During this Christmas season of cheer and good tidings, a universal message is going forth. They are all united from Barack Obama to Martha Stewart to Wall Street Banks, the Federal Reserve and even your local mall agrees: please borrow to spend more this Christmas.
Americans since 2008 have been tightening their belts, and they have paid down over 150 Billion dollars in consumer debt. This is a remarkable feat and a testimony to the diligence, hard work and frugality of the American citizen. In contrast to the people, we are embarrassed that our government is encouraging irresponsible and spendthrift behavior.
Little wonder the finances of the US Government and the Federal Reserve are in a shambles. When times are tight, overspending and excessive debt is never the answer. Americans intuitively understand this and they are making tough choices to avoid bankruptcy. Barack Obama would be smart to follow their example.
But governments never really tighten the budget. We all learned years ago the idiocy of government accounting when they proclaimed they were making "budget cuts" when spending and borrowing was going up every year. This would be akin to us saying "we want a Porsche, so we will cut the budget and get a Corvette," when our salary could only cover payments on a Toyota Corolla.
This upside down idea was in the news again this week with the bailout of Ireland. Ireland had a housing bust, and this put their banks on the brink of insolvency. The Irish government, emulating the Americans bailed out the banks. Problem is the government doesn't have the money to both backstop the bankers and pay their bills. The solution devised by the "wise men" in the European Union (EU): lend more money to the already nearly bankrupt Irish government.
Now everyone in Ireland will be paying the lenders for the rest of their lives to keep the Irish government afloat. Conditions on these new loans included budget cuts and tax increases. If Ireland had told the bankers to seek a solution in bankruptcy court, instead at the Treasury Department, the average Irish citizen wouldn't be getting poorer at the hands of the EU.
Same is true in the United States; we have a history of two hundred years of bankruptcy law that should have been utilized in the financial crisis ahead of the government treasury. But the powerful bankers paid the powerful lobbyists to twist the arm of the US Congress to pass TARP to protect them.
GM declared bankruptcy, but because the government stepped in the "new GM" didn't have to make as many tough choices as they would have without the bailout. In the case of GM, the powerful United Auto Workers Union twisted the arm of Barack Obama to borrow money to bail them out.
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