Just in time to derail the then surging Republican candidate for President, George Bush, Ben Bernanke, and Hank Paulson announced to the world the the United States monetary system was on the brink of catastrophic failure.  Such failure, we were told, could only be alleviated by immediately creating and injecting 750 billion dollars into the financial markets for the purpose of buying "toxic assets".  The Senate recognized the urgency and demanded an additional 100 billion in pork projects to finally pass the bail out bill.  John McCain did his part by reacting to this "crisis" in a totally incoherent and inconsistent manner - but that is the stuff of another post.

We know now that the afore mention three wizards of smart, were either wrong - or lying.  We don't need any outside confirmation to know this.  By there own admission, they did not buy "toxic assets."  The economy did not collapse.

What the hell are we doing ?

-The financial sector needed 750 billion - or we were all dead.
-The auto industry needed 40 billion - or we were all dead.
-Now the Government needs to spend a 2 trillion dollar "stimulus" - or we're all dead.

In the mean time - back on planet earth (which somehow continues in its rotation without additional spending), the U.S. economy "plunged" to a record setting level of unemployment.  That level is about 3% above theoretical full employment.  Most small and medium sized businesses are responding prudently to signals of economic slowdown.  They are cutting non-essential staff, seeking lower cost vendors, and re-focusing their market strategies toward a public with smaller discretionary income.  This is not a crisis.  This is a vital phase of the private sector business cycle.

It seems that the "wizards of smart" are so completely self centered, they've forgotten that they and their predecessors had little to do with the past 25 years of economic expansion.  The people that drove economic expansion over the past three decades are not, Reagan, Bush, Clinton, Volker, Greenspan, or Bernanke.  The people responsible have names like Dell, Jobs, Gates, Ellison, Torvalds (sorry couldn't resist), Page and Brin.  This is not to say that government did not play a role - it did.  Howerver, the driving force of economic growth is innovation and production.

That is, a useful item is invented, then it's produced - adding wealth to the economy; and defining the business cycle.  Since 1980 we've created major industry segments that didn't even exist in the 70's.  Personal comupters, cell phones, dvds, dvrs, gps, web servers, mp3 players, etc etc.  These innovations account for billions of dollars in economic expansion.  This is why we have a business cycle.  We have a period of innovation, followed by production, and as the market becomes saturated with the new innovation it reaches a point of maturity.  At this point there is little growth by adding new sales, but sales are sustained by the replacement of old and worn out products.

This is where we're at right now.  Most of the innovations of the past have reached a point of maturity.  That is, most of the people that want personal comupters, cell phones, dvds, dvrs, gps, web servers, mp3 players, etc etc. - have them; and there's been little advances in these technologies in the past two years to entice people to discard their current devices in favor of new ones.  For example, since 1995 it was almost axiomatic that businesses replace most of their desktop computers every three years.  The quickly advancing technology meant that failing to keep pace with the latest technology made it difficult to read, exchange, and communicate with those that did keep pace.  Currently, there is no functional difference between a computer purchased in 2006 and 2009; consequently they'll be replaced when they break not because they're obsolete.

Much the same is true for many industries.  The Government would have us believe that we all went out and bought Ipods and plasma screens because the nation appeared to have a sound monetary and fiscal policy.  Such thinking is abusrd.  People bought Ipods and plasma screen tv's because they're really, really, cool.   It is foolhardy to believe, however, that a prudent person would discard his perfectly good plasma screen tv and buy an new one just because the Congress passed a "stimulus package" that put money in a persons bank account.  

This places our economy in a "trough" of the business cycle - not a crisis.  It must be noted that the current "trough" is deeper due to the simultaneous  bursting of a government induced real estate bubble, and a spike in gas prices that absorbed huge amounts of disposable income.  No amount of "stimulus" is going to cause a prudent person to make an imprudent purchase.  Currently, people are behaving with full rationality by being frugal.  Given that there are few compelling innovations that pique the interest of the consumer and the Government is screaming that we are in a "crisis;" it is completly rational for both business and consumer to remain frugal.

The idea that the Government can embark on a totally irrational spending plan with the objective of spending enough money to cause people react equally irrationally - is nothing short of insanity.

Government's role in a free market economy is to provide a positive business environment by enforcing equitable laws of commerce fairly and consistently throughout the system, and to maintain the quality of the currency through sound fiscal and monetary policy.  That's it.  Such Government actions provide a high level of confidence in both investors (foreign and domestic) and innovators.  It is stability and confidence that provides the proper climate for the innovation that yields economic growth.  When peoples confidence in fair, equitable laws of commerce, fair taxation, a stable currency and financial system returns; so to. will innovation and production return.  Only then will we be on our way to recovery and prosperity.

There are those "Keynesians" who insist that the Government must "Prime the pump" with deficit spending.  This is at best debatable.  In any case, one must remember that the "pump"  is the economic climate made of sound fiscal, and monetary policy, buoyed by a sound currency and equitable enforcement of laws of commerce.  Government actions should be focused on correcting deficiencies in these fundamentals of our economy.  No amount of priming will fix a broken pump.