The Washington Post had an interesting article written by Reid Hoffman, founder of LinkedIn, about letting start-ups bail us out. I wouldn’t be calling what he talks about a bail out–it would be a real stimulus. I love start-ups and have made it a point to only work for small companies–the smaller the better.

While I absolutely agree that it will be up to new businesses and innovative entrepreneurs to bring the United States and world economy out of this crisis, I do not agree with the means by which Hoffman suggests. The last thing we need is for governments to create more bubbles–we are living the result of the last government created bubble.

Hoffman says that “we need incentives for business innovators.” That is very true. However, the incentives should not be to “encourage small business with loans”. The SBA has always attached terms to their loans and it must be used for specific purposes that they deem important. This is influencing the flow of capital to industries or sectors that the government wants. This is creating a bubble.

Secondly, where is the government getting the money to lend? The government has no money today. It didn’t have money yesterday either but, it is in worse shape now than it has ever been. If the only means to get this money is to tax, borrow, or print then one group will be made worse off for another. Redistribution of capital never makes the economy better off. If an idea has merit, capital will find its way there–that is how the free market works.

While this proposal is a better alternative to creating jobs using war or public works projects, there is still an infringement of Liberty as long as the government needs to take from one group in order to lend money to another.

“Venture capitalists are biding their time — not for want of good ideas, solid management or stable capital but to ensure that they can get the most bang for their buck. Similarly, venture capital firms are waiting for the slide to stop and the recovery to begin before investing.”

I’m not sure if that is entirely true. As the founder of LinkedIn, I will assume that he knows better than I do. I am not in the VC circle. Regardless of whether that is the truth, there is an economically sound reason why people don’t want to lend.

No one knows when or how the economy is going to turn north again. The government is intervening on a weekly–if not daily–basis thus creating an environment of uncertainty. It is much riskier to make long term investments that VC’s generally make if no one knows what the rules are going to be six months from now.

Start-ups are going to lead us out of our current predicament but, it will not be because of government “stimulus” or loans. If these companies can find a way to flourish it will be inspite of the government and not because of it.

Sears Chairman, Eddie Lampert, suggests that stockholders should read Hayek in these troubling economic times. He specifically suggests Road to Serfdom and The Fatal Conceit.

Sadly, I have not actually read these two works by Hayek–I really should. It is nice to see that Lampert is suggesting stockholders to read about the Austrian viewpoint of the situation we are in. It is good to see that not every head of big corporations are capitalists in good times and socialists in bad times.

“As a country, we need to rebuild confidence and trust and to understand what happened. Whether by business or by government, the misdiagnosis of situations leads to poor prescriptions for rehabilitation and recovery. When the misdiagnosis is done at the federal government level and involves large parts of a national economy, the consequences can be swift and significant.”

We absolutely need to understand what happened. The mainstream media has misdiagnosed the problem and is applying the wrong treatment. The swift and significant consequences of a poor prescription will be a long and extended depression.

I am mostly in shock at the size of this budget. Our GDP is about $14 trillion. This budget for 2010 is a quarter of our entire GDP. That seems pretty big to me–not that $3.55 trillion isn’t a massive number by itself. The deficit will be greater than the GDP of our neighbors above–Canada.

Obama’s plan to cut the deficit by 50% to about $533 billion in 2013 is becoming less and less believable. Not only is the budget for 2010 ridiculous but, Obama intends to increase spending to $3.94 trillion for this year. All of this is bad for the economy. Increases in government spending is a decrease in productive spending in the private sector.

“The deficit would remain near $1 trillion over the next two years before dropping to $581 billion in 2012 and $533 billion in 2013, the year that Obama has pledged to cut the deficit he inherited in half.”

The first thing you do to get yourself out of a hole is to stop digging. Obama believes that you should dig at an even faster rate. We are now going to sink faster and deeper.

In order for Obama’s budget plan to work, he is assuming that the economy “will come roaring back with economic growth of 3.2 percent next year and 4 percent-plus rates in the following three years”. Right. His stimulus bill is going to make things worse so this highly optimistic idea of economic growth is wishful thinking.

These massive budget deficits planned for the next 4 years is going to skyrocket the national debt. We are talking about adding over $4 trillion to the national debt. The national debt is currently about $11 trillion. If we add another $4 trillion to that, our national debt will be greater than our GDP.

The financial and economic side of the Obama administration is clearly out of their minds. It is going to be difficult for the dollar to survive this and for the American economy to thrive with these massive burdens. It is important to remember that governments cannot create prosperity.

It seems like every time I see a Russia Today video with Ron Paul on LRC, it is an interview conducted by my friend, Dina Gusovsky. I am jealous every time.