President Bush is dreaming up ways to “stimulate the economy” as you read this. He will present his grand ideas on January 28th at the annual State of the Union speech.

This desire to stimulate the economy goes beyond the Oval Office, however. On Friday, Nancy Pelosi and Harry Reid wrote a letter to the President seeking cooperation in developing an economic stimulus plan.

As many of you know, I’m a big fan of letting a free market and free economy work. The last thing we want to do is watch the government try to stimulate the economy. Let the economy forces work and they will “stimulate” themselves.

Along these lines, it’s very interesting to read message boards in times like these. Typically I don’t dabble in stock forums, but its interesting to see the maturity level of many individual investors (or lack thereof) when a long duration bull market starts to moderate to the downside.

Case in point: Check out any of your favorite stock boards and count how many people are calling for company management to “Do Something” about the falling stock price. It’s incredible. In many investors minds, the stock market can do nothing but go up, and when it doesn’t, it’s someone’s fault that their portfolio is losing money.

Example: “Management has been too quiet during the last two weeks. They need to come out and reinforce sales numbers over the holidays. Tell big money why they shouldn’t be running from the stock. They have to do something to alleviate all this red from my portfolio, and now!”

I digress.

In a free market, any external influence will do nothing but exacerbate the problems, and potentially make a seemingly bad situation even worse. This is what bothers me about this latest push from President Bush (and the rest of Congress) to do something.

Excerpts from Pelosi and Reid’s letter, along with my comments:

Millions of Americans share our growing concern about the deteriorating state of the economy and are looking to their elected representatives to quickly provide assistance. Federal Reserve Board Chairman Bernanke warned yesterday that the economy is weakening and that the Federal Reserve Board would take appropriate action.

OK, so Bernanke warned that the Federal Reserve Board would take appropriate action. That’s his job. Why does the President and Congress need to provide further assistance?

Prominent economists associated with Republican and Democratic Administrations have called on us to supplement monetary policy with an immediate fiscal stimulus. These same economists have stated that the most effective and responsible stimulus policies adhere to three simple principles: they must be timely, targeted and temporary.

So we should artificially inflate the economy to bail out those that made poor investment decisions? That’s a bit like freezing interest rates, right? Freeze the rates of those who took a variable rate mortgage when rates were at all time lows, but those of us who were smart enough to realize that rates had nowhere to go but up…

We want to work with you and the Republican leadership of the Congress to immediately develop a legislative plan based upon these principles so it can be passed and implemented into law without delay.

If that isn’t a “feel good” statement that we’ve heard over and over again…

We look forward to working together to develop a sound plan that injects demand into the economy, restores consumer confidence and purchasing power, and addresses the severe strains being felt by millions of our fellow Americans.

Again, there is absolutely no way to inject long lasting demand into an economy and restore consumer confidence without creating more drastic problems down the road.

The term “recession” has been tossed around a lot lately, and it seems that many people are getting “recession” confused with “depression”.

A recession is good for an economy. A depression is what happens to an economy when the government steps in to help.

Tags: artificial economic stimulation | Economics | Finance | Politics | recession

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