Lasting Solutions Part I

As I wrote earlier today, this will be the first of several pieces I publish over the next few days regarding my ideas for fixing America. I hope you enjoy my thoughts and would love for you to forward them on or improve upon my ideas if you feel so inclined.

Symptoms
The way I see it, and I clearly am not alone, we are approaching the current economic crisis all wrong. As with any problem one does not treat the symptoms, they are simply used to identify their cause. Then, once the problem is identified, one attempts to find a solution, implements a strategy for curing the problem if one exists, and ultimately attempts to stop the symptoms from persisting. In the case of our economy I feel that we are trying to fix the symptoms to our overall sickness rather than getting to the root cause of them. In this regard, attempting to cure any of our social problems will also not provide us with a lasting solution because each of these “issues” has shown up as a result of our greater disease.

The following events and ideas are commonly referred to as being the “cause” of our overall economic crisis. Depending on what and who you read the severity, the combination, and to the extent of which they are a problem is debated. (Note here that these are the most common root causes discussed and not a complete listing).

1) Unprecedented Losses within the United States Housing Market – To this one we all know that the collapse of the housing market has brought our banking system to its knees. I think no further explanation is required on this point as it has been discussed literally every day in the news for the past 2 years.

2) Easy Credit Extension to Under or Unqualified Borrowers for any Reason –Again, I don’t think further explanation is required. Simply, if a person couldn’t afford a loan for any asset they shouldn’t have been given any money to purchase that asset.

3) Statutory Regulation Regarding the Private use of Land -This one might need a little further explanation. Macro (Federal) or micro (cities/local ordinance) requirements regarding the use of private property which required specific spaces be used for specific types of development only (Zoned Residential, Zoned Industrial, Zoned Commercial etc.) creates artificial demand and increases prices. Free use of land is required for natural price progression and supply development and the absence of this feature in our society is altering true demand. Of course there are instances when a certain area can be protected or used for the greater good (ie a park, wetlands, wildlife preserves etc) however specific zoning was and is problematic as it forces demand up in eligible development zones.

Evidence of this principle can be seen in the outflows of residents from large metropolitan areas (high restrictions) to suburbs and other lesser developed metropolitan areas (less restrictions). In turn, artificial demand effectively raised the cost of living which ultimately increased lending exposure to banks. Support for this idea is readily apparent as areas with more regulatory requirements have suffered significantly greater losses than areas of lesser requirements (California, Florida, Nevada, high population density low development space etc.). According to the New York Time’s Paul Krugman in 2005:

“When it comes to housing, the United States is really two countries, Flatland and Zoned Zone. In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional down towns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.”

If you are interested in this idea read through the 2009 Demographia International Housing Affordability Survey to see some evidence of this or read the New York Times’s Paul Krugman’s work on the matter. I digress here as this is a symptom not the problem so what’s the point in solving it.

4) Fraud at Mortgage Lenders, the GSE’s, our Major Financial Institutions – Again I think this one is pretty well understood and pretty clear from all of the coverage lately regarding the bailouts and stimulus plans.

5) The Action or Inaction of George Bush’s and/or Barack Obama’s Administrations (our government)- More specifically of Henry Paulson, Timothy Geithner, Ben Bernanke, and our Congress. – Some (including me) also say on this point that the very possibility that these people (through the Federal Reserve) can take action is a root cause. However, I do not think I need to elaborate more here either as this has been widely discussed.

So what is the Problem?
If the five points above are the symptoms to the problem, what then is the cause of these symptoms and ultimately the current economic crisis? In my opinion, the true problem is that our government no longer reflects the will of its people, is not equipped to effectively lead, and our government has become a business rather than a service.

The US government in its current form is too inundated with ineffective laws, rules, and regulations, which hamper us as a country. I believe the people in office care more about themselves and their careers than they do about the American public whom they serve. I think that lobbying and the media have far too much influence over the way our representatives operate and conduct themselves. Most importantly though, (generally) I do not think our elected officials are qualified to make the decisions that they are required to make on a routine basis; there is simply too much to know and understand. On all of these points I am not alone as the majority of US Citizens agree with me. I wrote about this and provided a lot of statistical support for this claim a couple weeks back in “The Revolution is Coming” so go there for additional insights.

The world is not as it was when our country was founded over 200 years ago and we would be wise to recognize this. Our democratic system has many wonderful features within/about it and has been an amazing asset to the United States. Of course it is only an amazing asset when our government has operated as it was intended to be operated; an ideal which I feel is no longer being adhered to. For this reason, as with all earthly things, when times change we must learn to adapt and change with them lest we become irrelevant. Our founding fathers recognized this and allowed for constitutional amendments to address required change. The need for our government to be changed over time is also why they provided us with a democratic model that allowed for the common person to determine, via a vote, the change they wanted to see in their country. At the time they allowed for a common vote it was assumed that the elected government officials we selected would have the best interest of their constituents at hand; however as above, I suspect this is no longer the case.

It is our duty as US Citizens to not have to rely on the government, to ensure we are able to maintain our freedom, and to fix our democracy when it is broken. Based on these ideals I think the ultimate cure to our current economic crisis is a total overhaul of our governmental system. Our government is required, our government is useful, our government needs to exist, however we need not rely on it, and it must operate with the best interest of its people at hand. Over the following few days I intend to lay out a plan for how I feel this overhaul should look. I am confident that I will not cover all of the details surrounding my plans, however I will create a framework from which to start, and that is the first step in trying to be the change you wish to see in the world.