Behind the Recession

Editors' Note: Every month, Townhall Magazine highlights some of the outstanding blogs written by users in our community. The following is an entry from Steve at ReviesRamblings and appears in the March issue of Townhall Magazine.

One major cause of our recession is the $4 trillion early decline in the value of U.S. homes, which could escalate to steeper declines in other business activities. However, the root cause of the recession has been the Federal Reserve’s low-interest-rate policy on short-term loans. This policy led to uncontrolled growth in the housing market in the early 1990s, the willingness of mortgage lenders to underwrite fraudulent loans and the consequent decline in the housing market in 2008.

In the short-term, the Federal Reserve needs to closely control the in flow of capital into the financial market and guarantee money market securities that big companies need for day-to-day cash flow. In the long-term, the U.S. needs to stay true to its role as a global economic powerhouse. Changing the capitalist role of the U.S. will weaken market expectations and may lead to a global recession.

Recessions can be brought to a halt by counteracting government policies. What have U.S. policy makers done so far to halt the recession? While the economy is in transition, the current administration has accepted to incur a proactive $1 trillion expense to revive the banking industry and short-term lending market.

The Obama administration’s policies of change focus on long-term economic recovery. They focus on areas where government can intervene to redistribute the wealth, establish social reform in the health industry, implement middle-class tax cuts and higher corporate taxes, introduce massive efforts to rebuild infrastructure, invest in research and development of alternative sources of energy, and help middle-size U.S.-based companies survive in an increasingly global competition, which is hampered by increasing U.S. foreign-oil dependency.

These changes could lead to bigger government spending and higher taxes levied on capital gains, big corporations and medium-size businesses. These changes could bring undesirable slow growth and could slow job creation.

The Obama administration has offered little insight into how change will come to America. What we know is that Congress will take time to approve the distribution of the $1 trillion banking-industry bailout. Meanwhile, fear and inactivity of market participants could create a long and deep recession period. Many businesses fear the consequences of the Obama administration policies and might be already planning to shelter themselves from higher taxes and other undesirable government policies.

Confidence in an economic system depends strongly on speculation of market investors. The possibility of U.S. economic default is globally feared. Investors in the U.S. and abroad are focusing on the core of the economic problem: the massive destruction of capital caused by markdowns and troubled assets (mortgage assets, bad mortgages, bad credit, irresponsible builders and irresponsible consumers). Erroneous economic policies can lead advanced economies into a recession, which will prolong the financial market recovery period and bring fears of a global depression.

A message to the Obama administration is to avoid bringing change in turbulent economic times. Resolve the core of the financial problem with non-partisan economic policies. Policies to protect the middle class might not help the overall health of the economy. Don’t change the leading role of the U.S. among advanced economies. Don’t bring Marxist economic reforms to the country. Marxist reforms in the midst of market speculation could only prolong recessionary periods and provoke a global economic recession.