year mortgage) as the unemployment rate is rising and well-paid jobs are hard to come by. Regarding banks lending practice, it should be left to the banks to decide whom they lend to, and the government should not pressure them to create another credit and foreclosure crisis. Our current ailing economy is a result of banks abandoning their firm lending practices. The government should encourage responsible lending practice not the other way around.  

Consumption and consumer spending are igniting the fuel for flourishing capitalism. Capitalists are urging a consumption stimulus. This is utterly ridiculous.  Why is the business system and government encouraging people to spend? And if they do, then for how long? After all, people are not starving their needs and necessities if they can afford.  People usually consume based on their needs and the ability to pay. But for many years, we have been spending borrowed money, and acquiring many useless things we didn’t need.  We have invented too many things not as a matter of necessity but rather because they would be nice to have. Sure, it all helped the economy, so we let the economic boom keep going with happy music being played.

Capitalism thus flourished and ran long enough to exhaust and languish itself. The irony is that Wall Street, through their co-conspirators, the Federal Reserve and the Treasury Department, are trying to reignite the same fire which is engulfing the nation at present. 

Government should stop encouraging spending for the sake of spending alone because its effect is temporary. If America had maintained its industrial complex, it might have been a different story. Now the problem is that most of what we consume is imported and the main beneficiaries are exporting countries. Additionally, the Fed should not ease interest rates artificially as it did before, in the process trapping millions into home foreclosure and personal bankruptcy. You may blame borrowers and call them irresponsible.  But then what do you call the Fed who set traps for people through imposed artificially- low interest rates?


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