Uncommon Sense

I by no means consider myself an economist.  I haven’t taken economics and most of what I know comes from new analysis, professor analysis, and the help of my parents who work in the healthcare and insurance sector.

My Dad yesterday commented about how he was upset that the Democrats were breaking overwhelmingly in favor of the bailout bill while the Republicans are against he.  He thought it was going to break the other way.  Obviously, he didn’t quite understand the bill- he thought it was still Bush’s plan, rather than a bipartisan effort.  Also, his old school conservative laissez-faire leanings were starting to come out.

Here’s a little explanation for my own understanding, my dad’s, and for everyone else (liberal leaning of course):

The calm version, courtesy of Steven Pearlstein:

The basic problem here is that too many people don’t understand the seriousness of the situation.Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system.

Politicians worry less about preventing a financial meltdown than about ideology, partisan posturing and teaching people a lesson. Financiers have yet to own up publicly to their own greed, arrogance and incompetence. And leaders of foreign governments still think that this is an American problem and that they have no need to mount similar rescue efforts in their own countries.

In the coming weeks and months, all of these people will come to understand how deep the hole really is and how we’re all in it together.

They’ll come to understand that the giant sucking sound they hear is of a massive deleveraging of the global economy and the global financial system as households, governments, businesses and investment funds adjust to living in a world with less debt and more inflation.

And they will come around, reluctantly, to the understanding that the only way to get out of these situations is to have governments all around the world borrow gobs of money and effectively nationalize large swaths of the financial system so it can be restructured, recapitalized, reformed and returned to private ownership once the crisis has passed and the economy has gotten back on its feet.

In the next few weeks, the center of attention here in the United States will shift from the Congress and an exhausted Treasury to the Federal Deposit Insurance Corp., which will now have to rescue any number of failing banks, either by taking them over directly or managing their transfer into stronger hands. It will also shift back to the Federal Reserve and other central banks, which will have to step up their efforts to maintain liquidity in money markets and prevent the credit crunch from taking down hedge funds, businesses, and state and local governments.

These will, alas, be only holding actions. Restoring real stability to financial markets will require the kind of systemic approach and extraordinary government interventions that the public has refused to authorize and finance. In better times, the public might have put aside its reluctance in response to the strong and unified recommendation of political and business leaders. But it is a measure of how little trust remains in both Washington and Wall Street that voters are willing to risk a serious hit to their wealth and income rather than follow their lead.

 

The…erm…less calm version from Kevin Drum:

I spent most of the day feeling about the same way I did on 9/11, consumed with a debilitating combination of fury and despair. I don’t feel much better tonight, but here are a few thoughts on the failure of the bailout bill anyway: 

• The Republican Party Is Now Officially Hostage To A Band Of Primitive Conservative Ideologues Whose Knowledge Of Economics Was Already Outdated When Christians Were Being Fed To Lions. They Are Simply Beyond Belief.
• I’m Not Much Happier With The Jello-Like Support The Bailout Bill Got From Many Of Our Leading Liberals. Unfortunately, I Include Brad DeLong In This Group, But He’s Certainly Right When He Says, “This Republican Party Needs To Be Burned, Razed To The Ground, And The Furrows Sown With Salt…”
• John McCain Deserves To Be Tarred And Feathered. His Behavior Over The Past Week Has Been Almost Unbearably Craven.
• Barack Obama’s Behavior Has Been A Little Better. But Only A Little. He Hasn’t Exactly Displayed A Backbone Of Steel On This Issue.
• An Awful Lot Of People Really, Really Still Don’t Get It. I Swear, If I Hear One More Blogger Or Pundit Suggesting That Maybe It’s Actually A Good Thing The Bailout Bill Failed Because Now We Have A Chance To Pass An Even Better Bill, I’m Going To Scream.
• After The Failure Of The Bill, The GOP Leadership Invented A Fairy Tale About Nancy Pelosi Being At Fault For The Vote Debacle Because She Gave A Partisan Speech On The Floor Of The House. The Press Is Almost Unanimously Reporting This Seriously. If Republicans Had Blamed It On Santa Claus, I Guess They Would Have Reported That Seriously Too.
• Do You Know The Old Saying About Credit? “It’s Like Oxygen. You Don’t Know How Much You Need It Until It’s Gone.” We’re About To Go Into Financial Hypoxia, And It’s Not The Millionaires Who Are Going To Suffer Most From This.
• There Are Many Of You Who Probably Think I’m Overreacting. I Hope You’re Right.

 

And if you think this post is too caustic and bleak — well, you should have seen the first draft that Windows ate. This is the toned down version.

 

It’s odd. The fact that I’ve been warning my friends about potential problems in our financial sector for nearly 2 years now didn’t make today any easier. In some ways it might have actually made it worse. Either way, well… yes, I am most definitely beginning to panic. This is very, very not good. I hope very much that I’m wrong on this, but I suspect things are about to go very far downhill very quickly.

UPDATE: Meanwhile, many on the left are gloating because they believe this now means we can get a “better bill.” Before I react to this, let me revise and extend my earlier remarks just a bit. When I wrote the first update to this post, I did not mean for it to in any way imply that I thought the collapse of the bill was a good thing. The “now that its failed, let’s make the bill more progressive” was an attempt to suggest a way to make lemonade out of lemons. In abstract, I prefer a more progressive bill. In reality, I would have very much preferred the bill pass as is. Now, with that out of the way…

The kids at MyDD and dKos are gloating tonight about the failure of this bill. They do not understand that they are playing with fire. For every day this crisis goes on, the resulting recession gets deeper and longer. Given that most if not all of these people hope for and expect an Obama administration, they ought to think carefully about the long term political implications of anything even remotely resembling an economic collapse. Moreover, if they are truly “progressive,” if they truly believe all of this “we are all in this together, so we must help one another in times of distress” rhetoric that they so often put forth, they need to start thinking about the very real pain that inaction is going to create.

I need to repeat myself here:

Please, please remember: the Great Depression didn’t happen overnight. It is not as if one morning everything was fine and the next it was not. History books might give that impression, but if they do they are wrong. Black Tuesday is a symbolic starting point for the Great Depression, nothing more. It did not “cause” the Depression any more than the assassination of an Archduke “caused” the First World War. Complex events always have complex causes. Always.
Financial catastrophes unfold over weeks and months. They do not happen in a single day. Yes, some days matter more than others, sometimes much more, but they are never alone in their importance. Never.

 

The loss of over $1 trillion in wealth today may be just the tip of the iceberg. I hope beyond hope that I am wrong about this, but I do not see any reason to believe that I am. The problem, as Pearlstein notes above, is that the full ramifications of today’s events won’t be felt for months, and in some cases even years. These things play out over time, and by the time their implications are obvious it is usually far, far too late to react.

History does not pause for us while we make up our minds.

The problems we face are enormous. They are not going to go away. Put aside your ideological dreams and get serious about this. Everything in our lives runs on credit. Everything.

Your checkcard? It is a form of credit.

Your bank account? That money isn’t in the bank. It has been lent to someone else on credit.

The gas station where you fill up your car? It buys from suppliers on credit.

Your car? No doubt you bought that on credit.

The grocery store? It buys that food you ate for dinner from its suppliers on credit.

The corner bar? It bought that beer you drank tonight from a supplier on credit.

Credit crises roll downhill. Once this thing gets going, it will reach you. You will not be able to avoid it.

I am not trying to cause a panic. I’m just trying to make you understand. Everything in America runs on credit. And credit is disappearing at a ridiculously alarming rate. It doesn’t really matter right at this moment how we got here. We’ve got to find a way out of this mess.

To repeat: This problem will not solve itself, and history will not pause and wait while we deliberate.