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Blog

    The New American Capitalism

    12/28/2009

    In 2008 and 2009, the Bush White House, the Obama White House and the Federal Reserve doled out over $2 trillion in taxpayer money in an effort to save failed businesses and to stimulate the economy.  In 2010-- the Wall Street Journal predicts-- the public will begin to understand how dramatically such efforts have changed the US economy.



    Only as the recession recedes will it become fully evident how permanently the state's role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.


    This "hybrid strain" of capitalism is nothing more than the overreaching hand of government intruding into the private sector.



    If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you... [And] today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis.


    Stanford University economist John Taylor says that one of the effects of recent government expansions into the private sector is that America now suffers from a "bailout mentality."  Taylor asserts that, although the worst of the financial crisis may be behind us, Americans have come to rely upon such interventions and will depend on them to solve even minor emergencies in the future.


    But, this growth of government is accompanied by long-lasting costs.  Federal spending has led to skyrocketing deficits that could eventually lead to inflation and drive up interest rates.



    The International Monetary Fund estimates U.S. government debt will swell to the equivalent of 108% of annual economic output in 2014, from 62% in 2007...  As federal debt climbs, an ever-greater fraction of the budget goes just to pay interest, much of it to overseas creditors.  The bill will worsen if interest rates rise from their current low levels.


    Interest on America's debt currently costs $182 billion.  But the chairman of MBS Investment Management, Robert Pozen, fears that the interest may soon rival the $637 billion defense budget. 


    Unless the political elites in Washington shift their focus from entitlement expansion to deficit reduction, this gloomy prediction will become a harsh reality.  With double digit unemployment and some federal programs on the verge of bankruptcy, it is clear that further government intrusion into the private sector is one thing that American's simply cannot afford.