"I am the eternal optimist. I think that over time people respond to civility and rational argument." - President Obama

If only that were true.

I saw a link a couple of days ago breaking down all the wonderful things that the stimulus is going to do for us. I don't care if it's going to pay off all our mortgages, it's not a good idea. One article I read today put it like this: this plan is like taking buckets of water from the shallow end of the pool and pouring them into the deep end in the hopes that it will raise the water level.

Dear Obama: No, it is not a foregone conclusion that the New Deal was beneficial for America. There are plenty of historians, and economists who believe that it extended the depression.

It just goes to show you that the presidency is something like a drug. It makes people lose all connection to reality. Part of the reality that Obama needs to recognize is that the New Deal was a calamity far worse than the initial market downturn that began it. He needs to stop basing his policies on dumbed-down civics texts versions of events and consider the economic logic....You cannot make a country rich by looting taxpayers and paying people to pound nails into siding at public schools! These activities amount to capital consumption. They are not sources of investment....That was also true of Bush’s dumb stimulus program. He was only bailing out his friends at our expense. The effect was to give a little longer life to institutions that were failing anyway. It’s pathetic that the Republicans ever went along with it. You will notice that the scheme didn’t actually work. -- From Obama's Wealth Destruction by Lew Rockwell over at LRC.

I think Obama is right on one thing, everyone is suddenly an economist. I'll admit that I'm not qualified to give advice, but I read a lot of people who have been issued prescient warnings that this stuff was coming, all while being laughed at by the talking heads. And now we're here, and they're warning that we're just going to make it worse by following this path.

In a nutshell, the Democrats and Republicans are following the economic philosophy of John Maynard Keynes. Whereas folks like Ron Paul and much of the libertarian circles subscribe to the economic theories of the Austrian School. From the wiki entry for Keynesianism:

Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches :

• a reduction in interest rates.
• Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[1]

Now that strategy should sound very familiar. That's what the government is trying to do. More from the Keynesian playbook:

Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there's a vicious circle at work here: people hoard money in difficult times, but times become more difficult when people hoard money.

The cure for this, Keynes said, was for the central bank to expand the money supply. By putting more bills in people's hands, consumer confidence would return, people would spend, and the circular flow of money would be reestablished.

If this is the proposed definition and cure for recessions, then what about depressions? Keynes believed that depressions were recessions that had fallen into a "liquidity trap." A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what individuals were not, namely, spend.

So that is the theory behind all this stimulus. Spend... spend... spend. We're not spending money, so the government will do so in our name and send us (or our kids) the bill.

Now a look at the Austrian Theory of the business cycle:

According to the theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable "monetary boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if the money supply remained stable. A correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back towards more efficient uses.

Government regulation a) forced businesses to lend to sub-prime lenders and b) generated moral hazard by decoupling the rewards of doing business from the risk. Our economy has been built on this house of cards that was dependent on you and I continuously spending more and more and not saving any of our money. It had to fall apart.

Now this is a bit scary: Congressman Paul Kanjorski admitted the following in a recent interview about the start of the crisis back in September (watch the video and see for yourself):

I was there when the secretary and the chairman of the Federal Reserve came those days and talked to members of Congress about what was going on… Here’s the facts. We don’t even talk about these things.

On Thursday, at about 11 o’clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two.

The Treasury opened up its window to help. They pumped $105 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks.

They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic and there. And that’s what actually happened.

If they had not done that their estimation was that by two o’clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would have happened if that happened. It would have been the end of our economic system and our political system as we know it.

If that doesn't give you pause, I don't know what will...