Monday, April 7, 2008

Economics 101: Again

Everyone gets a little nervous when the economy gets a little shaky, but mild recessions will always happen, and they are a natural, self-correcting part of our economy. In a recession, slightly higher unemployment will occur, but this is not necessarily bad for a couple reasons. First, the recession came about in the first place because of a period of having a very successful economy. Business is booming, companies are expanding and adding on that new wing to the factory or office, investors are taking risks and many are becoming successful. A recession takes place when some of these ventures and investments do not work out. Turns out the business could not quite afford that new wing or the investment in that hot new computer company fell through because nobody was interested in the new products they were selling. Each of these failed ventures in turn represents employee job loss when these companies/businesses/investments fails. But remember, none of these jobs were there before the economic boom took place, and many new and risky investments were successful and created many more new jobs. So a recession is the market's way of keeping people from making too risky and foolhardy of investments, and a recession represents some of the more risky investments failing and also the jobs that were created as a result. The economy as a whole slows down, because many businesses and markets are interdependent on one another, so failure of some can cause pain in other industries as well. The sub-prime lending mess is a great example of what's going on right now. Companies such as Bear Sterns made risky business, and now we are having a recession because there were some risky deals made in the housing market. Some companies and individuals made too risky of investments over the last few years of economic prosperity that they were not able to afford, and now we have a mild recession as these people rework their situation to fix what mistakes they made. Once they do, unemployment will decrease once again and the economy will get back on its feet.
Amidst all this, the Democratic candidates and those in Congress propose a dangerous and ill-advised plan. They want to bail out companies and people who made these risky investments. This is a terrible idea in that it would say "go ahead, make incredibly risky investments, the government will come and bail you out if it doesn't work out". The lesson of recessions is to not be too risky in business endeavors and to learn limits of acceptable risk and to expand your business (and jobs) in a reasonable and safe manner. If the Democrats promise to bail out everyone who makes a mistake, none of these lessons will be learned and only cause more problems down the road, because why be careful investing if you know the government will just come in and save your butt? No responsibility required.

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