Thursday, September 18, 2008

A Simple Metaphor for a Confusing Week

I was watching the Today Show yesterday morning and struggling to believe what I was hearing. Two guests were trying to explain why our banking system and housing market are in such shambles.

Their answer: corporate greed.

To them, the CEOs of Fortune 500 companies, with their excessive wages and bonuses, were to blame for such a widespread problem as we currently face. Are we supposed to believe that if CEOs accepted pay cuts and passed on that money to the average employee we would not have a financial crisis? Absolutely not.

To the contrary, I have produced a simple metaphor that explains what exactly is going on. How am I an expert qualified to offer my opinion? Well, if the Federal Reserve was so knowledgeable, why are we here in the first place?

Here goes:

The problem rests primarily on our nation's debt.

Imagine the Federal Reserve as a cannon that can, at its choosing, fire off a load of cash into the economy--effectively lowering interest rates. Likewise, that cannon can also turn into a giant vacuum and suck cash out of the economy, raising interest rates. The system works fine until you run out of cannonballs, or, in reality, the government has no hard cash to launch into the economy.

So, when the Fed lowers interest rates, all it's doing is launching a big air bubble--one with NO cash behind it--into the economy. The result: the banks that lend money to each other begin trading in rather...airy, imaginary money.

When average folks hear of lower interest rates they take out a "cheaper" loan, buy a house they didn't think they can afford, but slowly find large pockets of air in the walls and floors of their new home.

When the market rights itself the goverment raises interest rates--turning on the vacuum--sucking the "money" out of the banks and the air out of the many newly-purchased houses, causing them to crumble. As their houses begin to collapse, homeowners can't afford to borrow at the newly-raised interest rates, and are stuck with piles of worthless property.

Could less corporate greed be a source of harm in our economy? Perhaps. But instead of blaming American workers (even the greedy ones) for the difficult times we're facing, we should also acknowledge the serious threats to our economic security that our national debt causes.

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