Rude awakening.

"Anyone who believes that politicians can do a better job constructing a healthy economy than the people they want to replace or manipulate in the financial world is in for a very rude awakening.”

That opinion was directed at the Obama administration, which is using government people and resources to fix the sick American economy. Our commentator also mentioned a ‘rude awakening’, which seems to be misplaced.

Today’s politicians, let alone the Obama administration, don’t and didn’t want the responsibility of constructing a healthy economy. That job belongs to the people because they are recognized as the best capable in doing it. The Obama team just wants to reestablish the environment in which ordinary people will themselves recreate a healthy economy, by bringing back trust and confidence to the system, and by reinvigorating the banking system that insiders destroyed. Throughout American history it has been government that has initially established the favorable circumstances, and common sense, in which a healthy economy can grow and flourish. There is no exception this time around and the Obama team recognizes its responsibility.

I was inspired to write this piece not only by the quote above but because of a book written by Felix Rohatyn: “Bold Endeavors: How Our Government Built America, and Why It Must Build Now”. Mr. Rohatyn is the former investment banker who helped rescue New York City from bankruptcy in the 1970’s, with the help of government aid. History knows that NYC recovered and paid back the government loans. From that government help, NYC went on to be better than ever. Nobody wanted to think what NYC could have become if it hadn’t gotten government assistance.

In his book Mr. Rohatyn also mentioned other great endeavors the government instigated over the years that expanded America’s economic vitality and prowess, projects that no single private corporation could have imagined or was willing to take on. There was the building of the Erie Canal, the Louisiana Purchase, the building of the Panama Canal, the government facilitation of the transcontinental railway, support for the Interstate highway system, NASA and the GI Bill. The government also laid the groundwork for today’s communication system and the Internet. In most cases the institutions the government inspired eventually were privatized. And let’s not forget the security government affords us so that we can go about doing our business.

I am thinking of Reaganomics, which virtually laid the groundwork for today’s economic fiasco, with it supply-side economics. It started the ball rolling towards the excesses that now hobble the economy. Reagan used to say, sardonically, that government was the problem. Ironically, though, he was correct because his hands-off, lax governing style, a style that gained acceptance over the years, was in part responsible for the events of today, the economic culture of imbalances and excesses that brought America to its knees. Rightly so, then, government is the problem if it neglects its governing and oversight duties.

Our commentator is right about one thing, about a rude awakening descending on us. But the rude awakening is courtesy of the last administration and not this one as suggested. This awakening, delivered via the Bush&Co, finally convinced the American people the importance of government and what negligence of duty on behalf of it can do to help destroy an economy. This rude awakening has also shown the America people that unfettered capitalism is, in the long run, a dangerous and destructive force. Now, it is only government that can pick up the pieces because it is, like most times, the savior of last resort.

It seems difficult for some people to understand that the economy is a concerted effort between two sectors, private and public. However, those sectors should remain autonomous from each other for best results. Unfortunately both sectors became a bit too chummy with each other over the years, effecting the economy’s honesty and efficiency. What the present administration is attempting to do is go back to when things worked better. However, because of the big mess the economy is in it is going to take a lot of aid and upheaval to do it, something some people are having difficulty accepting.

Capitalists always want governments to keep out of the way, especially in good times. But when things truly get rough, guess who they go to, crying cap in hand? Government! Government is the savior of last resort. And that, as Al Gore would say, is an inconvenient truth.

"Will things get worse?"

It bothers me that people think that the economic mess we are in is fueled by negative thinking on the part of the media and consumers. It follows that if we think this way the economy will naturally get worse and becomes a self-fulfilling prophecy. However, the argument goes, if we begin to think positively things will improve. To my way of thinking nothing could be further from the truth.

Recently an article in The Toronto Star argued such a point, that it's our collective negativity that is causing economic pain and making a recession a self-fulfilling prophecy. Its author is David Olive. Here is my response to his argument, which the paper published, edited of course:

David Olive overlooked today's precarious economic fundamentals, particularly in banking. Never have we seen such a calamity in banking caused by financial instruments that took on a life of their own. Derivatives have become contagions, so unpredictable that financial markets are frozen, continually waiting for the next shoe to drop.

Because of this there has been a lack of liquidity due to a lack of trust and confidence between financial institutions. And banks became over-leveraged to a point that became unsustainable. This was eventually exposed by the real estate bubble those financial institutions happily enabled.

Never have we seen large corporations like GM, Citigroup and GE, the backbone of the U.S. economy, in such dire straits. This alone is creating a "self-fulfilling prophecy."

At the root of the problem is excess – from over production to over capacity. There were too many stores, too many buildings, too many car producers. Eventually the economy became saturated; people could only buy and absorb so much.

Supply-side economics – "If you build it they will come" – got too far ahead of itself. Perhaps if money hadn't been so cheap this would not have happened.

Will things get worse? Most likely. But because of economic fundamentals that still need fixing, not people's misdirected psychology.