Re: Townhall.com – 1/27/2009 – “Where Is Free Market Economics When You Need It Most?” – Mona Charen

Charen says “we got into this mess because government created a housing bubble”. She’s only partially right. Government made it possible for and encouraged us to get into this mess. Private enterprise eagerly took the encouragement to heart and made the bad loans that plague us today; private enterprise should not have made bad loans even if the government thought it should. Private enterprise made the loans because it brought them short term profits at the cost of taking on long term risk and thus deserves most of the blame here.

Government debt is no worse than private enterprise debt. What is common about debt is that nobody can continue to run deficits forever, neither private enterprise nor government, and that any entity that does run deficits too long looses the faith of their creditors that they will repay the debts, and bankruptcy or some other form of financial ruin inevitably follows. Debt should be taken on and paid off depending on short term conditions relative to the long term --- you can take on debt when you need more money in the short term only if you can (and will) pay off the debt later on when short term means exceed needs.

Right now the supply of money has decreased due to insufficient capital in the financial system far in excess of any weak stimulus such as tax relief. Government debt taken on and redeployed to stimulate the economy makes sense even if some of the current proposed stimulations don’t make much sense. But we all should be worried that the money we borrow and inject into the economy to refinance the financial industry and jump-start the economy actually gets withdrawn from the economy as the economy recovers, liquidating the debt and keeping money supply form over extension.