The Dow Jones just fell to 7,789, the lowest it has been since the early ’90’s, after dropping another 186 points today. The Dow has already dropped over 45%, from its all time high of 14,164 on October 9th of 2007, and will probably continue to fall. Huge banks, such as Bear Stearns and Lehman Brothers, have failed, along with insurance giants like AIG. Mortgage foreclosures are up, credit is tight, unemployment is creeping toward 10%, and Americans are still saving approximately 0% of their income. That brilliant $700 billion dollar bailout and $787 billion dollar stimulus package don’t seem to be having their desired effect.
Unfortunately, all of this was predictable. The key to our current crisis was the housing bubble, which few saw coming, but the signs were there. And economists from across the political spectrum saw the housing bubble and financial crisis well before banks started failing. Peter Schiff, an Austrian, Dean Baker, a Keynesian, and Niall Fergusuon, a monetarist, all saw the crisis coming in one form or another, along with many others. And furthermore, our country being more or less bankrupt, which just about everybody recognized then and recognizes now, has done nothing but add fuel to the fire.
Economics can be a complicated discipline, but the basics are pretty simple. You cannot dramatically lower taxes, dramatically increase spending (Medicare expansion, No Child Left Behind, Department of Homeland Security, etc.), and start two wars without bankrupting your country. Most of this was George Bush’s fault, but Barack Obama has apparently decided “change” means simply spending even more money we don’t have.
What makes this even worse is not only did we do this to ourselves but we fell right into our enemy’s plan. We executed it to a “T”. Osama Bin Laden knew very well he couldn’t defeat the United States militarily. What he did know was that he could get us stuck in the Middle East, throwing money away fighting endless insurgencies. 9-11 was just a pretext to get us bogged down in an endless war (or two). He bled us. And that was his strategy the whole time! He even stated it publicly, “So we are continuing this policy in bleeding America to the point of bankruptcy.” He went further and cited Russia, who in the 1980’s went bankrupt fighting Bin Laden’s insurgents in, of all places, Afghanistan. His strategy, all along, was to do the exact same thing to us. Al Qaeda’s second-in-command, Ayman al-Zawahiri, echoed the same sentiment, saying in 2003, “We thank God for appeasing us with the [Americans] dilemma in Iraq and Afghanistan.” He continued:
“The Americans are facing a delicate situation in both countries. If they withdraw they will lose everything and if they stay, they will continue to bleed to death.” (1)
Yet, we were still too stupid to listen, or at least our politicians were. It could very well be said that Osama Bin Laden won the moment we invaded Iraq.
So where do we go from here? Well, ironically, losing the battle is probably the best way to win the war. So first things first: end both wars, as soon as possible. Obama has decided to withdraw (albeit very slowly), from Iraq. Unfortunately, Obama is planning his own surge in Afghanistan, which may very well be a bad military strategy, as well as a waste of money. We should also strongly consider bringing our military home from the rest of the world. We still have tens of thousands of troops in Germany protecting Europe from the Soviet Union! Many of these bases accomplish nothing of value and some build resentment from local populations. If the U.S. does withdrawal, Osama Bin Laden will probably simultaneously claim victory and lose most of his support. Radical Islamists will likely turn on their own governments, instead of worrying about a bunch of infidels on the other side of the planet. Osama Bin Laden and other terrorists have repeatedly said they are fighting what they see as an occupation. Despite the political rhetoric, they actually hate us for more than just our freedom. Shocking, I know. If we get rid of their incentive to hate us, Osama Bin Laden and the Al Qaeda’s top officials will still despise us, but most other Muslims will likely just forget about us. We will win their hearts and minds by making their hearts and minds focus on other things. Yes, maybe it’s giving up to just leave, but is it really a bad idea to give up on a huge mistake? (2)
We should then use the saved money to, preferably, cut taxes but at a minimum, spend the money here at home. As of now, we’ve spent several trillion dollars on bailouts and stimulus packages, but we still have no money and our credit line with China is basically maxed out. So almost assuredly, we will just print much of the money. This crisis could very well get much worse if we keep this up. The dollar may just collapse; we’ll have runaway inflation during a recession. In my humble opinion, we need to keep taxes as low as possible for the time being, and simply be patient, while the market liquidates the bad debt. It will take time and it will hurt but there is no such thing as a free lunch. You have to pay for your mistakes. And the United States, unfortunately, has many mistakes to pay for.
(1) Quoted in Michael Scheuer, Imperial Hubris, Pg. xxi, Potomac Books, Inc., Copyright 2004, Recorded Audio Message by Ayman Zawahiri, Al-Jazirah Satellite Channel Television, September 10th, 2003
(2) For a more thorough discussion on the motives of terrorists, see Dying to Win by Robert Pape. It’s the best, empirical study I’ve read on the reasons for suicide terrorism.