We will devote this week to the subprime mortgage crisis and the various responses to the crisis, especially those stemming from Congress. We will focus heavily on the two pieces of legislation that have been passed to address the crisis, The Troubled Assets Relief Program and the American Recovery and Reinvestment Act.
But there is really nothing unique about the current crisis. We are effectively cleaning up after a speculative bubble, these happen from time to time in a dynamic economy. They may even be necessary because they encourage investments in areas of society that might not otherwise receive it. The dot.com bubble, for example, may be responsible for the development of the internet as we know it. The current real estate bubble may be responsible for the expansion of home ownership beyond what would been possible normally (perhaps beyond what was prudent, but let's hold that thought for a moment). Since bubbles eventually pop, the purpose of government is to be able to provide solidity to society while the economy gets back on its feet.
I want to put the current crisis in historical context, so I want to talk about constitutional history, so that we understand the role that the creation of a national executive was supposed to play in facilitating the rise of the American Economy, and the controversies that went along with it. This will involve an understanding of not only the roles written for Congress in the Constitution, but those suggested in the document if one adopts a broad reading of its terminology--as did Alexander Hamilton.
We also need to come to terms with significant shifts that occurred in the role that the national government began to play in the economy beginning in the New Deal, and expanded in the Great Society. Each stage marked a significant increase in the size and role of the national government and also changes in the expectations that citizens had about what the national government is supposed to do.
We will note at least two shifts, one in sheer size (the establishment of non-discretionary programs such as Social Security, Medicare and Medicaid) and the other in the regulatory functions of government (the Security and Exchange Commission and the Food and Drug Administration among many others).
Economists also began to develop theories about how government should act in order to manage the booms and busts that tend to plague a free market system. We will discuss fiscal policy, which involves the manipulation of tax rates and the level of spending and the strategic running of budget surpluses and deficits. We will also discuss monetary policy where interest rates and other tools are used to affect the money supply. Each technique is in use today to handle the current crisis.
We will pay special attention to the backlash against the expansion of the size and role of government which came to fruition in the Reagan Administration. After a decade of sluggishness, the economy was seen to come to life. Though no substantive decreases were made in the size of government taxes were cut, and credit was loosened. While the economy expanded, so did the level of public and private credit. Some argue that this sets the stage for where we are today.
The subprime mortgage crisis may be the culmination of efforts to encourage people to spend (especially on homes), and to reward industries for facilitating that spending. If so, what does this suggest the proper response to the crisis might be? What's worse, considering that this crisis is relatively new, might other more serious crises be ignored and made worse because we can't may attention to them? These crises include the explosion of entitlement spending expected to occur as a result of an aging population that qualifies for Social Security and will place large pressures on Medicare.
There's a lot of ground to cover and I will post later today on what questions I want you to be prepared to answer Wednesday.
