Inflating
Government Bubble Can Only Lead to a Major Financial Hangover by Peter
Schiff - April 13, 2010
During
the 1990s, the inflationary policy of the U.S. Federal Reserve
fueled a tech-stock bubble. When that bubble burst, the Fed
inflated a larger one in real estate. Now that the real estate
bubble has burst, the Fed is inflating the biggest bubble
of them all – a bubble in government.
While the earlier booms provided at least the illusion of
prosperity – as well as some fun while they lasted – the government
bubble will cripple the economy and deliver widespread misery
to the vast majority of Americans.
Of course, there will be winners in the government bubble
– at least for a while. As was the case with the stock and
real-estate bubbles, plenty of money will be made by the well-connected
and parasitic classes. Government employees will continue
to enjoy pay raises at our expense, as will anyone benefiting
from the new wave of subsidies, such as Wall Street investment
bankers, financial speculators, and those working in healthcare
or education.
These gains will come at the expense of the taxpayers who
foot the bill and the consumers who face higher prices. As
government grows, it "crowds out" the private sector,
depriving it of the resources it needs to survive and grow.
The result is a lower overall standard of living.
Not only are government jobs less productive than private
sector jobs, but bureaucratic interference actually makes
the remaining private sector jobs less efficient, as well.
Our economy is being transformed from a mostly capitalistic
one to a mostly socialistic one. More decisions are being
made by politicians and lawyers in Washington and fewer by
entrepreneurs. The motivation behind this shift is the mistaken
belief that the financial crisis of 2008 was caused by too
much capitalism and a lack of proper government oversight.
This conclusion is self-serving for those in power, and couldn't
be more economically misguided.
Through corruption or just plain ignorance, Congress and
the Obama administration have embraced an ideology that has
failed every time it has been tried.
Take the recent student loan reforms that were slipped into
the healthcare bill. U.S. President Barack Obama wants to
reduce the cost of providing student loans by taking the profits
out of the industry. According to President Obama, student
loans are too expensive because banks profit from making them.
If the government nationalizes the function, we would apparently
bring down costs by eliminating those pesky profits.
This is a Marxist argument, pure and simple. If true, it would
apply to all industries, not just banking. States like Cuba
and North Korea would be the envy of the world, as they prohibit
profits across the board. The truth is that profits - earned
from free-market competition - keep cost down. By taking the
profits out and putting the bureaucrats in, any incentive
to provide better service or lower costs is eliminated. It's
not hard to predict that student-loan costs will now rise
faster than ever.
That is clearly not the result we want. To solve the problem,
people must understand that college tuitions are so expensive
specifically because the government has guaranteed student
loans. Guaranteed loans don't mean more access to education,
but rather that universities are free to charge more per pupil
than if their customers were paying out-of-pocket.
President Obama's plan only serves to remove more market forces
and creates an even bigger moral hazard. Under the new rules,
students will be required to repay a much smaller portion
of what they borrow. As a result, students will be willing
to borrow even greater amounts of cash to pay inflated tuitions,
making it that much easier for colleges and universities to
raise them.
Also, since the government will actually be loaning the money
directly - rather than simply guaranteeing private-sector
loans - the U.S. Treasury will actually have to borrow the
money itself before it can re-lend it to students. I suppose
the irony of going into debt to loan money never registers
in Washington. Further, as this bill will cause tuitions to
rise even faster, it will necessitate even larger loans that
will produce even greater taxpayer losses when the loans end
in default or forbearance.
Whether it is in education, housing, healthcare, automobiles,
insurance, or banking, greater government involvement in the
economy means higher prices, lower productivity, more bailouts,
bigger deficits, increased taxes, diminished industrial capacity,
fewer private-sector jobs, less freedom, and a falling standard
of living.
In the end, when runaway inflation and skyrocketing interest
rates burst the government bubble, there will be no more bubbles
to replace it - just one hell of a hangover.