Of Excessive Optimism

           Physiological, cognitive, cultural, environmental, and political factors can effect the decision making of consumers, business leaders, and politicians. A sound culture and a coherent mind is necessary for good decision making. I suspect that the culture was deliberately damaged from 2000 to 2008 to set the stage for the housing bubble of the early 2000's and the eventual 2008 crash.  Indeed, many economist, politicians, and business leaders deliberately ignored signs that housing prices in the mid 2000's were overvalued.  As I've stated in earlier blogs, many of these professionals and leaders will publicly state that this period of prosperity is different this time.  Thus, dismissing the possibility of a financial collapse and estimating low odds of a recession.  I've explained in earlier blogs how the lending tendencies of banks during the early 2000's led directly to the financial crises of 2008.  Indeed, proper regulation and oversight may have prevented such a crises.  This to say that simple, easy to understand regulations and adequate, not excessive, oversight of both commercial and investment banks are needed.  In previous blogs I thoroughly explained the difference between these two types of banks and why they need to be separated in order to ensure the stability of the financial system.  It is important to note that years ago Oxford scholar Dr. Joseph p Farrell has observed during interviews with the late George Ann Hughs, back when she hosted the Byte Show, that the bankers that testified before congress during the bailout hearings looked as if they were under a great deal of pressure.  They requested that their should be no government oversight of the bailout funds provided to several major American banks by the federal government.  Their request was subsequently granted despite evidence of wrong doing by these banks.
            Another factor affecting the economy of the 2000's was the Iraq and Afghanistan wars. In this blog I will not comment on whether or not the U.S should have sent its military into these countries, but rather I will objectively analyze the economic effects of these wars.  The U.S government spent over a trillion dollars on these wars during the 2000's.  This increased military spending caused the budget deficit to widen and few steps were taken to finance these wars.  Also, the Bush administration cut taxes in the early 2000's across the board meaning these tax cuts included all income levels.  Since then these tax cuts have been extended by Obama and Trump.  Although, Trump passed a tax reform bill into law about a year ago, but explaining this legislation is beyond the scope of this blog.  In theory, the Bush administration could have taken steps to ensure that these wars were sufficiently financed while borrowing little if any money to pay for them.
              The economic impact of increased government spending and a budget deficit is debated amongst economists.  I will comment more on this issue in later blogs.  Generally, economist agree that increased government spending may increase demand and a budget deficit could increase interest rates.  This is because when the federal government runs a budget deficit the treasury must issue more treasury bonds.  Thus, lowering the price of bonds, and increasing the interest rate.  This is known as the crowding out effect.  In theory, a higher interest rate encourages saving and discourages investments.  It is important to note that in this context investment refers to investments made in physical capital such as manufacturing equipment.  Such investments are often made by businesses to increase capacity, expand to a new location, or start a new business altogether.